Zscaler (ZS) Stock Drops 9% Despite Strong Earnings Beat and Raised Guidance

TLDR

• Zscaler reported Q1 fiscal 2026 earnings of $0.96 per share, beating analyst estimates of $0.86, while revenue hit $788.1 million versus expectations of $773.26 million
• Annual Recurring Revenue grew 26% year-over-year to $3.2 billion, with deferred revenue jumping 32% to $2.35 billion
• The company raised full-year fiscal 2026 guidance, projecting revenue of $3.28 billion to $3.30 billion and adjusted EPS of $3.78 to $3.82
• Shares tumbled 9% in after-hours trading despite the earnings beat, suggesting investors expected even stronger performance
• Year-to-date, Zscaler stock has gained over 60%, potentially making investors cautious despite the quarterly beat

Zscaler shares dropped 9% in after-hours trading Monday despite reporting first-quarter results that topped Wall Street expectations on both the top and bottom lines. The cloud security company posted adjusted earnings per share of $0.96, crushing the analyst consensus of $0.86.

Zscaler, Inc., ZS

Revenue climbed 26% year-over-year to $788.1 million, exceeding estimates of $773.26 million. The market’s negative reaction suggests investors had priced in even better numbers from the cybersecurity firm.

Annual Recurring Revenue reached $3.2 billion, growing 26% year-over-year. This metric shows predictable subscription revenue and serves as a key indicator for software companies.

Deferred revenue jumped 32% year-over-year to $2.35 billion. This growth rate accelerated from 30% in the prior quarter, indicating strengthening demand for Zscaler’s services.

The company’s non-GAAP income from operations hit $171.9 million, representing 22% of revenue. This compared to $134.1 million, or 21% of revenue, in the same period last year.

Guidance Raised Across The Board

Zscaler provided upbeat guidance for the second quarter. The company expects revenue between $797 million and $799 million, topping the consensus estimate of $796.1 million.

Adjusted EPS for Q2 is projected at $0.89 to $0.90, matching analyst expectations. The company also raised its full-year fiscal 2026 outlook across multiple metrics.

Full-year revenue guidance now stands at $3.28 billion to $3.30 billion. Adjusted EPS for the full year is expected to land between $3.78 and $3.82, both figures exceeding consensus estimates.

The company increased its full-year ARR guidance to a range of $3.698 billion to $3.718 billion. This represents another vote of confidence in the company’s growth prospects.

Tax Rate Change And Stock Performance

Zscaler announced it adopted a reduced adjusted tax rate of 21%, effective from the first quarter. The previous rate stood at 23%, with the change aligning with the enactment of the “One Big Beautiful Bill Act.”

Year-to-date, Zscaler stock has gained over 60% before Monday’s after-hours decline. This strong performance may have contributed to investor caution despite the quarterly beat.

Shares dropped to $266.90 in extended trading following the earnings release. The stock’s robust year-to-date gains potentially set a high bar for quarterly results.

Retail optimism improved following the quarterly print, according to market sentiment trackers. The company’s Zero Trust and AI security solutions continue driving demand across its customer base.

Chaudhry noted that the company now has over $3.2 billion in Annual Recurring Revenue. He emphasized that an increasing number of customers rely on the platform for better security, lower operational costs and reduced IT complexity.

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