Palo Alto Networks published yesterday the results of its fiscal fourth quarter and of fiscal 2026, which ended on 31 July. The growth measures are strong, the company beat its guidance, and the accounting bottom line swung to a loss.
All three of those are true at once, and the explanation sits in a single line of the report.
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What the Headline Said
| Fourth quarter | 2025 | 2026 | |
|---|---|---|---|
| Revenue | 2,536 | 3,410 | +34% |
| Next-Generation Security ARR | - | $9.10 billion | +63% |
| Remaining performance obligations | - | $21.2 billion | +34% |
(in millions of dollars, except where noted otherwise)
Nikesh Arora, the company's chairman and chief executive, noted in the release that it had added nearly $1 billion of Net New NGS ARR in a single quarter, and that the target is $20 billion of ARR by fiscal 2030.
And What Sits Underneath
Here the picture changes.
| Fourth quarter | 2025 | 2026 |
|---|---|---|
| Gross profit | 1,857 | 2,304 |
| Gross margin | 73.2% | 67.6% |
| Operating income | 497 | 172 |
| Other income (expense), net | 95 | (441) |
| Net income (loss) | 254 | (282) |
| Diluted earnings (loss) per share | 0.36 | (0.35) |
Operating income stayed positive. What turned the quarter into a loss sits below the operating line: a $536 million swing in other income and expense, from plus 95 to minus 441.
The Single Line Responsible for Most of the Gap
The reconciliation table the company publishes shows exactly what the move from GAAP to adjusted earnings consists of.
| Fourth quarter 2026 | $ millions |
|---|---|
| GAAP net loss | (282) |
| Share-based compensation | 487 |
| Change in fair value of convertible notes and capped calls | 524 |
| Amortisation of acquired intangible assets | 281 |
| Acquisition-related costs | 68 |
| Litigation-related charges | 3 |
| Tax adjustments | (228) |
| Adjusted net income | 853 |
The largest item in the gap is not share-based compensation but a line of $524 million, and the footnote states plainly what it consists of: changes in the fair value of convertible senior notes acquired from CyberArk.
This mechanism is worth pausing on, because it runs against intuition.
When a company carries a note convertible into its own shares and measures it at fair value, a rise in the value of the conversion right increases its liability - and is therefore recorded as an expense in the income statement.
So this is not an expense that indicates any deterioration in the business. It arises because the right to convert into those shares became worth more. No cash leaves, and operations are untouched.
And in the same breath - it is a real liability on the balance sheet. Long-term convertible senior notes now stand at $1.774 billion, against zero a year ago.
In per-share terms: of the $1.37 gap between the GAAP loss of $0.35 and the adjusted profit of $1.02, $0.64 comes from that line alone.
And What Does Recur
It is only fair to state the other side too, because not everything stripped out on the way to adjusted earnings is one-off.
Share-based compensation came to $487 million in the quarter and $1.712 billion for the full year. That is not a line that disappears next year, and the company itself writes in the release that the non-GAAP adjustments include items that are "recurring and will be reflected in the company's financial results for the foreseeable future, such as share-based compensation".
And the amortisation of acquired intangibles - $281 million in the quarter against $37 million in the comparable quarter - will run for years, because it is a direct consequence of the acquisition.
What Was Bought, and at What Price
The CyberArk deal closed on 11 February 2026, that is, in the middle of the fiscal year.
| The deal | |
|---|---|
| Reported value | about $25 billion |
| Cash consideration | $2.3 billion |
| Share consideration | 112 million shares |
| Per CyberArk share | $45.00 in cash and 2.2005 Palo Alto shares |
| Regulatory clearances | US, European Union, UK and Israel |
In May 2026 the CyberArk product portfolio was consolidated under a single brand named Idira, Palo Alto's identity security platform. Chief financial officer Dipak Golechha named it in the release alongside Network & AI Security and Cortex as one of the three platforms that drove the quarter.
Goodwill on the balance sheet rose from $4.567 billion to $22.010 billion - an addition of about $17.4 billion.
The Dilution, and What It Cost Per Share
The basic share count for the quarter rose from 669 million to 817 million - about 22%.
And this is what that did to adjusted earnings:
| Fourth quarter | |
|---|---|
| Adjusted net income | from $673m to $853m, +27% |
| Adjusted earnings per share | from $0.95 to $1.02, +7.4% |
Earnings grew 27%, earnings per share grew 7.4%. The difference is the shares issued to buy CyberArk.
For the full year the picture is milder, because the deal closed only in February: adjusted earnings +25%, adjusted earnings per share +15%.
The Guidance, and What It Reveals
This is the part I find most interesting in the report.
| Fiscal 2027 guidance | |
|---|---|
| Revenue | $14.10 to $14.20 billion, growth of 23% to 24% |
| Next-Generation Security ARR | $11.075 to $11.175 billion, growth of 22% to 23% |
| Remaining performance obligations | $25.2 to $25.4 billion, growth of 19% to 20% |
| Adjusted operating margin | 29.5% |
| Adjusted earnings per share | $4.16 to $4.19 |
| Adjusted free cash flow | 38.0% of revenue |
ARR is growing 63% today, and the company guides to 22% to 23% next year.
That is not a forecast of a dramatic slowdown in the business. It is what happens when an acquisition laps. CyberArk entered the books in February 2026, so it inflates the growth rate in every quarter where the comparison base still excludes it. Once it sits on both sides of the comparison, the underlying growth rate is what remains.
So 63% is a correct number that cannot be compared with last year, and 22% to 23% is the company's own estimate of the pace without the acquisition effect.
And What the Stock Did
The shares fell about 5% during the trading session of 1 September - a day when the broad market fell and yields rose - and slipped about 2% more in extended trading, after the results. The report was published after the close.
A pattern is worth noting: this is the fourth consecutive quarter in which the company has beaten guidance, and in three of them the stock fell in response.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
This report is a particularly good example of one working rule: when the gap between GAAP and adjusted earnings jumps, it is worth checking what it consists of before deciding how to treat it.
Here the gap is made of three quite different kinds of item, and in my view they deserve different treatment.
The first is the $524 million on the convertible notes. This is an accounting expense arising from a rise in the value of a conversion right, with no cash leaving and no bearing on how the business performed. I do not count it as operational damage.
The second is the amortisation of acquired intangibles. It is also non-cash, but it does represent something real - the company paid $25 billion, and amortisation is how that price is spread across the years. Anyone who always strips it out ends up with a picture in which acquisitions are free.
And the third is share-based compensation, $1.712 billion for the year. That is a recurring expense, the company says so itself, and it is well explained by the share-count column - which grew.
And what I take from all of it is not a conclusion about the company but a distinction that is easy to miss: the interesting figure in this report is not 63% but 22%. The first is an accurate description of what happened, and it includes an acquisition. The second is management's own estimate of the pace once the acquisition stops inflating the comparison.
When two numbers like that appear in the same release, the second is the one that deserves the attention. Not because the first is wrong, but because it is not comparable.
(It is important to stress: this is my personal opinion only, and nothing herein constitutes a recommendation to take any action.)
