Zscaler (ZS) Q3 2026 Earnings Call Transcript

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Date

May 26, 2026 at 4:30 p.m. ET

Call participants

• Chairman and Chief Executive Officer — Jagtar Singh Chaudhry
• Chief Financial Officer — Kevin Rubin

Takeaways

• Annual recurring revenue (ARR) -- $3.5 billion, up 25% year over year, with net new ARR of $166 million up 24%.
• Revenue -- $850 million, rising 25% year over year and 4% sequentially from Q2, above the high end of guidance.
• Free cash flow margin (year to date) -- 29%, with Q3 specifically at 16%, down from 18% last year due to cash collections timing.
• Remaining performance obligations (RPO) -- $6.5 billion, representing growth of approximately 30%, with 46% classified as current RPO.
• Non-GAAP operating margin -- 23%, increasing 140 basis points year over year to an all-time high.
• Non-GAAP gross margin -- 80.7%, compared to 80.3% a year ago.
• Customer metrics -- 748 customers generating more than $1 million ARR and 4,000 customers exceeding $100,000 ARR, growing 18% and 19% year over year, respectively.
• Geographic mix -- Americas contributed 56% of revenue, growing 31%; EMEA at 28%, growing 16%; and APJ at 16%, growing 23%.
• Data security ARR -- Surpassed $500 million, growing over 30% year over year.
• Zero Trust Branch ARR -- Approximately tripled year over year, underscoring product momentum.
• Z-Flex TCV -- Generated over $1 billion in total contract value over the past 12 months, with $480 million TCV in Q3, up over 60% quarter over quarter.
• Cloud marketplace channel -- $900 million transacted year to date, more than doubling year over year.
• AI Protect bookings -- Bookings exceeded $100 million over the last 12 months, fueled by the January launch and strong customer demand.
• Red Canary contribution -- Red Canary exited Q3 with $127 million ARR; expected to reach $137 million in fiscal 2026, with Q4 net new ARR of $10 million.
• Guidance for Q4 -- Revenue expected between $875 million and $878 million, approximately 22% growth; non-GAAP operating profit of $206 million-$208 million; earnings per share of $1.08-$1.09 assuming 168 million diluted shares.
• Full-year fiscal 2026 guidance -- Revenue in the $3.33 billion-$3.34 billion range (24.6%-24.7% growth); ARR outlook of $3.74 billion-$3.75 billion (24% growth); free cash flow margin expected at 22.8%-23.3%, revised down from previous 26.5%-27% guidance due to higher CapEx.
• Fiscal 2027 early look -- Expected ARR and revenue growth of 16%-17%; Red Canary to be fully integrated with no separate reporting going forward.
• CapEx trend -- Anticipates CapEx in fiscal 2026 at high single digits percentage of revenue, increasing up to 200 basis points in fiscal 2027 due to higher equipment prices.
• Product expansion -- Announced intent to acquire Symmetry Systems to enhance agent-to-data access mapping and bolster AI agent security.

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Risks

• Rubin said, "At the end of the third quarter, 2 sales leaders departed the company. We already appointed a replacement for 1 of these leaders and we are in the late stages of hiring a leader for the other role. However, we are taking a prudent approach to our guidance during this transition."
• Guidance revised to reflect "higher CapEx in Q4 taking fiscal 2026 CapEx to the high single digits as a percentage of revenue, up from our prior expectation of mid single digits."
• Rubin said, "today, we expect CapEx as a percentage of revenue to increase up to 200 basis points compared to fiscal 26 levels."
• Guidance for full-year free cash flow margin was lowered to 22.8%-23.3% from prior expectations of 26.5%-27%, directly citing increased CapEx.

Summary

Management directly reported an all-time high in non-GAAP operating margin (23%) and record large deal activity in Q3, indicating expanding customer engagement across core security segments. Zscaler (NASDAQ:ZS) attributed surging demand in AI security to both new customer wins and broad upsell among major enterprises, supported by the launch of the AI Protect suite and deepening global system integrator partnerships. Strategic acquisitions, including Symmetry Systems, were cited as reinforcing competitive differentiation in zero trust and agentic security, while guidance revisions explicitly accounted for leadership turnover and hardware cost challenges. Over the last 12 months, Z-Flex total contract value surpassed $1 billion, and AI-related offerings produced more than $100 million in annual bookings, establishing strong, recurring growth vectors. Management provided an early outlook for fiscal 2027, anticipating deceleration to 16%-17% ARR and revenue growth rates, with full Red Canary integration and elevated CapEx projections impacting free cash flow margin assumptions.

• Management highlighted accelerated bookings through cloud marketplaces, with $900 million transacted year to date and year-over-year doubling, underscoring changing procurement dynamics.
• Customer count of Zero Trust Everywhere enterprises surpassed 700 at quarter end, up from over 550 in Q2, demonstrating increasing full-platform adoption.
• Multiple marquee customer wins in health care, financial technology, public sector, and automotive segments emphasized the breadth of Zscaler’s platform and its role in displacing legacy firewall and VPN vendors.
• Investments in channel, GSI alliances, and expanded sales coverage were outlined as priorities for new logo growth, particularly in underpenetrated enterprise segments of 2,000-10,000 users.
• Operator-moderated Q&A and commentary confirmed that sales leadership departures and supply chain pressures are the main drivers of near-term conservative forecasts.

Industry glossary

• Zero Trust SASE: Unified approach combining secure access service edge (SASE) with zero trust principles to provide integrated security for users, branches, cloud workloads, and devices without reliance on traditional network perimeters.
• ARR: Annual recurring revenue—predictable, run-rate revenue based on existing subscription contracts, not including one-time fees.
• RPO: Remaining performance obligations—the total value of contracted future revenue yet to be recognized.
• Z-Flex: Zscaler’s flexible multiyear contract program allowing customers to activate or swap modules within existing procurement cycles, supporting upsell and forward sales visibility.
• AI Protect: Zscaler’s AI-focused security suite, including AI asset discovery, guardrails, and continuous red teaming for proactive protection of enterprise AI applications and agents.

Full Conference Call Transcript

Jay Chaudhry, Chairman and CEO and Kevin Rubin, CFO. Please note that we posted our earnings release, shareholder letter and a supplemental financial schedule to our investor relations website. Unless otherwise noted, all numbers we talk about today will be on an adjusted non GAAP basis. You will find a reconciliation of GAAP to the non GAAP financial measures in our earnings release. Before we get started, I would like to remind you that today's discussion will contain forward looking statements.

Including, but not limited to, the company's anticipated future revenue, annual recurring revenue, net new annual recurring revenue, operating margin, gross margin, operating profit, net other income, earnings per share, and free cash flow margin, our customer response to our products, our expectations regarding AI and its impact on our business and customers, and our market share and market opportunity and our objectives and outlook. These statements and other comments are not guarantees of future performance. But rather are subject to risk and uncertainty, some of which are beyond our control. These forward looking statements apply as of today, and you should not rely on them as representing our views in the future.

We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC as well as in today's earnings release. I also want to inform you that we will be attending the following conferences this quarter. The Baird Global Consumer Technology and Services Conference on June 2, the Bank of America global technology conference on June 3, and the FBN Virtual Technology Conference on June 15. And with that, I will turn the call over to Jay.

Jagtar Singh Chaudhry: Thanks, Kim. And thanks to everyone for joining us today. We delivered strong Q3 results. ARR grew 25%. And non GAAP operating margin hit an all time high at 23%. AI is changing the nature of cybersecurity in real time. And Zscaler is the cybersecurity platform for the AI era. This is evident in our results and the reason we are so confident in our long term potential. We offer the industry's only complete Zero Trust SASE solution, a singular Zero Trust platform across users, across cloud workloads, and across branches. Our architecture is purpose built to address the limitations of firewall based SASE solutions and has several key differentiators.

First, we hide applications and data behind our zero trust exchange making them invisible from the Internet. And eliminating the attack surface. An attacker cannot breach what it cannot reach. Hence, this architecture provides far superior cyber protection for our customers. Second, we eliminate lateral movement of attackers with our zero trust architecture. We only allow authorized users and workloads to access specific applications. This reduces the blast radius of a potential breach providing better security to our customers. This stands in stark contrast to competitors with firewall based SASE architecture. That connect users to the corporate network.

And once a malicious actor gains a foothold, on the network, it can roam freely and systematically attempt to compromise critical applications or steal data. This is how most ransomware attacks happen. Finally, scale matters. And our cloud native zero trust exchange is the largest distributed in line security platform in the world. That spans across 160 public exchanges. Processing more than 500 billion transactions per day. This gives us the best quality and quantity of telemetry data. Simply put, no other cybersecurity vendor has access to datasets with comparable fidelity and breadth. This high fidelity telemetry fuels our AI security capabilities continuously improving how we detect prevent, and stop threats.

These differentiators are especially important at a time when organizations are aggressively deploying AI applications and models with growing interest in AI agents at scale. We expect it will not be long before millions of AI agents have access to organizations mission critical applications, and sensitive data. Todd, users are the weakest link in cybersecurity. But soon, AI agents will be the weakest link. Because they operate at far greater speed and have far less oversight. Even a single compromised agent can move from to data theft in minutes. Inflicting catastrophic damage on enterprises. Making it even more challenging, new powerful frontier AI models like Meta's are finding security vulnerabilities in software at machine speed.

Significantly diminishing the effort, skill, and time needed to breach enterprises. All enterprises already have thousands of known vulnerabilities that they have not been able to patch. Frontier models are multiplying these unremediated vulnerabilities by as much as 10x. And even more powerful models that are currently being developed. Will undoubtedly make it worse. Enterprises do not have the capacity to patch and update existing vulnerabilities, so backlogs are piling up faster than organizations can address them. To tackle this challenge, the market needs to take a different approach. We provide the 2 most important defenses against these vulnerabilities. 1, hiding applications from attackers. And 2, eliminating lateral movement at scale.

This validates the architecture we pioneered Zscaler was built for this moment. We started with zero trust security for users, so users can safely access applications from anywhere. Then we expanded our exchange to provide zero trust security to workloads, and connected IoT OT devices. Now we are expanding our exchange to secure AI agents. An important element of agentic security is to understand which agents users, and other identities are communicating with which models applications, and data sources. On May 21st, we announced our intent to acquire Symmetry Systems a company that solved this difficult problem. Symmetry provides an access graph that maps how identities applications, and other data sources connect across the enterprise.

We are integrating its access graph technology with our zero trust exchange. We are excited to share more about this at our Zenith Live user conference in Las Vegas next month. We are also partnering with Anthropic on Project Glasswing, And with OpenAI as part of its Daybreak program formerly known as trusted access for cyber or TAC. Which allows us to access frontier models to proactively harden our systems and deliver better security and resilience to our customers. Against this backdrop, investors have asked us where is the ideal place to guard against AI threats? We are in the enviable position of having strong visibility and across 3 critical vantage points for superior security. Network, cloud, and endpoint.

This is indispensable in enforcing real time policy decisions. It is a powerful advantage for our customers and an important differentiator for Zscaler. We are enhancing our go to market engine across multiple dimensions to help highlight this differentiated approach. For example, we continue to deepen our partnership with global system integrators or GSIs who play a meaningful role in expanding the reach of the Zscaler platform. We are seeing strong growth in bookings through our GSI partners. We recently announced the launch of Project AI Guardian, a strategic collaboration with key GSI partners which will help our partners extend the Zero Trust architecture to AI assets including AI agents.

GSIs will be able to leverage Zscaler's AI protect portfolio to build specialized AI discovery and risk mitigation services. We are also continuing to expand our cloud marketplace motion. For fiscal 26 year to date. We transacted approximately $900 million in TCV through our cloud marketplaces. Which more than doubled year over year. This is becoming a more important route to market. As cloud marketplaces simplify procurement, align well with enterprise cloud commitments, and increasingly support larger strategic engagements. These investments are helping expand our reach. And Zscaler's unique architecture and for safe adoption of AI is resonating. This is evident in my conversations with customers and partners. And why I believe AI is a catalyst for our business.

Let me illustrate our progress with a few customer examples. In a 7-figure upsell deal, a Fortune 500 financial technology company chose Zscaler to secure rapid enterprise adoption of AI with our AI Protect solution. Which we introduced in January. AI Protect includes AI asset discovery, AI guardrails, and continuous red teaming. Zscaler AI Protect provides this customer a single integrated way to discover and manage all AI assets including shadow AI users, enforcing safe access to approved apps, and inspecting every prompt and response in real time to stop data leaks and attacks like prompt injection.

This customer faced a complex challenge of securing both employee interactions with public AI apps and their own suite of custom built AI solutions. With our AI red teaming and AI Guard capabilities, the customer moved from a manual reactive effort to an automated proactive approach to harden the growing number of AI applications. For customers building their own AI models and applications, Our AI red teaming solution performs continuous security assessment. Our unified user interface and deep integration of multiple products is a key differentiator. Our AI Protect solution is resonating with customers with bookings crossing $100 million over the past 12 months.

We are seeing inbound requests from across our customer base, and our pipeline is robust and growing. In another customer example, we closed a 7-figure upsell with a federal agency that previously migrated from a legacy VPN architecture last year to Zscaler's Zero Trust platform. This agency is deploying Zscaler to modernize and unify its data security strategy. Gaining broad coverage without the overhead of managing additional endpoint agents or the operational complexity of stitching together various data security products. With this expansion, the customer is now using 6 of Zscaler's 8 data security modules across data classification, email DLP, endpoint DLP, and inline DLP, along with our GenAI Security solution.

The expansion underscores our broader momentum in data security, which crossed $500 million ARR. Up over 30% year over year. As AI adoption accelerates, and sensitive data increasingly resides across multiple locations, Customers are reducing cost and complexity. By consolidating onto our data security solution. Turning to another customer example. During Q3, we signed the largest branch deal in Zscaler history. An 8 figure upsell with a leading health care system to deploy our unified zero trust branch solution across 2,000 sites. Zero Trust branch disrupts branch firewalls. Software defined wide area networks, or SD WAN, and MPLS networks. With this win, we are displacing both a major firewall incumbent and a legacy VPN incumbent.

With Zscaler, the customer is eliminating lateral threat movement in their health clinics at roughly half the cost of its prior legacy solution. We are seeing particular momentum with Zero Trust branch where ARR has approximately tripled year over year. The next customer I will highlight is a 7-figure new logo win with the leading health care technology company. For a platform wide adoption. This deal illustrates why customers choose Zscaler over incumbent firewall vendors The stickiness offers zero trust approach with CIOs and CSOs. And our ability to convert a limited initial request into a comprehensive platform win. We received an inbound request for this particular customer after a senior technology leader joined from another customer.

Where he had a great experience deploying Zscaler. He fully understood the difference between Zero Trust SASE and firewall based SASE. While the initial discussions started around securing users, the company's top priority quickly became securing cloud workloads. The deal quickly grew into a comprehensive platform win. Including Zero Trust Cloud, Zero Trust Branch, and 4 data security modules. The last customer win I will highlight is a large automotive manufacturer. That adopted our Zero Trust cloud solution in a 7-figure upsell deal. This is a long time Zscaler customer whose ARR is up 10-fold in the last 7 years. This quarter, the customer extended its existing Zscaler Zero Trust SASE footprint.

By expanding its deployment of Zero Trust Cloud improving its security posture, and securing its massive multi cloud environment. The customer can now inspect encrypted traffic and enforce granular security policies across hundreds of previously ungoverned cloud workloads. The deal also highlights the benefits of our Zero Trust cloud solution which was configured in under 10 minutes. During the customer's proof of concept. Zero Trust Cloud eliminates virtual firewalls in data centers and cloud environments reducing cost and operational complexity. The strength we are seeing in Zero Trust Cloud and Zero Trust Branch is driving the growth of our Zero Trust everywhere enterprises. That purchase each of our Zero Trust for users, Zero Trust for branch, and Zero Trust cloud.

We exited Q3 with more than 700 Trust Everywhere enterprises. Versus over 550 in Q2. Customers are recognizing that it is no longer enough to just secure their users and our platform is the industry's only complete Zero Trust SASE solution. Across users, across cloud workloads, and across branches. In summary, we are confident Zscaler is the cybersecurity platform for the AI era. We expect AI and like frontier models to be 1 of the strongest tailwinds our business has ever seen. Our Zero Trust SASE solution enables us to hide applications and make them invisible to attackers while also eliminating lateral movement. These attributes along with our scale, are true competitive differentiators for Zscaler.

With frontier models uncovering vulnerabilities at unfathomable speeds and AI agents becoming the weakest link in cybersecurity. These differentiators have never been more important than they are today. Our approach is resonating and helping to drive significant wins that demonstrate our ability to attract new customers and further penetrate our installed base of more than 9.4 thousand customers. Among those, we serve just 4.5 thousand enterprises out of a potential 20 thousand enterprises in our primary target market. We are confident that our innovative approach to staying ahead of threat actors will help to drive further share gains. With the significant long term growth potential, we are well positioned to continue creating significant value for No.

I will hand it over to Kevin to walk through the financials. Thanks, Jay.

Kevin Rubin: We delivered strong Q3 26 results. Growing revenue 25% while investing with discipline. Year to date with 26% revenue growth, and a 29% free cash flow margin, we achieved Rule of 55 performance. Our Q3 26 net new ARR was a $166 million up 24% bringing total ARR to $3.5 billion. Up 25% year over year. Net new ARR benefited from strength in the public sector vertical which includes state, local, and federal government and health care. Including an approximate 8 digit upsell at a federal agency. Net new ARR also benefited from strength of large deals in APJ where the deal value from $1 million plus deals increased more than 150% year over year.

Excluding the contribution from our acquisition of Red Canary, net new ARR was a $153 million up 14% year over year. And total ARR was also up 21%. Red Canary exited Q3 with a $127 million of ARR. We have steadily expanded our Zero Trust platform beyond users to protect branches, workloads, AI applications, and now AI agents. We believe AI agents will drive a meaningful increase in machine to machine and agent to agent interactions over time. In Q3, our non seat based metered usage solutions deliver just over 30% of new ACV. And the ARR tied to those offerings grew more than 100% year over year.

Revenue of $850 million grew 25% year over year and 4% sequentially, exceeding the high end of our guidance. We closed Q3 with 748 customers generating more than $1 million of ARR and 4 thousand customers exceeding a $100 thousand of ARR, growing 18%, 19% year over year, respectively. We also set a record $1 million plus New ACV deals for Q3. On a geographic basis, we saw strong growth from the Americas, which accounted for 56% of revenue, up approximately 31% year over year. EMEA accounted for 28% of revenue, up approximately 16%, and APJ for 16% up approximately 23%. Remaining performance obligation or RPO of approximately $6.5 billion grew approximately 30% including approximately 46% classified as current RPO.

Our go to market strategy is a key growth lever enabling us to deepen customer relationships accelerate platform adoption, and expand multiyear engagements. Building on Jay's earlier comments on enhancements to our go to market engine, we are continuing to strengthen our position as a long term strategic partner and driving deeper customer adoption over time through our account centric sales motion. We saw strong momentum this quarter with Z-Flex. Z-Flex gives customers with multiyear commitments the flexibility to activate or swap modules without starting a new procurement cycle along with premium deployment assistance and support. This program is driving meaningful upsell, shorter sales cycles, and greater forward visibility.

In Q3, Z-Flex generated just over $480 million in TCV, up more than 60% quarter over quarter. We have delivered over $1 billion in Z-Flex TCV over the last 12 months in an average 4 year term underscoring customers' long term commitment. To Zscaler. To share a couple customer examples, in a 5-year, 8-figure Z-Flex deal, a Fortune 500 finance and insurance customer that is spends more than $5 million with us annually, increased their ARR by nearly 50%, expanding module adoption across 4 existing modules, and adopting 6 new modules, including our AI Protect solution.

In another example, an existing 7 figure ARR global 2,000 semiconductor manufacturer customer increased their annual spend with us by 60% in a 3-year 8-figure Z-Flex deal. This customer expanded adoption across 6 existing modules and adopted 6 new modules, including our AI Protect and Zero Trust branch solutions. Turning to operating performance. Non-GAAP gross margin was 80.7% compared to 80.3% a year ago. Non GAAP operating income of a $196 million grew $49 million or 34% as compared to $147 million last year. Non-GAAP operating margin of 23% increased 140 basis points year over year, demonstrating leverage on sales and marketing. Turning to the balance sheet.

We ended the quarter with $3.5 billion in cash, cash equivalents, and short term investments. And $1.7 billion of debt. In Q3, we generated a $198 million in operating cash flow, and CapEx was $42 million or 5% of revenue. This equates to a free cash flow margin of 16% this quarter, down from 18% last year, reflecting the timing of cash collections and a free cash flow margin of 29% year to date. Looking ahead, I would like to spend a minute and provide an update on increasing memory storage and processor prices and availability. As a reminder, we purchase equipment for our data center and zero trust branch appliances.

To mitigate costs, we put through a price increase on our branch appliance earlier this calendar year. Which we expect to flow through in the next several months. We are also being opportunistic in taking advantage of delivery of data center equipment where we can get it to lock in today's prices ahead of potential increases in the future. This is pulling forward some of the investments we expected to make in fiscal 27 into Q4. As a result, we expect higher CapEx in Q4 taking fiscal 2020 CapEx to the high single digits as a percentage of revenue, up from our prior expectation of mid single digits.

Looking ahead to fiscal 27 based on higher prices we see in the market today, we expect CapEx as a percentage of revenue to increase up to 200 basis points compared to fiscal 26 levels. We will continue to monitor our costs and share regular updates about the impact. Turning to guidance. At the end of the third quarter, 2 sales leaders departed the company. We already appointed a replacement for 1 of these leaders and we are in the late stages of hiring a leader for the other role. However, we are taking a prudent approach to our guidance during this transition. Let me provide our outlook for Q4 and full year fiscal 2020.

As a reminder, these numbers are all on a non-GAAP basis. For the fourth quarter, we expect revenue of $875 million to $878 million reflecting approximately 22% year over year growth. Gross margin of approximately 80%, operating profit of $206 million to $208 million up to approximately 30% to 31 year over year. Net other income of approximately $24.5 million and earnings per share of approximately $1.08 to $1.09 per share, assuming a 21% tax rate and 168 million fully diluted shares. For the full year fiscal 26, we expect ARR of $3.74 billion to $3.75 billion or year over year growth of approximately 24%. This guidance implies net new ARR growth excluding Red Canary of approximately 9.5%.

For Red Canary, we expect ARR of a $137 million in fiscal 26, up from our prior guidance of a $130 million with net new ARR of $10 million in Q4. This includes all the business expected in each period, including fiscal 26 renewals, upsells, and new logos. Revenue of $3.33 billion to $3.34 billion reflecting year over year growth of 24.6% to 24.7%. We expect Red Canary revenue of approximately a $137 million in fiscal 26 up from our prior guidance of a $125 million.

Operating profit of $755 million to $757 million up approximately 30% year over year up from our prior guidance of $742 million to $748 million Earnings per share of $4.10 to $4.11, assuming a 21% tax rate and 168 million fully diluted shares. And free cash flow margin of approximately 22.8% to 23.3%, down from our prior expectations of 26.5% to 27%, reflecting CapEx in the high single digits as a percentage of revenue. Looking to fiscal 27, I would like to provide some early look to better align expectations heading into our second year with ARR as our primary growth metric and following the acquisition of Red Canary.

Sitting here today, our view is for total ARR and revenue growth for fiscal 2016 of 16% to 17%. Looking ahead, we are excited by the opportunities we see to continue scaling our rapidly expanding AI security portfolio accelerating Zero Trust Everywhere adoption, and growing our data security revenue. In summary, we are pleased with the results we delivered year to date in fiscal 26. We achieved 25% year over year ARR growth and record operating income. We also saw continued momentum with Zflex, and closed a record number of $1 million plus ARR deals for a Q3.

The opportunity ahead of us is substantial, and we are confident in our ability to continue driving profitable growth across multiple vectors including product innovation, go to market, and customer expansion, and creating value for our shareholders. I want to thank our employees, customers, and partners for their continued support.

Operator: With that, operator, you may now open the call for questions. Thank you. Thank you. *1 on your telephone. To remove yourself from the queue, you may press *1 again. Please limit yourself to 1 question then return to the queue. Our first question comes from the line of Brad Zelnick of Deutsche Bank. Your line is open, Brad.

Analyst (Brad Zelnick): Great. Thank you so much. Lot of strong proof points in these results. Maybe a compound question since you are limiting me to 1 for both Jay and Kevin. I am just trying to better understand the sales leadership turnover that you highlighted. Jay, if you can comment at all whether these positions, the turnover was voluntary or involuntary, how senior they were, and why this could have an impact when you have such a mature and resilient sales organization. And then maybe for Kevin, on the same topic, is the pipeline there, and you are just assuming a lower close rate, what would your guidance have been if these leaders were still in place? Thanks so much.

Jagtar Singh Chaudhry: Hey. Hey, Brad. Thank you. So regarding the sales leadership changes, these 2 leaders were part of our CRO, a Mike Rich team. And it is true that Mike has built a strong bench He has built a strong sales engine. We just want to improve on it, that as these changes are made, it could have impact in the short term, and that is what we are keeping in mind. Kevin?

Kevin Rubin: Yeah. Thanks, Jay, and thanks, Brad. Yeah. I do not have much more to offer other than, you know, we are taking a prudent approach. We do recognize when leaders of this nature change that it can have some disruptive nature to those organizations. So I am just taking a prudent, approach to how we think about those changes. Thanks Brad.

Jagtar Singh Chaudhry: And only other thing I will add Brad is that you know, there will be changes in leadership from time to time. And regarding these 2, we have already appointed an internal replacement for 1 of these. And the second 1 we are making progress and we expect to close that in the near future as well.

Analyst (Brad Zelnick): that is helpful. Thanks so much for taking the question.

Operator: Thank you. Our next question comes from the line of Saket Kalia of Barclays. Your line is open, Saket.

Analyst (Saket Kalia): Okay, great. Hey, guys. Thanks for taking my question here. Kevin, maybe for you, can we just speak to how big I guess, you know, the question is if we exclude that deal, The 8-figure federal deal was here in Q3? how do we maybe feel about the underlying flow business? Right? Whether it is new or renewals, again, excluding that large deal, which was great to see, I am just curious how you look at the business if we exclude it, if we could size that.

Kevin Rubin: Yeah. Thanks. Thanks, Saket. I mean, look, at the highest levels, you know, we delivered a strong and I think we are very pleased with the results of the business. As it relates to the 8 figure upsell that I called out, you know, keep in mind that these contract wins as you see them get reported, first of all, it is TCV. And second, that part of the deal, along with the upsell, was also a large part of that deal was renewals. So, that is already preexisting in ARR as you think about that particular deal that you are querying.

Jagtar Singh Chaudhry: And Saket, if I may add, you have seen in the past, it is these are unusually large. We point them out. So nothing unusual about this. Yeah.

Analyst (Saket Kalia): Very helpful. Thank you. Thanks, Saket.

Operator: Thank you. Our next question comes from the line of Joshua Tilton of Wolfe Research. Please go ahead, Joshua.

Analyst (Joshua Tilton): Hey, guys. Thanks for sneaking me in here. Appreciate the early look, for the numbers next year. When you look at the growth and kinda what it implies for net new ARR, you guys are kinda calling flat on an organic basis from the guide. For this year. Can you kind of help us maybe think about the moving pieces between where that is coming from, whether that is traditional descaler business or Red Canary? Or just any color to help us think about the trajectory of organic net new ARR next year in that guide? Thank you very much.

Kevin Rubin: Yes. I will go ahead and start, and Jay can append. This is how I thought about the different components as we were, giving you guys an early look. And I just wanna call out, you know, we do not typically provide you know, this type of guidance early this early in the year going into the following, but we thought it was important to give you an understanding of what we are seeing. So, first of all, you know, we have a pretty strong track record of upsells. And I expect that is going to continue into 2027.

You may recall that we shared we had a net retention of 115% in Q1, and that has been fairly stable the last, several quarters. The area that, you know, we have not been performing as well as we would like is new logo. It certainly is a large priority for us, but I did take a tempered view of new logos going into 2027. And then lastly, as we think about Red Canary, its contributions, we will be rolling out, the integrated SecOps solution that will be available, we would expect, in 2027. What I do not know is the pace of uptake, amongst the existing customers for that.

So as a result, as we think about Red Canary, we are expecting, Red Canary's net new ARR to grow at a slower rate than the overall business in 2027 as you think about modeling. And also keep in mind that Red Canary will be included in our results going into next year as it will be fully baked into 2026. So we will not be providing, separate disclosure of Red Canary in 2027.

Jagtar Singh Chaudhry: If I may add, look, we already covered the factor That sales leadership position has been part of our thinking to make sure you understand that it may have some impact. But if you look at the overall market opportunity, Metas has shed some more light on it. Every CIO, every CISO whom I talk to is talking about protecting his vehicles. And interesting part is while Ethos is about finding new software vulnerabilities and fixing them, People already have enterprise already have tons of vulnerabilities. The number 1 protection they are looking at is doing is hiding their attack surface, Number 2, they are trying to do is zero trust access. And we fairly uniquely provide those things.

So while we were prudent in our forecast, the need for Zscaler today especially for deep is probably far greater than it has ever been.

Analyst (Joshua Tilton): Super helpful, guys. Thank you. Thank you.

Operator: Thank you. Our next question comes from the line of Gregg Moskowitz of Mizuho. Please go ahead, Gregg.

Analyst (Gregg Moskowitz): Great. Thank you very much for taking the question. You did very well this quarter in The Americas in APJ. Although growth in Europe slowed What are you guys seeing in Europe? And then just wondering if you had any commentary on the competitive environment both in The Americas and in Europe. Thank you.

Jagtar Singh Chaudhry: So if you think with the overall competitive environment, I do not think things are very different in Europe than the rest of the rest of the world. You know, he has seen us from time to time geo may do better in a given quarter, and geo B may do better. But I think we know some of the areas of execution we need to improve. We are focused on it. And I am pretty sure that we will turn around and make EMEA a high-growth area.

Analyst (Gregg Moskowitz): Okay. Thank you. Thank you.

Operator: Our next question comes from the line of Gabriela Borges of Goldman Sachs. Your line is open. Please go ahead, Gabriela.

Analyst (Gabriela Borges): Hi, good afternoon. Thanks for the question. Kevin, you mentioned something interesting there when you were talking about the outlook for next year, which is that new logo growth may be tempered And so either for yourself or for Jay, maybe just give us a sense. When you dig beneath what is going on with the with the sales relationships, with the customer pipeline, why do you think new logo growth is tempered? Thank you very much.

Kevin Rubin: Yeah. Thanks, Gabriela. Just to clarify, it was not trying to suggest that new logo growth is tempering. What I was intending to convey is that my expectations relative to the early look for next year took a tempered approach to how we thought about the contributions of new logos. New logos is a strategic focus of ours and you know, as we go into 2027, it will continue to be. So but, again, I am I am providing an early look here far earlier than we would normally do.

And so as I looked at what we had in front of us in terms of the different components of the business, that was 1 area where I think we can do better.

Jagtar Singh Chaudhry: If I may add, there is a sizable new logo opportunity For us. We have 4.5 thousand enterprises as our customers, and those enterprises are customers with over 2,000 user seats. And out of the 2.5 thousand that cost -- that is what -- 23%. That means a sizable market for us. To go after.

Analyst (Gabriela Borges): Thank you for the call.

Operator: Thank you. Our next question comes from the line of Brian Essex of JPMorgan. Your line is open, Brian.

Analyst (Brian Essex): Jay, if I could maybe ask you to peel back the layers a little bit on the impact of Meta's and OpenAI models. You know, what we are hearing from some of the channel providers is that you know, this c suite executives at enterprises are maybe to use their words, freaking out over the emergence of these models and the realization of how robust they are. So when you comment about some of the tailwinds in your business on the back of the emergence of these foundation models, How do you see that materializing in your pipeline? It sounds like the consultants are very busy right now.

But given the typical sales cycles that you have, and maybe the, you know, architectural decisions that are involved with adopting your Zero Trust platform. When might we expect to see some kind of impact to pipeline revenue billings and so forth? And how is this materializing with your conversations and how your pipeline might be materializing? Thank you.

Jagtar Singh Chaudhry: it is a very important question, Brian. I have never seen so many inbound calls come in so quickly. And I got so many calls that I decided to say, we will reach out to them and figure out a programmatic way of engaging with them. So I do not need to dig into the detail of their concern. We all know they are very concerned, and they are looking for help. So, yeah, it is interesting that most of the customers and vendors are taking the approach that let me help you find more and more vulnerabilities and try to patch that.

While patching is a reasonable approach, we do not think the primary focus needs to be patching because you will never be done patching So our recommendations are very clean. Hiding your applications that I talked about. Zero trust access. Those are fundamental things that need to be done, and that is what we are helping our customers with. Now we also know that this is an area where we need to help our customers and not do ambulance chasing. Okay? So we are not rushing to create opportunities. We are actually engaging with our customers in a consultative fashion. To help them get out of the tough situations.

So they can really keep the board and CEOs apprised of what is going on. Now, obviously, there are areas these customer need to worry about. We are not really factoring in any meaningful impact of The new opportunities for Q4. But I do believe we will have impact in fiscal 27. The short term impact if I were to give you a couple of specifics, Number 1, many customers have ZIA for all the users. But ZPA's kind of private access is only for subset of users. Now they want zero trust access for everyone from every location, even from the headquarters. So it is increasing interest for ZPA upsell.

We have very cool deception technology it is a technology. Customers want this technology because they know that. With all this happening, there will be more breaches, and they want to catch that. Red handed using deception micro-segmentation. So that is why I said sometimes I feel like it is a forward like moment, Zero trust has never been more important before. Thank you. Helpful color.

Analyst (Brian Essex): Thank you.

Operator: Thank you. Next question comes from the line of Meta Marshall of Morgan Stanley. Please go ahead, Meta.

Analyst (Meta Marshall): Great. Thanks. Maybe building on a couple of the questions. Just as we think about kind of signposts that you guys are looking at, for improvements on the new logo side, will that come from some of the GSI channel outreach that you guys are doing, the expansion that you guys are doing? Will that come with some of the new leadership? Know, flexible pricing? Just trying to get a sense of what you think is kind of the most incremental to improve the measures that you laid out to improve the new logos? Thanks.

Jagtar Singh Chaudhry: Yeah. Meta, thank you. So we have pretty specific plans. We are formulating, and they will be important part of our fiscal 20 seventh plan. Number 1, we have a limited coverage in the lower end of the market. When I say lower end of the enterprise market, it is generally between 2,000 to 10 thousand users. As you know, the high end coverage is pretty strong. So adding more salespeople in that part of the market where coverage is less, Number 1. Number 2, the channel, especially the VAR channel. Plays an important role in the low end of the market. So we are creating specific programs and incentives for new logo in that area.

Number 3, on the GSIs, having good partners. GSIs generally good partners for large enterprises. So we are teaming with them for this area. You heard about AI Guardian program we launched with them. that is a natural extension of the work we are doing. Number 4, we have a program for major accounts. We are gonna make sure we do some more focus on those teams to get new logos in addition to working on upsell. I think we feel pretty good about the opportunities to engage and do this stuff. And a little bit more incentive to do new logo versus we have not done a whole lot in the past. This will probably make a difference.

Analyst (Meta Marshall): Gregg. Thanks. Thank you.

Operator: Our next question comes from the line of Ittai Kidron Of Oppenheimer and Company. Your line is open, Ittai.

Analyst (Ittai Kidron): Thanks. I appreciate it, guys. Kevin, I just want to make sure I get my bearings right around the ARR and the commentary there. Taking into account your revised guidance for the year and your preliminary view into next year, it looks like our Q4 net new ARR again is decelerating quite substantially, and it is probably also in the going back to mid single digit growth only, into next year. So another deceleration. I just wanna get my hands around outside of the sales leadership that you have talked about, are there any other elements to take into account here with respect to this?

You know, you guys have made a lot of work over the last couple of years kinda turning around the Salesforce. I understand that when 2 leaders leave, clearly, some disruption can happen. I am just wondering if that is the only element impacting, the net new ARR here. There are other things to, take into account. Thank you. Yeah.

Kevin Rubin: Thanks for the question. I mean, look, the 2 factors that I think are important you certainly mentioned 1 in terms of you know, the 2 leaders under Mike. That we commented on. You know, it is just a reality when you have leaders that do depart that you do you may see some disruption, and so I am just taking a prudent approach to, that potential disruption. The other thing that I commented on is just the pace of uptake with the, integrated, SecOps products. So, as we think about how that rolls out and what that pace of uptake is, I am also taking a prudent approach there.

As it relates to Q4, so the guide implies 9.5% net new ARR growth, on an organic basis, excluding Red Canary. And just keep in mind, you know, that is still an acceleration over what we put up, last year. So keeping everything in perspective.

Analyst (Ittai Kidron): Appreciate it.

Operator: Our next question comes from the line of Eric Suppiger of B. Riley Securities. Your line is open, Eric.

Analyst (Eric Heath): Yes, thanks for taking the question. On that outlook, for fiscal 27, I think you had commented last quarter that the ZIA ZPA core products were growing in the mid teens. What growth assumption are you assuming as you look out to 2027 on those core products? Yeah.

Kevin Rubin: Thanks for the question. I mean, it is a little bit early, and that is a fairly granular element. What I can say is that, you know, we have continued to see you know, consistent performance this year within the ZIA ZPA product lines, but we did not provide that level of granularity into next year.

Jagtar Singh Chaudhry: If I may add, quite often questions that are asked about core products, versus non-core products as if they are 2 separate buckets altogether. I think as we have been saying, our customers are asking for Zero Trust Everywhere. We started with zero trust for users, which is ZIA, ZPA, That was part 1. Now they are all moving towards zero trust for cloud work. And then zero to branches and IoT OT devices. So our number 1 push is to work with customers to do Zero Trust Everywhere. that is a big differentiation for us. And opportunity to sell bigger deals while others who claim to say we do what these guys do are fairly point tools.

Zero trust for users, which has matured over the last many, many years.

Analyst (Eric Heath): Thank you.

Operator: Thank you. Next question comes from the line of Adam Borg of Stifel. Please go ahead, Adam.

Analyst (Adam Borg): Awesome. And thanks for taking the question. Maybe just on Symmetry Systems I would love to learn a little bit more about what that brings to you that you could not do previously around securing AI agents. And given their Access Graph, technology, how are you thinking about the movement to identity security more broadly? And maybe just a quick follow-up, any color on symmetry and even Square X in terms of contribution to revenue and ARR?

Jagtar Singh Chaudhry: So first of all, Symmetry has built very innovative technology. So what is the problem statement? it is not really basic identity. We believe the identity of agents will really come from companies such like hyperscalers or large software companies. Who are actually providing platform to build agents, They are the natural place to build identities. So trying to be an identity company for agents for someone outside these big guys will be a hard thing. We have always taken the approach of being a Switzerland. Where we will take identity from different corners. So then what is symmetry? Symmetry pioneered identity mapping to data sources. So think of this way.

In a large enterprise, all these identities, maybe users, workloads, maybe other machines. They access data sources may be sitting out there somewhere. Do you know who is accessing what, when, where? Information sets in each application logs. Symmetry pulls that information and creates a very cool visual Access Graph. This was a hard problem to solve. So this was solved by a bunch of PhDs. Once you understand who talks to who, this solution, this thing can be used to enforce policy on our agentic exchange that we are building. So it is very complementary. Forward looking technology. This is the kind of stuff most companies are not thinking about.

Zscaler has always taken pride in being innovative and coming on solutions. That no 1 else has built. So our zero to the change got extended to zero to stuff that change for agents. And this becomes a very useful piece to highly differentiate our exchange and provide value for data governance and policy enforcement. On our customers. I answer your question?

Analyst (Adam Borg): that is really helpful. And just, Kevin, maybe any color just on Yep. Top line. Symmetry and SquareX. Thanks again.

Kevin Rubin: Yeah. Yeah of course. Of course. You know, so as Jay mentioned, just to level set, you know, symmetry is a technology and talent acquisition. Their ARR is immaterial and is in the low single digits. I think you also asked about Square X. That was also incredibly immaterial.

Analyst (Adam Borg): Appreciate the color. Thanks again. Yeah. Thank you.

Operator: Thank you. Our next question comes from the line of Fatima Boolani of Citi. Please go ahead, Fatima.

Analyst (Fatima Boolani): Thank you for taking my question. Kevin, just on some of the commentary with respect to the opportunities to step on the gas pedal vis a vis new logo acquisition, and in the context of the sales leadership, transition, Can you give us the quantified and quant qualification of sales productivity this year and some of your expectations as you think about the complexion of the 16% to 17% growth guide again, largely tied to some of your comments earlier around you know, building out more of a capacity presence with the lower end of the enterprise.

Would love a little bit more quantitative color on the sales productivity slash sales attrition and sales hiring quantum that you are thinking about in terms of pipeline build and conversion on productivity assumptions. Thank you.

Kevin Rubin: Yeah. Thank you for the question. Look. For Q3, this was our sixth straight quarter of sales productivity growth, even on the back of some tough compares. So I think we have done I think we are very pleased with the level of productivity that we have seen, continued improvement that we have seen. I would expect going forward into fiscal 27 that we will continue to see success in driving productivity and capacity I just caution that it is, you know, it is a bit early to provide quantification of how that you know, rolls into an early look for 2027. Thank you.

Operator: Thank you. Our next question comes from the line of Gray Powell of BTIG. Please go ahead, Gray.

Analyst (Gray Powell): Great. Thanks for taking the question. Maybe just 1 on the competitive front. So just from a technology perspective, how are you staying ahead of the firewall vendors who are increasingly trying to upsell Secure Service Edge into your installed base. And when you do have displacements of legacy vendors is there, like, a common driver? Is it, a particular set of features, or is it just the overall platform and just the, you know, that your technology is better. it is anything you could say on that front would be helpful.

Jagtar Singh Chaudhry: it is pretty simple. If you care about real cyber protection, you know that you need zero trust architecture. Firewalls create a trusted network. Trusted networks enable lateral movement. So our customers understand that They started with zero trust for users, Now they want zero trust for branch where each branch becomes an island like a cafe. Firewalls do that. They want zero trust for devices. Firewalls do that. They want Zero Trust for workloads. Workloads have been secured traditionally by 30 year old firewall technology. east-west, north-south firewall rules. We do it in a zero trust fashion. So we are on a roll to take our customers to Zero Trust Everywhere.

That is our biggest differentiator. it is not feature A or feature B. it is a architectural difference.

Analyst (Gray Powell): Okay. Thank you very much.

Operator: Thank you. Our next question comes from the line of Andrew DeCasperi of BNP Paribas. Your line is open, Andrew.

Analyst (Andrew DeCasperi): Thanks for taking my question. I wanted to ask about the comments on the CapEx guide And really, what I wanted to touch on is given you have put through a price increase earlier this year, and now these costs have gone even higher, are you considering potentially doing the same maybe at the same time next year? Yes, thanks for the question.

Kevin Rubin: I will start. You know, look, we are constantly looking at, you know, the balance you know, pricing, margin, and, you know, market prices and feel pretty good at where we are. We did push through a price increase earlier this year and have not seen any implications of that. I think the world is recognizing that hardware costs have gone up. But we do periodically review pricing and where we have opportunity to increase. So we do take advantage of that. I do not know that I would wanna sit here today and say at this time next year there will be another price change. It is something we look at more dynamically than that.

Jagtar Singh Chaudhry: But this situation you are talking about, is fairly unique. it is created by all these AI data centers that is causing such a shortage of so many parts. But as Kevin said, we will look at it from time to time. But this became a special factor that all of us recognized and adjusting accordingly for it.

Analyst (Andrew DeCasperi): Thank you.

Operator: I would now like to turn the conference back to Jay Chaudhry, for closing remarks. Sir?

Jagtar Singh Chaudhry: Thank you for joining us for the earnings call. We look forward to seeing you at 1 of the upcoming investor conferences. Thank you again.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Goodbye.

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