Zscaler, Inc. (ZS) — Form 10-Q Quarterly Report for the Quarterly Period Ended April 30, 2026 (Fiscal Third Quarter, Fiscal Year 2026)

Zscaler, Inc., the leading cloud-native cybersecurity platform company, delivered another quarter of strong revenue growth in its fiscal third quarter of 2026, with total revenue reaching $850.5 million, a 25% increase year over year. The company's Form 10-Q filing for the period ended April 30, 2026 reveals a business navigating a complex operating environment: one defined by robust secular tailwinds in cloud security and zero-trust architecture, tempered by persistent macroeconomic uncertainty that has elongated enterprise sales cycles and intensified customer scrutiny of large transactions. While Zscaler continues to invest aggressively in sales, marketing, research and development, and recent acquisitions — resulting in widening GAAP net losses — the company's key operating metrics, including Annual Recurring Revenue of $3.525 billion and a growing customer base exceeding 9,400 organizations, underscore the fundamental demand for its platform. This assembled description synthesizes the company's business outlook, financial performance, operational drivers, and material risk factors as disclosed in the filing.

I. Business Outlook and Guidance

Zscaler's fiscal 2026 second-quarter results (period ended April 30, 2026) reflect strong operational momentum, though management's forward-looking commentary emphasizes persistent macroeconomic headwinds and deliberate investment pacing. While the company does not provide specific quantitative revenue or earnings guidance in the 10-Q filing, the Management's Discussion and Analysis (MD&A) section offers extensive qualitative insight into management's expectations for the near-to-medium term.

Continued Investment Amid Net Losses

Zscaler expects to continue incurring net losses for the foreseeable future as it maintains elevated spending across sales, marketing, and research and development [Item 2 - MD&A, ¶4]. The company reported a net loss of $59.8 million for the nine months ended April 30, 2026, compared to $23.9 million in the prior-year period, reflecting stepped-up investment in go-to-market capacity and platform innovation. Management intends to invest significantly in growing and training its sales force, broadening brand awareness, and deepening channel partner relationships, which the company believes will expand its customer base over the long term [Item 2 - MD&A, ¶9]. R&D spending also continues to increase in absolute dollars as Zscaler enhances platform functionality, reliability, and scalability.

Demand Environment and Macro Trends

Management acknowledges that changes in macroeconomic and geopolitical conditions — including global conflicts, inflation, tariffs, and the emergence of AI — create uncertainty in the business [Item 2 - MD&A, ¶5]. In particular, the company continues to observe customer scrutiny of and elongated approval processes for transactions, especially larger deals, as customers carefully consider purchasing decisions and require multiple approvals. Management expects this customer cautiousness to continue in the near term, leading to extended sales cycles and delayed timing of large deals [Item 2 - MD&A, ¶7].

At the same time, Zscaler sees a significant secular tailwind. The rapid adoption of cloud infrastructure, expanding digital transformation, and growing AI usage have increased exposure to sophisticated cyber threats, forcing organizations to fundamentally change their network and security architectures. Management believes that most organizations have yet to fully make these investments, and that the imperative to securely move to the cloud and safely leverage AI will increase demand for Zscaler's cloud platform and broaden its customer base [Item 2 - MD&A, ¶6].

Strategic Priorities and Investment Focus

Zscaler's core go-to-market strategy remains its "land-and-expand" model, where new customers often start with a specific security function before expanding deployment to additional users, upgrading to AI-enabled capabilities, or purchasing new solutions such as data security or AI security services [Item 2 - MD&A, ¶8]. The company continues to invest in sales and marketing as its largest operating expense category, while simultaneously investing in R&D to offer new platform solutions and integrate acquired technologies. Management expects operating expenses to increase in absolute dollars but aims to balance growth investments with judicious cost management [Item 2 - MD&A, ¶9].

On the capital front, Zscaler reported $3,539.1 million in cash, cash equivalents, and short-term investments as of April 30, 2026, following the issuance of $1.725 billion in convertible senior notes in July 2025. Management believes existing resources are sufficient to fund working capital, capital expenditures, and debt repayment for at least the next 12 months [Item 2 - MD&A, ¶45].

Key Assumptions and Risks

Zscaler's outlook rests on several assumptions, including that its subscription-based revenue model (with contracts typically spanning one to three years) and land-and-expand strategy will continue to drive growth. However, risks remain elevated. Macroeconomic conditions could reduce future demand, elongated sales cycles may compress near-term bookings, and the company's history of operating losses and an accumulated deficit of $1,249.4 million underscore the uncertainty inherent in its growth-stage profile. Additionally, management notes that revenue recognition patterns and invoicing seasonality can cause periodic fluctuations in reported results [Item 2 - MD&A, ¶4, ¶15].

II. Revenue and Financial Performance

Zscaler delivered another quarter of strong revenue growth for the three and nine months ended April 30, 2026. Total revenue for the fiscal third quarter reached $850.5 million, a 25% year-over-year increase compared to $678.0 million in the same period last year [Item 2 - MD&A, ¶25]. For the nine-month period, revenue totaled $2,454.3 million, up 26% from $1,953.9 million in the prior year [Item 2 - MD&A, ¶35]. Growth was driven primarily by sales of additional subscriptions to existing customers, which contributed $102.7 million in incremental revenue in the quarter and $321.2 million year-to-date, supplemented by new customer additions as Zscaler's customer base expanded 17% year over year.

Revenue Composition

Zscaler generates nearly all of its revenue from subscription and support services, which accounted for approximately 98% of total revenue in all periods presented [Item 2 - MD&A, ¶14]. The company operates a single reportable segment and recognizes subscription revenue ratably over contract terms that typically range from one to three years. Geographically, the United States contributed 53% of revenue in the third quarter, followed by Europe, Middle East and Africa at 28%, and Asia Pacific at 16%. Importantly, channel partners represented 85% of total revenue, underscoring Zscaler's partner-led go-to-market approach [Item 1 - Financial Statements, ¶9].

Margins and Profitability

Gross margin remained steady at 77% for both the three- and nine-month periods, flat with the prior year [Item 2 - MD&A, ¶26]. Cost of revenue increased 24% to $192.7 million in the quarter, driven primarily by higher data center and equipment-related costs of $26.4 million from expanded cloud platform usage by customers, along with higher employee-related expenses and amortization of acquired intangible assets. Despite the company's investments in infrastructure, gross margin was sustained through economies of scale. On a non-GAAP basis, gross margin improved to 81% for Q3 from 80% a year ago [Item 2 - MD&A, ¶26].

Operating expenses continued to grow as Zscaler invested in its sales organization, research and development, and administrative infrastructure. Sales and marketing expenses, the largest operating expense category, rose 18% to $371.9 million in the quarter, driven by a $46.2 million increase in employee-related expenses including higher sales commissions and stock-based compensation [Item 2 - MD&A, ¶27]. Research and development expenses increased 37% to $232.3 million, reflecting Zscaler's ongoing commitment to enhancing its cloud platform and integrating recently acquired technologies. General and administrative expenses rose 32% to $83.2 million, with employee-related costs and acquisition-related expenses of $1.8 million contributing to the increase. Stock-based compensation was the single largest non-cash expense, totaling $205.2 million in Q3 and $610.3 million for the first nine months.

The company reported a GAAP net loss of $13.9 million for the third quarter and $59.8 million for the nine-month period, compared to net losses of $4.1 million and $23.9 million in the respective prior-year periods [Item 2 - MD&A, ¶4]. On a non-GAAP basis, income from operations was $195.8 million in the quarter (23% non-GAAP operating margin), up from $146.7 million (22% margin) a year ago. Non-GAAP gross margin improved to 81% from 80%.

Non-Recurring Items

Several one-time items shaped Zscaler's reported results. During the first quarter of fiscal 2026, the company completed a restructuring plan and recognized $4.7 million in charges consisting of employee severance and benefit payments. Additionally, the company incurred acquisition-related expenses of $1.8 million in the quarter and $4.1 million year-to-date in connection with its three recent acquisitions: Red Canary ($651.4 million in August 2025), SPLXAI ($40.6 million in October 2025), and SquareX ($112.8 million in February 2026). The provision for income taxes increased sharply to $27.8 million for the nine-month period from $7.5 million a year ago, primarily because the prior year benefited from a non-recurring $17.4 million release of valuation allowance on United Kingdom deferred tax assets [Item 2 - MD&A, ¶41]. Zscaler continues to maintain a full valuation allowance on its U.S. deferred tax assets due to a history of domestic losses.

III. Operational Metrics and Key Drivers

Zscaler's operating performance is evaluated through a combination of GAAP financial results, non-GAAP measures, and key business metrics that management uses to identify trends, formulate business plans, and make strategic decisions. For the nine months ended April 30, 2026, Zscaler reported revenue of $2,454.3 million, representing 26% year-over-year growth, driven primarily by expanded subscriptions from existing customers ($321.2 million of the increase) as well as new customer additions [Item 2 - MD&A, ¶35].

Deferred Revenue and Forward Revenue Visibility

Deferred revenue serves as a critical forward-looking indicator of future revenue. As of April 30, 2026, total deferred revenue stood at $2,477.2 million, of which $2,097.1 million was classified as current and expected to be recognized as revenue within the next 12 months [Item 2 - MD&A, ¶49]. The company typically invoices customers annually or multi-year in advance, generating substantial prepayments recorded as contract liabilities and recognized ratably over contract durations of one to three years, providing significant visibility into near-term revenue streams [Item 2 - MD&A, ¶50].

Annual Recurring Revenue (ARR)

A key non-GAAP metric management uses to track periodic performance is Annual Recurring Revenue, which reflects the next twelve months of subscription revenue from existing contracts assuming renewals under existing terms. ARR as of April 30, 2026 reached $3,525 million, up from $2,817 million in the prior year, indicating strong subscription momentum [Item 2 - MD&A, ¶13].

Customer Growth and Land-and-Expand Model

Zscaler's customer base exceeded 9,400 organizations as of July 31, 2025, including approximately 40% of the Forbes Global 2000 [Item 2 - MD&A, ¶7]. Customer count grew 17% from April 30, 2025 to April 30, 2026 [Item 2 - MD&A, ¶35]. The company employs a land-and-expand strategy to generate incremental revenue from existing customers by expanding deployments to additional users, upgrading to AI-enabled capabilities, and cross-selling new solutions like data security or AI security services [Item 2 - MD&A, ¶8].

Additional Non-GAAP Metrics

Management also tracks non-GAAP gross profit, non-GAAP income from operations, and free cash flow. Non-GAAP gross margin was 81% and non-GAAP operating margin was 23% for the quarter ended April 30, 2026. Free cash flow for the nine-month period totaled $718.4 million, reflecting a free cash flow margin of 29% [Item 2 - MD&A, Table 43].

Key Drivers of Revenue Growth

Looking ahead, Zscaler's growth is expected to be driven by secular tailwinds including the accelerating adoption of cloud applications, mobile-first computing, and AI, which are prompting organizations to replace legacy perimeter-based security with cloud-native zero-trust platforms [Item 2 - MD&A, ¶6]. The company continues to invest significantly in sales, marketing, and R&D — particularly around AI-enabled capabilities — to capture additional market share. However, management notes that macroeconomic uncertainty has led to elongated sales cycles and increased customer scrutiny of larger transactions, which could moderate near-term growth rates [Item 2 - MD&A, ¶5].

IV. Risk Factors

Zscaler faces a broad array of material risks that could significantly affect its business, financial condition, and growth prospects. The company has a history of net losses, reporting $41.5 million, $57.7 million, and $202.3 million in losses for fiscal years 2025, 2024, and 2023 respectively, with an accumulated deficit of $1.25 billion as of April 30, 2026. Zscaler expects operating expenses to continue increasing as it hires personnel and expands infrastructure, making sustained profitability uncertain [Item 1A - Risk Factors, ¶3].

Cybersecurity and Platform Integrity

As a cloud-native security provider, Zscaler's reputation depends on the perceived effectiveness of its platform. The company acknowledges it is "virtually impossible" to entirely mitigate the risk of breaches, and attack techniques change frequently, often going unrecognized until launched. The emergence of AI-enabled cyberattack toolkits has accelerated the sophistication and prevalence of attacks, with less-sophisticated actors now able to deliver customized attacks at scale. Any actual or perceived breach could result in reputational damage, customer loss, costly litigation, and regulatory inquiries [Item 1A - Risk Factors, ¶36]. While Zscaler maintains insurance for security incidents, it cautions that coverage may be insufficient for all liabilities incurred [Item 1A - Risk Factors, ¶39].

Intense Competition

The network security market is intensely competitive, characterized by rapid technological change. Zscaler competes against established appliance-based vendors, emerging cloud-native providers, and large networking companies that bundle security features into broader offerings. AI technologies may lower barriers to entry, enabling large AI providers to enter the market and potentially resulting in price reductions, lower gross margins, and loss of market share [Item 1A - Risk Factors, ¶26].

AI and Technology Evolution Risks

A notable area of emphasis in this filing is the dual-edged nature of artificial intelligence. While Zscaler is increasingly incorporating AI into its platform, AI-enabled vulnerability discovery tools are surfacing a substantially greater volume of issues requiring remediation, potentially diverting engineering capacity from new feature development [Item 1A - Risk Factors, ¶33]. The decentralized deployment of AI agents across the organization may increase risks of security vulnerabilities and data exposure, while the evolving regulatory landscape including the EU AI Act imposes compliance obligations that could require modifications to products and operations [Item 1A - Risk Factors, ¶79].

Macroeconomic and International Exposure

Zscaler derives approximately 49% of its revenue from international customers, and about 63% of its full-time employees are located outside the United States. The company faces risks from inflation, rising interest rates, tariffs, and geopolitical conflicts that could disrupt global markets. Challenging macroeconomic conditions have already resulted in longer sales cycles and increased customer scrutiny for new purchases [Item 1A - Risk Factors, ¶62].

Channel Partner Dependency

Zscaler derives most of its revenue through a channel partner network, with the top five partners representing 28% of revenue in fiscal 2025. These agreements are non-exclusive, and partners may promote competing products with limited or no notice, exposing Zscaler to concentration risk and potential reputational harm if partners misrepresent the platform [Item 1A - Risk Factors, ¶18].

Risk Mitigation Strategies

Zscaler employs several approaches to mitigate financial and operational risks. The company maintains a foreign currency risk management program using forward contracts as cash flow hedges to address exposure from foreign currency-denominated expenses [Item 1A - Risk Factors, ¶115]. In connection with its $1.725 billion 0.0% Convertible Senior Notes due 2028, the company entered into capped call transactions intended to reduce potential dilution upon conversion of the notes. The company also maintains incident management and disaster response plans to address potential service disruptions and security events [Item 1A - Risk Factors, ¶139].

Conclusion

Zscaler, Inc. enters the final quarter of its fiscal 2026 with considerable operational momentum and a clear strategic direction. The company's 25% year-over-year revenue growth, expanding ARR of $3.525 billion, and 17% customer base growth demonstrate that its zero-trust cloud security platform continues to resonate with enterprises navigating an increasingly complex threat landscape. However, the filing also reveals a business in transition: widening GAAP net losses, elevated stock-based compensation, a $1.25 billion accumulated deficit, and management's candid acknowledgment of elongated sales cycles and macroeconomic headwinds all point to a high-growth company still investing aggressively for the long term. The recent $1.725 billion convertible debt raise and three acquisitions (Red Canary, SPLXAI, and SquareX) further signal Zscaler's commitment to expanding its platform through both organic innovation and strategic M&A. For investors and analysts, the key themes to monitor in upcoming quarters will be the trajectory of non-GAAP operating margins, the pace of large-deal closures in a cautious macro environment, and the company's ability to translate its substantial deferred revenue base and growing ARR into sustained GAAP profitability.