Zscaler's Q3 Surge: Billings, AI, and the Case for Long-Term Dominance

Zscaler (NASDAQ: ZS) just delivered a quarter that reaffirms its position as the undisputed leader in cloud security. With billings growth of 25% year-over-year and a 114% dollar-based net retention rate, the company has validated its core metrics while doubling down on AI-driven security innovations. Even as near-term free cash flow margins face modest headwinds, the strategic moves unveiled in Q3—like the Red Canary acquisition—signal a path to long-term dominance in the $35 billion security services edge (SSE) market. Here's why investors should act now.

Billings Growth Outperforms: A Foundation for Future Upside

Zscaler's calculated billings of $784.5 million in Q3, up 25% YoY, represent a critical milestone. While slightly below analyst expectations, the figure still surpasses revenue growth (23% to $678 million), a testament to the recurring nature of its subscription model. Remaining performance obligations (RPO) surged 30% YoY to $4.98 billion, exceeding estimates and highlighting strong customer commitments. With deferred revenue hitting $1.985 billion (+26% YoY), Zscaler is building a fortress balance sheet.

The real story lies in its customer base: total customers rose to over 8,650 (+13% YoY), with $1M+ ARR enterprise customers up 23% to 642. Direct revenue from these high-value accounts jumped 57.6% to $80.1 million, proving Zscaler's ability to upsell within its installed base. shows a widening gap, a positive sign of deferred revenue accumulation.

Customer Retention: A Moat in a Fragmented Market

Zscaler's 114% net retention rate isn't just a number—it's a competitive barrier. In an industry where security solutions often face shelfware, Zscaler's platform serves 3.36 billion users and 150 million workloads daily, processing 500 billion transactions. This scale creates a data flywheel: more traffic means more threat intelligence, which in turn improves AI-driven security outcomes.

The addition of Red Canary—whose MDR expertise will integrate with Zscaler's threat data—solidifies this advantage. Together, they'll offer a unified AI-powered security stack, from threat detection to response. This vertical integration is a rarity in cybersecurity, where point solutions still dominate.

AI Investments: The Next Frontier in Security

Zscaler's Q3 disclosures underscore its aggressive pivot to AI. The Red Canary acquisition isn't just about MDR; it's about fusing Zscaler's cloud-native platform with AI-driven threat hunting. Consider the numbers: enterprises' use of AI/ML tools has skyrocketed 3,000% in a year (per Zscaler's ThreatLabz report). This creates both opportunity and risk: more AI adoption means more attack surfaces, but it also means Zscaler's Zero Trust Exchange—now enhanced with AI—is the only game in town for securing both public GenAI and private enterprise models.

The launch of Zscaler Asset Exposure Management further cements this vision. This tool leverages AI to inventory and prioritize vulnerabilities across an organization's assets, addressing the 92% of companies worried about ransomware due to legacy VPNs (per Zscaler's 2025 VPN Risk Report). For CFOs and CISOs, this isn't just a product—it's a risk mitigation lifeline.

Free Cash Flow: A Necessary Trade-Off for Growth

Critics will point to the dip in free cash flow margin to 18% (from 22% a year ago) as a red flag. But this is a calculated move: Zscaler is reinvesting in infrastructure (capital expenditures rose to $104.2M) and R&D to fuel AI initiatives. With $3 billion in cash reserves and operating cash flow hitting $211M (31% of revenue), the company isn't starved for liquidity.

The key metric here is non-GAAP operating margin guidance of 22% for FY25, which suggests management's confidence in scaling profitability alongside growth. Even with margin compression, Zscaler's free cash flow remains robust at $119.5M, and its nine-month margin of 28% is consistent with prior periods. This isn't a company in distress—it's a rocket ship accelerating through turbulence.

Why Buy Now? The Zero Trust Tsunami

The market for Zero Trust and SSE solutions is exploding. Gartner estimates the SSE market will hit $10 billion by 2026, and Zscaler is already a Leader in its Magic Quadrant. With AI becoming table stakes for enterprise security, Zscaler's integrated platform is the only one that combines:
1. Global scale: 160+ data centers, 500 billion daily transactions.
2. AI-native architecture: From threat detection to asset management.
3. Enterprise-grade retention: 114% net retention in a sector where churn is a silent killer.

shows it's underappreciated. At a forward P/S ratio of 13x (vs. 16x for peers), Zscaler is priced for perfection but delivering results that justify a premium.

The Bottom Line: A Buy for the Next Decade

Zscaler isn't just a cybersecurity company—it's the operating system for enterprise security in the AI age. The Q3 results validate its core metrics while laying the groundwork for AI-driven differentiation. Yes, margins will face pressure as it invests, but with $3B in cash and a fortress balance sheet, this is a temporary trade-off for long-term dominance.

If you're invested in cybersecurity, own Zscaler. If you're not, this is your moment. The Zero Trust revolution is here, and Zscaler is driving it.

Recommendation: Strong Buy
Price Target: $280 (20% upside from current levels)
Risks: Slower enterprise AI adoption, regulatory challenges in data privacy.

This analysis is based on Zscaler's Q3 2025 earnings report and publicly available data. Always conduct your own research before making investment decisions.