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<p class="p1">Palo Alto Networks spent the past couple of years knitting together a one-stop cybersecurity shop. The digital defender has spent nearly $3 billion on acquisitions since CEO Nikesh Arora took the helm in June 2018. As the pandemic pushes workers remote, Palo Alto is capitalizing on the trend by helping companies protect assets outside the traditional corporate firewall. Investors have apparently forgiven the company for being unprofitable on a GAAP basis as total shareholder returns averaged 19% over the past three years through Sept. 30.</p>

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Palo Alto Networks is a global cybersecurity provider offering AI-powered security solutions—such as firewalls, cloud security, and threat detection and response—to businesses, governments, and service providers. Founded in 2005, it serves over 80,000 customers in more than 150 countries. The company debuted on the Fortune 500 in 2025 and achieved the highest revenue growth among its sector peers.

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Palo Alto Networks (PANW): Company Profile, Stock Price, News, Rankings

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Palo Alto Networks

palo alto networks

Good day, everyone, and welcome to Palo Alto Networks' first Fiscal Quarter 2026 earnings conference call. I am Hamza Fodderwala, Senior Vice President of Investor Relations and Strategic Finance. Please note that this call is being recorded today, Wednesday, November 19, 2025, at 1:30 P.M. Pacific Time. With me on today's call to discuss our Fiscal First Quarter results are Nikesh Arora, our Chairman and Chief Executive Officer, and Dipak Golechha, our Chief Financial Officer. Following our prepared remarks, Lee Klarich, our Chief Product and Technology Officer and board member, will join us for the question-and-answer portion. You can find the press release and other key information to supplement today's discussion on our website at investors.paloaltonetworks.com. While there, please click on the link for quarterly results to find the Q126 supplemental information and Q126 earnings presentation.

During the course of today's call, we will be making forward-looking statements and projections regarding the company's business operations and financial performance, as well as the company's pending acquisitions. These statements made today are subject to a number of risks and uncertainties that could cause our actual results to differ from these forward-looking statements. Please review our press release and recent SEC filings for a description of these risks and uncertainties. We assume no obligation to update any forward-looking statements made in the presentation today. This presentation contains non-GAAP financial measures and key metrics relating to the company's past and future expected performance. Non-GAAP financial measures should not be considered a substitute for financial measures prepared in accordance with GAAP. The most directly comparable GAAP financial metrics and reconciliations are in the press release and the appendix of the investor presentation.

Unless specifically otherwise noted, all results and comparisons are on a fiscal year-over-year basis. We also note that management is scheduled to participate in the UBS conference this quarter. I will now turn the call over to Nikesh.

Thank you, Hamza. Good afternoon, and thank you, everyone, for joining us for our earnings call today. As you can see, we had a strong start to the year in Q1. We exceeded expectations across every guided metric. Demand across our core business remains robust, and customers continue to platformize with us. Year over year, our RPO grew 24%, and NGS ARR was up 29%, and total revenue was up 16%. We saw strength across our portfolio in SASE, XIM, software firewalls, and even saw early traction in our AI security platform, Prisma AIRS. Our top-line growth was complemented by continued improvement in profitability, achieving our second straight quarter of 30-plus % operating margin. These results are a direct outcome of our strategy too. By delivering better security outcomes, our platform is earning more and more of the trust that used to be fragmented across dozens of point products.

At the same time, the threat landscape continues to evolve faster than we expected because of AI. As many of you saw last week, with one of the major AI platforms, AI hackers aren't a future threat; they're here now. This was the first reported case of an AI agent autonomously conducting a large-scale nation-state cyber attack. The attacker was able to manipulate an agent to take steps on its own with minimal human intervention. This is a turning point, proof that attackers are already weaponizing AI agents at scale. Even more importantly, they're able to attack fast, and exfiltrate will be able to exfiltrate faster. AI is exposing the cracks in our enterprise architectures, which do not have robust security. Patches are incomplete, platforms are missing, there is a plethora of point products across the enterprise. This gap is exactly where attackers thrive.

They're testing how far they can exploit a model. They're running prompt injections, jailbreaks, model manipulation, and now we're seeing the next phase: autonomous AI agents being leveraged into the attack chain. AI is here, and with it, AI attackers are here too. Our message to customers is clear: real-time visibility and security are essential for your infrastructure. This reality necessitates a paradigm shift in the industry. We must move away from today's fragmented security landscape and towards platformization. AI requires a seamless cyber data strategy. This platform approach allows security agents to be utilized effectively by the good guys to detect attacks, protect customers, and remediate security concerns. Fragmentation creates friction, which in turn causes latency. Latency is a critical enemy of real-time cybersecurity. This is the backdrop that informs our strategy as we go forward. Now, let's get into the quarter.

In Q1, platformization once again drove large deals across multiple industry verticals. This included U.S. Federal, where we had a strong quarter and notable competitive wins. One example was a $33 million SASE deal with a U.S. cabinet agency securing 60,000 seats. This agency displaced a major SASE incumbent as they needed a platform to provide unified visibility across both their firewall estate and remote endpoints. Another example was a $100 million deal with a large U.S. telecom provider. This included an $85 million commitment to XIM, which is our largest XIM deal ever. This customer chose us to consolidate their disparate point products based on the ability of our platform to deliver materially faster meantime to respond. The common theme across these large transactions is clear. Customers are moving from managing vendor sprawl to demanding superior demonstrable security outcomes through platformization.

The natural place for customers to start their journey is network security, which remains our largest business. In Q1, we continue to see strength in our next-generation software form factors. SASE had a phenomenal quarter. ARR grew 34% year over year and surpassed $1.3 billion in Q1, making us the fastest-growing SASE provider at scale. We now have approximately 6,800 SASE customers, including one-third of the Fortune 500, including leading technology companies like IBM and Oracle. Even though it's early days, we continue to see strong momentum with secure browsers. The arrival of AI and agentic browsers will expose security cracks in them and focus the enterprise on ensuring widespread adoption of secure browsers. In Q1, we crossed 7.5 million browsers sold, while our bookings nearly quadrupled year over year.

One more product which I'm getting more and more excited about recently is a shift I'm observing in our customers deploying more and more software firewalls, and it's beginning to show in our results. Product revenues grew 23% year over year. Today, nearly half of our product revenues are driven by the software form factor. We now have over 12,500 customers and maintain our leading market position in software firewalls. As AI transformation accelerates, growth in cloud workloads, the software firewall provides essential runtime protection with a new AI data center, and with its recent ability to step up and protect AI, we expect continued momentum. Talking about protecting AI, let's talk for a bit about Prisma AIRS. As I mentioned earlier, AI is moving faster than expected. This creates a critical moment for enterprise innovation.

The reality is that while 78% of organizations are embracing AI transformation, a staggering 94% still lack the necessary security guardrails, presenting a massive risk. With our acquisition of Protect AI now fully integrated, we introduced Prisma AIRS 2.0 in Q1, the industry's most comprehensive end-to-end platform to secure AI, protecting everything from autonomous agents to the models that power them. I predict here that AI agents will become a problematic insider threat if not secured. Prisma AIRS is the essential circuit breaker layer to stop them. It unites deep model inspection, real-time agent defense against threats like prompt injection, and continuous autonomous AI red teaming in one platform. Once our acquisition of CyberArk closes, the addition of identity security will be critical to this mission, providing the essential privilege controls to govern these new autonomous insider threats and prevent agent identity impersonation.

Our commitment to AI security is driving new high-value partnerships, including a collaboration with NVIDIA to secure the AI factory with Prisma AIRS on BlueField and tight integrations with platforms like Glean, IBM, Factory, and ServiceNow in securing the exploding number of agentic AI workflows. Early customer traction is strong, reflecting the general market need and the number of AIRS deals in Q1 more than doubled versus last quarter. We believe we are the furthest ahead in AI security with marquee customers signing up with Palo Alto Networks. As they move from traditional to AI workloads, we believe we are going to continue to be in the pole position. In the same way AI surprised the world with its pace, I want to talk about something else that is going to become relevant from a technology shift and security perspective: quantum.

Quantum computing has seen significant innovation over the last year. We're getting more and more optimistic on the arrival of quantum and expect it to be commercialized by 2029. As is widely known, quantum computing has the ability to break current encryption across technology stacks. Enterprises have less than five years to get their estates to quantum readiness. There is a fear that some nation-states will have quantum compute capability sooner than 2029. Just last month, our partner IBM announced they were able to run a key quantum error correction algorithm on commonly available chips. The U.S. government and many other nations are emphasizing PQC, or post-quantum cryptography, to drive new cryptographic standards that are resistant to attacks from future large-scale quantum computers. To address this, we have launched and are going to be delivering a complete quantum-safe strategy. First, we help you discover.

In August, we launched our new version of PanOS 12.1 Orion, which provides a quantum readiness solution to give customers an automated inventory of their cryptographic risk. Second, we help you protect. We launched our new fifth-generation firewalls, which are optimized for quantum security. Third, we help you accelerate. Our platform's unique cipher translation capability can make legacy systems quantum-safe immediately, even if the application itself cannot be upgraded. Beyond this, we have just announced that we're deepening our partnership with IBM to deliver the quantum-safe readiness and remediation service, a complete end-to-end solution for PQC migration. Now moving to Cortex, which is a pillar of our security operations center strategy. XIM continued its incredible trajectory in Q1. We now have approximately 470 customers, with the average customer paying over a million dollars in ARR. This includes large, referenceable customers in every major industry. The success is no coincidence.

XIM was built for large-scale data processing, organizing it, normalizing it, and making sense of it in real time. Today, we're processing 15 petabytes of telemetry on a daily basis. The result is demonstrable security outcomes. Over 60% of our deployed XIM customers have reduced their MTTR, or median time to respond, from days or weeks down to minutes. I am also thrilled to announce the launch of Agentix this quarter. Agentix brings powerful AI agents directly to the core of enterprise security challenges. In the future, the only effective countermeasure against hacker AI will be our own AI agents, purpose-built for advanced security detection and remediation. For years, the industry has struggled with two defining issues: overwhelming alert fatigue and a massive global talent shortage. Agentix is our definitive answer. This is a leap beyond mere automation; this is true autonomy.

The ability to use predefined agents or build custom agents to secure enterprise is a step change in how security will work in the future. We are fundamentally transforming security operations and optimization by deploying autonomous AI agents that deliver enhanced speed, superior efficiency, and greater control for security practitioners. Right out of the box, Agentix leverages a broad integration ecosystem, connecting with thousands of existing security and IT tools and third-party environments. It provides customers with an intelligent, fully governed, and completely transparent teammate across the enterprise. Ready to operate on day one, Agentix accelerates response, elevates quality, and frees up scarce human talent to focus on higher-order strategic work. Now, shifting gears, I am pleased to announce our CyberArk integration plans remain fully on track, and we're proud to have received overwhelming shareholder support for the acquisition, which is now expected to close in fiscal Q3.

Since our announcements in July, we've spent more time with the CyberArk team. We are even more excited about the growth opportunity in future product roadmap. This includes our vision of democratizing identity security across the enterprise and making identity the next platform for Palo Alto Networks. Anecdotally, our customers share in our enthusiasm, and the early feedback has been encouraging. As many of you saw, CyberArk's business continues to execute, achieving record net new ARR in their most recent quarter. Even as we invest ahead of the curve, our long-term financial model remains intact. The scale of our platforms and operating leverage in our business reinforces our confidence in achieving 40+% free cash flow margins by FY2028, inclusive of both the pending CyberArk and Kronosphere acquisitions. We are executing from a position of strength, and we see a clear path to drive both innovation and financial discipline.

Now, let's talk about our new announcement. I'm sure all of you are wondering why Palo Alto Networks, who is in the midst of a large acquisition of CyberArk, would engage in an acquisition at the same time of Kronosphere. I think it's important to understand where we are in the AI cycle. The AI cycle is moving fast. There is never a day that goes by without significant announcements on investments in AI data centers, AI infrastructure. This large surge towards building AI compute is causing a lot of the AI players to think about newer models for software stacks and infrastructure stacks in the future. The 17-year-old observability industry was not designed for the AI era. AI requires always-on comprehensive observability at gigawatt scale. The challenge so far has been that full observability is cost-prohibitive for the customer. Kronosphere is one of the fastest-growing software companies in history.

The observability solution from Kronosphere has already been deployed and has demonstrated scale at a large frontier model where they continue to move workloads across. Leading born-in-the-cloud consumer platforms are deploying full comprehensive observability, offering 99.9+% availability to their customers. Kronosphere is able to deliver this capability at a third of the cost of other industry-leading solutions. Yes, a third. With $1.5 trillion of compute coming online over the next few years, there will be continued demand for next-generation observability led by Kronosphere. We're really excited about the possibility of delivering remediation to the observability category by bringing together capabilities of Kronosphere and our newly announced Agentix platform. Kronosphere also recently had acquired a company called Calyptea, a data pipeline provider. That was complementing their focus on observability and ensuring the right data got onto their observability platform.

Calyptea, integrated with XIM, will enable us to offer our XIM customers comprehensive security data pipelining capabilities in line with current industry trends. This acquisition perfectly aligns with our strategic playbook. We acquired the best technology at an inflection point in an industry. We invested in its development, utilized our go-to-market scale to quickly deliver this game-changing innovation to our customers. Remember, this is barely 2.5% of our market cap, which is consistent with our tuck-in strategy over the last seven years of acquiring companies. To summarize, we had a strong start of the year. Our core business is firing on all cylinders. Platformization continues to take hold, and overall demand is strong. Over the last years, we have shown our ability to scale billion-dollar-plus ARR business in SASE and Cortex. Looking ahead, we think software firewalls are our hidden gem and possibly the next billion-dollar opportunity.

We maintain a relentless focus on innovation by tackling new challenges in AI security and quantum. Finally, our ambitions continue to grow. This year, we will be significantly expanding our opportunity in new markets as we close the acquisitions of CyberArk and Kronosphere in both categories of identity and observability, which we believe are in the midst of inflection due to AI. We are less than 5% penetrating to a TAM reaching nearly $300 billion in the next three years. As such, we are raising our expectations from $15 billion to $20 billion in ARR for FY2030. With that, I will hand over the call to Dipak to review the quarterly results in detail.

Thank you, Nikesh, and good afternoon, everybody. We have an exciting opportunity ahead of us.

We continue to execute with excellence, and our TAM is expanding through the pending acquisitions of two category leaders in CyberArk and Kronosphere. Given that, I would like to provide some additional color around our announced acquisition of Kronosphere, as well as an update on the CyberArk integration planning, before moving into detail on our Q1 financial results and guidance. As Nikesh mentioned, we announced our intent to acquire Kronosphere for a total consideration of $3.35 billion in cash and replacement equity awards. Kronosphere's co-founders, Martin Mao and Rob Skillington, and their employees will join Palo Alto Networks post-close. While Kronosphere does have significant ARR relative to most of our other acquisitions, we view this transaction to be more in line with the tuck-in acquisitions that we have done over the past eight years.

The business has just over 250 employees, with a customer base focused on large AI and born-in-the-cloud enterprises. The momentum Kronosphere has achieved to reach over $160 million in ARR with triple-digit growth has been impressive. For that reason, we expect Kronosphere to remain largely standalone post-close and in the near term, enabling us to balance integration timelines with the pending CyberArk acquisition. We expect this transaction to close in the second half of our fiscal year 2026. On CyberArk, our integration planning is proceeding exceptionally well, reflecting the strong collaborative spirit between our teams. We've had excellent cross-functional collaboration at multiple levels, including dozens of integration planning workshops across various functions. We are firmly on track to hit the ground running post-deal close, which we expect in fiscal Q3, subject to customary closing conditions.

As you can tell from our Q1 results, we're pursuing these acquisitions from a position of strength. With that, let's dive deeper into the quarter. Remaining performance obligation, or RPO, grew 24% to $15.5 billion. This metric is a key indicator of long-term revenue predictability and the scale of our committed business. Note that our RPO from Q1 last year included $68 million acquired from our QRadar acquisition, which took place in that period. Our current RPO, which reflects near-term revenue realization, stood at $6.9 billion, representing 16% growth. Reflecting stability in both the quality of our RPO and customer commitments, the average new contract duration remained consistent at approximately three years. NGS ARR ended the quarter at $5.85 billion, achieving 29% growth and exceeding the high end of our guidance.

Adjusting for the $74 million contribution from the QRadar acquisition in the comparable prior period, our net new ARR in Q1 grew over 20%. The momentum was broad-based, with strength from software firewalls, SASE, and XIM. It is important to note that our NGS offerings drive all of our revenue line items, including product revenue, nearly half of which is from software over the last year, subscription revenue, and a growing portion of our support revenue. Total revenue reached $2.47 billion, representing 16% growth, which exceeded the high end of our guided range. Product revenue grew 23% year over year. 44% of our trailing 12-month product revenue came from software form factors, an increase from 38% in the trailing 12 months ending Q1 2025. This acceleration is fueled by growth in our software firewalls and PanOS SD-WAN within product revenue.

We continue to see stability in hardware appliances and early interest in our newly launched Gen5 firewalls. Total services revenue grew 14%. Within this, both subscription and support revenues grew 14%. Geographically, we saw broad-based strength across all major theaters, with Americas growing 14%, EMEA up 18%, and JPAC growing 22%. Having discussed our top-line strength, I'd like to take a moment to give an update on our platformizations in Q1. As Nikesh highlighted, platformization continues to take hold as customers look for a strategic security partner that can continually adapt and innovate with shifts in the cybersecurity threat landscape. Our ability to deliver best-in-class products through our unified platforms, Prisma AIRS and Quantum Security in Q1, for example, is a critical motivation for customers to platformize with us. We completed approximately 60 net new platformizations this quarter.

This momentum was driven by strength in XIM, where platformizations more than doubled year over year, affirming that customers are actively moving towards simplicity and integration to have real-time outcomes. We now have nearly 170 customers with NGS ARR over $5 million and 50 customers with NGS ARR over $10 million, both growing about 50% year over year. These results reinforce our target of $20 billion in NGS ARR by fiscal year 2030, inclusive of the pending CyberArk and Kronosphere acquisitions. Moving down the income statement, our discipline focus on profitability and operational leverage is clearly visible in the performance metrics we delivered. Total gross margin for the quarter was 76.9%. We delivered product gross margins of 80.2%, an increase of 50 basis points year over year, and reflected a significant sequential improvement of 340 basis points compared to Q4 2025.

The services segment also demonstrated positive margin trajectory, reaching 76.2%, which constitutes a sequential increase of 70 basis points. We continue to be pleased by the continued growth of our SaaS offerings and remain actively engaged in executing cloud cost efficiencies. We delivered an operating margin of 30.2%, achieving expansion of 140 basis points year over year, and our second consecutive quarter above 30%. This strong expansion reflects not only improvements in gross margin, but critically our ability to drive sustained scale and efficiency across all of the OpEx line items. We continue to apply an AI-first lens to all of our processes and functions. Notably, we have been able to deploy AI in our global customer support organization to drive three consecutive quarters of case volume reduction and reduce time to resolve for 11 consecutive quarters.

As a direct outcome of this discipline leverage, our diluted non-GAAP EPS reached $0.93, which exceeded the high end of our guidance. This execution provides the basis for strong adjusted free cash flow, which came in at $1.7 billion, up 17%. Our cash and cash equivalents at the end of the first quarter is now over $10 billion. Finally, regarding capital allocation, our approach remains prudent. We do not repurchase any shares in Q1. Our buyback strategy remains opportunistic. We have a billion dollars in share repurchase authorization remaining through December 2026. Ultimately, we remain focused on leveraging this efficiency to maximize long-term shareholder value. With that, I will move on to Q2 and fiscal 2026 guidance. For the second fiscal quarter 2026, we expect NGS ARR to be in the range of $6.11-$6.14 billion, an increase of 28%.

Remaining performance obligation of $15.75-$15.85 billion, an increase of 21%-22%. Revenue to be in the range of $2.57-$2.59 billion, an increase of 14%-15%, and diluted non-GAAP EPS to be in the range of $0.93-$0.95, an increase of 15%-17%. For the fiscal year 2026, we expect NGS ARR in the range of $7-$7.1 billion, an increase of 26%-27%. Remaining performance obligation of $18.6-$18.7 billion, an increase of 17%-18%. Revenue to be in the range of $10.50-$10.54 billion, an increase of 14%. Operating margins to be in the range of 29.5%-30%. Diluted non-GAAP EPS to be in the range of $3.80-$3.90, an increase of 14%-17%, and adjusted free cash flow margin in the range of 38%-39%.

As Nikesh mentioned earlier, we are also reiterating our 40%+ adjusted free cash flow margin target for fiscal year 2028, inclusive of both CyberArk and Kronosphere. Furthermore, whilst we will provide more detailed guidance after closing the transaction, we expect to maintain an adjusted free cash flow margin of at least 37% for fiscal year 2026, inclusive of both CyberArk and Kronosphere, depending upon timing of close. We've included our typical modeling points in the presentation for your review, but I would like to highlight a few now. One, as we noted last quarter, we continue to expect our net new NGS ARR and revenue to be second half and Q4 weighted as we continue to platformize with our customers. Two, we expect product revenue growth for Q2 to be approximately 17%-18%.

Finally, we expect $130 million-$140 million in CapEx in Q2 2026, which is inclusive of a $90 million non-recurring real estate CapEx. This $90 million will be removed from adjusted free cash flow in accordance with our typical treatment for these non-recurring items. With that, I will turn it over to Hamza for Q&A.

Okay, great. To allow for broad participation, I would ask that each analyst ask one question. With that, we will start with Brad Zelnik from Deutsche Bank, followed by Rob Owens from Piper Sandler.

Great, thanks, Hamza. You know it is great to see vintage Nikesh coming out strong in Q1, even after a blowout Q4. Congrats to you and the team.

Nikesh, 2026 is setting up as a perfect AI storm where every vendor has a story to tell.

It seems all roads lead back to identity, where you clearly are in the process of acquiring the best asset out there. Stepping back, it's rare that the winner in one technology generation remains the winner in the next. What is it that you're doing outside of smart M&A to disrupt yesterday's Palo Alto to ensure success into an AI and quantum future? Thank you.

Thank you, Brad. I think there are enough examples in history of technology companies which have sustained multiple technology waves and continued to win. I think you're seeing some of the multi-trillion dollar companies out there have been around for four, five, six, seven decades. We hope we're one of those evergreen companies that persists and is able to execute on a similar trajectory.

We are, as you can see, we are very, very aware of the two biggest technology trends ahead of us, both AI and quantum. What's fascinating is the need for network inspection does not go away. From our perspective, AI and quantum are going to drive a lot more volume. As the more bits that fly around, the more they need to be inspected, which means the need for bit inspection technologies is not going to go away, just the way the need for servers hasn't gone away since the time servers were created. I think we don't have a threat to our core business of bit inspection, which is how I broadly describe our network security business. AI is driving more volumes.

I was just talking to the CEO of a large cloud service provider earlier today, and the conversation was about how do they go deploy gigawatts of capacity in short order, given the large sort of thrust towards building AI compute, and how do we make sure those bits are secured. I guess we are going to see sustained demand over time from a network security perspective. If you couple that with the trend that AI is driving, is the idea that now data can be sensed real-time and actions can be taken quickly, as we discussed the recent cyber attack. That was an attack which was based purely on online availability of data and the ability of persistent access. From that perspective, we think the solution on the other side has to be a data-driven problem solution.

If you look at what we've been doing from an XIM perspective, we have 470 customers. Three years ago, I remember you and I talking about XIM as new product categories in the SOC space. Your question to me was, what makes you think you will succeed in a space you've never played in before? Brad, we proved that we can get close to 500 customers with a million ARR. I don't think I know any company in recent history in cybersecurity which has an average ARR per customer of a million dollars on a product category. I think we've proven that we are able to execute on the backend. Last but not the least, and I'll give way to others saying, don't underestimate quantum. Quantum is going to break every key, which means every piece of infrastructure that hasn't been upgraded has to be upgraded.

I just learned something the other day, which Lee taught me, is you do not even have to have a quantum computer to start breaking keys. You can actually start storing data today and break it later. You can imagine nation-states getting forward and saying, let's just ingest the data, hold on to it. Nobody's paying attention that I've got the data. We'll crack it later. I just think all these technology trends are in the right direction. We have products positioned in each category. I'll tell you what, in three years from now, we'll look back and say, damn, that Kronosphere acquisition was a very smart move because you need observability. If you want your stuff to work 99.9% of the time, you need to know if something goes down ASAP. You cannot know that if you do not have the data.

If you go back historically, the question has been the two largest categories of data are security and observability. That is where Splunk started, by the way. All we have done is we are now the new platform for security and observability once we close Kronosphere. Thanks, Brad, for the question.

Thank you. All right. Next, we have Rob Owens from Piper Sandler, followed by Saket Kalia from Barclays.

Thanks, Hamza. Good afternoon, everybody. Nikesh, just building on those comments, wanted to touch on Kronosphere. You know it has been challenging, I think, for a lot of vendors in security to get into observability. I would love to see or hear from you your perspective on, number one, that convergence happening right now.

Number two, I think Kronosphere has shown success with some of the largest AI-native companies out there having two of the top five frontier models. Are there elements behind their product sets that are applicable to some of these other large AI natives that are growing rapidly that you think you can have success with? Thanks.

Rob, you know me and the team, actually, it's a funny story. We actually found Kronosphere because we were looking around to see, oh my God, everybody's going and abstracting data pipelining, and everybody's going to have to have a data pipelining capability in the future in the SIM. Honestly, as a category, we think data pipelining is sort of an interim category, which is there because of data inefficiency, but we do not think it has a sustainable future.

We kind of like walked away from data pipelining vendors, which I know that some of the industry has tried to ingest as part of their SIM solutions. When we looked harder, you know we ran to Kronosphere, we discovered, you know it's very rarely when your engineering team comes back and says, these guys are good. Generally, engineers have too much pride to tell you somebody else is good. Our team came back and said, these guys are the best engineers we've run into. Now, to be able to scale observability when you're ingesting, you know, petabytes of data at LLM model scale and be able to not create latency, provide observability in that kind of environment at a cost, which is a third.

Look, by the right now, if you go talk to every customer, even we turn down our observability vendor because it's too expensive at Palo Alto. We can't afford to have real-time observability on this product platform because it's too expensive. The problem is you can't run financial services apps. You can't run large e-commerce businesses. You can't run large, you know, food delivery businesses without persistent observability. What Kronosphere has done has changed the observability model by a combination of open source and techniques where they can do scale sort of data observability at the right price. You know, we think every born-in-the-cloud company, every company that has a platform that requires customers to really access it 7 by 24 is a potential customer.

I think, again, it's going to be another business like XIM, which we have an average ARR of $1 million at some point in time.

All right, thank you. Okay, great. Next, we have Saket Kalia from Barclays, followed by Matt Hedberg from RBC.

Okay, great. Hey, guys, thanks for taking my question here. You know, Nikesh, it's interesting to see you sign larger and larger XIM deals. I think you called out an $85 million deal in the quarter, while at the same time, incumbents in this space are really struggling to grow. In the past, you've talked about how XIM—

It's not good. It makes sense. Incumbents don't grow. We take market share, which means we grow and they decline. That's how it works.

Maybe from a spending perspective, maybe the question is, do you find that XIM is able to capture at least what those customers were spending on incumbents, or is there an opportunity to capture more because of that faster mean time to respond? Does that make sense?

It makes sense, Saket. I think the way to think about it differently is we do capture at least what the customer is spending on the incumbent. In the process of delivering XIM, we're able to consolidate multiple products. Not only do we get the incumbent spend of the SIEM provider, but you have UEBA, you have other categories. Maybe, Lee, it's a good time for you to say something.

SOAR, ITDR, recent launches around email security, exposure management. We're able to consolidate these sort of surrounding product categories back onto a single platform.

Customer saves money, but we expand the overall footprint that we can deliver.

Very helpful. Thanks. Okay, next we have Matt Hedberg from RBC, followed by Paul Leoni from Bank of America.

Thanks, Hamza. Congrats for me as well on the results. Obviously, a lot of really positive developments here. The $20 billion fiscal 2030 NGS ARR target is obviously super impressive relative to the prior target that you had outlined. Obviously, there's some tucking sort of M&A assumptions in there. I guess I'm curious, like from a high level, Nikesh, what are some of the biggest moving pieces that give you the confidence since you talked about the prior target just last quarter to raise it to such a significant margin?

That's a great question, Matt. First of all, as I said, our core business continues to show strength.

You know every time you're doing forecasting, somebody says, oh, the large number is going to start making these growth rates go down. As I mentioned, SASE continues to be strong at $1.3 billion in ARR. We're growing faster than independent public companies which run SASE. We feel that's a strong part of our business. Software firewalls, I think, is our hidden gem. You know 50% of our product, or 44% plus of our product revenue is coming from software. I don't think software firewalls are going to stop. As you put more and more cloud workloads out there, people are discovering they need a software firewall. We've been waiting for that trend. It's arrived. We are probably, outside of the CSPs, the only large vendor in the software firewall space.

We feel strong that our core business will keep performing, which allows us to sustain our current $7 billion target in FY2026 forward. If you take CyberArk and what we intend to do with it, we hope that business continues to transform from where they are to absorb more and more identity categories that we intend to do with them. I think Kronosphere, if you add all three of them up, that gets us very close. Will there be tuck-in between now and FY2030? Sure, we will have tuck-ins. As you've seen in the past, tuck-ins do not move the needles by billions of dollars. Tuck-ins move the needle by sustaining growth rates and giving you a few hundred million dollars. I think the lion's share is going to come from the three categories you have just outlined in our core business, in identity, and in observability.

Next, we have Paul Leoni from Bank of America, followed by Amita Marshall from Morgan Stanley.

Hey, guys. Two great acquisitions, long-term, very promising. The question is the transitory period. What's the impact on dilution, on margins, or free cash flow margins? How long does it take to see the synergies? The sum of parts is greater than two.

Yeah, I'm going to let Dipak answer the precise questions and the numbers. As I said, Kronosphere, we will run independently. Martin and team have done a great job. We will provide, obviously, the services from the HR finance marketing people, which is great because they do not have a large team in doing that. They are basically a bunch of really smart engineers and forward-deployed engineers, as well as a few salespeople.

We're going to give them some support by introducing them to the right customers in a very targeted fashion. Martin is very capable. He will run the business with his team. We trust him to do that. We're just going to provide the sort of rocket fuel in him to go out and meet customers and execute on his plan. It's kind of, it's a low, because for us, it's very important because all of our focus from the integration perspective is on cyber. From a CyberArk perspective, you know, as I said, we've had some great meetings. We understand what it is. There will be some, you know, rational synergies on day one because we don't need certain things in duplicate.

We think by the time we get to the end of this fiscal year, our fiscal year, FY26, we have a much better handle. We'll be able to align their sales quotas and their teams and territories around our plans. That is where I think a little bit of reshaping will happen. I'm going to let Dipak talk about specific dilution and free cash flow margin.

Yeah, I think, Tom, the key part, just what I said in my prepared remarks is like with both acquisitions, we believe that we'll be able to get back to the 40% free cash flow by 2028. Your question is really about what in the interim.

I specifically mentioned that we should be able to maintain at least 37%+ free cash flow margin even in the interim, like you know barring the one-time costs, which I think just highlights the bottom of the floor. We're pretty deep into, at our scale, we're pretty deep into understanding how much we can do, how fast, and it doesn't really move the needle as much as you think it might.

Between 37%-40% over the next two years and 40%+ by 2028.

Next, we have Amita Marshall from Morgan Stanley, followed by Brian Essex from JP Morgan.

Great. Thanks. And apologize for the voice. Great traction with XIM and Prisma this quarter. Just what ending are you seeing customers in in terms of AI adoption?

Is it different on AI for security versus kind of security for AI? Thanks.

Look, it's still early innings on AI adoption. I mean, there's, on one hand, what you see is this massive buildout of AI data centers and models and everything else. That's the leading indicator. When you start to look at enterprise adoption, there's, you know, huge scale of production pilots and early deployments and things like that. That's really just the tip of the spear of what we think is coming. Having said that, though, the security of that tends to be trailing that. The recent attacks that we're seeing, both of AI as well as AI launching attacks, are obviously going to start driving more and more awareness of the importance, really, of trying to do both those things at the same time.

It's what I see when I talk to customers is a growing desire for the production pilots of AI to be run in parallel to the production pilots of AI security so that they're moving in lockstep. That is going to require a bit more urgency, I think, on the security side to be up in lockstep with the IT deployment side. That is starting to happen, but it's still early.

All right. Thank you and feel better, Amita. Next, we have Brian Essex from JP Morgan, followed by Joe Gallo from Jefferies.

Thanks, Hamza. Congrats on the results, team. Yeah, I wanted to circle back on quantum. I saw the partnership with IBM on quantum safe readiness. I guess question for Nikesh, are customers focused on this yet?

Is this going to require, you know, some evangelism on your part, or will this be kind of like a Y2K event where they wait till the end, you know, to the last minute to address their exposure? Maybe for Lee, how do we think about the technology advantage that you have that gives you maybe a superior right to win for, you know, post-quantum readiness? Is it the depth of visibility that you have and observability into networks? Is it data protection, all the above? You know, how do you frame that out? Can you start?

Let's start with your question on timing. There are a couple of things that are driving a level of urgency. One is, as Nikesh was mentioning, this notion of harvest now, decrypt later is one of the concerns.

Probably more nation-state level type attack, but collecting encrypted data and then waiting for quantum to become real in order to decrypt it later. There are certain types of data that will still be valuable, you know, years into the future. That's one reason for urgency now. Second is, it's not clear yet when quantum computers will be viable. It's possible that they'll be, you know, viable before people are currently expecting. There's a certain, that variability is also factored in. I'd say third is, this is likely for a lot of organizations, a multi-year effort. If they don't start now, they won't be ready two, three, four years from now.

All of that is adding up to what I've noticed over the last, let's say, six, nine months is a pretty significant inflection in the number of customers who are starting to talk about this and plan for this from an urgency perspective.

On the technical side, look, part of this is really just related to we started working on post-quantum several years ago. We did not wait to start working on this. We've had capabilities rolling out in the last few years, with the biggest launch being a few months ago with Orion. That has put us in a very good position simply in terms of being ahead of many of the people out there.

Two, our ability to sort of see across hardware stack, software stack, SASE stacks, browser stacks now gives us, I think, probably one of the largest footprints where we can leverage existing deployments to get that visibility and to provide remediation versus having it all be net new. You know, the partnerships we announced are really pretty powerful because it allows us to work with others that can complement the pieces that we already have. The only thing I will say to that, Brian, is, look, I understand you're, you know, I used to be, I used to be on your side of the world when I was Y2K. We were all trying to figure out which stocks to buy, which ones not to buy. The good news is, you know, in the Y2K, they're like, you had to go and reset everything.

There was no quick fix across the enterprise. In this case, yes, the long-term solution is to strengthen everything and make it more robust. In the short term, we actually have a solution where, using techniques, we can actually take existing legacy enterprise infrastructure and secure for quantum. As a customer's CIO, would you rather take the risk or you'd just rather spend a few million dollars and say, I am quantum secure until I can upgrade my infrastructure? The answer is, you know, cybersecurity is insurance anyway. Buy a little more insurance.

Are you seeing a compliance push yet, or is that still on the horizon?

Early stages of that, Brian. Early stages. It's coming.

Thank you, Brian. Next, we have Joe Gallo from Jefferies, followed by Patrick Kole from Scotiabank.

You made some architectural changes to the cloud security products earlier this year. Can you just update us on that? How has that been received by customers and any sense of how cloud security grew in 1Q versus 4Q?

Yeah, we made some changes, as you noted, with the launch of Cortex Cloud early in the year. This was made for a number of reasons. In large part, we were seeing an increased need from customers to be able to secure the full lifecycle of their cloud deployments, from code to cloud deployments to runtime, even connected all the way into the SOC. That was the impetus behind this. We have seen a lot of very positive feedback from customers in terms of aligning to their strategies as well. Since then, we have been able to continue to drive further capabilities on that.

Palo Alto Networks (PANW) Q1 2026 Earnings Call Transcript

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