⚠ A Convertible Marked to MarketLow threat

Palo Alto Networks (PANW) — threat to the moat

CyberArk's convertible notes turned a rising Palo Alto share price into a $562 million accounting loss.

With CyberArk, Palo Alto inherited a debt instrument that makes its reported earnings swing with its own share price. CyberArk had issued $1.25 billion of zero-coupon convertible notes due 2030, and holders converted $153 million of them in fiscal 20261. At year end $1,774 million of convertible notes sat on the balance sheet at fair value2.

Loss on fair value of convertible notes and capped calls, fiscal 2026 ($M)38Q1 to Q3524Q4562Full yearPalo Alto Q4 FY2026 release; Q1-Q3 calculated as full year less Q4
Most of it in the last quarter.

Because the notes are marked to market, a rising Palo Alto share price produces a loss. The change in fair value of the notes and related capped calls cost $562 million in fiscal 2026, $524 million of it in the fourth quarter3. That charge is most of the reason the fourth quarter showed a GAAP net loss of $282 million4.

Palo Alto has elected a combination settlement with a specified dollar amount of $1,000 per $1,000 principal5, meaning it pays the principal in cash and any excess in shares.

Palo Alto had just finished retiring its own convertible debt when it inherited CyberArk's. It carried $963.9 million of current convertible notes at the end of fiscal 2024 and none at the end of fiscal 20256. The CyberArk notes, recorded at $1,303 million in the purchase accounting7, brought the instrument back onto the balance sheet.

The charge is non-cash, but the shares are not free. With $1,774 million of notes outstanding at year end8, every further rise in the share price adds to the loss and to the shares that will eventually be issued.

References
  1. ReportedCyberArk had issued $1.25 billion of zero-coupon convertible notes due 2030, and holders converted $153 million of them in fiscal 2026.
    Palo Alto Networks Form 10-K for fiscal 2026 (year ended 31 July 2026) - financial statements and notes: deferred revenue, obligations, convertible notes, share-based pay, capital returns and receivables. — FY2026 · publ. 10 September 2026 · source ↗
  2. ReportedAt year end $1,774 million of convertible notes sat on the balance sheet at fair value.
    Palo Alto Networks fourth-quarter and fiscal 2026 results release, Form 8-K exhibit 99.1 - income statement, non-GAAP reconciliation, balance sheet, cash flow, Next-Generation Security ARR, remaining performance obligations and fiscal 2027 guidance - balance sheet and cash flow statement. — Q4 FY2026 · publ. 1 September 2026 · source ↗
  3. ReportedThe change in fair value of the notes and related capped calls cost $562 million in fiscal 2026, $524 million of it in the fourth quarter.
    Palo Alto Networks fourth-quarter and fiscal 2026 results release, Form 8-K exhibit 99.1 - income statement, non-GAAP reconciliation, balance sheet, cash flow, Next-Generation Security ARR, remaining performance obligations and fiscal 2027 guidance - fourth-quarter and full-year results, balance sheet and cash flow. — Q4 FY2026 · publ. 1 September 2026 · source ↗
  4. ReportedThat charge is most of the reason the fourth quarter showed a GAAP net loss of $282 million.
    Palo Alto Networks fourth-quarter and fiscal 2026 results release, Form 8-K exhibit 99.1 - income statement, non-GAAP reconciliation, balance sheet, cash flow, Next-Generation Security ARR, remaining performance obligations and fiscal 2027 guidance - fourth-quarter and full-year results, balance sheet and cash flow. — Q4 FY2026 · publ. 1 September 2026 · source ↗
  5. ReportedPalo Alto has elected a combination settlement with a specified dollar amount of $1,000 per $1,000 principal, meaning it pays the principal in cash and any excess in shares.
    Palo Alto Networks Form 8-K - settlement method elected for the CyberArk 2030 convertible notes. — March 2026 · publ. 23 March 2026 · source ↗
  6. ReportedIt carried $963.9 million of current convertible notes at the end of fiscal 2024 and none at the end of fiscal 2025.
    Palo Alto Networks fourth-quarter and fiscal 2025 results release, Form 8-K exhibit 99.1 - including initial fiscal 2026 guidance and the fiscal 2024 tax benefit. — Q4 FY2025 · publ. 18 August 2025 · source ↗
  7. ReportedThe CyberArk notes, recorded at $1,303 million in the purchase accounting, brought the instrument back onto the balance sheet.
    Palo Alto Networks Form 10-K for fiscal 2026 (year ended 31 July 2026) - acquisition notes: CyberArk, Chronosphere and other purchase accounting, and pro forma results. — FY2026 · publ. 10 September 2026 · source ↗
  8. ReportedWith $1,774 million of notes outstanding at year end, every further rise in the share price adds to the loss and to the shares that will eventually be issued.
    Palo Alto Networks fourth-quarter and fiscal 2026 results release, Form 8-K exhibit 99.1 - income statement, non-GAAP reconciliation, balance sheet, cash flow, Next-Generation Security ARR, remaining performance obligations and fiscal 2027 guidance - fourth-quarter and full-year results, balance sheet and cash flow. — Q4 FY2026 · publ. 1 September 2026 · source ↗
Sources
Generated September 26, 2026