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01/11 10:00
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Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
The earnings call presents a positive outlook with strong revenue growth driven by strategic pillars like Zero Trust and AI security. Despite a slight decline in gross margin, the company maintains efficient cost management and strong cash flow margins. Analyst questions highlight strong demand for products, significant growth potential, and a stable competitive landscape. The Q&A section reveals positive sentiment towards management's strategic direction, especially in Zero Trust areas. Although Red Canary's contribution is minimal, its integration is progressing well. Overall, the company's strategic initiatives and financial health suggest a positive stock price movement.
Annual Recurring Revenue (ARR) $3.2 billion, reflecting approximately 26% year-over-year growth. The growth was driven by the acceleration in ARR from the company's three growth pillars: AI Security, Zero Trust Everywhere, and Data Security Everywhere.
Revenue $788 million, growing 26% year-over-year and 10% sequentially. The growth was attributed to strong demand across geographies, with the Americas accounting for 58% of revenue, EMEA for 27%, and APJ for 15%.
Remaining Performance Obligation (RPO) $5.9 billion, growing approximately 35% year-over-year. This growth reflects the strategic role Zscaler plays in customers' digital transformation journeys.
Gross Margin 79.9%, compared to 80.6% in the prior fiscal year Q1. The slight decline was due to the introduction of new products optimized for faster go-to-market rather than margins.
Operating Margin 21.8%, growing by approximately 40 basis points year-over-year. This reflects efficient cost management and operational performance.
Free Cash Flow Margin 52%, including data center CapEx at 2% of revenue. This strong margin highlights the company's efficient cash generation capabilities.
Cash, Cash Equivalents, and Short-term Investments $3.3 billion, indicating a strong liquidity position.
AI Security pillar: Grew over 80% year-over-year, exceeding FY '26 target of $400 million ARR three quarters early. Expected to surpass $0.5 billion ARR by fiscal year-end.
AI-SPM (AI asset discovery solution): Detects unauthorized AI applications, prevents over permissions for AI agents, and strengthens governance for model deployments. Extended capabilities with SPLX acquisition.
AI Red teaming: Enables automated and continuous testing of AI apps for vulnerabilities, integrating with CI/CD pipelines.
AI Guardrails: Provides in-line policy enforcement for AI use, cybersecurity, and data loss prevention. Secures over 90 billion AI/ML transactions per month.
Agentic SecOps: AI-powered SOC for threat hunting and operational simplification. Integrated with Red Canary acquisition.
Agentic ITOps: Introduced ZDX innovations for faster resolution of application and network issues. ZDX Advanced Plus bookings grew over 80% year-over-year.
Zero Trust Everywhere: Achieved goal of securing 450 enterprises three quarters early. Includes Zero Trust users, branches, and cloud.
Zero Trust Cloud: Adopted by a Fortune 500 healthcare customer in an 8-figure TCV win, replacing legacy network and security products.
Zero Trust Branch: Adopted by a Global 2000 manufacturing customer in a 7-figure upsell, tripling ARR.
Data Security Everywhere: ARR accelerated to approximately $450 million. Includes 8 modules for data discovery, classification, and loss prevention.
Z-Flex program: Generated over $175 million in TCV, growing 70% quarter-over-quarter. Enabled customers to adopt multiple modules flexibly.
Free cash flow margin: Achieved 52% in Q1, reflecting strong operational efficiency.
AI and Zero Trust integration: Positioned to capture the growing AI security market by combining Zero Trust and AI security offerings.
Expansion of AI capabilities: Acquired SPLX and Red Canary to enhance AI-SPM and Agentic SecOps solutions.
AI Security Risks: The proliferation of AI is making enterprises increasingly susceptible to attacks. Threat actors are using AI to increase the speed, effectiveness, and loss radius of attacks. AI agents are becoming the weakest link in security, and hijacking even one trusted agent could lead to serious breaches of critical corporate resources and sensitive information.
Regulatory Compliance for AI: Evolving regulatory requirements for AI, such as transparency and explainability, pose challenges for organizations to meet compliance standards.
Operational Complexity: The introduction of new products optimized for faster go-to-market rather than margins is influencing gross margins, which may impact profitability in the short term.
Supply Chain and Deployment Delays: Without solutions like Zero Trust Cloud, customers face increased costs and months of delay in deploying secure systems, particularly for cloud migrations like SAP RISE.
Economic and Market Pressures: The company is investing aggressively to position for long-term growth, which could be impacted by economic uncertainties or market conditions.
AI Security ARR: Expected to exceed $0.5 billion by the end of fiscal year 2026, driven by strong demand and growth of over 80% year-over-year.
Zero Trust Everywhere: Achieved the goal of securing 450 enterprises three quarters ahead of the target date, with continued strong momentum expected.
Revenue Guidance for Q2 FY26: Projected revenue in the range of $797 million to $799 million, reflecting year-over-year growth of approximately 23%.
Full Year FY26 Revenue Guidance: Projected revenue in the range of $3.282 billion to $3.301 billion, reflecting year-over-year growth of 22.8% to 23.5%.
Full Year FY26 ARR Guidance: Expected ARR in the range of $3.698 billion to $3.718 billion, reflecting year-over-year growth of 22.7% to 23.3%.
Free Cash Flow Margin: Projected to be approximately 26.0% to 26.5% for the full year FY26.
Operating Profit Guidance for FY26: Expected operating profit in the range of $732 million to $740 million.
Earnings Per Share (EPS) Guidance for FY26: Projected EPS in the range of $3.78 to $3.82.
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The earnings call presents a positive outlook with strong revenue growth driven by strategic pillars like Zero Trust and AI security. Despite a slight decline in gross margin, the company maintains efficient cost management and strong cash flow margins. Analyst questions highlight strong demand for products, significant growth potential, and a stable competitive landscape. The Q&A section reveals positive sentiment towards management's strategic direction, especially in Zero Trust areas. Although Red Canary's contribution is minimal, its integration is progressing well. Overall, the company's strategic initiatives and financial health suggest a positive stock price movement.
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