Zscaler $ZS delivered impressive fiscal Q2 results, yet investors responded by sending shares lower. This reaction encapsulates the current state of software sector trading.
Zscaler, $ZS, Q2-26.
Rule-of-62, margins at highs.
Adj. EPS: $1.01
Revenue: $815.75M
Net Loss: $34.31M
ARR +25% YoY to $3.36B.
Non-GAAP operating margin 22% with strong FCF at 21%. pic.twitter.com/w3oYZsuyNq— EarningsTime (@Earnings_Time) February 26, 2026
The cloud security provider reported adjusted earnings of $1.01 per share, beating analyst expectations of $0.89 by a significant $0.12 margin. The company generated $815.8 million in revenue, representing 26% annual growth and exceeding consensus projections of $798 million.
Yet these strong results weren’t enough to lift the stock, which declined approximately 9% during Friday’s pre-market session.
The week proved volatile for ZS shareholders. Monday saw a 10% plunge amid AI-driven market turbulence. The following three trading days brought a 17% recovery before Thursday’s earnings release triggered another downturn.
Looking ahead to Q3 FY2026, Zscaler projects adjusted EPS between $1.00 and $1.01, comfortably above the $0.95 Wall Street consensus. The company anticipates revenue in the $834 million to $836 million range, modestly exceeding analyst estimates of $831.9 million.
Management elevated full-year FY2026 guidance, now targeting adjusted EPS of $3.99–$4.02 versus the previous $3.82 consensus. Annual revenue expectations were set at $3.309 billion to $3.322 billion, slightly above the $3.3 billion estimate.
CEO Jay Chaudhry emphasized the company’s strategic positioning around artificial intelligence, noting that enterprises accelerating AI deployment are leveraging Zscaler’s infrastructure to protect AI-powered and agentic systems.
Chaudhry positioned Zscaler as the “cybersecurity platform for the AI age,” emphasizing that the company’s Zero Trust architecture is ideally suited to manage the velocity and magnitude of AI and agentic workflows.
CFO Kevin Rubin highlighted an impressive operational efficiency metric. Zscaler is currently operating at a “Rule-of-62” on a fiscal year-to-date basis.
This metric blends revenue growth rate with profit margins. While the Rule-of-40 represents the baseline for healthy software businesses, Zscaler’s performance substantially exceeds this threshold.
Prior to the earnings release, ZS had already fallen 26% in 2026. The post-earnings selloff compounds the challenges facing a stock that has struggled to gain traction throughout the year.
This week’s price action illustrates the current mindset among software investors. A 10% decline, followed by a 17% recovery, then another sharp drop despite strong results—the market remains indecisive about proper valuations for these companies.
The Q3 forecast calling for $834–$836 million in revenue and EPS of $1.00–$1.01 continues to exceed analyst projections.
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