Shares of Palo Alto Networks Inc. fell more than 5% in late trading today after the network management and security firm reported earnings and revenue beats in its fiscal 2026 second quarter but fell short of expectations with part of its outlook.

For the quarter that ended on Jan. 31, Palo Alto reported adjusted earnings per share of $1.03, up from 81 cents per share in the same quarter of the previous fiscal year, on revenue of $2.6 billion, up 15% year-over-year. Both came in ahead of the 94 cents per share and revenue of $2.58 billion expected by analysts.

The better-than-expected numbers were driven by top-line growth. Palo Alto saw its next-generation security annual recurring revenue grow 33% year-over-year, to $6.33 billion, and its remaining performance obligations rise 23%, to $16 billion.

The quarter included Palo Alto’s agreement to acquire Chronosphere Inc., a next-generation observability platform provider, for $3.35 billion in November, followed by the transaction being completed in late January. Palo Alto said the deal strengthens its ability to deliver unified security and operations across complex cloud-native environments. It’s also aiming to reinforce its “platformization” strategy and deepen customer consolidation around its broader AI-driven security ecosystem by integrating observability with security analytics.

The company announced a partnership with IBM Corp. to develop joint quantum-safe security solutions, positioning both firms to address emerging cryptographic risks as quantum computing advances. The collaboration focuses on helping enterprises transition to quantum-resistant encryption standards and modernize their security architectures.

Palo Alto also unveiled an agreement with Google Cloud designed to accelerate cloud and AI security adoption for joint customers. The strategic collaboration aligns Palo Alto’s security platforms more closely with Google Cloud’s infrastructure and artificial intelligence services, with a focus on streamlining deployment and improving protection for cloud-native workloads.

“We saw continued strength in platformizations, a trend that is accelerating due to AI – customers are keen to both modernize and normalize their cybersecurity stack, aligning them to our approach,” Nikesh Arora, chairman and chief executive officer of Palo Alto Networks, said in the company’s earnings release. “We also saw steady and strong adoption of AI security, which we expect will be a long-term trend.”

For its fiscal third quarter, Palo Alto Networks expects adjusted earnings per share of 78 to 80 cents on revenue of $2.941 billion to $2.945 billion. The earnings outlook fell short of the 92 cents per share expected by analysts, while revenue topped an expected $2.61 billion.

It was a similarly mixed outcome for the full-year outlook, with Palo Alto Networks forecasting earnings of $3.65 to $3.70 on revenue of $11.28 billion to $11.31 billion, versus analyst expectations of $3.87 per share and revenue of $10.5 billion.

Earlier today and before releasing its earnings, Palo Alto also announced it had entered into a definitive agreement to acquire Koi Security Ltd., a startup that helps enterprises prevent their employees from downloading risky files. Though the amount of the planned acquisition was not disclosed, it was reportedly around $400 million.

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