Zscaler's Strong Quarter Still Left Investors Waiting on 1 Key Signal

Zscaler beat fiscal fourth-quarter expectations, with revenue and annual recurring revenue both rising 25% year over year. Management said the sales leadership transition will play out in the first half of fiscal 2027, keeping some uncertainty around the outlook. AI security demand, wider margins and stronger guidance support the bull case, but expected growth deceleration remains a key risk.

Zscaler NASDAQ: ZS gave the market everything it could ask for in its fiscal fourth-quarter 2026 earnings report: outperformance, acceleration, wider margins, and strong guidance. The one thing it didn’t give was firm reassurance that the sales leadership transition was going smoothly. Execs noted the transition would play out in the first half of the year, but offered little color beyond that. The critical takeaway is that this is the catalyst for higher share prices, and news could come at any time.

Zscaler is not advancing as strongly as other cybersecurity stocks because of lost sales execs. While one was replaced early in the quarter, the loss led to cautious guidance, cautious analysts, and tepid stock price action. The upshot is that Zscaler, as the sector laggard with a catalyst ahead, is well positioned to advance aggressively once the headwind is removed. Until then, investors can focus on the results and price action, which underpin and reflect a market reversal.

Zscaler’s chart price action is bullish, reflecting a Double-Bottom reversal pattern. The only bad news is that the pattern has yet to be confirmed, but that is likely over the coming months. Signs of strength include the action itself, high volume on buying days, and strengthening MACD, which points to improving momentum—each upswing is a little stronger than the last and likely to strengthen again, given the strength of results and guidance. Critical target levels are near $158 and $195, with the $158 support target potentially tested before a fresh high is set. Technical triggers include confirmed support at the low end of the range and/or a clear break to fresh highs. Q4 results indicate the reversal will progress and new highs will be set.

Revenue grew by 24.9%, accelerating year-over-year (YOY) to $898.19 million to outpace consensus by over 230 basis points. Strength came from new clients, penetration, and AI demand, with Security for AI Solutions growing 50% sequentially. Annual recurring revenue, an indicator of future revenue, also grew 25% both quarter over quarter and year over year, pointing to sustained strength in the coming quarters.

Margin news aligns with the bullish outlook, with GAAP and non-GAAP margins improving at the gross and operating levels. Key details include narrowing losses and improving adjusted profitability, with non-GAAP operating margin up 220 basis points (bps) to 24.3%. Adjusted earnings per share (EPS) were also solid, up by 34% and 10 cents better than expected. The only negative is a rising share count, but the increase is marginal, linked to share-based compensation, and insufficient to offset the equity gains.

The balance sheet reflects the impact of capital expenditures (CapEx), with cash down YOY, but that is the worst of the news. The cash depletion is offset by increased inventory and receivables; current and total assets are up, and liabilities increase. The net impact was a 44% increase in shareholder equity and the expectation of ample future cash flow to sustain future improvement.