ZS slips on conservative guidance; Should investors buy the dip?

Zscaler (ZS) delivered a solid Q1 performance, exceeding expectations on both revenue and EPS. The company reported adjusted EPS of $0.77, significantly beating the consensus estimate of $0.64, and revenues of $627.9 million, surpassing the forecast of $606.7 million. Revenue growth of 26% year-over-year underscores strong execution despite macroeconomic headwinds. Additionally, calculated billings grew by 13% to $516.7 million, exceeding estimates of $504 million. This outperformance demonstrates resilience in Zscaler's subscription-based business model.

Deferred revenue increased by 27% year-over-year to $1.78 billion, reflecting strong renewal activity and growth in unscheduled billings, which rose over 20% year-over-year. The company's success is partly attributed to its expanding product portfolio, including emerging products in data security and its continued momentum in replacing legacy VPNs with Zscaler Private Access (ZPA). Furthermore, strategic collaborations, such as with Microsoft’s Co-Pilot for data security, are creating large growth opportunities in cross-sell initiatives.

For Q2, Zscaler provided revenue guidance of $633–$635 million, roughly in line with consensus expectations of $633.8 million, and EPS guidance of $0.68–$0.69, slightly below the estimate of $0.69. Importantly, Zscaler reaffirmed its full-year guidance for fiscal 2025, increasing revenue projections to $2.62–$2.64 billion from $2.6–$2.62 billion and EPS to $2.94–$2.99, above previous forecasts. The company also maintained its FY25 billings guidance of $3.12–$3.15 billion, signaling confidence in a strong second-half performance.

Management emphasized that FY25’s back-end-loaded growth remains intact, with second-half billings expected to grow by 23% year-over-year, compared to just 7% in the first half. This reaffirms the narrative that Zscaler's product cycles and go-to-market strategies will drive a stronger second-half recovery. The ability to engage large ARR customers with account-centric selling under Chief Revenue Officer Mike Rich has been a key factor in maintaining confidence in this trajectory.

One overhang on the stock is the announced retirement of CFO Remo Canessa, who has been with Zscaler since its 2018 IPO. While the timing of his departure, pending a successor, is understandable given his age (67), it introduces an element of uncertainty during a critical growth phase. Analysts, however, view this development as manageable, given the strength of Zscaler's leadership team and operational momentum.

Despite the positive results, Zscaler shares slipped around 6–7% in pre-market trading, likely due to cautious Q2 guidance and concerns over the CFO’s retirement. However, analysts noted that Zscaler often sets conservative guidance, which could present a buying opportunity for long-term investors. With a strong pipeline, emerging product adoption, and improving sales productivity, Zscaler remains well-positioned for sustained growth.

Analysts remain optimistic, with firms like KeyBanc and BMO raising price targets to $250 and $222, respectively, citing solid billings growth, expanding opportunities in the SASE market, and Zscaler's proven ability to cross-sell emerging products. Needham highlighted improved sales productivity and a robust bookings pipeline as key reasons for confidence in the company's ability to meet its second-half ramp.

Zscaler's results reinforce its position as a leader in cloud security, benefiting from secular trends like digital transformation and zero-trust adoption. While the CFO transition may weigh on near-term sentiment, the company's conservative guidance approach, coupled with a strong balance sheet and improving go-to-market execution, positions it for long-term growth. Investors may view the pullback as an opportunity to buy into Zscaler's compelling growth story as it continues to address large market opportunities in VPN and firewall replacements and data security.