Palo Alto Networks, Inc. (PANW) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call reveals strong financial performance with record high revenue growth in key areas like software and services, a significant operating margin expansion, and a robust free cash flow margin. The Q&A section reinforces this with strategic insights into security consolidation, market share gains, and durable growth drivers. Despite some evasive responses, the overall sentiment is positive, driven by innovation, strategic partnerships, and optimistic guidance. The company's market cap isn't provided, but the positive indicators suggest a likely stock price increase in the 2% to 8% range.

Key Financial Performance

Total Revenue $2.54 billion, grew 16% year-over-year. Growth driven by product revenue (19%) and services revenue (15%).

Product Revenue Grew 19% year-over-year, driven by growth in software form factors. 56% of product revenue was from software form factors.

Services Revenue Grew 15% year-over-year. Subscription revenue grew 17%, and support revenue rose 11%.

Remaining Performance Obligation (RPO) Grew 24% year-over-year to $15.8 billion. Current RPO grew 17% year-over-year to $7.0 billion.

Next-Generation Security ARR $5.58 billion, grew 32% year-over-year. Net new ARR for the quarter was up 12% year-over-year. Growth driven by software firewalls, SASE, and XSIAM.

Operating Margin Expanded by 340 basis points, achieving over 30% for the first time in the company's history.

Free Cash Flow Margin 38% for the third consecutive year. Visibility to go even higher in the future.

Geographic Growth Americas grew 15%, EMEA grew 19%, and JPAC grew 13% year-over-year.

AI ARR Approximately $545 million, up over 2.5x year-over-year.

Product Gross Margin 76.8%. Fiscal year 2026 expected to increase to high 70s or low 80s.

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Operating Highlights

Prisma AIRS: Introduced as the industry's most comprehensive AI security platform, providing end-to-end security for AI apps, agents, models, and datasets. It addresses critical blind spots and ensures compliance.

PAN-OS 12.1 Orion: Launched with new appliances designed for quantum readiness and multicloud security, anticipating future threats.

Cortex Cloud: Delivered new capabilities like Application Security Posture Management (ASPM) to secure the AI developer lifecycle and address vulnerabilities.

Platformization: Achieved record-breaking platformization deals, with customers increasingly consolidating their security needs with Palo Alto Networks. Large deals included a $100 million contract with a global consulting firm and a $60 million deal with a European bank.

SASE Growth: SASE ARR grew 35% year-over-year, with notable deals including a $60 million contract covering 200,000 seats. The company displaced competitors in over 70 accounts, exceeding $200 million in total contract value.

Next-Generation Security ARR: Grew 32% year-over-year, driven by strong contributions from SASE, XSIAM, and software firewalls. The company aims to achieve $15 billion in ARR by FY '30.

Free Cash Flow Margins: Maintained 38%+ free cash flow margins for the third consecutive year, with visibility to further improvements.

CyberArk Acquisition: Announced the acquisition of CyberArk to expand into the identity security market, aiming to integrate identity security with AI-powered platforms.

AI Security Focus: Positioned AI security as a key growth area, with Prisma AIRS and AI access solutions addressing the growing AI attack surface.

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Risk or Challenges

Market Conditions: The rapid adoption of AI and GenAI has created a new and complex attack surface, increasing the risk of data security incidents. Additionally, the cybersecurity market is evolving quickly, requiring constant innovation to stay competitive.

Regulatory Hurdles: The company faces potential challenges related to compliance with evolving regulations, especially in the context of AI and cloud security. The need for FedRAMP high authorization for public sector customers highlights regulatory complexities.

Supply Chain Disruptions: The company has taken steps to mitigate potential supply chain risks by transitioning its manufacturing and fulfillment center to a facility in Texas. However, any disruptions in this transition or in the broader supply chain could impact operations.

Economic Uncertainties: The company is navigating economic uncertainties, including customer demand for cost optimization and deferred payment plans, which could impact cash flow and revenue predictability.

Strategic Execution Risks: The proposed acquisition of CyberArk introduces integration risks, including aligning go-to-market strategies and achieving anticipated synergies. Additionally, the company’s strategy to expand into the identity market could face challenges from established competitors.

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Guidance & Outlook

Revenue Growth: For fiscal year 2026, revenue is expected to be in the range of $10.47 billion to $10.525 billion, representing a 14% increase.

Next-Generation Security ARR: Expected to reach $7.0 billion to $7.10 billion in fiscal year 2026, an increase of 26% to 27%.

Operating Margins: Projected to be in the range of 29.2% to 29.7% for fiscal year 2026.

Free Cash Flow Margin: Anticipated to be in the range of 38% to 39% for fiscal year 2026.

Product Revenue Growth: Expected to grow approximately 20% in Q1 2026 and in the low teens for fiscal year 2026, driven by software form factors.

CyberArk Acquisition Impact: The combined company is targeting adjusted free cash flow of 40%+ in fiscal year 2028, the first full year post-integration.

Platformization Strategy: The company aims to more than double the number of platformized customers in the next 5 years, supporting a target of $15 billion in Next-Generation Security ARR by FY 2030.

AI and Cloud Security: Strong pipeline for AI security offerings, including Prisma AIRS, with expectations for it to become a growing contributor in the next 5 years.

SASE Growth: SASE ARR grew 35% year-over-year, and the company expects continued strong growth in this segment.

Identity Market Entry: The company anticipates the identity market will inflect in the next 12 to 24 months, with plans to leverage the CyberArk acquisition to expand in this area.

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Shareholder Return Plan

Buyback Strategy: We did not repurchase any shares in Q4, and our buyback strategy remains opportunistic. We have $1 billion in authorization remaining through December 2025.

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Key Q&A

Q:What is the strategic view on security consolidation and the role of Agentic in catalyzing market needs?

A:Nikesh Arora explained that security consolidation is a long-term process requiring consistent execution. He highlighted the potential of achieving $50 million in ARR through consolidation and compared the security market's fragmentation to other IT markets like CRM and ERP. He emphasized the role of AI in accelerating consolidation by enabling near real-time responses to threats, which requires a unified platform. He also mentioned the importance of integrating identity management into the platform.

Q:What were the underlying drivers for the near $5 billion bookings this quarter?

A:Nikesh Arora attributed the strong bookings to the platformization strategy, which involves educating sellers and customers about the value of deploying all products consistently. He downplayed the impact of macroeconomic factors, stating that the market remains stable. He also credited innovation, customer conviction in the platform's evergreen path, and the benefits of consolidation as key drivers.

Q:Why is Palo Alto Networks gaining market share in the software firewall market, and how does it compare to hardware firewalls in terms of lifetime value?

A:Nikesh Arora and Lee Klarich explained that Palo Alto Networks' focus on innovation, such as cloud-native firewalls and seamless integration across multiple cloud providers, has driven its success in the software firewall market. Software firewalls offer faster deployment, scalability, and easier upgrades compared to hardware firewalls. They also highlighted a $60 million TCV deal for software firewalls, which is significantly larger than typical hardware firewall deals. Dipak Golechha added that SASE has a lifetime value 2.5 times larger than hardware firewalls.

Q:What is the mix of advanced attached subscriptions versus the emerging portfolio in NGS ARR, and how durable is the growth from virtual firewalls?

A:Dipak Golechha stated that the growth in NGS ARR is increasingly driven by next-generation products like software firewalls, SASE, and XSIAM, rather than legacy subscriptions. He expressed confidence in the durability of growth from virtual firewalls and other emerging products.

Q:What are the components and confidence level behind the 40% free cash flow margin target by 2028?

A:Dipak Golechha expressed high confidence in achieving the 40% free cash flow margin, citing operating margin expansion, a scalable business model, and the transition to annual billings as key factors. Nikesh Arora added that the shift to annual billings would provide relief on free cash flow margins and emphasized the alignment with CyberArk partners to achieve this target.

Q:What is the momentum and competitive landscape for enterprise browsers?

A:Nikesh Arora discussed the growing importance of secure enterprise browsers due to the rise of Agentic tasks in consumer browsers. He highlighted the need for secure browsers in enterprises to control agents and predicted that secure browsers would become a critical part of the SASE stack.

Q:How is cloud security performing, and what is the customer response to the Cortex Cloud strategy?

A:Lee Klarich stated that the Cortex Cloud strategy, which integrates application security, cloud posture security, runtime security, and cloud SOC, is gaining strong customer alignment. He emphasized the importance of cloud runtime protection as enterprises move critical applications to the cloud and highlighted recent launches like application security posture management as part of the strategy.

Q:Review of Unclear Management Responses

A:Management appeared to avoid directly addressing the competitive landscape changes post the Wiz acquisition, as the response focused more on the overall strategy and customer alignment rather than specific competitive dynamics.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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