PANW Q1 Earnings Call: Next-Generation Security and AI Portfolio Drive Platformization Strategy

Cybersecurity provider Palo Alto Networks (NASDAQ:PANW) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 15.3% year on year to $2.29 billion. Its non-GAAP EPS of $0.80 per share was 3.6% above analysts’ consensus estimates.

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StockStory’s Take

Palo Alto Networks’ first-quarter results were shaped by continued adoption of its platformization strategy and growing customer interest in consolidating cybersecurity solutions. CEO Nikesh Arora highlighted that the company reached an important milestone of $5 billion in next-generation security annual recurring revenue (ARR), up 34% year over year. The quarter saw increased demand for products such as XSIAM, SASE, and software firewalls, all benefiting from enterprises’ shift toward modern, cloud-based security architectures. Arora pointed to several large multi-product deals that consolidated multiple legacy security tools, which management believes contributed to operational efficiencies for customers. The company also emphasized its ability to execute in a challenging environment marked by geopolitical and tariff uncertainties, noting steady progress across all major regions.

Looking ahead, management’s guidance is built on expectations that AI-driven transformation will accelerate both cloud migrations and the need for unified security platforms. Nikesh Arora commented that “the urgency to adopt AI is omnipresent,” and suggested this trend is leading organizations to modernize their security infrastructure at a faster pace. Palo Alto Networks is positioning its AI-powered offerings, including the recently announced Prisma AIRS and ongoing investment in XSIAM, as core to its future growth. The company expects these products, alongside continued expansion in SASE and software firewalls, to drive a higher proportion of net new ARR. CFO Dipak Golechha noted that ongoing efficiencies in cloud operations and product margins will support profitability targets, while management remains attentive to external risks such as evolving cybersecurity threats and macroeconomic volatility.

Key Insights from Management’s Remarks

Management attributed the quarter’s results to growing customer demand for AI-enabled security solutions, success in large platformization deals, and effective execution amid external uncertainties.

• AI integration driving demand: The adoption of AI across customer organizations is prompting a shift to cloud-delivered security platforms, with Palo Alto Networks’ XSIAM cited as a catalyst for replacing traditional SIEM (Security Information and Event Management) systems.
• Platformization momentum: Over 90 net new platformization deals were secured during the quarter, with the number of customers deploying multiple Palo Alto Networks platforms growing nearly 70% year over year. These deals often involved replacing several legacy security products, leading to increased ARR per customer.
• Product innovation: XSIAM’s rapid adoption continues, with approximately 270 customers now averaging over $1 million in ARR each. Management views XSIAM as a foundational element for modern security operations centers, with the product’s ARR up over 200% year over year.
• Expansion of AI-focused offerings: The launch of Prisma AIRS (AI Runtime Security) addresses customer needs in securing AI models and artifacts, reflecting increased demand for AI-specific security solutions. The planned acquisition of Protect AI aims to strengthen capabilities in this area.
• Resilience during external disruptions: Despite geopolitical tensions and tariff discussions in April, management reported stable customer demand and successful execution, particularly highlighting the teams’ ability to navigate short-term uncertainty without significant impact on the sales pipeline.

Drivers of Future Performance

Management expects AI adoption, cloud migration, and unified security needs to shape growth and profitability in the coming quarters.

• AI-driven cloud migration: The widespread adoption of AI is accelerating enterprise cloud migration, which in turn increases demand for Palo Alto Networks’ cloud-based security products. Management sees this shift as a tailwind for both software firewalls and next-generation security ARR.
• Expansion of AI security portfolio: The company is investing in both organic development and targeted acquisitions, such as Protect AI, to broaden its AI security capabilities. Management believes these moves will help maintain competitive differentiation as AI becomes more integral to customer operations.
• Operational leverage and margin outlook: Ongoing efficiencies in cloud operations, scale-driven cost savings, and a growing mix of software revenue are expected to support non-GAAP operating margin expansion. However, management acknowledged that macroeconomic volatility and evolving cyber threats remain risks to the outlook.

Catalysts in Upcoming Quarters

In upcoming quarters, the StockStory team will be watching (1) the pace of large enterprise platformization deals, (2) adoption rates and customer feedback on new AI-centric products like Prisma AIRS and XSIAM, and (3) the company’s ability to sustain operating margin improvements as it scales software and cloud-delivered services. Execution in integrating Protect AI and the evolving competitive landscape in AI security will also be important factors.

Palo Alto Networks currently trades at a forward price-to-sales ratio of 13.1×. At this valuation, is it a buy or sell post earnings? The answer lies in our full research report (it’s free).

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