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 (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

Palo Alto Networks operates as a global cybersecurity solutions provider, offering a comprehensive suite of products and services that protect enterprises, governments, and service providers from cyber threats. Revenue comes primarily from subscription-based security services, software support, and hardware product sales. The business is structured around two main segments: Subscription & Support and Product Revenue, with a small contribution from Other Revenue streams.

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 continued expansion of cloud-delivered security services, robust demand for next-generation firewall products, and upselling existing customers on advanced subscription offerings.

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 security solutions.
• Most costs come from infrastructure to deliver cloud services, hardware manufacturing, and technical 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-native solutions.
  • SG&A: $856.6M (-2.9% YoY, 33.8% of revenue) — Includes global sales force, marketing, and administrative functions.
  • PANW continues to prioritize innovation and invest in growth while maintaining efficiency and controlling 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 its scalable subscription model, but net income is impacted by a notably high effective tax rate this quarter.

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 Retention & Expansion: High net retention rates and upselling existing clients to advanced services underpin growth.
• R&D Investment: Nearly 20% of revenue is reinvested in innovation, ensuring PANW stays ahead in the rapidly evolving cybersecurity landscape.
• Future Growth Areas: Expansion into AI-powered security, cloud-native platforms, and managed security services, though some initiatives are not yet profitable.

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 and R&D) taking the largest chunk.
• Even after significant investments in innovation and global expansion, 10% of revenue drops to the bottom line.

Key Takeaways

• PANW's money comes overwhelmingly from recurring subscription and 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, upselling, and expansion into AI-driven solutions.

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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 and support services, including cloud security, threat intelligence, and software updates. Product sales make up about 23%, with a small contribution from other sources.

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 high 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 and Sales, General & Administrative (SG&A) at $856.6M in Q3 2025. R&D investment is focused on next-gen security and AI, while SG&A supports global sales and marketing.

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

Product revenue, despite generating $573.9M in Q3 2025, carries lower margins due to hardware manufacturing costs and competitive pricing. 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 discrete tax items and international structuring, which can fluctuate quarter to quarter.