Zscaler (NASDAQ:ZS) shares tumbled more than 21% in premarket trading on Wednesday, extending an after-hours decline of nearly 17%, after the cybersecurity group reduced its full-year free cash flow outlook despite delivering better-than-expected fiscal third-quarter earnings. Investor concerns were further amplified by the departure of two senior sales executives and softer-than-expected preliminary growth guidance for fiscal 2027.
The cloud security company reported third-quarter revenue of $850.5 million, representing year-over-year growth of 25% and exceeding company guidance. Adjusted earnings per share came in at $1.08, ahead of analyst expectations of $1.01. Annual recurring revenue also increased 25% to reach $3.53 billion.
However, market attention focused heavily on the sharp reduction in Zscaler’s free cash flow margin forecast. The company now expects full-year FCF margins in a range of 22.8% to 23.3%, compared with its previous outlook of 26.5% to 27%. Management attributed the change to a substantial increase in capital expenditures, which are expected to rise into the high single digits as a percentage of revenue, as the company secures pricing for memory, storage and processors ahead of anticipated cost inflation.
Investors were also unsettled by the company’s early outlook for fiscal 2027. Management projected annual recurring revenue and revenue growth of approximately 16% to 17%, below the 20%-plus expansion rate many investors had anticipated. Executives cited caution surrounding recent changes within the sales leadership team.
Jefferies described the FY27 ARR guidance as a “much-needed (and attainable) reset,” arguing that the impact of sales disruption had already been incorporated into forecasts while highlighting the Red Canary and Symmetry acquisitions as potential longer-term growth drivers. The brokerage also increased its FY26 EPS forecast to $4.12 from $4.01.
Macquarie adopted a more cautious stance on valuation, applying lower peer multiples across its EV/revenue, EV/FCF and discounted cash flow models.
Still, analysts noted that discussions with Zscaler’s chief executive and finance leadership suggested management may have deliberately taken a conservative approach to guidance in order to improve future comparison periods. Analysts also pointed to growing enthusiasm around Zero Trust cybersecurity architecture as a defence against large language model-driven attacks and zero-day vulnerabilities, which could become an important catalyst in FY27.
Both Jefferies and Macquarie highlighted continued momentum in Z-Flex, the company’s flexible purchasing programme, as a positive development. Z-Flex total contract value reached $480 million during the third quarter, rising more than 60% quarter-over-quarter and accounting for approximately 38% of remaining performance obligation bookings.
Chief executive Jay Chaudhry said Zscaler is “ideally positioned as the cybersecurity platform for the AI era,” while chief financial officer Kevin Rubin highlighted strategic partnerships with Anthropic and OpenAI, the launch of Project AI-Guardian and the pending $175 million acquisition of Symmetry Systems as key pillars supporting the company’s strategy heading into the next fiscal year.
For the fourth quarter, Zscaler forecast revenue between $875 million and $878 million, alongside adjusted earnings per share of $1.08 to $1.09. The company also raised its full-year revenue outlook to around $3.33 billion, slightly above analyst consensus estimates of $3.32 billion.