Zscaler cuts 3% of staff to fund AI sales push despite earnings beat

Key points

• Zscaler will lay off approximately 261 employees, or 3% of its 8,700-person workforce, to fund sales expansion.
• The company expects to spend $30 million to $33 million on severance for the cuts.
• Revenue for the quarter ended July 31 reached $898.2 million, beating estimates, while non-GAAP earnings per share hit $1.19.
• Zscaler plans to target enterprises with 2,000 to 10,000 users through third-party channel partners.
• Shares fell 2.14% in after-hours trading despite the positive financial results.

Background

Zscaler’s stock has declined 21% this year amid investor fears that AI could render certain software tools obsolete. While peers like CrowdStrike and Palo Alto Networks have avoided similar sentiment, Zscaler is actively repositioning its business model. Earlier market trends showed that cybersecurity firms with strong AI integration, such as Cisco, saw revenue growth despite stock volatility, highlighting the sector’s shift toward AI-driven infrastructure and consumption-based pricing.

How outlets are covering it

Barron’s framed the stock decline as a test of Zscaler’s ability to join the ranks of AI winners, noting that investors fear AI could obsolete traditional software tools. BankInfoSecurity emphasized the operational shift, highlighting CEO Jay Chaudhry’s focus on reallocating resources to 'dedicated new logo hunters' and channel partners to capture AI-driven security spending. Yahoo Finance questioned whether the undervaluation case remains compelling after the new guidance, suggesting the market is skeptical of the long-term impact of these strategic changes despite the short-term earnings beat.

Why it matters

Zscaler’s move signals a broader industry trend where cybersecurity firms are restructuring to prioritize AI-integrated, consumption-based revenue models over traditional per-user licenses. The layoffs indicate that companies are willing to sacrifice headcount for sales agility to capture emerging AI security budgets, potentially setting a precedent for other software firms facing similar AI-driven market pressures.

What to watch

Investors will watch Zscaler’s next quarter, ending October 31, for revenue between $935 million and $939 million and non-GAAP net income of $1.15 to $1.16 per share. The company’s success in expanding into mid-market enterprises through channel partners and its ability to convert AI-driven security spending into sustained revenue growth will be critical metrics for future performance.