ZS Q2 Deep Dive: AI Security and Zero Trust Expansion Shape Growth Trajectory

Cloud security platform Zscaler (NASDAQ:ZS) announced better-than-expected revenue in Q2 CY2025, with sales up 21.3% year on year to $719.2 million. Guidance for next quarter’s revenue was optimistic at $773 million at the midpoint, 2.9% above analysts’ estimates. Its non-GAAP profit of $0.89 per share was 11% above analysts’ consensus estimates.

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StockStory’s Take

Zscaler’s Q2 performance was characterized by strong revenue growth and operational execution, with management attributing the results to robust demand for its expanding cloud security platform. CEO Jay Chaudhry cited accelerating adoption of Zscaler’s AI-powered security solutions and the Zero Trust Everywhere platform across large enterprise customers. He highlighted the company’s success in winning multi-year, large-scale contracts, particularly in sectors seeking to eliminate legacy firewalls and streamline security operations.

Looking forward, Zscaler’s management emphasized the increasing relevance of AI security, data protection, and zero trust architectures in shaping its outlook. Chaudhry indicated that new product launches such as AI Guard and agentic security operations are expected to drive adoption, stating, “We are accelerating our platform innovations across three growth factors: AI security, zero trust everywhere, and data security everywhere.” The company aims to leverage its Z Flex program and Red Canary acquisition to broaden its customer base and deepen wallet share.

Key Insights from Management’s Remarks

Management highlighted that Q2 performance was driven by ongoing customer migration to zero trust security, demand for AI-driven protection, and the successful scaling of new enterprise partnerships.

• AI security traction: Zscaler observed significant interest in its AI security offerings, including AI Guard and GenAI security, as customers grappled with new risks from rapid artificial intelligence adoption. Management reported a 3,500% increase in AI/ML (machine learning) traffic observed on its cloud, underscoring the urgency for advanced security solutions.
• Zero Trust Everywhere momentum: The company’s Zero Trust Everywhere strategy, which secures users, branches, and cloud workloads, saw rapid uptake. Over 350 enterprises now deploy Zscaler’s full suite, with management highlighting large wins in manufacturing and education for branch and device segmentation.
• Data security consolidation: Enterprises increasingly adopted Zscaler’s data security modules, consolidating multiple legacy point products. The company’s data security portfolio grew to $425 million in annual recurring revenue, with management noting strong cross-selling and upsell activity.
• Z Flex program adoption: Zscaler’s flexible licensing model, Z Flex, gained traction, particularly among larger customers, enabling multi-module adoption and larger deal sizes. Management expects this program to be a meaningful growth driver as it expands to more customers and partners.
• Product innovation and Red Canary integration: The acquisition of Red Canary is enabling Zscaler to accelerate its agentic security operations capabilities. Management is focused on integrating agent technology for security operations and leveraging Red Canary’s expertise in managed detection and response to enhance Zscaler’s platform.

Drivers of Future Performance

Management expects continued momentum from AI security, zero trust adoption, and integrated data protection, while acknowledging potential headwinds from macroeconomic factors and evolving customer needs.

• AI and agentic security expansion: The rapid growth in AI-driven workloads and cyber risks is prompting enterprises to seek out Zscaler’s new AI security products. Management believes that solutions like AI Guard and agentic SecOps will be essential for securing both public and private AI applications, positioning Zscaler for further growth.
• Broader platform adoption: The Z Flex licensing program is expected to drive larger, longer-term contracts by simplifying module adoption and budgeting for customers. Management anticipates this will accelerate upsell opportunities and improve net retention rates.
• Integration of Red Canary capabilities: The Red Canary acquisition brings advanced detection and investigation technologies to Zscaler’s platform. Management expects this integration to enhance both product offerings and go-to-market execution, though acknowledges that managed detection and response has higher churn risk than the core business.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) the pace of adoption for AI Guard and agentic security modules, (2) expansion of Zero Trust Everywhere deployments, especially in retail and large branch environments, and (3) progress integrating Red Canary’s technology and specialist go-to-market teams. We will also monitor execution on the Z Flex program as a driver of multi-module deals and retention.

Zscaler currently trades at $277, in line with $274.61 just before the earnings. Is there an opportunity in the stock?Find out in our full research report (it’s free).

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