Palo Alto Q1 FY7/25 Earnings Review

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All roads lead to the Cloud

By HermitWarrior a.k.a. Richard Iacuelli

The folks at Palo Alto Networks ($PANW) are keen to make one thing very clear: They are not a hardware company. Or at least not much of one anyway. Perusing the Solutions overview of their web-site, one could be forgiven for thinking that this is in fact a pure-play Cloud Security provider; the word 'Appliance' doesn't appear at all (although, surprisingly, 'Hardware Firewall' does appear in the Products overview).

'Cloud' is the name of the game - and no longer just for storage or run-time environments - and the management team at PANW got this message long ago. The CEO is ex-Google (the epitomy of Cloud based services) as is the head of their Next Generation Security (NGS) business - oh and the Google CMO sits on the Board of Directors.

The shift to Cloud shows up strongly in their marketing, which like Fortinet's ($FTNT), is slick (their videos featuring action-star Keanu Reeves fighting off Keanu look-alikes, Matrix-style, are hard to miss on the web) and paints a picture of a vendor at the leading edge of cybersecurity, but also at where they're pointing the business.

Investments in Zero Trust, Cloud Security, Secure Access Service Edge (SASE) and AI are heavily promoted and designed to further drive the business - and the narrative - from hardware to services. 

Subscription revenue now dwarfs product revenue by a factor of 5 to 1 for the latest quarter, up from 3 to 1 for Q1 2021. 'Platformization', a somewhat awkward term coined by PANW to describe vendor consolidation by end customers, is a key part of their strategy to grow Annual Recurring Revenue (ARR), a.k.a subscriptions.

Where FTNT built its business on a large base of small and mid-market business customers, large enterprise customers are a key focus for PANW and their success in this segment may be one reason that Zscaler made significant changes to their go to market model to be more account and relationship-centric, a key requirement of selling into/competing in the large enterprise segment. We'll explore this further in the upcoming ZS earnings release.

Let's now look at the Financials. Here are the Headlines.

Here's Alex's take on revenue growth last quarter:

The company is guiding for an acceleration of growth next quarter; if they can achieve that whilst holding margins at or around the current level, kudos to the management team.

Year on year Revenue growth did in fact accelerate in Q1, for the first time since Q4 '23, although management is guiding for only 13% growth, at the midpoint, in Q2. EBITDA margins improved while UFCF margins ticked lower. All in all a very solid performance.