Key Takeaways
- Zscaler shares plummeted more than 21% in premarket trading following a significant reduction in full-year free cash flow margin guidance from 26.5–27% to 22.8–23.3%.
- Third-quarter revenue reached $850.5 million, marking a 25% annual increase, while adjusted earnings per share of $1.08 surpassed the $1.01 analyst estimate.
- Preliminary fiscal 2027 projections for ARR and revenue growth of 16–17% disappointed investors expecting expansion above 20%.
- The departure of two top sales executives raised questions about the company’s ability to execute on near-term growth initiatives.
- Wall Street analysts slashed price targets across the board, with Truist dropping to $200, Mizuho to $185, Morgan Stanley to $145, and Evercore ISI issuing a downgrade.
Shares of Zscaler (ZS) collapsed more than 21% in premarket hours on Wednesday, May 27, building on a nearly 17% decline from the previous evening’s after-hours session. The cloud security provider’s steep decline followed a substantial cut to its free cash flow projections alongside disappointing growth forecasts for the upcoming fiscal year.
Premarket activity showed shares trading around $143.90, representing approximately a $40 decline from Tuesday’s closing price of $184.60.
The third-quarter performance itself delivered impressive numbers. Revenue totaled $850.5 million, representing a robust 25% year-over-year increase that exceeded internal projections. Adjusted earnings per share of $1.08 topped Wall Street’s consensus estimate of $1.01. Annual recurring revenue demonstrated similar strength, climbing 25% to $3.53 billion.
Yet the market reaction told a different story. Investor attention zeroed in on forward-looking guidance.
Management slashed full-year free cash flow margin expectations to 22.8–23.3%, a dramatic reduction from the previously communicated range of 26.5–27%. The company attributed this adjustment to elevated capital expenditures, explaining that it had strategically secured pricing for memory, storage, and processors ahead of anticipated cost inflation.
The preliminary fiscal 2027 outlook delivered another blow. Leadership projected ARR and revenue expansion of just 16–17%, significantly trailing the 20%-plus growth trajectory Wall Street had anticipated.
Compounding these concerns, the company confirmed the departure of two senior sales executives. Management directly linked these personnel changes to the conservative fiscal 2027 assumptions, particularly regarding new customer acquisition.
Wall Street Responds
Truist maintained its Buy recommendation while reducing its price objective to $200 from $250. The firm recognized the quarter’s strength across revenue, ARR, and profitability metrics, with gross margins reaching 76.63%, but acknowledged the cautious forward guidance.
Evercore ISI adopted a more bearish stance, downgrading Zscaler from Outperform to In Line, emphasizing concerns around leadership transitions and diminished fiscal 2027 projections.
Mizuho reduced its target price to $185 from $210. RBC Capital lowered its objective to $200 from $205 while maintaining an Outperform rating. Morgan Stanley cut its target to $145 from $155, highlighting intensifying competition within the SASE market segment.
Jefferies struck a more optimistic tone, characterizing the fiscal 2027 ARR guidance as a “much-needed reset” and increasing its fiscal 2026 EPS projection to $4.12. The firm highlighted the pending Red Canary and Symmetry acquisitions as potential growth catalysts.
Z-Flex Program and AI Strategy
Analysts identified the Z-Flex initiative as a positive development. This flexible purchasing framework generated $480 million in total contract value during the third quarter, surging over 60% from the previous quarter and representing approximately 38% of remaining performance obligation bookings.
Chief Executive Jay Chaudhry emphasized the company’s strategic positioning for AI-driven security challenges, referencing collaborations with Anthropic and OpenAI alongside the introduction of the Project AI-Guardian platform.
The company is also advancing a $175 million acquisition of Symmetry Systems.
For the fourth quarter, Zscaler projected revenue between $875 million and $878 million with adjusted EPS of $1.08–$1.09. Full-year revenue guidance was modestly increased to approximately $3.33 billion, slightly exceeding the $3.32 billion consensus figure.
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