Key Takeaways
- Zscaler (ZS) stock 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, reflecting 25% year-over-year growth, while adjusted EPS of $1.08 exceeded analyst expectations of $1.01.
- Management’s preliminary FY27 outlook projecting 16–17% growth in ARR and revenue disappointed investors expecting over 20% expansion.
- The departure of two key sales executives raised concerns about the company’s ability to execute on growth initiatives in the near term.
- Wall Street analysts responded with price target reductions, including Truist (lowered to $200), Mizuho (cut to $185), and Morgan Stanley (reduced to $145), with Evercore ISI downgrading shares.
Shares of Zscaler (ZS) tumbled more than 21% during Wednesday’s premarket session on May 27, building on a nearly 17% decline in after-hours trading the previous evening. The sharp downturn followed the cybersecurity provider’s announcement of reduced free cash flow projections alongside tempered growth expectations heading into fiscal year 2027.
Premarket trading saw shares hovering around $143.90, representing a roughly $40 decrease from Tuesday’s closing price of $184.60.
The third-quarter performance itself told a different story. The company posted revenue of $850.5 million, marking a 25% increase compared to the same period last year and surpassing internal projections. Adjusted earnings per share came in at $1.08, topping the Street consensus of $1.01. Annual recurring revenue similarly climbed 25% to reach $3.53 billion.
But the market’s attention quickly shifted to forward-looking concerns.
The company slashed its full-year free cash flow margin projection to a range of 22.8–23.3%, a substantial reduction from the previously announced 26.5–27% target. Management attributed this adjustment primarily to elevated capital expenditures, explaining that the company had secured favorable pricing on memory, storage, and processors to mitigate anticipated cost inflation down the road.
Further weighing on investor sentiment was the preliminary FY27 guidance. Management projected ARR and revenue expansion of just 16–17%, falling considerably short of the 20%-plus growth trajectory Wall Street had been anticipating.
Compounding these concerns, two high-ranking sales executives recently departed the organization. Company leadership acknowledged these changes contributed to the conservative FY27 projections, particularly regarding new customer acquisition momentum.
Wall Street Responds
Truist Securities maintained its Buy recommendation while reducing its price objective to $200 from $250. Analysts at the firm highlighted the quarter’s strength across revenue, ARR, and profitability metrics, noting gross margins reached 76.63%, though they recognized the forward guidance reflected a more cautious stance.
Evercore ISI adopted a more bearish view, downgrading Zscaler from Outperform to In Line, emphasizing concerns around the leadership transitions and diminished FY27 projections.
Mizuho Securities adjusted its target downward to $185 from $210. RBC Capital Markets reduced its price objective to $200 from $205 while maintaining its Outperform stance. Morgan Stanley lowered expectations to $145 from $155, highlighting intensifying competition within the SASE market segment.
Jefferies offered a more optimistic perspective, characterizing the FY27 ARR guidance as a “much-needed reset” and increasing its FY26 EPS forecast to $4.12. The firm highlighted the pending Red Canary and Symmetry acquisitions as potential catalysts for future growth.
Z-Flex Initiative and AI Strategy
Among the positive developments analysts emphasized was the Z-Flex program, Zscaler’s flexible procurement model. This offering achieved $480 million in total contract value during the third quarter, representing more than 60% sequential growth, and accounted for approximately 38% of remaining performance obligation bookings.
CEO Jay Chaudhry emphasized the company’s positioning for AI-driven security challenges, highlighting collaborations with Anthropic and OpenAI alongside the introduction of its Project AI-Guardian platform.
The company is also in the process of finalizing a $175 million acquisition of Symmetry Systems.
Looking to the fourth quarter, Zscaler provided revenue guidance of $875–$878 million with adjusted EPS projected at $1.08–$1.09. The company lifted its full-year revenue outlook to approximately $3.33 billion, modestly ahead of the $3.32 billion analyst consensus.
