Zscaler Inc (NASDAQ: ZS) delivered a robust fiscal fourth-quarter performance, posting revenue of $898.2 million, a 25% year-over-year increase that surpassed the consensus estimate of $877 million. Adjusted earnings per share came in at $1.19, also beating expectations of $1.09. The company achieved a record non-GAAP operating margin of 24.3%, up 220 basis points year over year, while full-year free cash flow reached $779 million, translating to a 23% free cash flow margin. Annual recurring revenue (ARR) climbed 25% to $3.8 billion, with net new ARR growth accelerating to 17% in the fourth quarter when excluding contributions from Red Canary, a significant pickup from the 7% growth seen in fiscal 2025.

Despite the strong numbers, the market responded cautiously, with the primary concern centering on the fiscal 2027 outlook. The company guided for full-year revenue growth of approximately 16.6% to 17.5% and ARR growth of 16.6% to 17.4%, a notable slowdown from the 25% growth rate achieved in fiscal 2026. During the earnings call, Oppenheimer analyst Ittai Kidron pressed management on the implied deceleration in net new ARR growth embedded in the midpoint of the guidance. CFO Kevin Rubin responded that the outlook factors in the time required for the sales transformation, the pace of new customer acquisition, and the rollout cadence for the integrated security operations solution, while maintaining optimism about the incremental opportunities presented by AI security.

The effectiveness of the sales organization transformation, which has reached record productivity levels, became a central topic during the Q&A session. Barclays analyst Saket Kalia initiated questions on whether the impact of recent sales leadership changes on productivity had stabilized. CEO Jay Chaudhry noted that the company's transition from an opportunity-led to a customer-led sales model over the past few quarters has proven effective, with the fourth quarter delivering the highest sales efficiency on record.

CFO Kevin Rubin emphasized that fiscal 2026 was the most productive year for sales in four years, and the leadership transition is expected to be fully completed in the first half of fiscal 2027. Citi analyst Fatima Boolani asked for a breakdown of the drivers behind the acceleration in organic net new ARR. Chaudhry highlighted that nearly all metrics were strong in the fourth quarter, with the "Zero Trust Everywhere" solutions driving a majority of sales. AI security products are growing rapidly and have become a significant business component. Rubin added that net revenue retention remained stable at 115% for the quarter, while the AI security sales pipeline surged 75% sequentially, setting a solid foundation for calendar 2027.

Guggenheim analyst John DiFucci focused on the company's announced restructuring plan affecting approximately 3% of its workforce. Chaudhry clarified that this is essentially a "rebalancing and redeployment" of resources designed to improve operational leverage and increase investment in AI. Rubin noted that the restructuring charges are relatively modest, between $30 million and $33 million, and the company is actively expanding its new customer sales teams. The current target account coverage stands at approximately 4,600 companies against a total addressable market of 20,000, indicating substantial room for growth.

AI security emerged as the dominant theme throughout the call, with demand showing explosive growth. Chaudhry pointed out that over 90% of enterprise AI applications and models are exposed to the internet, and more than a third have known exploitable vulnerabilities. AI security bookings grew more than 50% sequentially in the fourth quarter, with the sales pipeline expanding by 75%. UBS analyst Roger Boyd raised questions about the competitive landscape in AI security. Chaudhry responded that customers are not looking for "one or two more point products" but rather integrated solutions that cover AI asset management, agent communication policy enforcement, and data loss prevention simultaneously, which is the core advantage of the Zscaler Zero Trust Exchange platform.

JPMorgan analyst Brian Essex inquired about the health of the Red Canary business. Rubin candidly acknowledged that the MDR business experiences higher customer churn compared to the company's core operations, with elevated churn observed in calendar 2026. However, the rationale behind the Red Canary acquisition was to secure intelligent agent technology and security operations expertise. This technology is now being integrated into the upcoming Agentic SecOps solution, which is expected to start contributing to revenue in the second half of fiscal 2027 and into fiscal 2028. Morgan Stanley analyst Meta Marshall asked whether Z-Flex would be mandated for new products. Chaudhry responded that the emphasis of Z-Flex is on flexibility rather than coercion, allowing customers to start with selected products and switch or add modules later without launching a new procurement cycle, which addresses one of the most pressing customer needs.

During the prepared remarks, management highlighted the transformative impact of AI on the security landscape. Chaudhry noted that new AI models have become more powerful, autonomous, and dangerous from a cybersecurity perspective, capable of rapidly discovering previously unknown vulnerabilities. He cited recent incidents at three leading frontier model companies where autonomous agents took unauthorized actions, including the Hugging Face incident where agents broke through sandbox training environments to launch complex attacks. The CEO stressed that Zscaler's Zero Trust Exchange makes applications, AI models, and data completely invisible to attackers, whether human or machine, and eliminates lateral threat propagation. He also referenced Anthropic's May white paper encouraging zero trust architecture for AI agents, reinforcing the industry-wide recognition of this imperative.

Management also emphasized the strength of the data security business, which is closely intertwined with AI security. Notably, 70% of AI security transactions in the quarter included data security solutions. Several key customer wins were highlighted, including a seven-figure expansion with a Fortune 500 transportation company that selected Zscaler's AI security solution over two major platform competitors, growing their ARR to nearly $10 million. A Fortune 500 semiconductor manufacturer expanded its Zscaler deployment through Z-Flex to secure company-wide deployment of Claude Cowork, choosing Zscaler as the only vendor capable of securing its AI applications across endpoint security, inter-agent secure communication, and model usage in private and public environments. Additionally, a Fortune 500 life sciences company signed a multi-million dollar new logo deal to deploy Zero Trust SASE and AI security platforms for 75,000 users, replacing a firewall-based SASE platform.

The financial results demonstrated strong execution across the board. Fourth-quarter revenue reached $898 million, with growth across all regions: Americas (57% of revenue) grew approximately 30%, EMEA (27%) grew 17%, and APJ (16%) grew 23%. Remaining performance obligations (RPO) totaled approximately $7.4 billion, up 27% year over year, with current RPO representing about 45% of the total. The company closed a record number of deals with annual contract value exceeding $1 million in the fourth quarter, and customer counts grew to 785 clients with ARR over $1 million and 4,182 clients with ARR over $100,000, representing 18% and 20% year-over-year growth respectively. Non-seat billing solutions contributed approximately 30% of new and expansion ACV, with associated ARR growing more than 100% year over year.

Z-Flex momentum proved exceptional, with fourth-quarter TCV surpassing $770 million, up more than 60% sequentially. In fiscal 2026, Z-Flex generated over $1.7 billion in TCV, underscoring customer commitment to the platform. Customers utilizing Z-Flex saw their ARR grow nearly 30% on average during the year in new and expansion ACV. Non-GAAP gross margin stood at 80.2% for the quarter, up from 79.3% in the prior year, while full-year gross margin reached 80.3%. Non-GAAP operating income for the quarter was $218 million, a 37% increase, with operating margin expansion of 220 basis points to 24.3%. The company ended the quarter with approximately $3.5 billion in cash, cash equivalents, and short-term investments, alongside $1.7 billion in debt.

Looking ahead, management guided for first-quarter fiscal 2027 revenue in the range of $935 million to $939 million, representing approximately 19% year-over-year growth, with gross margins around 80% and operating margins of approximately 23%. Earnings per share for the first quarter are expected to be between $1.15 and $1.16. For the full fiscal year 2027, ARR is projected to be between $4.396 billion and $4.426 billion, representing growth of 16.6% to 17.4%. Revenue is expected between $3.908 billion and $3.938 billion, growing 16.6% to 17.5%. Operating margins are projected around 23.7%, with EPS between $4.86 and $4.90. Free cash flow margin is expected to be approximately 23% to 23.5%, including capital expenditures but excluding internal-use software. Management noted that component price increases, particularly for memory chips, will keep capital expenditures elevated in fiscal 2027.