Usage grows fast, but costs and guidance weigh on outlook
- Zscaler is a cloud security company built around Zero Trust, a model that checks each user and device before access is allowed.
- The business is expanding beyond per-user seats, with non-seat metered usage now making up 30% of new and upsell contract value.
- Growth finished fiscal 2026 strong, but management guided for slower annual recurring revenue growth of 16% to 17% in fiscal 2027.
- Security for AI bookings increased more than 50% sequentially in the fourth quarter.
- Rising component costs, especially for memory, will keep capital spending high and pressure free cash flow in fiscal 2027.
Great market, messier setup
Zscaler has a real tailwind. More work apps live in the cloud, workers connect from many places, and AI can create new kinds of attacks. That makes the old castle-and-moat security model weaker. Zscaler sells a cloud platform that checks access every time, which fits this shift.
The better part of the story is that growth is spreading beyond the first products. Organic net new annual recurring revenue accelerated to 17% year over year in the fourth quarter of fiscal 2026. Security for AI bookings jumped more than 50% sequentially. These are signs that customers are buying more of the platform over time.
The harder part is the forward outlook. Management set a fiscal 2027 growth guide of 16% to 17%, which confirms a slowdown from the mid-20s growth seen in recent quarters. Higher memory costs will also keep capital spending high, acting as a drag on cash margins. A 3% workforce restructuring points to careful cost management as they reallocate resources toward AI.
The stock needs proof that new solutions like Agentic SecOps can offset customer churn from acquired businesses like Red Canary. It also needs proof that the recent sales leadership changes will not hurt close rates. Until then, the risk and reward are balanced.
Subscriptions and metered expansion
Zscaler makes most of its money by selling subscriptions to the Zscaler Zero Trust Exchange. Pricing is historically based on user seats. Contracts usually last one to three years, and revenue is counted over the life of the contract instead of all at once.
The model depends on a land-and-expand motion, and how customers expand is changing. While user seats are the core, Zscaler is successfully selling non-seat metered usage solutions for workloads and AI consumption. These metered solutions now deliver approximately 30% of new and upsell contract value.
This can be a powerful model because security software becomes hard to replace once it is built into a company network. But it also creates pressure. If customers stop expanding or choose a larger security bundle from a rival, growth can slow quickly.
Another pressure point is infrastructure cost. Free cash flow margins face headwinds in fiscal 2027 because higher memory pricing will force the company to spend more on data center capital expenditures. This keeps spending in the low teens as a percentage of revenue.
One platform, several bets
Zscaler Internet Access
ZIA helps companies secure employee traffic to the internet and cloud apps. It is one of the core user products inside the Zero Trust Users group.
Zscaler Private Access
ZPA controls access to private apps without putting users directly on the company network. It is often cross-sold to customers that already use ZIA.
Data Security Everywhere
This product family helps find and protect sensitive data. The company has noted strong continued momentum crossing the $500 million revenue mark.
Security for AI
This suite helps customers manage risks tied to AI use. Bookings increased more than 50% sequentially in the fourth quarter of fiscal 2026.
Agentic SecOps
This newer solution uses AI and telemetry to automate security operations. It builds on the Red Canary acquisition, but it must overcome high churn in that standalone business.
One segment, global revenue
Zscaler reports as one operating segment. For fiscal 2025, customers outside the United States made up about 49% of revenue, so the mix below uses geography rather than product lines.
What could break the thesis
Red Canary churn offsets growth
Medium impact · High oddsThe acquired Red Canary business is experiencing high churn. Management expects zero standalone net new revenue contribution from it in fiscal 2027. If the new Agentic SecOps platform fails to attract these users, that acquisition could become a drag on growth.
Cloud platform costs pressure cash flow
Medium impact · High oddsZscaler runs a large cloud security platform, making infrastructure spending critical. Management warned that higher component costs, especially for memory, will keep capital expenditures high into fiscal 2027. This acts as a drag on free cash flow margins.
Sales transition and restructuring
High impact · Medium oddsTwo sales leaders left after the third quarter of fiscal 2026, and the company is executing a 3% workforce reduction. The company is managing this transition and hired new enterprise reps, but leadership and staff changes can hurt close rates and sales productivity.
California software tax hits renewals
Low impact · High oddsCalifornia has enacted legislation that will subject certain software subscriptions to sales and use tax starting in January 2027. This could introduce pricing friction during renewals for California customers and raise internal costs.
Expansion becomes harder to measure
Medium impact · High oddsZscaler used to report dollar-based net retention, which shows whether existing customers spend more over time. The metric was 115% before the company stopped reporting it. Less disclosure makes it harder to judge the health of the land-and-expand motion.
In one breath
What does Zscaler actually do?
Zscaler sells cloud security software. Its platform checks users, devices, apps, and data before access is allowed, which is known as Zero Trust security.
How does Zscaler make money?
Most revenue comes from per-user subscriptions to its cloud platform. Contracts usually last one to three years, and Zscaler tries to grow each account by adding users and metered usage.
Why are investors worried about Zscaler?
Management gave a cautious fiscal 2027 growth view of 16% to 17% after recent sales leadership changes. Rising memory costs and a new 2027 California software tax are also expected to weigh on margins and pricing.
Is AI good or bad for Zscaler?
AI helps Zscaler because it creates new security problems that companies need to solve. Products like Security for AI are seeing fast bookings growth as customers try to secure their AI usage.
Sources and research notes
This page combines Finn's company research with public filings and other cited materials. The thesis is reviewed when material company information changes; Finn Scores use the latest available scoring data.
- Thesis reviewed
- September 13, 2026
- Score data
- September 27, 2026
- Reviewed by
- Shivam Bharuka
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