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Why Is Palo Alto (PANW) Up 5.2% Since Last Earnings Report?

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It has been about a month since the last earnings report for Palo Alto Networks (PANW - Free Report) . Shares have added about 5.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Palo Alto due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Palo Alto Q1 Earnings Surpass Estimates

Palo Alto reported first-quarter fiscal 2020 non-GAAP earnings of $1.05 per share, which surpassed the Zacks Consensus Estimate of $1.03. However, the figure declined 10.3% year over year. The expansion of tariffs in the United States had an adverse impact on the bottom line.

However, the company’s revenues of $771.9 million increased 18% year over year, outpacing the consensus estimate of $771 million.

The top line was mainly driven by several deal wins and the increasing adoption of the company’s next-generation security platforms. Growing traction in newer Prisma and Cortex offerings was another tailwind.

Moreover, the company’s continued efforts to bring automation across its product portfolio by using AI and ML bolstered its position in the cloud security market.

In a parallel announcement, Palo Alto clarified its intent to acquire machine identity-based micro-segmentation company Aporeto for $150 million to bring micro-segmentation capabilities in Prisma Cloud.

Quarterly Details

Product revenues declined approximately 4% to $231.2 million.

However, the company witnessed a 30% jump in subscription and support revenues to $540.7 million, driven by a 38% increase in SaaS-based subscription revenues and 21% rise in support revenues. This segment of Palo Alto’s business constituted 70% of total revenues in the fiscal first quarter.

Further, billings improved 18% year over year to $897.4 million. Deferred revenues rose 26% to $3 billion.

During the quarter, Palo Alto continued to acquire new customers as well as increase wallet share with existing customers.

Region wise, revenues from the Americas climbed 18% while that from Europe, the Middle East and Africa, and Asia Pacific jumped 16% and 21%, respectively.

Margins

Additionally, Palo Alto’s non-GAAP gross margin contracted 10 basis points (bps) on a year-over-year basis to 76.6%.

Non-GAAP operating margin contracted 500 bps to 15.8% due to a headwind of about $7 million in net expenses related to the recent acquisition.

Balance Sheet

Palo Alto exited the fiscal first quarter with cash, cash equivalents and short-term investments of approximately $3.3 billion compared with $2.8 billion at the end of the preceding quarter.

The company’s balance sheet does not have any long-term debt.

It generated cash flow from operations of $225.2 million compared with $231.5 million in the previous quarter. Free cash flow came in at $178 million.

Guidance

For the second quarter of fiscal 2020, Palo Alto anticipates revenue growth of 18-19% year over year between $838 million and $848 million. Billings growth is anticipated between 16% and 17%. Non-GAAP earnings per share are estimated in the range of $1.11-$1.13, which includes expenses related to the proposed acquisition of Aporeto.

For fiscal 2020, the company estimates billings to grow in the range of 18-19% year over year. Moreover, it now expects billings growth of its next-generation security business (Prisma and Cortex) at 79-82%. Revenues for the fiscal year are estimated to grow 19-20% year over year. Non-GAAP earnings per share are estimated in the band of $4.9-$5, down from $5-$5.1 predicted earlier to accommodate net expenses related to the Aporeto buyout.

Moreover, management projects a 23% CAGR for total billings and total revenues over the next three years in the firewall as a platform category. The company hopes to achieve $6 billion in total billings and $5 billion in total revenues by fiscal 2022.

Note: The EPS data mentioned in the text of this section differs from the rest of report due to the difference in calculation or consideration of one-time items.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted 122.22% due to these changes.

VGM Scores

Currently, Palo Alto has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Palo Alto has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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