Item 1. Financial Statements

81K characters. Original on sec.gov · Markdown

Item 1. Financial Statements

PALO ALTO NETWORKS, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS (in millions, except per share data)
	October 31, 2025		July 31, 2025
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	3,066	$	2,269
Short-term investments	1,144		635
Accounts receivable, net of allowance for credit losses of $14 and $10 as of October 31, 2025 and July 31, 2025, respectively	1,343		2,965
Short-term financing receivables, net	737		715
Short-term deferred contract costs	415		419
Prepaid expenses and other current assets	605		520
Total current assets	7,310		7,523
Property and equipment, net	394		387
Operating lease right-of-use assets	353		347
Long-term investments	5,982		5,555
Long-term financing receivables, net	855		1,002
Long-term deferred contract costs	546		586
Goodwill	4,567		4,567
Intangible assets, net	723		763
Deferred tax assets	2,416		2,424
Other assets	390		422
Total assets	$	23,536	$	23,576
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	223	$	232
Accrued compensation	398		608
Accrued and other liabilities	665		846
Deferred revenue	6,132		6,302

Total current liabilities	7,418		7,988

Long-term deferred revenue	6,098		6,450
Deferred tax liabilities	96		89
Long-term operating lease liabilities	346		338
Other long-term liabilities	913		887
Total liabilities	14,871		15,752
Commitments and contingencies (Note 10)

Stockholders’ equity:
Preferred stock; $0.0001 par value; 100 shares authorized; none issued and outstanding as of October 31, 2025 and July 31, 2025	—		—
Common stock and additional paid-in capital; $0.0001 par value; 2,000 shares authorized; 692 and 668 shares issued and outstanding as of October 31, 2025 and July 31, 2025, respectively	5,780		5,292
Accumulated other comprehensive income	67		48
Retained earnings	2,818		2,484
Total stockholders’ equity	8,665		7,824
Total liabilities and stockholders’ equity	$	23,536	$	23,576

See notes to condensed consolidated financial statements.

- 2 -

PALO ALTO NETWORKS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in millions, except per share data)
	Three Months Ended October 31,
		2025		2024
Revenue:
Product		$	434	$	354
Subscription and support		2,040		1,785
Total revenue		2,474		2,139
Cost of revenue:
Product		89		75
Subscription and support		549		479
Total cost of revenue		638		554
Total gross profit		1,836		1,585
Operating expenses:
Research and development		528		481
Sales and marketing		820		720
General and administrative		179		98
Total operating expenses		1,527		1,299
Operating income		309		286
Interest expense		—		(1)
Other income, net		103		83
Income before income taxes		412		368
Provision for income taxes		78		17
Net income		$	334	$	351
Net income per share, basic		$	0.49	$	0.54
Net income per share, diluted		$	0.47	$	0.49
Weighted-average shares used to compute net income per share, basic		679		654
Weighted-average shares used to compute net income per share, diluted		709		709

See notes to condensed consolidated financial statements.

- 3 -

PALO ALTO NETWORKS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited, in millions)
	Three Months Ended October 31,
		2025		2024
Net income		$	334	$	351
Other comprehensive income, net of tax:
Change in unrealized gains (losses) on investments		25		(3)
Cash flow hedges:
Change in unrealized gains (losses)		7		—
Net realized (gains) losses reclassified into earnings		(13)		1
Net change on cash flow hedges		(6)		1
Other comprehensive income (loss)		19		(2)
Comprehensive income		$	353	$	349

See notes to condensed consolidated financial statements.

- 4 -

PALO ALTO NETWORKS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited, in millions)
	Three Months Ended October 31, 2025
	Common Stock and Additional Paid-In Capital			Accumulated Other Comprehensive Income		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance as of July 31, 2025	668	$	5,292	$	48	$	2,484	$	7,824

Net income	—	—		—		334		334
Other comprehensive income	—	—		19		—		19
Issuance of common stock in connection with employee equity incentive plans	4	129		—		—		129
Taxes paid related to net share settlement of equity awards	—	(1)		—		—		(1)
Share-based compensation for equity-based awards	—	360		—		—		360




Settlement of warrants	20	—		—		—		—


Balance as of October 31, 2025	692	$	5,780	$	67	$	2,818	$	8,665


	Three Months Ended October 31, 2024
	Common Stock and Additional Paid-In Capital			Accumulated Other Comprehensive Loss		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance as of July 31, 2024	650	$	3,821	$	(2)	$	1,350	$	5,169

Net income	—	—		—		351		351
Other comprehensive loss	—	—		(2)		—		(2)
Issuance of common stock in connection with employee equity incentive plans	5	121		—		—		121
Taxes paid related to net share settlement of equity awards	—	(22)		—		—		(22)
Share-based compensation for equity-based awards	—	295		—		—		295


Settlement of convertible notes	4	—		—		—		—
Settlement of note hedges	(4)	—		—		—		—



Balance as of October 31, 2024	655	$	4,215	$	(4)	$	1,701	$	5,912

See notes to condensed consolidated financial statements.

- 5 -

PALO ALTO NETWORKS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in millions)
	Three Months Ended October 31,
	2025		2024
Cash flows from operating activities
Net income	$	334	$	351
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation for equity-based awards	370		295
Deferred income taxes	9		(137)
Depreciation and amortization	89		84

Amortization of deferred contract costs	126		110

Change in fair value of contingent consideration liability	(13)		6
Reduction of operating lease right-of-use assets	18		16
Amortization of investment premiums, net of accretion of purchase discounts	(7)		(15)


Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net	1,622		1,486
Financing receivables, net	125		11
Deferred contract costs	(82)		(79)
Prepaid expenses and other assets	(33)		(4)
Accounts payable	(2)		97
Accrued compensation	(210)		(201)
Accrued and other liabilities	(53)		(94)
Deferred revenue	(522)		(416)
Net cash provided by operating activities	1,771		1,510
Cash flows from investing activities
Purchases of investments	(1,401)		(660)
Proceeds from sales of investments	30		291
Proceeds from maturities of investments	474		369
Business acquisitions, net of cash and restricted cash acquired	(2)		(500)
Purchases of property, equipment, and other assets	(84)		(44)
Net cash used in investing activities	(983)		(544)
Cash flows from financing activities
Repayments of convertible senior notes	—		(319)




Proceeds from sales of shares through employee equity incentive plans	130		121
Payments for taxes related to net share settlement of equity awards	(1)		(22)


Payments of contingent consideration liability	(121)		—
Net cash provided by (used in) financing activities	8		(220)
Net increase in cash, cash equivalents, and restricted cash	796		746
Cash, cash equivalents, and restricted cash—beginning of period	2,279		1,547
Cash, cash equivalents, and restricted cash—end of period	$	3,075	$	2,293
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets
Cash and cash equivalents	$	3,066	$	2,283
Restricted cash included in prepaid expenses and other current assets	9		10

Total cash, cash equivalents, and restricted cash	$	3,075	$	2,293

Non-cash investing and financing activities

Contingent consideration for a business acquisition	$	—	$	(649)

See notes to condensed consolidated financial statements.

- 6 -

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Description of Business and Summary of Significant Accounting Policies

Description of Business

Palo Alto Networks, Inc. (the “Company,” “we,” “us,” or “our”), headquartered in Santa Clara, California, was incorporated in March 2005 under the laws of the State of Delaware and commenced operations in April 2005. Our cybersecurity platforms and services help enterprises, organizations, service providers, and government entities to secure their users, networks, clouds, and endpoints by delivering comprehensive cybersecurity backed by artificial intelligence and automation.

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), consistent in all material respects with those applied in our Annual Report on Form 10-K for the fiscal year ended July 31, 2025, filed with the Securities and Exchange Commission (“SEC”) on August 29, 2025. The condensed consolidated financial statements include our accounts and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The condensed consolidated financial statements are unaudited but include all adjustments of a normal recurring nature necessary for a fair presentation of our quarterly results. Our condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended July 31, 2025.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and the accompanying notes. We evaluate our estimates on an ongoing basis. Management estimates include, but are not limited to, the standalone selling price for our products and services, share-based compensation, fair value of assets acquired and liabilities assumed in business combinations, fair value of contingent consideration liability, the assessment of recoverability of our intangibles and goodwill, valuation allowance against deferred tax assets, valuation of inventory and manufacturing partner and supplier liabilities, deferred contract cost benefit period, and loss contingencies. We base our estimates on assumptions, both historical and forward looking, that we believe are reasonable. Actual results could differ materially from those estimates due to risks and uncertainties.

Summary of Significant Accounting Policies

There have been no material changes to our significant accounting policies as of and for the three months ended October 31, 2025, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2025.

Recently Issued Accounting Pronouncements

Income Tax Disclosures

In December 2023, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that requires consistent categories and greater disaggregation of information in the effective tax rate reconciliation and additional disclosures of income taxes paid by jurisdiction. The standard is effective for our annual periods beginning in fiscal 2026 and could be applied either prospectively or retrospectively. We are currently evaluating the impact of this standard on our disclosures in the consolidated financial statements.

Expense Disaggregation Disclosures

In November 2024, the FASB issued authoritative guidance that expands annual and interim disclosure of specified information about certain costs and expenses in the notes to financial statements. The standard is effective for our annual periods beginning in fiscal 2028 and interim periods beginning in the first quarter of fiscal 2029, and could be applied either prospectively or retrospectively. Early adoption is permitted. We are currently evaluating the impact of this standard on our disclosures in the consolidated financial statements.

Measurement of Credit Losses for Accounts Receivable and Contract Assets

In July 2025, the FASB issued authoritative guidance that provides a practical expedient for estimating expected credit losses on accounts receivable and contract assets. The standard is effective for our annual and interim periods beginning in the first quarter of fiscal 2027 and will be applied on a prospective basis. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.

- 7 -

Accounting for Internal-Use Software

In September 2025, the FASB issued authoritative guidance that modernizes the accounting for internal-use software by eliminating project stage-based capitalization and clarifying the requirements, including probable-to-complete threshold, to commence the capitalization of software development costs. The standard is effective for our annual and interim periods beginning in the first quarter of fiscal 2029 and could be applied either prospectively or retrospectively. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.

2. Revenue

Disaggregation of Revenue

The following table presents revenue by geographic theater (in millions):


	Three Months Ended October 31,
		2025		2024
Revenue:
Americas
United States		$	1,526	$	1,344
Other Americas		115		98
Total Americas		1,641		1,442
Europe, the Middle East, and Africa (“EMEA”)		521		442
Asia Pacific and Japan (“APAC”)		312		255
Total revenue		$	2,474	$	2,139

The following table presents revenue for groups of similar products and services (in millions):


	Three Months Ended October 31,
		2025		2024
Revenue:
Product		$	434	$	354
Subscription and support
Subscription		1,364		1,192
Support		676		593
Total subscription and support		2,040		1,785
Total revenue		$	2,474	$	2,139

Deferred Revenue

During the three months ended October 31, 2025 and 2024, we recognized approximately $1.9 billion and $1.6 billion of revenue pertaining to amounts that were deferred as of July 31, 2025 and 2024, respectively.

Remaining Performance Obligations

Remaining performance obligations were $15.5 billion as of October 31, 2025, of which we expect to recognize as revenue approximately $6.9 billion over the next 12 months and the remainder thereafter.

- 8 -

3. Fair Value Measurements

The following table presents our financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2025 and July 31, 2025 (in millions):


	October 31, 2025								July 31, 2025
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	1,105	$	—	$	—	$	1,105	$	1,206	$	—	$	—	$	1,206

Commercial paper	—		755		—		755		—		169		—		169
Corporate debt securities	—		157		—		157		—		—		—		—
U.S. government and agency securities	—		178		—		178		—		—		—		—

Total cash equivalents	1,105		1,090		—		2,195		1,206		169		—		1,375
Short-term investments:
Certificates of deposit	—		25		—		25		—		—		—		—
Commercial paper	—		340		—		340		—		15		—		15
Corporate debt securities	—		744		—		744		—		584		—		584
U.S. government and agency securities	—		14		—		14		—		6		—		6
Non-U.S. government and agency securities	—		3		—		3		—		3		—		3
Asset-backed securities	—		13		—		13		—		22		—		22
Total short-term investments	—		1,139		—		1,139		—		630		—		630
Long-term investments:

Corporate debt securities	—		4,448		—		4,448		—		4,050		—		4,050
U.S. government and agency securities	—		85		—		85		—		164		—		164
Non-U.S. government and agency securities	—		26		—		26		—		26		—		26
Asset-backed securities	—		1,423		—		1,423		—		1,315		—		1,315
Total long-term investments	—		5,982		—		5,982		—		5,555		—		5,555
Prepaid expenses and other current assets:
Foreign currency forward contracts	—		64		—		64		—		58		—		58
Total prepaid expenses and other current assets	—		64		—		64		—		58		—		58
Other assets:
Foreign currency forward contracts	—		—		—		—		—		3		—		3
Total other assets	—		—		—		—		—		3		—		3
Total assets measured at fair value	$	1,105	$	8,275	$	—	$	9,380	$	1,206	$	6,415	$	—	$	7,621

- 9 -


	October 31, 2025								July 31, 2025
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Accrued and other liabilities:
Foreign currency forward contracts	$	—	$	7	$	—	$	7	$	—	$	4	$	—	$	4
Contingent consideration	—		—		168		168		—		—		276		276
Total accrued and other liabilities	—		7		168		175		—		4		276		280
Other long-term liabilities:

Contingent consideration	—		—		212		212		—		—		238		238
Total other long-term liabilities	—		—		212		212		—		—		238		238
Total liabilities measured at fair value	$	—	$	7	$	380	$	387	$	—	$	4	$	514	$	518

As part of our acquisition of certain QRadar assets from International Business Machines Corporation (“IBM”) on August 31, 2024, we agreed to make post-closing payments to IBM contingent upon customers entering into qualified new transactions through June 30, 2028. Payments related to the contingent consideration liability commenced in the fiscal quarter ended October 2025 and are expected to continue through the fiscal quarter ending October 2028. The estimated range of undiscounted contingent consideration is between $0.4 billion and $0.6 billion.

The fair value of our contingent consideration liability is estimated using a discounted cash flow valuation technique. We consider the fair value of our contingent consideration liability to be a Level 3 measurement as we use unobservable inputs in determining discounted cash flows to estimate the fair value. The significant unobservable inputs include an estimate of future cash payments related to customers entering into qualified new transactions as well as a risk-adjusted discount rate used to present value the expected cash flows. A significant change in any of these assumptions could have a material impact to the fair value of our contingent consideration liability.

The following table presents a reconciliation of our contingent consideration liability (in millions):


	Three Months Ended October 31,
	2025		2024
Contingent consideration liability at the beginning of the period	$	514	$	—
Initial valuation on the acquisition date	—		649
Change in fair value	(13)		6
Payments	(121)		—
Contingent consideration liability at the end of the period	$	380	$	655

The total estimated fair value of our financing receivables approximates their carrying amounts as of October 31, 2025 and July 31, 2025. We consider the fair value of our financing receivables to be a Level 3 measurement as we use unobservable inputs in determining discounted cash flows to estimate the fair value.

- 10 -

4. Cash Equivalents and Investments

Available-for-sale Debt Securities

The following tables summarize the amortized cost, unrealized gains and losses, and fair value of our available-for-sale debt securities as of October 31, 2025 and July 31, 2025 (in millions):


	October 31, 2025
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Cash equivalents:

Commercial paper	$	755	$	—	$	—	$	755
Corporate debt securities	157		—		—		157
U.S. government and agency securities	178		—		—		178

Total available-for-sale cash equivalents	$	1,090	$	—	$	—	$	1,090
Investments:
Certificates of deposit	$	25	$	—	$	—	$	25
Commercial paper	340		—		—		340
Corporate debt securities	5,120		73		(1)		5,192
U.S. government and agency securities	99		—		—		99
Non-U.S. government and agency securities	29		—		—		29
Asset-backed securities	1,421		15		—		1,436
Total available-for-sale investments	$	7,034	$	88	$	(1)	$	7,121


	July 31, 2025
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Cash equivalents:

Commercial paper	$	169	$	—	$	—	$	169



Total available-for-sale cash equivalents	$	169	$	—	$	—	$	169
Investments:

Commercial paper	15		—		—		15
Corporate debt securities	4,588		47		(1)		4,634
U.S. government and agency securities	170		—		—		170
Non-U.S. government and agency securities	29		—		—		29
Asset-backed securities	1,328		9		—		1,337
Total available-for-sale investments	$	6,130	$	56	$	(1)	$	6,185

Unrealized losses related to our available-for-sale debt securities are primarily due to interest rate fluctuations as opposed to credit quality. We do not intend to sell any of the securities in an unrealized loss position and it is not likely that we would be required to sell these securities before recovery of their amortized cost basis, which may be at maturity. We did not recognize any credit losses related to our available-for-sale debt securities during the three months ended October 31, 2025 and 2024.

- 11 -

The following table summarizes the amortized cost and fair value of our available-for-sale debt securities as of October 31, 2025, by contractual years-to-maturity (in millions):


	Amortized Cost		Fair Value
Due within one year	$	2,226	$	2,229
Due between one and three years	2,299		2,327
Due between three and five years	3,133		3,182
Due between five and ten years	286		290
Due after ten years	180		183
Total	$	8,124	$	8,211

Marketable Equity Securities

Marketable equity securities consist of money market funds and are included in cash and cash equivalents on our condensed consolidated balance sheets. As of October 31, 2025 and July 31, 2025, the carrying values of our marketable equity securities were $1.1 billion and $1.2 billion, respectively. There were no unrealized gains or losses recognized for these securities during the three months ended October 31, 2025 and 2024.

5. Financing Receivables

The following table summarizes our short-term and long-term financing receivables as of October 31, 2025 and July 31, 2025 (in millions):


	October 31, 2025		July 31, 2025
Short-term financing receivables, gross	$	823	$	806
Unearned income	(80)		(86)
Allowance for credit losses	(6)		(5)
Short-term financing receivables, net	$	737	$	715
Long-term financing receivables, gross	$	927	$	1,079
Unearned income	(63)		(69)
Allowance for credit losses	(9)		(8)
Long-term financing receivables, net	$	855	$	1,002

The following table presents amortized cost basis of our financing receivables categorized by internal risk rating and year of origination (in millions):


Internal Risk Rating(1)		October 31, 2025																		July 31, 2025
	Fiscal Year of Origination																		Fiscal Year of Origination
	2026			2025			2024			2023			2022			Total			2025			2024			2023			2022			2021			Total
1 to 4		$	—		$	301		$	675		$	177		$	5		$	1,158		$	261		$	732		$	242		$	9		$	18		$	1,262
5 to 6		28			188			183			36			—			435			174			226			50			—			—			450
7 to 10		—			—			4			10			—			14			—			4			14			—			—			18
Amortized cost basis of financing receivables		$	28		$	489		$	862		$	223		$	5		$	1,607		$	435		$	962		$	306		$	9		$	18		$	1,730

(1)Internal risk ratings are categorized as 1 through 10, with the lowest rating representing the highest quality.

There was no significant activity in allowance for credit losses during the three months ended October 31, 2025 and 2024. Past due amounts on financing receivables were not material as of October 31, 2025 and July 31, 2025.

- 12 -

6. Derivative Instruments

We are exposed to foreign currency exchange risk. Our sales contracts are primarily denominated in U.S. dollars. A portion of our operating expenditures are denominated in foreign currencies, making them subject to fluctuations in foreign currency exchange rates. We enter into foreign currency derivative contracts with maturities of 24 months or less, which we designate as cash flow hedges, to manage the foreign currency exchange risk associated with our revenue and operating expenditures.

As of October 31, 2025 and July 31, 2025, the total notional amount of our outstanding foreign currency forward contracts designated as cash flow hedges was $760 million and $964 million, respectively. Refer to Note 3. Fair Value Measurements for the fair value of our derivative instruments as reported on our condensed consolidated balance sheets as of October 31, 2025 and July 31, 2025.

As of October 31, 2025, unrealized gains and losses in accumulated other comprehensive income (“AOCI”) related to our cash flow hedges were a $32 million net gain, of which $34 million in gains are expected to be recognized into earnings within the next 12 months. As of July 31, 2025, unrealized gains and losses in AOCI related to our cash flow hedges were a $40 million net gain.

As of October 31, 2025 and July 31, 2025, the notional amount of our outstanding foreign currency forward contracts not designated as hedging instruments was $586 million and $504 million, respectively.

7. Acquisition

CyberArk Software Ltd.

On July 30, 2025, we entered into a definitive agreement to acquire CyberArk Software Ltd., an identity security company (“CyberArk”). The acquisition is expected to close during the third quarter of our fiscal 2026, subject to the satisfaction of customary closing conditions, including the receipt of certain approvals under specified antitrust and foreign investment laws. Under the terms of the agreement, CyberArk shareholders will receive $45.00 in cash and 2.2005 shares of our common stock for each CyberArk share. This represents an equity value of approximately $25 billion for CyberArk based on the unaffected 10-day average daily volume-weighted average trading prices of our common stock as of July 25, 2025. We expect to fund the cash portion of the consideration with our cash on hand. The agreement also provides that we will assume certain unvested outstanding equity awards held by CyberArk employees.

We and CyberArk each have certain termination rights under the definitive acquisition agreement. A termination fee of $1.0 billion may be payable by us to CyberArk, or a fee of $750 million may be payable by CyberArk to us, upon termination of the definitive acquisition agreement under specified circumstances.

8. Intangible Assets

Purchased Intangible Assets

The following table presents details of our purchased intangible assets as of October 31, 2025 and July 31, 2025 (in millions):


	October 31, 2025						July 31, 2025
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Intangible assets subject to amortization:
Developed technology	$	515	$	(279)	$	236	$	536	$	(274)	$	262
Customer relationships	609		(137)		472		609		(123)		486
Acquired intellectual property	24		(9)		15		24		(9)		15

Other	1		(1)		—		1		(1)		—



Total purchased intangible assets	$	1,149	$	(426)	$	723	$	1,170	$	(407)	$	763

We recognized amortization expense of $40 million and $41 million for the three months ended October 31, 2025 and 2024 respectively.

- 13 -

The following table summarizes estimated future amortization expense of our intangible assets subject to amortization as of October 31, 2025 (in millions):


			Fiscal years ending July 31,
	Total		Remaining 2026		2027		2028		2029		2030		2031 and Thereafter
Future amortization expense	$	723	$	116	$	125	$	104	$	78	$	62	$	238

9. Debt

Convertible Senior Notes, Note Hedges, and Warrants

In June 2020, we issued $2.0 billion aggregate principal amount of 0.375% Convertible Senior Notes due 2025 (the “2025 Notes”). The 2025 Notes were converted prior to or settled on the maturity date of June 1, 2025 in accordance with their terms.

Concurrent with the issuance of the 2025 Notes, we entered into separate convertible note hedge transactions (the “2025 Note Hedges”) with respect to our common stock for an aggregate payment of $371 million. The 2025 Note Hedges expired upon maturity of the 2025 Notes. Any shares of our common stock receivable by us under the 2025 Note Hedges are excluded from the calculation of diluted earnings per share as they are antidilutive.

Separately, but concurrently with the issuance of our 2025 Notes, we entered into transactions whereby we sold warrants (the “2025 Warrants”) to acquire 40 million shares of our common stock with a strike price of $68.08 per share, subject to anti-dilution adjustments, for aggregate proceeds of $203 million. The 2025 Warrants are exercisable over 60 scheduled trading days beginning September 2025. The shares issuable under the 2025 Warrants are included in the calculation of diluted earnings per share when the average market value per share of our common stock for the reporting period exceeds the strike price of the 2025 Warrants.

During the three months ended October 31, 2025, we net settled a portion of the 2025 Warrants with 20 million shares of our common stock with a fair value of $4.1 billion. The number of net shares issued was determined based on the number of 2025 Warrants exercised multiplied by the difference between the strike price of the 2025 Warrants and their daily volume-weighted-average stock price. As of October 31, 2025, up to 11 million shares of our common stock were issuable for gross settlement under the remaining outstanding 2025 Warrants, which will be net settled when exercised through the end of November 2025.

Revolving Credit Facility

On April 13, 2023, we entered into a credit agreement (the “Credit Agreement”) with certain institutional lenders that provides for a $400 million unsecured revolving credit facility (the “Credit Facility”), with an option to increase the amount of the Credit Facility by up to an additional $350 million, subject to certain conditions. The Credit Facility matures on April 13, 2028.

The borrowings under the Credit Facility bear interest, at our option, at a base rate plus a spread of 0.000% to 0.375%, or an adjusted term Secured Overnight Financing Rate plus a spread of 1.000% to 1.375%, in each case with such spread being determined based on our leverage ratio. We are obligated to pay an ongoing commitment fee on undrawn amounts at a rate of 0.090% to 0.150%, depending on our leverage ratio. The interest rates and commitment fees are also subject to upward and downward adjustments based on our progress towards the achievement of certain sustainability goals.

As of October 31, 2025, there were no amounts outstanding and we were in compliance with all covenants under the Credit Agreement.

- 14 -

10. Commitments and Contingencies

Purchase Commitments

We have entered into various non-cancelable agreements with cloud hosting service providers, under which we are committed to minimum or fixed purchases of certain cloud hosting services. In addition, in order to reduce manufacturing lead times and plan for adequate supply, we have entered into agreements with manufacturing partners and component suppliers to procure inventory based on our demand forecasts. Other purchase obligations include non-cancellable subscription agreements and other commitments in the normal course of business. The following table presents details of the aggregate future non-cancelable purchase commitments under these agreements as of October 31, 2025 (in millions):


			Fiscal years ending July 31,
	Total		Remaining 2026		2027		2028		2029		2030		2031 and Thereafter
Cloud	$	6,380	$	60	$	660	$	998	$	1,017	$	1,148	$	2,497
Manufacturing	185		185		—		—		—		—		—
Other	141		66		61		7		3		4		—
Total	$	6,706	$	311	$	721	$	1,005	$	1,020	$	1,152	$	2,497

Additionally, we have a $112 million minimum purchase commitment with a cloud hosting service provider through September 2027 with no specified annual commitments.

Litigation

We are subject to legal proceedings, claims, tax matters, and litigation arising in the ordinary course of business, including, for instance, intellectual property and patent litigation. We accrue for contingencies when we believe that a loss is probable and that we can reasonably estimate the amount of any such loss.

Legal matters could include speculative, substantial, or indeterminate monetary amounts. Significant judgment is required to determine both the likelihood of there being a loss and the estimated amount of a loss related to such matters, and we may be unable to estimate the reasonably possible loss or range of loss. The outcomes of outstanding legal matters are inherently unpredictable, and could, either individually or in aggregate, have a material adverse effect on us and our results of operations. To the extent there is a reasonable possibility that a loss exceeding any amounts already recognized may be incurred, we will either disclose the estimated additional loss or state that such an estimate cannot be made.

The following matters arose in the ordinary course of business.

Centripetal Networks, Inc. v. Palo Alto Networks

On March 12, 2021, Centripetal Networks, Inc., filed a lawsuit against us in the United States District Court for the Eastern District of Virginia. The lawsuit alleges that our products infringe multiple Centripetal patents. We successfully challenged certain of these patents, which were found unpatentable by the U.S. Patent and Trademark Office (“PTO”). The case went to jury trial on January 22, 2024, on four patents. On January 31, 2024, the jury returned a verdict of non-willful infringement with a lump sum amount of $152 million, plus statutory interest. After post-trial motions, a judgment was issued on October 3, 2024 affirming infringement on three patents, reversing infringement on the fourth patent, and subsequently, reducing the damages amount to $114 million. We posted a surety bond that was agreed upon by the parties and approved by the court. This bond prevents execution of the judgment while appeals are pending. In addition, Centripetal filed infringement contentions on certain of their patents in the European Patent Office and Unified Patent Court in Germany, to which we filed appropriate legal challenges. Those matters are still pending.

As of October 31, 2025 and July 31, 2025, we accrued $147 million and $146 million based on the judgment and estimated interest, which is recorded in other long-term liabilities on our condensed consolidated balance sheets. The corresponding charge was $1 million for the three months ended October 31, 2025. We recorded a release of $43 million for the three months ended October 31, 2024. These amounts are included in general and administrative expense on our condensed consolidated statements of operations.

Finjan, Inc. v. Palo Alto Networks

On November 4, 2014, Finjan, Inc., filed a lawsuit against us in the United States District Court for the Northern District of California. The lawsuit alleges that our products infringe multiple Finjan patents. The complaint requests injunctive relief, monetary damages, and attorneys’ fees. On March 21, 2025, the judge issued an order granting summary judgment of non-infringement on all remaining patents at issue. Plaintiff filed a Notice of Appeal on April 21, 2025. We are unable, at this time, to reasonably estimate a possible loss or potential range of loss, if any.

- 15 -

Eire OG Innovations. v. Palo Alto Networks

On April 3, 2024, Eire OG Innovations filed a lawsuit against us in the United States District Court for the Eastern District of Texas asserting infringement of multiple patents, certain of which were subsequently dismissed. The complaint requests monetary damages and attorneys’ fees. Trial is set for February 17, 2026. As of October 31, 2025, we accrued for an immaterial amount related to this matter.

11. Stockholders’ Equity

Share Repurchase Program

In February 2019, our board of directors authorized a $1.0 billion share repurchase program, which is funded from available working capital. Our board of directors subsequently authorized additional increases to this share repurchase program, bringing the total authorization under this share repurchase program to $4.1 billion (our “current authorization”). As of October 31, 2025, the expiration date of our current authorization was December 31, 2025. The expiration date of the authorization was subsequently extended to December 31, 2026. Refer to Note 16. Subsequent Events for additional information. Our repurchase program may be suspended or discontinued at any time. Repurchases may be made at management’s discretion from time to time on the open market, through privately negotiated transactions, transactions structured through investment banking institutions, block purchase techniques, 10b5-1 trading plans, or a combination of the foregoing.

We did not repurchase shares of our common stock during the three months ended October 31, 2025 and 2024.

As of October 31, 2025, $1.0 billion remained available for future share repurchases under our current repurchase authorization.

12. Equity Award Plans

Restricted Stock Unit (“RSU”) and Performance-Based Stock Unit (“PSU”) Activities

The following table summarizes the RSU and PSU activity under our stock plans during the three months ended October 31, 2025 (in millions, except per share amounts):


	Unvested RSUs			Unvested PSUs
	Number of Shares	Weighted-Average Grant-Date Fair Value Per Share		Aggregate Intrinsic Value		Number of Shares	Weighted-Average Grant-Date Fair Value Per Share		Aggregate Intrinsic Value
Balance—July 31, 2025	13	$	143.33	$	2,285	9	$	140.92	$	1,635
Granted(1)	1	$	190.48			3	$	182.59
Vested(2)	(2)	$	122.51			—	$	62.72
Forfeited	—	$	136.82			—	$	194.01
Balance—October 31, 2025	12	$	150.94	$	2,623	12	$	153.01	$	2,677

(1)For PSUs, shares granted represent the aggregate maximum number of shares that may be earned and issued with respect to these awards over their full terms.

(2)Includes time-based vesting for PSUs.

Our RSUs generally vest over a period of four years from the date of grant. Until vested, RSUs do not have the voting and dividend participation rights of common stock and the shares underlying the awards are not considered issued and outstanding.

Our PSUs generally vest over a period of one to four years from the date of grant. The number of PSUs eligible to vest is determined based on the level of achievement against certain performance conditions, market conditions, and a combination thereof.

During the three months ended October 31, 2025, we granted 3 million shares of PSUs that contain service, performance, and market conditions. The service conditions are satisfied after a period of one to three years. The performance conditions are based on an average of next-generation security annualized recurring revenue and non-GAAP net income per diluted share. The market condition is measured based on our total shareholder return (“TSR”) relative to the TSR of the companies listed in the Standard & Poor’s 500 index. As of October 31, 2025, we have approved 3 million shares of PSUs, which will be granted upon the performance condition being established during the next two fiscal years.

- 16 -

The fair value of the PSUs subject to market conditions is estimated on the grant date using a Monte Carlo simulation model. The following table summarizes the assumptions used and the resulting grant-date fair value of our PSUs subject to market conditions granted during the three months ended October 31, 2025 and 2024:



	Three Months Ended October 31,
		2025		2024
Volatility		36.6% - 42.6%		44.1% - 47.6%
Expected term (in years)		1.0 - 3.0		1.0 - 2.9
Dividend yield		0.0	%	0.0	%
Risk-free interest rate		3.6% - 3.9%		3.7% - 4.5%
Grant-date fair value per share		$226.06 - $261.62		$264.51 - $305.83

Performance Stock Option (“PSO”) Activities

We have granted PSOs with both service and market conditions. The market conditions were achieved when certain stock price targets were met. As of October 31, 2025 and July 31, 2025, all of our outstanding PSOs have been fully vested. The maximum contractual term of our outstanding PSOs is seven and a half years from the date of grant in fiscal year 2018 and 2019.

The following table summarizes the PSO activity under our stock plans during the three months ended October 31, 2025 (in millions, except per share amounts):



	Number of Shares	Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Balance—July 31, 2025	1	$	32.76	0.5	$	197

Exercised	(1)	$	32.88

Balance—October 31, 2025	—	$	32.25	0.5	$	52
Exercisable—October 31, 2025	—	$	32.25	0.5	$	52

Share-Based Compensation

The following table summarizes share-based compensation included in costs and expenses (in millions):


	Three Months Ended October 31,
		2025		2024
Cost of product revenue		$	1	$	1
Cost of subscription and support revenue		32		31
Research and development		155		138
Sales and marketing		102		76
General and administrative		80		49
Total share-based compensation		$	370	$	295

As of October 31, 2025, total compensation cost related to unvested share-based awards not yet recognized was $2.2 billion. This cost is expected to be amortized over a weighted-average period of approximately 2.4 years.

13. Income Taxes

For the three months ended October 31, 2025 and 2024, our provision for income taxes reflected effective tax rates of 18.9% and 4.9%, respectively. Our income taxes for the three months ended October 31, 2025 and 2024 were primarily due to U.S. and foreign income taxes.

Our effective tax rates for the three months ended October 31, 2025 and 2024 differed from the U.S. statutory tax rate primarily due to excess tax benefits from share-based compensation.

- 17 -

14. Net Income Per Share

Basic net income per share is computed by dividing net income by basic weighted-average shares outstanding during the period. Diluted net income per share is computed by dividing net income by diluted weighted-average shares outstanding during the period giving effect to all potentially dilutive securities to the extent they are dilutive. We compute the dilutive effect of shares issuable upon conversion of our convertible senior notes using the if-converted method, and the dilutive effect of warrants related to the issuance of convertible senior notes and equity awards under our employee equity incentive plans using the treasury stock method.

The following table presents the computation of basic and diluted net income per share of common stock (in millions, except per share data):


	Three Months Ended October 31,
		2025		2024
Net income		$	334	$	351

Weighted-average shares used to compute net income per share, basic		679		654
Weighted-average effect of potentially dilutive securities:
Convertible senior notes		—		12
Warrants related to the issuance of convertible senior notes		20		24
Employee equity incentive plans		10		19
Weighted-average shares used to compute net income per share, diluted		709		709

Net income per share, basic		$	0.49	$	0.54
Net income per share, diluted		$	0.47	$	0.49

The following securities were excluded from the computation of diluted net income per share of common stock as their effect would have been antidilutive or issuance of such shares is contingent upon the satisfaction of certain conditions which were not satisfied by the end of the applicable period (in millions):


	Three Months Ended October 31,
		2025	2024


Employee equity incentive plans		3	3

15. Other Income, Net

The following table sets forth the components of other income, net (in millions):


	Three Months Ended October 31,
		2025		2024
Interest income		$	105	$	86
Foreign currency exchange gains (losses), net		(11)		(8)
Other, net		9		5
Total other income, net		$	103	$	83

- 18 -

16. Subsequent Events

Share Repurchase

On November 18, 2025, our board of directors authorized the extension of the expiration date of our current share repurchase authorization to December 31, 2026. Our repurchase program may be suspended or discontinued at any time without prior notice. Repurchases may be made at management’s discretion from time to time on the open market, through privately negotiated transactions, transactions structured through investment banking institutions, block purchase techniques, 10b5-1 trading plans, or a combination of the foregoing.

Chronosphere, Inc.

On November 19, 2025, we entered into a definitive agreement to acquire Chronosphere, Inc., a privately-held observability technology company (“Chronosphere”), in exchange for total consideration of $3.35 billion in cash and replacement awards, subject to adjustments. We expect the acquisition to be our entry into the observability space. The acquisition of Chronosphere is expected to close during the second half of our fiscal 2026, subject to the satisfaction of closing conditions, including regulatory clearance.

- 19 -

Previous: Cover and table of contents · Next: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations