Zscaler, Inc. (NASDAQ:ZS) reported fiscal fourth-quarter GAAP revenue of $898.2 million, up 25%, while company-reported annual recurring revenue, or ARR, increased 25% to $3.771 billion. Zscaler, Inc. (NASDAQ:ZS) defines ARR as the next 12 months of revenue from subscription contracts, assuming contracts expiring during that period renew under existing terms.
The headline growth included Red Canary. Excluding the acquisition, ARR was $3.630 billion, up 20%, while net new ARR grew 17%. The results arrived alongside a restructuring plan that would reduce Zscaler, Inc.’s worldwide workforce by approximately 3% and generate $30 million to $33 million of charges, primarily for severance and benefits.
Bull Case
The acquisition-adjusted figures show demand. Total net new ARR reached $246 million and grew 24%, while management reported record large-deal activity, continued Z-Flex momentum and stronger contributions from products not priced by seat. Those products broaden the growth opportunity beyond employee access.
Profitability also improved on an adjusted basis. Non-GAAP operating margin reached 24%, up from 22% a year earlier. Zscaler, Inc. defines this measure as GAAP loss from operations excluding stock-based compensation and related payroll taxes, acquired-intangible amortization, restructuring and other charges, and acquisition-related expenses.
Operating cash flow increased to $279.3 million from $250.6 million. For fiscal 2026, company-defined non-GAAP free cash flow rose to $779.1 million from $726.7 million, even as the annual margin declined to 23% from 27%. Zscaler, Inc. defines free cash flow as operating cash flow minus purchases of property, equipment, and other assets and capitalized internal-use software.
Fiscal 2027 guidance calls for revenue growth of 16.6% to 17.5% and ARR growth of 16.6% to 17.4%. The projected free-cash-flow margin of 23.0% to 23.5% indicates that Zscaler, Inc. expects annual cash conversion to remain near its fiscal 2026 level despite continued investment.
Bear Case
The acquisition-adjusted growth rate is less impressive than the headline figure. Red Canary contributed $141 million of fourth-quarter ARR, reducing growth to 20% when excluded. Fiscal 2027 guidance points to further moderation, making sustained net new ARR growth increasingly important.
Quarterly cash conversion also weakened sharply. Free cash flow fell to $60.8 million from $171.9 million, and free-cash-flow margin dropped to 7% from 24%. Purchases of property, equipment and other assets plus capitalized internal-use software increased to $218.5 million from $78.7 million. The spending may support future platform capacity, but it raises the near-term capital intensity required to deliver growth.
The restructuring adds another execution test. Zscaler, Inc. expects to recognize most of the $30 million to $33 million of charges during the first half of fiscal 2027. Reallocating resources toward AI and growth initiatives could improve efficiency, but reducing headcount during a product expansion can strain sales execution, development schedules, and customer support.
Adjusted profitability also remains far above GAAP performance. Zscaler, Inc. recorded a $15.5 million GAAP operating loss, while stock-based compensation and related payroll taxes totaled $215.2 million in the quarter.
Hedge Fund Sentiment
The filings available so far reflect positions held before Zscaler, Inc. reported its fiscal fourth-quarter results and workforce reduction. Insider Monkey’s database showed 52 hedge funds holding Zscaler, Inc. at the end of 2Q2026, up from 46 funds three months earlier.
Conclusion
Zscaler, Inc. retains a credible growth-and-efficiency model, supported by 20% ARR growth excluding Red Canary and solid full-year cash generation. The next test is whether infrastructure investment and restructuring can sustain acquisition-adjusted growth without another sharp decline in quarterly cash conversion. Fiscal 2027 net new ARR, capital spending, and progress toward the guided free-cash-flow margin will determine whether the expansion is producing durable operating leverage.
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This article is originally published at Insider Monkey.
