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    PANW
    Earnings call· Jan 2025(Q2 FY25)

    Palo Alto Networks Inc PANW

    Feb 13, 2025 Source

    Executive summary

    Palo Alto Networks Q2 FY25 — Strong Platformization and AI-Driven Efficiencies Drive Top and Bottom Line Beat

    Palo Alto Networks delivered a robust Q2 FY25, surpassing revenue and EPS expectations, driven by broad-based growth across its portfolio and successful execution of its platformization strategy. The company is leveraging AI to enhance security outcomes and drive internal efficiencies, leading to increased confidence in future operating margin expansion and free cash flow generation. Management highlighted the increasing importance of AI-enabled platforms in cybersecurity and the continued demand for network and cloud security amidst evolving threats.

    Highlights

    5

    • Total revenue reached $2.26 billion, growing 14% year-over-year, exceeding the high end of guidance.

    • NGS ARR grew 37% year-over-year to $4.78 billion, fueled by strength in advanced subscriptions, SASE, and Cortex.

    • Diluted non-GAAP EPS was $0.81, outperforming expectations and leading to raised full-year guidance.

    • Platformization deals saw significant growth, with 74 accounts transacting over $5 million (up 25% YoY) and 32 accounts over $10 million (up over 50% YoY).

    • XSIAM surpassed the $1 billion cumulative bookings milestone in Q2, demonstrating strong adoption of the AI-driven SecOps platform.

    Concerns

    2

    • Gross margin was 76.6%, down slightly due to the impact of newer SaaS offerings not yet at scale and one-time inventory/product transition costs.

    • Net new ARR growth declined on a year-over-year basis for the last two consecutive quarters, attributed to strong prior-year comparisons.

    Guidance & targets

    13
    CategoryTargetConfidence
    NGS ARR
    $5.52B to $5.57B
    high materiality
    High
    Remaining Performance Obligation (RPO)
    $15.2B to $15.3B
    high materiality
    High
    Total Revenue
    $9.14B to $9.19B
    high materiality
    High
    Operating Margin
    28% to 28.5%
    high materiality
    High
    Diluted Non-GAAP EPS
    $3.18 to $3.24
    high materiality
    High
    Adjusted Free Cash Flow Margin
    37% to 38%
    high materiality
    High
    NGS ARR
    $5.03B to $5.08B
    medium materiality
    High
    Remaining Performance Obligation (RPO)
    $13.5B to $13.6B
    medium materiality
    High
    Total Revenue
    $2.26B to $2.29B
    medium materiality
    High
    Diluted Non-GAAP EPS
    $0.76 to $0.77
    medium materiality
    High
    Adjusted Free Cash Flow Margin
    >37%
    high materiality
    High
    Adjusted Free Cash Flow Margin
    >37%
    high materiality
    High
    Platformizations
    2,500 to 3,500
    high materiality
    High

    Operational metrics

    40
    Operating Expenses as % of Revenue
    decreased by 120 bpsYoY
    Q2 FY25

    Benefited from scale in business model and efficiency initiatives.

    Diluted Non-GAAP EPS
    $0.81
    Q2 FY25

    All per share figures adjusted for 2-for-1 stock split.

    Diluted GAAP EPS
    $0.38
    Q2 FY25

    All per share figures adjusted for 2-for-1 stock split. Prior year had significant positive impact from tax valuation allowance release.

    Debt Balance Reduction
    Over $100M
    Q2 FY25

    Debt balance came down due to early conversions of convertible debt.

    Remaining Debt
    Just over $500M
    Q2 FY25

    May continue to see some early conversions.

    Buyback Authorization Remaining
    $1B
    Q2 FY25

    No shares repurchased in Q2; buyback strategy remains opportunistic.

    Contract Labor Reduction (AI-based initiatives)
    50%
    FY25

    AI-based initiatives focused on employee-facing processes.

    Support Copilot Usage (Network Security)
    About 85%
    Q2 FY25

    Internally developed copilot used to assist in case resolution.

    Case Resolution Time Reduction (Support Copilot)
    Approximately 50%
    Q2 FY25

    Resulting in better customer experience and ability to absorb more case volume with less headcount.

    Deferred Payments
    $1B32% of FY24 adjusted FCF
    FY24

    Scheduled for the year, increasing visibility into free cash flow.

    Deferred Payments
    $1.4B41% of expected adjusted FCF
    FY25

    Scheduled for the year, further increasing visibility into free cash flow.

    Deferred Payments
    $2B
    FY26

    Expected to end fiscal 2026 with $2 billion in deferred payments scheduled for the year.

    Product Revenue (Software contribution)
    Approaching 40%
    TTM

    Expected to increase into double-digit growth in the second half of FY25.

    Appliance Market Growth
    0% to 5%
    FY25

    Expected to continue through fiscal 2025.

    Appliance Bookings Growth
    Mid-single digits
    Q2 FY25

    Driven by stable demand and market share gains.

    Software and SASE Bookings Growth (vs FaaP)
    1.5x faster
    Q2 FY25

    Compared to the rate of the total Firewall as a Platform business.

    SASE Bookings Growth
    Well north of 50%
    Q2 FY25

    SASE continues to be the fastest-growing form factor in network security.

    SASE Deals over $1M
    Up 2.5x
    Q2 FY25

    Indicates increasing deal size for SASE.

    Individual Seats (SASE + GP)
    Over 23M
    Q2 FY25

    Across SASE base and GP customers.

    Users Protected (SASE + GP)
    Over 100M
    Q2 FY25

    Chosen to help protect the base of over 100 million users.

    Newer SASE Modules Bookings Growth (ADEM, CASB, Prisma Access browser, AI access)
    Nearly fourfold
    Q2 FY25

    Momentum drivers for SASE are broadening.

    Prisma Access Browser New Seats
    Roughly 1/3
    Q2 FY25

    Of the new Prisma Access seats sold in the quarter.

    Prisma Access Browser Bookings
    Over $30M
    Q2 FY25

    Total bookings in Q2.

    Prisma Access Browser Seats Growth
    95%QoQ
    Q2 FY25

    Strong quarter-over-quarter growth.

    AI Access Applications Visibility
    Over 1,800up from 500 six months ago
    Q2 FY25

    Provides real-time visibility into AI-based applications.

    Software Firewall Bookings Growth
    50%
    Q2 FY25

    Driven by AI and public cloud adoption.

    VM Deployments in Public Cloud
    Approximately 70%
    Q2 FY25

    Of VM deployments are now in the public cloud.

    Software Firewall Customers also Hardware Firewall Customers
    About 2/3
    Q2 FY25

    Showing the hybrid nature of the solution and need for platformization.

    AI Software Firewall Transaction
    First 7-figure
    Q2 FY25

    First software firewall transaction for AI in the quarter.

    AI Firewalls Pipeline
    Healthy 8-figure
    Q2 FY25

    For AI firewalls for the future.

    Cortex Bookings Growth
    Approximately 50%
    Q2 FY25

    Strong momentum in Cortex.

    Prisma Cloud Bookings Growth
    Approximately 50%
    Q2 FY25

    Strong momentum in Prisma Cloud.

    Cortex Customer Growth
    Approximately 20%
    Q2 FY25

    Healthy momentum fueling customer growth.

    XDR New Customers
    Hundreds
    Q2 FY25

    Signed in Q2, becoming opportunities for SOC transformation.

    XSIAM Cumulative Bookings
    $1B
    Q2 FY25

    Surpassed milestone in Q2.

    QRadar-related Bookings (Cortex)
    Over $100M
    Q2 FY25

    Contributing to Cortex strength in Q2.

    Platformizations (Q2)
    Approximately 75up from approximately 45 in the year ago
    Q2 FY25

    Progress in driving platformization strategy.

    2-Platform Customers Growth
    Over 50%YoY
    Q2 FY25

    Growth in customers platformized in two areas.

    3-Platform Customers Growth
    3xYoY
    Q2 FY25

    Growth in customers platformized in three areas.

    Cortex Platformized Customers Growth
    More than 3x
    Q2 FY25

    Reflecting strong XSIAM momentum.

    Industry KPIs

    9
    MetricValueDetails
    Revenue growth$2.26BUSD
    Arr net new arr$4.78BUSD
    Rpo current rpo$13BUSD
    Bookings billings21%%
    Customer account countOver 5,600customers
    Large deal new logo metrics74accounts
    Multi product platform attachOver 1,150platformizations
    Operating FCF margin rule of 4076.6%%
    Ai product adoption monetizationOver 300customers

    Orderbook & backlog

    3
    Total RPO$13BQ2 FY25

    grew 21% YoY

    At the high end of guided range.

    Current RPO$6.1BQ2 FY25

    grew 17% YoY

    Average Duration of New ContractsApproximately 3 yearsQ2 FY25

    trended towards the high end of historical range

    Based on performance in large platformization deals, particularly customers making longer-term commitments to XSIAM.

    Product announcements

    4
    ProductTypeDetails
    Cortex Cloudlaunch
    Mobile Prisma Access browserlaunch
    AI Accessupdate
    API-based AI Runtime Securitylaunch

    Deals & partnerships

    4
    IBMStrategic partnership for QRadar and go-to-market collaboration

    Strong partnership with IBM, contributing significantly to Cortex bookings and enabling large opportunities with shared customers.

    Asian bankPlatformization deal for Cortex with significant XSIAM deploymentOver $65M

    First-time platformization in Cortex for a bank in Asia, leveraging XDR and other Cortex capabilities. Addressed limitations in security incident discovery and remediation.

    U.S. municipalityRenewal of network security and expansion across portfolioOver $60M

    Included renewal of network security estate, expansion into Cortex and Prisma Cloud, leveraging all three form factors within network security.

    European automotive manufacturerRenewal of firewalls and support footprint, expansion into Cortex and Prisma Cloud$25M

    Customer already platformized in network and cloud security. Renewed firewalls and support (IoT, virtual firewalls, SASE) and secured business in Cortex (XDR, XSOAR, Xpanse) and Prisma Cloud.

    Capital programs

    1
    Contract Manufacturing Facility Transitionunderway

    Benefit: Enable scale and innovation in appliances; mitigate tariffs on international shipments by taking advantage of foreign trade zone.

    Transitioning the contract manufacturing facility in Texas to be the primary manufacturing and fulfillment center. All firewall appliance products are assembled and manufactured in the U.S.

    Risks & headwinds

    3
    Gross Margin Pressure from SaaS Offerings and One-time CostsQ2 FY25

    Gross margin of 76.6%, down slightly.

    Mitigation: Newer SaaS offerings are expected to mature and scale; one-time inventory and product transition costs are not expected to recur in the second half of the year.

    Net New ARR Growth DecelerationLast two consecutive quarters

    Net new ARR growth declined year-over-year for the last two consecutive quarters (excluding QRadar in Q1).

    Mitigation: Management attributes this to strong prior-year comparisons due to transitions of old attaches to cloud-delivered advanced subscriptions; current products driving platformization continue to show strength.

    Accelerated AI-driven CyberattacksOngoing

    Google found adversaries can use generative AI to more rapidly create attacks, including custom payloads and evasion techniques. Unit 42 research shows a 66% increase in threats targeting cloud environments.

    Mitigation: Palo Alto Networks is developing AI-enabled security platforms (e.g., Cortex Cloud, AI firewalls) to provide real-time visibility, controls, and automated remediation. Nikesh advises enterprises to deploy AI with firewalls and in sequestered environments.

    What to watch in Q3 FY25

    5

    Gross Margin Trajectory

    H2 FY25
    Current76.6% (down slightly)
    TargetRecovery as one-time costs do not recur and SaaS offerings scale

    Why it matters

    Indicates the company's ability to improve profitability as newer SaaS offerings mature and one-time📎 costs subside.

    Gross margin of 76.6% was down slightly as we continued to see the impact of some of our newer SaaS offerings that are growing quickly but have yet to achieve scale. Also, we had some costs in Q2 related to inventory and product transitions that were higher than typical, and we don't expect that, that will recur in the second half of the year.

    Q&A highlights

    5

    What are the drivers behind the improved free cash flow margins, and how do deferred payments contribute to this outlook?

    Nikesh attributed improved profitability to efficiencies from large platform deals and early AI experiments, expecting higher operating margins. Dipak clarified that deferred payments primarily apply to high-end deals and SaaS, while smaller transactions and appliance sales are typically upfront, providing good visibility and management over the cash flow trend.

    “There's parts of our business that are really never going to go to deferred payments. The smaller transactions that have a multi-tier distribution network where everybody wants to get paid upfront, the appliance business, whether it's industry standard pay upfront, then you're left over with everything else, and we've already made a significant transition already.”

    asked by Saket Kalia · answered by Dipak Golechha

    2 min read5 chapters

    Detailed Narrative

    01

    Platformization Strategy Driving Growth and Efficiency

    Palo Alto Networks' platformization strategy, initiated a year ago, is demonstrating significant traction. The company achieved approximately 75 new platformizations in Q2, an increase from 45 in the prior year, bringing the total to over 1,150 among its top 5,000 customers. This approach is leading to larger deals, with 2-platform customers growing over 50% and 3-platform customers tripling year-over-year. The strategy is on track to meet the FY2030 target of 2,500 to 3,500 platformizations, contributing to both top-line expansion and sales efficiency.

    02

    AI as a Catalyst for Cybersecurity Demand and Transformation

    The pervasive influence of AI is driving accelerated cloud adoption and infrastructure investment, consequently boosting demand for cybersecurity solutions. The company observes that legacy architectures hinder AI aspirations, prompting a resurgence in cloud transformation projects and network security needs. The escalating threat landscape, with bad actors leveraging AI for more rapid and sophisticated attacks, further underscores the critical need for AI-enabled security platforms that can unify SecOps across diverse environments.

    03

    Strong Momentum in Network Security, SASE, and Software Firewalls

    Network security, which accounts for approximately 80% of bookings, exhibited robust software demand. Firewall as a Platform bookings grew 21%, with software and SASE components expanding 1.5 times faster than the overall business. SASE remains the fastest-growing network security form factor, with bookings up well over 50% and customer count increasing by more than 20% to over 5,600. Software firewall bookings surged 50%, driven by AI and public cloud adoption, with 70% of VM deployments now in the public cloud.

    04

    Introduction of Cortex Cloud and Cloud Security Leadership

    Palo Alto Networks unveiled Cortex Cloud, positioning it as the industry's first end-to-end cloud security platform. This new offering integrates Prisma Cloud and CDR capabilities, deeply embedding cloud security into the Security Operations Center (SOC) with AI-powered prioritization and automated remediation. Both Cortex and Prisma Cloud bookings grew approximately 50% in Q2, and XSIAM, the AI-driven SecOps platform, surpassed $1 billion in cumulative bookings, reflecting strong market validation and leadership in cloud security.

    05

    Operational Efficiencies and Confident Free Cash Flow Outlook

    The company is committed to profitable growth, implementing efficiency initiatives, including AI-based tools. These efforts are projected to reduce contract labor by 50% by the end of FY25 and have already led to a 50% reduction in case resolution time in customer support. Increased visibility into future cash flows, with deferred payments expected to reach $2 billion in FY26, underpins management's confidence in achieving adjusted free cash flow margins greater than 37% through FY27, balancing growth with financial discipline.

    AI-generated summary of the company’s earnings call. Not investment advice.