Zscaler's Q1 2026: Contradictions Emerge on Zero Trust Branch Demand, Red Canary Integration, and AI Security Focus

Date of Call: None provided

Financials Results

• Revenue: $788M, up 26% YOY, up 10% sequentially, exceeded high end of guidance
• Gross Margin: 79.9%, compared to 80.6% in the prior year Q1
• Operating Margin: 21.8%, up approximately 40 bps YOY

Guidance:

• Q2 revenue expected $797M–$799M (~23% YoY) and gross margin ~80%
• Q2 operating profit $172M–$174M; Q2 EPS $0.89–$0.90 (assumes 21% tax, 170M shares)
• FY26 ARR $3.698B–$3.718B (up ~22.7%–23.3%); ~47.8% of net new ARR to be recognized in H1
• FY26 revenue $3.282B–$3.301B (up ~22.8%–23.5%); FY26 operating profit $732M–$740M; FY26 EPS $3.78–$3.82
• FY26 free cash flow margin ~26.0%–26.5%

Business Commentary:

* Revenue and ARR Growth: - Zscaler reported Q1 revenue of $788 million, growing 26% year-over-year, and ARR growth accelerated to 26% year-over-year. - The growth was driven by strong performance in the AI security pillar, which grew over 80% year-over-year, and the expansion of Three Growth Pillars: AI Security, Zero Trust Everywhere, and Data Security Everywhere.

• AI Security and Market Opportunity:
• AI Security ARR is expected to exceed $0.5 billion by the end of fiscal '26.

• The demand is driven by the increasing use of AI applications, which are making enterprises vulnerable to attacks, and by the need for security measures like AI Asset Discovery, AI Red Teaming, and AI Guardrails.

• Zero Trust Everywhere and Market Expansion:

• The company achieved its goal of securing over 450 Zero Trust Everywhere enterprises, three quarters ahead of schedule.

• This success is attributed to the growing interest in eliminating legacy network security products and the migration of workloads to the cloud, enhancing customer relationships and creating follow-on demand for other products.

• Z-Flex Program Success:

• The Z-Flex program generated over $175 million in TCV, growing 70% quarter-over-quarter.
• The growth is driven by the program's ability to provide customers with flexibility in module swaps and upsells, reducing procurement cycles and driving large customer commitments.
  
  

Sentiment Analysis:

Overall Tone: Positive

• Management said "we exceeded our growth targets"; Q1 revenue $788M (+26% YOY) and ARR +26% to $3.2B; AI security ARR grew >80% YOY and already surpassed prior FY target early; free cash flow margin was 52% and operating margin expanded ~40bps — all indicating strong execution and upbeat outlook.

Q&A:

• Question from Brad Zelnick (Deutsche Bank): Jay, I wanted to ask about Zero Trust Branch, which we continue to hear good things about. It's showing some nice early adoption. But as we look ahead, how much more work needs to be done on the product and/or go-to-market fine-tuning to see real acceleration from here?
  Response: Product and go-to-market are in good shape; demand is strong, adoption starts small then scales, and penetration is early (~10% of enterprise base), implying large upside.

• Question from Saket Kalia (Barclays): The $1 billion in ARR that's coming from the three emerging areas is clearly outgrowing the rest of the business. Can you help us think about the other $2 billion in ARR — is it fair to think of that as more a la carte Zero Trust tools like ZIA/ZPA — and how should we think about growth rates for that $2B vs the emerging bucket?
  Response: Yes — the $1B emerging bucket is growing faster; the remaining ~$2B is largely ZIA/ZPA and will grow more slowly but can be expanded by migrating customers into Zero Trust Everywhere.

• Question from Meta Marshall (Morgan Stanley): I wanted to ask a question about Red Canary and how it's performing versus expectations given churn assumptions — any context around that performance?
  Response: Integration is going well; Red Canary is trending slightly better than prior guidance but is not material to the overall business and management won't provide more specific color.

• Question from Tal Liani (Bank of America): You're growing 26% on a strong prior-year quarter and added $160M in ARR this quarter; can you break down what's driving strength on revenue (not ARR) — core versus leading products?
  Response: Growth acceleration is driven by the three pillars—AI security, Zero Trust Everywhere and Data Security—each accelerating and contributing to stronger-than-expected organic performance.

• Question from Joseph Gallo (Jefferies): In conversations with customers, how are they thinking about spend in calendar 2026 and what are their priority areas?
  Response: IT budgets are tight but cyber and AI security remain priorities; customers focus on Zero Trust and AI security, and Zscaler's ROI/cost-takeout message helps create and close pipeline.

• Question from Michael Cikos (Needham): What are you seeing in the SaaSy/Zero Trust competitive landscape regarding trends, pricing discipline and displacement?
  Response: Zscaler sees itself as a clear leader; new entrants haven't meaningfully impacted pipeline or win rates and the company is widening its lead through continued innovation and platform expansion.

• Question from Brian Essex (JPMorgan): Can you give a sense for organic net new ARR in the quarter? And how do acquisitions (Red Canary, Avalor, SPLX) align with threat intel and data visibility?
  Response: Organic growth in Q1 was consistent with Q4 and better than internal expectations; acquisitions enhance the Data Fabric and agentic AI capabilities, improving threat detection and actionable SecOps.

• Question from Shrenik Kothari (RW Baird): On AI security tracking to $500M — where is traction (visibility/governance vs runtime AI Guard) and which use cases are most deployed?
  Response: Strong traction first in GenAI visibility, then AI asset discovery (AI-SPM); AI Guardrails and SPLX red teaming are earlier-stage but building pipeline—demand exists across visibility, governance and runtime protection.

• Question from Roger Boyd (UBS): Can you talk about demand for Zero Trust Gateway and customer buy-in versus deploying virtual firewalls?
  Response: Customers are replacing many firewalls with Zero Trust Cloud; Zscaler's cloud gateway simplifies deployment, removes firewall/ACL complexity, and accelerates migrations versus virtual firewall approaches.

• Question from Eric Heath (KeyBanc): Is outperformance in Zero Trust Everywhere due to firewall refresh, or do you see a larger displacement opportunity into calendar '26?
  Response: Outperformance is driven by clear ROI, cost and operational benefits—customers adopt proactively, not just on refresh, leaving a large untapped branch opportunity to displace legacy stacks.

• Question from Fatima Boolani (Citi): You compared SAP migration to RISE to the Office365 tailwind — how will SAP RISE manifest across your product lines and what optionality exists for newer products?
  Response: SAP RISE migration creates demand for Zero Trust Cloud (workload protection) and better user access experience, enabling simpler architectures, cost reduction and uptake of both core and newer modules.

• Question from Gray Powell (BTIG): Z-Flex bookings were $175M (20% of mix) and grew >70% QoQ — where does this go longer term and does it give higher visibility into future ARR?
  Response: Z-Flex drives larger, longer commitments and greater visibility thanks to extended contract terms and flexibility; it doesn't fundamentally change ARR recognition but improves predictability and deal size.

• Question from Joshua Tilton (Wolf Research): Did Red Canary assumptions for full-year ARR change? And was the FY ARR raise simply equal to Q1 organic outperformance?
  Response: Red Canary is trending slightly better than prior guidance but is immaterial; Q1 outperformance was incorporated into the full-year guide.

• Question from Jonathan Ruykhaver (Cantor): What synergies exist between Red Canary and the data security portfolio — remediation/governance and differentiation?
  Response: Closed-loop integration: Zero Trust Exchange signals feed the Data Fabric enabling faster detection, remediation and enforcement; agentic operations plus in-line policy enforcement create clear differentiation.

• Question from Matthew Hedberg (RBC): Can you quantify average Z-Flex upsell and the pipeline outlook for the rest of the year?
  Response: While not quantified, Z-Flex reduces friction, enables module swapping, drives larger deals and strong pipeline; management reports improved close rates and larger commitments.

Contradiction Point 1

Zero Trust Branch Demand and Adoption

It involves differing statements about the demand and adoption of Zero Trust Branch, which is a key product offering with potential implications for customer engagement and company growth.

How much work remains on product and go-to-market adjustments for Zero Trust Branch to achieve meaningful acceleration? - Brad Zelnick(Deutsche Bank)

20251126-2026 Q1: The product is in a great shape, and the go-to-market team is engaged with the right buyers. There's significant demand for Zero Trust Branch, with over 450 customers. Many start small and then scale, leading to larger deals. There's a big opportunity in the remaining 90% of enterprise-class customers, with a strong pipeline and good customer engagement. - Jagtar Chaudhry(CEO)

What remaining work is needed for Zero Trust Branch, and how will acceleration occur? Are product or go-to-market adjustments required? - Brad Zelnick(Deutsche Bank)

2026Q1: Zero Trust Branch is in great shape, and there is significant demand due to its ability to eliminate lateral movement, reducing Ransomware attacks. Product development is robust, and a specialized go-to-market team is in place. The number of customers has exceeded 450, with potential for considerable growth as only a small fraction of enterprises have been targeted so far. - Jagtar Chaudhry(CEO)

Contradiction Point 2

Red Canary Integration and Performance

It involves differing statements about the integration and performance of Red Canary, which is a key acquisition with potential implications for revenue and operational integration.

Can you provide context on Red Canary's performance relative to churn expectations? - Meta Marshall

20251126-2026 Q1: Red Canary is trending slightly better than previous guidance, but its contribution is not material to the overall business. - Kevin Rubin(CFO)

How is Red Canary performing against expectations considering churn assumptions, and how is the integration progressing? - Meta Marshall

2026Q1: Red Canary's integration with Zscaler is progressing well, with G&A integration completed. The engineering and product integration is going well, and Red Canary's team is working as security operations specialists. The performance is slightly better than expected, surpassing previous guidance. - Jagtar Chaudhry(CEO)

Contradiction Point 3

AI Security Focus and Market Opportunities

It involves differing emphasis on AI security market opportunities and the focus of customer adoption, which is a key area of growth for the company.

Which AI security modules, such as AI asset discovery or AI Guard, are showing more traction? - Shrenik Kothari (RW Baird)

20251126-2026 Q1: Customers are indicating that AI security is becoming a priority for them... They need to secure their AI applications and AI infrastructure, and that's a big market opportunity for us. - Jagtar Chaudhry(CEO)

Are customers focusing on security for AI apps or AI for security when adopting AI security products? - Meta Marshall (Morgan Stanley)

2025Q4: Customers first secure public AI access, then private AI models, and are now focusing on agent-to-agent communication... AI Guardrails are launched for private models, and agent communication is a significant opportunity. - Jagtar Chaudhry(CEO)

Contradiction Point 4

Red Canary's Contribution to ARR

It involves expectations for Red Canary's contribution to ARR, which is a key metric for assessing the company's growth and financial performance.

Can you provide context on Red Canary's performance considering expected churn in the business? - Meta Marshall (Morgan Stanley)

20251126-2026 Q1: Red Canary is trending slightly better than previous guidance, but its contribution is not material to the overall business. - Kevin Rubin(CFO)

How does the Red Canary acquisition align with Zscaler's growth strategy, and will it accelerate reaching $5 billion in ARR? - Saket Kalia (Barclays)

2025Q3: We expect Red Canary to contribute a few percentage points to our ARR growth in fiscal '26. So the contribution percentage will depend on how much ARR we're going to do next year. - Remo Canessa(CFO)