ZS — Q2 FY26 Earnings Review (Atlas)

Date: 2026-04-03 Quarter: Q2 FY26 (January 31, 2026) Market cap: 21.8B|EV: 19.9B | EV/TTM Rev: 6.6x | Revenue growth: 25.9% YoY Stock price: $136.63 | 52-week range: 128–337

Verdict

Zscaler delivered a clean Q2 that confirms the re-acceleration thesis: revenue +25.9% YoY (beat guide by 2.2%), ARR +24.4%, RPO +31%, Non-GAAP operating margin at an all-time high of 22.2%. The numbers were in-line to slightly better than expected on every headline metric. The concerns I flagged — organic net new ARR growth, SBC burden, Red Canary churn — remain unresolved but are not worsening. At 6.6x EV/TTM revenue, the market is pricing in a terminal deceleration story that leading indicators continue to contradict. Conviction: 4/5.

Qualification Gate

Criterion Threshold Actual Verdict
Revenue YoY growth >30% 25.9% FAIL — but re-accelerating from 21.3% trough; at $3B+ TTM, 26% growth = $168M incremental quarterly revenue
Gross margin >60% 76.6% GAAP / 80.2% Non-GAAP PASS
Revenue per quarter >$50M $815.8M PASS
Data availability 4+ quarters 19 quarters in DB PASS
Share dilution <10% annual ~3.9% YoY (153.7M to 159.7M GAAP diluted) PASS
GAAP profitability trajectory Improving or positive GAAP net loss -34.3M, widenedfrom−7.7M YoY; driven by acquisition-related SBC MARGINAL — Non-GAAP expanding steadily; GAAP distorted by Red Canary/SPLX

Gate result: Conditional pass. The growth rate miss reflects scale, not deterioration. RPO +31% and ARR re-acceleration both signal the growth rate will sustain at 24-26% through FY26. Proceeding with full analysis.

Six-Factor Score

Factor Rating Detail
Growth Adequate Revenue +25.9% YoY, ARR +24.4%, RPO +31%. Below 30% threshold but re-accelerating from 21.3% trough. At $3B+ TTM scale, this is strong.
Trajectory Accelerating YoY revenue: 21.3% > 22.6% > 25.5% > 25.9% over 4 quarters. Second consecutive quarter of acceleration. RPO confirms. Q3 guide implies ~23% but management systematically beats by ~2pp.
Margins High Non-GAAP GM 80.2%, Non-GAAP OM 22.2% (all-time high), Non-GAAP NM 20.7%. H1 FCF margin 36.3%. Rule of 40 score: 46.4% (revenue growth + FCF margin).
Dominance Strong Gartner SSE Leader 4 consecutive years, 34% market share (#1). 100% CyberRatings security efficacy. But SASE Visionary only — SD-WAN gap is structural. Netskope and PANW gaining in bake-offs.
Valuation Cheap EV/TTM Rev 6.6x vs PANW 13x, CRWD 18.7x. PEG 1.3x on Non-GAAP EPS. 52% multiple compression YoY despite improving fundamentals. Cheapest since 2021.
Special Present (1) AI agent security TAM expansion — metered usage >25% of ACV, +100% YoY; (2) ZFlex consumption model ($290M Q2 TCV, +65% QoQ); (3) extreme valuation discount creating mean-reversion setup.

The Numbers

Revenue & Growth (12 Quarters)

| | Q323 | Q423 | Q124 | Q224 | Q324 | Q424 | Q125 | Q225 | Q325 | Q425 | Q126 | Q226 | | | Apr-23 | Jul-23 | Oct-23 | Jan-24 | Apr-24 | Jul-24 | Oct-24 | Jan-25 | Apr-25 | Jul-25 | Oct-25 | Jan-26 | |---|---|---|---|---|---|---|---|---|---|---|---|---| | Revenue ($M) | 419 | 455 | 497 | 525 | 553 | 593 | 628 | 648 | 678 | 719 | 788 | 816 | | YoY % | 46.0% | -- | 39.7% | 35.4% | 32.1% | 30.1% | 26.4% | 23.4% | 22.6% | 21.3% | 25.5% | 25.9% | | QoQ % | 8.0% | 8.7% | 18.6% | 5.7% | 5.4% | 7.2% | 5.9% | 3.2% | 4.6% | 6.1% | 9.6% | 3.5% | | GM % [GAAP] | 77.1% | 77.4% | 77.6% | 77.7% | 78.6% | 78.0% | 77.5% | 77.1% | 77.0% | 76.0% | 76.6% | 76.6% | | OM % [nGAAP] | -- | -- | -- | -- | 22.0% | 21.5% | -- | 21.7% | 21.6% | 22.1% | 21.8% | 22.2% | | NM % [GAAP] | -11.0% | -6.7% | -6.7% | -5.4% | 3.5% | -2.5% | -1.9% | -1.2% | -0.6% | -2.4% | -1.5% | -4.2% | | EPS [nGAAP] | -- | -- | -- | -- | -- | $0.88 | $0.77 | $0.78 | $0.84 | $0.89 | 0.96|**1.01** | | FCF (M)|− − |− − |232|− − |− − |136|314|143|120|172|413|* * 169 * *||SBC(M) | 108 | -- | 129 | 140 | 113 | 149 | 157 | 176 | 168 | 181 | 189 | 220 |

ARR Trajectory

| | Q224 | Q225 | Q325 | Q425 | Q126 | Q226 | | | Jan-24 | Jan-25 | Apr-25 | Jul-25 | Oct-25 | Jan-26 | |---|---|---|---|---|---|---| | ARR (M)|2, 195|2, 700|2, 890|3, 015|3, 204|* * 3, 359 * *||NetNewARR(M) | -- | -- | +190 | +125 | +189 | +156 | | YoY % | -- | +23.0% | -- | -- | -- | +24.4% |

Prior Beliefs / Updated Beliefs

Prior Beliefs (entering Q2 FY26)

Based on Q1 FY26 results and management guidance:

  1. Revenue would be ~$810-815M, slightly ahead of $797-799M guide, consistent with the ~2pp beat pattern.
  2. ARR re-acceleration would continue, reaching ~$3,350M (+24% YoY).
  3. Non-GAAP operating margin would hold at ~21.5-22.0%, roughly in line with Q1's 21.8%.
  4. RPO growth would sustain above 25%, confirming the bullish leading indicator divergence.
  5. Red Canary ARR would remain roughly flat (~$114M) or decline modestly given elevated churn — I did not expect sequential growth.
  6. Organic net new ARR (ex-Red Canary) would be in the $130-140M range, with the key question being whether YoY growth improved from the weak levels implied by Q1.
  7. SBC would moderate slightly from Q1's $188.6M as acquisition-related awards began normalizing.

Updated Beliefs

Metric Expected Actual Verdict
Revenue $810-815M $815.8M (+25.9% YoY) Met — top of range, 2.2% beat vs guide
ARR ~$3,350M (+24%) $3,359M (+24.4% YoY) Met — fractionally better than expected
Non-GAAP OM 21.5-22.0% 22.2% Beat — all-time high Non-GAAP OM. Positive surprise
RPO >25% YoY $6.1B (+31% YoY) Beat — 31% materially exceeds expectations; bullish divergence widening
Red Canary ARR ~$110-114M (flat/down) $114M (stable) Met — no deterioration; management guided $130M FY end
Organic net new ARR $130-140M $139M (+7% YoY) Met — in range but +7% YoY is uninspiring for an "acceleration" narrative
SBC ~$180-190M $220.4M (27% of revenue) Miss — significantly higher than expected; worst Q since inception

Delta Assessment

What surprised me:

  1. Non-GAAP operating margin at 22.2% (positive). This is a genuine new high. Despite $220M in SBC, the non-GAAP cost structure is improving. ZS is demonstrating operating leverage — non-GAAP op income grew 29% YoY vs 26% revenue growth. This was the best single data point in the quarter.

  2. RPO at +31% (positive). This was already the thesis centerpiece, but the magnitude of divergence is widening. RPO growth at 31% against revenue at 26% is a 5pp gap that has sustained for 2+ quarters. This strongly predicts revenue growth sustains at or above current levels through FY27.

  3. SBC at $220M / 27% of revenue (negative). This was the worst single data point. I expected acquisition-related SBC to normalize; instead it increased $32M sequentially from 189M.Managementdidnotaddressthisonthecall.Atthislevel, dilutionis 434M. The gap between GAAP reality and non-GAAP presentation is growing.

  4. Organic net new ARR +7% YoY (concerning). This confirms the organic engine is growing slowly. The reacceleration in reported ARR is acquisition-boosted. For the AI tollbooth thesis to hold, organic net new ARR needs to reach +15%+ — it is not there.

Leading Indicators

Bullish Divergence: RPO growing materially faster than revenue (sustained, widening)

Metric Q3 FY25 Q2 FY26 Growth Rate Divergence
Total RPO $5,000M $6,100M +31% YoY (est.) Bullish — widening
ARR $2,890M $3,359M +24.4% YoY Bullish — accelerating
Revenue $678M $816M +25.9% YoY Re-accelerating
Deferred Revenue -- $2,355M +25% YoY (est.) Consistent

Assessment: Sustained and widening bullish divergence. RPO at +31% is 5pp above revenue at +26%. ARR at +24.4% re-accelerated from +23.0% a year ago. This divergence has persisted for 2+ quarters and is strengthening. It strongly predicts revenue growth sustains through FY26 and into FY27.

Bearish Signal: Organic net new ARR weak

Organic net new ARR (ex-Red Canary) was $139M, +7% YoY. This is the cleanest measure of the core demand engine, and it is not re-accelerating. The headline numbers (total net new ARR +19%, total ARR +24.4%) are acquisition-boosted. If organic net new ARR does not improve to +15%+ by Q4 FY26, the AI tailwind thesis is premature.

Customer Consolidation Signal: ZTE 4x YoY

Zero Trust Everywhere customers went from ~130 to 550+ in 12 months. This is the platform consolidation license — customers buying multiple ZS products in a single contract. A 4x increase signals the installed base is expanding wallet share, which should reduce churn and support NRR (even though NRR is no longer disclosed).

Scuttlebutt Findings

Valuation Context

Metric Current (Apr-2026) 1Y Ago (est.) PANW CRWD Assessment
EV/TTM Revenue 6.6x ~13.6x 13x 18.7x Deep discount — cheapest in peer set
EV/TTM Gross Profit 8.7x ~17.7x ~16x ~25x Cheap
EV/TTM FCF 22.8x ~40x+ ~40x ~50x+ Reasonable
P/E (Non-GAAP TTM) 35.5x ~55x+ ~55x ~75x Cheap vs peers
PEG (Non-GAAP) 1.3x ~2.5x ~3.5x ~3.0x Attractive
Market cap $21.8B ~$33B $126B $99B
Revenue growth 25.9% 22.6% ~15% ~22% ZS growing faster than both
EV/Rev / Growth 0.25x 0.60x 0.87x 0.85x 30% of peer ratio
Rule of 40 46.4% ~40% ~40% ~45% Above threshold

Assessment: ZS experienced 52% multiple compression over 12 months while revenue re-accelerated. At 6.6x EV/TTM revenue, the stock trades at roughly 30% of the peer valuation ratio (EV/Rev divided by growth rate). Even a modest reversion to 10x EV/TTM Revenue — still below its own 2-year median and well below peers — implies ~50% upside on multiples alone, plus ~24% annual growth carry.

Platform & Secular Position

Secular trend: Enterprise cybersecurity in the AI era. Total market $255B (2025) growing to $580B (2031) at 14.7% CAGR. SASE segment $17B by 2029 at 12% CAGR. AI security is a nascent sub-segment that could be the fastest-growing category as agentic AI deployment scales.

Platform assessment: Genuine multi-product platform. ZIA (web proxy, core), ZPA (private access), ZDX (digital experience, >$100M LTM), ZTE (platform consolidation, 550+ customers), AI Security Suite (data protection, red teaming, asset management), Red Canary (MDR/EDR). The platform is extensible and the ZTE consolidation motion is working (4x customer growth). The SD-WAN gap limits full SASE ambitions but does not undermine the SSE core.

TAM penetration: $3.36B ARR against $17B SASE market (2029) = ~20% of narrow market, ~1.3% of total cybersecurity. Significant room for growth, especially if the AI security TAM materializes as a distinct category.

AI positioning specifics: Nearly 1 trillion AI transactions processed in calendar 2025. 3,400+ unique AI apps detected (4x in 12 months). Metered usage >25% of new ACV, growing >100% YoY. MCP (Model Context Protocol) request handling. The positioning as a "tollbooth for AI agents" has early quantitative validation but revenue materiality is still emerging.

Key Risks

  1. SBC corrosion at 27% of revenue. 220MinQ2(758M TTM). GAAP net loss widened to -$34M despite 26% revenue growth. If SBC doesn't moderate toward 20% of revenue, the stock is a treadmill — non-GAAP EPS growth offset by dilution. Management has not acknowledged or addressed the Q2 spike.

  2. Red Canary integration risk. 692Mfor 114M ARR with "elevated churn" and no stabilization timeline. Guided to ~$130M by FY26 end (needs $16M in H2). If Red Canary ARR declines or stabilizes below $120M, the acquisition thesis breaks. Forrester's cultural-misalignment warning is credible.

  3. Organic net new ARR +7% is weak. The re-acceleration narrative is acquisition-boosted. Organic net new ARR needs to reach +15%+ by Q4 FY26. If it doesn't, the AI tailwind is noise, not signal.

  4. SASE competitive gap. No SD-WAN means ZS loses in full-SASE deals. PANW Prisma, Cato (+43% ARR growth), Fortinet offer single-vendor solutions. Market is shifting toward SASE bundling.

  5. EMEA deceleration. +18% vs Americas +31% — a 13pp geographic divergence that management did not address. EMEA is 28% of revenue. If deceleration spreads to Americas, growth retraces toward 20%.

Key Catalysts

  1. AI agent deployment wave (2026-2028). Every AI agent needs secure internet access through ZIA. Metered pricing monetizes agent-count growth without per-seat negotiation. If agentic AI scales as projected (50-100 agents per employee), the TAM expansion is structural.

  2. ZFlex consumption model. $290M Q2 TCV (+65% QoQ). If ZFlex becomes the default commercial motion, it removes the seat-count ceiling and unlocks mid-market/SMB penetration. Could re-accelerate organic net new ARR.

  3. Valuation mean reversion. 6.6x EV/TTM Rev vs 2-year median ~13x and peers at 13-19x. Even partial reversion to 10x implies ~50% upside on multiples. 52% compression occurred during improving fundamentals — the gap should narrow.

  4. Q3 FY26 beat continuation. Guide of $834-836M implies ~23% YoY. If actual comes in at $850M+ (consistent with 2pp beat pattern), that's a third consecutive quarter of re-acceleration. Earnings date: May 28, 2026.

  5. Federal zero trust mandates. Government cybersecurity spending is high-duration and high-certainty. ZPA already reviewed positively in federal deployments. Slow-burn catalyst with multi-year duration.

Position disclosure: Atlas holds no position. This is a baseline analysis for other personas.

Analysis date: 2026-04-03 | Data through Q2 FY26 (Jan-2026) | Stock price: $136.63