Palo Alto Networks, Inc. (PANW) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary indicates strong financial performance with significant growth in SASE and NGS ARR, and positive market trends in AI and quantum security. The Q&A highlights management's strategic approach to AI and acquisitions, with positive analyst sentiment. Although some ambiguity exists in ARR contributions, the overall outlook is optimistic with growth in key areas and strategic acquisitions. The absence of major negative factors and the focus on innovation and integration suggest a likely positive stock price movement.
Key Financial Performance
NGS ARR $6.33 billion, up 33% year-over-year. This includes a $200 million contribution from the Chronosphere acquisition. On an organic basis, NGS ARR was up 28% year-over-year. Growth was driven by acceleration in SASE and software firewall ARR, alongside continued momentum in XSIAM.
Remaining Performance Obligation (RPO) $16.0 billion, up 23% year-over-year. This includes approximately $150 million of RPO from the Chronosphere acquisition. Current RPO was $7.1 billion, representing 18% growth.
Total Revenue $2.59 billion, up 15% year-over-year. Product revenue was up 22%, with 45% of product revenue coming from software form factors over the trailing 12 months, up from 38% in the prior year. Services revenue grew slightly above 13%, with subscription revenue up 14% and support revenue up 12%.
Operating Margin 30.3%, a 190 basis point expansion year-over-year. This reflects consistent scale and efficiency across all operating expense line items.
Diluted Non-GAAP EPS $1.03, above the high end of guidance.
Adjusted Free Cash Flow $502 million for Q2. On a trailing 12-month basis, adjusted non-GAAP free cash flow was $3.75 billion, representing a margin of 37.9%.
Cash and Cash Equivalents $7.9 billion, reflecting a $2.6 billion cash consideration for the Chronosphere acquisition.
SASE Business ARR Surpassed $1.5 billion, growing approximately 40% year-over-year. This solidifies Palo Alto Networks' position as the fastest-growing SASE provider at scale.
XSIAM ARR Surpassed $0.5 billion, with almost 150 new customers in Q2, bringing the total base to over 600. Customers are achieving mean time to remediation of less than 10 minutes in over 60% of deployments.
Prisma AIRS Over 100 customers by the end of Q2, with rapid scaling driven by increased AI deployments.
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Operating Highlights
NGS ARR: Up 28% year-over-year, driven by strong demand for cybersecurity and platformization strategy.
Prisma AIRS: Rapid scaling with over 100 customers ending Q2.
XSIAM: Surpassed $0.5 billion ARR milestone with over 600 customers.
Secure Browser: Accelerating SASE business with over 9 million licenses sold to date.
SASE Business: Surpassed $1.5 billion ARR milestone, growing approximately 40% year-on-year.
Chronosphere Acquisition: Signed a multiyear 9-figure expansion deal with a leading AI model provider, generating approximately $200 million in ARR.
CyberArk Acquisition: Closed acquisition, aligning go-to-market engines and innovation roadmap to address identity security.
Operating Margin: Achieved 30%+ operating margin for the third consecutive quarter.
Product Revenue: Up 22%, driven by strong demand for software firewalls and hardware adoption.
Services Revenue: Grew slightly above 13%, with subscription revenue up 14%.
AI Security: Focused on securing AI deployments with Prisma AIRS and acquiring Koi to enhance endpoint capabilities.
Platformization Strategy: Continued execution with approximately 110 net new platformizations in Q2, bringing total to 1,550.
Identity Security: Building a next-generation identity security platform post-CyberArk acquisition.
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Risk or Challenges
AI adoption and security risks: As AI becomes more pervasive across enterprises, it expands the attack surface area, introducing new classes of risks such as more agents, infrastructure, machine-to-machine activity, and potential breaches due to gaps in visibility and controls.
Fragmented security systems: A fragmented defense of disparate products is no longer viable as adversaries are moving at machine speed, increasing the risk of breaches.
End-to-end attack speed: End-to-end attacks are now 4x faster than a year ago, with nearly 25% of cases involving data exfiltration in under an hour, highlighting the need for real-time security measures.
Supply chain risks: Marginal impact on product costs due to higher memory and storage pricing, which could affect profitability.
Post-quantum security threats: Adversaries are using a 'harvest now, decrypt later' strategy, stealing encrypted data today to break it in the future, necessitating preparation for post-quantum security challenges.
AI-driven endpoint threats: The rise of AI agents and autonomous software introduces a significant unmanaged attack surface, including browser extensions, plug-ins, and ephemeral code that bypasses standard security controls.
Integration risks from acquisitions: The integration of recent acquisitions (CyberArk and Chronosphere) poses challenges in aligning platforms, reporting structures, and operating rhythms, which could disrupt business momentum.
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Guidance & Outlook
NGS ARR: Expected to be in the range of $7.94 billion to $7.96 billion for Q3 2026, an increase of 56%, and $8.52 billion to $8.62 billion for fiscal year 2026, an increase of 53% to 54%. This includes contributions from M&A.
Remaining Performance Obligation (RPO): Expected to be $17.85 billion to $17.95 billion for Q3 2026, an increase of 32% to 33%, and $20.2 billion to $20.3 billion for fiscal year 2026, an increase of 28%. Includes contributions from M&A.
Revenue: Projected to be $2.941 billion to $2.945 billion for Q3 2026, an increase of 28% to 29%, and $11.28 billion to $11.31 billion for fiscal year 2026, an increase of 22% to 23%. Includes contributions from M&A.
Operating Margins: Expected to be in the range of 28.5% to 29% for fiscal year 2026.
Diluted Non-GAAP EPS: Projected to be $0.78 to $0.80 for Q3 2026 and $3.65 to $3.70 for fiscal year 2026.
Adjusted Free Cash Flow Margin: Expected to be 37% for fiscal year 2026.
Product Revenue Growth: Expected to grow 25% in Q3 2026 and in the low 20s for fiscal year 2026.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:How does the AI era compare to the cloud era in terms of its impact on cybersecurity, and is M&A the primary lever for Palo Alto Networks this time?
A:Nikesh Arora explained that during the cloud era, the company had to refactor its security services and make acquisitions to deliver cloud security. In the AI era, he sees AI as a positive trend for security, driving platformization and data consistency. He noted that AI adoption is slower on the enterprise side but is inevitable. M&A may not be the primary lever this time as the company is better positioned now.
Q:How does Palo Alto Networks view the impact of LLMs on SIEM tools and the broader security landscape?
A:Nikesh Arora stated that LLMs are additive to security capabilities, particularly in data classification and DLP. However, LLMs are not a threat to security products as they lack the required accuracy. He emphasized that security companies must use AI to enhance their products, but LLMs will not replace security products anytime soon.
Q:What is the joint pipeline opportunity with CyberArk, and how will it unfold?
A:Nikesh Arora highlighted that both Palo Alto Networks and CyberArk have strong teams and are working on joint opportunities. They have identified overlapping pipelines and are building momentum. However, integration is in early stages, and systems are still being aligned.
Q:What is driving the reacceleration of the SASE business?
A:Lee Klarich attributed the growth to customers seeking comprehensive solutions rather than point products. The platform approach provides consistent security outcomes and user experiences, which is driving customer excitement and adoption.
Q:What is the impact of AI adoption on network traffic and demand for network security products?
A:Nikesh Arora noted that AI adoption in enterprises is still in early stages, with most activity in coding applications. While AI traffic is not yet impacting network traffic significantly, it is expected to grow as adoption increases. Consolidating AI traffic for better visibility and control will be a future focus.
Q:When will the benefits of AI on security show up in financial results?
A:Nikesh Arora explained that AI adoption in enterprises is in its early stages, similar to the initial phases of cloud adoption. He expects it to take time before it significantly impacts financial results, as enterprises are still laying the groundwork for AI security platforms.
Q:What technical advancements are needed to make CyberArk's technology more accessible for all users?
A:Lee Klarich mentioned that modern PAM is evolving to improve security and user experience. Integrations with Prisma Browser and other capabilities are being developed to drive broader adoption and create a comprehensive human identity solution.
Q:What are the key attributes of Chronosphere that led to a 9-figure expansion deal with a leading AI provider?
A:Nikesh Arora stated that Chronosphere's scalable architecture and cost efficiency were key factors. It displaced an existing vendor and has been technically validated by the AI provider. The company plans to expand its customer base and integrate with Palo Alto's capabilities.
Q:What is the quantum opportunity and how is Palo Alto Networks addressing it?
A:Nikesh Arora and Lee Klarich discussed the integration of quantum capabilities into Palo Alto's offerings, including automation for cryptography and certificate management. These capabilities aim to enhance security and reliability while addressing enterprise needs.
Q:How is Palo Alto Networks managing the integration of its two largest acquisitions, Chronosphere and CyberArk?
A:Nikesh Arora explained that both acquisitions were planned over several months, with detailed integration strategies. Teams have been assigned roles and OKRs, and additional capacity has been added to handle transitions. The company is leveraging lessons from previous acquisitions to ensure smooth integration.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the specific ARR contribution from CyberArk and Chronosphere, providing only general guidance and leaving some ambiguity around the organic versus inorganic ARR breakdown.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI SOC
AI agent
AI enterprise
AI scale
AI security
AI software
ARR milestone
AgentiX
Chronosphere acquisition
CyberArk Chronosphere
Palo Alto
XDR
XSIAM
agent machine
approach architecture
assumption
attack surface
bet
control attack
control point
count
cycle
decision
defense
discipline
ecosystem
endpoint
extension
flywheel
identity security
integration plan
investment SASE
layer
machine speed
market inflection
observability
platform control
precision
quarter adoption
road
visibility AI
workflow
PANW Transcript
Palo Alto Networks, Inc. (PANW) Q2 2026 Earnings Call Transcript
Positive2-17
The earnings call summary indicates strong financial performance with significant growth in SASE and NGS ARR, and positive market trends in AI and quantum security. The Q&A highlights management's strategic approach to AI and acquisitions, with positive analyst sentiment. Although some ambiguity exists in ARR contributions, the overall outlook is optimistic with growth in key areas and strategic acquisitions. The absence of major negative factors and the focus on innovation and integration suggest a likely positive stock price movement.
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Positive11-19
The earnings call indicates strong financial performance and strategic growth plans, including AI and quantum preparedness, SASE growth, and impactful acquisitions like Chronosphere and CyberArk. Despite some lack of detailed guidance, the optimistic outlook on revenue growth, next-gen security ARR, and strategic acquisitions suggest a positive sentiment. The Q&A section supports this with management addressing key growth drivers and strategic initiatives, aligning with the positive sentiment from the earnings summary.
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PANW Slides
PANW Report
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