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Palo Alto Networks (PANW) Q3 Loss Widens, Revenues Beat

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Palo Alto Networks Inc. (PANW - Free Report) reported mixed third-quarter fiscal 2017 results.

Palo Alto Networks reported adjusted loss per share (excluding amortization and other one-time items but including stock-based compensation), on a proportionate tax basis of 51 cents. The figure was significantly wider than the Zacks Consensus Estimate of a loss of 41 cents.

The stock has declined around 15.7%, underperforming the Zacks categorized IT Services industry’s gain of 11.5% in the last one year.

Quarter Details

Palo Alto Networks’ revenues of $431.8 million surged 24.9% year over year and surpassed the Zacks Consensus Estimate of $413 million. The quarterly revenues came above the guided range of $406 million to $416 million, primarily due to customer wins coupled with an expanding customer base.

Product revenues increased 1.3% to $164.2 million. The company saw a 45.7% surge in subscription and support revenues ($267.6 million). SaaS-based subscription revenues climbed 55% from the year-ago period. Support revenues increased 37% year over year.

Geographically, on a year-over-year basis, revenues from the Americas increased 22%. The figures from Europe, the Middle East and Africa (EMEA) went up 32% while Asia-Pacific was up 33%.

Billings jumped 12% year over year to $544.1 million during the quarter.

Palo Alto Networks’ gross margin decreased 120 basis points (bps) on a year-over-year basis to 71.4% owing to higher cost of sales.

The company reported an adjusted operating loss of $33.7 million compared with a loss of $39.6 million in the year-ago quarter. GAAP operating loss during the quarter came in at $49.1 million compared with a loss of $52.5 million reported in the year-ago quarter. Higher operating expenses (up approximately 17.7% year over year) also impacted operating results.

The company’s adjusted net loss during the quarter came in at approximately $47.5 million. Non-GAAP net income was $57.1 million compared with $42.3 million reported last year. On a GAAP basis, net loss was $60.9 million compared with a loss of $64.1 million reported in the prior-year quarter.

Palo Alto Networks exited the third quarter with cash, cash equivalents and short-term investments of approximately $1.372 billion compared with $1.354 billion in the previous quarter.

Receivables were $364.1 million compared with $386.1 million in the last quarter. Palo Alto Networks’ balance sheet does not have any long-term debt. The company reported cash flow from operations of $211.2 million during the quarter. Free cash flow came in at $162.6 million during the quarter. In the same period, the company repurchased 1.1 million shares worth $113 million.

Guidance

For the fourth quarter of fiscal 2017, Palo Alto Networks expects revenues in a range of $481 million to $491 million, up 20% to 23% year over year. The Zacks Consensus Estimate is pegged at $485.2 million. The company expects non-GAAP earnings per share within 78 cents to 80 cents.

Our Take

Palo Alto Networks allows firms, service providers and government bodies to impose tighter security measures through its network security platform. The company reported wider-than-expected loss in the third quarter. Revenues, however, surpassed the Zacks Consensus Estimate. The company also provided an encouraging revenue guidance for the forthcoming quarter.

Revenue growth seems to be steady, aided by strength across all its geographical regions and business segments. Customer wins coupled with expansion of the company’s existing customer base are other positives. We believe that the company’s product refreshes and acquisition synergies will boost revenues, going forward.

The company is keen on expanding its cloud exposure. A volatile spending environment and competition from Cisco Systems, Inc. (CSCO - Free Report) and Check Point Software Technologies Ltd. (CHKP - Free Report) remain concerns.

Currently, Palo Alto Networks has a Zacks Rank #3 (Hold). A better-ranked stock in the technology sector is Applied Materials, Inc. (AMAT - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Materialshas a long-term expected earnings per share growth rate of 16.58%.

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