Palo Alto Networks Q3 2024 Earnings Analysis
Dive into $PANW Palo Alto’s Q3 2024 earnings with review of financial performance, key metrics, operating expenses, dilution, customer growth, future outlook
Financial Results:
↗️$2,138.8M rev (+13.9% YoY, +12.1% LQ) beat est by 0.9%
↘️GM* (77.3%, -0.7 PPs YoY)🟡
↗️Operating Margin* (28.8%, +0.6 PPs YoY)🟢
↘️FCF Margin (68.5%, -10.8 PPs YoY)🟡
↗️Net Margin (16.4%, +6.1 PPs YoY)
↗️EPS* $1.56 beat est by 5.4%🟢
*non-GAAP
Revenue By Type
Product
➡️$353.8M rev (+3.7% YoY, -5.3% LQ) 🟡
↗️GM* (79.7%, +1.3 PPs YoY)
Subscription and support
➡️$1,785.0M rev (+16.1% YoY, +18.2% LQ)
↘️GM* (76.8%, -1.1 PPs YoY)
Key Metrics
↗️RPO $12.60B (+21.2% YoY)🟢
↘️Billings $1,785M (-9.2% YoY)🟡
↗️NGS ARR $4,520M (+39.9% YoY)
Operating expenses
↘️S&M*/Revenue 29.3% (-1.1 PPs YoY)
↗️R&D*/Revenue 15.8% (+0.6 PPs YoY)
↘️G&A*/Revenue 3.4% (-0.8 PPs YoY)
Quarterly Performance Highlights
↗️Net New ARR $300M (+7.1% YoY)
↗️CAC* Payback Period 8.6 Months (+0.6 YoY)🟡
↘️R&D* Index (RDI) 0.88 (-0.33 YoY)🟡
Dilution
↗️SBC/rev 15%, +1.6 PPs QoQ
↘️Basic shares up 5.4% YoY, -0.3 PPs QoQ🔴
↗️Diluted shares up 1.3% YoY, +1.5 PPs QoQ
Guidance
➡️Q4'24 $2,220.0 - $2,250.0M guide (+10.9% YoY) in line with est
➡️$9,120.0 - $9,170.0M FY guide (+20.8% YoY) raised by 0.2% in line with est
Key points from Palo Alto’s Third Quarter 2024 Earnings Call:
Financial Performance Overview
Palo Alto Networks delivered $2.14 billion in revenue for Q1 2025, reflecting a 14% YoY increase. Growth was driven by subscription and services revenue, which rose 16% YoY, with subscription revenue up 21% and support revenue increasing 8%. Product revenue grew modestly by 4%. Operating margin improved by 60 basis points, indicating better efficiency alongside continued growth investment.
NGS ARR (Next-Generation Security Annual Recurring Revenue) reached $4.52 billion, a 40% YoY growth, bolstered by $74 million from the QRadar SaaS acquisition. RPO (Remaining Performance Obligations) climbed 20% YoY to $12.6 billion, while current RPO increased 18% YoY to $5.9 billion. Contract durations held steady at approximately three years.
Billings Transition
Palo Alto shifted its focus from billings to NGS ARR and RPO as primary performance metrics, ensuring long-term value alignment. Billings growth would have been consistent at 12% YoY without these changes. Shifts to annual invoicing and reduced reliance on financing structures, such as PanFS, streamlined sales processes and accelerated deal closures.
Product Innovations
Key innovations advanced Palo Alto's strategic objectives. Strata CoPilot, an AI-driven support tool, enhanced accuracy and resolution times by training on over 50,000 sources. Prisma Access Browser, launched after the Talend acquisition, secured 1 million licenses and improved unmanaged device security and phishing resistance. SASE enhancements, incorporating AI-based monitoring, CASB, and ATEM, extended use cases and increased adoption.
Platformization Momentum
Platformization drove growth, with 70 new deals in Q1, raising the total to 1,100. ARR per platformized customer increased 6% YoY. Large transactions included a $50 million SOC transformation deal, a $30 million expansion with a security services company, and a $15 million platformization agreement with a hospital system. Platformization consolidated cybersecurity tools, improving customer outcomes and cost-efficiency. Challenges included persuading enterprises to transition from entrenched vendors, addressed through phased deployments and aligned payment structures.
Cortex Expansion
Cortex surpassed $1 billion in ARR, with XSIAM driving rapid adoption among 150 active customers, 40 of whom contribute over $1 million in ARR. The QRadar SaaS acquisition contributed $80 million in bookings, with a $1 billion pipeline. Cortex positions Palo Alto as a leader in next-generation SIEM, replacing outdated systems and reducing threat detection times from days to hours. The legacy SIEM market, valued at $20 billion, presents a significant disruption opportunity.
Cloud Security Leadership
Prisma Cloud exceeded $700 million in ARR, with cloud detection and response (CDR) deployments growing 10x over two quarters. Integration of CNAP, CDR, and XIM strengthened real-time security offerings. A third of Prisma Cloud customers also utilize Cortex products. AI-powered DSPM capabilities automated risk remediation, securing Palo Alto's position in cloud security leadership.
Prisma Momentum
Prisma Access Browser sold over 1 million licenses, acquiring 115 new customers and reducing reliance on legacy VDI solutions. SASE adoption increased, with 40% of new customers being net-new to Palo Alto. Prisma innovations addressed competitive pressures from legacy VPN and proxy vendors, with added AI capabilities enhancing customer attraction.
Co-Pilot AI Integration
AI-driven Co-Pilots, launched across Strata, Prisma, and Cortex, delivered actionable insights, faster resolutions, and automation. Strata CoPilot significantly reduced Tier 1 support ticket resolution times, showcasing strong potential for improving operational efficiency and margins.
SASE Adoption
SASE experienced a 40% rise in transactions exceeding $1 million in Q1. Enhanced by AI capabilities, SASE solutions gained traction among new customers unfamiliar with Palo Alto's legacy VPN solutions. The company now supports 16 million active SASE licenses.
XSIAM and the Future of SIEM
XSIAM, consolidating SIEM and XDR functionalities, drove significant interest, achieving $80 million in bookings and creating a $1 billion pipeline. The legacy SIEM market's $20 billion TAM is ripe for transformation, with XSIAM offering superior outcomes and cost-efficiency. Strategic partnerships, such as with IBM, facilitated customer migration, strengthening Palo Alto’s foothold in next-generation SIEM.
Large Customer Wins
A $50 million SOC transformation deal replaced legacy SIEM systems with XSIAM and XDR. A $30 million agreement with a security services provider expanded SASE and XSIAM deployments. A $15 million deal with a hospital system replaced legacy firewalls and positioned the customer for SASE adoption. A $20 million agreement with a financial institution standardized firewalls and adopted SASE, reducing costs and operational complexity.
Challenges in Execution and Market Dynamics
Migrating enterprise customers from legacy systems to integrated platforms requires significant upfront effort. QRadar SaaS customers added $80 million in bookings, but migrating on-premises users remains complex. Rapid cloud adoption and evolving environments demand constant innovation, which is resource-intensive. Economic uncertainty, budget constraints, and geopolitical risks further complicate enterprise decision-making, emphasizing the need for clear ROI and efficiency.
Future Outlook
Palo Alto raised its FY25 guidance, projecting NGS ARR of $5.52-$5.57 billion (+31%-32% YoY) and revenue of $9.12-$9.17 billion (+14% YoY). EPS is expected to grow 10%-13%, driven by operational efficiency and AI integration. AI remains a critical force in cybersecurity, positioning Palo Alto as a leader in the evolving landscape. A 2-for-1 stock split will increase accessibility, with shares trading on a split-adjusted basis from December 16, 2024.
Management comments on the earnings call.
Product Innovations
Nikesh Arora, Chairman and Chief Executive Officer
“Our ability to innovate has been instrumental in addressing the evolving cybersecurity landscape. The launch of AI-driven solutions like Strata CoPilot, Prisma Access Browser, and SASE enhancements demonstrates our commitment to improving accuracy, response times, and overall security outcomes for our customers.”
Platformization
Nikesh Arora, Chairman and Chief Executive Officer
“Platformization is the future of cybersecurity. By consolidating fragmented tools into unified platforms, we are delivering better security outcomes while driving cost efficiencies. With over 1,100 platformized deals and a 6% increase in ARR per platformized customer, our strategy continues to resonate across industries.”
Competitors
Nikesh Arora, Chairman and Chief Executive Officer
“We’re seeing a shift in the industry toward platformization, as evidenced by a 50% increase in mentions of 'platform' on our competitors’ earnings calls. While others are now advocating for this approach, our early adoption and robust platform capabilities give us a clear competitive advantage.”
Customers
Nikesh Arora, Chairman and Chief Executive Officer
“Customers are increasingly recognizing the value of our integrated solutions. From replacing legacy SIEM systems to adopting SASE and Cortex, our large-scale wins reflect their trust in our ability to deliver improved security and cost-efficiency through innovation.”
Strategic Partnerships
Nikesh Arora, Chairman and Chief Executive Officer
“The partnership with IBM and the acquisition of QRadar SaaS are game-changers. Together, we’re supporting customer migrations to next-generation solutions while accelerating our position in the SIEM market. This collaboration is setting a new benchmark for industry partnerships.”
International Growth
Deepak Golecha, Chief Financial Officer
“Our geographic performance underscores the global demand for cybersecurity solutions. Revenue grew by 21% in EMEA and 13% in JAPAC, demonstrating the strength of our international strategy and the scalability of our platforms in diverse markets.”
Challenges
Nikesh Arora, Chairman and Chief Executive Officer
“Convincing enterprises to migrate from entrenched legacy systems requires tailored approaches and significant upfront effort. However, our phased deployment strategy and alignment with customer budgets allow us to overcome these challenges and deliver measurable outcomes.”
Future Outlook
Nikesh Arora, Chairman and Chief Executive Officer
“With AI driving both opportunities and threats, the cybersecurity industry is at a critical inflection point. We are confident in our ability to lead this evolution through continuous innovation, operational excellence, and a platformization strategy that positions us for long-term success.”