Zscaler Q3 2025 Earnings Report

Zscaler EPS Results

• Actual EPS: $0.84
• Consensus EPS: $0.76
• Beat/Miss: Beat by +$0.08
• One Year Ago EPS: $0.88

Zscaler Revenue Results

• Actual Revenue: $678.03 million
• Expected Revenue: $667.13 million
• Beat/Miss: Beat by +$10.91 million
• YoY Revenue Growth: +22.60%

Zscaler Announcement Details

• Quarter: Q3 2025
• Date: 5/29/2025
• Time: After Market Closes
• Conference Call Date: Thursday, May 29, 2025
• Conference Call Time: 4:30PM ET

Zscaler (NASDAQ:ZS) is a cloud security company that provides a range of services designed to protect enterprises as they transition from traditional data centers to cloud-based architectures. Founded in 2007 and headquartered in San Jose, California, Zscaler pioneered a security model known as Zero Trust Exchange, which assumes no user or device should be trusted by default—even if they are connected to a corporate network. The company offers its platform via a global, multi-tenant cloud infrastructure that delivers security as a service rather than relying on legacy on-premises appliances.

The company’s flagship offerings include Zscaler Internet Access (ZIA) and Zscaler Private Access (ZPA). ZIA secures web and internet traffic by enforcing policy-based access controls, data loss prevention, and threat protection at the network edge. ZPA enables secure remote access to internal applications without exposing them to the public internet, leveraging identity-based segmentation to reduce attack surfaces. Zscaler Digital Experience (ZDX) complements these products by providing insights into user experience and application performance across the digital supply chain.

Zscaler serves a broad array of industries—such as financial services, healthcare, manufacturing, and retail—helping organizations in North America, Europe, Asia-Pacific, and beyond to modernize their security architectures. By replacing traditional security stacks with its cloud-native platform, the company aims to simplify management, improve performance, and enhance visibility across distributed workforces. Customers range from small businesses to global enterprises seeking to secure remote users, branch offices, and cloud workloads.

Under the leadership of founder, chairman, and CEO Jay Chaudhry, Zscaler went public on the Nasdaq stock exchange in March 2018. The executive team blends expertise in cybersecurity, cloud networking, and enterprise software. With ongoing investments in threat research and platform innovation, Zscaler positions itself at the forefront of the Secure Access Service Edge (SASE) market, driving adoption of zero trust principles and helping organizations navigate the evolving security landscape.

Zscaler Q3 2025 Earnings Call Transcript

Key Takeaways

• Zscaler reported Q3 revenue of $678 M, up 23% YoY, its ARR hit around $2.9 B (+23%), and RPO almost reached $5 B (+30% YoY).
• The company raised its outlook, guiding Q4 revenue of $705–707 M (+19% YoY) and full-year billings of $3.184–3.189 B (+21–22%), with a target free cash flow margin of ~26%.
• Platform milestones include securing 50 M users, processing 100 quadrillion transactions and generating 20 PB of daily data, fueling AI-driven security solutions with strong network effects.
• Emerging offerings in Zero Trust Everywhere, Data Security Everywhere, and Agentic Operations are gaining traction, collectively approaching $1 B ARR and growing 60%–120% YoY.
• Zscaler agreed to acquire Red Canary for $675 M to bolster SecOps with managed detection and threat intel, expected to close in August 2025 with neutral impact on FY26 margins.

Presentation

[Operator]

Thank you for standing by and welcome to Zscaler's Third Quarter Fiscal Year twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone. I would now like to hand the call over to Ashwin Casarelli, Vice President, Investor Relations and Strategic Finance. Please go ahead.

[Ashwin Kesireddy, Vice President of Investor Relations & Strategic Finance at Zscaler]

Good afternoon, everyone, and welcome to the Zscaler third quarter fiscal year twenty twenty five earnings conference call. On the call with me today are Jay Chowdhury, Chairman and CEO and Remo Kanissa, CFO. Please note, we have posted our earnings release and a supplemental financial schedule to our investor relations website. Unless otherwise noted, all numbers we talk about today will be on an adjusted non GAAP basis. You will find the reconciliation of GAAP to the non GAAP financial measures in our earnings release.

[Ashwin Kesireddy, Vice President of Investor Relations & Strategic Finance at Zscaler]

I'd like to remind you that today's discussion will contain forward looking statements, including, but not limited to, the company's anticipated future revenue, annual recurring revenue, calculated billings, operating performance, gross margin, operating expenses, operating income, net income, free cash flow, dollar based net retention rate, future hiring decisions, remaining performance obligations, income taxes, earnings per share, our objectives and outlook, our customer response to our products, and our market share and market opportunity. These statements and other comments are not guarantees of future performance, but rather are subject to risk and uncertainty, some of which are beyond our control. These forward looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC as well as in today's earnings release.

[Ashwin Kesireddy, Vice President of Investor Relations & Strategic Finance at Zscaler]

I also want to inform you that we'll be attending the following conferences, Bank of America Global Technology Conference on June 5, FBN Virtual Technology Conference on June 6, BMO Virtual Software Conference on June 9. Now I'll turn the call over to Jay over to Jay.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Thank you, Ashwin. Thank you, Ashwin. Our strong q three results demonstrate growing demand for our platform and continued improvement in our sales productivity. More customers are adopting Zscaler's comprehensive solutions with platform wide deals for our zero trust security. Driven by the strong demand, we achieved two significant milestones.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

First, we achieved our best q three with TCV bookings of over $1,000,000,000. And second, our remaining performance obligations or RPO are now nearly $5,000,000,000. New logo ACV had strong growth of over 40% year over year. Total new ACV was up double digits year over year once again in the quarter. Our annual recurring revenue, or ARR, was approximately $2,900,000,000 representing the third straight quarter of twenty three percent year over year growth.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

We remain on track to reach $3,000,000,000 or more in ARR by the end of this quarter. We are proud of achieving these strong top line results at scale while delivering strong profitability. Our year to date fiscal twenty five revenue growth of 24% combined with our free cash flow margin of 28% resulted in rule of 52 performance. While many SaaS companies struggle to achieve rule of 40 performance, we have exceeded this industry benchmark for each of the last twenty one quarters. Moving on to discussion of our platform.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

I am very pleased to share that our platform now secures over 50,000,000 users and other significant milestone. This milestone gives us several competitive advantages. First, more users deliver powerful network effect and strengthen our market leadership. Zscaler's zero trust exchange platform sits in line for enterprise communications. Every time we secure a user from a new attack, we apply that protection for all users of our platform, creating a flywheel for improving security.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

The magnitude of this effect is staggering. Last year alone, our Exchange processed over 100,000,000,000,000 transactions, blocked over 60,000,000,000 threats, and enforced over 5,000,000,000,000 policies. This unique network effect differentiates Zscaler from other vendors trying to pursue this market segment and delivers unparalleled cybersecurity to our customers. Hence, more and more enterprises are selecting Zscaler as the partner of choice. Second, more users mean more high quality data for our AI solutions.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

The millions of users, workloads, and IoT OT devices on our platform result in over 500,000,000,000 transactions, generating over 20 petabytes of high fidelity data per day. As you know, AI is only as good as the data that powers it, and I believe we have the best data. There are two unique aspects to our proprietary data. One, its vast quantity, and two, its high fidelity, both of which we utilize to train our models and deliver highly effective AI solutions. Third, the large volume of proprietary data I just talked about empowers us to deliver cutting edge solutions for security operations.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

By leveraging our data fabric technology and correlating our logs with third party data, we have introduced exposure management and threat management solutions, which deliver a new level of actionable insights for our customers' security operations. Leveraging our scale, we are building new security operational solutions, Copilots, and AgenTic AI solutions that will be showcased at our upcoming Zenith Live conferences. With our Zero Trust Exchange platform, we fundamentally transform cybersecurity from firewall based model to Zero Trust architecture. Firewall based security creates trusted and untrusted networks. Once a user or a threat actor gets on the trusted network, they are then blindly trusted and can move unchecked across the enterprise network.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

That is what makes ransomware and other cyber attacks so dangerous. With Zscaler's Zero Trust architecture, there's no concept of trusted networks. Every user, every workload, every IoT OT device, and every AI model is untrusted. With Zero Trust, we connect only the authorized party to the authorized application. While legacy vendors are attempting to cobble together disjointed point products and calling it a platform, we are constantly expanding our core Zero Trust Exchange by integrating new functionality to solve more and more of our customers' security concerns.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Our industry leading capabilities are recognized by our customers, partners, and leading third party analyst firms. Of note, I am thrilled to share that Gartner once again recognized Zscaler as a leader in their SSE Magic Quadrant, extending our status as a leader in the MQ for user security for over a decade. Moving on to the macro environment. Customers remain cautious about their IT spending due to ongoing economic uncertainty. While customers are still prioritizing cyber and data protection, return on investment and the value delivered remain important to customers.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

A couple of quarters ago, we launched our cost taker program to help customers identify and eliminate legacy security and networking products such as firewalls, VPNs, VDIs, and more. We are seeing great success with our program as more and more customers are embracing it to reduce cost and complexity while improving security. Additionally, to help our customers unlock more cost savings, we launched a new purchasing program in q three called customers to flexibly scale their adoption of our platform to meet the constantly evolving organizational demands for cyber and data protection. Customers can seamlessly adopt, scale, and change modules based on agreed pricing, which simplifies the procurement process. Since its recent launch, Z Flex commitments contributed over $65,000,000 in TCV bookings.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

To give you an example, an existing Fortune five hundred technology customer made a multiyear commitment under the Z Flex program, increasing their ARR by over 40% to approximately $19,000,000. As part of the Flex commitment, the customer added managed threat hunting, micro segmentation, identity threat detection, JNI protection, and several data security modules. This win also demonstrates our growing capabilities in the SOC and Zero Trust cloud. I expect the contribution from Zflex to grow meaningfully in the next fiscal year. Moving to products, we are seeing significant growth drivers in three categories: Zero Trust Everywhere, Data Security Everywhere, and AgenTic Operations.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Each of these categories is growing significantly faster than our overall ARR, and their combined ARR is approaching $1,000,000,000. Let me cover each of these categories in more detail. On our last earnings call, we introduced Zero Trust Everywhere, which highlights our unique ability to take Zero Trust security beyond users, Zero Trust for cloud workloads, and Zero Trust for branches. In q three, fifty nine percent of customers who bought Zero Trust branch were new logo customers. Many of these new logo customers are starting their branch journey by securing a small number of branches, which creates significant upsell opportunities for us.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

We are enhancing our Zero Trust branch functionality with several innovations. For example, in q we launched our new unified appliance for branch that brings together Zero Trust branch connectivity and Zero Trust device segmentation into a single plug and play appliance. This solution dramatically simplifies branch infrastructure, eliminating the need for SD WAN, firewall, NAC, and legacy segmentation. I expect Zero Trust branch to be a significant growth contributor in fiscal twenty six. Another key pillar of our Zero Trust Everywhere strategy is Zero Trust cloud, which enables secure communication from workload to workload and from workload to the Internet.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Initially, our customers leverage Zero Trust cloud to secure a small number of workloads to get comfortable with this innovative approach that requires no East West firewalls, no North South firewalls, no virtual private networks, no access routes, and no direct connects. Now we are seeing larger deals for Zero Trust Cloud to secure a larger number of workloads, resulting in acceleration of Zero Trust Cloud ARR. To share an example, an existing financial services customer made their initial purchase of cloud workload protection to secure all their internal workload traffic. This is an impressive 7 figure ACV land deal for workload protection. We are seeing tremendous success as more customers are becoming Zero Trust Everywhere enterprises by embracing Zero Trust for users, branches, and cloud.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Last quarter, we shared our goal to triple the number of Zero Trust Everywhere customers from over one thirty to over three ninety by the end of fiscal twenty six. I'm pleased to share that we ended q three with over two hundred and ten Zero Trust Everywhere Enterprises, which is over 60% quarter over quarter growth. With this strong momentum, we remain on track to achieve our target. The second category driving our growth is data security everywhere. We have the most comprehensive data security capability to secure all types of data, whether structured or unstructured, data in motion or data at rest, and data across all channels, including Gen AI apps, web, email, endpoints, SaaS, DSPM, and more.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Our comprehensive data security capabilities are resonating with customers and helping us win large deals. To give you an example, in a 7 figure ACV deal, an existing Fortune 50 automotive customer added an Endpoint DLP module and Privileged Mode Access, or PRA, while expanding Zero Trust users with more ZPA seats. This customer now has six of our eight data security modules, including inline DLP, SaaS security, cyber isolation, data isolation, classification and encryption, and endpoint DLP. With this deal, the customer's annual spend with us increased by over 50% to well over $10,000,000. Historically, data security was an important consideration for data heavy regulated industries such as finance and health care.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

With the increasing adoption of Gen AI and SaaS applications, data security is now becoming important to all industries. To give you an example, in a 7 figure ACV deal, a new logo, Fortune 100 food and beverage company, adopted Zero Trust users and multiple data security modules. Moving to agentic operations, our third category of growth. Our agentic operations are expanding rapidly in two areas, ITOps and SecOps. For ITOps, we delivered ZDX CoPilot last year as an embedded feature in our ZDX Advanced Plus package.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Since the launch of ZDX CoPilot a year ago, bookings for ZDX Advanced Plus grew over 70% year over year to nearly $75,000,000. ZDX CoPilot helps lower the mean time to resolution of service tickets, and its capabilities are becoming a key differentiator for us. To give you an example, an existing US based large healthcare customer purchased ZDX Advanced Plus for 140,000 users in a 7 figure ACV deal. CDX CoPilot was an important consideration for this win. Moving on to the second area of agentic operations, SecOps, where we have several modules, including Risk three sixty, Business Insights, Unified Vulnerability Management, Identity Threat Detection, and Cyber Asset Attack Surface Management, or CHaSM.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Our SecOps solution, built on the data fabric technology we acquired last year, is gaining traction, and it drove over 120% year over year growth in SecOps ACV. To share a customer example, an existing US based healthier customer purchased Unified Vulnerability Management for 400,000 assets in a 7 figure ACV deal. The customer told me that UVM gave them an accurate asset inventory within two hours, which is a dramatic reduction from the six months it would have taken them otherwise. We will continue to expand our SecOps solution. The acquisition of Red Canary will allow us to expand into SAW categories of Managed Detection and Response, or MDR, and Threat Intel.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

We expect to close this transaction in August 2025. In addition to developing AI powered solutions, we are enabling customers to safely adopt AI. Our GenAI data security module is enabling enterprises to securely use public GenAI apps, such as Microsoft three sixty five Copilot, DeepSea, ChatGPT, and more. In q three, many customers, including an existing global 2,000 tech company, a leading fleet management company, and a large federal customer, and more purchased our GenAI data security module. In addition to securing public AI apps, we are introducing solutions to secure customers' private AI apps such as AI models, chatbots, and inference engines.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

We are expanding the functionality of our Zero Trust Exchange with an LLN proxy to analyze prompt queries to detect and prevent prompt injections and other malicious activities, and analyze responses to prevent data leakage and enforce the right access. I believe these cutting edge innovations will position Zscaler to be a market leader in the AI security space. Our customer obsession, employee dedication to our mission, and our customers' trust in our platform are driving us to deliver innovations that solve our customers' most critical security challenges. With a strong go to market machine and strong momentum in Zero Trust Everywhere and AI security, I am more excited than ever about our continued growth to $5,000,000,000 or more in ARR. Now I'd like to turn over the call to Remo for our financial results.

[Remo Canessa, CFO at Zscaler]

Thank you, Jay. Our q three results exceeded our guidance on growth and profitability, even with ongoing customer scrutiny of large deals. Revenue was $678,000,000 up 23% year over year and up 5% sequentially. From a geographic perspective, Americas represented 54% of revenue, EMEA was 30%, and APJ was 16%.

[Remo Canessa, CFO at Zscaler]

Our annual recurring revenue, or ARR, exiting Q3 was approximately $2,900,000,000 ARR growth was approximately 23% year over year. Remaining Performance Obligations, or RPO, grew 30% from a year ago to $4,978,000,000 Current RPO was approximately 48% of the total RPO. Total calculated billings grew 25% year over year to $785,000,000 Our unscheduled billings, comprised of new, upsell, and renewal billings, grew in the high 20% year over year, driven by increasing customer demand for our platform. Our calculated current billings grew 24% year over year. We ended Q3 with six forty two customers with over $1,000,000 in ARR, and 3,363 customers with over $100,000 in ARR.

[Remo Canessa, CFO at Zscaler]

This continued strong growth of large customers speaks to the strategic role we play in our customers' digital transformation journeys. Our twelve month trailing dollar based net retention rate was 114%. While good for our business, our increased success in selling bigger bundles, selling multiple pillars from the start, and faster upsells within a year can reduce our dollar based net retention rate in the future. There could be variability in this metric on a quarterly basis due to the factors I just mentioned. Turning to the rest of our Q3 financial performance, total gross margin of 80.3% compares to 81.4% in the year ago quarter.

[Remo Canessa, CFO at Zscaler]

Our total operating expenses increased 5% sequentially and 21% year over year to $397,000,000 Operating margin of approximately 22% was comparable year over year. Our free cash flow margin was 18%, including data center CapEx at 11% of revenue. We ended the quarter with approximately 3,000,000,000 in cash, cash equivalents, and short term investments. As a reminder, our convertible debt reaches final maturity in July. We intend to settle the outstanding convertible debt in cash and equity in Q4.

[Remo Canessa, CFO at Zscaler]

Also, we will use $675,000,000 in cash in Q1 of fiscal twenty twenty six for the acquisition of Red Canary, which we announced on May 27. Next, let me provide our guidance for Q4 and full year fiscal twenty twenty five. As a reminder, these numbers are all non GAAP. For the fourth quarter, we expect revenue in the range of $7.00 $5,000,000 to $7.00 $7,000,000 reflecting a year over year growth of approximately 19%. Gross margins to be approximately 80%.

[Remo Canessa, CFO at Zscaler]

I would like to remind investors that we are introducing new products that experience strong growth and are optimized for faster go to market rather than margins. This will continue to influence our gross margins. We plan to optimize new products for margins over time as they scale: Operating profit in the range of $152,000,000 to $154,000,000 Net other income of $16,000,000 earnings per share in the range of $0.79 to $0.80 assuming a 23% tax rate and 164,000,000 fully diluted shares. Based on our strong Q3 performance, we're increasing our full year guidance across all metrics. For the full year fiscal twenty twenty five, billings in the range of $3,184,000,000 to $3,189,000,000 reflecting a year over year growth of approximately 21% to 22%.

[Remo Canessa, CFO at Zscaler]

Revenue in the range of $2,659,000,000 to $2,661,000,000 reflecting a year over year growth of approximately 23% operating profit in the range of $573,000,000 to $575,000,000 earnings per share in the range of $3.18 to $3.19 assuming a 23% tax rate and approximately 163,000,000 fully diluted shares free cash flow margin to be approximately 25.5% to 26%. With a large market opportunity and customers increasingly adopting the broader platform, will invest aggressively to position us for long term growth and profitability. Now I'd like to turn the call back to Jay.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Thank you, Remo. Before moving on to q and a, I am happy to share the appointment of Kevin Rubin as our new chief financial officer. Remo will remain in an advisory capacity until the end of this fiscal year to ensure a smooth transition. I'm very excited to have someone with Kevin's strong background and experience join Zscaler. Kevin has over two decades of experience as a CFO of multiple technology companies.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

I firmly believe his recent eight year tenure as a CFO of a data analytics company will be crucial to Zscaler in our next phase of growth, which will be driven in large part by the combination of Zero Trust and AI security. I'm thrilled to have Kevin on board, and our leadership team and I look forward to working with him. Kevin, welcome to Zscaler.

[Kevin Rubin, CFO at Zscaler]

Thank you, Jay. I'm incredibly excited to be joining Zscaler, the leader in cloud security. I believe with its expanding platform, Zscaler is well positioned to benefit in an increasingly AI driven enterprise security market. With my background in data analytics, I am strongly aligned with Jay's vision of leveraging the high volume, high fidelity data of Zscaler's platform to deliver pioneering security innovations for the age of AI. I look forward to being part of our growth to $5,000,000,000 in ARR and beyond, and I look forward to working with our customers, partners, employees, investors, and analysts. Jay, back to you.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Thank you, Kevin. Operator, you may now open the call for questions.

[Operator]

Thank you. As a reminder, to ask a question, you will need to press 11 on your telephone Our first question comes from the line of Ittai Kedron of Oppenheimer and Company. Please go ahead, Ittai.

[Ittai Kidron, MD & Senior Analyst - Analytics, Data, Security & Infrastructure Software at Oppenheimer & Co. Inc.]

Thanks and nice results guys. And and Raymund, thank you. And and Kevin, good luck. Great to connect with you again for the third time. So congrats and good luck to you on that.

[Ittai Kidron, MD & Senior Analyst - Analytics, Data, Security & Infrastructure Software at Oppenheimer & Co. Inc.]

Jay, a lot of great interesting things happening. So great to see a lot of good momentum here with products and customers. I guess I wanted to get your perspective on Salesforce focus. And what I mean by that is you have a portfolio that's expanding at warp speed. You have a new purchasing mechanism through ZeeFlex.

[Ittai Kidron, MD & Senior Analyst - Analytics, Data, Security & Infrastructure Software at Oppenheimer & Co. Inc.]

How do you get people, how do you get customers focused? How do you get salespeople focused and make sure that things stay on track. And more specifically with regards to Z Flex, which is a clearly a program that should do well for you. It's done well for many others. Help me think about the scope of usage of this.

[Ittai Kidron, MD & Senior Analyst - Analytics, Data, Security & Infrastructure Software at Oppenheimer & Co. Inc.]

Is this gonna be available to everybody? What is the bottleneck in making this available to everybody tomorrow?

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Yeah, Itayan, thank you. Great set of questions. So first of all, expanding platform at a rapid pace creates interesting challenge or opportunity for our sales team. We have been working on it for the last three, four years. As you know, we started the notion of takeoff teams for newer product areas.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

For example, data protection has a takeoff team for quite some time. And with the acquisition of Red Canary, we're requiring actually a seasoned go to market team that knows how to sell SOC solutions. And this essentially can act as our second specialist team that work closely with a larger Zscaler go to market engine. So we are really using, call it, a two tier model. Our broad sales team is covering all products, and they are account centric, account focused.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

And then some of the take off teams are more experts in some of these new product areas, so they can cover the products of interest to them. So having done it for the last few years, we're pretty comfortable and we know how to scale it. Second question was Zephlex. It evolved out of the questions our customers have been asking for. As the platform has gotten bigger and bigger, multiple choices, at many times they wanted the flexibility to try some modules, they wanted to be able to swap one with other.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

So this is the kind of flexibility we're giving them, and it's also pre agreed upon pricing, so they don't have to go through a procurement cycle every time they want a new product. Now, this is a relatively new program. As we mentioned, we got a great start in the first quarter itself. In Q3, had $65,000,000 plus in TCV booking for this program. But we will start with larger customers, then expand to the next level.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

There's nothing holding it back, but we like to be prudent, test things, learn it, and expand from there.

[Operator]

Thank you. Our next question comes from the line of Mike Sikos of Needham. Please go ahead, Mike.

[Mike Cikos, Senior Analyst at Needham & Company]

Great. Thanks for taking the questions, guys, and congrats on the announcement to Kevin and Remo to you as well. Wanted to cycle back. It really sounds like macro trends you saw in April and May were a relative nonevent versus some of the more mixed data points you've got for companies that are on a fiscal quarter end. Can you just tackle that a little bit more from the macro side of the house?

[Mike Cikos, Senior Analyst at Needham & Company]

What are you guys seeing as far as increased scrutiny or increased hesitation versus is it a relative non event just given the momentum that you guys have from a product and go to market side? Thank you.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

I'll start, then Rimu can add on. We did not see a softer April. This may be because we are not in the business of selling security appliances. Overall, spending environment remains challenging, macro is still tight, and we continue to see large deal scrutiny. Now budgets are tight in general for IT, but for cyber, it's a little easier because cyber is a bigger priority.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

And even in cyber, the two areas that are high priority for our customers. Zero Trust Architect is one, and securing use of AI is two. If your project involves one of these two security offerings, and you can actually do some cost savings, the deal can get done. We are able to do all these things together. That's why it has been a good quarter for us.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Overall, we have been working closely with our customers to reduce their costs and become a strategic partner. And this ends up translating into ARR over time. I can tell you this week alone, the three customers who talked to me and they said, Oh, Jay, I'm becoming a third time customer for you. That's relationships. That's what they're proud of. Raimo?

[Remo Canessa, CFO at Zscaler]

Not much to add, Jay, other than to call out our sales organization. Mike Rich has been on board now for about a year and a half and has really built a strong sales organization, really to go after the large enterprise. As you remember, Mike came from ServiceNow. We are emulating ourselves towards ServiceNow model where we're trying to get deeper into accounts and the strategic large accounts. I think that's a call out to our go to market organization as well as our sales organization.

[Operator]

Thank you. Our next question comes from the line of Brad Zelnick of Deutsche Bank. Your question please, Brad.

[Brad Zelnick, Managing Director at Deutsche Bank]

Great, thanks so much and I echo my congrats all around. Mean, these are really refreshing results and congrats on everybody's new appointments and Remo, it's been a pleasure. I wanted to circle back to Z Flex, because it really speaks to the strategic platform style relationship customers want to have with you. But from your perspective, Remo, can you walk us through how are these structured, what's the typical duration in the accounting of these deals, do you maybe foresee a future where billings might no longer be the right metric to measure Zscaler's momentum and success? Thank you.

[Remo Canessa, CFO at Zscaler]

Yeah, I'll take the first part, which is billing is going to be the right metric, and let Shae answer the rest. We've talked about it, we're going go to ARR in fiscal 'twenty six, so you're going to see a change from billing to ARR. I think that's a really big for Zscaler because it gives us the opportunity really to sell more deeper and more products and really work with our customers related to when they can adopt our products. So I believe going to an ARR metric is the right metric going forward. And I think the Z Flex program gives us a lot of flexibility to continue to sell across our entire platform. Sure.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

So the ZFx program came out of our customers' desire to buy more, but not having to go through negotiations and procurement every time. For example, take data protection. There are eight plus modules in this single product line itself. And many times the customer says, Here are three or four things I'm interested in, but I'm not sure. I'm ready to buy all four, or I'm not sure I can deploy all four if I bought them right now.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

So being able to give them flexibility to try and test, and they can swap one versus the other. So ability to swap, the ability to add some more at a predetermined pricing without having to go through procurement cycles are some of main benefits they're getting. Now as these things are being done, they're being done because the customer views us as more strategic. And the duration of the contracts is moving. We used to do most of the deals three years.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

We're seeing more and more deals becoming four years and five years.

[Operator]

Thank you. Our next question comes from the line of Saket Kalia of Barclays. Please go ahead, Saket.

[Saket Kalia, Managing Director at Barclays Capital]

Okay, great. Hey guys, thanks for taking my question here and echo my congrats to Kevin and Remo on your next steps. Jay, maybe for you, I was wondering if you could just dig into Red Canary a little bit more And maybe more specifically, whether you sort of view this as an extension of Zero Trust that accelerates that path to 5,000,000,000 in ARR, or whether this is something that adds to that and broadens the platform.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Yeah. So when I talk to customers often, I tell them from day one we had one north star, Zero Trust Architecture, which expanded from users, partners, suppliers, to workflows, to branches, and everything. And as we did more and more, our customers would often talk to me and say, Jay, this is wonderful, and you got the most logs I have. And then I have to feed these logs a third party solution, pay them again for storing them and doing some stuff with them. Shouldn't you naturally expand in that space and provide me a close feedback so things discovered in your security operation solutions can be fed back to Zscaler or Zero Trust Exchange.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Those are the discussions over the past several years that took us to move in that direction. The first foundational step we took in this direction was last year when we acquired Avalar. Avalar basically brought the notion that you no longer need to build a massive data lake and pay for it. You should have a data fabric, which synthesizes the logs and creates a subset of meaningful information that has context and identity relationships. So now, Red Canary brings a number of interesting things for us to move in that direction at a faster pace so we can kind of accelerate our vision of becoming a leading player.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

They have highly talented and experienced detection and tech intel engineers. That's very important. Two, to my surprise, they had developed a very sophisticated agentic AI technology for reasoning and workflow. And this is being used today. This is not future.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

They're using it to support a large number of customers. Now I can take their agentic technology, combine it with a Zscaler data fabric, things accelerated by many, many months for us. And they also have a good sales team that can help us acting as a take off team for Zscaler. So these two things together, they accelerate our overall growth, but it is expansion of the platform for us. Raimo, you want to add?

[Remo Canessa, CFO at Zscaler]

Yeah. Mean, just some financial information on the transaction. It is valued at $675,000,000 plus equity for employees. As Jay mentioned, we expect it to close in August of twenty twenty five, and we expect it also to be largely neutral to our FY 'twenty six consensus operating margin. A big portion of Red Canary's ARR is concentrated in certain segments that are not strategic to us.

[Remo Canessa, CFO at Zscaler]

So through the post close integration process, we expect to retain approximately half of the $140,000,000 ARR you may have seen. We will share more details on this on the next call, in our Q4 call.

[Operator]

Thank you. Our next question comes from the line of Shrenik Khothari of Baird. Please go ahead, Shrenik.

[Shrenik Kothari, Senior Research Analyst at Robert W. Baird & Co]

Yeah. Thanks for taking my question. Again, congrats on on great execution. Looking forward to working with you, Kevin. So in terms of the the ZFLEX, definitely looks like that's helping broader adoption of of multiple deals, as you said, Jay, with the emerging product categories growing 40%.

[Shrenik Kothari, Senior Research Analyst at Robert W. Baird & Co]

You also cited Gen AI as a key demand driver. Can you tell us a little bit about what kinds of attach rates are you seeing there? And if it's driven by Flex, any sense of percentage of sort of wins which explicitly citing this Chen AI related risk, Copilot charge you with as the buying catalyst? Appreciate it.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Yes. So Chen AI is becoming more and more important to our customers. And our solutions are in three areas. First has been securing use of public AI. We have been actually offering that solution for quite some time now.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

And even Microsoft three sixty five, co pilot security, is part of that. And this is the first area. We are bundling that solution along with our advanced data protection module because the number one use of this is protect the data. Secondly, security use of private AI models and applications our customers are building. Here, we have been building an LLM proxy that can analyze prompt queries and to detect any bad things like prompt injections and the rest of the stuff, and can also inspect responses.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

So that's the second area. The third area is agentive operations in IT operations categories and security operations category. And this area we started building a couple of years ago. You saw our risk three sixty area, you saw Unified Vulnerability Management when we acquired Avamar, and the Red Canary is going to help us accelerate that area as well. And they're using a bunch of agentic AI technology, which is very helpful.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

So we are seeing traction. And if you look at the numbers of growth, it's starting with small numbers, but it's pretty impressive growth so far.

[Operator]

Thank you. Our next question comes from the line of Roger Boyd of UBS. Your question please, Roger.

[Roger Boyd, Executive Director at UBS Group]

Great. Thanks for taking the questions and congrats to you both as well. Maybe Jay, just on BranchCenter, I think the metric that continues to impress me is that you have nearly 60% of customers adopting BranchCenter over the past few quarters that are effectively new to Zscaler. What are your thoughts on what's going right there, the role that BranchCounter is playing in new customer wins, particularly as you continue to have success with some of these cost takeout ROI sales programs against maybe some legacy network equipment? Thanks.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Yeah. Our branch connector is now packaged as plug and play appliance, which actually is helping customers because they plug and play the things happen. And now we had also embedded or integrated our AirGuard technology to do Zero Trust segmentation for devices. The two together are doing very well. Frankly, the degree of interest the customers have taken in this area has exceeded my expectations.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

As you heard, I mean, 9% of customers that purchase Zero Trust branch are new logo customers. That's pretty impressive. And I think it's going to get better. I was talking to a customer recently who was testing our branch appliance and was looking for deploying it for about 100 branches. And once the testing went through, he said, I should be doing for all 1,000 branches.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

This is pretty remarkable. Obviously, we need to keep on executing. But it just tells you the pain customers have, having a bunch of firewalls, boxes, DHCP, and they have VLANs and all this stuff. Our goal is to eliminate all of that stuff. The branch has nothing more than two things: Zscaler appliance and a switch, and of course, some Wi Fi stuff. So very, very excited about it.

[Operator]

Thank you. Our next question comes from the line of Ty Liani of Bank of America. Please go ahead, Ty.

[Tal Liani, Analyst at Bank of America]

How are you? Monday, they're going to learn how to pronounce my name. We're entering second half of the year with scheduled billing very high. And the question we always ask ourselves because of the new competition in SASE is how much of the growth is because of scheduled billing and how much of the growth is because of new products that are beyond ZIA ZPA. The question is, can you you break down the strength this quarter?

[Tal Liani, Analyst at Bank of America]

The reason why I'm asking it is because I see that the NRR that was high about a year and a half ago declined and then slightly recovered last quarter went down again this quarter sequentially. So the question is, what were the trends in ZIA ZPA versus the trends in other products? Sorry for the long winded end question. And if you can give some kind of outlook, some discussion of the outlook of the new products and how you expect them to perform and contribute to revenues? Thanks.

[Remo Canessa, CFO at Zscaler]

That's a lot of questions. I'll try to go with a few, and hopefully Jay can pick up where I think I missed. Q3 unscheduled billings was 28% growth year over year, so that is outstanding. Scheduled billings growth in Q3 came as expected, it was in the low 20% range. The unscheduled billings in Q4 and the guidance that we gave is 25% growth year over year.

[Remo Canessa, CFO at Zscaler]

So the business is doing very well, and it's consistent to what we said at the beginning of the year when we called out scheduled versus unscheduled billings, it's pretty much worked out almost exactly what we said. So we're really proud of how we communicated that to the Street and how the performance is happening in the second half of the year. Related to the NRR rate, it is 114%, but that is outstanding. So from my perspective, we've said this before, we only look at it once every quarter, right now, if we're talking to our investor call. The key thing, I think, is that you look at what we have and the platform that we've created and the expansion of the emerging products, we've talked about that the emerging products is expanding.

[Remo Canessa, CFO at Zscaler]

So we're expecting emerging products to be in the mid-twenty percent to high 20% range for this year. And the reason for that is that we're expanding the products. Those are all new products that come out, DSPM, Gen AI, the DLP products. So I think, you know, Jay called out, we're a technology company. We're an innovation company.

[Remo Canessa, CFO at Zscaler]

I mean, we are at the size that we have a, you know, very large, you know, revenue and recurring revenue and RPO. But at the heart, Zscaler is a technology company at the forefront to continue to really, I think, exploit this market as no other company can. Jay?

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Yeah. I mean, look, all the metrics are exceptionally strong.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Unscheduled billing is strong, even the new sorry, new logo ARR. New logos grew 40%. So very proud of all ADRs. And I think the only number you could talk about NRR. We kind of the bigger platform we sell, the sooner we sell the next thing, the lower the NRR. That's why we kind of ignored NRR but looked at other metrics.

[Operator]

Thank you, To. Our next question comes from the line of Andrew DeCasperi of BNP Paribas. Please go ahead, Andrew.

[Andrew Degasperi, Director - Senior Software Analyst at BNP Paribas]

Thanks for taking my question. Just on a separate line of thought, our checks found that Zscaler could benefit greatly from the federal business. I know it's not a big contributor of revenue today, but we've heard that it's not really being impacted by the cuts that the administration is making. And in fact, there could be some ramp up there. Are you seeing the same thing, or are you still optimistic about that line of revenue?

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

So FED for us was in line with our expectations this quarter. And sure, there's some uncertainty in the business, but Fed wants to cut costs. The biggest cost in the security space is firewall and legacy type of vendors. And if I can go and take a lot of cost out of it by removing a lot of those products, it actually works in our favor. Raimo?

[Remo Canessa, CFO at Zscaler]

Yeah. And also, for our guide for Q4, we're not expecting a significant strength with Fed. As Jay mentioned, we're well, well positioned. These are very large contracts which take time. We're in 14 of the 15 cap and agencies.

[Remo Canessa, CFO at Zscaler]

But again, right now, as I said, as Jay mentioned, we came as expected in Q3, and we're not expecting a significant quarter in Q4 for that.

[Operator]

Thank you. Our next question comes from the line of Andrew Nowinski of Wells Fargo. Your question please, Andrew.

[Andrew Nowinski, Analyst at Wells Fargo]

Thank you taking the question, and, yeah, congratulations, Kevin, on joining Zscaler and Remo. It's been a pleasure working with you as well. Wish you well. I I wanted to ask about the new growth categories at at a higher level. Thank you for providing some of those new metrics for it.

[Andrew Nowinski, Analyst at Wells Fargo]

I think it was over $1,000,000,000 already in ARR across the three new growth categories you called out. But it looks like ZIA and ZPA were part of Zero Trust Everywhere. So I'm wondering what's making up the difference between the 1,000,000,000 and the new growth categories they are you generated versus the 2,900,000,000.0 in total? And then what's the growth rate of those sort of non emerging products look like? Thank you.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Okay. So that's good. That's clarified. Three main buckets, zero trust everywhere. So here, we're basically making sure the customers were having zero trust users, zero trust branches, zero trust cloud, all areas together.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

And this is where these customers were, about 130, and we more than doubled it or went to two ten, sorry. And we plan to go to three ninety. So that's a subset of customers. That's number one. And we are actually seeing 60% quarter over quarter growth in that area.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

It's a growth factor that matters quite a bit. 60% is impressive. The data security aspect. You know, we have been talking about data security for quite some time. Last quarter we shared that.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

We crossed $350,000,000 in ARR in that, and it's still growing faster than the total company ARR. And third area is the relatively newer area. This is our AI solution. This is for our security operation, IT operation. This is where some of the Red three sixty Unified Vulnerability Management type of solutions come in.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

And we saw in ZDX Advanced Plus, which actually uses some of the Zscaler co product technology, you're seeing 70% year over year growth in that area. And products, the younger products that fall in the security ops bucket, that ACV grew over 120%. So from all angles, these three products are doing very good, amazing growth and approaching about a billion dollars.

[Operator]

Thank you. Our next question comes from the line of Shaul Eyal of TD Cowen. Please go ahead, Shaul.

[Shaul Eyal, Managing Director - Equity Research at TD Cowen]

Thank you. Congrats Jay, Remo and Kevin on all fronts. Jay, on Red Canary, there are a number of MDR providers, various sizes out there. Are the two or three reasons that attracted you specifically to this asset over the others? Is it technology, market reach, clients, revenue scope? Just want to get some additional color. Thank you.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Sure. I mean, this acquisition was driven to make sure we can accelerate our vision to become a leading player in the stock market. So what did these guys offer? We wanted something complimentary to what we had. What we have in this space is the data fabric technology that we acquired from Everest last year.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Number one, we are impressed with the talented engineers, experienced people who had detection and fat intel. That's foundational to doing these things. Two, I mentioned earlier, we are impressed with our agentic AI technology for reasoning and workflow they already built and they're using in production. Lots of companies talk about AgenTiG AI. The 20 startups we looked at in this area, all new AgenTiG AI.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

You look at how many customers do you have, what is in production, hardly any. This company had real stuff in production. And we can integrate that technology with our platform, with expertise they bring to the table. It became very impressive. And then, of course, they also have a go to market team that can become a takeoff team or team of specialists to help us take the solution to market.

[Operator]

Thank you. Our next question comes from the line of Michael Hedberg of RBC Capital Markets. Please go ahead, Matthew.

[Michael Richards, Equity Research Senior Associate at RBC Capital Markets]

Hey, guys. This is Mike Richards on for Matt. Thanks for taking the question. With the accelerating success across the broader platform here, maybe we could take a step back and talk about how much of that success is driven from the ROI messaging resonating in this macro versus the go to market productivity that you guys were expecting? And what inning are we in that go to market productivity improvement? Thanks for the question.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

It's coming from auto y versus go to market versus what? Productivity. Productivity. Okay, great. Okay.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Look, all these things in your success, generally, there's no single thing that kind of makes it happen. It's generally a collection of things that work together. We have a strong go to market team. That migration team has done a great job. Platform has expanded.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

The two together. Then being able to show cost savings. You bring these things together, magic happens. Trying to do one thing at a time goes only so far. If you're able to pull it off, great go to market, great platform, and cost savings, it's wonderful.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

In fact, lots of people talk about cost savings. How many companies can actually go to the customer today and say, here's my security solution that's going to save you money? It's generally known that security never saves money. But in the seascale world, we are able to show that they can actually save money by taking out a lot of not only legacy security products, but a lot of legacy networking products as well. That's why the numbers are very impressive.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

We are very excited about it. This thing has been working for quite some time. It's getting better. And so the end result of that ends up being good numbers and good productivity.

[Operator]

Thank you. Our next question comes from the line of Gray Powell of BTIG. Your question please, Gray.

[Gray Powell, Managing Director at BTIG]

Okay, great. Thanks for taking the question and congratulations on the good results. So I just maybe had like a higher level question. I understand the need for customers to rationalize their spend or, like, not buy the same product twice. But we've also heard, particularly with other security vendors, that some companies have become really aggressive pushing ELAs, and sometimes that ends up creating shelfware.

[Gray Powell, Managing Director at BTIG]

So I'd be curious, when you're talking about Zscaler versus the competition, is that something that you see in the market? And and if so, how does that feed into your customer conversations? And and does it actually put you in a a better position?

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Customers dislike ELA. They know that ELAs often become shelfware. So we really don't like to push ELA. But our goal is interesting to say customers are drawing to have better cybersecurity and or cost. And as we go in, we show them journey of Hayes' journey, how you can take of these products, these products, these products, and reduce the cost and have better user experience and, in addition, business agility.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Often customers are saying, I want to open a new branch office in two days rather than two months. Zscaler can make it happen. There's so many M and As happening out there. I never thought there would be so many mergers and integration. Every week I see a couple of them at least, and they all need Zscaler solution to be able to bring things together without needing legacy network and legacy security.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

So these deals are actually growing our platform. We are really not selling a lot of ELAs. We are selling the platform they need. Often I tell salespeople, don't really try to push a bigger deal because they can take longer. But the customer says, if I can have more savings, I can do a bigger deal.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

So we let the deal happen the way it happens. But our goal is do what's right for the customer, look at them as a long term partnership. And honestly, one of the number one thing I look at, go to market point of view, how well is Zscaler deployed? How much is not deployed? There's a big focus on that.

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

And I can tell you Zscaler solutions are very well deployed out there.

[Operator]

Thank you. I would now like to turn the conference back to Jay Chaudhry for closing remarks. Sir?

[Jay Chaudhry, CEO, Chairman & Founder at Zscaler]

Thank you for joining us for the earnings call. I look forward to seeing you at one of the many conferences. Thank you again. Thank you.

[Operator]

Goodbye. This concludes today's conference call. Thank you for participating. You may now disconnect.

Participants

Executives

• Ashwin Kesireddy, Vice President of Investor Relations & Strategic Finance
• Jay Chaudhry, CEO, Chairman & Founder
• Remo Canessa, CFO
• Kevin Rubin, CFO

Analysts

• Ittai Kidron, MD & Senior Analyst - Analytics, Data, Security & Infrastructure Software at Oppenheimer & Co. Inc.
• Mike Cikos, Senior Analyst at Needham & Company
• Brad Zelnick, Managing Director at Deutsche Bank
• Saket Kalia, Managing Director at Barclays Capital
• Shrenik Kothari, Senior Research Analyst at Robert W. Baird & Co
• Roger Boyd, Executive Director at UBS Group
• Tal Liani, Analyst at Bank of America
• Andrew Degasperi, Director - Senior Software Analyst at BNP Paribas
• Andrew Nowinski, Analyst at Wells Fargo
• Shaul Eyal, Managing Director - Equity Research at TD Cowen
• Michael Richards, Equity Research Senior Associate at RBC Capital Markets
• Gray Powell, Managing Director at BTIG