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Zscaler, Inc. (ZS)·Q3 2025 Earnings Summary

Executive Summary

  • Zscaler delivered a clear beat in Q3 FY25: revenue $678.0M (+23% YoY) vs S&P Global consensus $667.1M, and non-GAAP diluted EPS $0.84 vs consensus $0.758; management cited strong platform demand and improved sales productivity as drivers *.
  • Guidance raised across FY25 metrics: revenue to $2.659–$2.661B, billings to $3.184–$3.189B, non-GAAP operating income to $573–$575M, and EPS to $3.18–$3.19; Q4 guidance initiated at revenue $705–$707M and non-GAAP EPS $0.79–$0.80 .
  • Strategic catalysts: announced definitive agreement to acquire Red Canary (expected close Aug-2025) to accelerate AI-powered SecOps; CFO transition to Kevin Rubin; and launch of Zflex purchasing program contributing >$65M TCV in Q3 .
  • Narrative moving stock: beat-and-raise quarter, RPO near $5B and best Q3 TCV bookings >$1B, plus expanding AI security and Zero Trust Everywhere footprint (Zero Trust enterprises grew to >210, +60% QoQ) .

What Went Well and What Went Wrong

  • What Went Well

    • Record bookings and backlog: “best Q3 with TCV bookings of over $1 billion” and RPO ≈$4.978B (+30% YoY), underpinning forward demand .
    • Platform adoption and new programs: Zflex launched, contributing >$65M TCV; stronger upsell/new logo momentum including Zero Trust branch and cloud .
    • AI security traction: Management emphasized proprietary high-fidelity data powering AI security, protecting 50M+ users and processing 100T transactions last year; expanding GenAI protections and agentic operations .

  • What Went Wrong

    • Margin compression: Non-GAAP gross margin 80% (down vs year-ago), Q3 free cash flow margin 18% (vs 22% YoY), with data center CapEx at ~11% of revenue for new products/AI infrastructure .
    • GAAP profitability: GAAP net loss of $4.1M (vs GAAP net income of $19.1M in Q3 FY24), reflecting elevated stock-based comp and investments .
    • Macro and deal scrutiny: Management noted ongoing large-deal scrutiny and tight IT budgets, albeit cyber/AI priorities are helping deals close; DBNRR at 114% may fluctuate as larger bundles land upfront .

Financial Results

MetricQ1 FY25Q2 FY25Q3 FY25
Revenue ($USD Millions)$627.955 $647.900 $678.034
Non-GAAP EPS (Diluted, $)$0.77 $0.78 $0.84
GAAP Net Income (Loss, $USD Millions)$(12.051) $(7.724) $(4.125)
Non-GAAP Gross Margin (%)81% 80% 80%
Non-GAAP Operating Margin (%)21% 22% 22%
KPIsQ1 FY25Q2 FY25Q3 FY25
Calculated Billings ($USD Millions)$516.701 $742.685 $784.514
Deferred Revenue (End of Period, $USD Millions)$1,783.720 $1,878.505 $1,984.985
RPO ($USD Billions)$4.411 $4.615 $4.978
Current RPO (% of total)49% 49% ~48%
Customers >$1M ARR (Count)585 620 642
Customers >$100k ARR (Count)3,165 3,291 3,363
Dollar-Based Net Retention Rate (%)114% 115% 114%
Free Cash Flow ($USD Millions)$291.881 $143.428 $119.463
Free Cash Flow Margin (%)46% 22% 18%
Cash from Operations ($USD Millions)$331.335 $179.433 $211.081
Cash, Cash Equivalents & ST Investments ($USD Millions)$2,707.9 $2,880.2 $3,005.6
Geographic Mix (% of Revenue)Q1 FY25Q2 FY25Q3 FY25
Americas54% 54% 54%
EMEA30% 30% 30%
APJ16% 16% 16%

Q3 vs S&P Global Consensus

MetricConsensus*Actual
Revenue ($USD Millions)$667.101*$678.034
EPS (Non-GAAP, $)$0.758*$0.84
EPS - # of Estimates41*—
Revenue - # of Estimates38*—

Values marked with * retrieved from S&P Global.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($USD Billions)FY25$2.640–$2.654 $2.659–$2.661 Raised
Calculated Billings ($USD Billions)FY25$3.153–$3.168 $3.184–$3.189 Raised
Non-GAAP Operating Income ($USD Millions)FY25$562–$572 $573–$575 Raised
Non-GAAP EPS ($)FY25$3.04–$3.09 $3.18–$3.19 Raised
Free Cash Flow Margin (%)FY2524.5%–25% ~25.5%–26% Raised
Revenue ($USD Millions)Q4 FY25N/A$705–$707 Initiated
Non-GAAP Operating Income ($USD Millions)Q4 FY25N/A$152–$154 Initiated
Non-GAAP EPS ($)Q4 FY25N/A$0.79–$0.80 (23% tax, ~164M shares) Initiated
Gross Margin (%)Q4 FY25N/A~80% Initiated
Net Other Income ($USD Millions)Q4 FY25N/A~$16 Initiated
Non-GAAP Tax RateFY/Q4 FY2523% (long-term projected) 23% Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3)Trend
Zero Trust Everywhere (users/branches/cloud)Launched; >130 enterprises by Q2; strong branch new logos (57%) >210 Zero Trust enterprises (+60% QoQ); unified branch appliance; strong workload protection deals Accelerating adoption
AI Security & Agentic OpsIntroduced ZDX Copilot; AI-powered data protection; building LLM proxy; AI analytics growth Expanded GenAI protections, LLM proxy, agentic AI; SecOps ACV +120% YoY; Red Canary acquisition to accelerate MDR/Threat Intel Expanding scope and monetization
Zflex Purchasing ProgramNot presentNew flexible purchasing, pre-agreed pricing; >$65M TCV in Q3; targeting larger customers first New growth lever
Go-to-market productivity & GSIsShift to account-centric; GSIs driving large deals; Q1/Q2 unscheduled billings >20–25% YoY Continued improvement; unscheduled billings +28% YoY; deeper enterprise focus (ServiceNow model) Improving throughput
Federal/Public Sector14 of 15 Cabinet agencies; landmark APAC government win Fed in line; not expecting Q4 strength; positioned for cost-saving transformations Steady; timing lumpy
Metrics EvolutionBillings highlighted in Q1/Q2 Plan to transition primary external metric to ARR in FY26 Reporting shift forthcoming
Macro & Deal ScrutinyOngoing scrutiny; pipeline strong Macro tight; large-deal scrutiny persists; cyber+AI ROI helps closures Structural constraint offset by value

Management Commentary

  • “Our strong Q3 results demonstrate growing demand for our platform and continued improvement in our sales productivity…best Q3 with TCV bookings of over $1 billion…RPO are now nearly $5 billion.” — Jay Chaudhry, CEO .
  • “Zflex allows customers to flexibly scale their adoption of our platform…Zflex commitments contributed over $65 million in TCV bookings.” — Jay Chaudhry .
  • “For the fourth quarter, we expect revenue in the range of $705–$707 million…EPS $0.79–$0.80…Based on our strong Q3 performance, we're increasing our full year guidance across all metrics.” — Remo Canessa, CFO .
  • “The proposed acquisition of Red Canary is a natural expansion…to accelerate our vision of AI-powered SOC of the future.” — Jay Chaudhry on Red Canary .
  • “I believe we remain on track to increase sales productivity and achieve strong growth…ARR $3B or more by year-end.” — Jay Chaudhry .

Q&A Highlights

  • Zflex structure and metrics: Designed to simplify procurement, enable module swaps/additions at pre-set pricing; contracts trending from 3 years to 4–5 years; ZS plans shift to ARR reporting in FY26 .
  • Macro commentary: Tight budgets and scrutiny persist; cyber priorities (Zero Trust, AI security) plus cost-savings drive deal closures .
  • Red Canary acquisition: Complements Avalor data fabric; agentic AI in production; expected close Aug-2025; net neutral to FY26 op margin with ~half of $140M ARR retained post-integration .
  • Branch Connector/Zero Trust branch: 59% of branch buyers are new logos; plug-and-play appliance integrating segmentation; large-scale deployments contemplated .
  • Federal outlook: In line in Q3; not expecting Q4 strength; presence in 14/15 Cabinet agencies; positioned to reduce legacy cost and complexity .

Estimates Context

  • Q3 FY25 results vs S&P Global consensus: Revenue $678.0M vs $667.1M* (beat); EPS $0.84 vs $0.758* (beat). Number of estimates: EPS 41*, Revenue 38* .
  • Implications: Consensus likely to move higher for FY25 and FY26 given raised full-year guidance and stronger backlog (RPO ~$5B) .
    Values marked with * retrieved from S&P Global.

Key Takeaways for Investors

  • Beat-and-raise quarter with durable backlog: Strong revenue/EPS beats and increased FY25 guidance supported by RPO ~$5B and record Q3 bookings; near-term positive for sentiment .
  • AI security and SecOps expansion: Red Canary adds MDR/Threat Intel and agentic AI, enhancing ZS’ data fabric–centric SecOps vision; medium-term driver as integration proceeds .
  • New purchasing mechanics and platform breadth: Zflex lowers friction, encourages upfront platform commitments; expect larger bundles and duration to support ARR growth into FY26 .
  • Margin trajectory: Non-GAAP gross margin ~80% near-term as fast-growing new products are optimized for GTM; FCF margin compression in Q3 reflects elevated data center CapEx; watch FY25 FCF margin guide (~25.5–26%) .
  • Zero Trust Everywhere momentum: Branch/cloud expansion and new logos point to incremental TAM within existing accounts; workload protection ARR accelerating .
  • Federal and macro: Timing remains lumpy with continued deal scrutiny, but Zero Trust + ROI messaging resonates; exposure balanced by pipeline and partner-enabled execution .
  • Capital allocation: Convertible notes maturity to be settled in cash/equity in Q4; ~$675M cash outflow expected Q1 FY26 for Red Canary; liquidity strong with $3.0B cash/ST investments .

Additional Q3 Press Releases and Events

  • Announced definitive agreement to acquire Red Canary (MDR) to accelerate AI-powered SOC; expected close Aug-2025 .
  • CFO appointment: Kevin Rubin joins as CFO to drive scale; transition from Remo Canessa .
  • Investor innovations briefing at Zenith Live; unveiling AI-focused data security, segmentation, and ZDX Network Intelligence upgrades .