Zscaler (ZS)

Cloud security platform Zscaler (NASDAQ:ZS) beat Wall Street’s revenue expectations in Q2 CY2025, with sales up 21.3% year on year to $719.2 million. Guidance for next quarter’s revenue was optimistic at $773 million at the midpoint, 2.9% above analysts’ estimates. Its non-GAAP profit of $0.89 per share was 11% above analysts’ consensus estimates.

Company Overview

Pioneering the "zero trust" approach that has fundamentally changed enterprise network security, Zscaler (NASDAQ:ZS) provides a cloud-based security platform that connects users, devices, and applications securely without traditional network-based security hardware.

Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks. The migration of businesses to the cloud and employees working remotely in insecure environments is increasing demand modern cloud-based network security software, which offers better performance at lower cost than maintaining the traditional on-premise solutions, such as expensive specialized firewall hardware.

Zscaler competes with traditional network security vendors like Palo Alto Networks (NASDAQ:PANW), Cisco Systems (NASDAQ:CSCO), and Fortinet (NASDAQ:FTNT), as well as cloud security specialists such as Cloudflare (NYSE:NET) and CrowdStrike (NASDAQ:CRWD). Microsoft (NASDAQ:MSFT) also offers competing capabilities through its Defender platform.

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Thankfully, Zscaler’s 34.8% annualized revenue growth over the last three years was excellent. Its growth beat the average software company and shows its offerings resonate with customers, a helpful starting point for our analysis.

This quarter, Zscaler reported robust year-on-year revenue growth of 21.3%, and its $719.2 million of revenue topped Wall Street estimates by 1.6%. Company management is currently guiding for a 23.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 19.8% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is noteworthy and suggests the market is baking in success for its products and services.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Zscaler’s billings punched in at $1.20 billion in Q2, and over the last four quarters, its growth was impressive as it averaged 22.1% year-on-year increases. This performance aligned with its total sales growth, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Zscaler is efficient at acquiring new customers, and its CAC payback period checked in at 40.2 months this quarter. The company’s relatively fast recovery of its customer acquisition costs gives it the option to accelerate growth by increasing its sales and marketing investments.

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Zscaler’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an excellent 76.9% gross margin over the last year. Said differently, roughly $76.94 was left to spend on selling, marketing, and R&D for every $100 in revenue.

Zscaler’s gross profit margin came in at 76.1% this quarter, marking a 2.1 percentage point decrease from 78.1% in the same quarter last year. Zscaler’s full-year margin has also been trending down over the past 12 months, decreasing by 1.1 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Zscaler’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same, averaging negative 4.8% over the last year. Unprofitable, high-growth companies warrant extra attention, especially if their profitability doesn’t improve. In Zscaler’s case, it seems it’s deferring current profits by investing heavily to win market share.

Analyzing the trend in its profitability, Zscaler’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Zscaler generated a negative 4.5% operating margin.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Zscaler has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 27.2% over the last year. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Zscaler’s free cash flow clocked in at $171.9 million in Q2, equivalent to a 23.9% margin. This cash profitability was in line with the comparable period last year but below its one-year average. We wouldn’t read too much into it because investment needs can be seasonal, causing short-term swings. Long-term trends are more important.

Over the next year, analysts’ consensus estimates show they’re expecting Zscaler’s free cash flow margin of 27.2% for the last 12 months to remain the same.

Companies with more cash than debt have lower bankruptcy risk.

Zscaler is a well-capitalized company with $3.57 billion of cash and $95.85 million of debt on its balance sheet. This $3.48 billion net cash position is 8.1% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Zscaler blew past analysts’ billings expectations this quarter. We were also glad its operating profit beat. Looking ahead, revenue guidance for next quarter exceeded Wall Street’s estimates. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 5% to $288.24 immediately following the results.

Updated: November 15, 2025 at 9:12 PM EST

Are you wondering whether to buy Zscaler or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

There are several reasons why we think Zscaler is a great business. For starters, its revenue growth was exceptional over the last five years. And while its operating margin hasn't moved over the last year, its splendid ARR growth shows it’s securing more long-term contracts and becoming a more predictable business. On top of that, Zscaler’s bountiful generation of free cash flow empowers it to invest in growth initiatives.

Zscaler’s price-to-sales ratio based on the next 12 months is 14.7x. Scanning the software space today, Zscaler’s fundamentals really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $327.86 on the company (compared to the current share price of $300.85), implying they see 9% upside in buying Zscaler in the short term.