Key Takeaways
- Shares of Zscaler plummeted more than 21% in premarket sessions following a significant reduction in full-year free cash flow margin projections from 26.5–27% to 22.8–23.3%.
- Third-quarter revenue reached $850.5 million, marking a 25% year-over-year increase, while adjusted earnings per share of $1.08 surpassed the Street’s $1.01 estimate.
- Management’s preliminary fiscal 2027 guidance calling for 16–17% ARR and revenue expansion disappointed investors expecting growth above 20%.
- The departure of two senior sales executives raised additional questions about the company’s ability to execute on near-term growth initiatives.
- Wall Street firms responded by slashing price targets, with Truist moving to $200, Mizuho to $185, Morgan Stanley to $145, and Evercore ISI issuing a downgrade.
Shares of Zscaler (ZS) tumbled over 21% during premarket hours on Wednesday, May 27, building on a nearly 17% decline from the previous evening’s after-hours session. The cloud security provider triggered the selloff by lowering its free cash flow projections while simultaneously indicating slower growth ahead for fiscal year 2027.
Premarket trading saw shares hovering around $143.90, representing approximately a $40 decline from Tuesday’s closing price of $184.60.
The third-quarter performance itself was impressive. The company delivered $850.5 million in revenue, representing 25% growth compared to the same period last year and exceeding internal forecasts. Adjusted earnings per share came in at $1.08, comfortably ahead of analyst expectations of $1.01. Annual recurring revenue climbed 25% to reach $3.53 billion.
But the market’s attention shifted to forward-looking indicators.
The company drastically reduced its full-year free cash flow margin forecast to a range of 22.8–23.3%, a meaningful pullback from the previously stated 26.5–27% range. Management attributed the revision to elevated capital expenditures, explaining they had secured favorable pricing on memory, storage, and processing components in anticipation of future cost inflation.
The preliminary fiscal 2027 projections compounded investor concerns. Leadership projected ARR and revenue growth between 16–17%, significantly trailing the 20%+ expansion rate Wall Street had been anticipating.
Adding to the uncertainty, the company confirmed the exit of two senior sales executives. Management cited these leadership transitions as factors contributing to their conservative fiscal 2027 assumptions, especially regarding new customer acquisition.
Wall Street Responds
Truist Securities maintained its Buy recommendation while lowering its price objective to $200 from $250. The firm observed that quarterly performance was robust across revenue, ARR, and profitability metrics, with gross margins reaching 76.63%, though it recognized the cautious forward guidance.
Evercore ISI adopted a more skeptical stance, downgrading Zscaler from Outperform to In Line, emphasizing concerns around the executive departures and diminished fiscal 2027 projections.
Mizuho Securities reduced its target to $185 from $210. RBC Capital Markets lowered its objective to $200 from $205 while maintaining its Outperform stance. Morgan Stanley brought its target down to $145 from $155, highlighting intensifying competitive pressures in the SASE market segment.
Jefferies struck a more optimistic tone, characterizing the fiscal 2027 ARR guidance as a “much-needed reset” and elevating its fiscal 2026 EPS projection to $4.12. The firm highlighted the Red Canary and Symmetry acquisitions as potential catalysts for future expansion.
Z-Flex Initiative and AI Strategy
One element analysts viewed positively was the Z-Flex program, the company’s flexible procurement offering. Total contract value under Z-Flex hit $480 million during the third quarter, surging more than 60% sequentially and representing roughly 38% of remaining performance obligation bookings.
Chief Executive Jay Chaudhry emphasized the company’s positioning for AI-driven security challenges, referencing collaborations with Anthropic and OpenAI alongside the introduction of its Project AI-Guardian platform.
The organization also has a $175 million deal pending to acquire Symmetry Systems.
For the fourth quarter, management projected revenue between $875–$878 million with adjusted EPS of $1.08–$1.09. Full-year revenue guidance was modestly increased to approximately $3.33 billion, marginally above the consensus estimate of $3.32 billion.
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