Key Takeaways
- Zscaler delivered Q2 FY2026 results with adjusted EPS of $1.01 and $816M in revenue, surpassing analyst projections
- Shares declined 9% in pre-market hours Friday following the earnings announcement
- Annual EPS forecast increased to $3.99–$4.02, exceeding the $3.92 Wall Street consensus
- Year-to-date performance shows a 26% decline, mirroring widespread software sector valuation concerns
- Company CFO highlighted operating efficiency at “Rule-of-62,” significantly outperforming the industry’s Rule-of-40 standard
Zscaler $ZS delivered impressive fiscal second-quarter results, only to see investors react negatively. This response encapsulates the current sentiment plaguing the software sector.
The cloud security provider reported adjusted earnings of $1.01 per share, exceeding analyst expectations of $0.89 by a significant margin of $0.12. The company generated $815.8 million in revenue, representing a robust 26% year-over-year increase and surpassing the anticipated $798 million.
Yet these strong results couldn’t prevent a roughly 9% decline in pre-market trading Friday morning.
The week proved turbulent for the stock. Shares plunged 10% Monday amid AI-driven market volatility. The following three trading sessions saw a remarkable 17% recovery before Thursday’s earnings announcement triggered another downturn.
Looking ahead to Q3 FY2026, Zscaler projected adjusted EPS ranging from $1.00 to $1.01, comfortably exceeding the $0.95 analyst consensus. Revenue expectations landed between $834 million and $836 million, marginally outpacing the $831.9 million forecast.
The company elevated its full-year FY2026 guidance, projecting adjusted EPS of $3.99–$4.02, surpassing the previous $3.82 consensus. Annual revenue projections now stand at $3.309 billion to $3.322 billion, slightly above the $3.3 billion estimate.
CEO Jay Chaudhry positioned the company strategically within the AI revolution, emphasizing how enterprises embracing AI transformation are leveraging Zscaler’s infrastructure to protect AI-powered and agentic operations.
Chaudhry described Zscaler as the “cybersecurity platform for the AI age,” highlighting how the company’s Zero Trust architecture is uniquely positioned to address the velocity and complexity of AI and agentic systems.
Exceptional Efficiency Metrics
CFO Kevin Rubin highlighted an impressive efficiency indicator during the call. Zscaler currently operates at a “Rule-of-62” metric on a fiscal year-to-date basis.
This metric blends revenue growth rate with profit margins. While the Rule-of-40 serves as the benchmark for robust software businesses, Zscaler’s performance significantly exceeds this threshold.
Challenging Year-to-Date Performance
Prior to the earnings release, ZS had already experienced a 26% decline in 2026. The post-earnings selloff compounds challenges for a stock that has faced persistent headwinds throughout the year.
This week’s volatility illustrates the current uncertainty among software investors. A 10% plunge followed by a 17% rally, then another sharp retreat despite solid fundamentals — the market remains deeply conflicted about proper valuations for this sector.
The Q3 guidance projecting $834–$836 million in revenue alongside EPS of $1.00–$1.01 continues to exceed analyst expectations.
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