ZS • 10-Q • Q3 2025 • Positive

Zscaler Shows Strong Growth But Margins Compress Amid Strategic Investments

November 25, 2025 • 1 min read

TL;DR

Zscaler delivered 25.5% YoY revenue growth to $788.1M in Q3, though operating margins compressed 72bps to -4.6% as the company increased investments in R&D and sales capacity. Customer acquisition costs rose while gross margins remained stable at 76.6%. Strategic focus on AI/ML capabilities and international expansion drove a 30% increase in R&D spend. The company's competitive position remains strong but elevated investment cycle may pressure profitability through 2024.

Financial Performance Overview: Revenue grew 25.5% YoY to $788.1M, with deferred revenue reaching $2.35B (+18% YoY). Gross margins held steady at 76.6% despite increased infrastructure costs. Operating loss widened to $36.4M as R&D investments jumped 30% YoY to $200.5M. Sales & marketing expenses increased 22% YoY, reflecting expanded go-to-market initiatives. Cash position remains strong at $3.32B but saw sequential decline from $3.57B in Q2.
Strategic Initiatives and Operational Changes: Major strategic shifts include expanded AI/ML capabilities, evidenced by 30% R&D increase and acquisition-related goodwill growth to $994M from $418M. International expansion accelerated with EMEA showing strongest growth. New product launches in zero trust and cloud security verticals. Management signals continued high investment cycle through 2024 to capture market share and technological leadership.
Market Position and Competitive Dynamics: Maintained leadership in zero trust security market with expanded product portfolio. Growing competitive pressure from cloud hyperscalers and legacy security vendors. Strong customer retention but longer sales cycles noted in enterprise segment. Geographic expansion provides growth runway but increases operational complexity. Market share gains continue in core segments despite pricing pressure.
Operational Efficiency and Profitability: Operating leverage declined as investments outpaced revenue growth. Sales efficiency metrics show slight deterioration with CAC payback extending. Infrastructure optimization initiatives partially offset margin pressure. Deferred revenue growth suggests strong future revenue recognition but near-term profitability impacted by front-loaded costs. Management expects efficiency improvements in late 2024.
Growth Catalysts and Material Risks: Key growth drivers include AI-enhanced security offerings, international expansion, and cross-sell opportunities. Material risks include extended enterprise sales cycles, rising competition, and high customer acquisition costs. Macro headwinds may impact IT spending. Management focused on balancing growth investments with path to profitability. Product innovation and market expansion remain primary catalysts.

Revenue

$788.1M ( YoY, QoQ)

↑ +25.5%

Net Loss

$11.6M (improved from $12.1M YoY)

Rd Spend

$200.5M ( YoY) representing of revenue

↑ +30%

Gross Margin

(-10bps YoY)

↑ 76.6%

Free Cash Flow

Not directly provided in filing

Operating Margin

-4.6% (-72bps YoY)

Growth Indicators

$994.5M (increased from $417.7M)

Cash Position ↓$3.32B (-7% QoQ)

Deferred Revenue ↑$2.35B (+18% YoY)

Key Risks

Extended enterprise sales cycles impacting growth trajectory
Rising competition from cloud providers requires sustained high investment
Integration risks from recent acquisitions
International expansion increases operational complexity

Key Opportunities

AI-enhanced security offerings expand addressable market
International expansion provides significant growth runway
Cross-sell opportunities within existing customer base
Cloud transformation trends support long-term demand

Bottom Line

Zscaler's Q3 results reflect a company prioritizing market share gains and technological leadership over near-term profitability. While core metrics remain healthy, the elevated investment cycle pressures margins and may extend through 2024. Strong cash position and deferred revenue provide runway for strategic initiatives, but execution in enterprise segment and competitive dynamics require monitoring. Key success indicators include R&D efficiency, sales cycle duration, and international expansion progress.