Zscaler Inc. (NASDAQ:ZS) shares fell more than 31% on Wednesday after the cloud security company shared softer-than-expected forward guidance, drawing attention from a modest fiscal third quarter earnings beat.
For the fiscal fourth quarter, Zscaler projected revenue of $875 million to $878 million, slightly below consensus expectations of $879 million. The company also guided non-GAAP earnings per share of $1.08 to $1.09.
More significantly, management’s preliminary fiscal 2027 outlook called for revenue and annual recurring revenue (ARR) growth of 16% to 17%, a clear step down from current growth rates and below prior Street expectations of roughly 19% to 20%.
For fiscal Q3, Zscaler reported adjusted earnings per share of $1.08, above analyst estimates of $1.01.
Revenue came in at $850.5 million, above the $835.5 million expected, while ARR reached $3.53 billion, above the $3.51 billion consensus.
Revenue rose 25% year over year, with ARR also increasing 25% to $3.53 billion. Net new ARR totaled $166 million in the quarter, including contributions from the Red Canary acquisition. Excluding that acquisition, organic ARR growth was about 21%, with organic net new ARR growth of roughly 14%.
Profitability trends were mixed. GAAP operating loss widened slightly to $29.6 million, while non-GAAP operating income rose to $195.8 million, or 23% of revenue. Non-GAAP net income increased to $177.9 million, with diluted earnings per share of $1.08, up from $0.84 a year earlier. Free cash flow rose to $136 million, while cash from operations declined to $198 million.
Deferred revenue increased 25% year over year to $2.48 billion.
Jefferies analysts said the quarter was broadly in line, but the outlook signals a meaningful reset in growth expectations, driven in part by recent sales leadership turnover and a sharper-than-expected deceleration in organic ARR assumptions into financial year 2027.
They pointed to fiscal third-quarter organic ARR growth of 20.6%, with organic net new ARR of $153 million, representing 14% year-over-year growth and an acceleration from the prior quarter. However, they said fiscal fourth-quarter guidance implies a slowdown in organic ARR growth to roughly 19.6%, even accounting for potential upside.
Jefferies added that the fiscal 2027 guidance reset to 16% to 17% ARR growth reflects a meaningful step down from prior expectations, though they characterized the reset as “much needed and attainable.” They also noted that the outlook factors in sales leadership turnover and a more cautious stance on new logo growth, alongside expectations that the Red Canary business will grow more slowly than the core platform.
The analysts highlighted mixed underlying trends in fiscal third-quarter ARR composition, including strength in public sector demand, large federal upsells, and strong performance in the Asia-Pacific region where large deals grew 150% year over year.
They also pointed to sales leadership changes late in the quarter, with two senior departures that management said did not affect fiscal third-quarter results but were reflected in near-term guidance. Jefferies said the company is working to stabilize execution through expanded channel partnerships, increased SME coverage, and deeper enterprise relationships.