Executive Summary / Key Takeaways

• Zscaler is at the forefront of a fundamental architectural shift in cybersecurity, championing its cloud-native Zero Trust Exchange platform, now deeply integrated with AI, to displace legacy perimeter-based security.
• The company's strategic focus on "Zero Trust Everywhere," "Data Security Everywhere," and "Security for AI" is driving substantial growth, with these combined categories surpassing $1 billion in Annual Recurring Revenue (ARR) in Q4 fiscal 2025.
• Zscaler's platform delivers significant value to enterprises by enabling the consolidation of multiple legacy security and networking products, leading to enhanced security, operational simplicity, and quantifiable cost reductions.
• Strong financial performance in fiscal 2025, including 23% revenue growth to $2.67 billion and a 27% free cash flow margin, demonstrates consistent operational leverage and efficiency, with the company operating at a "Rule of 50."
• Strategic initiatives like the Z Flex purchasing program and the Red Canary acquisition are accelerating customer adoption and expanding Zscaler's market opportunity in the rapidly evolving cybersecurity landscape.

The Dawn of a New Security Paradigm

Zscaler, Inc. was founded in 2007 with a prescient vision: the internet would become the new corporate network, and the cloud, the new data center. This foresight positioned the company to pioneer the Zero Trust Exchange™ platform, a fundamental architectural departure from traditional perimeter-based security. In an era defined by rapid cloud adoption, increasing workforce mobility, and the omnipresent emergence of artificial intelligence (AI), legacy firewall and VPN approaches are proving inadequate, creating vulnerabilities that threat actors readily exploit. Zscaler's core business is to enable enterprises to securely accelerate their digital transformation by replacing these outdated models with a cloud-native, Zero Trust architecture.

The cybersecurity landscape is undergoing a profound transformation, driven by the explosive growth of AI and machine learning (ML) traffic, which increased by 3500% on Zscaler's cloud in the past year alone. This shift introduces new threats such as model jailbreaking and prompt injection, alongside traditional cyber risks. Governments globally, including those in the U.S., Europe, and Asia, are increasingly mandating Zero Trust adoption in response to successful nation-state cyberattacks that bypass conventional defenses. This broad industry trend underscores the critical need for Zscaler's solutions, which are designed to secure users, devices, applications, and workloads without implicit trust, regardless of location.

Technological Moat: The Zero Trust Exchange and AI Integration

At the heart of Zscaler's competitive advantage is its Zero Trust Exchange, a globally distributed, multi-tenant cloud platform spanning over 160 public exchanges and thousands of private exchanges across more than 185 countries. This architecture is purpose-built to provide inline inspection of internet and SaaS traffic, secure access to private applications, protect cloud applications, manage digital experience, and scan for exposures and misconfigurations. The platform processes over 500 billion requests daily, blocking more than 225 million threats and performing over 250,000 unique security updates each day. This "cloud security effect" ensures that once a new threat is detected, it is blocked across Zscaler's entire customer base within minutes, offering unparalleled, real-time protection.

Zscaler's technological differentiation is further amplified by its deep integration of AI and ML. The company leverages its vast repository of high-fidelity enterprise data, generated from billions of daily transactions, to train its models and deliver highly effective AI solutions. This proprietary data, coupled with advanced analytics, underpins Zscaler's ability to develop cutting-edge solutions for security operations and IT operations. Key AI innovations include Zscaler AI Guard and GenAI Security, designed to secure public and private AI applications against emerging adversarial attacks like prompt injection and data leakage. The ZDX CoPilot, an AI-powered feature within Zscaler Digital Experience (ZDX) Advanced Plus, has already demonstrated its value, driving a 58% year-over-year growth in bookings for that SKU in fiscal 2025 by automating root cause analysis and accelerating IT ticket resolution. The recent appointment of Phil Tee as EVP of AI Innovations signals Zscaler's aggressive commitment to further expand its AI portfolio, particularly in Agentic AI.

Strategic Growth Pillars and Market Penetration

Zscaler's growth strategy is concentrated around three rapidly expanding pillars: Zero Trust Everywhere, Data Security Everywhere, and Agentic Operations. These combined categories surpassed $1 billion in ARR in Q4 fiscal 2025, growing significantly faster than the company's overall ARR.

Zero Trust Everywhere extends the core Zero Trust principles beyond users to encompass branches, cloud workloads, IoT/OT systems, and autonomous AI agents. This comprehensive approach directly challenges legacy network architectures. For instance, Zero Trust Branch, which includes Zero Trust SD-WAN and Zero Trust Device Segmentation, is designed to eliminate north-south firewalls, VPNs, and NAC systems in branch offices, factories, and campuses. This solution is gaining significant traction, with 59% of Zero Trust Branch customers in Q3 fiscal 2025 being new logos. A Global 2000 manufacturing customer, for example, achieved over 60% cost savings by adopting Zero Trust Branch to secure 120 manufacturing plants, replacing legacy SD-WAN and firewall-based VPNs. Similarly, Zero Trust Cloud, which secures workload-to-workload and workload-to-internet communication, saw accelerated ARR in Q4 fiscal 2025, driven by the proliferation of AI workloads and the introduction of the Zero Trust Gateway for rapid deployment. Zscaler has already surpassed 350 "Zero Trust Everywhere" enterprises, nearing its goal of 390 by the end of fiscal 2026.

Data Security Everywhere addresses the critical need to safeguard sensitive information across its entire lifecycle and diverse channels, including GenAI apps, web, email, endpoint, SaaS, and cloud data stores. This comprehensive suite, including AI-powered data classification, Enterprise DLP, Unified SaaS Security, and Data Security Posture Management (DSPM), reached approximately $425 million in ARR in Q4 fiscal 2025. The increasing adoption of GenAI and SaaS applications has made data security a paramount concern across all industries, driving large deal wins and module expansion. Over 85% of Zscaler's $1 million-plus ARR customers now utilize two or more data protection modules, demonstrating strong upsell potential and the platform's ability to consolidate multiple point products.

Agentic Operations leverages AI to enhance the efficiency of both Security Operations (SecOps) and IT Operations (ITOps). In SecOps, Zscaler is building an AI-powered SOC solution to simplify operations, reduce alert fatigue, and predict breaches by combining its differentiated data fabric (from the Avalor acquisition) with AI-driven threat detection. The recent acquisition of Red Canary, Inc. for $675 million in cash plus equity awards, completed on August 1, 2025, significantly strengthens this portfolio, contributing to over 85% year-over-year growth in SecOps ARR in Q4 fiscal 2025. For ITOps, ZDX's AI-enabled root cause analysis and predictive analytics are transforming user experience management, with bookings for ZDX Advanced Plus growing 58% year-over-year in fiscal 2025. The Agentic Operations portfolio is expected to surpass $400 million in ARR in fiscal year 2026.

Zscaler's go-to-market strategy has evolved to an account-centric selling motion, supported by robust partnerships with Global System Integrators (GSIs). This approach has led to stronger customer engagements, a higher-quality pipeline, and improved close rates. The Z Flex purchasing program, launched in Q3 fiscal 2025, further facilitates platform adoption by offering flexible scaling and module changes with pre-agreed pricing, generating over $100 million in TCV bookings in Q4 fiscal 2025. The company's customer base continues to expand, with over 9,400 customers globally, including approximately 40% of the Forbes Global 2000 and over 45% of the Fortune 500. Zscaler's success in the federal sector, now serving 14 of the 15 cabinet-level U.S. federal agencies, including the DoD, highlights its ability to meet stringent security requirements while delivering cost efficiencies.

Financial Strength and Outlook

Zscaler concluded fiscal year 2025 with robust financial results, demonstrating consistent operational excellence. Revenue grew 23% year-over-year to $2,673.10 million, building on a 34% growth in fiscal 2024. While the company reported a net loss of $41.50 million in fiscal 2025, an improvement from previous years, it anticipates continued net losses as it aggressively invests in research and development and sales and marketing to capitalize on its vast market opportunity.

Despite these investments, Zscaler maintains strong profitability metrics. The company achieved a "Rule of 50" performance in fiscal 2025 (23% revenue growth + 27% free cash flow margin) and even a "Rule of 70" in Q1 fiscal 2025, placing it among the top-tier SaaS companies for growth at scale. Non-GAAP gross margin for fiscal 2025 was 77%, slightly down from 78% in fiscal 2024 due to a one-time private cloud deployment but is expected to return to approximately 80% in Q1 fiscal 2026. Operating expenses increased due to strategic investments in headcount and R&D, but operating margin has expanded by over a thousand basis points since Q1 2023, underscoring the inherent leverage in Zscaler's model. Calculated billings increased 24% to $3.25 billion in fiscal 2025, and the dollar-based net retention rate stood at a healthy 114%.

As of July 31, 2025, Zscaler maintained a strong liquidity position with $3.57 billion in cash, cash equivalents, and short-term investments. The company successfully issued $1.725 billion in 0% Convertible Senior Notes due 2028 and repaid its $1.15 billion 0.12% Convertible Senior Notes due 2025, demonstrating prudent capital management.

For fiscal year 2026, Zscaler projects ARR in the range of $3.676 billion to $3.698 billion, representing 21.9% to 22.7% year-over-year growth. Revenue is guided to be between $3.265 billion and $3.284 billion, reflecting 22% to 23% year-over-year growth. Operating profit is expected to be $728 million to $736 million, with earnings per share between $3.64 and $3.68. The free cash flow margin is anticipated to be approximately 26% to 26.5%. This guidance includes a $95 million ARR and $90 million revenue contribution from the Red Canary acquisition, with a prudent assumption of no contribution from Red Canary contracts up for renewal in fiscal 2026. Zscaler expects high single-digit organic net new ARR growth in fiscal 2026, assuming a "relatively unchanged" macroeconomic environment.

Competitive Dynamics and Risks

Zscaler operates in an intensely competitive market, facing a diverse array of rivals including legacy on-premises appliance vendors (e.g., Fortinet (FTNT), Check Point (CHKP)), independent IT security vendors (e.g., CrowdStrike (CRWD), Palo Alto Networks (PANW)), and companies offering point solutions. Zscaler's primary competitive advantage lies in its cloud-native, Zero Trust Exchange architecture, which fundamentally differs from traditional perimeter-based security. While competitors often attempt to "cobble together disjointed point products" or market "SASE built on SD-WANs" (which Zscaler argues worsens ransomware attacks by enabling lateral threat movement), Zscaler's integrated platform offers a unified, policy-driven approach. This allows Zscaler to directly challenge and displace legacy firewalls, VPNs, SD-WANs, and NAC systems, offering superior security and operational simplicity.

Zscaler's technological lead in AI-powered threat detection, leveraging its massive data scale, provides a significant edge. While other companies may offer AI security, few operate "in the traffic path" to provide both inline and out-of-band data protection. The company's subscription model, while providing scalability and recurring revenue, also exposes it to risks from economic downturns and customer churn. However, Zscaler's focus on large enterprises and its ability to demonstrate tangible cost savings through consolidation help mitigate these risks. The rapid evolution of AI also presents challenges, including ethical considerations, potential non-compliance with new regulations, and the need for continuous R&D investment to stay ahead of emerging threats. International operations expose Zscaler to geopolitical uncertainties and regulatory complexities.

Conclusion

Zscaler stands as a transformative force in cybersecurity, propelled by its pioneering Zero Trust Exchange and aggressive integration of AI. The company's vision, born from the early days of cloud adoption, has matured into a comprehensive platform that directly addresses the most pressing security challenges of the digital age. By enabling enterprises to achieve "Zero Trust Everywhere," secure their data, and leverage AI for operational efficiency, Zscaler is not merely competing in the cybersecurity market; it is actively redefining it.

The strong financial performance in fiscal 2025, coupled with ambitious yet strategically grounded guidance for fiscal 2026, underscores Zscaler's robust execution and the compelling value proposition of its platform. While the path ahead includes navigating intense competition and the inherent complexities of a rapidly evolving threat landscape, Zscaler's technological leadership, strategic acquisitions, and disciplined go-to-market approach position it for sustained growth. For discerning investors, Zscaler represents a compelling opportunity to participate in the fundamental transformation of enterprise security, driven by an indispensable platform that delivers both superior protection and significant cost efficiencies.