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The most exciting thing for us is ensuring that our customers have access to the most secure assistant inside the enterprise. And with our partnership with Palo Alto Networks, the prospect of continuing to lead in terms of providing the most secure and performant AI assistant for our customers that are some of the biggest organizations operating in a hundred plus countries, that is what excites us.
5m 37s
Good day, everyone.
5m 38s
And welcome to Palo Alto Networks Fiscal Third Quarter twenty twenty five Earnings Conference Call. I'm Hamzah Farawala, Senior Vice President of Investor Relations Strategic Finance. Please note that this call being recorded today Tuesday, May 20, 2025, at 01:30PM 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 Guletra, our Chief Financial Officer. Following our prepared remarks, Lee Klaritch, 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 five supplemental information and Q3 twenty five earnings presentation. [indiscernible] 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.
7m 17s
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.
8m 1s
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, 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 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 [indiscernible] 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 FY 'thirty. 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.
9m 25s
We also generated healthy free cash flow continuing to manage our transition from 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 no longer seems to be a choice.
9m 51s
It's becoming a strategic imperative for every customer as the risk of inaction 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 ID architectures weren't built for the scale, speed or complexity of AI. 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. 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 does 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.
11m 8s
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.
11m 17s
Friction causes latency. Latency is the enemy of real time cyber security. 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 attack chain. 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 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.
12m 30s
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 with 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. Overall growth in largest customers also reinforces our success. We had 130 customers with over $5,000,000 in NGS ARR in Q3, up over 40% year over year. 44 customers is over $10,000,000 in NGSI are up over 60%. To give more color on what these platformizations look like, I wanna take a look at a few examples from q three. Of particular note, beyond the size and scope of our deals, is the customer's ability to consolidate 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 platformized 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.
13m 45s
As a result, our NGSI Rs 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 XIAM, the customer also expanded and extended their platformization on our network security platform in the quarter. Our U. Financial services firm signed a $32,000,000 with us. This customer platformized a network security consolidated cloud security vendors. Driven by a company mandate to consolidate their security tools, 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 my earlier comments, I'm particularly about the momentum we're seeing with Ex I'm that saw accelerating growth in q three.
14m 39s
Xi'M 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, ex SIAM 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 XIM, By consolidating security data into a single AI driven SOC platform, ExIm 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 Xi'an 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 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.
15m 50s
On a trailing twelve month basis, Xi'an 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. 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. Will enhance our ability to further expand ExIIM and its capability. ExIme, 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'an 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.
17m 9s
This massive data stream isn't just powering XiM, 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, broad data ingestion capabilities, we're bringing to deliver solutions using the multiple content capabilities of ExI. 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 and trialing 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 increasingly secure hybrid workforces and IT environments spanning headquarters, branch [indiscernible] uniquely positioned with a consistent security architecture. In q three, we 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.
18m 21s
Sulfur 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, remote users and branch offices, we continue to see robust growth for SASE. Many SASE projects are large and comprehensive. Which is well suited to our rich offering and enterprise focused sales expertise. In Q3, our SaaS 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.
19m 20s
Meanwhile, the drivers of our SASE momentum are broadening. This quarter we saw particularly a 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, have now sold approximately 3,000,000 license seats on Prisma Access browser, up more than 10x from a year ago.
19m 41s
And we have a healthy 9 figure pipeline. As AI drives more data and applications to the 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 resource and more about securely connecting to and managing cloud based services. As more and more critical applications of data reside, within the browser environment, naturally becomes a target of cyber [indiscernible] 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 in enabling secure and productive work in an evolving AI driven world. 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.
20m 51s
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 Airs 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 any security flaws are both protected against, as well as remediated across the enterprise. Prisma AIRS extends our existing capability in posture management and 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, 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 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 robust Q4 pipeline.
22m 6s
We continue to take share across multiple security categories driving strong growth in NGSAR at an industry leading scale. Our platformization strategy translates into tangible business benefits for customers, including a strong security posture and improve operational efficiency throughout through vendor consolidation. With our relentless focus on innovation, we believe Palo Alto Network is the ideal partner to help organizations achieve and secure their AI transformation goals.
22m 32s
I'm particularly proud of our teams for driving phenomenal success in a Q3 which was fraught with geopolitical discussions, tariff discussions yet our teams kept our heads down and continued to execute setting ups up for what we hope will be a great Q4. Let me hand it over to Deepak review the quarterly results in detail. Thank you, Nikesh, and good afternoon everyone.
22m 56s
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%, 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 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 XIM to transform their security operation center.
24m 38s
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 '25 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 2026 and 2027. 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 Panafest, 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 5,090,000,000.00 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.
26m 6s
You've seen the results of this effort in our NGS ARR. Over the last several years, 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 is meaning and this has driven meaningful NGS ARR growth.
26m 31s
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 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 target. 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 performance center to benefit from scale and innovation as well as to take advantage of a foreign trade zone that can help us mitigate tariffs and products that we ship to international destinations.
28m 1s
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.
29m 31s
We generated $578,000,000 in adjusted free cash flow in Q3. Turning to the balance sheet. Will see that our debt balance came down by $151,000,000 as we continue to see early conversion of our convertible debt. 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 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 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 twenty twenty five, we expect NGS ARR to be in the range of 5.52 to $5,500,000,000 an increase of 31% to 32%. Remaining performance obligation of $15,200,000,000 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, increase of 15%.
31m 16s
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 [indiscernible] 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, expect NGS ARR to be in the range of 5.52 to 5.57. 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 16% to 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.
32m 32s
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 Sakai Khalia followed by Brian Essex of JPMorgan. Okay. Great. Hey, guys. Thanks for taking my question.
32m 47s
Here, and congrats, Hamzah, on on the move over. Nikesh Nikesh, maybe for you. Lots of things There's life after. You can see.
33m
Absolutely.
33m 2s
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 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?
33m 30s
Well, Saket, first of all, thank you for the question. Look, I think we had this debate last quarter. You know, how big is ex I'm gonna be versus Swiss 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, then we did the deal with IBM, where the first set of conversion we saw were from QROC. 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. And 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 component.
34m 37s
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. 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 customer. So think the opportunity is huge. If you go back historically, I've said this in cybersecurity, certain swim lanes reach inflection points. Where 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 know, 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.
35m 20s
And I think this is the moment of the SIEM market. It's a $40,000,000,000 TAM, think in the next three to five years it will get replaced. It will 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, 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 [indiscernible] And deliver results immensely. If you concatenate that with what I said, 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.
36m 8s
So there's no way to get 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 I said this in my prepared remarks, I want make sure I emphasize is 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 actually a multi context launch. You know, email security products are traditionally swim lane products. I look at your email, I protect you.
36m 44s
You. Able to look past the email in the sim and say, wait, 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 swim lanes which will get discovered as we deploy Xtime on our customers. We've seen early examples of exposure management and email management. We think those are the first two use cases. There's many use cases behind it. Eventually we think, something like Ex I'm becomes the underlying security fabric of enterprises.
37m 15s
Very helpful.
37m 16s
Thanks.
37m 19s
All right. Next we have Brian Essex from JPMorgan, by Keith Weiss from Morgan Stanley.
37m 24s
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, Makesh, the the you know, the details behind the product revenue growth. Really strong quarter of of growth there, and and I heard 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 refresh.
37m 54s
O'Brien, as you know that our product revenue growth is a combination of hardware and software. It's not just the hardware part. I think the core hardware business still continues to grow at sound like a broken record. I've always maintained five to 8%. 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.
38m 20s
And and I said this and I wanna 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 on prem. There's no Lambda for on prem. We can't deploy Lambda on on prem, but 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.
39m 12s
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, also bolstering our product revenue. At Palo Alto Networks.
39m 32s
Thank you. Next question will be Keith Weiss from Morgan Stanley. Followed by Joe Gallo, Jefferies.
39m 40s
Excellent.
39m 40s
Keith, why did he pick you third?
39m 43s
I I I know. That's a that's a good question. This is this is what you get?
39m 49s
That being said, Hamza, if you ever realize you made the wrong decision, there's always room for you to back to work. It's never too late. It's never too late to come back.
39m 59s
But congratulations, guys, on a really solid quarter.
40m 2s
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 you're talking to customers that 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 in that out year forecast?
40m 46s
It's a great question. 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. It's not one model. It's 30 models because these various models for different things. Now the moment we talk about 35 models, our board starts getting worried about, oh my God, how are you securing these models because they could be from anywhere. What you discover is that 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 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 I don't know. 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 transformation.
41m 58s
So the transformation where you sort of be slowly chugging along for the last five, six years moving to a more balanced portfolio put it harder on software is getting accelerated which will cause the NGS ARR 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 RF 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 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. [indiscernible] I guess.
42m 57s
Thank you, Heath. Next up, we have Joe Gallo from Jefferies, followed by Gabriela Borges from Goldman Sachs.
43m 4s
Hey, guys. Thanks for the question, and congrats, Hamza, on the new role. Nikesh, you briefly alluded to executing through geopolitical 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 April? Or is there still a lot of uncertainty? Maybe just kinda talk through the the pipeline conversations and what's embedded in 4Q guide.
43m 28s
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 to happen? Next time I ship a car across the border it's gonna be twice as expensive. Or I can't ship anything. What am I doing over here? So you saw that little 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 It was not an easy quarter to execute, had we not had the tariff conversations or geopolitical tensions. It would have been 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.
44m 21s
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 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. There's a little more I'd say stability in the business climate than there was. Towards the sort of I'll say the April. But our teams did execute through it, so I'm very proud of that.
44m 56s
Thank you. Great.
44m 59s
Next up, we have Gabrielle Borges from Goldman Sachs followed by Matt Hebberg from RBC.
45m 7s
Hey. Good afternoon. Thank you. Nitesh, 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 couple of years out, the mix between organic and inorganic and on your plan being sites like how do you think about inflating yourself from being leapfrogged in AI technology specifically given how quickly the technology is evolving? Thanks.
45m 34s
Thanks thanks, Gabriela, for the question. I think, you know, 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 slurry of companies. The Dome Nine, 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 our disservice by not indexing harder on the run time scenarios which is where eventually the market has evolved as you can see. Now we see more action in cloud detection and response. Cloud sims than we see in cloud posture. Over time cloud posture is getting commoditized. Every vendor in our industry has a cloud posture module whether you're in SASE or in endpoint detection a cloud security vendor.
46m 40s
So it's a very commoditized industry and know, you've seen pricing sort of get rationalized because of many players in the market and it being an extension of many existing categories.
46m 48s
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 you know, we are sort of you know, 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 where 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. Right? They're to have agency. When that happens, 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 we discovered customers wanted to understand the veracity of the models, they wanted them scanned, they wanted persistent red teaming, Oh my god, it's gonna take us six months to build it.
47m 51s
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 going to work with us. And we're going to close that acquisition and that team is actually gonna run our AI security business.
48m 8s
Excellent, thank you. You.
48m 10s
Next up, we have Matt Hebberg from RBC followed by Shaul Eyal from Cowen.
48m 16s
Hey. Thanks, Hamza, for the question. Congrats on the results, guys. I had a question for Lee. You know, walking around RSA, it really felt like it was an AI conference versus a cyber conference. And you guys talked about 400,000,000 in AI ARR, which is great. I guess my question question is, you know, from an agentic world, talk about why Palo Alto is best positioned to help you know, customers think through that, which is a whole obviously, a whole new paradigm shift. But but talk about some of the foundational aspects that you feel really good about from from that from an agentic perspective.
48m 49s
Yeah.
48m 50s
Great question. I think two years ago, RSA was AI. A year ago, it was AI security, and this year, it was agentic AI. Right? [indiscernible] cycling through the different forms of AI. [indiscernible] with agentic AI, I think the the way I think about it starts with this idea that AI is gonna move from being a sort of helper function to having autonomy. Like, it's going to be able to take actions on its own. Obviously, those actions will be metered out and increased over time as trust is built up.
49m 23s
And you think about that in concept, one of the there's a few key building blocks that are going to have to be present. And one of those is it's not just going to be sort of an open ended let AI kind of create and do whatever it wants to. There'll have to be certain guardrails in constraints on that from an enterprise perspective and certainly from a cybersecurity perspective. And so the first aspect of that then that positions us very well is our breadth and strength across everything related to automation. Right? Our XSOAR platform has over a thousand integrations We know how to integrate with all the different systems in the enterprise. We know how how to programmatically approach this in a consistent, reliable way. What happens then if we put a AI engine behind that, and that's the agentic piece that can actually start to actually create and and evolve and and improve and learn over time. So no one else really has that same level of integration and automation capabilities that can be paired with AI. The second piece is the the biggest concern that I heard from just about every customer I talked to was the sort of the the permission infrastructure for how do you make sure that these agentic systems are actually allowed to do what they're allowed to do.
50m 42s
And the our footprint in understanding the the the interconnectedness of all different applications in enterprise puts us at a very good place to be able to understand the right permissioning and security implications of that. And so we shared this in two forms. One, what we're doing on Prisma errors to secure agentic systems. And two, we gave a preview of agentic, which is going to be our approach to to building Agentyx platforms for our customers. And I'm excited about both of those. Thanks, guys. You, Matt. Next up, we have Shaul Yal from Cowen followed by Jonathan Ho from William Blair.
51m 23s
Thank you. Good afternoon, guys. Congrats on solid results.
51m 27s
Congrats to Hamzah on leading his first call. Nikesh, back to Curator and Talend, and I get these are two different products at their core Both seem to be exceeding their targets internally, both should continue to show great results. From where you sit, would you rank them as Palo Alto's probably better acquisitions over the course of the past four or five years. Where is the bigger TAM opportunity longer term? Like, I think the if you step back, and you think five years out, I think five years out, security will be delivered on top of a large security data lake. By some version of machine learning and AI. I think the traditional approach to security of writing policies and writing rules and writing human sort of you know controls at the edge. Gonna fail.
52m 28s
Because AI will be incessantly banging at those edges trying to find the loopholes and the misconfiguration in the way humans have not secured the perimeter. So if you believe that and you say that the way to make sure that your perimeter is secured is look at all the data, analyze it, pattern recognize it, have your agents. The same agents that, you know, Matt was asking about. Those agents should go back and say, found a misconfiguration at the edge. Let me go fix it.
52m 55s
Right? Why shouldn't that not happen? Why should security in the future be some security analyst sitting and writing a policy pane saying do this for traffic and do this for HTTP etcetera. So by definition it means you should have some version of agentic AI securing a perimeter five years from now. That requires that agentic AI to have the access to all the data across all your endpoints. Right? Mean you have to have the same endpoint, it doesn't mean you have to have Prisma access. Browser or SASE or Palo Alto SASE. You can have anything, can have Zscaler, Netskope, Palo Alto, whoever you want. But at the end of the day, the data has to get to one place. Now what's happened is we've been collecting data recently in new paradigm for the incident response use case. Well guess what? That same data can be used for the policy remediation use case or protect your perimeter use case. So think the evolution of security will be people will go towards a lot you know. Harmonized security data lakes, which will be used for multiple activities. And I think we're seeing the beginning of that. I think three to five years and when you look back you'll say, that was obvious.
53m 53s
It's not obvious today because people are still gonna sell best of breed products at the perimeter to protect it, but how can you protect the perimeter if you only have a singular lens on the problem? If you only see what you see with your product, how can you protect the perimeter You have to see the entire enterprise to understand the relative opportunities, where the relative mistakes are. I think that's where security goes in two to five years. So in that context, I think Prisma Access Browser is a great edge device which will actually very interesting and useful because you have full visibility of the interactions of the endpoint or the human perhaps or the agent perhaps in that use case. But you're going need something in the back to try and make sense of that data and be able to respond in real time. And I think that's where underpinning of the next generation Sims of the world is going Alright.
54m 45s
Thank you, Shaul. Next up, we have, Joel Fishbein from Truist. Followed by Andy Nowinski from Wells Fargo. Hey, guys.
54m 57s
Can you talk a little bit about the enterprise browser and why you know, Talend has seen the inflection that it has? And does this perhaps help your platform approach particularly around the AI opportunity? Thank you.
55m 11s
Yeah. Absolutely. So the the the key, if you think about this from a secure browser perspective, is it it it's a niche sort of use case when it is disconnected from everything else. Right? You have a user. They they browse the Internet. You secure it. That's it's interesting. When we deliver it and are able to integrate it with our platform, it it completely transforms that from being a sort of one off use case to being an everything use case. We can now secure users' traffic to the Internet, we can secure their connection to SaaS, we can secure their connections to private applications, With the recent announcements where we're integrating VDI, we can even secure their connections things that are not even browser based. And so the what I just described is enabled by us delivering it as part of a comprehensive platform, as opposed to a standard solution. Now, we can deliver stand alone, and we have some customers that are starting there as a first step toward broader adoption. Which that's part of the flexibility in how our platforms work. But the Comprehensive Solution is really what's driving the inflection point as we see it.
56m 23s
And then to your point around how AI factors in, we're finding that through the secure browser, we're able to then deliver a differentiated solution to our customers for securely adopting AI. Where they get better security and a better user experience, when adopting AI. Because we can embed a lot of the security controls directly in the browser which just makes it a lot easier from an adoption perspective.
56m 52s
Sorry about that, Jonathan. Next up, we have Joel Fish from Truist, and we'll wrap it up with Andy Nowinski from Wells Fargo.
57m
Thanks for the question. Hamza, congrats. Nikesh, I guess a follow-up to Shaul's question or your answer to Shaul's question. You know, pretty, you know, powerful statement about, you know, the data lake security. I'm curious about how you view threat intelligence and the importance of sharing threat intelligence in this AI era and and, you know, protecting against the bad guys. Love to hear your thoughts on that.
57m 26s
We've we've always had a a a belief that threat intelligence should be shared for the most part. There's obviously certain exceptions, but generally speaking, we're we've been open. We're one of the founding members of the Cyber Threat Alliance, which is focused on doing just that even amongst security vendors. So with our competitors. I actually think the to a certain extent, the advent of AI and attacker AI is gonna have an interesting impact on this. A lot of threat intelligence is oriented toward the idea that if I know about a specific attack, a specific piece of malware, specific IOC, I can build a protection for that specific thing. And in the advent of AI, more and more attacks are going to be novel attacks. They're going to be new and different And it becomes much more important that protections then are AI based. Now these AI based protections will be informed by threat intelligence it'll be less of a direct correlation. Become much more important that what is being shared from a threat intelligence perspective actually becomes more about attack techniques and approaches and that's actually gonna require a bit of a change to the threat intelligence space.
58m 37s
So that'll need to happen. It'll need to play out. It'll be interesting to see how that that shift manifests itself.
58m 45s
Thank you.
58m 47s
Thank you. And our final question will be from Andy Nowinski from Wells Fargo.
58m 51s
Okay. Thank you for squeezing me in, and I'll make it a good one here. You guys had solid growth in platformization customers. I think you now have 1,250, that have deployed a platform. That's a small percentage of, you know, your total installed base over 70,000 customers. So I'm I'm wondering, is there any way to look at the percentage of ARR that those platform customers account for? Because I would guess that they account for a much higher percentage of your ARR than you know, the the 2% they account for in your installed base. I'm I'm really trying to understand the importance of the growth in these platform customers relative to reaching your $15,000,000,000 ARR target?
59m 30s
Thank you.
59m 31s
So let's recap, Andy. I think we had said we wanna get to between 2,500 to 3,500 platformizations. We believe when we get there, at the current trajectory of ARR per platform deals, we're going to get close to our $15,000,000,000 target. And that assumes somewhere between 60% to 70% of our NGS ARR is made up of these platform customers. Does that make sense?
59m 57s
Certainly does. Okay.
59m 59s
That's that's that's our math. So you can do the math by yourself and say, you know, what does that mean? If 70% of 15,000,000,000 is not hard to compute, [indiscernible] 35 you can divide that by 2,500 or 3,500, whichever you like, and see the average AR per deal.
1h 13s
And then, you know, we'll tell you if you worked that back five, 6% a year over the next five years, you'll say, wow.
1h 19s
You know, that's must be the average platform deal that Palo Alto has, give or take.
1h 23s
Got it. Thank you.
1h 25s
K. Great. With that, we will conclude the q and a portion of this call. I will now turn it back to Nikesh for his closing remarks.
1h 31s
Again, thank you everyone again for joining us for our earnings call. We look forward to seeing many of you at upcoming investor events. I also want to thank our customers, partners, and as I said, our employees for powering through was a tumultuous April but we think now it's business as usual. All of us are heads down trying to execute on our big $4,000,000,000 quarter. In Q4. Thanks again.
Key Insights
Q3 total revenue was $2.29B, up 15% YoY, with product revenue up 16% and services revenue up 15%; subscription revenue grew 18% and support revenue rose 10%.
Next Generation Security (NGS) ARR surpassed $5B, up 34% YoY; AI ARR reached ~$400M, more than 2.5x YoY; strong momentum in Cortex/XSIAM, with XSIAM ARR up over 200% YoY and bookings approaching $1B.
Platformization strategy is driving large deals and customer consolidation: 19 net new platformization deals in Q3, now ~1,250 platformized customers among top 5,000; customers with multiple platformizations grew nearly 70% YoY.
SASE ARR grew 36% YoY (outpacing the market), with ~6,000 SASE customers (+22% YoY); software firewalls ARR grew ~20% YoY, driven by public cloud deployments and AI-driven cloud adoption.
FY25 guidance: NGS ARR of $5.52–$5.57B (+31–32%), total revenue of $9.17–$9.19B (+14%), operating margin of 28.2–28.5%, non-GAAP EPS of $3.26–$3.28 (+15%), and adjusted free cash flow margin of 37.5–38%; Q4 revenue expected at $2.49–$2.51B (+14–15%) and non-GAAP EPS of $0.87–$0.89 (+16–19%).
