Jefferies analysts have offered a cautiously optimistic take on Palo Alto Networks Inc (NYSE:PANW, XETRA:5AP)’ fiscal second quarter results, highlighting both near-term challenges from acquisitions and confidence in the company’s longer-term outlook.
The firm noted that while most top-line metrics for F2Q came in modestly above guidance, the performance of the services business was a disappointment.
“Fiscal Q2 services revenue decelerated to 13.3% year-over-year and missed again,” Jefferies wrote, noting that this compared with consensus expectations of 13.7%.
The analysts also pointed to the impact of recent M&A on profitability, noting that Palo Alto lowered its full-year 2026 margin guidance by one percentage point to 29%.
Despite these headwinds, Jefferies maintained that the company’s guidance remains achievable. “While the deals muddied the financial outlook, we believe the guide is achievable (organically & to guided M&A contribution) & remain confident in the long-term guide of 40% free cash flow margin,” the analysts wrote.
On the recurring revenue front, Palo Alto reported $6.3 billion in ARR for fiscal Q2, growing 33% year-over-year, or 28.4% on an organic basis.
Notably, Jefferies emphasized that the company’s FY26 ARR and RPO guidance was reiterated, projecting $7.05 billion in ARR at the midpoint and 17% to 18% organic RPO growth.
The analysts noted that most of Palo Alto’s new business is recognized in the second half of the fiscal year, making the guidance feasible despite implied deceleration in growth relative to the recent quarter.
Jefferies also highlighted the company’s path to free cash flow targets amid the integration of acquisitions, like Chronosphere and CYBR. Adjusted FCF margins were 19% in fiscal Q2, down three points from last year, but Palo Alto expects to reach 37% in financial year 2026 and reaffirmed its long-term 40% margin target for financial year 2028.
The analysts noted that cost synergies, including lower cloud hosting expenses and workforce reductions focused away from R&D and sales, should support the target.
Further, Jefferies underscored the company’s software business as a source of underlying strength. Management reported that the software portion of product revenue reached 45% on a trailing 12-month basis, up from 38% in the prior year, with software ARR growing roughly 25% year-over-year. “Overall, the software business remains healthy,” the analysts wrote.
Investors seemed less convinced about Palo Alto following its report, sending shares almost 6% lower on Wednesday to about $154.