Zscaler(ZS) - 2026 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a strong start to fiscal Q1 2026, with annual recurring revenue (ARR) growth accelerating to 26% year-over-year and remaining performance obligation (RPO) growth accelerating to 35% [7][23] - Q1 revenue reached $788 million, growing 26% year-over-year and 10% sequentially, exceeding the high end of guidance [23] - The gross margin for Q1 was 79.9%, down from 80.6% in the same quarter last year, influenced by new product introductions [24] - Operating margin was 21.8%, with a free cash flow margin of 52% [25] Business Line Data and Key Metrics Changes - ARR from the three growth pillars—AI Security, Zero Trust Everywhere, and Data Security Everywhere—accelerated in Q1 [7][23] - AI Security pillar grew over 80% year-over-year, exceeding the FY26 target of $400 million ARR three quarters early [8][15] - Data Security Everywhere ARR accelerated to approximately $450 million [19] Market Data and Key Metrics Changes - Geographically, the Americas accounted for 58% of revenue, EMEA for 27%, and APJ for 15% [23] - The company closed Q1 with 698 customers generating over $1 million in ARR and 3,754 customers exceeding $100,000 in ARR [24] Company Strategy and Development Direction - The company aims to exceed $10 billion in ARR, leveraging its leadership in Zero Trust security and comprehensive AI security offerings [22] - The introduction of the Zflex program is driving meaningful upsells and reducing sales cycles, generating over $175 million in total contract value (TCV) [20][21] - The company is focusing on expanding its Zero Trust Everywhere initiative, having secured over 450 enterprises, surpassing its goal three quarters ahead of schedule [16] Management's Comments on Operating Environment and Future Outlook - Management noted that while IT budgets remain tight, there is less pressure on cybersecurity spending, with strong interest in Zero Trust and AI Security solutions [65] - The company is optimistic about the future, expecting AI Security ARR to surpass $500 million by the end of fiscal 2026 [15][21] Other Important Information - The company announced the transition of Ashwin Kesireddy to a new role as Product Manager of AI Security, with Kim Watkins joining as the new head of Investor Relations [4][27] - The integration of Red Canary is progressing well, with its contribution trending slightly better than previous guidance, although it is not expected to be material to overall business [48][116] Q&A Session Summary Question: About Zero Trust Branch and its future acceleration - Management indicated that the technology for Zero Trust Branch is in great shape, with significant demand from customers, and they see a big opportunity for growth [30][32] Question: Regarding the growth of the $2 billion ARR segment - Management confirmed that a significant part of the remaining $2 billion is from ZIA and ZPA, which are growing well, but the core business will grow at a slower rate than the overall business [40][42] Question: Performance of Red Canary and its integration - Management stated that the integration of Red Canary is going well, with its go-to-market team uncovering opportunities within Zscaler's customer base [48][116] Question: Insights on revenue strength and core business performance - Management highlighted that all three growth pillars are accelerating, contributing to strong overall performance, and they are seeing organic growth consistent with previous quarters [54][56] Question: Competitive landscape and customer priorities - Management noted that the competitive landscape has not changed significantly, with Zscaler's brand becoming stronger and customers prioritizing Zero Trust and AI Security solutions [58][66] Question: Trends in the SASE market - Management emphasized that Zscaler remains strong in the Zero Trust market, differentiating itself from other vendors claiming to offer SASE solutions [70][72] Question: Organic net new ARR in the quarter - Management confirmed that organic growth in Q1 was consistent with Q4, exceeding internal expectations [78][116] Question: Synergies between Red Canary and data security portfolio - Management discussed the integration strategy, highlighting opportunities for remediation and governance within the data security portfolio [119]