Palo Alto Networks Inc Q3 FY2025 earnings call

Platformization Strategy

• Making progress on platformization strategy, with over 90 net new platformization deals in Q3 and approximately 1,250 platformizations within top 5,000 customers. Larger deals are being closed due to the resonating platformization strategy.

AI Imperative

• Urgency to adopt AI is omnipresent for customers, shifting to agentic AI which creates higher urgency for technology transformation. Traditional IT architectures aren't built for AI scale, speed, or complexity, and customers are reaccelerating cloud migrations. Over $300 billion will be spent on AI infrastructure alone in the next year.

Product Highlights

• XSIAM: Fastest-growing product ever, with accelerating growth in Q3, average ARR per customer over $1 million, and approximately 270 customers. Cortex Cloud has strong early customer interest. Network security continues to lead the market, with growth in product revenue and stable demand in appliance market. SASE is the fastest-growing form factor in network security, with 40% of new SASE customers being net new to Palo Alto Networks in Q3. Prisma AIRS launched to help secure AI transformation journey, and intent to acquire Protect.ai to bolster capabilities.

Big Deals

• A leading global consulting firm signed a $90 million deal, platformizing on Cortex for XSIAM and reducing mean time to respond and cost. A leading financial services company signed a $46 million deal, consolidating products and expanding platformization. A U.S. financial services firm signed a $33 million deal, consolidating security tools and reducing complexity.

Next-generation security ARR surpassed $5 billion in Q3, up 34% year-over-year. XSIAM is the fastest-growing product ever, with ARR growing over 200% year-over-year in Q3 and approaching $1 billion in trailing 12-month bookings. Product revenue for network security grew 16% year-over-year in Q3. SASE ARR grew 36% year-over-year in Q3. AI ARR was approximately $400 million in Q3, up over 2.5 times year-over-year. In terms of revenue contribution, XSIAM is becoming more impactful to overall growth rate, and network security and SASE are also key contributors.

Fiscal Year 2025 Guidance

• NGS ARR expected to be in the range of $5.52 billion to $5.57 billion, an increase of 31% to 32%. Remaining performance obligation (RPO) expected to be $15.2 billion to $15.3 billion, an increase of 19% to 20%. Revenue expected to be in the range of $9.17 billion to $9.19 billion, an increase of 14%. Operating margins expected to be in the range of 28.2% to 28.5%. Diluted non-GAAP EPS expected to be in the range of $3.26 to $3.28 per share, an increase of 15%. Adjusted free cash flow margin expected to be in the range of 37.5% to 38%.

Q4 2025 Guidance

• NGS ARR expected to be in the range of $5.52 billion to $5.57 billion, an increase of 31% to 32%. RPO expected to be $15.2 billion to $15.3 billion, an increase of 19% to 20%. Revenue expected to be in the range of $2.49 billion to $2.51 billion, an increase of 14% to 15%. Diluted non-GAAP EPS expected to be in the range of $0.87 to $0.89, an increase of 16% to 19%.

Risks

• Geopolitical and tariff discussions could impact business operations. Uncertainty in the market due to events like supply chain shocks and tariff conversations in April could affect customer plans and sales. The rapid evolution of AI technology poses a risk of being leapfrogged if not keeping up with innovation.

Q: How are customers thinking about upgrading from QRadar on-premise to XSIAM?

A: The QRadar on-prem transition is not just moving QRadar to XSIAM but also from an on-prem delivered solution to cloud-based solution. Large deals on XSIAM are possible, and the average ARR per XSIAM customer is over $1 million. The opportunity is huge as the SIEM market is set to be replaced by new age players with different architectures.

Q: Can you unpack the details behind the product revenue growth, specifically the shift from hardware to software?

A: The software firewall business is beginning to inflect due to the AI wave. Organizations are moving to the cloud to leverage AI models, and software firewalls are the best technology for securing multi-cloud network traffic in the cloud. This is underpinning the transformation from hardware to software and bolstering product revenue.

Q: When talking to customers about securing new AI infrastructures, is it just about AIRS or a wider opportunity? What gives confidence in next-generation ARR growth?

A: It's a wider opportunity. Conversations are beginning with securing AI implementations, and the software firewall example extends to other areas. The faster adoption of cloud firewalls due to the AI trend is driving the transformation from hardware to software, which gives confidence in next-generation ARR growth. The platformization strategy and strong momentum in products like XSIAM and SASE also contribute.

Q: Can you elaborate on executing through geopolitical volatility and the pipeline in Q4?

A: April was an anomalous month with uncertainty due to geopolitical and tariff discussions. Now, it's back to normal to a certain extent. Our teams executed through it, and there is stability in the business climate. The Q4 guide is embedded with a solid pipeline despite the earlier volatility.

Q: How do you think about the AI product portfolio evolving, the mix between organic and inorganic, and insulating from being leapfrogged?

A: In the cloud world, we learned from focusing too much on posture and not enough on runtime. In AI, it's an accelerated version. We were lucky to deploy native firewalls in cloud providers. We acquired Protect.ai to bolster AI security capabilities, and we'll continue to innovate to avoid being leapfrogged.

Q: How do you rank QRadar and Talon as better acquisitions and their TAM opportunities?

A: Five years out, security will be delivered on top of a large security data lake by machine learning and AI. Prisma Access Browser and next-generation SIEMs are important. QRadar and Talon are both exceeding targets and have good TAM opportunities, with the overall trend pointing to security based on a data lake and AI.

Q: Talk about the enterprise browser and its inflection and relation to the AI opportunity.

A: The secure browser is a niche use case when standalone, but when integrated with the platform, it transforms into an everything use case. It enables securing users' traffic to various destinations and helps in securely adopting AI, providing better security and user experience.

Q: Thoughts on threat intelligence and sharing in the AI era?

A: Threat intelligence should generally be shared. In the AI era, attacks are more novel, so protections will be AI-based. Threat intelligence needs to shift to focus more on attack techniques and approaches for better protection.

Q: Percentage of ARR from platform customers and its relation to $15 billion ARR target?

A: It's estimated that 70% of $15 billion ARR target will come from platform customers. With the goal of 2,500 to 3,500 platformizations, the average ARR per deal can be calculated, which supports the long-term target.