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Palo Alto Networks (PANW -5%) is trading lower despite reporting EPS and revenue upside with its Q2 (Jan) report last night. The cybersecurity giant posted solid EPS beat with its typical upside (split adjusted). Revenue rose 14.3% yr/yr to $2.26 bln, which just a bit better than expected. Guidance was decent with an in-line outlook for Q3 (Apr) and upside EPS for the full year. Growth was pretty broad across the entire portfolio, with strength across all three geographies and platforms.

• Within revenue, product revenue grew 8%, while total services revenue grew 16%. PANW noted that product revenue is now approaching 40% software on a trailing 12-month basis. PANW expects healthy software contribution to product revenue in the second half of this year, which should increase product revenue into the double-digit growth range. PANW also saw stable demand for firewall appliances in Q2, which it expects will continue throughout FY25.
• PANW saw double-digit revenue growth across all geographies, which was encouraging, with the Americas growing 13%, EMEA up 18% and JPAC growing 17%. PANW was particularly encouraged by the volume of large deals it closed with some notable large deals in EMEA and JPAC. In fact, PANW signed its largest deals ever in both EMEA and JPAC this quarter, each in excess of $50 mln. PANW believes these deals demonstrate the broadening of its large deal success in North America to its international markets.
• Metrics are important for PANW. The company no longer provides billings data because it's too volatile and is not really representative of the business. Instead it uses Next-Generation Security (NGS) ARR, which grew 37% yr/yr in Q2 to $4.8 bln, which was above the $4.70-4.75 bln prior guidance. RPO is another key metric, it grew 21% yr/yr to $13.0 bln vs $12.9-13.0 bln prior guidance.
• Given all the government downsizing, PANW addressed concerns about how it might be impacted. PANW saw stable federal business in Q2. Much of its federal business is tied to renewals and existing programs with long-standing funding.
• PANW noted that companies are racing to evaluate, experiment and deploy AI. As they do so, they are discovering that some of their legacy architectures are standing in the way of their aspirations. This is resulting in a resurgence of cloud transformation projects, and consequently, demand for network security and network transformation. In other words, the cloud is becoming an integral part of the enterprise, and the same level of security must be delivered.

Overall, this was a good, solid report for PANW. We were a bit nervous about their Asian business and possible FX headwinds. However, Q2 growth was pretty broad across the entire portfolio, with strength across all three geographies and platforms, including some large international deals. In terms of why the stock is lower, we think investors might be disappointed the company only reaffirmed its FY25 NGS ARR and RPO guidance despite Q2 upside on the former and high end on the latter. It may also be some profit taking given the 20% move in the stock since early January.