Summary
Palo Alto Networks reported fiscal 2025 third-quarter revenue of $2.29 billion, up 15.3% from the prior-year quarter. Gross profit was $1.67 billion, up 13.5%, and operating income reached $218.8 million, up 23.8%. Net income moved the other way. It fell to $262.1 million, down 6.0%, and diluted EPS slipped to $0.37, down $0.02. The gap between operating gains and net income reflects items below the operating line, including a higher tax provision. The filing points to the prior-year release of a valuation allowance as a key swing factor. Revenue growth reflected increased adoption of the portfolio, which includes product, subscriptions, and support. Product revenue growth was driven by demand for the new generation of hardware and accessories, while subscription and support revenue rose on increased demand from end-customers.
Margins were mixed. Gross margin was 72.9%, down 1.2 percentage points from the prior-year quarter. Operating margin was 9.6%, up 0.7 percentage points. The gross margin decline came as cloud hosting service costs and inventory reserves rose. Subscription and support gross margin also faced higher costs for cloud-based offerings. Operating expense growth was led by research and development and sales and marketing, both up on personnel costs and headcount growth. General and administrative expense rose in the quarter but fell for the nine-month period after a prior litigation accrual and a partial release.
Cash generation remained a bright spot in the quarter. Operating cash flow was $628.7 million, up 18.9% from the prior-year quarter. Capital expenditures were $68.3 million, up 82.6%. For the nine months, operating cash flow was $2.70 billion, down 1.8%, and capital expenditures were $159.9 million, up 46.2%. Free cash flow, a non-GAAP measure, was $2.535 billion for the nine months, compared with $2.635 billion in the prior-year period. Free cash flow subtracts purchases of property, equipment, and other assets from operating cash flow. Deferred revenue, current portion, was $5.76 billion, up 14.8% from the prior-year quarter. Remaining performance obligations were $13.50 billion, up 19.5%. Next-Generation Security annualized recurring revenue was $5.1 billion as of April 30, 2025, and $4.2 billion as of July 31, 2024. Cash provided by operating activities for the nine months was affected by higher cash expenditures to support business growth, partially offset by higher customer receipts.
The company kept pushing its platformization strategy. In April 2025 it introduced Prisma AIRS, new SASE innovations including Prisma Access Browser 2.0, and Cortex XSIAM 3.0. It also agreed to acquire Protect AI, a privately held cyber security company. That deal is expected to close by the first quarter of fiscal 2026. The company describes platformization as combining products and services into a tightly integrated architecture to make security faster, less complex, and more cost-effective. It operates across network security; security operations and cloud security; and threat intelligence and advisory services through Unit 42. The filing flags several risks that could affect results. Those include worldwide economic and geopolitical conditions, tariffs and trade policy, inflation, high interest rates, supply chain disruptions, the hostilities in Israel and the surrounding region, and tensions between China and Taiwan and between the U.S. and China. Gross margin pressure from cloud hosting costs and inventory reserves is another watch item.
On a year-to-date basis, revenue was $6.69 billion, up 14.5%. Net income was $880.1 million, down 60.4%, and diluted EPS was $1.24, down 60.5%. Gross margin for the nine months was 73.5%, down 1.1 percentage points. Operating margin was 11.2%, up 3.5 percentage points. The company expects to recognize approximately $2.4 billion of share-based compensation expense over a weighted-average period of approximately 2.5 years. The 2025 Notes mature on June 1, 2025. As of April 30, 2025, $1.0 billion remained available under the share repurchase program. Palo Alto Networks had end-customers in over 180 countries, including almost all of the Fortune 100 companies and a majority of the Global 2000 companies.
Forecast
No forward guidance in this quarter's filings.
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2025 | Q2 FY2025 | QoQ | Q3 FY2024 | YoY |
|---|---|---|---|---|---|
| Revenue | $2.29B | $2.26B | +1.4% | $1.98B | +15.3% |
| Gross profit | $1.67B | $1.66B | +0.7% | $1.47B | +13.5% |
| Gross margin | 72.9% | 73.5% | -0.5 pp | 74.1% | -1.2 pp |
| Research & development | $494.5M | $505.7M | -2.2% | $457.2M | +8.2% |
| Sales & marketing | $792.5M | $758.3M | +4.5% | $718.7M | +10.3% |
| General & administrative | $163.9M | $153.8M | +6.6% | $118.6M | +38.2% |
| Total operating expenses | $1.45B | $1.42B | +2.3% | $1.29B | +12.1% |
| Operating income (loss) | $218.8M | $240.4M | -9.0% | $176.7M | +23.8% |
| Operating margin | 9.6% | 10.7% | -1.1 pp | 8.9% | +0.7 pp |
| Net income (loss) | $262.1M | $267.3M | -1.9% | $278.8M | -6.0% |
| Net margin | 11.4% | 11.8% | -0.4 pp | 14.1% | -2.6 pp |
| Diluted EPS | $0.37 | $0.38 | -$0.01 | $0.79 | -$0.42 |
Risks
GAAP gross margin was down to 72.9% in FY2025 Q3 from 74.1% in FY2024 Q3, down 1.2 pp, and down to 73.5% YTD from 74.6%, down 1.1 pp. MD&A attributes the decline primarily to product inventory reserves and higher cloud hosting costs for subscription offerings.
For the nine months ended April 30, 2025, three distributors each represented 10% or more of total revenue and 44.7% in aggregate, while two distributors represented 33.5% of gross accounts receivable as of April 30, 2025. Disruption or failure of these channel partners could materially harm sales.
The filing notes intense competition and that new and enhanced technologies, including AI and machine learning, continue to increase competition. The company is incorporating AI into its products and faces risks from AI flaws, biased datasets, evolving EU AI regulation, third-party IP claims, and higher computing costs.
As a well-known security provider, the company is an attractive target for attacks. The filing cites the April 2024 GlobalProtect command injection vulnerability in PAN-OS software and related remediation efforts, and warns that breaches could damage reputation, cause losses, and lead to regulatory investigations.
MD&A reports that cloud hosting service costs, which support cloud-based subscription offerings, increased $55.7 million for the quarter and $141.4 million YTD compared to the same periods in 2024. These costs could continue to pressure subscription gross margin.
The growth strategy depends on selling additional products and platformization to large enterprise end-customers, which involves longer sales cycles, increased negotiating leverage for customers, and more complex deployments. MD&A highlights platformization as a key strategy.
In April 2025, the company entered a definitive agreement to acquire Protect AI, expected to close by Q1 fiscal 2026, and it acquired IBM QRadar assets in August 2024. As of April 30, 2025, contingent consideration obligations were $669.2 million; integration may disrupt operations and not deliver expected benefits.
$383.3 million of 2025 Notes remained outstanding as of April 30, 2025 and mature June 1, 2025. The filing notes the company may need third-party financing if cash flows and existing resources are inadequate to settle conversions or repay principal, though MD&A believes cash resources are sufficient.
The filing highlights hostilities in Israel and surrounding region, Russia sanctions, China/Taiwan tensions, tariffs, and export controls. The company has operations in Israel and is monitoring these conditions, which could disrupt supply chain, sales, or customer spending.
Revenue from government entities is subject to government shutdowns, budget cycles, changes in administrations, certification requirements, and federal efforts to reduce overall government spending. Any funding reductions or compliance failures could adversely affect public sector demand.
Privacy and data protection obligations, including GDPR data transfer mechanisms such as the EU-U.S. DPF, face legal challenges. CCPA and at least 20 U.S. state privacy laws, plus emerging AI regulation, impose compliance costs and potential enforcement actions.
A judgment of $113.6 million was assessed against the company in the Centripetal Networks patent infringement lawsuit on October 3, 2024, currently on appeal. The company may face additional IP claims and indemnification obligations to customers and partners.
SaaS KPIs
All quarters →Free cash flow (non-GAAP)
Summary, forecast, risks and KPIs are extracted from Palo Alto Networks Inc's SEC filings for Q3 FY2025 (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.