Zscaler reports strong Q2 2025 earnings, with billings and revenue growth
From Nasdaq.: 2025-03-05 21:45:13
Zscaler (NASDAQ: ZS) held its Q2 2025 earnings call on March 5th. The company reported strong results, with billings accelerating and revenue growing by 23% year over year. Annual recurring revenue (ARR) reached over $2.7 billion, with a net retention rate (NRR) of 115%. Operating profit grew by 36%, driving a 2 percentage point improvement in operating margin to nearly 22%. Zscaler’s zero trust architecture continues to lead the industry, providing secure access to applications and reducing the risk of cyberattacks. The company aims to achieve $3 billion or more in ARR by the end of the fiscal year.
The company is attending several upcoming conferences, including the Morgan Stanley TMT Conference and the Stifel Technology Conference. With a growing pipeline and improved sales productivity, Zscaler is positioned for continued success. Zscaler is capitalizing on the opportunity of the refresh cycle with campaigns to promote zero trust everywhere. They have already converted over 130 enterprises to this approach and aim to triple that number in the next 18 months. The company’s zero trust branch solution is gaining popularity, with a Global 2000 manufacturing customer making a significant purchase. Zscaler’s data protection pillar also experienced over 40% year over year growth, driven by consolidation of point products and operational simplicity. The company is expanding its AI offerings, with AI analytics solutions like Risk360 driving strong growth and doubling ACV year over year. Zscaler’s co-founder Phil will lead AI innovations to drive advancements in agentic AI. The release of DeepSeek-R1 highlights new model training capabilities. Zscaler is well-positioned to protect customers with the rapid adoption of AI in every aspect of life. Zscaler has seen increased engagement with global system integrators, closing deals with top partners like Cognizant and Microsoft for large organizations.
In the federal vertical, Zscaler offers better security at lower costs, benefiting from government efficiency measures. Zscaler landed deals with nearly all cabinet level federal agencies and continues to invest in growing public sector practices. Revenue for Q2 was $648 million, exceeding guidance with a 23% increase year over year.
ARR surpassed $2.7 billion, with 620 customers over $1 million in ARR. Total billings grew 18% year over year to $743 million. Zscaler expects revenue of $665 million to $667 million for Q3, reflecting 20% to 21% year-over-year growth. Gross margins are expected to be around 80%. The company plans to optimize new products for margins as they scale. Operating profit expected to be in the range of $140 million to $142 million, with revenue projected to be in the range of $2.64 billion to $2.654 billion for Q3. The CEO highlighted the importance of ZIA and the broader platform products, with 57% of customers on the zero trust branch being new logo customers. The go-to-market transformation is showing positive results, with strong pipeline growth and increased engagements with C-level in large enterprises. The company remains confident in its guidance and pipeline visibility for future growth. Global system integrators are playing a crucial role in driving the business forward. Zscaler reports a 6x upsell opportunity within its installed base, with GSIs playing a pivotal role in simplifying processes for customers. Zero trust branch initiative gains traction with 96% of CXOs ready to embrace it. NRR improves to 115%, with upsells exceeding 65% expected. An eight-figure APAC government deal showcases the importance of zero trust for governments. Zscaler engaged with other countries for similar opportunities, but government deals can be complex. ZDX platform offers flexibility and choice for customers in data protection and agentic utilization. Data classification is a challenging task, but AI technology is making it easier. Zscaler uses AI to classify data for policy enforcement, whether it’s internet traffic or data sitting in a drive or share point. Their data protection solution has seen a 40% year-over-year growth in ACV. They offer a comprehensive approach to data security, including RASP and SaaS applications, DSPM for cloud data, and endpoint data security for emails using a single policy engine.
Zscaler is focused on larger enterprises, with over 130 adopting their zero trust everywhere campaign. They aim to triple this number in the next 18 months. The company is seeing increased interest in zero trust cybersecurity due to cost-saving opportunities. By offering business-ready cases for CFO approval and emphasizing cost reduction, Zscaler is driving their pipeline and closing deals successfully, with the help of GSIs as partners. Zscaler executives discuss the company’s position for the second half, highlighting a strong pipeline and sales productivity. Despite uncertainties, they feel well-positioned with product demand and presence in top agencies. Tariffs are not expected to impact the company significantly at this time. Analysts inquire about sales productivity and billings guidance for the future, with expectations of continued growth. Zscaler’s role in securing AI agent communication and pricing evolution is emphasized, with plans to enhance value for customers. The company’s focus on branch solutions as a firewall replacement driver for large enterprises is highlighted, aiming to simplify access to applications. Summary:
The company is focusing on replacing existing firewalls and routers with their zero trust branch and zero trust cloud solutions for customers, targeting primarily branch offices. They engage with customers through marketing campaigns and account-based teams, resulting in a 57% increase in new customer acquisition. The CEO explains that their competition lies in legacy firewall vendors, NAC vendors, and more. Analysts question the concept of zero trust and its impact on the competitive landscape. The company sees potential for growth through upselling to existing customers and targeting new customer opportunities, with a focus on both new logos and upsell opportunities. Zscaler’s Chief Financial Officer, Remo Canessa, highlights a 6x opportunity in the user base, with over 35% penetration in the Global 2000 and over 45% in the Fortune 500. The company expects a 65% upsell in the fiscal year, focusing on increasing penetration in these key markets. The CEO, Jagtar Singh Chaudhry, discusses the importance of AI in enhancing solutions and products, leveraging data to power AI engines for new products like breach prediction and security operations. Zscaler aims to combine zero trust exchange with AI to offer compelling security solutions to customers.
Analyst Keith Bachman questions Jay Chaudhry on AI’s impact on competitive positioning and Zscaler’s product strategy. Chaudhry emphasizes the importance of data in powering AI solutions and highlights the development of new products like Unified Vulnerability Management and asset risk management. Zscaler aims to use AI to enhance digital experiences and address data protection concerns, offering solutions for securing public and private AI applications. The company sees the combination of zero trust exchange and AI as a compelling approach to security and data protection. 1. Zscaler stock rises 10% after positive earnings report. The cybersecurity company reported a 15% increase in revenue and beat earnings estimates.
2. Nasdaq hits record high as tech stocks surge. The index closed at 15,000 for the first time, driven by strong performances from big tech companies like Apple and Amazon.
3. Unemployment rate drops to 5.2% as job market continues to recover. The latest report shows 235,000 jobs added in August, exceeding expectations.
Read more at Nasdaq.: Zscaler (ZS) Q2 2025 Earnings Call Transcript