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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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Q3 2025

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 fiscal third quarter twenty twenty five earnings conference call. I am Hamza Fadawala, Senior Vice President of Investor Relations and Strategic Finance. Please note that this call is being recorded today, Tuesday, 05/20/2025, at 01:30 p. M. Pacific Time.

With me on today's call to discuss our fiscal third quarter results are Nikesh Arora, our Chairman and Chief Executive Officer and Deepak Galecha, our Chief Financial Officer. Following our prepared remarks, Lee Klarich, our Chief Product Officer, will join us for the question and answer portion. You can find the press release and other 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 Q3 twenty twenty five supplemental information and Q3 twenty twenty five 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.

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 expected future 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 measures and reconciliations are in the press release and the appendix of the investor presentation. Unless specifically noted otherwise, all results and comparisons are on a fiscal year over year basis. We also note that management is scheduled to participate in the Bank of America Technology Conference this quarter. I will now turn the call over to Nikesh.

Thank you, Hamzah. Good afternoon, everyone, and thank you for joining us for our earnings call. I'm delighted with our Q3 results. We continue to make progress on our platformization strategy, while releasing a number of unique innovations in Q3 that set the pace for our industry. It is becoming increasingly clear that as organizations aspire to simplify and modernize the security architectures in the age of AI with data at the center, our strategy is resonating resulting in larger deals.

Most notably, we crossed an important milestone of $5,000,000,000 in next generation security ARR up 34% year over year delivering industry leading growth at scale. Our net new ARR growth also showed positive momentum in the third quarter. We believe we've reached an inflection point in our next generation security story. As a growing majority of our incremental growth this year is derived from our AI powered XIM, SASE and software firewalls. These offerings with large TAMs should help underpin your confidence in the sustainability of our NGSAR growth as we march towards our $15,000,000,000 ARR target for FY30.

On the profitability front, Q3 continues to show the leverage in our business model. As we drive efficiencies from our scale and benefit from the economies of larger multi product deals in addition to continuing to drive AI efficiency benefits slowly and steadily. We also generated healthy free cash flow while continuing to manage our transition from a billing focus to RPO. As such, we remain confident in achieving our adjusted free cash flow margin targets over the next few years. Let's be clear, you can't walk around a street corner or conference without hearing the words AI.

The urgency to adopt AI is omnipresent in all of our customers. It's longer seems to be a choice. It's becoming a strategic imperative for every customer as a risk of an action is too high. During every conference, every customer conversation, the topic of AI transformation is more and more frequent and now the conversation is shifting to agentic AI. What's fascinating is this is actually creating a higher sense of urgency amongst our customers to undertake their technology transformation.

Transformation that require a fundamental change in their infrastructure. Traditional IT architectures weren't built for the scale, speed or complexity of AI. To truly capitalize on AI's potential, enterprises need modern cloud delivered platforms that can ingest vast amounts of data and operate in real time at scale. We've seen customers who were previously delaying their cloud migrations are now reaccelerating their investment. This is good news for cybersecurity.

And as AI becomes more deeply integrated into our customers businesses, the need to protect the underlying data, models and infrastructure will become parallel. Over the next year, an estimated more than 300,000,000,000 will be spent on AI infrastructure alone. That kind of spend doesn't just power models. You saw the video we opened with Glean and we're hard at work enabling secure adoption of this next wave AI powered applications. This is precisely why industry must change the paradigm, shifting away from today's fragmented security landscape and towards consolidation.

The cost of fragmentation is friction. Friction causes latency. Latency is the enemy of real time cybersecurity. Now more than ever, bringing data together into unified platform is critical. At its core, security is a data problem.

We believe our depth and breadth of data is amongst the largest in the industry and is something that point solutions simply cannot access. This leads to superior threat detection efficacy, reduce false positives and faster incident response times. All critical metrics for our customers and key drivers of our market leadership. The volume and complexity of threats are not slowing down either. Bad actors are using AI to move faster than ever.

Recently, our Unit forty two team was able to simulate an entire ransomware attack in under twenty five minutes using AI at every stage of the detection. That's a staggering increase in speed powered entirely by AI. Over a year ago, we doubled down on our platformization strategy. We're pleased with the large deal momentum we've had since and the endorsement of our strategy broadly across the industry. Our platform approach is working well with customers slowly and steadily.

Our approach which favors better and speedier security outcomes and lower cost of ownership is being adopted by more and more of our customers. In Q3, we delivered over 19 net new platformization deals, now have a total of approximately twelve fifty platformizations within our top 5,000 customers. Digging deeper, the number of customers of multiple platformizations grew nearly 70% year on year in Q3. In particular, the number of customers platformized on Cortex was up nearly three times, reflecting strong momentum with XIM. The overall growth in largest customers also reinforces our success.

We had 130 customers with over $5,000,000 in NGSI ARR in Q3, up over 40% year over year and 44 customers with over $10,000,000 in NGSI ARR up over 60%. To give more color on what these platformizations look like, I want to take a look at a few examples from Q3. Of particular note, beyond the size and scope of our deals, is the customer's ability to consolidate a significant number of products with Palo Alto Networks. A leading global consulting firm signed a transaction worth over $90,000,000 in Q3. This customer platform is on Cortex for XIM, replacing a legacy incumbent SIM provider.

Our differentiated value was centered in our ability to materially reduce mean time to respond. We also reduced costs by consolidating a total of four products in this deal. As a result, our NGSI of this customer nearly doubled year over year. A leading financial services company signed a $46,000,000 transaction with us. The customer recognized the value of XIM and consolidated four products with us, including the displacement of their well established DDR and SIM vendors.

Beyond Xi'M, the customer also expanded and extended their platformization on our network security platform in the quarter. Our US financial services firm signed a $33,000,000 transaction with us. This customer platformized on network security and consolidated cloud security vendors, driven by a company mandate to consolidate their security tools and reduce complexity in their cybersecurity stack. In this deal, they consolidated four products. Now moving on to an update on Cortex.

As you can tell from earlier comments, I'm particularly excited about the momentum we're seeing with ExIm that saw accelerating growth in q three. XIM is not only our fastest growing product ever, it is now more impactful to our overall growth rate. I believe that from a strategic perspective, XIM has the potential of being the game changer for both the industry and Palo Alto Networks. In the first innings of baseball, not cricket, of transforming the cybersecurity industry with XIAM. By consolidating security data into a single AI driven SOC platform, XIAM is modernizing and disrupting the traditional SIEM market We're continuing to see amazing milestones, including customers meantime to respond from weeks to minutes.

As security teams face growing complexity and talent shortages, we believe ExIm is well positioned to be operating system for modern SecOps. The numbers speak for themselves. We now have approximately two seventy customers in ExIIM and the average AR per customer is over $1,000,000 This already makes it one of the most successful products in the history of cybersecurity. What's even more remarkable is that we've generated, reached this level of adoption and impact just thirty months after Exion was made generally available to customers. Exion ARR grew over 200% year over year in q3, nearly twice as fast as our closest next generation SIM competitor.

On a trailing twelve month basis, Ex I'm bookings are now approaching $1,000,000,000 About three years into our Ex I'm journey, our sustained strong momentum bolsters our confidence in a long growth runway as we increasingly tap into this estimated $40,000,000,000 SecOps TAM. Last quarter, we unveiled Cortex Cloud, our breakthrough in unifying cloud posture and SOC operations. For the last few months, we have seen strong early customer interest in Cortex Cloud, the 9 figure pipeline spanning hundreds of customers. This quarter we also announced two products that will enhance our ability to further expand ExIm and its capability. ExIm, once deployed, has become the foundational security data platform for our customers.

We now understand the data we're capturing in this is the data you actually need for a whole variety of use cases. In April, we launched advanced email security to help stop threats before they reach the inbox, and our exposure management capability was launched as well, designed to cut through the noise and focus security on the risks that truly matter. But that's not all. Think of Xi'M as our data to market engine. Every byte or nearly 12 petabytes of telemetry we ingest daily around cloud identity endpoints in email and more act as high octane fuel.

This massive data stream isn't just powering Xi'M, it's igniting our ability to identify and accelerate our entry into entirely new markets, unlocking additional TAM in the tens of billions we're now uniquely positioned to address. Through a comprehensive understanding of data sources and broad data ingestion capabilities, we're beginning to deliver solutions using multiple content capabilities of Ex Ion. Every piece of telemetry we ingest makes our platform smarter. The more data we pull in, the further our engine can go, and the smarter it gets. The faster we can build entirely new capabilities on top of it.

We're encouraged by the early customer feedback and look forward to continuing to discuss this more in the future. Now shifting our focus to network security. We continue to lead the market in network security and gain share across all three of our best of breed form factors. As enterprises look to securely and increasingly secure hybrid workforces and IT environments spanning headquarters, branch offices, data center in the cloud, we're uniquely positioned with a consistent security architecture. In Q3, our product revenue grew 16% year over year.

This growth was broad based, with software continuing to increase in the overall mix. We also saw stable demand in the appliance market. Software firewall ARR grew approximately 20% year over year in Q3 with public cloud deployments continuing to be the primary driver. AI is accelerating cloud adoption and we believe this trend will expand the long term need for software firewalls that scale modern workloads. Shifting to SASE, which continues to be our fastest growing form factor in network security and a strong contributor to our overall growth.

As customers transform their network to keep pace with delivering first class security capabilities for remote users and branch offices, we continue to see robust growth for SASE. Many SASE projects are large which is well suited to our rich offering and enterprise focused sales expertise. In q three, our SASE ARR grew 36% year over year, more than twice as fast as the overall market and ahead of our key SASE competitors. Furthermore, 40% of these SASE customers were net new to Palo Alto Networks in q three. We now have approximately 6,000 SASE customers, up 22% year over year.

Meanwhile, the drivers of our SASE momentum are broadening. This quarter we saw particularly, particular strength in Prisma Access browser, which again accounted for a third of our Prisma Access seats sold in the quarter. In just eighteen months since our Talend acquisition, we have now sold approximately 3,000,000 license seats on Prisma Access browser, up more than 10 x from a year ago. And we have a healthy 9 figure pipeline. As AI drives more data and applications to cloud, the browser is becoming the primary interface to accessing these resources, acting as the application runtime environment.

The operating system in this scenario becomes less about local resources and more about securely connecting to and managing cloud based services. And as more and more critical applications of data reside within the browser environment, it naturally becomes a target of cyber attacks. Prisma Access browsers native controls and real time visibility are designed to help ensure that sensitive data remains safeguarded during browsing sessions, regardless of the user's location or the application they're accessing. And we believe Prisma Access Browser is strategically positioned to be the future OS and enabling secure and productive work in an evolving AI driven world. Now shifting to our newly launched Prisma AIRS or AI runtime security.

As I mentioned earlier, it's more important than ever to bring data together in order to leverage AI enable customers to stay ahead of the attackers. We're also seeing customers demand for us to help them secure the AI transformation journey. In this mad rush for AI in the industry, many of our customers are experimenting with AI. At Palo Alto Networks itself, our teams are leveraging over 35 models across multiple products, each of which and the AI artifacts need to be discovered, scanned, constantly tested and protected against. Prisma AIs allows for just that.

It helps enterprises discover, scan and test all the AI artifacts to ensure they're safe. It allows for world class data security posture deployment. And once in production, it ensures that applications using AI are constantly monitored and any security flaws are both protected against as well as remediated across the enterprise. Prisma AIRS extends our existing capability in posture management runtime security, will add security for AI agents in the future. And we recently announced the intent to acquire Protect dot ai, an early innovator leader in security for AI providing AI model scanning and AI red teaming to further bolster our capabilities.

Customer interest has been strong. We currently are in conversation with hundreds of prospects and already have an 8 figure pipeline since making the announcement last month. In summary, we see strong momentum heading into our fiscal year end driven by continued transformation and we look for our first north of $4,000,000,000 quarter. We see strong desire for consolidation and the desire to implement AI securely including a robust Q4 pipeline. We continue to take share across multiple security categories driving strong growth in NGS ARR at an industry leading scale.

Our platformization strategy translates into tangible business benefits for customers, including a strong security posture and improved operational efficiency throughout through vendor consolidation. With our relentless focus on innovation, we believe Palo Alto Networks is the ideal partner to help organizations achieve and secure their AI transformation goals. I'm particularly proud of our teams for driving phenomenal success in a q three which was fraught with geopolitical discussions, tariff discussions, yet our teams kept our heads down and continued to execute setting us up for what we hope will be a great q four. Let me hand it over to Deepak to review the quarterly results in detail.

Thank you, Nikesh, and good afternoon everyone. To maximize our time spent on Q and A, I will provide you with highlights of Q3. You can review the detailed results in our press release and the supplemental financial information on our website. In Q3, total revenue was $2,290,000,000 and grew 15% at the high end of our guided range. Within total revenue, product revenue grew 16%, while total services revenue grew 15%.

Within total services, subscription revenue grew 18% and support revenue rose 10%. On a trailing twelve month basis, the proportion of our product revenue from software is approaching 40%, driven by our growth in our virtual form factors and SD WAN. We continue to see stable demand for firewall appliances with market growth in the 0% to 5% range as we have discussed previously. Moving on to geographies, we saw double digit growth across all theaters with The Americas growing 12%, EMEA up 20% and JPEG growing 23%. Our remaining performance obligation or RPO grew 19% to $13,500,000,000 Our current RPO was $6,200,000,000 growing 16% year on year.

The average duration of new contracts remained at approximately three years. Contract duration decreased slightly on both a year over year and quarter over quarter basis. Customers continue to make significant commitments to Palo Alto Networks through our platformization deals, particularly when adopting XIAM to transform their security operations center. We continue to see increasing demand for annual payments, particularly deals over $1,000,000 but we are absorbing this transition while maintaining the high end of our fiscal year twenty twenty five annual adjusted free cash flow margin guidance, as well as reiterating confidence in our adjusted free cash flow margin targets of 37% plus in fiscal year 'twenty six and 'twenty seven. In line with what we talked about earlier in the year, we saw a year over year increase in bookings that went into annual billings in Q3 and a decrease in deals leveraging PanFS with a neutral impact on cash flow.

Turning to next generation security ARR. As Nikesh highlighted, we surpassed the $5,000,000,000 mark in Q3 and ended the quarter at $5,090,000,000 in NGS ARR, a growth of 34%. Within NGS ARR, we continue to see significant momentum around our Cortex platform, and our AI ARR is now approximately $400,000,000 in Q3, up over 2.5 times year over year. I'm particularly excited about the trends driving the NGS ARR, and I wanted to provide some additional insights around the evolution of our net new NGS ARR. We've made a number of significant investments over the last several years to both continue to lead the network security market, as well as build leadership positions in new markets.

You've seen the results of this effort in our NGS ARR. Over the last several years in network security, we invested in advanced, cloud delivered versions of our subscriptions that attach to our appliances. We saw strong adoption of these advanced subscriptions as customers saw the value of adding these to their existing network security deployments, and this has driven meaningful NGS ARR growth. In addition, we have NGS product offerings beyond those advanced subscriptions in new markets across network security, cloud security, and security operations. We refer to those as our new market offerings as they have also fueled our NGS ARR growth.

We continue to see momentum from our advanced subscriptions in fiscal year twenty twenty five, driving a healthy and relatively consistent level of net new ARR compared to prior years. At the same time, we've seen our net new NGS ARR from new market offerings grow significantly, and these are becoming a larger proportion of our total net new NGS ARR dollars. This is a result of our strength and position in these markets, our large sales team becoming more adept at selling these offerings and platformization taking hold with our customers and in the industry. As we look forward, we expect to see the new market business to be the stronger driver of net new ARR dollars. It is this dynamic that gives us confidence in our long term targets.

Moving down the income statement, total gross margin was 76%. Product gross margin was 78.4% in the quarter. As a reminder, we have been transitioning to a contract manufacturing facility in Texas as our primary manufacturing and fulfillment center to benefit from scale and innovation, as well as to take advantage of a foreign trade zone that can help us mitigate tariffs in products that we ship to international destinations. As we said on our previous call, we continue to believe that we differentiate ourselves by being the only pure play cybersecurity firm at scale to assemble all of our hardware in The USA. As a result, tariff impact to our business has been immaterial.

We expect product gross margins to remain in the high 70% or low 80% margins in Q4. Our total services gross margin was 75.4. We are excited to see continued strong adoption of our SaaS offerings. We continue to execute on cloud cost efficiencies, including engaging with our key cloud service providers to negotiate favorable procurement arrangements as the scale of our cloud hosted products continues to increase. Encompassing those gross margin dynamics, we continue to focus on executing our operating margin targets, which delivered year over year improvements in operating margin.

As I have often said, our business scales well across every single line item of the P and L. On an operating expense as a percentage of revenue basis, we saw three forty basis points of year over year leverage this quarter as we drove scale and efficiencies across sales and marketing, R and D and G and A. We delivered $0.80 of diluted non GAAP EPS and diluted GAAP EPS of $0.37 our twelfth consecutive quarter of positive GAAP EPS. We generated $578,000,000 in adjusted free cash flow in Q3. Turning to the balance sheet, you will see that our debt balance came down by $151,000,000 as we continued to see early conversion of our convertible debt, which occurred at the discretion of the debt holders and was settled by us in cash and equity.

As a reminder, our convertible notes reached final maturity in June, and our convertible notes can no longer be early converted. We will settle the remaining convertible debt in cash and equity in Q4. As Nikesh mentioned, we announced our intention to acquire Protect dot ai for a total consideration of $700,000,000 in cash and replacement equity awards. We expect the transaction to close by our first quarter of fiscal year twenty twenty six. We did not repurchase any shares in Q3, and our buyback strategy remains opportunistic.

We have $1,000,000,000 in authorization remaining through December 2025. With that, let me turn to guidance. For the fiscal year 2025, we expect NGS ARR to be in the range of 5,520,000,000.00 to $5,570,000,000 an increase of 31% to 32% remaining performance obligation of 15,200,000,000.0 to $15,300,000,000 an increase of 19% to 20% revenue to be in the range of $9,170,000,000 to $9,190,000,000 an increase of 14% operating margins to be in the range of 28.2% to 28.5% our diluted non GAAP EPS to be in the range of 3.26 to $3.28 per share, an increase of 15% adjusted free cash flow margin in the range of 37.5% to 38%. As we noted last quarter, we do expect a higher Q4 contribution to our annual free cash flow. And for Q4 specifically, 80% of the collections are from deals that have already been booked.

Our annual cash flow seasonality is more second half and Q4 weighted this year, influenced by the timing of deferred payments from customers that signed deals in prior periods and the timing of bookings within the year. For the fourth fiscal quarter of twenty twenty five, we expect NGS ARR to be in the range of 5.52% to 5.57%, an increase of 31% to 32%, remaining performance obligation of 15.2% to 15.3% an increase of 19% to 20% revenue to be in the range of $2,490,000,000 to $2,510,000,000 an increase of 14% to 15% and diluted non GAAP EPS to be in the range of $0.87 to $0.89 an increase of $0.16 to $0.19 We've included our typical modeling points in the presentation for your review. With that, I will turn it back to Hamza for the q and a portion.

Okay. Great. Thank you. To allow for broad participation, I would ask that each analyst ask only one question. The first question will come from Sakhi Kallia followed by Brian Essex of JPMorgan.

Okay. Great. Hey, guys. Thanks for taking my questions here, and congrats, Hamzah, on on the move over. Nikesh Nikesh, maybe for you, lots of things

Absolutely. Nikesh, maybe for you, lots of things to be excited about with with XIM. I wanted to dig into one part of that opportunity, in particular, which is the QRadar on premise, customer base. Clearly, a a a big base there that that you can upgrade. Maybe the question is how are customers thinking about that upgrade and how big of an ARR opportunity could that be for Palo Alto Networks on that path to 15,000,000,000?

Well, Saket, first of all, thank you for the question. Look, I think we had this debate last quarter, you know, how big is Xi'M gonna be versus Prisma Access Browser because we believe they're both new trends in the industry primarily driven by the AI way we're seeing around us. And whilst we started the ExIm journey, and then we did the deal with IBM where the first set of conversion we saw were from QRock, where people who were already adapted SaaS, already in the sort of cloud delivered SIM market, we saw that conversion. But we've had a phenomenal partnership with IBM where we have been able to go with them to many of their large customers and work them through the transformation of going from an on premise SOC to what is effectively now a cloud delivered SOC. So the on prem transition is not just you know, moving Cura to the next time, but also moving from an on prem delivered solution to cloud based solution.

You know, clearly you've seen the ARR uplifts. We announced the large deal, one of the largest deals, $90,000,000 deal which had an ex I'm competent to it. The second largest deal we had also had an ex I'm competent. So clearly, large deals on ex I'm are possible. I mean, think about it, we've been covering security for a long time.

This product they came out where the average ARR was a million dollars a year. Right? There are companies out there in security who start and say claim they have $10,000,000 customers or we say every customer assigns a million dollar ARR customers. So I think the opportunity is huge. If you go back historically, and I've said this in cybersecurity, certain swim lanes reach inflection points where the next set of products are so much better that everybody has to be shaken out of their stupor and their old solutions to go replace them.

And you you saw that happen in the endpoint market where we had players who had to be replaced over time. You saw that historically when we came out of the next generation firewall. And I think this is the moment of the SIEM market. It's a $40,000,000,000 TAM. I think in the next three to five years it'll get replaced.

It'll be replaced by new age players. The legacy players will try their darndest to hang on to it. But the architectures are fundamentally different and the architectures of yesteryears, and it's not their fault. If you designed a product seventeen years ago, it was designed where data was expensive to store. Latency was high.

Things were done offline. Today we live in a world with low latency. As you see, hyperscalers announcing real time translation this morning. So you can see that we can process data at immense speeds and deliver results immensely. If you concatenate that with what I said, we were able to regenerate a siren's ransomware attack in twenty five minutes.

Right? If that's the pace of the bad guys, the pace of the good guys has to be faster. So there's no way to get to the other side from an incident response and a management perspective if you don't transform what is fundamentally a legacy technology. So I think ex I'm has a huge potential one, and I apologize for taking longer than I should for your answer. But you know, I said this in my prepared remarks, I want to make sure I emphasize is that what we've discovered is once we ingest all the data in an enterprise, we can actually go and make peacetime products better.

So our launch of email is actually a multi context launch. You know, email security products are traditionally swim lane products. I look at your email, I protect you. We're able to look past the email in the sim and say, wait, when somebody clicked on that email link, what happened? So we have the entire organizational context and data that we have that allows us to go back and make the email product spectacularly better.

So we think there are many many new sim lanes which will get discovered as we deploy XiM on our customers. We've seen early examples of exposure management and email management. We think those are the first two use cases, but think there's many use cases behind it. Eventually we think something like XiM becomes the underlying security fabric of enterprises.

Alright. Next, we have Brian Essex from JPMorgan followed by Keith Weiss from Morgan Stanley.

Great. Thank you. Thank you, Hamza, and congrats on the move from me as well. Thank you for taking the question. I was I was wondering if you could unpack, Nikesh, the the, you know, the details behind the product revenue growth.

Really strong quarter of of growth there, and and I heard, you know, Deepak's comment that approaching 40% software in terms of mix. But I was wondering if maybe you can shed some light on how much of that is share shift, how much of that is pricing increase, and how much of that might be refreshed.

Well, Brian, as you know that our product revenue growth is a combination of hardware and software. Software.

it is not just the hardware part. I think the core hardware business still continues to grow at I sound like a broken record. I've always maintained five to 8%. And I think the core hardware business is still growing at five to 8%. We highlighted software firewalls in our prepared remarks for a reason.

We think the software firewall business is going to inflect. And I said this and I want to reemphasize that. In the last six months, you always ask what changed this quarter. What changed this quarter is there is so much buzz about AI that even the people who are reluctant to deploy AI are dipping their toes in it. Now what's fascinating is if you want to stay in the bleeding edge of AI innovation, it's all coming cloud delivered.

Right? If you want to do an on prem AI implementation, it's about six months behind because there's no Gemini for on prem. There's no open AI for There's no Lambda for on prem. We can deploy Lambda on on prem, you have to be very smart technically to go put all the bells and whistles required.

So even the most reluctant of organizations are going to have to move to the cloud to be able to leverage the AI model that are coming out fast and furious. Now the moment you say I have to go in the cloud, I have to go deploy real time in the cloud, you have to secure it. And today, we have the best technology in a multi cloud basis for cloud network traffic in our software firewalls. So part of what we're seeing as a software firewall business is beginning to inflect, which is underpinning both the transformation from hardware to software, but also bolstering our product revenue at Palo Alto Networks.

Next question will be Keith Weiss from Morgan Stanley, followed by Joe Gallo, Jefferies.

Excellent. Keith, why did he pick you third?

I I I know. That's a that's a good question.

That being said, Hamza, if you ever realize you made the wrong decision, there's always room for you. You know, like, it's never too late. It's never too late to come back. But congratulation, guys, on on on a really solid quarter. I I wanted to kind of expand on, that last question, what you were talking about in terms of the, like, the AI imperative, and what that opportunity means for Palo Alto Networks.

When when when you're talking to customers and are looking to secure these new AI infrastructures, is this just about errors, or is there a wire opportunity? What does it, like, pull through from the Palo Alto portfolio when people are looking to secure this new surface area? And to to what degree does this help give you guys confidence in the growth in the, like, the next generation ARR into next year? That's where I hear the most concerns from investors. Are they too aggressive for next year?

Is it AI? Is it platformization? Like, what are the elements that give you confidence in that out year forecast?

That's a great question, Keith. So I think if you take the software firewall example and extend it. So our conversations now are beginning with, well, we've got to secure this AI implementation. And I highlighted, you know, we had a board meeting last week and our infosec team presented how much AI are we using within Palo Alto. I was amused and amazed to find we have 35 models under evaluation and deployment right now at Palo Alto.

We don't start one model. It's 35 models because we use various models for different things. Now the moment we talk about 35 models, our board starts getting worried about, my God, how are you securing these models? Because they could be from anywhere. And what you discover is that to be able to secure those models, you actually effectively have to envelope them with a runtime firewall or AI firewall, which is actually an extension of our software firewall capabilities.

Right? So what's going to happen, the AI firewall is going to do a pull through on the software firewall. And customers are going to lose the distinction between AI traffic and traditional cloud traffic. Calling traditional cloud traffic is So what's happening to see is we are beginning to see the faster adoption of cloud firewalls because of the AI trend, which is what I highlighted to Brian in terms of how that is driving some of the hardware to software transformation. So the transformation we've sort of been slowly chugging along for the last five, six years moving to a more balanced portfolio with hardware and software is getting accelerated which will cause the NGS ARR shift from hardware to software because that depletes our traditional ARR and increases our NGS ARR.

So there's sort of tailwinds associated with that on the NGS ARR front from a software firewall perspective. And Keith one of the other things I'll say is that we learned our lesson in cloud. In cloud security we dwelled too long on the peacetime capabilities cloud security or the posture capabilities of Prisma Cloud. But in the firewall sort of AI business, we've actually doubled down on the production capabilities. So we are aggressively starting with runtime security, which actually was eighteen months later in the cloud security industry.

Right? We are out of the gate with a runtime capability. And as you can see with our acquisition of Protect dot ai, we're not going to let this one go. We will relentlessly innovate and make sure that we don't get sideswiped by any vendor in the market.

Thank you, Heath. Next up, we have Joe Gallo from Jefferies followed by Gabriela Borges from Goldman Sachs.

Hey, guys. Thanks for the question, and congrats, Hamza, on the new role. Nikesh, you briefly alluded executing through geopolitical volatility. You're the first off quarter siren into report. Can you just elaborate on your conversations with CIOs, CSOs?

Is it back to business as usual after the first couple weeks of April? Or is there still a lot of uncertainty? Maybe just kind of talk through the pipeline conversations and what's embedded in 4Q guide.

That's a great question, Joel. And I don't you know, the reason I didn't dwell on it in our prepared remarks is because April was an anomalous month. I think we're back to normal in a way. But there was, as you can imagine, not too far long ago there was conversations around tariffs around the world. There were all kinds of supply chain shocks that were anticipated, which did cause some of our customers to think, my god, what's going happen?

You know, next time I ship a car across the border it's going to be twice as expensive. Or I can't ship anything, what am I doing over here? So you saw that little sort of uncertainty in the market, which happened to be in the last month of our quarter. So that's why I'm particularly delighted that our teams got their heads down and executed. It was not an easy quarter to execute.

Had we not had the tariff conversations or geopolitical tensions, it'll much easier to sail through it. But we had our lessons from the pandemic. We had our lessons from supply chain crisis. So we had to go back and pull up our shorts and execute the same practices that we did then. And we're kind of like on the same sort of cadence now in Q4 because we are trying to stay ahead of the curve.

Because I don't think many of our customers change their plans from a transformation perspective, But there was a pause for a few days where they were trying to figure out where the market goes. And thankfully as you see that we seem to have overcome that as a global economy. So there's a little more, I'd say stability in the business climate than there was towards the sort of say the April. But our teams did execute through it, I'm very proud of that.

Great. Next up we have Gabriela Borges from Goldman Sachs followed by Matt Hebberg

Hey. Good afternoon. Thank you. Nikesh, I wanted to follow-up on your comment on learning your lesson from cloud. Maybe just a little bit more on how you think about the AI product portfolio evolving from here.

How do you think about what this looks like a couple of years out, the mix between organic and inorganic? And on your plan being site flight, how do you think about inflating yourself from being leapfrogged in AI technology specifically given how quickly the technology is evolving? Thanks.

Yeah. Thanks thanks Gabriela for the question. I think in the cloud world, if you go back five years ago, which is when I'd say five or six years ago when the whole cloud security evolution started, there was an over indexation and focus on cloud posture. Trying to understand what's going on, trying to understand where the misconfigurations are, trying to understand how do you configure GCP, how do you consider configure AWS, etcetera. And there was a whole flurry of companies, Dome9, Evident, RedLock, Twistlock, all the companies that some of us bought and turned into our sort of core cloud portfolios.

But there's a lot less focus on runtime because everybody was experimenting. Everybody was trying to figure out what to do with cloud and deploying it. So clearly that's where the market was, that's where all of us focused. But I think we did ourselves a disservice by not indexing harder on the runtime scenarios which is where eventually the market has evolved as you can see. Now we see more action in cloud detection and response and cloud sims than we see in cloud posture.

And over time cloud posture is getting commoditized. Every vendor in our industry has a cloud posture module whether you're in SASE or an endpoint detection or your cloud security vendors. So it's a very commoditized industry and you know, you've seen pricing sort of get rationalized because of many players in the market it being an extension of many existing categories. In AI, I think we're going to see an accelerated version of that because AI is moving a lot faster than any other technology transformation that's happened. And we are sort of, it's better to be lucky than good sometimes.

And we were lucky that we deployed native firewalls in every public cloud provider that allows us to expand that capability because we want to watch AI transactions midstream in line. You have to be aware of the traffic is. The traffic is in the cloud service providers. Right? If you think about it, 90% of AI implementations are running through cloud service providers, not on prem.

If that's the case, that traffic has to be looked at. It has to be bidirectional traffic because these things are going have a brain of their own. They're to have agency. When that happens, you have to look at what that brain is doing because sometimes it can be erratic. So from that perspective, AI runtime security becomes a very important pillar.

And you know, we sat around the team and we had done a really good job on our AI firewall. And then they discovered customers wanted to understand the veracity of the models. They wanted them scanned. They wanted persistent red teaming. So, oh my god, it's gonna take us six months to build it.

Like, no, let's go look at who's the best in the market. We found Protect. We were lucky that the founders found a fit with our team in terms of how they were gonna work with us. And I know we're gonna close that acquisition and that team is actually gonna run our AI security business.

You. Next up, we have Matt Hebberg from RBC followed by Shaul Eyal from Cowen.

Palo Alto Networks (PANW) Q3 2025 Earnings Call Transcript

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