Zscaler's Q1 2026: Contradictions Emerge on SASE Strategy, AI Security Integration, Zero Trust Branch Growth, and Red Canary Impact

Date of Call: None provided

Financials Results

• Revenue: $788.0M, up 26% YOY, up 10% sequentially, exceeded high end of guidance
• Gross Margin: 79.9%, compared to 80.6% in prior year Q1
• Operating Margin: 21.8%, up ~40 basis points year-over-year

Guidance:

• Q2: Revenue $797M–$799M (~23% YoY); gross margin ~80%; operating profit $172M–$174M; net other income ~$19M; EPS $0.89–$0.90 (assumes 21% tax, 170M diluted shares).
• FY26: ARR $3.698B–$3.718B (22.7%–23.3% YoY); Revenue $3.282B–$3.301B (22.8%–23.5% YoY); operating profit $732M–$740M; EPS $3.78–$3.82 (21% tax, ~170.5M shares); free cash flow margin ~26.0%–26.5%.

Business Commentary:

• Strong Revenue and ARR Growth:
• Zscaler reported a 26% year-over-year growth in ARR for Q1 Fiscal Year 2026, with RPO growth accelerating to 35%.

• The growth was driven by the success of the three growth pillars: AI Security, Zero Trust Everywhere, and Data Security Everywhere.

• 
  AI Security Pillar Success:

• The AI Security pillar grew over 80% year-over-year, surpassing the FY26 target of $400 million ARR three quarters earlier.

• The rapid growth is attributed to an increased demand for AI security solutions and the integration of AI assets into enterprise applications.

• Zero Trust Everywhere Adoption:

• Over 450 Zero Trust Everywhere enterprises were secured, achieving the goal three quarters ahead of schedule.

• This expansion was driven by the elimination of legacy network and security products, resulting in cost and complexity reductions for customers.

• ZFlex Program Impact:

• ZFlex generated over $175 million in TCV, growing over 70% quarter-over-quarter.
• The adoption of ZFlex is increasing customer flexibility and commitment, resulting in larger and more frequent upsells.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • "We had a strong start to our fiscal year. In Q1, ARR growth accelerated to 26% year over year"; management reported "Q1 revenue was $788 million, growing 26% year-over-year, 10% sequentially" and provided above-guidance Q2 and FY26 targets, highlighting product momentum and ARR acceleration.

Q&A:

• Question from Brad Zelnick (Deutsche Bank): How much more product or go-to-market work is required for Zero Trust Branch to accelerate adoption?
  Response: Product is ready; a specialty GTM team is engaged, demand is strong, only ~10% of enterprise-class customers addressed so far, implying substantial runway.

• Question from Saket Kalia (Barclays): How should we think about the other $2B of ARR vs the faster-growing $1B emerging areas?
  Response: The remaining ~$2B is largely ZIA/ZPA and will grow slower than emerging AI/Data pillars; the strategy is to migrate customers into Zero Trust Everywhere to lift growth.

• Question from Meta Marshall (Morgan Stanley): How is Red Canary performing versus expectations and churn assumptions?
  Response: Integration is going well and Red Canary is trending slightly better than prior guidance; contribution is not material and management will provide limited future detail.

• Question from Tal Liani (Bank of America): What is driving the stronger revenue growth this quarter across core vs leading products?
  Response: Acceleration is driven by the three pillars—Zero Trust Everywhere, AI Security, Data Security—each accelerating; organic growth was consistent with last quarter and outperformed internal expectations.

• Question from Joseph Gallo (Jefferies): How are customers thinking about cyber spend for calendar 2026 and priority areas?
  Response: IT budgets are tight but cyber is a priority; customers prioritize Zero Trust and AI security and seek cost takeout via consolidation to justify purchases.

• Question from Michael Sykus (Needham): Any competitive or pricing pressure in the SASE/Zero Trust market after recent M&A?
  Response: SASE label is meaningless; Zscaler sees strong pipeline, stable win rates, and believes market has sorted with Zscaler widening distance from many entrants.

• Question from Brian Essex (JPMorgan): Can you quantify organic net new ARR and how acquisitions enhance threat intelligence/value?
  Response: Organic growth in Q1 matched Q4 and beat internal expectations; Avalor and Red Canary add a data fabric and agentic capabilities enabling richer threat detection and SOC insights.

• Question from Shaul Kothari (Robert W. Baird): Which AI security modules show most traction—visibility/Posture vs runtime guardrails?
  Response: Traction started with GenAI visibility and AISPM; AI Guardrails and Red Teaming are early but growing; adoption spans visibility, posture, runtime and pipeline is expanding.

• Question from Roger Boyd (UBS): Is Zero Trust Gateway being pulled by demand for AI infrastructure and replacing virtual firewalls?
  Response: Zero Trust Cloud replaces many firewalls/VM-based approaches; the Zscaler-managed cloud gateway simplifies deployment and policy enforcement, enabling rapid migration away from legacy firewalls.

• Question from Eric Keith (KeyBanc): Is outperformance due to firewall refresh timing or larger displacement opportunity?
  Response: Deals are driven by ROI and security needs (eliminating lateral movement and reducing cost); while refresh helps, customers often move proactively, leaving a very large branch displacement opportunity.

• Question from Fatima Boolani (Citi): How will SAP RISE migration mirror Office365 tailwinds and impact newer products?
  Response: SAP RISE migration removes need for express routes/direct connects and many firewalls; it accelerates adoption of Zero Trust Cloud and improves user experience, creating a multi-product uplift similar to Office365 migration.

• Question from Gray Powell (BTIG): ZFlex bookings grew sharply—how does that affect visibility to ARR and future upsells?
  Response: ZFlex drives larger, longer commitments and reduces procurement friction; it improves long-term visibility though ARR recognition follows contract terms and impact is similar to other bookings.

• Question from Joshua Tilton (Wolf Research): Did Red Canary ARR assumptions change and was the FY ARR uplift due to organic outperformance in Q1?
  Response: Red Canary is trending slightly better but remains immaterial; the company passed Q1 outperformance into the full-year guide and organic Q1 growth was consistent with Q4.

• Question from Jonathan Ruykhaver (Cantor): How will Red Canary and data security integrate to enable remediation/governance and differentiation?
  Response: Combined data fabric and agentic ops enable closed-loop detection-to-inline enforcement and faster remediation, creating differentiation vs point-product AI/data vendors.

• Question from Matt Hedberg (RBC): How does ZFlex upsell behavior look and what pipeline traction do you expect?
  Response: ZFlex formalizes ramp deals and module swapping, enabling larger deals and faster adoption; management sees meaningful interest and improved deal-closing though average upsell sizing not quantified.

Contradiction Point 1

SASE Market Trajectory and Strategy

It involves differing perspectives on the trajectory of the SASE market and Zscaler's strategic positioning within it, which impacts market expectations and competitive dynamics.

What trends are you seeing in the SASE market, particularly regarding competitive displacement? - Michael Sykus (Needham)

2026Q1: We remain strong in the Zero Trust market, with our expansion driven by new Zero Trust Everywhere functionality. The market is sorting out the winners, and our pipeline remains strong. - Jay Chaudhry(CEO)

How much is SASE replacing firewall appliances? What is the adoption rate of firewall appliances? - Saket Kalia (Barclays)

2025Q4: The SASE market is not limited to just firewall and secure web gateway, but SASE is now expanding into SD-WAN and other security components, all of which are part of Zscaler's platform. - Jagtar Chaudhry(CEO)

Contradiction Point 2

AI Security Integration and Red Canary

It highlights differing views on the integration and impact of AI security, particularly with the acquisition of Red Canary, which could influence investor expectations and integration strategy.

Can you explain where the growth is coming from in AI security and the key use cases driving it? - Shaul Kothari (Robert W. Baird)

2026Q1: Customers first wanted visibility into AI solutions. Next, we launched AI Asset Discovery for posture management. AI Guardrails are growing nicely, and SPLX brought Red Teaming technology. All these are proceeding well. - Jay Chaudhry(CEO)

Which AI security areas are customers prioritizing first: AI app security, data security, or agentic solutions? - Meta Marshall (Morgan Stanley)

2025Q4: With Red Canary, we are extending our threat detection capabilities beyond the network to endpoints and infrastructure as code and integrating it into our platform. - Jagtar Chaudhry(CEO)

Contradiction Point 3

Zero Trust Branch Growth and Market Penetration

It highlights differing views on the customer adoption and market penetration of the Zero Trust Branch product, which could impact the company's growth strategy and revenue expectations.

What additional work is required on Zero Trust Branch product and/or go-to-market refinements to achieve significant acceleration? - Brad Zelnick(Deutsche Bank)

2026Q1: We have about 450 customers, and there's potential to expand as we've only reached about 10% of our customer base. - Jay Chaudhry(CEO)

Is adoption of Zero Trust Everywhere increasing in small, mid-sized, or larger enterprises? - Gregg Moskowitz(Mizuho)

2025Q2: We've seen significant interest in the product, with a goal to triple the number of Zero Trust Everywhere enterprises in the next 18 months. - Jagtar Chaudhry(CEO)

Contradiction Point 4

Sales Productivity and Pipeline Growth

It involves differing perspectives on the rate of sales productivity improvement and pipeline growth, which are critical for achieving revenue targets.

What is driving the revenue growth compared to last year? - Tal Liani(Bank of America)

2026Q1: Sales productivity is expected to continue to increase. We feel our guidance is prudent, and we believe our guidance fully supports the sales productivity improvements. - Remo Canessa(CFO)

Have there been any changes to assumptions regarding scheduled and unscheduled billing timing in the back half? - Saket Kalia(Barclays)

2025Q2: The strength of the pipeline is growing, with double-digit new ACV growth. Automatics are improving across the board, including data protection, which is growing over 40%. - Jagtar Chaudhry(CEO)

Contradiction Point 5

Red Canary Integration and Contribution

It highlights differing expectations regarding the integration and contribution of Red Canary to Zscaler's business, which could impact financial performance and strategic direction.

What is the organic net new ARR for the quarter, and how does it align with the threat intelligence market? - Brian Essex(JPMorgan)

2026Q1: Q1 organic growth was consistent with Q4, and Zflex program is driving upsells and reduced sales cycles. - Kevin Rubin(CFO)

Were there changes in assumptions regarding Q3 billings timing in the back half? - Saket Kalia(Barclays)

2025Q2: The integration of Red Canary is on plan, and we expect to hit our timelines for the fiscal year 2025 shareholder letter. - Remo Canessa(CFO)