Zscaler Inc Earnings Preview: What You Should Know Beyond Headline Estimates

Earnings Report Date: March 5, 2025 (After Market Close)

Cybersecurity leader Zscaler Inc (NASDAQ: ZS) is poised to announce its fiscal Q2 2025 results on March 5th, subsequent to the market’s closure. While the investor community will undoubtedly zero in on the headline figures such as earnings per share (EPS) and revenue, a comprehensive evaluation of Zscaler’s performance necessitates delving deeper into additional metrics and qualitative factors. This in-depth analysis aims to uncover the nuanced elements that traders and investors should monitor to gain a holistic understanding of Zscaler’s operational health and future trajectory.

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Earnings Expectations vs. Historical Performance

For Q2 FY2025, which concludes on January 31, 2025, analysts have forecasted the following key financial metrics:

• EPS: $0.69 (consensus), with estimates ranging between $0.68 and $0.82
• Revenue: $635.4 million (consensus), varying from $633.3 million to $658 million

These projections encapsulate significant year-over-year movements:

• EPS Decline: A decrease of -8.96% compared to $0.76 in Q2 FY2024
• Revenue Growth: An increase of +21.02% year-over-year, up from $525 million in Q2 FY2024

The anticipated decline in EPS juxtaposed with robust revenue growth underscores Zscaler’s strategic emphasis on expansive market penetration and long-term growth initiatives over immediate profitability. Historically, this approach has enabled the company to solidify its market position, albeit at the expense of short-term earnings performance.

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Earnings Surprise History

Zscaler has cultivated a remarkable history of surpassing analyst expectations, establishing itself as a consistent overperformer in the market. The following table illustrates the actual EPS versus estimated EPS over the past four quarters:

Quarter	Actual EPS	Estimated EPS	Surprise
Q1 FY2025	$0.77	$0.63	+22.74%
Q4 FY2024	$0.88	$0.69	+26.96%
Q3 FY2024	$0.88	$0.65	+35.94%
Q2 FY2024	$0.76	$0.58	+31.05%

This steadfast trend of exceeding EPS estimates by an average of 29.2% over the last four quarters indicates that current analyst projections might be overly conservative. Such a track record not only boosts investor confidence but also suggests potential upward revisions in future earnings estimates as Zscaler continues to outperform expectations.

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Beyond the Headlines: Key Metrics to Watch

1. Billings Growth and Customer Acquisition

While headline revenue figures provide a snapshot of current performance, deeper insights lie in billings growth, which offers a forward-looking perspective on revenue recognition. Key aspects to monitor include:

• Total Billings Growth Rate: A higher growth rate may signal increasing demand and future revenue streams.
• Net New Customer Additions: Particularly in the enterprise segment, adding large-scale customers can significantly impact long-term revenue stability.
• Dollar-Based Net Retention Rate: Historically exceeding 125%, this metric indicates the company’s ability to expand revenue from its existing customer base through upselling and cross-selling strategies.

A strong performance in these areas would validate Zscaler’s market expansion strategies and customer loyalty, essential for sustained growth.

2. Free Cash Flow Generation

Zscaler has demonstrated impressive free cash flow (FCF) generation, standing at $732.7 million. This robust FCF highlights the company’s capability to generate cash while simultaneously investing in growth initiatives. The FCF margin will be crucial in assessing operational efficiency and the effectiveness of capital allocation strategies. A healthy FCF margin ensures that Zscaler can continue to fund innovation, pursue strategic acquisitions, and return value to shareholders without compromising financial stability.

3. Operating Margin Trajectory

Currently, Zscaler’s operating margin stands at -4.88%, reflecting ongoing investments in growth and market expansion. Investors should closely monitor any improvements in this metric, as it serves as a barometer for operational efficiency and profitability. Management has previously outlined a strategic path towards enhancing operating margins while maintaining aggressive growth investments. Achieving incremental improvements in operating margins would signal effective cost management and operational scaling, paving the way for eventual profitability.

4. Guidance and Outlook

Beyond the quarterly results, management’s guidance plays a pivotal role in shaping investor sentiment. For this quarter, the consensus estimates are:

• Q3 FY2025 (April 2025 quarter): $0.74 EPS on $667.2 million revenue
• Full-year FY2025: $2.99 EPS on $2.64 billion revenue

Any revisions to these outlooks, especially full-year projections, could significantly influence Zscaler’s stock performance. Positive adjustments to guidance would likely bolster investor confidence, whereas downward revisions might raise concerns about the company’s growth trajectory or market conditions.

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Analyst Sentiment and Valuation

Zscaler’s current stock price stands at $196.23, with analysts assigning a mean price target of $227.35, indicating an approximate 16% upside potential. The recommendation consensus is overwhelmingly in favor of a “Buy,” rated at 1.91 on a scale where 1 signifies a Strong Buy and 5 denotes a Sell. This sentiment is supported by 41 analysts actively covering the stock.

Recent EPS revisions furnish a mixed outlook:

• Current Quarter: 1 upward revision, 1 downward revision in the last 7 days
• FY2025: 2 downward revisions in the last 7 days

These revisions suggest some uncertainty or changing perceptions about Zscaler’s near-term performance. Investors should consider these dynamics when evaluating the stock’s potential and weigh them against the company’s historical outperformance and long-term growth prospects.

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Long-Term Growth Trajectory

Looking further ahead, analysts project a compelling growth trajectory for Zscaler:

• FY2026 EPS: $3.57 (a 19.35% increase)
• FY2026 Revenue: $3.18 billion (a 20.37% increase)

This sustained projection of over 20% revenue growth annually reflects strong confidence in Zscaler’s entrenched market position within the cybersecurity sector. The burgeoning demand for robust cybersecurity solutions in an increasingly digital and interconnected world underpins these optimistic forecasts. Moreover, Zscaler’s investment in innovative technologies and strategic partnerships is anticipated to drive continued expansion and market share gains.

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Investment Considerations

Strengths

• Market Leadership in Zero Trust Security Architecture: Zscaler’s pioneering role in zero trust frameworks positions it favorably in the evolving cybersecurity landscape.
• Strong Revenue Growth: Achieving 26.4% growth in the most recent reported period highlights the company’s ability to scale effectively.
• Consistent Earnings Beats: A history of surpassing EPS estimates builds investor trust and credibility.
• Solid Cash Position: With $2.71 billion in cash, or $17.65 per share, Zscaler maintains robust liquidity to support operations and strategic initiatives.

Challenges

• Negative Operating and Profit Margins: Operating at a loss suggests ongoing investments may strain profitability, necessitating careful monitoring of margin improvements.
• Debt-to-Equity Ratio of 86.7%: While not exorbitant, this ratio indicates a significant level of leverage that could pose risks if not managed prudently.
• Increasing Competition in the Cybersecurity Space: The growing number of players in cybersecurity intensifies the competitive landscape, potentially impacting market share and pricing strategies.
• Potential for Slowing Growth as the Company Scales: As Zscaler expands, maintaining high growth rates may become more challenging, requiring continuous innovation and market adaptation.

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Conclusion

Zscaler continues to exhibit robust revenue growth within the critical and expanding cybersecurity market. Although the anticipated EPS for Q2 FY2025 reflects a year-over-year decline, this is juxtaposed with substantial revenue increases, highlighting the company’s strategic prioritization of market expansion over immediate profitability. Investors are encouraged to focus on Zscaler’s ability to sustain revenue momentum, enhance operating leverage, and deliver confident forward guidance.

The stock’s performance in the aftermath of earnings will likely hinge more on management’s outlook and insights regarding the demand environment than solely on the Q2 results. Given Zscaler’s history of conservative guidance paired with subsequent earnings outperformance, it is imperative for investors to attentively assess management’s tone and strategic vision concerning future growth prospects in the dynamic cybersecurity landscape.

“Zscaler’s strategic focus on market expansion and innovation positions it well for sustained growth, despite short-term earnings fluctuations.”

Disclaimer: This analysis is for informational purposes only and should not be considered investment advice. Always conduct your own research before making investment decisions.

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Disclaimer: This analysis is for informational purposes only and does not constitute investment advice. All trading and investment decisions should be made based on your own research, experience, and risk tolerance.