Source: Motley Fool transcript
Jay Chaudhry, Chairman & CEO: Thanks, Kim. And thanks to everyone for joining us today. We delivered strong Q3 results. ARR grew 25%. And non-GAAP operating margin hit an all-time high at 23%. AI is changing the nature of cybersecurity in real time. And Zscaler is the cybersecurity platform for the AI era. This is evident in our results and the reason we are so confident in our long-term potential. We offer the industry's only complete Zero Trust SASE solution, a singular Zero Trust platform across users, across cloud workloads, and across branches.
Our architecture is purpose built to address the limitations of firewall-based SASE solutions. First, we hide applications and data behind our zero trust exchange, making them invisible from the Internet and eliminating the attack surface. An attacker cannot breach what it cannot reach. Second, we eliminate lateral movement of attackers with our zero trust architecture. Finally, scale matters. Our cloud native zero trust exchange is the largest distributed inline security platform in the world, spanning 160 public exchanges and processing more than 500 billion transactions per day.
We expect it will not be long before millions of AI agents have access to organizations' mission-critical applications and sensitive data. Soon, AI agents will be the weakest link in cybersecurity, because they operate at far greater speed and have far less oversight. New powerful frontier AI models like Meta's are finding security vulnerabilities in software at machine speed, multiplying unremediated vulnerabilities by as much as 10x.
We provide the two most important defenses against these vulnerabilities: hiding applications from attackers, and eliminating lateral movement at scale. We are integrating its access graph technology (Symmetry Systems) with our zero trust exchange. We are also partnering with Anthropic on Project Glasswing and with OpenAI as part of its Daybreak program (formerly known as Trusted Access for Cyber).
We continue to deepen our partnership with global system integrators (GSIs). We recently announced Project AI Guardian, a strategic collaboration with key GSI partners to extend the Zero Trust architecture to AI assets including AI agents. For fiscal 26 year-to-date, we transacted approximately $900 million in TCV through our cloud marketplaces, more than doubled year over year.
AI Protect bookings crossed $100 million over the past 12 months. Data security crossed $500 million ARR, up over 30% year over year. During Q3, we signed the largest branch deal in Zscaler history — an 8-figure upsell with a leading healthcare system to deploy our unified zero trust branch solution across 2,000 sites. Zero Trust Branch ARR has approximately tripled year over year. We exited Q3 with more than 700 Trust Everywhere enterprises, versus over 550 in Q2.
Kevin Rubin, CFO: We delivered strong Q3 26 results, growing revenue 25% while investing with discipline. Year-to-date with 26% revenue growth and a 29% free cash flow margin, we achieved Rule of 55 performance. Our Q3 26 net new ARR was $166 million, up 24%, bringing total ARR to $3.5 billion, up 25% year over year. Excluding the contribution from our acquisition of Red Canary, net new ARR was $153 million, up 14%, and total ARR was up 21%. Red Canary exited Q3 with $127 million of ARR.
Revenue of $850 million grew 25% year over year and 4% sequentially, exceeding the high end of our guidance. We closed Q3 with 748 customers generating more than $1 million of ARR and 4,000 customers exceeding $100,000 of ARR, growing 18% and 19% year over year, respectively. RPO of approximately $6.5 billion grew approximately 30%, with approximately 46% classified as current RPO.
Z-Flex generated just over $480 million in TCV, up more than 60% quarter over quarter. We have delivered over $1 billion in Z-Flex TCV over the last 12 months in an average 4-year term.
Non-GAAP gross margin was 80.7% compared to 80.3% a year ago. Non-GAAP operating income of $196 million grew 34% compared to $147 million last year. Non-GAAP operating margin of 23% increased 140 basis points year over year. We ended the quarter with $3.5 billion in cash and short-term investments, and $1.7 billion of debt. In Q3, we generated $198 million in operating cash flow, and CapEx was $42 million or 5% of revenue — a free cash flow margin of 16% this quarter, and 29% year-to-date.
On increasing memory, storage, and processor prices: we put through a price increase on our branch appliance earlier this calendar year. We expect higher CapEx in Q4, taking fiscal 2026 CapEx to the high single digits as a percentage of revenue, up from our prior expectation of mid-single digits. For fiscal 27, we expect CapEx as a percentage of revenue to increase up to 200 basis points compared to fiscal 26 levels.
For Q4, we expect revenue of $875 million to $878 million, reflecting approximately 22% year-over-year growth. Gross margin of approximately 80%, operating profit of $206 million to $208 million, EPS of approximately $1.08 to $1.09 per share. For the full year fiscal 26, we expect ARR of $3.74 billion to $3.75 billion (approximately 24% growth), revenue of $3.33 billion to $3.34 billion (24.6-24.7% growth), operating profit of $755 million to $757 million, EPS of $4.10 to $4.11, and free cash flow margin of approximately 22.8% to 23.3%.
For fiscal 27, our view is for total ARR and revenue growth of 16% to 17%, reflecting a tempered view on new logos and Red Canary pace of uptake.