Zscaler Q4 FY2025 Earnings Call Transcript

Zscaler Inc. (NASDAQ:ZS) reported financial results for the fourth quarter of fiscal 2025 after the market close on Tuesday.

Below are the transcripts from the fourth quarter earnings call.

What is ZS stock doing now? Find out here.

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OPERATOR

Hello and welcome to Zscaler fourth quarter 2025 earnings call. At this time all participants are in a listen only mode. After the speaker’s presentation, there will be a question and answer session. To ask the question during the session you will need to press Star one one on your telephone. You would then hear an automated message advising. Your hand is raised to withdraw your question. Please press Star one one. Again, we ask that you limit yourself to one question only. I would now like to turn the conference over to Ashwin Kesireddy, Vice President of Investor Relations and Strategic Finance. Sir, you may begin.

Ashwin Kesireddy

Good afternoon everyone and welcome to the Zscaler fourth quarter fiscal year 2025 earnings conference call. On the call with me today are Jay Chaudhry, Chairman and CEO and Kevin Rubin, 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. 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 but rather are subject to risks 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. I also want to inform you that we’ll be attending the Following Citi Global TMT conference on September 4 Truist Securities Technology Symposium on September 4 Goldman Sachs Communacopia Plus Technology Conference on September 10 Wolf Research TMT conference on September 10 Now I’ll turn the call over to Jay.

Jay Chaudhry

Thank you, Ashwin. We had an outstanding Q4 and I am very pleased to share our strong growth which once again exceeded our guidance. Our revenue grew 21% year over year and operating margin exceeded 22% which is a quarterly record for us. We are seeing growing demand for our large and expanding platform which provides best in class cyber and AI security while eliminating complexity and reducing cost. We are seeing significant customer interest in our powerful AI security solutions, including our new AI Guard and GenAI Security offerings. An increasing number of enterprises are choosing Zscaler because of our technology leadership and platform scale. I am pleased to share that our platform now secures nearly 40% of the global 2000 and over 45% of the Fortune 500 companies driven by the strong customer demand. Our annual recurring revenue or ARR, increased about 22% in year over year and surpassed $3 billion, making us one of the only two pure play SaaS security vendors to achieve this milestone for fiscal year 2025. With our revenue growth of 23% and free cash flow margin of 27%, we operated at rule of 50. While many public SaaS companies strive for rule of 40 results, we have consistently exceeded the sought after industry benchmark. Heading into fiscal 2026, we are accelerating our platform innovations across three growth factors, AI Security, Zero Trust Everywhere and Data Security Everywhere, which together surpassed $1 billion in ARR in Q4. Let me share more details on our innovations in these three areas. Starting with AI security, we have entered an era of omnipresent AI which is fundamentally transforming enterprises and is leading to an explosive growth of AI ML traffic. The scale of this transformation is true, truly remarkable. Our Threat Labs report revealed that AI ML transactions on Our cloud increased 3,500% in the past year. The adoption of AI at this breakneck pace is creating new security challenges such as model jailbreaking, prompt injection, model poisoning and more. The growth in AI also increases complexity and creates new cyber risks. To address these emerging security challenges, we are innovating in two primary areas. First, security for AI applications. We have delivered solutions to secure AI apps and access to those apps, whether by users or AI agents. To secure AI apps from traditional cyber and emerging intent based attacks and to battle the new security challenges I just referenced, we recently launched Zscaler AI Guard which is being tested by a significant number of large customers. We’re already the leading vendor for Zero Trust communication between users, Workloads, devices, devices and B2B. Agent to agent communication is a natural extension of our proven Zero Trust platform. We’re developing Zero Trust Solution to Secure Agent to Agent and Agent to Application communication. As an increasing number of software vendors are introducing their own agents, enterprises are looking for a proven vendor agnostic platform like Zscaler to secure agentic communication using standard protocols like MCP or A2A. Our second area of AI innovations is agentic Operations which includes Agentic SecOps and Agentic ITOps. I am pleased to see continued strong demand for our AgentIQ operation products and I expect this portfolio to surpass $400 million in ARR in fiscal year 26. In addition, we’re delivering several innovations to continue driving growth in these areas. For example, for security operations we’re building an AI powered SOC solution to simplify customers operations, reduce alert fatigue, automatically hunt for threats, discover vulnerabilities and predict breaches while reducing cost and complexity and eliminating legacy sims. We are combining our highly differentiated data fabric with the recently acquired Red Canary’s Agentic AI technology to deliver a truly AI powered society. During the quarter we saw strong demand for our solutions which drove over 85% year over year growth in SecOps ARR. For IT operations we are introducing several Zscaler Digital Experience or ZDX innovations to enable faster resolution of IT tickets. To share an example, we are introducing an AI powered endpoint remediation solution which will further reduce resolution time of IT tickets. Our current innovations like the ZDX CoPilot are resonating with customers and drove 58% year over year growth in the bookings of ZDX Advanced Plus Q in fiscal ’25. Our second growth factor, zero Trust Everywhere, which includes Zero Trust Users, Zero Trust Branch and Zero Trust Cloud is exceeding our expectations. Two quarters ago we shared our goal of securing 390 enterprises with zero Trust Everywhere by the end of fiscal ’26. As of the end of fiscal ’25 we are already close to reaching this goal with over 3500 trust everywhere enterprises. Let me share an example of an enterprise that embraced Zero Trust Everywhere in a seven figure ACB win an existing Zero Trust users and Zero Trust Cloud Enterprise purchased Zero Trust Branch to secure over 120 manufacturing plants and become a Zero Trust Everywhere enterprise. Zero Trust Branch enables this Global 2000 enterprise to replace legacy SD-WAN, firewall based VPNs and existing OT security solutions solutions and they expect to realize more than 60% cost savings. Customers are leaning into our vision of a CAFE like branch by eliminating north south firewalls and SD-WANs. Furthermore, they’re deploying Zero Trust security inside branches, factories and campuses and eliminating legacy point products such as Network Access Control and East west firewalls with our over 3500 trust branch Enterprise customers. We’re just beginning to benefit from the massive opportunity to replace legacy solutions in millions of branches across a wide range of verticals including finance, insurance services, retail, healthcare, education and more. To give you an example, in Q4 we signed our largest ever Branch deal with a leading higher ed institution. They purchased our Zero Trust Device Segmentation to secure around 150,000 devices across more than 400 locations in a seven figure.

New logo ACV deal. We are also seeing strong demand for our Zero Trust Cloud, the third component of Zero Trust Everywhere. Zero Trust Cloud secures workload to workload and workload to the Internet communication and provides workload segmentation. By design, this eliminates the need for VPNs, north, south and east west virtual firewalls, Express routes and direct connects. The proliferation of AI is driving an urgency to secure the large footprint of enterprise workloads and I believe our Zero Trust Cloud is the best solution for it. We are seeing strong demand for Zero Trust Cloud which resulted in an acceleration of its ARR in Q4 to share a customer. Example In a seven figure ACV win, an existing Fortune 10 healthcare enterprise expanded their workload protection from public cloud workloads to data center workloads. This large enterprise chose ZSCALER to implement Zero Trust Security and eliminate east west firewalls. This is our fourth workload expansion deal with this customer, highlighting the large upsell opportunity we have for Zero Trust Cloud. Zero Trust Cloud enables enterprises to safely adopt agentic AI technologies that require workload communication between cloud and data centers, particularly in special retrieval, augmented generation or RAG implementations. To drive faster adoption of Zero Trust Cloud, we recently introduced an innovative cloud gateway solution which reduces the deployment time to under 10 minutes. By simplifying connectivity for distributed workloads across hyperscalers. We are helping customers achieve Zero Trust at global scale, which accelerates cloud and AI initiatives. With the ongoing growth in AI workloads and the need to secure them, I expect Zero Trust Cloud to continue its strong growth in fiscal 26. Our third growth vector, Data Security Everywhere, is seeing strong demand as enterprises are consolidating multiple data security point products on our platform. I’m pleased to share that Data Security Everywhere ARR grew to approximately $425 million. Our comprehensive data security capabilities including data discovery, classification, posture management and data loss prevention are driving large deal wins. For example, an existing Fortune 500 services enterprise that’s also a key global system Integrator partner adopted our data security Solution in a 7 figure ACV deal for 350,000 users. This customer adopted Isolation Email, DLP Endpoint, DLP data classification and Encryption and GenAI Security, enabling them to consolidate multiple point products. I’m very pleased with the pace of our platform innovations for Zero Trust Everywhere, Data Security Everywhere and AI Security and I expect our strong growth in these areas to continue to accelerate the adoption of our broader platform. We introduced our Z-Flex program less than 2/4 ago in Q4. This program generated over $100 million in Total Contract Value (TCV) bookings representing over 50% sequential growth. Our Z-Flex program is becoming the preferred motion for strategic model multi year deals as it enables seamless adoption of new product modules by our customers. To share an example in a 5 year 8 figure Total Contract Value (TCV) deal, a large enterprise energy customer chose our Z-Flex program to increase the number of modules adopted from 14 to 19 including Zero Trust branches for hundreds of locations. This purchase resulted in an over 100% increase in ARR with us. Customer interest in Z-Flex continues to grow and I expect it to be a meaningful growth driver in fiscal 26. In conclusion, our expanding platform and a stronger go to market engine position us well to to benefit from the tailwinds of Zero Trust and AI Security. With accelerating pace of our Zero Trust and AI innovations, we’re still in the early innings of disrupting a large $100 billion security market. Now I’d like to turn over the call to Kevin for our financial results.

Kevin Rubin (Chief Financial Officer)

Thank you Jay and good afternoon everyone. Our Q4 results represent a strong finish to fiscal ’25, reinforcing the demand for our solutions and our operational scale. We operated at rule of 50 in fiscal ’25, demonstrating our commitment to profitable growth. We ended fiscal ’25 with over $3 billion in Annual Recurring Revenue (ARR), a milestone that reflects approximately 22% year over year growth. Notably, as Jay mentioned, we are one of only two pure play SaaS security companies to surpass this level of Annual Recurring Revenue (ARR). Annual Recurring Revenue (ARR) represents the next 12 months revenue from existing customer contracts active at the end of the period. For modeling purposes. Quarterly Annual Recurring Revenue (ARR) figures from prior year periods are included in the supplemental materials accompanying our Q4 results. Q4 revenue was $719 million, growing 21% year over year, 6% sequentially, and exceeding the high end of our guidance. Geographically, the Americas accounted for 55% of revenue, EMEA for 29% and APJ for 16% for the full fiscal year. Total revenue reached $2.7 billion, representing 23% year over year growth and surpassing our guidance. Our remaining performance obligation, or RPO grew approximately 31% year over year to $5.8 billion, with approximately 46% classified as current RPO. We closed fiscal ’25 with over 9,400 customers, including 664 customers generating over $1 million in Annual Recurring Revenue (ARR) and 3,494 customers exceeding $100,000 in Annual Recurring Revenue (ARR), we now serve nearly 40% of the Global 2000 and over 45% of Fortune 500 companies, demonstrating the strategic role we play in customers digital transformation journeys. Turning to the rest of our Q4 financial performance, our gross margin was 79.3% as compared to 81.1% last fiscal year Q4. Our gross margin this quarter is lower than our historical target of 80% due to a one time deployment of a large private cloud in a government customer’s data center which included a hardware component that carries lower gross margin. Given the one time nature of this shipment, we expect gross margin to move back up to 80%. In Q1, operating expenses increased 3% sequentially, and 16% year over year reaching $411 million. Operating margin was 22.1%, exceeding our long term range and growing by approximately 60 basis points year over year. Since Q1 23 operating margin has expanded by over 1000 basis points, underscoring the leverage in our model. Our free cash flow margin for Q4 was 24% including data center capital expenditures (CapEx) at 8% of revenue. For fiscal ’25, data center capital expenditures (CapEx) represented 6% of revenue, approximately 60 basis points lower than last year. Due to investment timing, we ended the quarter with $3.6 billion in cash, cash equivalents and short term investments, including net proceeds of 1.6 billion dol billion from the convertible note we issued during the quarter. Next, let me provide key assumptions driving our fiscal ’26 guidance. On August 1, we successfully closed the acquisition of Red Canary. We recognized approximately $83 million of Annual Recurring Revenue (ARR) at close. Our full year Annual Recurring Revenue (ARR) guidance assumes $95 million contribution from Red Canary and our full year revenue guidance assumes approximately $90 million contribution from Red Canary. Our Red Canary Annual Recurring Revenue (ARR) guidance assumes no contributions from customer contracts up for renewal ...