Palo Alto Networks Inc 10-Q

Item 1. Financial Statements PALO ALTO NETWORKS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in millions, except per share data) January 31, 2026 July 31, 2025 (unaudited) Assets Current assets: Cash and cash equivalents $ 4,158 $ 2,269 Short-term investments 378 635 Accounts receivable, net of allowance for credit losses of $ 13 and $ 10 as of January 31, 2026 and July 31, 2025, respectively 2,116 2,965 Short-term financing receivables, net 672 715 Short-term deferred contract costs 424 419 Prepaid expenses and other current assets 621 520 Total current assets 8,369 7,523 Property and equipment, net 485 387 Operating lease right-of-use assets 368 347 Long-term investments 3,362 5,555 Long-term financing receivables, net 870 1,002 Long-term deferred contract costs 526 586 Goodwill 6,931 4,567 Intangible assets, net 1,249 763 Deferred tax assets 2,392 2,424 Other assets 427 422 Total assets $ 24,979 $ 23,576 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 262 $ 232 Accrued compensation 562 608 Accrued and other liabilities 937 846 Deferred revenue 6,248 6,302 Total current liabilities 8,009 7,988 Long-term deferred revenue 6,181 6,450 Deferred tax liabilities 75 89 Long-term operating lease liabilities 372 338 Other long-term liabilities 949 887 Total liabilities 15,586 15,752 Commitments and contingencies (Note 10) Stockholders’ equity: Preferred stock; $ 0.0001 par value; 100 shares authorized; none issued and outstanding as of January 31, 2026 and July 31, 2025 — — Common stock and additional paid-in capital; $ 0.0001 par value; 2,000 shares authorized; 703 and 668 shares issued and outstanding as of January 31, 2026 and July 31, 2025, respectively 6,097 5,292 Accumulated other comprehensive income 46 48 Retained earnings 3,250 2,484 Total stockholders’ equity 9,393 7,824 Total liabilities and stockholders’ equity $ 24,979 $ 23,576 See notes to condensed consolidated financial statements. - 2 - Table of Contents PALO ALTO NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in millions, except per share data) Three Months Ended January 31, Six Months Ended January 31, 2026 2025 2026 2025 Revenue: Product $ 514 $ 421 $ 948 $ 775 Subscription and support 2,080 1,836 4,120 3,621 Total revenue 2,594 2,257 5,068 4,396 Cost of revenue: Product 115 101 204 176 Subscription and support 570 498 1,119 977 Total cost of revenue 685 599 1,323 1,153 Total gross profit 1,909 1,658 3,745 3,243 Operating expenses: Research and development 511 505 1,039 986 Sales and marketing 823 758 1,643 1,478 General and administrative 178 154 357 252 Total operating expenses 1,512 1,417 3,039 2,716 Operating income 397 241 706 527 Interest expense — ( 1 ) — ( 2 ) Other income, net 152 85 255 168 Income before income taxes 549 325 961 693 Provision for income taxes 117 58 195 75 Net income $ 432 $ 267 $ 766 $ 618 Net income per share, basic $ 0.61 $ 0.41 $ 1.10 $ 0.94 Net income per share, diluted $ 0.61 $ 0.38 $ 1.07 $ 0.87 Weighted-average shares used to compute net income per share, basic 704 659 695 657 Weighted-average shares used to compute net income per share, diluted 711 709 713 709 See notes to condensed consolidated financial statements . - 3 - Table of Contents PALO ALTO NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited, in millions) Three Months Ended January 31, Six Months Ended January 31, 2026 2025 2026 2025 Net income $ 432 $ 267 $ 766 $ 618 Other comprehensive income, net of tax: Change in unrealized gains (losses) on investments ( 26 ) ( 5 ) ( 1 ) ( 8 ) Cash flow hedges: Change in unrealized gains (losses) 16 ( 9 ) 23 ( 9 ) Net realized (gains) losses reclassified into earnings ( 11 ) 4 ( 24 ) 5 Net change on cash flow hedges 5 ( 5 ) ( 1 ) ( 4 ) Other comprehensive loss ( 21 ) ( 10 ) ( 2 ) ( 12 ) Comprehensive income $ 411 $ 257 $ 764 $ 606 See notes to condensed consolidated financial statements . - 4 - Table of Contents PALO ALTO NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited, in millions) Three Months Ended January 31, 2026 Common Stock and Additional Paid-In Capital Accumulated Other Comprehensive Income Retained Earnings Total Stockholders’ Equity Shares Amount Balance as of October 31, 2025 692 $ 5,780 $ 67 $ 2,818 $ 8,665 Net income — — — 432 432 Other comprehensive loss — — ( 21 ) — ( 21 ) Issuance of common stock in connection with employee equity incentive plans 2 9 — — 9 Taxes paid related to net share settlement of equity awards — ( 108 ) — — ( 108 ) Share-based compensation for equity-based awards — 307 — — 307 Replacement awards related to a business acquisition 2 109 — — 109 Settlement of warrants 7 — — — — Balance as of January 31, 2026 703 $ 6,097 $ 46 $ 3,250 $ 9,393 Three Months Ended January 31, 2025 Common Stock and Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Stockholders’ Equity Shares Amount Balance as of October 31, 2024 655 $ 4,215 $ ( 4 ) $ 1,701 $ 5,912 Net income — — — 267 267 Other comprehensive loss — — ( 10 ) — ( 10 ) Issuance of common stock in connection with employee equity incentive plans 5 37 — — 37 Taxes paid related to net share settlement of equity awards — ( 156 ) — — ( 156 ) Share-based compensation for equity-based awards — 325 — — 325 Settlement of convertible notes 2 — — — — Settlement of note hedges ( 2 ) — — — — Balance as of January 31, 2025 660 $ 4,421 $ ( 14 ) $ 1,968 $ 6,375 - 5 - Table of Contents Six Months Ended January 31, 2026 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 — — — 766 766 Other comprehensive loss — — ( 2 ) — ( 2 ) Issuance of common stock in connection with employee equity incentive plans 6 138 — — 138 Taxes paid related to net share settlement of equity awards — ( 109 ) — — ( 109 ) Share-based compensation for equity-based awards — 667 — — 667 Replacement awards related to a business acquisition 2 109 — — 109 Settlement of warrants 27 — — — — Balance as of January 31, 2026 703 $ 6,097 $ 46 $ 3,250 $ 9,393 Six Months Ended January 31, 2025 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 — — — 618 618 Other comprehensive loss — — ( 12 ) — ( 12 ) Issuance of common stock in connection with employee equity incentive plans 10 158 — — 158 Taxes paid related to net share settlement of equity awards — ( 178 ) — — ( 178 ) Share-based compensation for equity-based awards — 620 — — 620 Settlement of convertible notes 6 — — — — Settlement of note hedges ( 6 ) — — — — Balance as of January 31, 2025 660 $ 4,421 $ ( 14 ) $ 1,968 $ 6,375 See notes to condensed consolidated financial statements. - 6 - Table of Contents PALO ALTO NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in millions) Six Months Ended January 31, 2026 2025 Cash flows from operating activities Net income $ 766 $ 618 Adjustments to reconcile net income to net cash provided by operating activities: Share-based compensation for equity-based awards 671 615 Deferred income taxes 14 ( 317 ) Depreciation and amortization 180 171 Amortization of deferred contract costs 261 225 Amortization of debt issuance costs — 1 Change in fair value of contingent consideration liability ( 10 ) 16 Reduction of operating lease right-of-use assets 35 32 Amortization of investment premiums, net of accretion of purchase discounts ( 52 ) ( 26 ) Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable, net 864 1,123 Financing receivables, net 175 ( 11 ) Deferred contract costs ( 206 ) ( 193 ) Prepaid expenses and other assets ( 45 ) 89 Accounts payable 40 33 Accrued compensation ( 47 ) ( 63 ) Accrued and other liabilities 23 1 Deferred revenue ( 344 ) ( 247 ) Net cash provided by operating activities 2,325 2,067 Cash flows from investing activities Purchases of investments ( 1,925 ) ( 1,732 ) Proceeds from sales of investments 2,816 645 Proceeds from maturities of investments 1,609 753 Business acquisitions, net of cash and restricted cash acquired ( 2,578 ) ( 499 ) Purchases of property, equipment, and other assets ( 254 ) ( 92 ) Net cash used in investing activities ( 332 ) ( 925 ) Cash flows from financing activities Repayments of convertible senior notes — ( 432 ) Proceeds from sales of shares through employee equity incentive plans 138 158 Payments for taxes related to net share settlement of equity awards ( 109 ) ( 178 ) Payments of contingent consideration liability ( 135 ) — Net cash used in financing activities ( 106 ) ( 452 ) Net increase in cash, cash equivalents, and restricted cash 1,887 690 Cash, cash equivalents, and restricted cash—beginning of period 2,279 1,547 Cash, cash equivalents, and restricted cash—end of period $ 4,166 $ 2,237 Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets Cash and cash equivalents $ 4,158 $ 2,226 Restricted cash included in prepaid expenses and other current assets 4 11 Restricted cash included in other assets 4 — Total cash, cash equivalents, and restricted cash $ 4,166 $ 2,237 Non-cash investing and financing activities Equity consideration for a business acquisition $ ( 109 ) $ — Contingent consideration for a business acquisition $ — $ ( 649 ) See notes to condensed consolidated financial statements. - 7 - Table of Contents 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 six months ended January 31, 2026, 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. - 8 - Table of Contents 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. Hedge Accounting Improvements In November 2025, the FASB issued authoritative guidance that clarifies and improves the existing hedge accounting guidance to better reflect the economics of an entity’s risk management activities. The standard is effective for our annual and interim periods beginning in the first quarter of fiscal 2028 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. 2. Revenue Disaggregation of Revenue The following table presents revenue by geographic theater (in millions): Three Months Ended January 31, Six Months Ended January 31, 2026 2025 2026 2025 Revenue: Americas United States $ 1,588 $ 1,400 $ 3,114 $ 2,744 Other Americas 124 102 239 200 Total Americas 1,712 1,502 3,353 2,944 Europe, the Middle East, and Africa (“EMEA”) 560 480 1,081 922 Asia Pacific and Japan (“APAC”) 322 275 634 530 Total revenue $ 2,594 $ 2,257 $ 5,068 $ 4,396 The following table presents revenue for groups of similar products and services (in millions): Three Months Ended January 31, Six Months Ended January 31, 2026 2025 2026 2025 Revenue: Product $ 514 $ 421 $ 948 $ 775 Subscription and support Subscription 1,404 1,233 2,768 2,425 Support 676 603 1,352 1,196 Total subscription and support 2,080 1,836 4,120 3,621 Total revenue $ 2,594 $ 2,257 $ 5,068 $ 4,396 Deferred Revenue During the six months ended January 31, 2026 and 2025, we recognized approximately $ 3.5 billion and $ 3.1 billion of revenue pertaining to amounts that were deferred as of July 31, 2025 and 2024, respectively. Remaining Performance Obligations Remaining performance obligations were $ 16.0 billion as of January 31, 2026, of which we expect to recognize as revenue approximately $ 7.1 billion over the next 12 months and the remainder thereafter. - 9 - Table of Contents 3. Fair Value Measurements The following table presents our financial assets and liabilities measured at fair value on a recurring basis as of January 31, 2026 and July 31, 2025 (in millions): January 31, 2026 July 31, 2025 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Cash equivalents: Money market funds $ 1,395 $ — $ — $ 1,395 $ 1,206 $ — $ — $ 1,206 Certificates of deposit — 14 — 14 — — — — Commercial paper — 912 — 912 — 169 — 169 Corporate debt securities — 17 — 17 — — — — U.S. government and agency securities — 885 — 885 — — — — Total cash equivalents 1,395 1,828 — 3,223 1,206 169 — 1,375 Short-term investments: Certificates of deposit — 3 — 3 — — — — Commercial paper — 57 — 57 — 15 — 15 Corporate debt securities — 280 — 280 — 584 — 584 U.S. government and agency securities — 13 — 13 — 6 — 6 Non-U.S. government and agency securities — — — — — 3 — 3 Asset-backed securities — 9 — 9 — 22 — 22 Total short-term investments — 362 — 362 — 630 — 630 Long-term investments: Corporate debt securities — 2,583 — 2,583 — 4,050 — 4,050 U.S. government and agency securities — 17 — 17 — 164 — 164 Non-U.S. government and agency securities — — — — — 26 — 26 Asset-backed securities — 762 — 762 — 1,315 — 1,315 Total long-term investments — 3,362 — 3,362 — 5,555 — 5,555 Prepaid expenses and other current assets: Foreign currency forward contracts — 80 — 80 — 58 — 58 Total prepaid expenses and other current assets — 80 — 80 — 58 — 58 Other assets: Foreign currency forward contracts — — — — — 3 — 3 Total other assets — — — — — 3 — 3 Total assets measured at fair value $ 1,395 $ 5,632 $ — $ 7,027 $ 1,206 $ 6,415 $ — $ 7,621 - 10 - Table of Contents January 31, 2026 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 $ — $ 4 $ — $ 4 $ — $ 4 $ — $ 4 Contingent consideration — — 157 157 — — 276 276 Total accrued and other liabilities — 4 157 161 — 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 $ — $ 4 $ 369 $ 373 $ — $ 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 January 31, Six Months Ended January 31, 2026 2025 2026 2025 Contingent consideration liability at the beginning of the period $ 380 $ 655 $ 514 $ — Initial valuation on the acquisition date — — — 649 Change in fair value 3 10 ( 10 ) 16 Payments ( 14 ) — ( 135 ) — Contingent consideration liability at the end of the period $ 369 $ 665 $ 369 $ 665 The total estimated fair value of our financing receivables approximates their carrying amounts as of January 31, 2026 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. - 11 - Table of Contents 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 January 31, 2026 and July 31, 2025 (in millions): January 31, 2026 Amortized Cost Unrealized Gains Unrealized Losses Fair Value Cash equivalents: Certificates of deposit $ 14 $ — $ — $ 14 Commercial paper 912 — — 912 Corporate debt securities 17 — — 17 U.S. government and agency securities 885 — — 885 Total available-for-sale cash equivalents $ 1,828 $ — $ — $ 1,828 Investments: Certificates of deposit $ 3 $ — $ — $ 3 Commercial paper 57 — — 57 Corporate debt securities 2,820 43 — 2,863 U.S. government and agency securities 30 — — 30 Asset-backed securities 762 9 — 771 Total available-for-sale investments $ 3,672 $ 52 $ — $ 3,724 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 and six months ended January 31, 2026 and 2025. - 12 - Table of Contents The following table summarizes the amortized cost and fair value of our available-for-sale debt securities as of January 31, 2026, by contractual years-to-maturity (in millions): Amortized Cost Fair Value Due within one year $ 2,189 $ 2,190 Due between one and three years 1,180 1,199 Due between three and five years 1,892 1,919 Due between five and ten years 110 111 Due after ten years 129 133 Total $ 5,500 $ 5,552 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 January 31, 2026 and July 31, 2025, the carrying values of our marketable equity securities were $ 1.4 billion and $ 1.2 billion, respectively. There were no unrealized gains or losses recognized for these securities during the three and six months ended January 31, 2026 and 2025. 5. Financing Receivables The following table summarizes our short-term and long-term financing receivables as of January 31, 2026 and July 31, 2025 (in millions): January 31, 2026 July 31, 2025 Short-term financing receivables, gross $ 754 $ 806 Unearned income ( 75 ) ( 86 ) Allowance for credit losses ( 7 ) ( 5 ) Short-term financing receivables, net $ 672 $ 715 Long-term financing receivables, gross $ 937 $ 1,079 Unearned income ( 58 ) ( 69 ) Allowance for credit losses ( 9 ) ( 8 ) Long-term financing receivables, net $ 870 $ 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) January 31, 2026 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 $ 36 $ 257 $ 610 $ 156 $ 5 $ 1,064 $ 261 $ 732 $ 242 $ 9 $ 18 $ 1,262 5 to 6 129 172 169 14 — 484 174 226 50 — — 450 7 to 10 — — 3 7 — 10 — 4 14 — — 18 Amortized cost basis of financing receivables $ 165 $ 429 $ 782 $ 177 $ 5 $ 1,558 $ 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 and six months ended January 31, 2026 and 2025. Past due amounts on financing receivables were not material as of January 31, 2026 and July 31, 2025. - 13 - Table of Contents 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 January 31, 2026 and July 31, 2025, the total notional amount of our outstanding foreign currency forward contracts designated as cash flow hedges was $ 523 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 January 31, 2026 and July 31, 2025. As of January 31, 2026, unrealized gains and losses in accumulated other comprehensive income (“AOCI”) related to our cash flow hedges were a $ 39 million net gain, of which $ 40 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 January 31, 2026 and July 31, 2025, the notional amount of our outstanding foreign currency forward contracts not designated as hedging instruments was $ 557 million and $ 504 million, respectively. 7. Acquisitions Chronosphere, Inc. On January 29, 2026, we completed our acquisition of Chronosphere, Inc. (“Chronosphere”), a privately-held observability technology company. The acquisition resulted in forming our observability platform. The total purchase consideration for the acquisition of Chronosphere was $ 3.0 billion, which consisted of the following (in millions): Amount Cash $ 2,842 Fair value of replacement awards 109 Total $ 2,951 As part of the acquisition, we issued $ 525 million of replacement equity awards, of which the portion attributable to services performed prior to the acquisition date was allocated to purchase consideration. The remaining fair value was allocated to future services and will be expensed over the remaining service periods as share-based compensation. The replacement equity awards included 2 million shares of our restricted common stock. These restricted common stock vest over a period of two to three years from the date of issuance. We have accounted for this transaction as a business combination and allocated the purchase consideration to assets acquired and liabilities assumed based on preliminary estimated fair values, as presented in the following table (in millions): Amount Goodwill $ 2,364 Identified intangible assets 565 Cash 57 Net liabilities assumed ( 35 ) Total $ 2,951 Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-acquisition synergies from integrating Chronosphere technology into our platforms. The goodwill is not deductible for U.S. income tax purposes. The following table presents details of the identified intangible asset acquired (in millions, except years): Fair Value Estimated Useful Life Developed technology $ 300 5 years Customer relationships 255 6 years - 10 years Trade name and trademarks 10 1 year Total $ 565 - 14 - Table of Contents We have included the financial results of Chronosphere in our consolidated financial statements from the date of acquisition. Post-acquisition revenue and earnings of Chronosphere were not material to our condensed consolidated statements of operations for the three and six months ended January 31, 2026. CyberArk Software Ltd. On July 30, 2025, we entered into a definitive agreement to acquire CyberArk Software Ltd., an identity security company (“CyberArk”). Under the terms of the agreement, CyberArk shareholders were entitled to receive $ 45.00 in cash and 2.2005 shares of our common stock for each CyberArk share. On February 11, 2026, we completed the acquisition of CyberArk. Refer to 16. Subsequent Events for additional information. This acquisition will be accounted for as a business combination in the third quarter of fiscal 2026. Additional Acquisition-Related Information The following unaudited pro forma financial information summarizes the combined results of operations for Palo Alto Networks and Chronosphere, as though the companies were combined as of the beginning of our fiscal 2025 (in millions): Three Months Ended January 31, Six Months Ended January 31, 2026 2025 2026 2025 Total revenue $ 2,643 $ 2,271 $ 5,158 $ 4,423 Net income $ 286 $ 173 $ 535 $ 422 The unaudited pro forma financial information include adjustments attributable to our acquisition of Chronosphere, including amortization for intangible assets acquired and stock-based compensation expense from assumed replacement equity awards. The unaudited pro forma financial information is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of our fiscal 2025 or of the results of our future operations of the combined business. Additional information related to our acquisitions, such as that related to income tax and other contingencies, existing as of the acquisition date may become known during the remainder of the measurement period, not to exceed 12 months from the acquisition date, which may result in changes to the amounts and allocations recorded. 8. Goodwill, Intangible Assets and Other Long-Lived Assets Goodwill The following table presents details of our goodwill during the six months ended January 31, 2026 (in millions): Amount Balance as of July 31, 2025 $ 4,567 Goodwill acquired 2,364 Balance as of January 31, 2026 $ 6,931 Purchased Intangible Assets The following table presents details of our purchased intangible assets as of January 31, 2026 and July 31, 2025 (in millions): January 31, 2026 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 $ 815 $ ( 303 ) $ 512 $ 536 $ ( 274 ) $ 262 Customer relationships 864 ( 151 ) 713 609 ( 123 ) 486 Acquired intellectual property 24 ( 10 ) 14 24 ( 9 ) 15 Trade name and trademarks 10 — 10 — — — Other — — — 1 ( 1 ) — Total purchased intangible assets $ 1,713 $ ( 464 ) $ 1,249 $ 1,170 $ ( 407 ) $ 763 - 15 - Table of Contents We recognized amortization expense of $ 39 million and $ 79 million for the three and six months ended January 31, 2026, respectively, and $ 45 million and $ 86 million for the three and six months ended January 31, 2025, respectively. The following table summarizes estimated future amortization expense of our intangible assets subject to amortization as of January 31, 2026 (in millions): Fiscal years ending July 31, Total Remaining 2026 2027 2028 2029 2030 2031 and Thereafter Future amortization expense $ 1,249 $ 130 $ 224 $ 199 $ 173 $ 156 $ 367 Other Long-lived assets During the six months ended January 31, 2026, we purchased 14.5 acres of land adjacent to our headquarters in Santa Clara, California, for $ 91 million to accommodate future expansion of our headquarters. This amount was recorded in property and equipment, net on our condensed consolidated balance sheet as of January 31, 2026. 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 six months ended January 31, 2026, we net settled all of the 2025 Warrants with the issuance of 27 million shares of our common stock with a fair value of $ 5.6 billion, of which 7 million shares of our common stock with a fair value of $ 1.5 billion were issued during the three months ended January 31, 2026. 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. 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 January 31, 2026, there were no amounts outstanding and we were in compliance with all covenants under the Credit Agreement. - 16 - Table of Contents 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 January 31, 2026 (in millions): Fiscal years ending July 31, Total Remaining 2026 2027 2028 2029 2030 2031 and Thereafter Cloud $ 6,446 $ 65 $ 535 $ 1,078 $ 1,122 $ 1,148 $ 2,498 Manufacturing 198 176 22 — — — — Other 145 43 71 13 9 9 — Total $ 6,789 $ 284 $ 628 $ 1,091 $ 1,131 $ 1,157 $ 2,498 Additionally, we have a $ 104 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 January 31, 2026 and July 31, 2025, we accrued $ 149 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 interest charge was $ 2 million and $ 3 million for the three and six months ended January 31, 2026, respectively. We recorded a charge of $ 1 million and a release of $ 42 million for the three and six months ended January 31, 2025, respectively. 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. - 17 - Table of Contents 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 parties have resolved all pending matters between them as of December 2025. The amount paid by us to resolve these matters was not material. 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”). The expiration date of our current authorization was extended to December 31, 2026, and 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 and six months ended January 31, 2026 and 2025. As of January 31, 2026, $ 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 six months ended January 31, 2026 (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)(2) 5 $ 200.15 4 $ 186.49 Vested (3) ( 3 ) $ 126.28 ( 3 ) $ 151.12 Forfeited ( 1 ) $ 146.80 ( 2 ) $ 143.61 Balance—January 31, 2026 14 $ 168.38 $ 2,533 8 $ 155.96 $ 1,464 (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 1 million RSUs assumed in connection with the acquisition of Chronosphere, with a weighted-average grant-date fair value of $ 176.20 per share for the six months ended January 31, 2026. (3) 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 six months ended January 31, 2026, 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 January 31, 2026, we have approved 3 million shares of PSUs, which will be granted upon the performance condition being established during the next two fiscal years. - 18 - Table of Contents 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 and six months ended January 31, 2026 and 2025: Three Months Ended January 31, Six Months Ended January 31, 2025 2026 2025 Volatility 43.5 % - 43.9 % 36.6 % - 42.6 % 43.5 % - 47.6 % Expected term (in years) 1.7 - 2.7 1.0 - 3.0 1.0 - 2.9 Dividend yield 0.0 % 0.0 % 0.0 % Risk-free interest rate 4.2 % - 4.2 % 3.6 % - 3.9 % 3.7 % - 4.5 % Grant-date fair value per share $ 287.98 - $ 291.91 $ 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 January 31, 2026 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 six months ended January 31, 2026 (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 ) $ 32.76 Balance—January 31, 2026 — $ — 0.0 $ — Exercisable—January 31, 2026 — $ — 0.0 $ — Share-Based Compensation The following table summarizes share-based compensation included in costs and expenses (in millions): Three Months Ended January 31, Six Months Ended January 31, 2026 2025 2026 2025 Cost of product revenue $ 1 $ 2 $ 2 $ 3 Cost of subscription and support revenue 32 32 64 63 Research and development 116 139 271 277 Sales and marketing 98 90 200 166 General and administrative 54 57 134 106 Total share-based compensation $ 301 $ 320 $ 671 $ 615 As of January 31, 2026, total compensation cost related to unvested share-based awards not yet recognized was $ 2.9 billion. This cost is expected to be amortized over a weighted-average period of approximately 2.6 years. 13. Income Taxes Our income taxes primarily consist of U.S. and foreign income taxes and our effective tax rates differ from the U.S. statutory tax rate primarily due to the excess tax benefits from share-based compensation. For the three and six months ended January 31, 2026, our provision for income taxes reflected effective tax rates of 21.3 % and 20.3 %, respectively. For the three and six months ended January 31, 2025, our provision for income taxes reflected effective tax rates of 17.7 % and 10.9 %, respectively. Our effective tax rates for the three and six months ended January 31, 2026 increased as compared to the same periods in 2025 primarily due to decreased excess tax benefits from share-based compensation relative to our increased business profits. - 19 - Table of Contents 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 January 31, Six Months Ended January 31, 2026 2025 2026 2025 Net income $ 432 $ 267 $ 766 $ 618 Weighted-average shares used to compute net income per share, basic 704 659 695 657 Weighted-average effect of potentially dilutive securities: Convertible senior notes — 9 — 10 Warrants related to the issuance of convertible senior notes 1 26 10 25 Employee equity incentive plans 6 15 8 17 Weighted-average shares used to compute net income per share, diluted 711 709 713 709 Net income per share, basic $ 0.61 $ 0.41 $ 1.10 $ 0.94 Net income per share, diluted $ 0.61 $ 0.38 $ 1.07 $ 0.87 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 January 31, Six Months Ended January 31, 2026 2025 2026 2025 Employee equity incentive plans 6 6 4 5 15. Other Income, Net The following table sets forth the components of other income, net (in millions): Three Months Ended January 31, Six Months Ended January 31, 2026 2025 2026 2025 Interest income $ 109 $ 87 $ 214 $ 173 Foreign currency exchange gains (losses), net ( 16 ) 2 ( 27 ) ( 6 ) Other, net 59 ( 4 ) 68 1 Total other income, net $ 152 $ 85 $ 255 $ 168 - 20 - Table of Contents 16. Subsequent Events CyberArk Software Ltd. On February 11, 2026, we completed the acquisition of CyberArk for $ 2.3 billion in cash and 112 million shares of our common stock. The cash portion of the consideration was funded with our cash on hand. We also assumed certain unvested outstanding equity awards held by CyberArk employees under certain of CyberArk’s share incentive plans. Koi Security Ltd. On February 16, 2026, we entered into a definitive agreement to acquire Koi Security Ltd., a privately-held endpoint posture management company (“Koi Security”), in exchange for total consideration of $ 300 million in cash and replacement awards, subject to adjustments. We expect the acquisition to expand the capabilities of our security operations platform. The acquisition of Koi Security is expected to close during the second half of our fiscal 2026, subject to the satisfaction of closing conditions, including regulatory clearance. - 21 - Table of Contents