Zscaler stock drops after solid quarter fails to excite investors

Shares in Zscaler Inc. were down greater than 9% in late trading today despite the cloud security company reporting beats in its fiscal 2026 second quarter and giving an outlook ahead of expectations, as investors were on the lookout for something more upbeat from the corporate.

For the quarter that ended on Jan. 31, Zscaler reported adjusted earnings per share of $1.01, up from 78 cents per share in the identical quarter of the previous fiscal yr, on revenue of $815.8 million, up 26% year-over-year. Each figures got here ahead of 77 cents per share and revenue of $798.32 million expected by analysts.

Zscaler’s strong figures were driven by customer growth, with the corporate seeing its annual recurring revenue grow 25% year-over-year within the quarter to $3.359 billion, with $155.5 million in net latest annual recurring revenue throughout the quarter.

Money flow from operations got here in at $204.1 million, up from $179.4 million within the second quarter of the previous fiscal yr, deferred revenue was $2.355 billion, up 25% year-over-year and Zscaler was sitting on $3.513 billion in money, money equivalents and short-term investments as of the tip of January.

Business highlights within the quarter include Zscaler announcing a variety of artificial intelligence security innovations, including Zscaler AI Protect, which is designed to guard the total spectrum of enterprise AI implementations and to supply end-to-end visibility and governance.

The AI Protect solution allows organizations to find and manage their shadow AI footprint and offers complimentary capabilities, including AI Asset Management, AI Access Security and AI Red Teaming, to perform continuous testing against vulnerabilities.

Although coming just after the tip of the quarter, Zscaler also announced Feb. 5 that it had acquired browser security company SquareX Ltd. for an undisclosed sum. Zscaler said on the time that the acquisition would help it redefine browser security by allowing organizations to embed lightweight extensions into any browser to supply increased security and eliminate the necessity for third-party browsers.

“We consider Zscaler is the cybersecurity platform for the AI age – our in-line Zero Trust platform is uniquely architected to secure the unprecedented speed and scale of AI and agentic workflows,” said Jay Chaudhry, chief executive officer, chairman and founding father of Zscaler, in the corporate’s earnings release. “Organizations racing to adopt AI want to us to supply the safety solution they trust and we’re just scratching the surface of this massive future growth opportunity.”

For its fiscal third quarter, Zscaler is expecting adjusted earnings per share of $1 to $1.01 and revenue of $834 million to $836 million. Each forecasts were ahead of the 95 cents per share and revenue of $831.9 million expected by analysts.

For its full fiscal yr, the corporate expects adjusted earnings of $3.99 to $4.02 per share and revenue of $3.309 billion to $3.322 billion; analysts had been expecting $3.82 per share and revenue of $3.3 billion.

There have been no bad figures in either Zscaler’s quarterly results or outlook, but likewise, there was no strong acceleration or big guidance upside either. In a market where some tech and cybersecurity corporations are surging, particularly because the AI boom continues apace, the share price drop could simply be a matter of investors not being excited enough by solid and yet somewhat conservative results and outlook.

Pressure on Zscaler’s share price also comes amid growing pressure on software-as-a-service corporations, as there may be increasing concern amongst investors that AI may, in the approaching years, replace portions of traditional subscription-based software by enabling enterprises to construct more customized, automated and lower-cost solutions in-house.

Photo: Zscaler