ZS Q3 Deep Dive: AI Security and Zero Trust Growth Offset Cautious Market Response

Cloud security platform Zscaler (NASDAQ:ZS) announced better-than-expected revenue in Q3 CY2025, with sales up 25.5% year on year to $788.1 million. The company expects next quarter’s revenue to be around $798 million, close to analysts’ estimates. Its non-GAAP profit of $0.96 per share was 11.4% above analysts’ consensus estimates.

Is now the time to buy ZS? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Zscaler's third quarter results were met with a negative market reaction despite the company exceeding Wall Street's expectations for both revenue and adjusted earnings per share. Management highlighted the acceleration of growth across its three key pillars—AI security, Zero Trust Everywhere, and Data Security Everywhere. CEO Jay Chaudhry attributed the quarter’s performance to robust demand for the company’s AI-focused offerings and the rapid adoption of its Zero Trust platform. He emphasized that “ARR from these three growth pillars accelerated in the quarter,” underlining their importance to Zscaler’s ongoing momentum.

Looking forward, Zscaler’s updated outlook is grounded in continued expansion of AI security solutions and broader platform adoption. Management sees opportunity in new product modules, strategic acquisitions, and programs like Z Flex, which increase customer flexibility and upsell potential. CFO Kevin Rubin noted that Zscaler will continue investing aggressively to position for long-term growth, while monitoring gross margins as new products scale. Chaudhry stated, “Our clear leadership in zero trust security combined with our comprehensive AI security offerings positions us well to capture the large and growing AI security market.”

Key Insights from Management’s Remarks

Management credited quarterly performance to strong enterprise demand for AI security, increased customer adoption of zero trust solutions, and the success of flexible contract arrangements driving upsell activity.

• AI security adoption surges: Zscaler’s AI security pillar grew over 80% year over year, with annual recurring revenue (ARR) already surpassing its fiscal year target ahead of schedule. Management noted broad enterprise uptake of GenAI protection and AI posture management tools.
• Zero Trust Everywhere milestone: The company exceeded its goal for Zero Trust Everywhere customers three quarters early, with over 450 enterprises now using the full suite. This platform approach is displacing legacy networking and security products, leading to larger, multi-module deals.
• Data security platform consolidation: Customers are increasingly turning to Zscaler’s integrated data security modules to replace point products. Management highlighted a major healthcare provider choosing Zscaler over a leading cloud access security broker (CASB) for comprehensive coverage.
• Z Flex program accelerates upsells: The Z Flex contract program, which lets customers swap or activate modules without new procurement cycles, generated over $175 million in total contract value, growing more than 70% sequentially. This approach is reducing sales friction and enabling larger commitments.
• Recent acquisitions strengthen offerings: The integration of Red Canary and SPLX added capabilities in AI-powered security operations and red teaming (automated security testing), both of which management cited as differentiators contributing to new customer wins and faster product innovation.

Drivers of Future Performance

Zscaler’s guidance rests on expanding AI security demand, platform consolidation trends, and the scaling impact of new contract models and acquisitions.

• AI and zero trust momentum: Management believes continued growth in AI security and Zero Trust Everywhere will drive future revenue, with customers adopting new modules to address evolving threats and regulatory needs. The expansion of AI guardrails and posture management is expected to sustain high ARR growth in these segments.
• Customer flexibility and upselling: Programs like Z Flex, which let clients commit to broader platform use with flexibility to switch modules, are expected to increase contract size and visibility into future revenue streams. Management described this as a “win-win” for both Zscaler and its customers, reducing procurement friction.
• Margin dynamics and investment: While Zscaler aims to optimize margins as new products mature, management signaled ongoing investment in go-to-market and R&D to maintain growth. CFO Kevin Rubin noted that gross margins may fluctuate as new modules scale, but expects margin expansion in the back half of the year as adoption grows.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) the pace of adoption for new AI security modules, (2) further expansion of Zero Trust Everywhere and the ability to win large multi-module deals, and (3) customer uptake and cross-sell success within the Z Flex program. Additionally, we will watch for the margin trajectory as new products mature and the impact of recent acquisitions on both product innovation and go-to-market execution.

Zscaler currently trades at $266.80, down from $290.50 just before the earnings. At this price, is it a buy or sell? The answer lies in our full research report (it’s free for active Edge members).

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