Zscaler $ZS drops 21% as FY26 free-cash-flow margin guide is cut

Zscaler $ZS dropped more than 21% in premarket trading on May 27 after its fiscal third-quarter beat was outweighed by guidance details. The company reported revenue of $850.5M, up 25% year over year, and non-GAAP EPS of $1.08, up 28%, according to its May 26 earnings release. Investor's Business Daily reported that the selloff followed revenue guidance below expectations and sales-organization changes.

The strongest number in the release was growth, not the share reaction. Zscaler said annual recurring revenue should reach $3.740B to $3.749B for fiscal 2026, about 24% growth, while full-year revenue guidance moved to $3.3295B to $3.3325B, or 24.6% to 24.7% growth. Non-GAAP operating income guidance also rose to $755M to $757M.

The pressure point was cash conversion. Management cut the expected free-cash-flow margin to 22.8% to 23.3%, down from the prior 26.5% to 27% range, citing capital expenditure in the high single digits as a percentage of revenue. Q4 revenue guidance of $875M to $878M implies roughly 22% growth, a slower pace than the quarter just reported.

For cybersecurity investors, the read-through is narrow but important: large software companies can still clear near-term revenue and EPS estimates while being penalized for next-quarter deceleration and lower cash-flow quality. CrowdStrike, Palo Alto Networks and other security peers will be watched for similar signs in ARR, billings, and capex intensity.

The next checkpoint is Zscaler's Q4 execution against the $875M to $878M revenue range and whether the company can restore free-cash-flow margin after the current investment cycle.

Not investment advice. Verify all figures with primary sources before acting.