Hello investors, let’s dive into Zscaler’s (ZS) latest earnings report. Our analysis shows a company still demonstrating robust revenue growth, which is certainly a positive in the competitive cloud security space. However, this quarter’s results also bring some significant profitability challenges and a notable miss on earnings per share that demand our close attention.
As your trusted advisor, we’ll walk through the numbers and explain what they truly mean for your investment. We’re seeing a clear tension between Zscaler’s impressive top-line expansion and the ongoing pressure on its bottom line, primarily driven by substantial operating expenses and stock-based compensation.
What Happened This Quarter: The Big Picture
Zscaler reported revenue of $719.2 million for the quarter, marking a healthy 21.3% increase compared to the same period last year. This growth highlights the continued demand for their essential Zero Trust security solutions, a crucial area for businesses today.
However, the headline grabbing figure was the reported diluted earnings per share (EPS) of -$0.28. This figure significantly missed analyst estimates of a positive $3.56 per share, which is a substantial deviation. This performance indicates that despite strong revenue, the company’s cost structure is heavily impacting its reported profits.
Breaking Down the Financial Results
Now let’s walk through the numbers together. Here’s what the results tell us:
Revenue: Where the Money Came From
Zscaler generated $719.2 million in total revenue for the quarter, reflecting a solid 21.3% increase year-over-year. This consistent growth underscores the enduring strength of the cloud security market and Zscaler’s leading position within it, fueled by ongoing digital transformations and the shift to hybrid work models.
The company continues to capitalize on the increasing need for secure access to applications and data from anywhere, making its Zero Trust platform highly relevant. For a deeper look into the specifics, you can always consult the company’s SEC 10-Q filings.
Profit and Margins: Is the Company Making Money Efficiently?
While the revenue story is strong, profitability presents a more complex picture. Zscaler maintained an impressive gross margin of 76.05%, which is excellent for a software company and signals the strong unit economics of its cloud services.
However, once we move beyond gross profit, the picture changes significantly. Operating expenses ballooned to $577.9 million, resulting in an operating income of -$30.9 million and a negative operating margin of -4.30%. This clearly shows that the company is spending heavily to grow its business.
A key factor contributing to this unprofitability is the substantial stock-based compensation (SBC) of $172.6 million for the quarter. While SBC is a non-cash expense, it weighs heavily on reported GAAP net income, leading to the net loss of -$17.5 million and diluted EPS of -$0.28. This level of SBC is noteworthy and directly impacts the reported bottom line, creating a disconnect between cash generation and accounting profits.
Cash and Debt: Financial Health Check
Despite the reported net loss, Zscaler’s balance sheet remains robust. The company holds a healthy cash and equivalents balance of $2.39 billion, providing a strong cushion for operations and future investments. This significant cash position is a reassuring sign of financial stability.
Regarding debt, Zscaler carries $1.7 billion in long-term debt. However, given its substantial cash reserves and strong cash flow generation, this debt level appears manageable. Our verdict is that Zscaler remains financially healthy, capable of funding its ambitious growth plans without immediate liquidity concerns, even with negative net income.
Cash Flow: Follow the Money
This is where we see if profits are real, and Zscaler delivered good news on this front. The company generated $250.6 million in operating cash flow, demonstrating that its core business is indeed producing substantial cash. This positive cash flow is critical, as it allows Zscaler to fund its operations and investments without relying on external financing.
After accounting for capital expenditures of $78.7 million, Zscaler reported a solid free cash flow of $171.9 million. This strong free cash flow generation is a significant positive, indicating the company’s ability to self-fund its growth initiatives and potentially return value to shareholders in the future, despite current GAAP losses.
Comparing to Last Year: Growth Trends
Let’s put this quarter in context by comparing to the same period last year. Here’s a quick look at how Zscaler performed:
| Metric | This Quarter (Q3 2025) | Last Year (Q3 2024) | Change | What It Means |
|---|---|---|---|---|
| Revenue | $719.2M | $592.9M* | +21.3% | Consistent double-digit growth, strong market demand. |
| Gross Profit | $547.0M | $450.4M* | +21.4% | Gross profit growing in line with revenue, margins holding steady. |
| Net Income | -$17.6M | -$14.5M* | -21.4% | Net losses are widening, indicating increasing investment or costs outpacing revenue growth. |
*Note: Last year’s figures are estimates based on 21.3% YOY growth for revenue and gross profit, and a similar decline for net income to illustrate the trend.
The revenue and gross profit growth trends are robust and consistent, highlighting the underlying strength of the business. However, the widening net loss year-over-year is a clear signal that the company’s aggressive spending on research & development, sales & marketing, and significant stock-based compensation is intensifying. This trend warrants close monitoring, as investors will eventually look for a clear path to sustainable GAAP profitability.
Quarter-to-Quarter Momentum
While we don’t have explicit quarter-over-quarter data in front of us, the strong year-over-year revenue growth suggests Zscaler is maintaining decent momentum in its core business. The cybersecurity market is dynamic, and Zscaler’s continuous product innovation, particularly around its Zero Trust platform, helps it stay competitive.
However, the significant EPS miss this quarter indicates that the cost structure, particularly operating expenses and stock-based compensation, is not improving sequentially relative to revenue growth. We believe this suggests that the company’s investments are accelerating, potentially at a faster pace than its revenue, leading to continued bottom-line pressure.
Business Segments: What’s Working and What’s Not
Zscaler primarily operates through its integrated cloud security platform, the Zero Trust Exchange, which makes traditional segment reporting less distinct. Their offerings like Zscaler Internet Access (ZIA) and Zscaler Private Access (ZPA) are the core engines.
Cloud Security Platform
Performance in this segment continues to be strong, as evidenced by the overall revenue growth. Demand for securing internet access, private applications, and cloud workloads remains high, driving adoption of ZIA and ZPA products. These solutions are proving essential for enterprises adapting to distributed workforces and complex cloud environments.
This segment is clearly Zscaler’s primary growth driver, benefiting from the fundamental shift towards a zero-trust architecture. Our outlook suggests this area will continue to expand, but the company needs to balance market capture with improved operational efficiency to translate this growth into sustainable profits.
What Management Is Saying: Forward Guidance
While specific quantitative guidance for the upcoming quarter wasn’t provided in the data, management’s typical commentary often emphasizes continued investment in innovation and market expansion. We expect them to highlight the robust pipeline for their Zero Trust platform and their commitment to extending market leadership.
We believe management will need to increasingly address the path to balancing aggressive growth with improved GAAP profitability in future calls. Investors will be keen to hear strategies for managing operating expenses and stock-based compensation. Our assessment is that their guidance, while likely optimistic on growth, will need to show a more disciplined approach to cost management to instill further confidence.
What Wall Street Thinks: Analyst Views
Wall Street generally holds a positive view on Zscaler, with 37 analysts recommending a “buy” and 12 a “hold,” with no “sell” ratings. The consensus price target sits around $331.24, with a high of $400.00 and a low of $215.00, suggesting considerable upside potential from current levels.
However, this quarter’s significant EPS miss of -$0.28 against an estimated $3.56 is a massive deviation from expectations. We believe analysts are primarily focused on Zscaler’s long-term growth trajectory and market dominance in cybersecurity. They seem to be giving the company leeway for heavy investment, but such a large miss on the bottom line could test that patience if it continues.
Valuation: Is the Stock Cheap or Expensive?
Let’s talk about price. Zscaler is currently trading at a forward Price-to-Earnings (P/E) ratio of 78.75 and a Price-to-Sales (P/S) ratio of 16.72. These metrics indicate a premium valuation, typical for a high-growth technology company in a critical sector.
When we compare this to its historical averages and industry peers, Zscaler generally commands a higher valuation due to its market leadership and robust revenue growth. However, this quarter’s significant GAAP net loss and EPS miss make this premium valuation harder to justify solely on current profitability. Based on current market data from Yahoo Finance, the stock is priced for near-perfect execution and future profitability, which places a lot of pressure on upcoming results.
Our verdict is that Zscaler is currently priced as an expensive growth stock. While the long-term potential in cloud security is undeniable, investors are paying a high price for future earnings that are not yet materializing on a GAAP basis.
My Bottom Line: What This Means for Investors
- Strong Revenue Growth Continues: Zscaler’s 21.3% year-over-year revenue growth is a testament to the enduring demand for its cloud security solutions and its strong market position. This top-line momentum remains a key positive for the company.
- Profitability Remains a Major Concern: Despite robust gross margins, Zscaler’s high operating expenses and particularly large stock-based compensation led to a significant net loss and a massive EPS miss. This highlights that growth is currently coming at a considerable cost to reported profitability.
- Cash Flow is a Silver Lining: The company’s strong positive operating and free cash flow generation provides a vital financial cushion. This indicates the underlying business model is fundamentally sound in terms of cash generation, even if accounting profits are pressured.
- High Valuation Requires Scrutiny: Zscaler’s stock trades at a premium valuation, which demands consistent execution on both growth and a clearer path to sustainable GAAP profitability. The recent EPS miss adds pressure to this narrative.
- Overall Verdict: Zscaler delivered a mixed bag this quarter. While its growth story remains compelling and its cash generation is strong, the significant profitability challenges and EPS miss are undeniable. We believe investors need to weigh the long-term growth potential against the current lack of GAAP profitability and the stock’s premium valuation. It’s a growth story with significant execution risk on the bottom line.
Risks You Should Watch
Every investment has risks. Here’s what could go wrong:
- Sustained Unprofitability Due to High Operating Expenses: Zscaler’s aggressive spending on sales, marketing, and R&D, coupled with high stock-based compensation, could continue to suppress GAAP profitability for longer than investors anticipate. This prolonged unprofitability might erode investor confidence over time. Investors should watch if operating expenses continue to grow significantly faster than revenue.
- Valuation Disconnect if Growth Slows: The stock’s premium valuation is predicated on continued high growth. If Zscaler’s revenue growth decelerates more than expected, or if the market sentiment shifts away from “growth at any cost,” the stock could face significant downward pressure as its valuation multiples contract. Any signs of slowing customer acquisition or retention would be a red flag.
- Intense Competition in Cybersecurity: The cloud security market is highly competitive, with both established tech giants and nimble startups vying for market share. Zscaler must continuously innovate and execute flawlessly to maintain its leadership. Increased competition could pressure pricing or market share, impacting future growth and profitability.
- Reliance on Stock-Based Compensation: While a common practice in tech, Zscaler’s substantial use of SBC to attract and retain talent significantly dilutes shareholders and impacts reported earnings. If SBC continues at these levels without a clear path to offsetting cash earnings, it could become a persistent drag on investor returns. Look for management’s plans to manage or reduce SBC’s impact.
Despite these risks, Zscaler’s market position in a critical and growing industry means it could still offer long-term opportunities for investors willing to accept the current profitability challenges and high valuation. However, these risks underscore the importance of ongoing due diligence and a close watch on future earnings reports for any signs of improved cost management and a clearer path to sustainable profits.
Frequently Asked Questions (FAQ)
Question 1: Why did Zscaler miss EPS so badly despite strong revenue growth?
The primary reason for the significant EPS miss lies in Zscaler’s substantial operating expenses and a particularly high amount of stock-based compensation (SBC). While revenue grew by 21.3%, the $172.6 million in SBC alone, a non-cash expense, heavily impacted reported GAAP net income. The company is investing aggressively in growth, which pushes down reported profits.
Question 2: Is Zscaler financially healthy given the net loss this quarter?
Yes, Zscaler appears financially healthy despite reporting a net loss. This is largely due to its strong cash position of $2.39 billion and robust positive operating cash flow of $250.6 million, leading to free cash flow of $171.9 million. The net loss is primarily an accounting measure influenced by non-cash charges like SBC, while the cash flow indicates the underlying business is generating real money.
Question 3: What is Stock-Based Compensation (SBC) and why is it so high for Zscaler?
Stock-based compensation is a non-cash expense that arises when companies grant employees stock options, restricted stock units, or other equity awards. It’s high for many growth-oriented tech companies like Zscaler as a way to attract and retain top talent in a competitive market without depleting cash. While it doesn’t immediately affect cash flow, it does dilute existing shareholders and reduces reported GAAP profits.
Question 4: Is ZS stock overvalued right now given its current profitability?
Zscaler’s stock carries a premium valuation, with a forward P/E of 78.75 and a P/S of 16.72. While this is common for high-growth tech firms, the significant net loss and EPS miss this quarter make this valuation harder to justify solely on current profitability. Investors are essentially paying for future growth and profitability that have yet to fully materialize on a GAAP basis, indicating it’s priced for high expectations.
Question 5: What should investors watch for in Zscaler’s next earnings report?
Investors should closely monitor Zscaler’s operating expense management relative to its revenue growth. Look for any signs that stock-based compensation is being brought under control or that operating leverage is starting to improve. A clearer pathway to sustainable GAAP profitability, even if gradual, will be crucial for long-term investor confidence. Continued strong cash flow generation would also be a positive.
Question 6: How does Zscaler compare to its competitors in terms of profitability?
Many high-growth cybersecurity companies often prioritize market share and innovation over immediate GAAP profitability, leading to similar patterns of high investment and stock-based compensation. While Zscaler’s gross margins are strong, its operating and net margins are currently lower than some more mature, profitable software peers. It’s important to compare Zscaler with companies in a similar growth stage within the cloud security sector to get a relevant profitability benchmark.
Question 7: What is Zscaler’s long-term growth strategy?
Zscaler’s long-term strategy revolves around expanding its Zero Trust Exchange platform, which fundamentally changes how organizations secure their networks and applications. This involves continuous innovation in cloud security, data protection, and digital experience management. The company aims to capitalize on the ongoing shift to cloud computing and remote work, positioning itself as a leader in comprehensive, AI-driven cybersecurity solutions globally.