Zscaler Inc. (NASDAQ:ZS) is expected to deliver a strong fiscal third quarter when it reports results on May 26, with Jefferies analysts saying the cybersecurity company is well positioned to beat consensus annual recurring revenue growth expectations.
Jefferies is modeling F3Q ARR at $3.51 billion, representing 24.6% year-over-year growth. The firm views the investor bogey of $160-165 million in net new ARR as attainable, with the more closely watched threshold being $155 million or more in organic incremental ARR.
A proprietary VAR survey conducted by Jefferies in April showed Zscaler's average performance versus plan at 2.3%, still ranking third best overall among peers and ahead of typical calendar first quarter seasonality.
The firm noted some competitive pressure in the channel, including from Palo Alto Networks' Prisma SASE product, though it remains constructive on Zscaler's expanding product portfolio and what it sees as reasonable fiscal 2026 expectations.
Federal business is shaping up as a meaningful catalyst for the fourth quarter. The Department of Homeland Security signed a $122 million blanket purchase agreement with Zscaler on April 16, followed by a one-year, $40 million BPA call on April 30 that Jefferies assumes is primarily ARR to be recognized in F4Q.
Zscaler also closed a $10.3 million renewal with the Department of Transportation and a $6.9 million renewal with the Department of Labor during F3Q.
Looking to F4Q, consensus ARR expectations of $3.73 billion imply 23.9% year-over-year growth. Jefferies said the bar looks high on the surface but more achievable if F3Q upside flows through and the DHS deal contributes as much as $40 million in net new ARR, which would represent roughly 18% of total implied consensus net new ARR for the quarter.
On valuation, Jefferies said Zscaler screens attractively at 29 times next twelve months free cash flow versus 35 times for Palo Alto Networks and 36 times for Fortinet.