0001327567-25-000035
SEC filingPANW Q1 FY26 revenue grew 16% YoY to $2.47B, driven by 23% product growth, while operating margin contracted 90 bps.
In Q1 FY2026, Palo Alto Networks reported total revenue of $2.474 billion, a 16% increase year-over-year from $2.139 billion. Product revenue grew 23% to $434 million, driven by higher demand and increased pricing for on-premise software licenses. Subscription and support revenue rose 14% to $2.040 billion, reflecting continued adoption of the company's offerings. Gross margin improved slightly to 74.2% from 74.1%, with product gross margin expanding to 79.5% due to a favorable mix shift toward software, while subscription and support gross margin was flat at 73.1%. Operating income increased to $309 million from $286 million, but operating margin contracted to 12.5% from 13.4%, primarily due to a $43 million litigation accrual reversal in the prior year that did not recur, along with higher personnel costs. Net income declined to $334 million from $351 million, as the effective tax rate rose to 18.9% from 4.9% due to lower excess tax benefits from share-based compensation.
The product segment contributed 17.5% of total revenue, with its share increasing due to strong hardware and software license sales. Subscription and support remained the dominant revenue source at 82.5%, growing 14% YoY. Geographic revenue growth was broad-based: Americas +14%, EMEA +18%, and APAC +22%, reflecting continued global sales force expansion. Key operating metrics showed Next-Generation Security ARR reached $5.9 billion, up from $5.6 billion as of July 31, 2025, while remaining performance obligations decreased to $15.5 billion from $15.8 billion, likely due to contract timing.
Management emphasized the platformization strategy and investment in innovation, including the planned acquisition of CyberArk Software Ltd. for approximately $25 billion, expected to close in Q3 FY2026. The company expects to fund the cash portion from existing cash on hand. While no specific numeric guidance was provided, forward-looking statements indicate expectations for continued revenue growth driven by recurring subscriptions and expansion of the customer base. Management also noted macroeconomic uncertainties, including geopolitical tensions and inflationary pressures, which could impact future results. The company maintains a strong liquidity position with $10.2 billion in cash, cash equivalents, and investments, and believes existing cash flows will be sufficient for at least the next 12 months.
As of October 31, 2025, Palo Alto Networks reported cash and cash equivalents of $3.066 billion and marketable securities (short-term and long-term investments) totaling $7.126 billion. Shareholders' equity stood at $8.665 billion, up from $7.824 billion at July 31, 2025. The company has no outstanding debt, with a $400 million undrawn revolving credit facility available until April 2028. Deferred revenue was $12.23 billion ($6.132 billion current, $6.098 billion non-current), and remaining performance obligations were $15.5 billion, of which $6.9 billion is expected to be recognized over the next 12 months.
Total purchase commitments amounted to $6.818 billion, predominantly for cloud hosting services ($6.492 billion, including a $112 million minimum commitment through September 2027). Manufacturing commitments were $185 million, and other obligations $141 million. Timing: $311 million due within one year, $1.726 billion in 1-3 years, and $4.669 billion beyond three years. Additionally, a contingent consideration liability of $380 million related to the IBM QRadar acquisition is recorded, with undiscounted payments estimated between $0.4 billion and $0.6 billion through fiscal 2028.
No share repurchases were executed during the quarter; $1.0 billion remained available under the authorization, which was subsequently extended to December 31, 2026. No dividends were declared. Capital expenditures (purchases of property, equipment, and other assets) were $84 million, representing 3.4% of total revenue. The company settled $4.1 billion of warrants through net share issuance during the quarter, resulting in 20 million shares issued. No new debt was incurred or repaid.
Segment-level operating income is not disclosed in the Notes. Revenue by geography: Americas $1.641 billion (US $1.526B, Other Americas $115M), EMEA $521M, APAC $312M. Revenue by type: Product $434M, Subscription $1.364B, Support $676M. Subscription and support combined $2.04 billion.
Operating cash flow of $1,771M significantly exceeded net income of $334M, reflecting cash generation strength and adjustments such as share-based compensation ($370M), deferred revenue timing, and a large reduction in accounts receivable ($1,622M). The cash conversion is robust, with CFO covering capex (84M) over 21 times. However, the capex intensity increased from 2.9% of CFO in prior year to 4.7%, indicating higher investment in fixed assets. No share repurchases or dividends were made; capital returns remain minimal. Financing activities were nearly neutral, with proceeds from employee stock plans ($130M) largely offset by contingent consideration payments ($121M) and tax withholdings.
A notable working capital swing: accounts receivable declined sharply, providing $1.6B in cash inflow, partially offset by a $522M decrease in deferred revenue. The change in fair value of contingent consideration added $13M to operating cash flow. Overall, operating cash flow quality is high, driven by collections and non-cash charges.