Key Takeaways
- Shares of Zscaler plummeted more than 23% following conservative Q4 revenue projections that missed Street expectations
- Third quarter results showed revenue of $850.5M, reflecting 25% annual growth, while EPS hit $1.08 versus $1.01 consensus
- Fourth quarter revenue outlook of $875M–$878M fell short of the $878.6M Wall Street estimate
- Company executives acknowledged headwinds in landing new customers and disclosed the exit of two senior sales executives
- Analysts across major firms slashed price targets, with Morgan Stanley reducing to $145, UBS to $225, and Mizuho to $185
Shares of Zscaler tumbled over 23% during Wednesday’s premarket session as investors reacted negatively to the cybersecurity firm’s conservative fourth-quarter projections, overshadowing an otherwise strong third-quarter performance.
The stock opened near $127 before the sharp decline erased significant recent appreciation in the share price.
For the third quarter, adjusted earnings per share reached $1.08, surpassing analyst expectations of $1.01. Top-line results climbed 25% from the prior-year period to $850.5 million, exceeding the Street’s $835.6 million projection.
However, on a GAAP basis, the company recorded a net loss of $13.9 million, expanding from the $4.1 million deficit reported in the same quarter last year.
Management increased its full-year revenue outlook to a range of $3.32–$3.33 billion, with adjusted EPS now expected between $4.10–$4.11. This represents an incremental improvement from previous guidance calling for $3.31–$3.32 billion in revenue and $3.99–$4.02 in earnings per share.
Yet the sell-off centered squarely on fourth-quarter projections. The company forecast Q4 revenue between $875M–$878M, falling marginally below the $878.6M analyst consensus. Meanwhile, Q4 EPS guidance of $1.08–$1.09 exceeded the $1.03 Street estimate.
CFO Kevin Rubin characterized the conservative stance as “prudent,” though the market showed clear disapproval.
Slowing Customer Acquisition Emerges as Concern
The more substantial worry centers on new customer additions — specifically, the deceleration in that metric.
During the earnings conference call, Rubin conceded that new logo acquisition had fallen short of internal expectations. “The area that we haven’t been performing as well as we’d like is new logo,” he admitted, identifying it as “a large priority.”
He further noted the company is adopting a “tempered view” regarding customer acquisition as it enters the upcoming fiscal year.
Zscaler outlined plans to intensify its focus on mid-tier enterprises with employee counts ranging from 2,000 to 10,000. The strategy also includes launching new customer acquisition incentives and deepening reliance on channel partnership networks.
Complicating matters further, two key sales leadership figures departed at quarter-end. Rubin specifically cited these exits as contributing factors to the cautious forward outlook.
Price Target Reductions Sweep Through Analyst Community
The investment community responded swiftly with widespread target price adjustments.
Morgan Stanley’s Meta Marshall lowered her price objective to $145 from $155 while maintaining an Equal Weight rating. Her April downgrade had already cited intensifying competitive pressures, and she cautioned that ZS would remain out of favor until its SecOps offering demonstrates stronger market adoption.
UBS reduced its target to $225 from $260. RBC Capital Markets trimmed to $200 from $205. Mizuho adjusted downward to $185 from $210. BMO Capital brought its target to $178 from $210.
Truist Securities cut to $200 from $250 while preserving its Buy recommendation. Stifel reduced to $175 from $180, also keeping a Buy rating, characterizing the disruption as “idiosyncratic” and attributing it to sales leadership transitions and unclear guidance around Red Canary assumptions.
Morgan Stanley highlighted increasing competitive threats from Palo Alto Networks, Netskope, and Cato Networks as an expanding challenge for the company.
Regarding expenses, Zscaler announced it’s expediting data center infrastructure investments to preempt escalating costs tied to AI-driven demand. Capital expenditure guidance was elevated from mid-single-digit to high-single-digit percentages of revenue.
The most optimistic analyst remains Cantor Fitzgerald’s Jonathan Ruykhaver, who maintained a Buy rating with a $300 price target — suggesting potential upside exceeding 136% from present trading levels.
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