Palo Alto Networks (PANW) Q3 2025: Next-Gen Security ARR Surges 34% as AI and Platformization Drive Inflection

May 20, 2025 | By EarningsIQ Research

Palo Alto Networks delivered a strong Q3 with total revenue up 15% and next-generation security annual recurring revenue (NGS ARR) surpassing $5 billion, up 34% year-over-year. The company’s platformization strategy and rapid adoption of AI-powered security are driving larger deals, positioning PANW as a consolidator in a fragmented cybersecurity landscape. Management’s confidence in sustainable growth is underpinned by accelerating momentum in AI, SASE, and software firewalls, despite ongoing macro and geopolitical volatility.

Summary

  • AI-Driven NGS ARR Inflection: NGS ARR reached $5.09 billion, up 34% YoY, with Cortex XIM ARR more than doubling.
  • Platformization Momentum: Over 1,250 large customers now platformized, with multi-product deals growing nearly 70% YoY.
  • Software and SASE Acceleration: Software firewalls and SASE ARR grew 20% and 36% YoY, respectively, outpacing the market.
  • Operational Leverage: Gross margin held at 76% with 340 basis points of operating expense leverage, supporting strong cash flow.

Performance Analysis

Palo Alto Networks reported Q3 revenue of $2.29 billion, up 15% year-over-year and at the high end of guidance. Product revenue rose 16%, while services revenue grew 15%, with subscription services up 18% and support up 10%. The company’s NGS ARR, a key measure of recurring revenue from advanced software and cloud-delivered security, reached $5.09 billion, a 34% YoY increase, reflecting leadership in next-generation security.

Software now approaches 40% of product revenue, underscoring the shift from hardware to cloud and software-centric models. SASE, secure access service edge, ARR climbed 36% YoY, more than double the market rate, and software firewall ARR grew 20% YoY, driven by cloud adoption and AI-related workloads. Gross margin remained robust at 76%, with product gross margin at 78.4%. Operating expense leverage improved by 340 basis points, and adjusted free cash flow was $578 million for the quarter.

  • NGS ARR Growth: Surpassed $5 billion, up 34% YoY, with Cortex XIM ARR up over 200% YoY and now approaching $1 billion in TTM bookings.
  • Geographic Strength: Double-digit revenue growth across all regions, led by Americas up 12%, EMEA up 20%, and JPAC up 23%.
  • Cash Flow and Margins: Free cash flow margins remain on track for 37%+ in FY26–27, with Q3 reflecting strong operational discipline.

Deal sizes are increasing, with 130 customers now generating over $5 million in NGSA ARR (up 40% YoY) and 44 customers over $10 million (up 60%). The company’s transition to annual payments and longer contract durations is being absorbed without impacting cash flow targets.

Executive Commentary

"As organizations aspire to simplify and modernize their security architectures in the age of AI with data at the center, our strategy is resonating, resulting in larger deals. Most notably, we crossed an important milestone of $5 billion in next-generation security ARR, up 34% year-over-year, delivering industry-leading growth at scale."

Nikesh Arora, Chairman and CEO

"I’m particularly excited about the trends driving the NGS ARR, and I wanted to provide some additional insights around the evolution of our net new NGS ARR. At the same time, we’ve seen our net new NGS ARR from new market offerings grow significantly, and these are becoming a larger proportion of our total net new NGS ARR dollars. It is this dynamic that gives us confidence in our long-term targets."

Deepak Galecha, Chief Financial Officer

Strategic Positioning

1. Platformization as a Core Growth Engine

Palo Alto Networks’ platformization strategy—consolidating multiple security products into unified, cloud-delivered platforms—continues to accelerate, with over 1,250 of the top 5,000 customers now platformized. Multi-platform customers grew nearly 70% YoY, and large deals (such as a $90 million transaction with a global consulting firm) highlight the value of consolidation for both security outcomes and cost efficiency. Management expects 60–70% of future NGS ARR to come from platform customers, critical to the $15 billion ARR target for FY30.

2. AI-Powered Security and Data Leverage

AI is now a strategic imperative for customers, driving urgency in technology and security transformation. PANW’s Cortex XIM, an AI-driven security operations platform, is now the fastest-growing product in company history, with ARR up 200%+ YoY and an average ARR per customer over $1 million. The company’s ability to ingest and analyze nearly 12 petabytes of telemetry daily provides a unique data advantage, enabling new use cases and rapid product development—such as advanced email security and exposure management—on top of the XIM platform.

3. SASE and Software Firewall Momentum

SASE and software firewalls are central to PANW’s strategy for securing hybrid and cloud environments. SASE ARR grew 36% YoY, with 40% of new SASE customers new to PANW. Prisma Access Browser, a secure enterprise browser, is rapidly scaling—now at 3 million licensed seats, up 10x YoY. Software firewall ARR grew 20% YoY, fueled by cloud migration and AI workloads, as enterprises shift from hardware appliances to software-based, cloud-native security solutions.

4. AI Runtime Security and M&A

PANW is investing in AI runtime security with the launch of Prisma AIRS and the acquisition of Protect.AI for $700 million. This expands PANW’s capabilities in securing AI models and artifacts, addressing emerging risks as agentic AI—AI systems capable of autonomous actions—becomes mainstream. The company’s early focus on runtime security and model scanning positions it ahead of competitors in the fast-evolving AI security market.

5. Operational and Financial Discipline

Operational leverage and disciplined capital allocation remain priorities. The company is transitioning to annual payments and longer contracts, managing the shift without impacting cash flow guidance. Gross and operating margins remain strong, and the buyback program remains opportunistic, with $1 billion in authorization through December 2025.

Key Considerations

Palo Alto Networks’ Q3 results reflect a business at a strategic inflection, with AI, platformization, and cloud migration driving both top-line growth and operational scale. Investors should focus on:

  • AI as a Demand Catalyst: The urgency to secure AI infrastructure is driving accelerated cloud adoption, larger deals, and new product opportunities (e.g., XIM, Prisma AIRS).
  • Platformization Penetration: While only 1,250 of 70,000 customers are platformized, these customers account for a disproportionate share of ARR and are key to the $15 billion target.
  • Software Mix Shift: The mix of software in product revenue is approaching 40%, supporting higher margins and recurring revenue.
  • Execution Through Volatility: PANW executed through April’s geopolitical and tariff uncertainty, demonstrating operational resilience and pipeline stability.
  • Cloud and SASE Expansion: SASE and software firewalls continue to outpace market growth, positioning PANW for continued share gains as enterprises modernize security architectures.

Risks

Key risks include potential macroeconomic slowdowns, increased competitive intensity in AI and SASE, and evolving regulatory or geopolitical disruptions. The rapid pace of AI-driven change could also create execution challenges, especially as PANW integrates acquisitions like Protect.AI and continues to scale new products. Management flagged April as an anomaly due to geopolitical uncertainty but indicated that business conditions have stabilized.

Forward Outlook

For Q4 2025, Palo Alto Networks guided to:

  • NGS ARR of $5.52 to $5.57 billion, up 31–32% YoY
  • Revenue of $2.49 to $2.51 billion, up 14–15% YoY
  • Non-GAAP EPS of $0.87 to $0.89, up 16–19% YoY

For full-year 2025, management reiterated:

  • Total revenue of $9.17 to $9.19 billion, up 14% YoY
  • Operating margin of 28.2% to 28.5%
  • Non-GAAP EPS of $3.26 to $3.28, up 15% YoY
  • Adjusted free cash flow margin of 37.5% to 38%

Management highlighted a robust Q4 pipeline, with 80% of collections from previously booked deals and annual cash flow seasonality weighted to the second half.

Takeaways

Palo Alto Networks is executing on a strategic pivot to platformization and AI-driven security, driving industry-leading growth at scale and positioning itself as the consolidator of choice for enterprises seeking to modernize security in an AI-centric world.

  • AI and Platformization as Growth Engines: AI transformation and unified platforms are driving larger, stickier deals and accelerating next-gen ARR growth.
  • Cloud and Software Shift: The rapid mix shift to software and SASE is expanding margins and recurring revenue while supporting long-term growth targets.
  • Execution and Resilience: Strong operational leverage and the ability to execute through macro volatility reinforce confidence in PANW’s outlook.

Conclusion

Palo Alto Networks’ Q3 results underscore its emergence as the leading platform consolidator in cybersecurity, powered by AI, cloud, and operational discipline. With next-gen ARR inflecting and platformization deepening, PANW is well positioned to capture the next wave of enterprise security spend.

Read-Through

PANW’s results signal a broader industry shift toward unified, AI-powered security platforms and away from fragmented point solutions. The accelerating adoption of SASE and software firewalls underscores the urgency for enterprises to secure hybrid and cloud environments, a trend likely to benefit other platform-oriented vendors. AI is not only a threat vector but a growth catalyst—vendors that can ingest, analyze, and act on large-scale telemetry data will gain outsized advantage. The platformization narrative is set to reshape the cybersecurity landscape, with consolidation and data integration as central themes for the next several years.

PANW Technology Cybersecurity AI Platformization SASE Cloud