Business Context and Reporting Period
Company: Zscaler, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended October 31, 2025 (Fiscal Q1 2026)
Business Overview: Zscaler operates 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 globally.
Key Financial Metrics
| Metric | Q1 2026 (Oct 31, 2025) | Q1 2025 (Oct 31, 2024) |
|---|---|---|
| Revenue | $788.1 million | $628.0 million |
| Gross Profit | $603.4 million | $486.5 million |
| Gross Margin | 77% | 77% |
| Net Loss | $(11.6) million | $(12.1) million |
| Operating Loss | $(36.4) million | $(30.7) million |
| Free Cash Flow | $413.3 million | $291.9 million |
| Cash & Short-Term Investments | $3,321.3 million | $2,727.0 million |
| Convertible Senior Notes (2028) | $1,725.0 million principal | $1,725.0 million principal |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 26% year-over-year, driven by a 14% increase in the customer base, expansion of existing customers, and revenue from the Red Canary acquisition.
- Acquisitions: The company completed two significant acquisitions: Red Canary Inc. (August 1, 2025) for $651.4 million and SPLXAI Inc. (October 31, 2025) for $40.6 million. These transactions added $576.7 million to goodwill and $176.6 million to acquired intangible assets.
- Operating Expenses: Total operating expenses increased 24% to $639.7 million. Sales and marketing expenses rose 22%, and R&D expenses rose 30%, primarily due to increased headcount from acquisitions and continued investment in AI capabilities.
- Restructuring: The company recognized $4.7 million in restructuring charges related to employee severance and benefits to streamline operations.
- Debt: In July 2025, the company issued $1.725 billion in 0.0% Convertible Senior Notes due 2028. The 2025 Notes ($1.15 billion) were repaid in full in July 2025.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue incurring net losses in the foreseeable future due to investments in sales, marketing, and R&D. The company anticipates operating expenses will increase in absolute dollars but decrease as a percentage of revenue over the long term.
- Key Metrics: Annual Recurring Revenue (ARR) reached $3,204 million as of October 31, 2025, up from $2,553 million in the prior year. The company announced it will discontinue reporting the "Dollar-Based Net Retention Rate" metric starting in Q2 2026.
- Liquidity: The company holds $3.3 billion in cash and short-term investments, deemed sufficient to fund operations for at least the next 12 months.
- Risks: Key risks include intense competition, reliance on channel partners (85% of revenue), macroeconomic uncertainty affecting customer spending, cybersecurity threats to the platform, and regulatory challenges regarding AI and data privacy.
Investor Verification Checklist
- Acquisition Integration: Verify the timeline and financial impact of integrating Red Canary and SPLXAI technologies into the core platform.
- Debt Conversion Risk: Monitor the 2028 Convertible Senior Notes ($1.725B) and the associated capped call transactions for potential dilution or cash repayment obligations.
- Customer Concentration: Confirm that no single customer accounts for more than 10% of revenue, though top five channel partners accounted for 30% of revenue in Q1 2026.
- Non-GAAP Reconciliations: Review the reconciliation of Non-GAAP operating income ($171.9 million) to GAAP operating loss, noting the significant impact of stock-based compensation ($193.8 million).
- Deferred Revenue: Track the $2.35 billion deferred revenue balance as an indicator of future revenue visibility.