Sometimes beating expectations isn't enough. Zscaler Inc. (ZS) proved that on Wednesday when shares tumbled in early trading despite the cybersecurity company reporting fiscal first-quarter earnings that topped Wall Street forecasts.

The problem? Investors wanted answers about Red Canary, and management wasn't saying much.

What the Analysts Are Saying

The analyst community had mixed reactions to the results. Needham analyst Mike Cikos maintained a Buy rating but trimmed his price target from $350 to $310. RBC Capital Markets analyst Matthew Hedberg kept an Outperform rating with a $366 target, while BTIG's Gray Powell and Rosenblatt Securities' Catharine Trebnick both reaffirmed Buy ratings with $365 price targets. Guggenheim Securities analyst John DiFucci stuck with a Neutral rating.

The Red Canary Mystery

Here's where things get interesting. Zscaler's annual recurring revenue climbed 26% year-over-year to $3.204 billion, exceeding consensus estimates by $22 million. Solid numbers, right? But then management raised fiscal 2026 guidance by only $21 million at the midpoint.

That struck Cikos as "underwhelming," particularly given the 47.8% growth in net new ARR during the first half of the fiscal year. Making matters worse, management wouldn't specify how much the Red Canary acquisition actually contributed to ARR. "We believe this was further exacerbated by management failing to quantify ARR contribution from the Red Canary acquisition," he noted.

Hedberg from RBC Capital observed that while the 26% revenue growth and 30% billings growth were strong, and ARR growth accelerated from 22% in the prior quarter, something was missing. "The acceleration was a positive, but our sense is investors were looking for more color around the source of upside between the organic business and Red Canary," he explained. The math suggested potential deceleration in net new ARR growth ahead.

Parsing the Numbers

Powell at BTIG did some detective work. Excluding Red Canary, Zscaler added $104 million in net new ARR, topping Street estimates of $86 million. That's good news, though Powell expected the upside to be even larger based on historical patterns and "what we thought were normal sequential trends and the historical ratio of revenue to ARR."

Management indicated the full-year guidance increase came mainly from stronger organic growth in the core business. Powell pointed out that bears might grumble about the ARR upside, but Zscaler's total revenue beat was $15 million for the quarter. That compares favorably to "an average $13MM beat the prior three quarters."

The Bright Spots

Trebnick from Rosenblatt saw a "healthy start" to the fiscal year, with 25% year-over-year revenue growth and accelerating ARR growth, both ahead of expectations. The projected moderation in the fiscal second quarter "is largely attributed to a mix shift toward larger enterprise multimodule deals and ramp time for newer growth vectors," she noted.

One standout performer: AI Security ARR grew more than 80% year-over-year, surpassing $400 million. That prompted management to raise the full-year target above $500 million, which Trebnick called "a signal of the product velocity uptake."

DiFucci from Guggenheim got some additional clarity on callbacks with management, learning that Red Canary didn't contribute materially to either ARR or revenue. Management said organic growth exceeded internal expectations and matched the previous fiscal quarter's roughly 22% year-over-year growth. Running the numbers, that suggests Red Canary contributed approximately $92.7 million to ARR.

The Market's Verdict

Despite the solid underlying results, investors weren't impressed. Shares of Zscaler declined 10.7% to $258.52 at the time of publication on Wednesday. The market's message was clear: transparency matters, especially when you've just made an acquisition and investors are trying to figure out what's organic growth and what's been bought.