Zscaler (ZS) Q1 2026: AI Security ARR Surges Past $400M, Accelerating Platform Adoption
Zscaler’s AI security business surpassed its FY26 target three quarters early, fueling broad-based acceleration across its platform pillars. The company’s Zero Trust and Data Security segments also delivered above-plan growth, with the ZFlex program emerging as a powerful driver of multi-module expansion and long-term visibility. With management signaling continued investment and margin discipline, Zscaler is positioning for sustained outperformance in a tightening cybersecurity landscape.
Summary
- AI Security Outpaces Expectations: Zscaler’s AI security ARR exceeded its FY26 goal, reinforcing product-market fit in a fast-evolving threat environment.
- Platform Expansion Drives Upsell: ZFlex program accelerated large, multi-module commitments, supporting deeper customer penetration and stickier contracts.
- Margin Discipline Amid Growth: Leadership balances aggressive innovation investment with stable operating margins, signaling confidence in long-term scalability.
Performance Analysis
Zscaler delivered 26% year-over-year revenue growth in Q1, with annual recurring revenue (ARR) reaching $3.2 billion and remaining performance obligations (RPO) up 35% to $5.9 billion. The Americas led with 58% of revenue, EMEA contributed 27%, and APJ delivered 15%. Each of Zscaler’s three growth pillars—AI Security, Zero Trust Everywhere, and Data Security Everywhere—saw ARR acceleration, with AI Security ARR alone growing over 80% year-over-year and surpassing $400 million, well ahead of the original FY26 target.
Gross margin held at 79.9%, a slight decrease from last year as the company prioritized rapid go-to-market for emerging products over immediate margin optimization. Operating margin expanded by 40 basis points year-over-year to 21.8%, near the high end of the long-term range. Free cash flow margin was a robust 52%, and Zscaler ended the quarter with $3.3 billion in cash and equivalents. The company closed Q1 with 698 customers generating over $1 million in ARR, underscoring deepening strategic relationships in enterprise accounts.
- Growth Pillar Acceleration: AI Security, Zero Trust, and Data Security all delivered faster ARR growth, confirming product-market fit and platform leverage.
- Margin Stability Amid Innovation: Gross margin ticked down as new modules ramped, but operating margin improved, reflecting disciplined investment.
- Customer Base Deepening: High-value customers ($1M+ ARR) increased, signaling ongoing enterprise wallet share gains.
The combination of platform breadth, cross-sell momentum, and disciplined cost structure supported both growth and profitability, with Zscaler exceeding internal expectations for organic business performance.
Executive Commentary
"ARR from these three growth pillars accelerated in the quarter. I'm particularly pleased with our AI security pillar, which grew over 80% year over year and has already exceeded our FY26 target of $400 million ARR, three quarters earlier than expected."
Jay Chowdhury, CEO
"We exceeded our growth targets in Q1 and operated at Rule of 78 for the quarter... As we look into the back half of the year, you will notice that there's margin expansion in the guide in the back half. We are orientated to growth, but you know that we're also very mindful of the financial model and operating margin."
Kevin Rubin, CFO
Strategic Positioning
1. AI Security as a Core Differentiator
Zscaler’s AI Security business, now exceeding $400 million in ARR, is redefining its competitive moat. The company’s portfolio spans AI asset discovery (AI SPM, security posture management), AI red teaming (continuous vulnerability testing), and AI guardrails (policy enforcement for safe AI use). Customers are adopting these solutions for both visibility and runtime protection, with Zscaler securing over 90 billion AI/ML transactions monthly. The SPLX acquisition further strengthens discovery and red teaming capabilities, while integration with the Zero Trust Exchange, Zscaler’s core secure connectivity platform, ensures unified policy enforcement across user and AI agent activity.
2. Zero Trust Everywhere—Beyond User Security
The Zero Trust Everywhere initiative has reached 450 enterprise customers, beating its FY26 target three quarters early. This expansion goes beyond user access to include branches, cloud workloads, and IoT, enabling customers to retire legacy firewalls, SD-WAN, and point solutions. The Zero Trust Branch and Zero Trust Cloud modules are seeing rapid uptake, with large-scale wins in healthcare and manufacturing. Management sees a multi-year runway, given penetration is only 10% of the enterprise-class customer base.
3. Data Security Consolidation
Data Security Everywhere ARR accelerated to $450 million, as customers consolidate point solutions for data discovery, classification, and loss prevention onto Zscaler’s unified platform. The company’s integration of data classification, posture management, and DLP (data loss prevention) modules is a key differentiator, enabling closed-loop detection and remediation, especially when combined with Red Canary’s threat intelligence and incident response capabilities.
4. ZFlex—A New Upsell Engine
The ZFlex program, allowing customers to pre-commit spend and flexibly activate modules, drove over $175 million in TCV and grew 70% quarter over quarter. This model shortens sales cycles, increases deal sizes, and locks in longer-term visibility, as customers can swap modules as needs evolve. ZFlex is now 20% of bookings and is credited with facilitating several eight-figure, multi-module expansions, especially in large enterprise accounts.
5. Innovation-Fueled Go-to-Market
Acquisitions (SPLX, Red Canary, Avalor) and internal R&D are fueling rapid product innovation, with new modules and integrations coming online across AI security, agentic operations (AI-powered SecOps and ITOps), and digital experience monitoring (ZDX). The unified platform approach is resonating with CIOs seeking both security and operational efficiency, with Zscaler positioned as a strategic partner in digital transformation and cloud migration initiatives (notably SAP Rise and Office 365 analogs).
Key Considerations
This quarter showcased Zscaler’s ability to convert platform breadth into tangible growth and margin leverage, while navigating a complex competitive and macro environment.
Key Considerations:
- AI Security as a Growth Engine: Surpassing the $400 million ARR mark well ahead of schedule validates demand and expands Zscaler’s addressable market.
- Cross-Sell and Upsell Momentum: ZFlex is driving larger, stickier deals, accelerating platform adoption and improving long-term revenue visibility.
- Margin Management Amid Expansion: Management is intentionally prioritizing speed to market for new modules, accepting near-term gross margin dilution for future scale and profitability.
- Competitive Moat in Platform Integration: The ability to unify zero trust, data security, and AI security under a single policy and analytics layer is a clear differentiator against point-product and legacy firewall competitors.
Risks
Macro IT budget constraints remain, though cybersecurity is less pressured than broader IT spend, according to management. Gross margins could face additional pressure as new products ramp, and competitive intensity from firewall and SASE vendors persists, even as Zscaler claims minimal impact from new entrants. Execution risk around integrating acquisitions and scaling new modules is present, though early signals are positive.
Forward Outlook
For Q2, Zscaler guided to:
- Revenue of $797 million to $799 million (23% YoY growth)
- Gross margin of approximately 80% and operating profit of $172 million to $174 million
For full-year 2026, management raised guidance:
- ARR of $3.698 billion to $3.718 billion (22.7% to 23.3% YoY growth)
- Revenue of $3.282 billion to $3.301 billion (22.8% to 23.5% YoY growth)
- Operating profit of $732 million to $740 million
- Free cash flow margin of 26.0% to 26.5%
Management cited continued platform adoption, strong ZFlex pipeline, and rapid growth in AI and data security modules as key tailwinds. Margin expansion is expected in the back half of the year as new modules scale.
- Visibility into future ARR improves with longer-term ZFlex contracts.
- Ongoing investment in innovation and go-to-market capacity will remain a priority.
Takeaways
Zscaler’s Q1 demonstrates that platform breadth, rapid innovation, and flexible commercial models are driving both growth and stickiness in a demanding enterprise security market.
- AI Security Outperformance: Early achievement of ARR targets confirms Zscaler’s leadership and first-mover advantage in AI-driven security.
- Platform Leverage and Upsell: ZFlex and cross-pillar selling are accelerating wallet share gains and long-term customer commitments.
- Watch for Margin Trajectory: Investors should monitor gross margin trends as new modules scale and Zscaler balances growth with profitability.
Conclusion
Zscaler’s early overachievement in AI security, combined with robust platform expansion and disciplined margin management, positions it as a standout in enterprise cybersecurity. The company’s ability to drive both growth and customer lock-in through innovation and flexible commercial models supports a durable long-term thesis, even as competitive and macro risks persist.
Industry Read-Through
Zscaler’s results reinforce the market shift toward unified security platforms, with AI and data security rapidly becoming core requirements for large enterprises. The success of flexible commercial models like ZFlex signals a broader industry move toward multi-module, pre-committed contracts to drive stickier, higher-value relationships. As AI adoption accelerates, vendors able to combine threat intelligence, policy enforcement, and data protection under a single architecture will gain share at the expense of point solutions and legacy firewall providers. The SAP Rise migration tailwind suggests further opportunity for cloud-first security architectures across the enterprise software landscape.