ZS

Business Context and Reporting Period

Company: Zscaler, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended January 31, 2026 (Fiscal 2026 Q2)
Business Overview: Zscaler provides a cloud security platform enabling secure access to cloud resources based on identity and Zero Trust principles. The company operates as a single reportable segment, primarily generating revenue through subscription and support services.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 26% year-over-year for both the quarter and six-month periods, driven by sales to existing customers (land-and-expand) and a 15% increase in the customer base.
• Operating Expenses: Total operating expenses rose significantly due to strategic investments in headcount, particularly in Sales & Marketing (+20% QoQ) and R&D (+34% QoQ). Stock-based compensation increased to $216.6 million for the quarter.
• Acquisitions: The company completed two major acquisitions in the first half of fiscal 2026: Red Canary Inc. ($651.4 million) and SPLXAI Inc. ($40.6 million). These transactions resulted in $583.7 million in new goodwill and $165.8 million in acquired intangible assets.
• Net Loss Expansion: Net loss widened to $45.9 million for the six months ended Jan 31, 2026, compared to $19.8 million in the prior year period, primarily due to increased operating expenses and a tax provision of $16.3 million (vs. a benefit of $1.2 million in the prior year).
• Deferred Revenue: Total deferred revenue decreased to $2,355.4 million from $2,468.0 million at the end of the prior fiscal year, though it remains a significant source of future revenue recognition.

Guidance, Outlook, and Risks

• Outlook: Management expects to continue incurring net losses for the foreseeable future as it invests in sales, marketing, and R&D to maximize market opportunity and integrate AI capabilities. The company anticipates operating expenses will increase in absolute dollars.
• Key Metrics: Annual Recurring Revenue (ARR) reached $3,359 million as of January 31, 2026, up from $2,683 million a year ago.
• Liquidity: The company holds $3.5 billion in cash and short-term investments. Management believes this is sufficient to fund operations and debt obligations for at least the next 12 months.
• Risks:
  • Macroeconomic Conditions: Customer scrutiny and elongated approval processes for large deals due to economic uncertainty.
  • Competition: Intense competition from legacy vendors and new entrants, particularly regarding AI-driven security solutions.
  • Acquisition Integration: Risks associated with integrating Red Canary and SPLXAI technologies and workforces.
  • Regulatory: Evolving global regulations regarding AI, data privacy (e.g., EU AI Act), and tax laws (e.g., OECD Pillar Two).
• Subsequent Event: On February 5, 2026, Zscaler acquired SquareX Holdings, Inc. for approximately $113.0 million to extend browser capabilities to unmanaged devices.

Investor Verification Checklist

• Acquisition Accounting: Verify the final purchase price allocation for Red Canary and SPLXAI, specifically the valuation of goodwill and intangible assets, as these impact future amortization expenses.
• Deferred Revenue Trend: Monitor the decline in deferred revenue balance ($2.36B) relative to the 26% revenue growth to ensure future booking momentum is sustainable.
• Operating Leverage: Assess whether the significant increase in operating expenses (driven by headcount and stock-based comp) will yield proportional revenue growth in subsequent quarters.
• Debt Structure: Review the terms of the $1.725 billion 2028 Convertible Senior Notes and the associated capped call transactions to understand potential dilution scenarios.
• Non-GAAP Reconciliation: Compare GAAP net loss against Non-GAAP income from operations ($352.8M for six months) to understand the impact of stock-based compensation and amortization on reported profitability.