Zscaler plunges 31% as guidance reset cuts growth expectations

Zscaler reported fiscal third-quarter revenue of $850.5 million, beating estimates by 1.8%, but shares plunged 31% on Wednesday after the cloud security company issued a weaker-than-expected growth outlook.

"The reset in fiscal 2027 ARR guidance to 16% to 17% growth is much needed and attainable," Jefferies analysts said, noting the outlook incorporates recent sales leadership turnover and a more cautious stance on new logo growth.

Adjusted earnings per share came in at $1.08, above the $1.01 consensus. Annual recurring revenue reached $3.53 billion, up 25% year over year and above the $3.51 billion consensus. For the fiscal fourth quarter, Zscaler projected revenue of $875 million to $878 million, below the $879 million consensus. The company also cut its full-year free cash flow margin forecast to 22.8% to 23.3% from 26.5% to 27%, citing higher capital expenditure for memory, storage and processor pricing.

The 31% decline erased roughly $13 billion in market value, pushing the stock to its lowest level since late 2024. The preliminary FY27 outlook implies a sharp deceleration from the 25% ARR growth the company delivered in Q3, raising questions about whether Zscaler can sustain its premium valuation as competition in cloud security intensifies.

Metric	Actual	Consensus	Beat/Miss
Revenue	$850.5M	$835.5M	+1.8%
Adjusted EPS	$1.08	$1.01	+$0.07
ARR	$3.53B	$3.51B	+0.6%

Organic net new ARR totaled $153 million in the quarter, representing 14% year-over-year growth and an acceleration from the prior quarter. The Red Canary acquisition contributed the remainder of the $166 million in net new ARR. Deferred revenue rose 25% to $2.48 billion.

Non-GAAP operating income reached $195.8 million, or 23% of revenue, while GAAP operating loss widened slightly to $29.6 million. Free cash flow came in at $136 million, down from the prior quarter's 20.7% margin to 16%.

The company's Z-Flex flexible purchasing program reached $480 million in total contract value during the quarter, rising more than 60% quarter over quarter and accounting for roughly 38% of remaining performance obligation bookings. Macquarie adopted a more cautious stance on valuation, applying lower peer multiples across its enterprise value-to-revenue, enterprise value-to-free cash flow and discounted cash flow models.

The guidance reset reflects real headwinds from sales team disruption and rising infrastructure costs, but the company's Zero Trust positioning and Z-Flex momentum provide a foundation for potential re-acceleration. Investors will watch the Q4 earnings call for signs of sales team stabilization and updated margin targets.

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