Zscaler's RPO Growth Reinforces Backlog Visibility, But Execution and Profitability Concerns Persist

What happened

A recent article highlights Zscaler's 31% increase in remaining performance obligations (RPO) to $6.1 billion, driven by large deals and multi-year contracts, which it frames as a sign of strong future demand. This aligns with the DeepValue report's emphasis on RPO as a critical forward indicator, especially after Zscaler discontinued calculated billings disclosure in FY26. However, beyond the positive spin, the report notes that RPO's 12-month recognition share holding at 47% is crucial for near-term revenue conversion, and any deterioration could signal demand issues. Moreover, Zscaler's persistent GAAP operating losses at 6% of revenue and high stock-based compensation limit per-share value capture, requiring scrutiny of whether growth translates to profitability. Thus, while the RPO update supports the investment thesis focused on backlog visibility, it does not mitigate the need for ongoing monitoring of conversion rates and operational efficiency improvements.

Implication

Zscaler's 31% RPO increase to $6.1B suggests robust deal activity, supporting the thesis that backlog metrics can drive a sentiment reset over the next 6-12 months. However, with 47% of RPO due within 12 months, investors should watch for any decline in this share, which could indicate weaker near-term revenue conversion and trigger sell-offs. The DeepValue report underscores that deferred revenue growth must stay near +25% YoY to maintain forward coverage, and any slowdown here would be a thesis breaker. Additionally, GAAP operating losses at 6% of revenue and SBC of $216.6M in Q2 FY26 need to improve for sustainable value creation, as they cap multiple expansion. Therefore, while the RPO data is encouraging, it reinforces rather than resolves the execution risks, necessitating close tracking of quarterly updates on ARR trajectory and non-GAAP to GAAP gap narrowing.

Thesis delta

The new article confirms the RPO strength central to the DeepValue thesis, which views backlog visibility as a key catalyst for sentiment reset and potential re-rating. No material shift in the thesis is indicated; it remains contingent on sustained RPO growth, a stable 12-month recognition share, and improvement in GAAP profitability metrics. Investors should continue to assess the thesis based on upcoming quarterly reports for signs of operational leverage and conversion consistency.