Better Buy: Zscaler or Workday?
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Who's beating the market now? We've got ideas. You're listening to Motley Fool Money.
Welcome, Fools! I'm your host, Tim Beyers, and with me are longtime Fools, Austin Sharma and David Meyer. Fellas, how are we doing? Both fully caffeinated, good weekends?
Doing good. I'm only half caffeinated right now.
Dave, you got just a few seconds. Quaff it down. You got to get fully caffeinated before we roll. I'm on it.
Half caffeinated is better than uncaffeinated. Let's just say that. All right. Today, we'll be talking about fiscal Q1 2026 earnings from Zscaler and Q3 2026 earnings from Workday, tickers ZS and WDAY, and predicting which of these two will be the better performer over the next decade. We'll also tackle some mindset questions and a potential new feature we're calling Mindset Monday. We are going to ask for your feedback. We want to know if you want more mindset content. But we start with earnings, and let's quickly review what we saw last week starting with Zscaler. We had some good numbers, and I want you both to react to these. So Zscaler said they exceeded their expectations on both the top and bottom line.
They say they blew past what they call rule of 78. They're just making stuff up here. There's a rule of 40 number that is very common, which is growth compared to margins. If the growth is materially above 40 over the margin, that's a good sign for the company. They say, forget about 40, we're at 78. I think that's a little nonsensical, but revenue did grow 26% year-over-year. Annual recurring revenue was up 26% year-over-year. Their backlog now is $3.2 billion in annual recurring revenue, $1 billion of that are some very high-growth initiatives, including what they are calling AI security. They say their AI security ARR surpassed their fiscal year 2026 target of $400 million three-quarters early, and now they are anticipating they'll hit half a billion before fiscal 2026.
More AI, more need for security, zero trust, lots of companies in the market for this, 450 enterprises. Dave, let me start with you here. Would you make it these Zscaler results and does anything give you pause?
Nothing gives me pause. This is a company that, in my opinion, is doing very well. They're in a market that needs its technology prowess, that needs its products. We always have to remember, in the cybersecurity market, It's always growing, because there's always a bad actor on the other side inventing something new that companies like Zscaler need to figure out how to deal with, which is why I'm actually really excited about the company. Not only do they have their own expertise from all the years that they've been doing this, but now they have AI tools to complement their experience. Nothing gives me pause about what they said.
Asit, let's talk about the full-year forecast here. They are forecasting some slowing growth. Overall revenue growth for fiscal year 2026, the forecast is for 22.8% to 23.5% year-over-year growth. That's down from 26%. Any of the slowing growth concern you? There are still operating losses here? Or are you with Dave? Is this one that you find particularly compelling?
I think I'm with Dave, Tim. The slight slowdown doesn't concern me. That's more of the original core of this business, which is zero-trust architecture, slowing down a bit. But that, as a market, is still growing. Even if all the AI business hadn't evolved, for this company. Zero Trust would be a wide field to play in, and Zscaler is one of the leaders in providing this architecture. I do like the AI opportunity. Those numbers that you cited before represent 80% year-over-year growth. When you talk about that artificial intelligence annualized recurring revenue, Zscaler was very early to call out the potential dangers of all of us using so much artificial intelligence. They were early on the idea of prompt injection, that bad actors could take over prompts.
They were early on the idea that agents, which are the theme of the day, might not always be good actors. They could be taken over by bad actors.
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