Summary
Palo Alto Networks closed FY2023 Q2, ended January 31, 2023, with revenue of $1.66 billion, up 25.7% from the prior-year quarter. Gross profit rose 30.4% to $1.19 billion, and gross margin reached 71.8%, up 2.6 percentage points. Operating income was $39.9 million, a swing to a profit, and operating margin was 2.4%, up 8.0 percentage points. Net income came in at $84.2 million, also a swing to a profit, and diluted EPS was $0.25, a swing to a profit. For the first six months of FY2023, revenue was $3.22 billion, up 25.5%, gross margin was 71.2%, up 1.8 percentage points, operating income was $55.1 million, a swing to a profit, and operating margin was 1.7%, up 7.8 percentage points. Net income was $104.2 million, a swing to a profit. Diluted EPS for the six months was $0.31, a swing to a profit.
Cash generation was a clear bright spot. Operating cash flow for the quarter was $694.6 million, up 43.9%, and operating cash flow for the first six months was $1.93 billion, up 80.2%. Capital expenditures for the quarter were $38.3 million, down 52.5%, and for the first six months they were $77.9 million, down 32.4%. The company also reported non-GAAP free cash flow of $1,853.4 million for the first six months, which is different from operating cash flow because it subtracts purchases of property, equipment, and other assets. Billings, another non-GAAP metric, were $2,029.1 million for the quarter, up 26.2%, and $3,778.1 million for the first six months, up 26.4%. Deferred revenue on the balance sheet, current portion, was $3.94 billion, up 33.3%, while remaining performance obligations were $8.80 billion, up 39.7%.
Management's comments in the MD&A point to product innovation as a growth driver. In November 2022, the company launched PAN-OS 11.0 Nova, which introduced 50 product updates and innovations. In October 2022, it released Cortex XSIAM, an autonomous security operations platform. The portfolio spans network security, SASE, cloud security, security operations, and threat intelligence through Unit 42. Prisma Access, Prisma Cloud, Cortex XDR, Cortex XSOAR, and Cortex Xpanse are among the offerings. Prisma SASE combines Prisma Access with Prisma SD-WAN. Palo Alto Networks had end-customers in over 180 countries as of January 31, 2023, including almost all Fortune 100 companies and a majority of Global 2000 companies. The company uses a two-tiered, indirect fulfillment model, selling through distributors that sell to resellers and then to end-customers. Management expects operating expenses to increase in absolute dollars but to decline over the long term as a percentage of revenue. It also expects subscription and support revenue to increase over the long term, though the mix can vary by quarter.
Risks remain stacked against the strong top-line result. The MD&A flags worsening economic conditions, inflation, higher interest rates, slower growth, and foreign exchange fluctuations as potential drags. COVID-19 still creates uncertainty for customer spending, sales cycles, partners, suppliers, and employees. Supply chain and semiconductor challenges continue, with chip and component shortages causing delays and higher costs. The convertible notes add a financing consideration: the sale price condition was met during the quarter ended January 31, 2023, so holders may convert their notes during the quarter ending April 30, 2023. If all holders converted, the company would be obligated to settle the $3.7 billion principal amount in cash. The 2023 notes mature on July 1, 2023, and the 2025 notes mature on June 1, 2025. Management believes cash from operations, existing cash, cash equivalents, and investments, and available financing will be sufficient if holders convert or hold until maturity. There were no amounts outstanding under the $400.0 million unsecured revolving credit facility as of January 31, 2023. The share repurchase program had $750.0 million available as of January 31, 2023. The quarter showed improving profitability and robust cash flow, but the external backdrop and the notes' conversion window keep execution risk in view.
Forecast
No forward guidance in this quarter's filings.
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.66B | $1.56B | +5.9% | $1.32B | +25.7% |
| Gross profit | $1.19B | $1.10B | +7.9% | $911.6M | +30.4% |
| Gross margin | 71.8% | 70.5% | +1.4 pp | 69.2% | +2.6 pp |
| Research & development | $404.1M | $371.8M | +8.7% | $359.0M | +12.6% |
| Sales & marketing | $625.5M | $615.0M | +1.7% | $528.8M | +18.3% |
| General & administrative | $119.4M | $99.5M | +20.0% | $97.7M | +22.2% |
| Total operating expenses | $1.15B | $1.09B | +5.8% | $985.5M | +16.6% |
| Operating income (loss) | $39.9M | $15.2M | +162.5% | -$73.9M | +154.0% |
| Operating margin | 2.4% | 1.0% | +1.4 pp | -5.6% | +8.0 pp |
| Net income (loss) | $84.2M | $20.0M | +321.0% | -$93.5M | +190.1% |
| Net margin | 5.1% | 1.3% | +3.8 pp | -7.1% | +12.2 pp |
| Diluted EPS | $0.25 | $0.06 | +$0.19 | — | — |
Risks
Unfavorable economic and geopolitical conditions, including inflation, higher interest rates, slower growth, foreign exchange fluctuations, and Russia's invasion of Ukraine, may reduce customer spending, lengthen sales cycles, and increase costs. MD&A states that worsening economic conditions may adversely affect results of operations and financial performance.
Global semiconductor and component shortages, limited and sole-source suppliers, and logistics delays have caused delays in acquiring chips, components, and inventory and increased costs versus historic levels, according to MD&A. These pressures can delay product deliveries or force redesigns.
Sales to large enterprise end-customers involve longer sales cycles, particularly during the current economic slowdown, in some cases over 12 months, plus budget constraints and multiple approvals. Failure to close an expected large deal in a quarter could materially affect results.
All 2023 Notes and 2025 Notes were convertible from February 1, 2023 through April 30, 2023, and if all holders converted, the company would be obligated to pay the $3.7 billion principal amount of the Notes in cash. The company may need third-party financing if operating cash and existing resources are insufficient.
The enterprise security market is intensely competitive, with larger competitors able to bundle products, offer concessions, or sell at zero or negative margins, and smaller specialists often delivering point solutions faster. MD&A notes total revenue grew 25.7% year over year in the second quarter of fiscal 2023, but competitive pressure could reduce margins or market share.
The company must hire, integrate, train, and retain highly skilled personnel and senior management, especially engineering staff in the San Francisco Bay Area. Headcount grew from 12,561 at the end of fiscal 2022 to 13,932 at the end of the second quarter of fiscal 2023, increasing management and retention complexity.
Revenue growth rates were 25.5% for the six months ended January 31, 2023 and 30.6% for the six months ended January 31, 2022, and the company states prior growth rates may not be indicative of future performance. The second quarter of fiscal 2023 revenue grew 25.7% year over year versus 29.5% in the prior-year quarter.
Substantially all revenue is generated through channel partners, including distributors and resellers, whose agreements may generally be terminated by either party with advance notice before each annual renewal date. Failure or consolidation of key channel partners could limit sales and harm operating results.
Future success depends on selling new offerings, including cloud security, AI, and analytics, and on existing end-customers renewing subscriptions, but customers have no contractual obligation to renew and may renew for shorter or less favorable terms. Failure to expand deployments could slow revenue growth.
The company is subject to sanctions and export controls, including Sanctions on Russia, and could face liability if not in full compliance. It is also subject to tax, privacy, anti-bribery, environmental, and other regulations that could lead to investigations, penalties, or reputational harm.
SaaS KPIs
All quarters →Total deferred revenue
Summary, forecast, risks and KPIs are extracted from Palo Alto Networks Inc's SEC filings for Q2 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 2, 2026.