Quick Summary
- Zscaler shares plummeted more than 23% following Q3 results despite exceeding earnings expectations
- Third-quarter revenue reached $850.5M, representing 25% year-over-year growth, with EPS of $1.08 beating the $1.01 forecast
- Fourth-quarter revenue forecast of $875M–$878M fell short of the $878.6M analyst consensus
- CFO highlighted decelerating customer acquisition momentum and the exit of two senior sales executives
- Several Wall Street firms reduced price targets: Morgan Stanley to $145, UBS to $225, Mizuho to $185
Shares of Zscaler experienced a dramatic decline of over 23% during Wednesday’s premarket session as the cybersecurity company’s conservative fourth-quarter projections overshadowed an otherwise strong third-quarter performance.
Trading around $127 before the market opened, ZS shares experienced a significant downturn that erased substantial recent market gains.
For the third quarter, adjusted earnings per share registered at $1.08, surpassing analyst projections of $1.01. Total revenue climbed 25% from the previous year to reach $850.5 million, exceeding Wall Street’s anticipated $835.6 million.
However, on a GAAP basis, the company recorded a net loss of $13.9 million, expanding from the $4.1 million deficit reported in the comparable year-earlier quarter.
Management elevated its full-year revenue projections to a range of $3.32–$3.33 billion with adjusted earnings per share of $4.10–$4.11. This represents an increase from previous guidance of $3.31–$3.32 billion in revenue and $3.99–$4.02 in EPS.
Yet investor attention centered squarely on fourth-quarter expectations. The company forecasted Q4 revenue between $875M and $878M, marginally below the Street’s $878.6M projection. Meanwhile, Q4 EPS guidance of $1.08–$1.09 exceeded the $1.03 consensus estimate.
CFO Kevin Rubin characterized the forecast as “prudent,” though the market reaction suggested skepticism.
Customer Acquisition Slowdown Sparks Concern
The more significant concern appears to be stagnating new customer growth.
During the earnings conference call, Rubin admitted that new customer wins had fallen short of expectations. “The area that we haven’t been performing as well as we’d like is new logo,” he stated, identifying it as “a large priority.”
He further noted the company is adopting a “tempered view” regarding customer acquisition as it enters the upcoming fiscal year.
Zscaler announced plans to intensify its focus on mid-sized enterprises with 2,000 to 10,000 employees. The company also intends to introduce fresh customer incentives while expanding its reliance on channel partnerships.
Compounding the uncertainty, two senior sales leadership positions turned over at quarter’s end. Rubin cited these departures as contributing factors to the company’s conservative forward outlook.
Wall Street Responds With Widespread Price Target Reductions
Financial analysts moved swiftly, issuing numerous price target adjustments.
Morgan Stanley’s Meta Marshall reduced her target to $145 from $155 while maintaining a Hold rating. Having previously downgraded the stock in April due to intensifying competitive pressures, Marshall indicated ZS would remain in the “penalty box” until its SecOps offering demonstrates stronger market adoption.
UBS lowered its price target to $225 from $260. RBC reduced its target to $200 from $205. Mizuho adjusted downward to $185 from $210. BMO decreased to $178 from $210.
Truist reduced its target to $200 from $250 while preserving a Buy rating. Stifel cut to $175 from $180, also maintaining Buy, characterizing the challenges as “idiosyncratic” and attributing them to sales leadership transitions and uncertainty surrounding Red Canary guidance parameters.
Morgan Stanley highlighted increasing competition from Palo Alto Networks, Netskope, and Cato Networks as an escalating challenge.
Regarding operational expenses, Zscaler disclosed it’s fast-tracking data-center infrastructure investments to mitigate escalating AI-driven equipment costs. Capital expenditure guidance was increased from mid-single-digit to high-single-digit percentage of revenue.
The most optimistic Street voice remains Cantor Fitzgerald’s Jonathan Ruykhaver, who maintained a Buy rating with a $300 price target — suggesting potential upside exceeding 136% from current trading levels.
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