To The Moon

$Zscaler Inc.(ZS)$ is scheduled to release its Q3 Fiscal Year 2025 earnings after the market closes today, Thursday, 29 May 2025.

Adjusted Diluted EPS: The consensus estimate is around $0.75 per share. This represents a year-over-year decline of approximately 14.8% from the prior year's comparable quarter.

Revenue: Analysts anticipate revenue to be approximately $666.11 million, indicating a year-over-year growth of about 20.4%. The company's own guidance for Q3 revenue was in the range of $665 million to $667 million.

Billings: Expected to reach around $792.21 million, compared to $628.04 million in the year-ago quarter.

Remaining Performance Obligations (RPO): Forecasted to be approximately $4.73 billion, up from $3.82 billion in the same period last year.

Dollar-Based Net Retention Rate: Analysts predict this metric to be around 115.0%, a slight decrease from 116% in the prior year.

Zscaler (ZS) Last Positive Earnings Call Saw Share Price Gained 30.97%

Zscaler had a positive earnings call on 05 March 2025 which saw its share price gained significantly by 30.97% since.

Zscaler demonstrated strong growth in revenue, ARR, and profitability, with significant progress in its Zero Trust Everywhere initiative and AI product offerings. Despite some macroeconomic challenges and variability in net retention, the company's strategic partnerships and expanding product suite position it well for future growth.

Zscaler (ZS) Guidance

During Zscaler's second quarter fiscal year 2025 earnings call, the company reported significant growth metrics, exceeding expectations in several key areas. Revenue increased by 23% year-over-year, driven by a 23% rise in annual recurring revenue (ARR) to over $2.7 billion, and a net retention rate (NRR) improvement to 115%.

The company's operating profit surged by 36%, resulting in a 2 percentage point increase in operating margin to nearly 22%, while free cash flow margin reached a record 22% for the quarter. Zscaler's expansion aims to achieve $3 billion or more in ARR by the fiscal year's end. Additionally, the company highlighted the success of its Zero Trust Everywhere initiative, which has already attracted over 130 enterprises, with plans to triple that figure within 18 months. The company's push into AI-powered solutions and data protection also saw substantial growth, with net new ACV in data protection increasing by over 40% year-over-year.

Key Factors to Watch (and anticipated trends)

Revenue grew by 23% year-over-year, reaching $648 million, with billings increasing by 18% year-over-year to $743 million.

Continued Demand for Cloud Security and Zero Trust: The cybersecurity market remains robust due to ongoing digital transformation, the rise of hybrid work models, and increasing cyber threats. Zscaler's Zero Trust Exchange platform is well-positioned to benefit from these trends. Analysts expect sustained demand for its security and networking solutions.

ARR grew 23% year-over-year to over $2.7 billion, and net retention rate improved to 115%. Over 130 enterprises have adopted Zero Trust Everywhere, with plans to triple this number in the next 18 months.

Impact of Sales Productivity and Deal Cycles: In recent quarters, Zscaler has faced challenges with longer deal cycles and increased scrutiny on large deals as customers scrutinize IT budgets. Management commentary on sales execution and the sales environment will be crucial. The company has been investing in improving sales and marketing capabilities, and investors will look for signs of these efforts paying off.

Global system integrators played a critical role in closing several deals, including a 7-figure deal with a Global-2000 insurance customer.

Profitability and Margins: While revenue growth is expected to remain strong, the anticipated decline in EPS suggests potential pressure on the bottom line, possibly due to increased operating expenses from investments in sales and marketing, and research and development. Investors will be keen to see the non-GAAP operating margin and free cash flow margin for the quarter. Zscaler's Q2 FY25 saw an improved operating margin and record free cash flow margin, so maintaining this trend will be important.

Operating profit grew by 36%, improving operating margin by 2 percentage points to nearly 22%. Free cash flow margin was a record 22%.

Strategic Initiatives and Product Enhancements: Zscaler's strategy revolves around expanding its platform with new features (e.g., Cloud Access Security Broker, Cloud Browser Isolation, Cloud Protection, Zscaler Digital Experience, Cloud Security Posture Management) and leveraging emerging technologies like Generative AI for threat detection. Updates on the adoption and impact of these new offerings, as well as the recent acquisition of Red Canary (expected to finalize by August 2025) to bolster managed detection and response, will be key.

Data protection pillar experienced over 40% year-over-year growth in net new ACV, with significant upsell deals. AI-powered products like ZDX Advance Plus saw bookings grow by over 45% to nearly $50 million.

Customer Metrics: Beyond the headline numbers, investors will be interested in the growth of customers with Annual Recurring Revenue (ARR) over $1 million and $100K, as well as the dollar-based net retention rate, which indicates customer loyalty and upsell opportunities. The company previously noted that increased success in selling bigger bundles could reduce the dollar-based net retention rate, so any insights on this will be important.

There is ongoing customer scrutiny of large deals due to tight macroeconomic conditions. The increased success in selling bigger bundles and faster upsells could lead to variability in the dollar-based net retention rate.

While well-positioned, the federal sector deals can be lumpy and are not heavily relied upon in the guidance due to current uncertainties.

Full-Year FY25 Guidance: The most significant factor for the stock's movement post-earnings will likely be Zscaler's updated full-year fiscal year 2025 guidance. The company previously guided for full-year revenue between $2.64 billion and $2.654 billion (reflecting ~22% year-over-year growth) and free cash flow margin of approximately 24.5% to 25%. Investors will be watching to see if this guidance is reaffirmed, raised, or lowered, as it will signal management's confidence in the remainder of the fiscal year.

Zscaler (ZS) Price Target

Based on 41 analysts from Tiger Brokers offering 12 month price targets for Zscaler in the last 3 months. The average price target is $244.99 with a high forecast of $340.00 and a low forecast of $195.00. The average price target represents a -4.78% change from the last price of $254.10.

Overall, analysts have a positive outlook on Zscaler, with many firms like Cantor Fitzgerald and Stifel recently raising their price targets and maintaining "Overweight" or "Buy" ratings. The average brokerage recommendation indicates an "Outperform" status.

Technical Analysis - Exponential Moving Average (EMA)

There are some analysts who are predicting a negative Earnings ESP for the quarter, suggesting that a definitive earnings beat cannot be conclusively predicted by their model this time, despite Zscaler's history of beating EPS estimates in the past four quarters.

Judging from how the technicals is stacking, we are seeing Zscaler is moving in a positive momentum and investors sentiment is also growing, we should be seeing confidence to continue.

Summary

Zscaler's Q3 FY25 earnings report is expected to show continued revenue growth driven by strong demand for cloud security, but with potential headwinds on EPS due to increased investments and a tougher sales environment. The market will be closely watching for strong execution, customer acquisition and retention, and any updates to the full-year guidance as key indicators of the company's future performance.

Appreciate if you could share your thoughts in the comment section whether you think Zscaler navigate the tough sales and competition with increased investments.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.