Palo Alto Q2 FY7/25 Earnings Review
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All In [the Cloud]
By HermitWarrior a.k.a. Richard Iacuelli
Our last Palo Alto ($PANW) earnings review (available here) made it pretty clear that they long ago ditched the notion of being a hardware company. Fast forward a few months and the message is the same - but subtly different.
The focus on cloud services growth is still there, with accelerating bookings growth in Q2 (up 21% yoy) coming from cloud security services such as Secure Access Edge (SASE) and software firewalls, and the launch of their AI-enabled 'Cortex Cloud' service adding new capabilities to secure clients' cloud infrastructure (more on that later).
What's new is their realization that the increasing adoption of AI is fast becoming a tailwind for the same software-centric services they are focused on selling. This from the Q2 earnings prepared remarks delivered by CEO Nikesh Arora:
As the conversation around AI continues to get omnipresent and companies race to evaluate, experiment and deploy AI, they're discovering that some of the legacy [on-prem] architectures come in the way of their aspirations. Interestingly, this is resulting in a resurgence of cloud transformation projects, and consequently, demand for network security and network transformation.
This bodes well for Palo Alto - and for other cloud-first cybersecurity providers such as CrowdStrike ($CRWD), Zscaler ($ZS) and SentinelOne ($S) - and likely helped PANW's Q3 revenue growth guide tick up to 15%.
Let's take a look at the headlines.
A 'steady as she goes' kind of quarter with Q2 revenue growth at 14% (they had guided to 13%) and EBITDA margins and net cash up. Unlevered free cashflow margins continued to trend down from the late FY23/early FY24 highs but are within the 25-35% range seen in quarters previous to that.