Shares of Zscaler fell 24.3% in pre-open trading after the cloud security provider released its fiscal third-quarter results, a reaction prompted largely by a significantly reduced free cash flow outlook, a below-consensus revenue guide for the coming quarter, and an early, softer read on fiscal year 2027 growth.
The company reported adjusted earnings per share of $1.08, beating estimates by $0.07, and revenue climbed 25% year-over-year to $850.5 million. Despite those positives, investors focused on the companys downgraded forward metrics.
Zscaler narrowed its fiscal 2026 free cash flow margin projection to a range of 22.8% to 23.3%, down from a prior range of 26.5% to 27%. Management said the revision reflects higher capital expenditures, which they characterized as being in the high single digits as a percentage of revenue.
Operationally, the company is navigating leadership changes in its sales organization. Two senior sales executives left by the end of the third quarter; management indicated it has already named a successor for one role and is in late-stage recruiting for the other. Executives said they are taking a cautious approach to forward guidance while the sales team is being stabilized.
Looking further ahead, Zscaler provided an early view of fiscal 2027 that signaled a slower pace of growth. Management projected ARR and revenue expansion in the range of 16% to 17%. The company also noted that Red Canary will be fully integrated into results going forward with no separate reporting line.
Analysts reacted to the new outlook by adjusting their models. Barclays analyst Saket Kalia lowered his price target to $170 from $180 while maintaining an Overweight rating. Shaul Eyal at TD Cowen cut his target to $180 from $220 and kept a Buy rating. Evercore ISI took a more conservative step, downgrading the stock to In Line from Outperform and reducing its price target to $155 from $225.
Zscaler has been operating in a highly competitive market, where larger rivals - including Palo Alto Networks - are expanding integrated platform offerings, and competitors such as Cloudflare and Netskope have been cited as adding pressure in the zero-trust segment. The stock had already fallen 19% year-to-date entering the earnings release, amid concerns about slowing growth in its core business and intensified competition.
Market conditions provided little support on the day of the results. The broader indices were positive, with the Nasdaq up 1.2% and the S&P 500 rising 0.6%, buoyed by optimism around AI and geopolitical developments that helped lift many technology names. Despite the favorable market backdrop, Zscaler underperformed sharply.
Investors will be weighing a mixed set of signals: a headline operating strength reflected in a record non-GAAP operating margin of 23% and a clear quarter-over-quarter revenue beat, against a forward picture that includes a free cash flow margin reduction, a material deceleration in projected growth to the mid-teens, and short-term organizational uncertainty following the departure of two senior sales leaders.
Some retail investors viewed the selloff as an overreaction, characterizing the move as a potential buying opportunity given the stocks prior declines. At the time of the report, Zscaler shares were trading near $139.67, significantly below the companys 52-week high of $336.99. Going forward, market participants will be watching whether management can shore up its sales organization and convince investors that the company can return to a stronger growth trajectory.
Additional context for readers
- The companys third-quarter results included a beat on adjusted EPS and robust year-over-year revenue growth.
- Guidance revisions centered on a lower free cash flow margin for fiscal 2026 and a preliminary fiscal 2027 growth outlook of 16% to 17% for ARR and revenue.
- Executive turnover in sales and the integration of Red Canary into consolidated results were highlighted as near-term considerations by management.