Palo Alto(PANW) - 2025 Q2 - Quarterly Report

Financial Performance - Total revenue for Q2 fiscal 2025 was $2.3 billion, a year-over-year increase of 14.3$2.0 billion in Q2 fiscal 2024[116] - Product revenue reached $421.5 million, accounting for 18.7$1.8 billion, representing 81.3% of total revenue, with a year-over-year increase of 15.9%[117] - Total revenue for the three months ended January 31, 2025, was $2,257.4 million, a 14.3$1,975.1 million in 2024[128] - Product revenue for the three months ended January 31, 2025, was $421.5 million, up 7.9$390.7 million in 2024, driven by increased demand for new hardware products[132] - Subscription and support revenue for the three months ended January 31, 2025, was $1,835.9 million, a 15.9$1,584.4 million in 2024[134] Profitability Metrics - Gross margin for Q2 fiscal 2025 was 73.5%, slightly down from 74.7% in Q2 fiscal 2024[124] - Operating income for Q2 fiscal 2025 was $240.4 million, with an operating margin of 10.6$240.4 million, significantly up from $53.6 million in 2024, reflecting improved profitability[128] - Total gross profit for the three months ended January 31, 2025, was$1,658.2 million, with a gross margin of 73.5%, compared to $1,476.0 million and a gross margin of 74.7$267.3 million, compared to $1,746.9 million in 2024, reflecting a significant year-over-year change[128] Cash Flow and Investments - Cash flow from operating activities for the six months ended January 31, 2025, was$2.066 billion[124] - Free cash flow for the six months ended January 31, 2025, was $1,974.9 million, down from$2,144.0 million in 2024, indicating a decrease of 7.9%[126] - Cash provided by operating activities during the six months ended January 31, 2025, was $2.1 billion, a decrease of$149.5 million compared to the same period in 2024[171] - Cash used in investing activities during the six months ended January 31, 2025, was $924.6 million, a decrease of$529.9 million compared to the same period in 2024[176] - Cash used in financing activities during the six months ended January 31, 2025, was $451.9 million, an increase of$337.5 million compared to the same period in 2024[178] Expenses - Research and development expenses for the three months ended January 31, 2025, were $505.7 million, accounting for 22.4$505.7 million for the three months ended January 31, 2025, up 12.9% from $447.9 million in the same period of 2024[149] - Sales and marketing expenses rose to$758.3 million for the three months ended January 31, 2025, a 12.7% increase from $673.0 million in the same period of 2024[151] - General and administrative expenses decreased to$153.8 million for the three months ended January 31, 2025, down 49.0% from $301.5 million in the same period of 2024, primarily due to a litigation-related accrual in the prior year[154] Future Outlook and Strategic Initiatives - The company announced the launch of Cortex Cloud in February 2025, integrating CDR and CNAPP capabilities for enhanced cloud security[118] - The company continues to monitor macroeconomic conditions, including inflation and geopolitical tensions, which may impact future performance[120][122] - Next-Generation Security Annualized Recurring Revenue (NGS ARR) will include revenue from QRadar SaaS contracts starting Q1 fiscal 2025, reflecting the strength and trajectory of the business[125] - The company expects operating expenses to increase in absolute dollars but decrease as a percentage of revenue over the long term as it scales its business[147] Balance Sheet and Obligations - As of January 31, 2025, total cash, cash equivalents, and investments amounted to$7.8 billion, an increase from $6.8 billion as of July 31, 2024[161] - As of January 31, 2025, the company had total operating lease obligations of$436.6 million recorded on its balance sheet[168] - The company has commitments to purchase products and services totaling $4.4 billion as of January 31, 2025[169] - The company has total contingent consideration obligations of$664.9 million related to the acquisition of certain QRadar assets from IBM[170] - As of January 31, 2025, $534.2 million of the 2025 Notes remained outstanding, with$100.4 million converted or submitted for conversion[165] Taxation and Interest Rates - The provision for income taxes for the three months ended January 31, 2025, was $(1,611.4) million, a change of$1,668.9 million compared to the same period in 2024[160] - The effective tax rate for the three months ended January 31, 2025, was 17.7%, an increase from (1,189.2)% in the same period of 2024[160] - As of January 31, 2025, a hypothetical 100 basis point increase in interest rates would result in a $110.3 million decline in the fair market value of the investment portfolio[185] - Conversely, a hypothetical 100 basis point decrease in interest rates would lead to a$110.3 million increase in the fair market value of the portfolio[185] Internal Controls - The company's disclosure controls and procedures are effective as of January 31, 2025, providing reasonable assurance for timely reporting[186] - No changes in internal control over financial reporting were identified during the fiscal quarter ended January 31, 2025, that materially affected internal controls[187] - Management acknowledges that controls can only provide reasonable assurance and cannot guarantee the detection of all errors or fraud[188]