ZS · Research
Zscaler Inspects 750 Billion Transactions a Day. After Stock Pay, Owners Lost $42.8M Last Year
Free cash flow was $779.1M in fiscal 2026. Stock pay was $821.9M. Organic growth slowed to 20%, acquisitions filled the gap, and the guide points to the high teens.
- Owner cash after all capex and stock pay
- -$42.8M
- Stock pay as a share of operating cash flow
- 72.8%
- Revenue growth excluding the Red Canary acquisition
- 20%
1. Verdict and what this piece answers
Verdict: watch. Zscaler shows $779.1M of free cash flow for fiscal 2026, 23% of revenue [2].
Counted our way, the owners got nothing. Owner cash, meaning operating cash flow of $1,129.7M less $277.3M of property and equipment and $73.2M of capitalized software, less $821.9M of stock pay, was -$42.8M for the year ended Jul 31, 2026, our calculation [2].
It was positive in the two prior years, $57.2M in fiscal 2024 and $65.3M in fiscal 2025, and negative at -$111.2M in fiscal 2023 [8]. Under our standard a base value needs three positive years, so none is set.
The question this piece answers is whether Zscaler's position, sitting inline on every connection its customers make, is turning into cash for outside owners. The answer so far is no, and fiscal 2026 moved the wrong way.
Stock pay rose 24%, spending on data centers and software almost doubled in the fourth quarter, and the company spent $918.1M of cash buying four companies, which lifted headline growth to 25% while the business it already owned grew 20% [2]. Management guides fiscal 2027 revenue growth of 16.6% to 17.5% with Red Canary now in both years [2].
Our view: Zscaler owns one of the best positions in security, the proxy in the middle of enterprise traffic, and superintelligence agents will need to pass through that kind of checkpoint. But the cash that position throws off is being paid to employees in stock and to sellers of acquired companies, and organic growth is slowing toward the high teens.
2. Rating metrics
| Metric | Value |
|---|---|
| R&D share of revenue | 26.9%, research and development expense of $903.4M, fiscal 2026, our calculation [1][8]. It grew 34% against 25% revenue growth |
| GAAP net margin | -1.9%, net loss of $63.2M on $3,352.5M of revenue, fiscal 2026, our calculation [2]. The loss widened from $41.5M, and it includes $136.1M of interest income on corporate cash [8] |
| API quality | 3 of 5, our scoring: documented REST APIs for ZIA and ZPA administration with OneAPI and published rate limits; no self-serve signup or public price list, since the product is sold through contracts and channel partners [1]; SDKs and Terraform providers exist but the developer ecosystem is small next to network peers |
| Toll-gate score | 1 of 4 pass, 2 partial, 1 fail (section 2b) |
2b. Thesis and the toll-gate test
Zscaler built a cloud that sits between a company's users and everything they reach: the internet, SaaS applications, private applications and now superintelligence models and agents. The 10-K says the platform processes over 750 billion transactions a day across more than 200 public data centers and serves users in over 185 countries [1].
Every one of those requests is inspected inline before it reaches its destination. The question is whether that checkpoint is a toll gate the company prices like one.
| Test | Result | Evidence |
|---|---|---|
| Owns the record | Partial | Zscaler holds the policy, traffic logs and threat data for every connection it brokers, and uses them across its whole customer base, blocking over nine billion threats and policy violations a day [1]. It does not hold the customer's business record; applications and data live elsewhere |
| Owns the connection | Pass | The Zero Trust Exchange is inline on every connection for ZIA and ZPA customers, brokering users, devices, workloads and agents to applications by identity rather than by network location [1]. Removing it means rerouting the whole company's traffic |
| Prices close to outcomes | Fail | Subscriptions run one to five years and are mostly non-cancelable, priced on users and modules [1]. Z-Flex lets customers draw products against a committed spend, which helps adoption but is still a budget, not a fee per transaction or per outcome [1] |
| R&D on the gate vs features | Partial | Core spending goes to the inline cloud and its inspection engines [1]. But the year's $957.7M of acquisition cash went to adjacent features: managed detection and response (Red Canary), browser security (SquareX), data security posture (Symmetry) and model testing (SPLX) [1], our calculation |
One pass, two partials and one fail. Zscaler owns the connection as well as any security company.
What it has not done is price that connection like a gate. Customers pay for seats and modules on multi-year contracts, so a doubling of agent traffic through the checkpoint raises Zscaler's data center bill before it raises revenue.
The cost line already shows it: data center and equipment costs rose $103.1M in fiscal 2026
3. Growth
| Measure | Value | Change |
|---|---|---|
| Fiscal 2026 revenue | $3,352.5M | +25% [2] |
| Fiscal 2026 revenue excluding Red Canary | $3,209M | +20% [2] |
| Q4 fiscal 2026 revenue | $898.2M | +25% [2] |
| Fiscal 2024 and 2025 revenue | $2,167.8M and $2,673.1M | +23% in fiscal 2025 [1] |
| Annual recurring revenue excluding Red Canary, Jul 31, 2026 | $3,630M | +20% [2] |
| Customers, Jul 31, 2026 | About 11,000 | about 9,400 a year earlier [1] |
| Deferred revenue, Jul 31, 2026 | $2,926M | +19% [2] |
| Q1 fiscal 2027 revenue guide | $935M to $939M | about +19% [2] |
| Fiscal 2027 revenue guide | $3,908M to $3,938M | +16.6% to +17.5% [2] |
Headline growth held at 25% for the year, but the acquired business did the lifting. Red Canary closed on Aug 1, 2025, the first day of the fiscal year, and brought $141M of annual recurring revenue [2].
Excluding it, revenue and annual recurring revenue each grew 20%, and net new annual recurring revenue grew 17% [2]. Fiscal 2025 grew 23% with no acquisition of that size [1].
The guide for fiscal 2027, the first year in which Red Canary sits in both periods, is 16.6% to 17.5% [2]. Organic growth has gone from 23% to 20% to a guided high teens in three years.
Customer counts rose to about 11,000 from about 9,400, but part of that is Red Canary's own base [1]. Zscaler serves over 40% of the Forbes Global 2000 and over 50% of the Fortune 500, and it says it supports over 4,600 of an estimated 20,000 organizations with more than 1,500 employees [1].
That is the room it points to. The 10-K does not disclose dollar-based net retention, so we cannot tell how much of the growth is existing customers buying more.
4. New products and how fast the company ships them
The platform has four pillars in the 10-K: Zero Trust SASE, security for superintelligence, Data Security and Agentic Security Operations [1]. The first is the core and the cash engine.
The other three are where the acquisitions went.
Zero Trust SASE. Zscaler Internet Access is a cloud proxy that decrypts and inspects traffic leaving the company, including TLS traffic, and Zscaler Private Access connects users to internal applications without putting them on the network [1].
Zero Trust Branch and Cloud extend the same model to offices, factories and cloud workloads, replacing MPLS lines, SD-WAN boxes and firewalls [1]. This is the product that makes Zscaler a checkpoint.
Its weakness is that it competes with the firewall and network vendors that sell the hardware it replaces, and with large clouds that bundle similar controls.
Security for superintelligence. This set discovers which superintelligence applications, models and agents a company is using, blocks prompt injection and data leaks, and governs what agents can reach [1].
Zscaler bought SPLX on Oct 31, 2025 for $40.6M of cash plus $16.6M of restricted stock to add model testing [1]. The pitch is that the proxy already sees every prompt leaving the company, so it can inspect them the way it inspects web traffic.
Data Security. Data loss prevention, SaaS posture, email and endpoint controls, and since May 27, 2026, Symmetry's data security posture management, bought for $152.9M of cash and $16.9M of restricted stock
5. Operations and execution
Zscaler runs its own cloud. Over 200 public data centers and thousands of private edge sites carry customer traffic [1].
That is an advantage, because latency and inspection quality are the product, and a cost, because traffic growth from agents and encrypted inspection lands on Zscaler's equipment before it lands on a customer invoice. Cost of revenue rose $159.5M, or 26%, in fiscal 2026, with $103.1M of that in data center and equipment costs [1].
GAAP gross margin held at 77% [2].
Capital spending is the change to watch. Purchases of property, equipment and other assets rose to $277.3M from $164.3M, and the fourth quarter alone took $199.8M against $60.0M a year earlier [2].
Including capitalized software, the fourth quarter was $218.5M against $78.7M, and free cash flow fell to $60.8M, 7% of revenue, from $171.9M [2]. The company describes the spending as support for the growth and expansion of its cloud platform [1].
It guides fiscal 2027 free cash flow at 23.0% to 23.5% of revenue, which implies spending stays higher than fiscal 2025 [2].
Sales and marketing is the largest cost, at $1,495.8M or 44.6% of revenue, up 19%
6. Owner cash
Free cash flow, as the company defines it, rose 7% to $779.1M [2]. Stock pay rose $160.6M, or 24%, to $821.9M, which is 24.5% of revenue and 72.8% of operating cash flow, our calculation [2].
Some of that is the price of acquisitions: acquisition-related stock pay and payroll taxes were $57.4M in fiscal 2026 against $33.1M [2]. Even excluding it, owner cash would have been only about $15M, our calculation.
Two items flatter operating cash flow. Interest income was $136.1M, earned on cash raised partly through convertible notes [8].
Deferred revenue added $379.9M of cash as customers prepaid [2]. Strip out interest, as our standard requires, and owner cash was about -$178.9M, our calculation.
Prepayments are a real strength of the model, but they turn into revenue that has to be served, so they are not owner cash.
The dilution shows up in the share count. Weighted basic shares rose to 160.2M from 154.4M, up 3.8% in a year, and the company bought back no stock [8]
7. Acquisitions in the last 24 months
Total cash of $957.7M and $91.1M of restricted stock in ten months, our calculation [1]. Net of cash acquired, the cash flow statement shows $918.1M [2].
Goodwill rose to $1,218.1M from $417.7M, and acquired intangibles to $214.4M from $47.3M [2]. In fiscal 2024 Zscaler bought Avalor for $256.7M of cash and Airgap Networks [1].
None of these deals used new debt. All of them were paid from the balance sheet built by the 2028 convertible notes and by prepayments.
8. Risks and catalysts
Risks. Organic growth: it is slowing from 23% to 20% to a guided high teens, and acquisitions are filling the gap [1][2].
Stock pay: it grew faster than revenue and erased owner cash [2]. Capital intensity: fourth-quarter spending more than doubled, and the 10-K warns that agent traffic will significantly increase load on the cloud [1][2].
Integration: four deals in one year, all excluded from the control audit [1]. Sales leadership: a new chief revenue officer started Oct 1, 2026, alongside a 3% workforce cut [3][4].
Competition: firewall vendors, cloud providers and endpoint security companies all sell into the same budgets, and Red Canary puts Zscaler head to head with endpoint leaders [1].
Catalysts: first quarter fiscal 2027 results, expected in late November 2026 (unconfirmed; the company had not announced the date as of Oct 31, 2026); restructuring charges in the first half of fiscal 2027 (confirmed)
9. Valuation anchor and balance sheet
Owner cash was positive in only two of the last four fiscal years and negative in the latest, so there is no valuation band and no base value [8]. The anchor to watch is a year in which owner cash, after interest income is removed, turns positive and stays there.
| Item | Jul 31, 2025 | Jul 31, 2026 |
|---|---|---|
| Cash and cash equivalents | $2,389.0M | $928.4M [2] |
| Short-term investments | $1,183.4M | $2,545.8M [2] |
| Convertible senior notes due 2028, net | $1,700.7M | $1,696.4M [2] |
| Deferred revenue, current and noncurrent | $2,468.0M | $2,925.8M [2] |
| Goodwill | $417.7M | $1,218.1M [2] |
| Total stockholders' equity | $1,799.3M | $2,598.3M [2] |
Cash and short-term investments of $3,474.2M exceed the $1,725.0M of 0% notes due Jul 15, 2028, our calculation [1][2]. The notes carry no interest, and the conversion conditions were not met in the fourth quarter [1].
Capped calls bought for $196.7M reduce dilution if they convert [2]. The balance sheet is sound.
The issue is not solvency but where the cash goes: in fiscal 2026 it went to acquisitions and servers, while stock pay covered the payroll.
10. Superintelligence angle
Tailwind for the position, headwind for the margin. Agents calling models, SaaS tools and internal systems at machine speed need a checkpoint that knows who they are and what they may reach, and Zscaler already brokers connections by identity rather than network location [1].
Chief executive Jay Chaudhry called agents the most significant opportunity in the company's history at the Oct 6 Investor Day [5]. The risk is the pricing.
Agent traffic is inspected on Zscaler's servers, and its contracts charge by user and module. Unless the company finds a way to bill for agents and transactions, more machine traffic means more data center cost per dollar of revenue.
11. Leadership and control
Jay Chaudhry founded Zscaler in 2007 and is chief executive officer and chairman; the 10-K names him as the executive the company depends on most [1]. He and his affiliates owned about 16.5% of the common stock at Jul 31, 2026, and officers, directors and 5% holders together owned about 39.7% [1].
Zscaler has one class of common stock, so his influence comes from ownership and the combined chair and chief executive roles, not from super-voting shares. There is no independent chair.
Kevin Rubin is chief financial officer under an offer letter dated Apr 23, 2025, and signed the fiscal 2026 10-K and the 8-Ks we cite [1][3]. Adam Geller is chief product officer, under an offer letter dated Aug 8, 2024 [1].
Ross Tackett became chief revenue officer on Oct 1, 2026, succeeding Mike Rich, who is staying as an advisor through Dec 31, 2026 and is expected to receive severance under the company's policy [4]. Raj Judge, executive vice president of corporate strategy, resigned as an officer and as a director on Apr 15, 2026, with his departure effective Jul 31, 2026; the filing states there was no disagreement with the company [6].
Robert Schlossman is chief legal officer [6]
12. Questions for the owner and predictions
Questions for the owner. First, will stock pay fall as a share of revenue in fiscal 2027, and will it grow slower than revenue in dollars?
Second, what is the fourth-quarter capital spending buying, and how much of it is capacity for agent traffic? Third, when will Zscaler price agents or transactions directly rather than seats and modules?
Fourth, what is organic growth once Red Canary laps, and what is net retention? Fifth, conviction on a 1 to 5 scale: our view is 3. The checkpoint is real and the balance sheet is sound, but owners were paid nothing last year and organic growth is slowing.
Predictions to register: first quarter fiscal 2027 revenue lands at or above $939M, the top of the guide (75%); fiscal 2027 stock pay exceeds $900M (70%); owner cash for fiscal 2027, as we define it, is below $100M (70%); Zscaler announces at least one more acquisition with cash consideration above $100M by Jul 31, 2027 (55%); Zscaler introduces pricing tied to agent count or transaction volume by Jul 31, 2027 (30%).
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