Key Takeaways
- Shares of Zscaler plummeted more than 23% despite surpassing Q3 earnings expectations due to disappointing Q4 projections
- Third-quarter revenue reached $850.5M, representing 25% year-over-year growth, while EPS hit $1.08 versus the $1.01 forecast
- Fourth-quarter revenue outlook of $875M–$878M fell short of the $878.6M analyst consensus
- CFO highlighted challenges in securing new customers and noted the exit of two senior sales executives
- Wall Street firms slashed their price targets, with Morgan Stanley reducing to $145, UBS to $225, and Mizuho to $185
Shares of Zscaler experienced a dramatic decline exceeding 23% during Wednesday’s premarket session as the cybersecurity firm’s conservative fourth-quarter forecast sparked investor concern, even though third-quarter results exceeded expectations.
The stock began trading around $127 before the sharp decline erased much of the company’s recent price appreciation.
For the third quarter, adjusted earnings per share registered at $1.08, surpassing the Street’s $1.01 projection. Top-line performance climbed 25% from the prior-year period to $850.5 million, exceeding Wall Street’s anticipated $835.6 million.
However, on a GAAP basis, the cybersecurity provider reported a net loss of $13.9 million, expanding from the $4.1 million deficit recorded during the comparable quarter last year.
Management elevated its full-year revenue outlook to a range of $3.32–$3.33 billion while lifting adjusted EPS guidance to $4.10–$4.11. This represents an incremental improvement from the previous projection of $3.31–$3.32 billion in revenue and $3.99–$4.02 for adjusted earnings.
Investors, however, fixated on the fourth-quarter outlook. The company projected Q4 revenue between $875M and $878M, marginally below the $878.6M consensus estimate. Fourth-quarter EPS guidance of $1.08–$1.09 did manage to exceed the $1.03 Wall Street expectation.
CFO Kevin Rubin characterized the conservative stance as “prudent,” though market participants remained unconvinced.
Customer Acquisition Headwinds Surface
The more concerning development appears to be the deceleration in new customer additions.
During the earnings conference call, Rubin conceded that new customer wins fell short of internal targets. “The area that we haven’t been performing as well as we’d like is new logo,” he admitted, 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 period.
Zscaler outlined plans to intensify its focus on mid-sized enterprises serving between 2,000 and 10,000 users. The company also intends to introduce fresh customer incentive programs and strengthen relationships with distribution partners.
Compounding the uncertainty, two top-level sales executives departed as the quarter concluded. Rubin cited these leadership transitions as contributing factors to the cautious forward-looking stance.
Wall Street Firms Reduce Price Expectations
The analyst community swiftly responded with widespread target price reductions.
Morgan Stanley’s Meta Marshall lowered her objective to $145 from $155 while maintaining an Equal Weight rating. Having previously downgraded the security in April amid intensifying competitive pressures, she cautioned that ZS would remain under scrutiny until its SecOps offering demonstrates stronger momentum.
UBS decreased its target to $225 from $260. RBC reduced expectations to $200 from $205. Mizuho adjusted downward to $185 from $210. BMO lowered its forecast to $178 from $210.
Truist cut its price objective to $200 from $250 while preserving a Buy recommendation. Stifel reduced its target 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 intensifying rivalry from Palo Alto Networks, Netskope, and Cato Networks as an increasing challenge.
Regarding expenditures, Zscaler disclosed plans to expedite data-center equipment acquisitions to stay ahead of escalating AI-driven infrastructure expenses. Capital expenditure projections were elevated from mid-single-digit to high-single-digit percentages of revenue.
The most optimistic perspective on Wall Street comes from Cantor Fitzgerald’s Jonathan Ruykhaver, who maintained a Buy rating alongside a $300 price target — suggesting potential upside exceeding 136% from present trading levels.
