Zscaler (ZS) heads into fiscal third-quarter earnings Tuesday night at the center of one of the market’s most important debates: is artificial intelligence going to supercharge cybersecurity spending — or cannibalize large portions of the traditional software industry? Investors appear to be increasingly leaning toward the bullish interpretation, at least for now. After getting crushed earlier this year alongside much of the software space, cybersecurity names have staged an impressive comeback in recent weeks as investors rotate back into higher-growth software tied directly to AI infrastructure and enterprise security. Shares of Zscaler have rallied roughly 60% from their April 10 low near $114, climbing back toward the $190 area as momentum improves across cybersecurity leaders including CrowdStrike (CRWD), Palo Alto Networks (PANW), and Cloudflare (NET). The key question heading into earnings is whether Zscaler can deliver enough evidence that AI is accelerating demand for its platform rather than disrupting its business model.
The backdrop for cybersecurity has improved materially over the past month. Investor fears earlier this year centered around the idea that increasingly autonomous AI agents and advanced large language models could reduce demand for seat-based SaaS software products. That concern hit software valuations hard across the board, with Zscaler at one point down more than 40% year-to-date. However, cybersecurity has increasingly emerged as one of the software segments viewed as more insulated — and potentially enhanced — by AI adoption. The logic is straightforward: as enterprises deploy AI systems and autonomous agents across their organizations, the attack surface expands dramatically, creating greater demand for cloud security, zero trust architecture, identity verification, and AI-specific security layers.
Management has leaned aggressively into that narrative. On the prior earnings call, CEO Jay Chaudhry repeatedly positioned Zscaler as “the security platform for the AI era,” arguing that AI adoption is creating “new vulnerabilities” and significantly increasing cyber threats in both sophistication and scale. The company has increasingly focused its messaging around three major growth pillars: AI Security, Zero Trust Everywhere, and Data Security Everywhere. Those themes will likely dominate Tuesday night’s conference call as investors attempt to determine whether Zscaler is becoming an AI beneficiary or simply another software company attempting to defend itself from disruption.
Wall Street is expecting fiscal third-quarter adjusted earnings per share of approximately $1.01 on revenue of roughly $835.7 million, representing year-over-year revenue growth of about 23.2%. While that remains strong growth by most software standards, it would represent a modest deceleration from the 26% revenue growth Zscaler delivered last quarter when it reported $816 million in revenue. The company has developed a strong reputation for outperforming expectations, however, beating both EPS and revenue estimates 100% of the time over the past two years. Analysts have also steadily become more constructive heading into the print, with more than 40 upward EPS revisions over the past three months compared to zero downward revisions.
The company’s prior quarter was broadly viewed as strong fundamentally even though the stock initially sold off following the release. Revenue rose 26% year-over-year while Annual Recurring Revenue grew 25% to approximately $3.4 billion. Remaining performance obligations, or RPO, climbed roughly 31% to $6.1 billion, which investors view as one of the most important forward-looking indicators for enterprise software demand. Non-GAAP gross margins held above 80%, while free cash flow margins reached nearly 21%. Management also highlighted that non-seat-based metered solutions accounted for more than one-quarter of new ACV and that ARR tied to those offerings grew more than 100% year-over-year.
That last metric may be one of the most important figures to watch on Tuesday night. Investors are increasingly trying to determine whether AI is causing enterprise software pricing models to shift away from traditional seat-based subscriptions toward consumption-based or metered architectures. Zscaler appears to be benefiting from that transition so far, with management repeatedly emphasizing that AI-driven traffic growth could become a meaningful revenue tailwind. During the prior quarter’s Q&A session, Chaudhry specifically noted that “the more agents, the more agentic traffic, the more value we deliver, and the better revenue opportunity for us.”
At the same time, there are still meaningful concerns around competition and execution. Morgan Stanley downgraded the stock earlier this year, warning that competition in secure access service edge, or SASE, has intensified as Palo Alto Networks, Cloudflare, Netskope, and traditional firewall vendors aggressively expand their offerings. BTIG also downgraded shares following field checks that suggested competitive pressures were rising and that Zscaler’s broader platform expansion story was not progressing as quickly as previously expected.
Another issue investors will watch closely is sales cycle behavior. Wedbush recently noted that the launch of Anthropic’s Mythos platform and Databricks’ Lakewatch products temporarily slowed cybersecurity purchasing decisions as customers paused to reevaluate budget allocations and platform strategies. Sales cycles reportedly expanded to roughly 102 days in April. However, Wedbush also argued that major platform players like Zscaler, CrowdStrike, and Palo Alto should ultimately benefit from platform consolidation trends rather than lose share to AI labs themselves.
Guidance will likely determine the stock reaction more than the quarter itself. Last quarter management guided fiscal third-quarter revenue to $834 million to $836 million alongside EPS of $1.00 to $1.01. Full-year guidance currently calls for ARR between $3.73 billion and $3.745 billion alongside revenue of $3.309 billion to $3.322 billion and EPS between $3.99 and $4.02. Investors will want to see whether those targets move higher again, particularly given the recent improvement in cybersecurity sentiment and the company’s strong pipeline commentary.
Technically, the stock has improved significantly. Shares reclaimed a major resistance zone between roughly $153 and $166 during the recent rally and are now attempting to challenge the psychologically important $200 area. Momentum indicators have also improved materially after spending much of late 2025 and early 2026 in bearish territory. Still, implied volatility remains elevated heading into earnings, with options markets pricing in a move of more than 12% following the report. With short interest still elevated and investor positioning remaining cautious despite the recent rally, another strong quarter and upbeat guidance could fuel a sharp squeeze higher. But if management fails to convincingly demonstrate that AI is accelerating rather than disrupting growth, the stock’s explosive rebound could quickly face renewed pressure.