Zscaler Q2 Earnings Preview: A Deep Dive into Cloud Security and Strategic Growth#

As of Wednesday, February 26, 2025, ZS, a leader in cloud security, is navigating a landscape marked by both significant opportunities and notable challenges. This analysis provides a comprehensive intraday snapshot of the latest developments and corporate events affecting the company, drawing on verified, real-time data from Monexa AI and other reputable sources.

Zscaler's Q2 Earnings: What to Expect?#

Zscaler's Q2 earnings, expected in nine days according to Seeking Alpha, are a focal point for investors. The company's stock, currently priced at $197.42, has seen a year-to-date rally of +16%, prompting questions about whether it remains a viable buying opportunity, according to Zacks.com. With a market capitalization of $30.29 billion, Zscaler operates in the software infrastructure sector, a key area of technological growth (Monexa AI).

Revenue Projections and Growth Rate#

Analysts project a revenue average of $3.16 billion for fiscal year 2026 and an EPS average of $3.53 (Monexa AI). These estimates hinge on continued strong growth, propelled by the increasing adoption of cloud security solutions and Zscaler's leadership in Zero Trust Network Access (ZTNA). Zscaler's Q1 fiscal year 2025 results showed revenue growing +26% year-over-year to $628.0 million, with calculated billings growing +13% year-over-year to $516.7 million (Monexa AI). The growth rate of billings has slowed compared to revenue growth, making Q2 billings a critical metric to watch.

Billings and Deferred Revenue Analysis#

Calculated billings and deferred revenue are key indicators of future revenue. In Q1 2025, Zscaler's calculated billings grew +13% year-over-year, while deferred revenue grew +27% year-over-year to $1,783.7 million, according to Monexa AI. A slowdown in billings growth could signal potential challenges in securing new contracts or upselling existing customers. Deferred revenue, representing the value of services prepaid by customers, provides a buffer and visibility into future revenue streams. Monitoring these metrics will offer insights into Zscaler's sales execution and customer commitment.

Profitability and Expense Management#

Analysts are closely monitoring Zscaler's profitability and expense management. Although the company's operating margins have been negative, its non-GAAP net income for Q1 fiscal year 2025 was $124.3 million, compared to a GAAP net loss of $12.1 million (Monexa AI). Key expense items include sales and marketing, research and development, and general and administrative costs. Effective expense management is crucial for improving operating margins and achieving sustainable profitability.

The Asset Exposure Management Solution: A Game Changer?#

On February 25, 2025, Zscaler announced the introduction of Zscaler Asset Exposure Management, designed to advance how organizations manage their asset risk (GlobeNewswire). This solution, also known as Cyber Asset Attack Surface Management (CAASM), consolidates and correlates data from various sources to provide a precise inventory of assets and visibility into security gaps. It serves as a foundation for Zscaler's broader Continuous Threat Exposure Management (CTEM) offerings.

Features and Benefits of Asset Exposure Management#

The Zscaler Asset Exposure Management solution consolidates data from various sources, providing a single platform for asset risk management. It offers advanced analytics and reporting capabilities, enabling organizations to identify and prioritize vulnerabilities. By providing a comprehensive view of an organization's attack surface, it enables security teams to focus on the most critical areas.

Impact on Customer Acquisition and Retention#

This new offering is expected to positively impact Zscaler's customer acquisition and retention rates. By offering a more comprehensive and proactive security solution, Zscaler can attract new customers and retain existing ones. While specific data on the financial impact of AEM is not yet available, analysts expect it to contribute to Zscaler's overall revenue growth and market share.

EY Alliance: Expanding Reach and Capabilities#

Zscaler's strategic alliance with EY, announced on February 19, 2025, aims to enhance its cloud security offerings and simplify digital transformations for clients (PRNewswire). The alliance combines Zscaler's cloud security platform with EY's expertise in cybersecurity consulting and implementation. This collaboration aims to bring visibility and control in the cloud across users, data, and applications.

Synergies and Revenue Potential with EY#

The key synergies between Zscaler and EY lie in their complementary strengths. Zscaler provides the technology and platform for cloud security, while EY provides the consulting and implementation expertise. Together, they can offer clients a comprehensive solution that addresses their specific needs and challenges. This alliance is expected to generate significant revenue potential for both companies.

Expanding Reach and Capabilities#

This alliance is expected to have a positive impact on Zscaler's market reach and capabilities. By leveraging EY's global network and client relationships, Zscaler can expand its presence in new markets and industries. The partnership also enhances Zscaler's ability to offer a wider range of services, including cybersecurity consulting, risk management, and compliance.

Zscaler vs. The Competition: A Comparative Analysis#

The cloud security market is highly competitive, with Zscaler facing competition from companies such as Akamai, Palo Alto Networks, and Check Point. Zscaler's competitive advantage lies in its cloud-native architecture, its leadership in ZTNA, and its comprehensive security platform. However, it faces challenges in terms of competition, integration complexity, and cost.

Competitive Advantages and Disadvantages#

Compared to traditional security vendors, Zscaler's cloud-native architecture provides scalability, performance, and security advantages. However, integrating Zscaler with existing IT infrastructure can be complex, especially for organizations with legacy systems. The cost of Zscaler's solutions can also be a barrier for smaller organizations.

P/S Ratio and Other Valuation Metrics#

Zscaler's price-to-sales (P/S) ratio currently stands at 13.18 (Monexa AI), which is higher than the average for the software industry, indicating a premium valuation. However, this premium reflects investors' expectations for future growth. To maintain its competitive edge, Zscaler needs to continue innovating and expanding its product offerings.

Zscaler's Valuation: Justified or Overhyped?#

Zscaler's valuation has been a subject of debate among investors and analysts. The company's high growth rate and leadership in the cloud security market have justified a premium valuation compared to some of its peers. However, concerns have been raised about whether the company's valuation is justified given its profitability and the increasing competition in the market.

Key Risks and Challenges for Zscaler#

Zscaler faces a number of risks and challenges that could impact its future performance. These include regulatory risks, cybersecurity threats, and competition. Regulatory risks include changes in data privacy laws and regulations, which could impact Zscaler's ability to collect and use data. Cybersecurity threats include the increasing sophistication of cyberattacks, which could compromise Zscaler's systems and data.

The Future of Zscaler: Growth Drivers and Opportunities#

Zscaler has several growth drivers and opportunities that could fuel its future success. These include expansion into new markets and geographies, innovation in AI-driven security solutions, and strategic partnerships. The company is expanding its presence in international markets, such as Europe and Asia. This expansion is expected to drive revenue growth and increase Zscaler's market share.

Zero Trust Security and Zscaler's Role#

Zero Trust Security is a security framework based on the principle of "never trust, always verify." Zscaler is a leader in the Zero Trust Security market, offering a comprehensive platform that enables organizations to implement Zero Trust principles. The company's Zero Trust Exchange platform provides secure access to applications and data, regardless of location.

Cloud Security Market Trends and Zscaler#

The cloud security market is experiencing rapid growth, driven by the increasing adoption of cloud computing and the rising sophistication of cyber threats. Organizations are investing heavily in cloud security solutions to protect their applications, data, and infrastructure. Zscaler is a key player in this market, offering a comprehensive platform that addresses a wide range of security needs.

Zscaler's Customer Base and Market Penetration#

Understanding Zscaler's customer base and market penetration is essential for assessing its growth potential. The company serves customers in various industries and has a strong presence in North America and Europe, but it is expanding its presence in Asia and other regions.

Conclusion#

Zscaler is strategically positioned in the cloud security market, driven by its innovative solutions and key partnerships. While upcoming Q2 earnings and competitive pressures pose challenges, its focus on Zero Trust architecture and expansion into new markets offer substantial growth opportunities. Investors should monitor key metrics like billings growth and profitability to assess its long-term potential. The introduction of Asset Exposure Management and the alliance with EY are pivotal steps in Zscaler's evolution, enhancing its capabilities and market reach. ZS remains a compelling player in the evolving cybersecurity landscape, demanding close observation for sustained growth and innovation.