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Palo Alto Networks (PANW) is trading flat after reporting Q1 (Oct) results last night. The cybersecurity giant posted a solid EPS beat although it was not its usual double-digit beat. PANW has now posted single-digit beats in two of the last three quarters after a long period of double-digit beats. Revenue rose 13.9% yr/yr to $2.14 bln, which was in-line. The company also declared a 2-for-1 stock split. It will begin trading on split-adjusted basis on December 16.

• The Q2 (Jan) EPS and revenue guidance was just in-line, perhaps a bit of a letdown following big upside guidance last quarter. Some key metrics may also be adding to the weakness today. NGS (Next-Generation Security) ARR grew 40% yr/yr to $4.5 bln, which was good but a bit below the 43% growth we saw in Q4 (Jul). In fairness, its Supplemental Financials shows that PANW's yr/yr NGS ARR growth has been trending lower for many quarters as it gets larger: 63%-60-56-53-50-47-43 and now 40%.
• RPO (remaining performance obligation) grew 20% yr/yr to $12.6 bln, the same yr/yr growth as Q4. However, that $12.6 bln was a small sequential decline from Q4's $12.7 bln. The small decline was not earth shattering but a bit of a disappointment, although PANW said on the call that both metrics performed well ahead of internal expectations. Recall that PANW made a reporting change starting in Q1. It will no longer report billings. With higher interest rates, more clients are asking to spread payments over multiple years instead of an upfront payment. Also, PANW recently rolled out its platformization strategy. Both have made the billings metric more volatile.
• PANW says the market for cybersecurity continues to be robust and continues to grow faster than the overall technology market. Despite the acceleration of technology spend due to AI, PANW said that cybersecurity continues to outpace technology spend. The company saw particular strength in its next generation security offerings, notably in Cortex and in NetSec.
• Of note, PANW has been talking about the benefits of simplifying security architectures and consolidating point products into platforms for a while now. PANW wishes it had made the change sooner. More recently, PANW noted that its industry peers have finally been evangelizing the virtues of platformization. PANW said imitation is the highest form of flattery.
• While many competitors are now talking about their platform approach, PANW does not believe they are equipped to deliver it in the same way. Furthermore, PANW feels the cybersecurity industry is embarking into its next phase, where the market will continue to converge towards a fewer set of platformization players over the next 5-10 years. Having started this trend, PANW intends to be one of those few players.

Overall, this was a decent quarter. It was not the blowout we have seen in past quarters and the metrics were maybe a bit soft. However, they were ahead of internal expectations. PANW did not provide metric guidance last quarter, but they did last night, so we will have a better comparison next quarter. We also think the stock split was good to see, however, given its high stock price, we think investors would have preferred a 3-for-1 or 4-for-1.