Zscaler Q4 Earnings Report: Mixed Results Amid a Volatile Market Reaction

Introduction: Earnings Amid a Shifting IT Landscape

Zscaler (ZS) reported its Q4 2025 earnings on a backdrop of heightened volatility in the IT Services sector. Investors had been closely watching for signs of sustained momentum in cloud security, a segment where Zscaler remains a key player. The firm’s earnings results revealed continued investment in R&D and operations, with revenue growth outpacing earnings, which remained in negative territory. The results were released against a broader industry trend of moderate post-earnings performance, particularly in the IT Services space, as historical data shows a slow but steady market response to strong earnings surprises.

Earnings Overview & Context

In Q4 2025, Zscaler reported total revenue of $2.17 billion, a strong showing in a market that values consistent top-line growth. However, the company’s operating performance remained under pressure. It reported an operating loss of $25.48 million, driven by high operating expenses totaling $1.72 billion. These included $1.31 billion in marketing, selling, and general administrative expenses, and $500 million in R&D expenses. The company also posted net interest income of $109 million, but after accounting for interest expense, the net interest expense was -$96 million, indicating strong net interest gains.

Net income came in at -$57.7 million, with basic and diluted earnings per share at -$0.39. These results reflect the company's continued investment in growth and R&D, consistent with its strategy to maintain a leadership position in the cloud security market.

Backtest Analyses

Stock-Specific Backtest

The backtest results on Zscaler's stock suggest a mixed but generally positive market reaction to earnings beats. Specifically, the stock has a 66.67% win rate within 3 days post-beat, with an average return of 0.83%. However, this optimism wanes slightly over the 10-day horizon, where the win rate drops to 58.33% and the average return turns slightly negative at -0.25%. By the 30-day mark, the market begins to recover, with a 58.33% win rate and a 2.20% return. The maximum observed return of 4.46% occurs 55 days post-event, suggesting that while the immediate reaction is positive, the full impact may take longer to materialize.

Industry Backtest

For the broader IT Services industry, the response to earnings beats is more moderate and gradual. The data shows that the sector tends to reward positive earnings surprises with a maximum return of 2.22%, typically 51 days post-event. This points to a delayed but consistent market reaction, suggesting that the sector’s earnings surprises are not immediately capitalized but rather appreciated over time as investors begin to adjust their expectations.

The comparison with Zscaler's own backtest results indicates that while the company experiences a sharper, shorter-term reaction, it still aligns with the industry’s general trend of slow but positive performance following strong earnings.

Driver Analysis & Implications

Zscaler’s Q4 performance underscores its strategy of scaling through high R&D and SG&A spending, which has historically been a trade-off for long-term growth. The company’s operating loss reflects the cost of maintaining leadership in a rapidly evolving cloud security market, where innovation is key to retaining and expanding market share.

From a macro perspective, Zscaler's results align with a broader trend in the IT Services industry: revenue growth outpaces profit generation, as companies reinvest in technology and market expansion. This trend is supported by a global shift toward digital infrastructure, especially with hybrid and cloud environments becoming the norm.

Investment Strategies & Recommendations

Given Zscaler’s earnings performance and the backtest insights, investors may consider the following strategies:

• Short-term traders may want to adopt a wait-and-see approach post-earnings, given the mixed 10-day reaction. The 3-day positive return suggests that an initial short-term buy may be justified if the earnings beat is confirmed and priced in quickly.

• Long-term investors should focus on whether Zscaler's fundamentals are improving and whether the company is gaining market share in high-growth areas such as zero-trust security. The 30- to 55-day return window appears to be a key period for capturing value in the stock.

• Position sizing should remain cautious, given the volatility and uncertainty around operating performance. Investors may also monitor the broader IT Services sector for confirmation of a positive post-earnings trend.

Conclusion & Outlook

Zscaler’s Q4 earnings report highlights a company in growth mode, with strong revenue but a widening operating loss. While the earnings results and post-beat performance suggest initial optimism from the market, the longer-term outlook will depend on the company’s ability to maintain revenue growth while improving operating efficiency.

The next key catalyst will be the earnings guidance provided by the company, which will offer more clarity on near-term expectations. If Zscaler can show signs of cost discipline or margin expansion, it could reinvigorate investor sentiment and potentially lead to a more sustained performance boost.