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Palo Alto Networks (PANW -5%) is trading lower despite reporting EPS and revenue upside with its Q3 (Apr) report last night. The cybersecurity giant posted a solid EPS beat with its typical upside (split adjusted). Revenue rose 15.3% yr/yr to $2.29 bln, which just a bit better than expected. Guidance was decent with an in-line outlook for Q4 (Jul). However, there were some metrics that were perhaps a bit soft.

• Next-Generation Security ARR grew 34% yr/yr to $5.10 bln vs $5.03-5.08 bln prior guidance. This was a key milestone for PANW with its first-ever $5 bln quarter for NGS ARR. In fact, PANW believes it has reached an inflection point in its NGS ARR story as a growing majority of its incremental growth this year is derived from its AI-powered XSIAM, SASE and software firewalls. These offerings have large TAMs and should fuel further growth as PANW marches towards its $15 bln ARR target for FY30.
• One of the metrics that was maybe a slight letdown was Remaining performance obligation (RPO), which grew 19% yr/yr to $13.5 bln, at the low end of $13.5-13.6 bln prior guidance. PANW noted that customers continue to make significant commitments through its platformization deals, particularly when adopting XSIAM. PANW continues to see increasing demand for annual payments, particularly deals over $1 mln, but PANW is absorbing this transition.
• Another area that was perhaps a bit soft was non-GAAP gross margin at 76%. However, it's worth noting that PANW has been transitioning to a contract manufacturing facility in Texas as its primary manufacturing and performance center. This is partly to take advantage of a foreign trade zone that can help mitigate tariffs. PANW believes that it differentiates itself by being the only pure play cybersecurity firm at scale to assemble all hardware in the US. As a result, tariff impacts have been immaterial.
• PANW saw double-digit growth across all geographies, with the Americas growing 12%, EMEA up 20%, and JAPAC growing 23%. Looking forward, PANW said as AI becomes more deeply integrated into its customers' businesses, the need to protect the underlying data, models and infrastructure will become paramount. Over the next year, an estimated $300+ bln will be spent on AI infrastructure alone.

Overall, this was a good, solid report for PANW with maybe some areas of slight underperformance, which may explain the weakness today. However, it may also be some profit taking given the 30+% move in the stock since early April.