Zscaler's Q4 2025: Contradictions Emerge on Z Flex Pricing, AI Security Demand, Sales Productivity, and Firewall Replacement

The above is the analysis of the conflicting points in this earnings call

Date of Call: None provided

Financials Results

• Revenue: $719M, up 21% YOY and 6% sequentially
• Gross Margin: 79.3%, compared to 81.1% in prior-year Q4
• Operating Margin: 22.1%, up ~60 bps YOY

Guidance:

• Q1 FY26 revenue: $772M–$774M (~23% YOY); gross margin ~80%.
• Q1 FY26 operating profit: $166M–$168M; EPS: $0.85–$0.86 (23% tax, 167M shares).
• FY26 ARR: $3.676B–$3.698B (+21.9%–22.7% YOY), includes ~$95M from Red Canary.
• FY26 revenue: $3.265B–$3.284B (+22%–23% YOY).
• FY26 operating profit: $728M–$736M; EPS: $3.64–$3.68 (23% tax, ~169M shares).
• FY26 free cash flow margin: ~26%–26.5%.
• Net new ARR seasonality: ~46.5%–47% in 1H.
• Macro assumed unchanged; introducing new products may weigh on GM near term.

Business Commentary:

• Strong Revenue and ARR Growth:
• Zscaler reported revenue growth of 21% year over year for Q4, with an operating margin of 22%, which is a record for the company.

• The growth is driven by increasing demand for the company's large and expanding platform, which provides best-in-class cyber and AI security solutions, and its strong customer interest in AI security solutions such as AI Guard and JNI security offerings.

• ARR Milestone and Customer Expansion:

• The company's Annual Recurring Revenue (ARR) surpassed $3,000,000,000, making it one of only two pure play SaaS security vendors to achieve this milestone.

• This achievement is attributed to strong customer demand for the platform, which now secures nearly 40% of the Global 2,000 and over 45% of the Fortune 500 companies.

• Zero Trust Everywhere and AI Security:

• Zscaler's Zero Trust Everywhere pillar secured over 350 enterprises, surpassing their initial goal of 390 enterprises by the end of fiscal 26.

• Growth in this area is driven by the adoption of AI at a rapid pace, which increases complexity and creates new cyber risks, leading to a strong demand for AI security solutions.

• AI Security Opportunity and Product Innovation:

• The adoption of AI applications, such as AI Guard and JNI security offerings, is gaining significant interest within large enterprises.
• This interest is fueled by the explosive growth of AIML transactions, which have increased by 3500% on the company's cloud in the past year, underscoring the need for advanced AI security solutions.

Sentiment Analysis:

• Q4 revenue grew 21% YOY (6% sequential), and operating margin hit 22.1%, a quarterly record. ARR surpassed $3B (~22% YOY). Management highlighted strong demand across AI Security, Zero Trust Everywhere, and Data Security, with Data Security ARR ~$425M. FY26 guidance calls for 22%–23% revenue growth, ARR up ~22%, and FCF margin ~26%–26.5%. They expect GM to revert to ~80% after a one-time low-margin shipment.

Q&A:

• Question from Saket Kalia (Barclays): To what extent is SASE/Zero Trust replacing firewall appliances, and how fast is that transition?
  Response: Firewalls must be eliminated for true Zero Trust; branch firewalls go first (driven by Zero Trust Branch), then data center, then virtual—acceleration underway.

• Question from Brad Zelnick (Deutsche Bank): How will Z Flex help the field exceed goals in FY26, and how broadly is it available?
  Response: Z Flex couples architectural/BVA work with flexible multi-module pricing to land larger 3–5 year deals; launched with large accounts and expanding broadly.

• Question from Mike Sikos (Needham): What defines a Zero Trust Everywhere customer and how does spend change; any rep quotas tied to it?
  Response: Customers progress users→branch→cloud, often doubling/tripling ARR; no strict product quotas (some incentives), with strong demand driving adoption.

• Question from Meta Marshall (Morgan Stanley): Where do customers start with AI security—security for AI or AI for security?
  Response: They first secure public AI use, then private models via AI Guardrails; next major focus is Zero Trust agent-to-agent communications.

• Question from Joshua Tilton (Wolfe Research): What does the FY26 guide imply for net new ARR growth?
  Response: Organic net new ARR is guided to high single-digit growth in FY26.

• Question from Andy Nowinski (Wells Fargo): Are customers buying Data Security alongside Zero Trust Everywhere; what’s the upsell runway?
  Response: Yes, often bundled; only ~30% use ≥3 modules and ~10% ≥4, leaving significant cross-sell/upsell opportunity.

• Question from Fatima Boolani (Citi): Is Z Flex primarily for new or existing customers, and how does it affect KPIs?
  Response: Applicable to both; it doesn’t change model mechanics and increases TCV/ARR via predefined rates—not usage-based consumption.

• Question from Gary Powell (BTIG): What’s driving Zero Trust Branch demand—SD-WAN replacement, segmentation, or something else?
  Response: It replaces SD-WAN/firewalls to cut ops overhead and stop lateral movement; demand is exceeding expectations.

• Question from Eric Heath (KeyBanc): How do you view retail as a target for Zero Trust Branch given refresh cycles?
  Response: Retail’s many small, similar sites ease rollout; eliminating SD-WAN/firewalls there should drive FY26 growth.

• Question from Patrick Coville (Scotiabank): Outlook for emerging products mix and momentum in ZPA/ZIA?
  Response: Shifting to three growth vectors—AI Security, Zero Trust Everywhere, Data Security—now >$1B ARR; strong outlook with ZPA as core engine.

• Question from Joseph Gallo (Jefferies): Any changes to guidance methodology; macro or Fed exposure assumptions?
  Response: No philosophy change; moving focus to ARR; Fed remains high-single-digit percent; macro assumed unchanged.

• Question from Brian Essex (JPMorgan): How do AgenTeq SecOps/ITOps compete vs legacy SIEM?
  Response: Building an outcomes-based, AI-powered SOC using Data Fabric + Red Canary to avoid data-lake pricing; extending ZDX to user and M2M performance.

• Question from Todd Weller (Stephens): Timeline for the next-gen SOC and view on log filtering pipelines?
  Response: Phased SIEM displacement—cut data volumes early, full replacement over quarters; Data Fabric synthesizes logs; Red Canary augments detection.

• Question from Andrew DeGasperi (BNP Paribas): Clarify Red Canary ARR contribution in FY26 vs earlier commentary.
  Response: Recognized $83M ARR at close; assuming low double-digit growth to ~$95M in FY26, with prudence given higher MDR churn.