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Palo Alto Networks (PANW) is sharply lower after reporting its Q2 (Jan) results last night. The company beat Q2 EPS and revenue expectations, with revenue rising 14.9% yr/yr to $2.59 bln. However, guidance was mixed. For Q3, revenue of $2.941-2.945 bln was above expectations, but EPS of $0.78-0.80 was below, and for FY26, PANW raised revenue to $11.28-11.31 bln but lowered EPS to $3.65-3.70, also below expectations. While the top-line outlook is surging from the CyberArk and Chronosphere deals, the downside EPS guide implies margin pressure from integration-related costs and higher input costs, which is weighing on the stock.

• Results were driven by strength across SASE, software firewalls, XSIAM, and Prisma AIRS, while platformization stayed a tailwind with a quarterly record 110 net new adds.
• NGS ARR grew 33% yr/yr to $6.33 bln, including $200 mln from Chronosphere, while it increased 28% organically (+29% in Q1), led by an acceleration in SASE and software firewall ARR and XSIAM.
• A key contributor to software firewall growth has been Prisma AIRS, which management tied to customers scaling AI deployments, with the platform ending Q2 with 100+ customers.
• RPO increased 23% yr/yr to $16.0 bln (from $15.5 bln in Q1) and included $150 mln from Chronosphere, while current RPO increased 18% yr/yr to $7.1 bln.
• Operating margin expanded 190 bps yr/yr to 30.3%, marking the third consecutive quarter above 30%, though noted a marginal impact to product COGS from higher memory and storage pricing.
• While PANW expects to manage costs with its higher software mix and pricing actions, it lowered FY26 operating margin to 28.5-29.0% (from 29.5-30.0%), pointing to integration-related pressure.
• On the closed CyberArk and Chronosphere deals, management reiterated its platform playbook and reaffirmed targets of 40%+ adjusted free cash flow margin by FY28 and $20 bln in NGS ARR by FY30.
• Despite current sentiment around AI and software, PANW said that security is an enabling layer for AI adoption, and that AI-driven threats are accelerating platformization rather than disrupting demand.
• FY26 guidance incorporates the completed acquisitions, with NGS ARR $8.52-8.62 bln (+53-54%) including $1.52 bln from M&A, and RPO $20.2-20.3 bln (+28%) including $1.6 bln from M&A.

Briefing.com Analyst Insight

The quarterly results from PANW were strong, with robust growth across NGS ARR and RPO, continued platformization momentum, and further acceleration in newer AI offerings like Prisma AIRS. While Q2 included only a marginal contribution from the acquisitions, organic NGS ARR growth remained healthy at 28%. What's weighing on the stock is the guidance. Even as Q3 and FY26 revenue, NGS ARR, and RPO step up meaningfully with CyberArk and Chronosphere now included, the downside EPS outlook is a typical sign of margin pressure, reflecting integration-related costs and a higher cost backdrop. While those costs are viewed as manageable over time, they add to the current AI-heavy sentiment, where disruption fears are already weighing on shares and the market is now more sensitive to any sign of margin compression. Overall, the strong results are being outweighed by the lower EPS outlook. PANW reaffirmed its long-term targets and downplayed disruption concerns, but investors will be watching closely for improving visibility on integration execution, cost pressures, and how quickly EPS can reaccelerate as the combined platform scales.