Palo Alto Networks(PANW -0.36%) reported fourth-quarter 2025 earnings on August 18, 2025, with revenue rising 16% year-over-year to $2.54 billion. Platformization deals reached new highs, next-generation security annual recurring revenue (ARR) climbed 32% year-over-year to $5.58 billion, and operating margins exceeded 30% for the first time. This summary provides detailed insights on the company’s transition to software firewalls, sustained free cash flow margin expansion, and the strategic CyberArk acquisition.
Software firewalls accelerate Palo Alto Networks product revenue
Product revenue increased 19% year-over-year, with 56% of product revenue in the quarter sourced from software-based form factors, reflecting a significant shift away from hardware. Over the trailing twelve months, software accounted for more than 40% of total product revenue, with software firewalls and secure access service edge (SASE) driving demand, especially among large enterprise and cloud customers.
"Our software firewall market share is nearly 50%, our product is native in all major public clouds. This quarter, signed a $60 million deal significantly expanded our partnership with a leading US based cloud provider, all in, we generated 9 figures and deals across the major cloud service providers in Q4."
— Nikesh Arora, Chairman and Chief Executive Officer
The rapid adoption of cloud-native software firewalls positions the company as a leader as enterprises migrate to hybrid and multi-cloud environments, increasing customer lifetime value and scalability compared to legacy hardware appliances.
Palo Alto Networks expands margins and free cash flow
Operating margin expanded by 340 basis points to over 30% in the fourth quarter of fiscal 2025, with annual operating margin reaching 28.8% for the year, surpassing guidance as product and software-as-a-service (SaaS) growth scaled efficiently. Free cash flow reached $3.5 billion in fiscal 2025, representing a 38% margin, and management now targets an adjusted free cash flow margin of 38%-39% for fiscal 2026 and 40% or higher for the combined company with CyberArk by fiscal 2028, demonstrating resilient profit generation despite deferred payment transitions and a rising software mix.
"We have expanded our operating margins by almost 1,000 basis points since FY2022 and we expect to continue to deliver expanded operating efficiencies fiscal year 2026 and beyond. Our ability to expand operating margins have enabled us to deliver sustained high free cash flow margins while steadily managing an increase in demand for deferred payments. We've been moving through this transition since fiscal 2021, and as we lap deals with deferred payments from prior period, we have an increased visibility into our future free cash flows. As I mentioned earlier, we delivered $3.5 billion of free cash flow at 38% margin in fiscal year 2025. We had visibility to approximately 40% of that free cash flow from deferred payments on deals signed prior to the fiscal year. We continued through this transition to deferred payments in fiscal 2025, and we expect about half of our fiscal 2026 free cash flow to come from deferred payment deals signed in fiscal 2025 or earlier."
— Deepak Golechha, Chief Financial Officer
The company’s disciplined cost structure, high recurring software revenue, and effective management of billing cycles support a rare combination of strong top-line growth and sector-leading free cash flow conversion, reinforcing long-term value creation.
CyberArk acquisition strengthens identity security strategy
The proposed acquisition of CyberArk marks a proactive expansion into identity security, an area reaching an inflection point due to artificial intelligence (AI) transformations across enterprise infrastructure. Management aims to integrate CyberArk’s privileged access management (PAM) capabilities—serving over 8 million privileged users and more than 50 Fortune 500 clients—with the company’s platformized approach and 75,000-customer base.
"We are strategically entering this category now to define the next chapter of cybersecurity for the AI era. We look forward to providing more details on our strategy once we close the transaction. Before I hand over to Deepak, I wanna take a moment to speak from the heart on the important leadership announcement we made today. Our founder, our first innovator and a true tight knuckles industry, Nirzuk, has decided to retire after more than twenty years."
— Nikesh Arora, Chairman and Chief Executive Officer
This transaction positions the company for leadership in converged network, cloud, and identity security, expanding its total addressable market, cross-selling opportunities, and competitive advantages as identity threats intensify with the proliferation of AI agents and machine identities.
Looking Ahead
Management guides for revenue between $10.475 billion and $10.525 billion in fiscal 2026, up 14% year-over-year, next-generation security ARR of $7 billion to $7.1 billion in fiscal 2026 (up 26%-27% year-over-year), and operating margin of 29.2%-29.7% in fiscal 2026. Adjusted free cash flow margin is forecast at 38%-39% in fiscal 2026, with 40% or higher targeted for the combined entity with CyberArk by fiscal 2028. Product revenue growth in fiscal 2026 is projected in the low teens, with first-quarter fiscal 2026 product revenue expected to rise approximately 20% year-over-year; management will continue to focus on consolidating security platforms, scaling software, and capitalizing on AI-driven opportunities.
