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Palo Alto Networks (PANW) Q1 Loss Widens; Revenues Miss

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Palo Alto Networks Inc. (PANW - Free Report) reported lower-than-expected first quarter of 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 58 cents. The figure was significantly higher than the Zacks Consensus Estimate of a loss of 27 cents. The company had suffered a loss of 36 cents in the year-ago quarter.

Quarter Details

Though Palo Alto Networks’ revenues of $398.1 million surged 34% year over year, it missed the Zacks Consensus Estimate of $400 million. The year-over-year improvement in revenues was primarily backed by strength in the network security market, a strong product lineup and deal wins.

Product revenues jumped 11% to $163.8 million. The company saw a 57% surge in subscription and support revenues ($234.3 million). SaaS-based subscription revenues climbed 65% from the year-ago period. Support revenues increased 49% year over year.

Geographically, on a year-over-year basis, revenues from the Americas increased 33% and represented 70% of total revenue. Europe, the Middle East and Africa (EMEA) also went up 32%, accounting for 18% of total revenue. Asia-Pacific was up 47% and brought in the balance.

Also, customer wins coupled with expansion of the existing customer base supported quarterly revenues. Moreover, billings jumped 33% year over year to $516.9 million during the quarter.

Palo Alto Networks’ gross margin increased 120 basis points (bps) on a year-over-year basis to 74.6%, primarily backed by growth in both product recurring subscription and support gross margins.

The company reported an adjusted operating loss of $38.7 million, which increased from a loss of $21.8 million suffered a year ago. GAAP operating loss during the quarter came in at $49.9 million compared with a loss of $32 million reported in the year-ago quarter. Higher operating expenses (up approximately 38.7% year over year) also impacted operating results.

The company’s adjusted net loss was $51.9 million, wider than a loss of $31.6 million reported last year. On a GAAP basis, net loss was $61.8 million compared with a loss of $39.9 million reported in the year-ago quarter.

Palo Alto Networks exited the first quarter with cash, cash equivalents and short-term investments of approximately $1.390 billion compared with $1.285 billion in the previous quarter.

Receivables were $346.5 million compared with $348.7 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 $203.3 million during the quarter. Free cash flow came in at $182.4 million during the quarter. During the quarter, the company repurchased 340k shares worth $50 million.


For the second quarter of fiscal 2017, Palo Alto Networks expects revenues in the range of $426 million to $432 million, up 27% to 29% year over year. The Zacks Consensus Estimate is pegged at $438 million. The company expects non-GAAP earnings per share within 61 cents to 63 cents (excluding stock-based compensation expenses).

The company continues to expect fiscal 2017 non-GAAP earnings per share to be in the range of $2.75 to $2.80. Revenues for the same period are expected to grow in the range of 30% to 31%.

PALO ALTO NETWK Price, Consensus and EPS Surprise

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 first quarter. Revenues also missed the Zacks Consensus Estimate. The company also provided a tepid forthcoming revenue guidance.

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

The company is also keen on expanding its cloud exposure. Nevertheless, 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 Seagate Technology plc (STX - Free Report) , sporting a Zacks Rank #1(Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Seagate has a long-term expected earnings per share growth rate of 4.05%.

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