PANW Q3 2026 Earnings Transcript

Image source: The Motley Fool.

DATE

Tuesday, June 2, 2026, at 4:30 p.m. ET

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — Nikesh Arora
• Chief Financial Officer — Dipak Golechha
• Chief Product and Technology Officer & Board Member — Lee Klarich
• Senior Vice President, Investor Relations and Strategic Finance — Hamza Fodderwala

TAKEAWAYS

• Next Generation Security (NGS) ARR -- $8.13 billion, up 60% year over year, including $1.63 billion from CyberArk and Chronosphere.
• Consolidated Remaining Performance Obligation (RPO) -- $18.4 billion, up 36% year over year; organic RPO up 22% when excluding recent acquisitions.
• Revenue -- $3 billion, up 31% year over year; product revenue $594 million, and services revenue $2.4 billion, both increasing 31% year over year.
• Platformization Progress -- Net new platformized customers reached 110, bringing the total to approximately 2,280, demonstrating increased architectural standardization on Palo Alto Networks' platform.
• Network Security Performance -- Booking for next generation firewalls up nearly 40% year over year, marking the strongest hardware quarter in a decade.
• SASE ARR -- $1.6 billion, up 40% year over year; nearly 50 SASE displacement wins totaling $200 million in contract value year to date.
• XSIAM ARR -- Surpassed $600 million, reflecting a 100% year-over-year increase with a customer base of over 740.
• Chronosphere ARR -- Surpassed $300 million, having nearly doubled since the acquisition announcement last autumn.
• Prisma AIRS Adoption -- Customer count exceeded 300, tripling sequentially from Q2.
• Gross Margin -- Total gross margin was 75.8%, with product gross margin at 78.8%, improving 40 basis points year over year.
• Adjusted Free Cash Flow -- Achieved $910 million, up 57% year over year; trailing 12-month adjusted free cash flow margin reached 38.5%.
• Share Repurchases -- $1 billion allocated for buybacks, purchasing 6.8 million shares at an average cost of $147.69.
• Product Mix Shift -- 46% of trailing 12-month product revenue comprised recurring software revenue, up from 22% three years prior.
• Future Guidance (Q4 and Fiscal Year) -- Management raised full-year outlook, projecting NGS ARR of $8.9 billion to $8.95 billion, RPO of $20.9 billion to $21 billion, and revenue of $11.415 billion to $11.425 billion.
• Platformized Customer Retention -- Net retention rate was 120%, with single-digit churn among platformized customers.

Need a quote from a Motley Fool analyst? Email pr@fool.com

RISKS

• Dipak Golechha noted, "we are closely monitoring rising component costs, particularly in memory and storage," and confirmed the impact of a 10% price increase on hardware, indicating cost pressures that are reflected in guidance.
• CEO Arora described error rates in frontier AI models as a positive development, but also highlighted that error rates often reach 25%, which forces manual intervention and undermines the speed of automatic automation. He further explained that these models consistently fail at the last mile of complexity, leaving critical gaps in remediation and vulnerability management. In today's threat landscape, the most subtle one percent of novel attack techniques can lead to the most devastating breaches. For every enterprise, the defensive bar must be perfect, while the attacker only needs to succeed once. The probabilistic nature of even the most advanced systems leads to inaccuracies. In a mission-critical environment, the cost of a false positive is simply too high. One wrong enforcement decision can take down a global production network.

SUMMARY

Palo Alto Networks (NASDAQ:PANW) reported accelerated platformization and acquisition integration, highlighted by marked growth in core and acquired ARR, contract value, and customer commitments. Management described a fundamental industry shift driven by AI deployment, emphasizing new product introductions and architectural unification, while noting significant volume expansion in hardware, SASE, and observability. Strategic initiatives included a pivot to inline real-time defense capabilities, expanded endpoint and identity offerings, and reinforced guidance for both top-line growth and free cash flow margin improvement, despite flagged supply chain and AI model error-rate risks.

• CEO Arora said, "We validated this potential during the quarter. Leveraging our strategic partnerships with leading frontier labs, we utilize early access to their most advanced models to complete the equivalent of a year's worth of pen testing in less than three weeks," underscoring AI's transformative effect on both offense and defense in cybersecurity.
• Dipak Golechha stated, "we will be moving to total company guidance, moving forward. Beginning in fiscal 2027, we intend to provide segment level revenue disclosures across," revealing upcoming changes in financial reporting structure.
• Arora referenced an $80 million deal with a leading U.S. power producer and a $20 million-plus agreement with a global consulting leader utilizing Prisma AIRS, confirming growing adoption of the platform among large multinational customers with demanding AI infrastructure needs.
• Unit 42 Frontier AI Defense was launched, achieving over 800 customer meetings in six weeks, and indicating exceptional interest in AI-resilient cybersecurity offerings.

INDUSTRY GLOSSARY

• NGS ARR: Next Generation Security Annual Recurring Revenue—recurring revenue from cloud, software, SASE, and other non-traditional product offerings.
• Platformization: Strategic consolidation of multiple point security products into a unified, integrated cybersecurity architecture.
• SASE: Secure Access Service Edge—cloud-delivered security and networking solutions integrating WAN capabilities with network security functions.
• XSIAM: Extended Security Intelligence and Automation Management—Palo Alto Networks' AI-powered security operations platform unifying threat detection, remediation, and telemetry.
• Prisma AIRS: Palo Alto Networks' AI-centric security cloud platform for protecting and orchestrating AI applications and agentic endpoints.
• Chronosphere: Next generation observability platform acquired by Palo Alto Networks, delivering real-time telemetry for complex AI workloads.
• AgentiX: Modern identity security platform for AI-driven enterprises, handling machine, human, and agentic identities at enterprise scale.
• PAM: Privileged Access Management—the system of securing accounts with potentially elevated access to critical systems.

Full Conference Call Transcript

Hamza Fodderwala: I am Hamza Fodderwala, Senior Vice President of Investor Relations and Strategic Finance. Please note that this call is being recorded today Tuesday, 06/02/2026 at 01:30 PM Pacific time. With me on today's call to discuss our fiscal third quarter results are Nikesh Arora, our Chairman and Chief Executive Officer and Dipak Golechha, our chief financial officer, Following our prepared remarks, Lee Klarich, our chief product and technology officer and board member, will join us for the question and answer portion. You can find the press release and other information to supplement today's discussion on our website at investors.paloaltonetworks.com.

While there, please click on the link for quarterly results to find the Q3 26 supplemental financials information and Q3 26 earnings presentation, During the course of today's call, we will be making forward looking statements and projections regarding the company's business operations, and financial performance as well as the company's recent acquisitions. These statements made today are subject to a number of risks and uncertainties that could cause our actual results to differ from these forward looking statements. Please review our press release, recent SEC filings a description of these risks and uncertainties. We assume no obligation to update any forward looking statements made in today's presentation.

Our presentation also contains non GAAP financial measures, and key metrics relating to the company's past and expected future performance non GAAP financial measures should not be considered a substitute for financial measures made in accordance with GAAP. The most directly comparable GAAP financial metrics and reconciliations are in the press release and the appendix of the investor presentation. Unless otherwise noted, all results and comparisons are on a fiscal year over year basis. I will now turn the call over to Nikesh.

Nikesh Arora: Hamza, good afternoon, and thank you everyone for joining us today for our earnings call. As you can see, our Q3 performance was exceptional. As we delivered a record quarter. Our results surpassed every guided metric fueled by an acceleration in organic bookings momentum, the sustained tailwinds from our platformization strategy, and surging cybersecurity needs as AI transitions from experimental stages to enterprise wide production. Within our core portfolio, we achieved significant traction in network security and XIM, while Prisma AIRS continues to establish itself as the fastest scaling product in our history.

Altogether, we delivered $8.13 billion in NGSI during the third quarter, representing 60% year-over-year growth, This is our most significant quarterly outperformance to date and surpassed our guidance. Our RPO reached $18.4 billion, up 36% compared to last year, When adjusting for recent CyberArk and Chronosphere acquisitions, both of which are exceeding expectations in their first quarter post close. Our organic NGS ARR and RPO rose 28%, 22% respectively. These results are materializing as AI fundamentally redefines the enterprise tech stack. Elevating cybersecurity to mission critical priority for every organization. Much has been said about Mythos, over the last many months. Over the past quarter, Frontier AI development reached a critical inflection point.

We have entered the era of truly cyber capable systems where models like AgentiX possess the autonomous capability to execute comprehensive attack campaigns from start to finish. This represents a fundamental paradigm shift for the cybersecurity industry. The most critical factor in this transition is speed. When weaponized by adversaries, frontier models can identify and weaponize vulnerabilities in mere minutes. A process that previously required months of manual effort. Earlier this year, our unit 42 researchers demonstrated the acceleration by simulating comprehensive ransomware campaign from initial entry to data exfiltration in just 25 minutes. In contrast, the typical enterprise still requires days to identify a breach.

These existing latency gaps are already a concern, but the emergence of these latest models makes them completely unsustainable. We believe this is merely the opening act. As frontier AI development continues to accelerate, we anticipate a 3- to 6-month window before these systems evolve into more sophisticated hacking entities globally. Within a few years, expect Agenda AI to reach a level of autonomous execution that is truly unprecedented. Scanning environments generating bespoke exploits, and orchestrating end to end campaigns at machine speed without human intervention. That is a trajectory of the modern threat landscape. However, the same technological leap provides a powerful defensive advantage. We validated this potential during the quarter.

Leveraging our strategic partnerships with leading frontier labs, we utilize early access to their most advanced models to complete the equivalent of a year's worth of pen testing in less than 3 weeks. Unique vantage point allowed us to introduce Unit 42 Frontier AI Defense, enabling our customers to fortify their environments against AI driven attacks. Market reception has been exceptional. With north of 1.2 thousand customers asking to meet us, we have already completed 800 meetings in the last 6 weeks. To help our customers think through their cybersecurity future. These meetings are driving conversations across the platform. In fact, we are already seeing strong interest in our agentic endpoint security offering since the acquisition of Koi.

And have already generated interest for over 150 customers. This is critical for securing rise in AI coding tools and agents as they proliferate our endpoints. While identifying vulnerabilities is a critical first step, true mission-critical production is achieved at runtime. Real time, in line defense is the only way to shield even unpatched infrastructure as an attack sequence unfolds. This is where the cybersecurity battle will be won or lost. Countering the next generation of adversaries requires a comprehensive architectural vision that goes far beyond simple large language models. While the capabilities of these Frontier systems are impressive, they are not a silver bullet for cybersecurity. We currently see 2 major structural challenges. it is positive.

But error rates often reaching 25%, forcing manual intervention that destroys the speed of automatic automation, Second, these models always fail at the last mile of complexity. Leaving critical gaps in remediation and vulnerability management. In today's threat landscape, the most subtle 1% of novel attack techniques that lead to the most devastating breaches. For every enterprise, the defensive bar must be perfect. The attacker only needs to succeed once. The probabilistic nature of even the most advanced systems leads to inaccuracies. In a mission critical environment, the cost of a false positive is simply too high. 1 wrong enforcement decision can take down a global production network.

Just as autonomous vehicles require constant real time validation, an automated defense must be built on high fidelity telemetry and battle tested against every edge case to be mission ready. An AI model is only as effective as the data it can see. As frontier models become available to everyone, the real competitive advantage shifts from 1 model to the data layer. That is why having sensors that sit in line with live traffic is so vital. They provide the telemetry and context needed to outmaneuver bad actors while serving as a critical enforcement point. Logic is simple. The more you integrate, the more you see, the more data you unify.

The better the AI performs, the more you inspect the runtime, the faster you can stop an attack. Our global footprint now exceeds 125 million sensors across network endpoint and cloud. Ingesting over 17 petabytes of daily telemetry. This scale creates a powerful flywheel. Every new sensor makes our entire platform more intelligent. Which leads to more deployments, more data, and even stronger real time protection. This reality is why platformization is the only sustainable answer. The legacy approach of query based tools that wait for human reaction cannot keep up with machine speed threats. We are transforming the industry by consolidating data onto a single platform. Reducing breach response times from days to minutes through AI driven pre-analysis.

Point products that silo data and increase latency are becoming obsolete. As the battle moves to fight AI with AI, we believe Palo Alto Networks is in pole position and our Q3 results proves that momentum. As AI compresses attack timelines, only a platform that gets smarter with scale can respond fast enough. During third quarter, we secured 110 net new platformizations, a figure that includes 20 from our CyberArk and Chronosphere integrations. These strategic additions expand our reach into large addressable markets within and identity observability. Given the fragmented nature of these sectors, they are perfectly aligned with our overarching platformization vision.

We concluded Q3 with roughly 2.28 thousand total platformized customers, bolstered by the inclusion of our latest acquisitions. These engagements represent deep architectural commitments rather than simple transactions. When organizations reach this integration milestone, they standardize their infrastructure on our platform, yielding superior long term retention and expansion. This is reflected in a 120% net retention and single digit churn rates amongst this cohort. Moving forward, we remain confident in surpassing 4 thousand platformizations by fiscal 2030, providing the primary momentum towards a $20 billion target for NGS ARR. The scale and quality of our customer wins this quarter reflect how strategic these platform commitments have become.

And how customers are increasingly bringing us in to secure their production AI deployment to scale. Let me share a few examples. In Q3, we surpassed $200 million in ARR with a leading frontier AI lab relies on us for observability across its most demanding training and inference clusters. We expect that to continue to grow again next quarter as they complete their migration to Chronosphere. Of our largest Q3 deals was an $80 million transaction with a leading power producer in The United States, an organization that is at the center of the AI infrastructure expansion. They selected our next generation firewalls and also adopted SASE to secure distributed workforce over 25 thousand employees.

A global consulting leader signed a deal for over $20 million selecting Prisma AIRS, our AI security platform to secure its rapidly growing fleet of AI apps and agents. Running more than 2 trillion tokens per month on our platform. This was an existing platformized customer that spent several months working closely with us to secure this entirely new frontier. It is also a record Prisma AIRS win and speaks to our customer partners with us for the AI transformation journey. As AI raises the stakes, these deals further validate our position as a cybersecurity partner of choice. That is particularly notable in our network security business where we had our strongest Q3 in several years.

Our largest business unit, network security, delivered its most robust third quarter performance in years. This momentum underscores the mission critical role of real time network traffic inspection as enterprise wide AI initiatives continue to transition to production. We saw strong growth in hardware, SASE, and software firewalls during the period. While we are in the early innings, we anticipate that AI will serve as a structural catalyst for deeper traffic inspection requirements. The initial phase of AI adoption was primarily conversational but the shift towards agentic AI represents a fundamental change. Unlike simple prompts, autonomous agents trigger a massive volume of secondary machine to machine interactions, consistently accessing tools and data to complete complex workflows.

This creates a significant increase in east-west traffic. This evolution directly translates into heightened demand for high throughput hardware. Expanded cloud based software capacity, and the necessity for unified policy enforcement across the entire platform. Our Q3 results featured the strongest hardware performance in a decade, with next generation firewall booking rising nearly 40% year-over-year, This was supported by our latest gen 5 appliances in early access and AI data center build outs. We are seeing early adoption from new class of buyers including sovereign infrastructure providers in AI labs, representing a significant new market as deployments move beyond traditional hyperscalers.

A key differentiator for hardware portfolio remains the strength of our subscription attach, illustrating how customers are standardizing security stack on our platform. Within our installed base, we currently average more than 4 subscriptions per device. Our innovation engine continues to expand this opportunity We now provide 11 advanced subscriptions, including our next generation trust security which utilizes CyberArk certificate management to address emerging compliance standards for shorter certificate lifespans. Palo Alto Networks remains the fastest growing provider in the SASE market. In Q3, SASE ARR reached $1.6 billion, growing 40% year over year as customers prioritize unified protection across hybrid workforces and AI application. Competitive momentum remains high.

We nearly 50 displacement wins totaling $200 million in contract value year to date. Secure Browser also achieved a major milestone. Scaling to 11 million licenses a 4-fold increase that cements the status as a critical control point for the AI enterprise. Furthermore, software firewalls remain, the requirements for high fidelity telemetry only increase. The common architecture reports are also increasing, is driving increased customer growth in Prisma AIRS, which continues to be the fastest growing product in our history. Organizations are aggressively moving beyond the experimental phase. Deploying AI agents and applications into production. This transition creates entirely new mission critical security demands. We believe we are the first in the industry to embrace AI security platformization. Yes.

AI security platformization capable of securing and monitoring AI end to end. We have effectively doubled our capabilities in this space in just over 9 months. Our journey began with securing models and runtime defense, then integrated identity security to govern agent access and observability to trace agent behavior across complex infrastructure. Most recently, we expanded the agentic endpoint security as AI tools proliferate across the edge. Our recent acquisition of Portkey marks yet another strategic milestone. A leading AI gateway processing trillions of tokens monthly, Portkey provides a critical enforcement point to monitor every request to apply real time policy to agent-to-agent interactions at scale.

Tripling our Q2 count and we have clear visibility towards $100 million in ARR. within the next couple of quarters for a product that was not in the market 1 year ago. Ultimately, securing the AI enterprise generates a massive volume of runtime telemetry. which is a core mission of our Cortex platform. The data is only actionable if processed at machine speed, XSIAM remains our primary response to the emerging frontier model threat. As attack cycles compress to machine speed, organizations can no longer rely on legacy query based architectures or manual dashboards. Effectively countering AI necessitates a defensive strategy powered by AI.

Upon the introduction of XSIAM, 42 months ago, we entered the sector as a disruptive innovator engineering our platform from the ground up to redefine security op centers. Today, our platform processes more than 17 petabytes of daily telemetry volume unmatched by any other pure play security vendor. We ended third quarter with more than $600 million in ARR, representing a 100% year-over-year increase across a growing base of 740 customers. The most significant metric, however, is the outcome. The majority of our customers are now responding to threats in under 10 minutes. This is a dramatic reduction from the days or previous or weeks previously required and serves as the blueprint for the modern SOC.

In observability, our Q3 performance was well above our initial expectations. As AI initiatives generate a surge in telemetry, Chronosphere is a purpose built capability to scale alongside these workloads. Our observability ARR surpassed $300 million this quarter, nearly doubling since our acquisition announcement last autumn. Furthermore, 80% of our net new customer acquisition this year adopted multiple products reinforcing our platformization momentum. The world's leading AI natives, including 2 of the top 5 frontier labs, have adopted Chronosphere, validating our ability to provide observability at AI scale. Beyond our early investments in markets where AI would drive a positive inflection, we also recognized early AI would overhaul existing security categories.

Consider posture management Traditional periodic scanning is insufficient when attack timelines are measured in minutes. As a result, we proactively transitioned our cloud portfolio from static posture to real time detection to Cortex Cloud. We are making steady progress and anticipate most Prisma customers will be migrated Cortex Cloud by the end of the fiscal year. Now, as these agents proliferate, every autonomous entity represents a new identity that must be managed. Leads directly to our progress at CyberArk. Our inaugural quarter post close, CyberArk has surpassed our internal targets. Last month, we launched AgentiX, our next generation identity platform for the AI driven enterprise.

For years, the industry operated under the PAM fallacy, the belief that you only needed to secure a handful of privileged administrators. In the era of agentic AI, the distinction has vanished. Every identity whether human, machine, or software agent, now possesses the potential to access the sensitive systems at machine speed. AgentiX addresses this shift by democratizing modern PAM controls across all users and extending protection to agentic identities which represent the primary attack vector of the future. Our execution in Q3 was strong. Joint go-to-market efforts have already initiated approximately 1 thousand cross-org engagements. He has sustained CyberArk's growth trajectory while improving its profitability profile through our integration initiatives.

Given our rapid progress, we are now 3 to 6 months ahead of our original timeline for converging CyberArk profitability with our own. A milestone we expect to reach within the next 12 to 18 months. This acceleration reinforces our path towards a 40% free cash flow margin in fiscal 28, as Deepak will talk about more. Events of the third quarter represent a watershed moment for cybersecurity. And has elevated our category even higher on the CIO priority list. Mark my words, that has increased the terminal value of the entire service industry. We are identifying several structural catalysts from the AI cycle driving growth across our portfolio.

First, AI creates a massive surge in traffic and connection points requiring real time inspection As agents trigger hundreds of second reactions, network security becomes indispensable for security and safety adoption. Second, countering machine speed adversaries requires real time automated defense. This is a core mission of XSIAM, which is consolidating data onto a single platform so AI can respond to threats in minutes rather than days. And third, in an environment populated by both human and AI agents, identity serves as the primary defensive layer. When autonomous entities can execute actions independently, securing access via AgentiX become mission critical.

The convergence of these trends validates our platformization strategy, managing fragmented data and siloed point products is no longer viable in an AI driven landscape. Unified platform that gains intelligence with scale is the only path forward. While we are still in the early stages of the shift, we remain committed to innovating ahead of the threat landscape earning our customers trust every day. I will now turn the call over to Deepak to discuss our financial results in greater detail.

Dipak Golechha: Thank you, Nikesh, and good afternoon, everyone. We delivered a record Q3 with broad based demand across our platforms and geographies, We exceeded our guidance ranges across the board driven by an acceleration in organic bookings growth and outperformance from our recent acquisitions, as we made early progress on our integration efforts. Please note that during my remarks, I will discuss results with and without the impact of Chronosphere and CyberArk. The financial impact of our acquisition of Koi closed later in the quarter, was immaterial to our Q3 results. Starting with next generation security ARR, we delivered 60% year over year growth in Q3 reaching $8.13 billion. This included $1.63 billion from CyberArk and Chronosphere.

We surpassed $300 million in ARR for Cronosphere, our next generation observability platform. That was an over 50% increase from Q2 and far exceeded our expectations, driven by an existing LLM customer increasing consumption as they continue to migrate from the incumbent vendor. Excluding the impact of CyberArk and Chronosphere, NGS ARR was $6.5 billion, up 28% year over year, and net new NGS ARR was $370 million, up 18% year over year. Please note that this excludes ARR attached to our hardware backlog that also reached record levels. For a Q3 quarter. We saw notable strength in network security, which is our largest segment in accounts for approximately 70% of our total revenue.

All NetSec form factors delivered sustained or accelerating growth in Q3, In SASE, ARR reached $1.6 billion, up 40% year over year, more than 2x the overall market growth rate. We have seen a nearly 50% increase in SASE net new NGS ARR, over the trailing 12 months, driven by continued scale strong performance in net new logos and displacement wins. Software firewall showed strength once again this quarter, with ARR up 25% year over year, driven in part by the increase in Prisma AIRs and Firewall Flex deals. As Nikesh highlighted, Prisma AIRS continues to be our fastest growing product ever.

We have over 300 Prisma AIRS customers as of Q3, up from just 100 at the end of Q2. As AI adoption grows in the enterprise, we believe AIS is becoming a foundational infrastructure to secure AI deployment. Turning to remaining performance obligation or RPO we ended the quarter at $18.4 billion, growing 36% year over year. Excluding $1.8 billion from CyberArk and Cronosphere, RPO grew 22% year over year, which we believe is direct result of our platformization strategy driving deeper customer commitments across our platforms. Current RPO was $8.3 billion, up 34% year over year. Excluding the impact from CyberArk and Cronosphere, current RPO was $7.2 billion and grew 17% year over year.

An acceleration Versus 15% in Q2. Total revenue for the quarter was 3 billion growing 31% year over year, Product revenue was $594 million, total services revenue was $2.4 billion, both growing 31% year over year. As I have highlighted in previous quarters, software and recurring revenue now represents a large and growing portion of the slide item. Today, product revenue includes major growth drivers including software firewalls and Prisma AIs, SD WAN, and self hosted identity security subscriptions. As a result, 46% of our trailing 12 month product revenue in Q3 included recurring software revenue, a significant increase from just 22 percent 3 years ago.

Hardware, which is approximately 10% of our total revenue, delivered its best quarter in a decade. Fueled by strong demand for our next generation firewalls and we saw early AI denser data wins contributing to record Q3 backlog. Our next generation firewall bookings grew nearly 40% year-over-year, Q3 as we continued to gain share. AI data centers and AI driven enterprise networking needs are driving a new market opportunity for us that could potentially be additive to our long term growth for firewall appliances. From a geographic perspective, we saw broad-based growth across all of our major theaters, with The Americas growing 32% year over year, EMEA up 32% year over year, and JAPAC growing 26% year over year.

Moving down the P&L, our Q3 strength was not confined simply to our top line metrics, we continue to drive profitable growth across the P&L and execute against our M&A integration strategy. Total gross margin for the quarter was 75.8%, This included services gross margin of 75.1%. We continue to balance services gross margins by driving efficiencies in cloud hosting, while the shift, whilst the mix shift of our high growth SaaS offerings increases. Within this, product gross margin was at 78.8%, which was a 40 basis point improvement year over year. Turning to the supply chain, we are closely monitoring rising component costs particularly in memory and storage.

Please note that we have approximately 1 million firewalls in the field, our required component volumes are not as significant as some of our peers. Furthermore, we remain well positioned to navigate these dynamics for the following reasons. First, a higher recurring revenue mix acts as a natural hedge, Hardware today accounts for approximately 10% of our total revenue, compared to 20% in fiscal year 2021. Second, our vendors view us as critical infrastructure provider, and we have a track record of leveraging our prior supply chain experience and expertise to mitigate these impacts. This includes evaluating alternative sources of supply and extending purchase commitments with our suppliers.

Thirdly, we continue to evaluate further pricing actions, As a reminder, we implemented a 10% price increase on hardware in early April, The impact of pricing and rising component costs are reflected in our Q4 and fiscal 26 outlook. These dynamics, paired with the continued operating efficiency resulted in non GAAP operating margin of 21.3%, in Q3. Flat versus Q3 of 2025. Looking forward, we expect to drive operating leverage as we scale and continue to make progress against our M&A integration plans. In Q3, we made a lot of progress on our integration plans. This was driven by strong execution and collaboration by our teams across every function.

Including our new colleagues from our recent acquisitions, who have truly risen to the occasion. This is already driving tangible results. Our integration philosophy starts with product, and our relentless focus on driving innovation. Just months after closing the CyberArk transaction, we introduced AgentiX, next generation identity security platform. This includes the key innovations Nikesh highlighted, including modern PAM, agentic identity security, integrated with Prisma AIRS, as well as deeper integration of identity signals with our core NetSec and Cortex platforms. Early go to market collaboration has also been encouraging, more than 1 thousand cross-organization engagements initiated between the core and identity sales organizations to date.

On the expense side, we are leveraging our combined scale to drive improved cloud hosting economics for the acquired CyberArk business. Post close, we are optimizing our organizations to deliver a unified 1 team culture that is future ready. We are carefully reviewing every single line item across each of our financial statements to drive operating leverage across vendors and functions, This includes streamlining our combined real estate footprint, which includes over 40 new facilities from our acquisitions, to enhancing and fostering collaboration post close. Additionally, we are optimizing our marketing and our IT vendor footprint To date, we have identified more than 300 IT vendors to streamline and have already dispositioned approximately 20%.

All of these factors will enable us to hit our cyber arc synergy targets about 3- to 6-months earlier than we initially anticipated. This visibility paired with our continued operating leverage across the overall company reinforces our confidence in reaching 40% free cash flow margin in fiscal 2028. In Q3, we generated adjusted free cash flow of $910 million, a 57% increase year over year. On a trailing 12 month basis, we generated $4.08 billion in adjusted non GAAP free cash flow. This represents a margin of 38.5%, a 34 basis points improvement year over year even with the inclusion of CyberArk and Cronosphere.

We will, of course, have a full year of CyberArk and Cronosphere expenses next year, but these results solidify our continued ability deliver best in class free cash flow margin. And enabled us to raise our fiscal 26 guidance. The strong cash flow generation supports our opportunistic share repurchase programme, During Q3, we utilized $1 billion to buy back 6.8 million shares at an average cost of 147.69. We currently maintain $1 billion of remaining capacity, on our existing repurchase authorization. Moving to the non GAAP items, stock based compensation increased sequentially to 17% of revenue, in Q3 primarily driven by SBC related to our recent acquisitions.

While M&A related SBC will continue to be amortized in future quarters, we expect stock based compensation as a percentage of revenue to return to pre acquisition level Beyond stock based compensation, our GAAP results are also reflect transaction and integration costs from these acquisitions, which further detailed in our SFI. These non recurring charges resulted in a GAAP net loss per share of $0.22 for the quarter. Our diluted non GAAP EPS, which adjusts for SBC and 1-time items, reached $0.85, came in $0.05 above the high end of our Q3 guidance. Reflecting on my 5 years in the seat, I have always maintained that our business model scales well across every line item of our P&L.

This financial framework is precisely what allows us to execute our broader corporate strategy from a position of strength. When you look at our M&A trajectory, we initially proved this execution capability by integrating over 20 tuck-in acquisitions to build out our platforms. Today, we are successfully integrating larger, highly strategic acquisitions all while driving durable growth and balancing against our profitability commitments. Now turning to guidance. Given the acceleration in our Q3 organic bookings growth, our early progress on M&A integration, and the strong Q4 pipeline, we are raising our full year fiscal 26 guidance across all metrics both our core and acquired businesses.

This quarter and last, we provided a breakout of performance for both our core business and our recent acquisitions. Our intention was always to make this a 1-time in nature, and move our disclosures closer in line to how we run the business. As such, we will be moving to total company guidance, moving forward. Beginning in fiscal 27, we intend to provide segment level revenue disclosures across network security cortex, and identity. This will align our reporting with how we run the business, and our platform strategy post integration. Now let me take you through guidance in detail.

For the fourth quarter 26, we expect NGS ARR of $8.9 billion to $8.95 billion or 59 to 60% growth, We expect RPO of $20.9 billion to $21 billion or 32% to 33% growth, and we expect revenue of $3.345 billion to $3.355 billion or 32% growth. Fully diluted share count of 38 to 48 million shares, diluted non GAAP EPS to be in the range of $0.96 to $0.98. For fiscal year 2026, we expect NGS ARR of $8.9 billion to $8.95 billion or 59 to 60% growth. Expect RPO of $20.9 billion to $21 billion or 32% to 33% growth.

We expect revenue of $11.415 billion to $11.425 billion or 24% growth operating margins to be in the range of 28.9% to 29.2% diluted non GAAP EPS to be in the range of $3.77 to $3.79 fully diluted share count of 763 to 766 million shares and adjusted free cash flow margin of 37.5%. We have included our typical modeling points in the presentation, for your review. And with that, I will turn it back over to Hamza for Q and A.

Operator: Okay. Thank you, Deepak. To allow for broader participation, I would ask each analyst to 1 question. First question goes to Saket Kalia from Barclays followed by Brian Essex, from JPMorgan.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.