Palo Alto Networks (PANW, Financial) saw its stock drop by 5% despite reporting better-than-expected earnings per share (EPS) and revenue for Q2. The cybersecurity leader posted a notable EPS beat and a 14.3% year-over-year revenue increase to $2.26 billion, slightly surpassing expectations. The guidance for Q3 was in line, with a positive full-year EPS outlook. Growth was evident across all regions and platforms.

• Product revenue grew by 8%, while total services revenue increased by 16%. Product revenue is nearing 40% software on a trailing 12-month basis. PANW anticipates a strong software contribution to product revenue in the latter half of the year, potentially pushing product revenue growth into double digits. Demand for firewall appliances remained stable in Q2 and is expected to continue through FY25.
• Double-digit revenue growth occurred across all geographies: Americas (13%), EMEA (18%), and JPAC (17%). Notably, PANW closed its largest-ever deals in EMEA and JPAC, each exceeding $50 million, highlighting its expanding success in international markets.
• The company no longer provides billings data due to its volatility. Instead, it focuses on Next-Generation Security (NGS) Annual Recurring Revenue (ARR), which grew 37% year-over-year to $4.8 billion, surpassing prior guidance of $4.70-4.75 billion. Remaining Performance Obligation (RPO) increased 21% year-over-year to $13.0 billion, aligning with previous guidance.
• Despite government downsizing, PANW's federal business remained stable in Q2, with much of it tied to renewals and existing programs with long-term funding.
• As companies explore AI, they are realizing that legacy architectures hinder progress, leading to a resurgence in cloud transformation projects. This shift is driving demand for network security and transformation, making cloud integration essential for enterprises.

Overall, PANW delivered a strong report with broad growth across its portfolio, including significant international deals. The stock decline may be attributed to investor disappointment over the reaffirmed FY25 NGS ARR and RPO guidance, despite Q2 exceeding expectations, and potential profit-taking after a 20% stock increase since early January.