Zscaler Earnings: Emerging Products and Improving Execution Drive a Robust Quarter

Key Morningstar Metrics for Zscaler

• Fair Value Estimate: $213.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Zscaler’s Earnings

Zscaler ZS reported strong second-quarter earnings, with the firm’s revenue growing 23% year over year to $648 million and an adjusted operating margin of 22%, up 210 basis points year over year. The firm also raised its sales and profitability outlook for fiscal 2025.

Why it matters: After facing go-to-market execution challenges in 2024, Zscaler’s improvements in its sales organization have been palpable in fiscal 2025. Further, as more sales reps ramp toward full capacity, we expect second-half sales growth to remain strong.

• We believe an improved sales motion and strong customer demand for Zscaler’s emerging products category will be key drivers for the firm’s top line in the second half of 2025 and beyond.
• Zscaler’s emerging products, which include solutions such as digital experience and artificial intelligence analytics, continue to impress us. Annual recurring revenue from this cohort grew twice as fast as the firm’s core products, and we expect strong upselling potential for emerging products.

The bottom line: We maintain our fair value estimate of $213 per share for Zscaler after the firm’s results were largely in line with our above-consensus estimates. With shares up 5% in after-hour trading, we view them as fairly valued.

• Zscaler’s improving sales execution was evident in its forward-looking indicators, remaining performance obligations and billings, which expanded 28% and 18% year over year, respectively.
• We believe the firm’s strong unit economics, underpinned by its software business model, will allow it to expand operating margins materially over our explicit forecast. We expect Zscaler to ramp to operating profitability by fiscal 2027.

Coming up: For fiscal 2025, management expects sales of $2.647 billion and adjusted earnings per share of $3.07. We view this as skewing conservative, and model Zscaler surpassing both targets.