How PANW (Palo Alto Networks) Makes Money in 2025: A Deep-Dive With Income Statement

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Understanding how a cybersecurity leader like PANW (formerly Palo Alto Networks) makes money is essential for investors and anyone interested in the business of digital security. In this post, we break down PANW's quarterly income statement (Q3 2025) using a Sankey chart to visualize the financial flows — what comes in, where it goes, and what's left as profit.

Quick PANW Overview

PANW operates as a global cybersecurity solutions provider, delivering advanced firewalls, cloud-based security, and threat intelligence services to enterprises, governments, and service providers. Revenue comes primarily from subscription & support services, complemented by product sales of security appliances and related hardware. The business is structured around two main segments: Subscription & Support (recurring revenue from software and cloud services) and Product Revenue (hardware and appliance sales).

Revenue Breakdown

• Total Revenue (Q3 2025): $2.54B (+15.8% YoY)
  • Total Subscription & Support Revenue: $1.93B (76.2% of total, +13.1% YoY)
  • Product Revenue: $573.9M (22.6% of total, +19.4% YoY)
  • Other Revenue: $30.0M (1.2% of total)
  • Growth is powered by robust demand for cloud-delivered security services and continued expansion in enterprise firewall deployments.

Gross Profit and Margins

• Gross Profit: $1.86B (73.2% gross margin)
  • Cost of Revenue: $679.0M (+18.4% YoY)
  • PANW maintains robust margins due to its scalable digital subscription model and operational efficiencies in delivering cloud-based services.
• Most costs come from infrastructure to support cloud services, hardware manufacturing, and customer support.

Operating Income and Expenses

• Operating Income: $497.2M (+108.6% YoY, 19.6% margin)
• Operating Expenses: $1.36B (-1.3% YoY)
  • R&D: $503.5M (+1.8% YoY, 19.9% of revenue) — Focused on developing next-generation security platforms, AI-driven threat detection, and cloud security innovations.
  • SG&A: $856.6M (-2.9% YoY, 33.8% of revenue) — Includes global salesforce, marketing, and administrative functions.
  • PANW continues to prioritize innovation and invest in growth while maintaining efficiency in operating costs.

Net Income

• Pre-Tax Income: $591.8M (+85.5% YoY, 23.3% margin)
• Income Tax: $338.0M (57.1% effective tax rate)
• Net Income: $253.8M (-29.0% YoY, 10.0% net margin)
• PANW converts a moderate portion of sales into profit due to the scalability of its subscription business, though net income declined YoY mainly due to a higher effective tax rate.

What Drives PANW's Money Machine?

• Subscription & Support Revenue: 76%+ of revenue, driven by recurring contracts for cloud security, threat intelligence, and software updates.
• Customer Growth: Expanding enterprise and government client base, with strong renewal rates and upselling of advanced security modules.
• R&D Investment: $503.5M in Q3 2025, fueling innovation in AI-powered security and cloud-native solutions.
• Future Growth Areas: Expansion into Zero Trust architectures and managed security services, which are scaling rapidly but not yet major profit contributors.

Visualizing PANW's Financial Flows

The Sankey chart below visualizes how each dollar flows from gross revenue, through costs and expenses, down to net income. This helps investors spot where value is created, what areas weigh on profits, and how efficiently the company operates.

• Most revenue flows into gross profit, with operating expenses (especially SG&A) taking the largest chunk.
• Even after significant investments in R&D and sales infrastructure, 10% of revenue drops to the bottom line.

Key Takeaways

• PANW's money comes overwhelmingly from recurring subscription & support services.
• High gross and net margins illustrate the power of PANW's scalable, software-driven business model.
• Heavy investment in R&D, balanced by efficiency in operating costs.
• Ongoing growth is driven by cloud security adoption and enterprise digital transformation.

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FAQ About PANW's Income Statement

1. What is the main source of PANW's revenue in 2025?

PANW generates over 76% of its revenue from subscription & support services, including cloud-delivered security, threat intelligence, and software updates. Product sales of security appliances contribute about 23%.

2. How profitable is PANW in Q3 2025?

PANW reported net income of $253.8M in Q3 2025, with a net margin of approximately 10%, reflecting moderate profitability driven by strong gross margins but impacted by a higher effective tax rate.

3. What are the largest expense categories for PANW?

The biggest expenses on PANW's income statement are operating expenses, particularly Research & Development (R&D) at $503.5M in Q3 2025 (focused on security innovation), and Sales, General & Administrative (SG&A) at $856.6M (supporting global sales and operations).

4. Why does the Product segment operate at a lower margin?

Product revenue, despite generating $573.9M in Q3 2025, operates at a lower margin due to higher costs of hardware manufacturing and logistics. PANW invests in product innovation and customer acquisition, believing these will drive long-term growth—even if the segment is less profitable today.

5. How does PANW's effective tax rate compare to previous years?

PANW's effective tax rate in Q3 2025 was 57.1%, significantly higher than prior periods. This high rate is primarily due to changes in tax treatment of share-based compensation and international structuring.