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Palo Alto (PANW) Up on Robust Q1 Earnings & Upbeat '18 View

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Palo Alto Networks Inc. (PANW - Free Report) started fiscal 2018 on a solid note with better-than-expected results in the first quarter. The company’s earnings and revenues surpassed the Zacks Consensus Estimate and also improved year over year.

Strong quarterly results were mainly driven by healthy demand environment, new product launches and increasing adoption of the company’s next-generation security platforms. Buoyed by marvellous first-quarter performance, the company provided impressive guidance for the forthcoming quarter and also raised fiscal 2018 outlook.

Consequently, investors’ were optimistic about the stock’s growth prospect as reflected from the share price movement during the yesterdays’ after-hours trading. The company’s shares gained approximately 7% in late trading session.

So far this year, Palo Alto has outperformed the industry it belongs to. While the stock has been up 14%, the industry gained 20.7%.

 

Let’s discuss the quarter in detail.

Revenues

Palo Alto’s revenues of $505.5 million surged 27% year over year and outpaced the Zacks Consensus Estimate of $489 million. In fact, the top line came above the guided range of $482-$492 million.

The year-over-year increase was primarily driven by customer additions along with new product launches. Additionally, the company stated that the successful execution of its 'land and expand' go-to-market model has helped it in acquiring new clients. Palo Alto also managed to increase its existing customers’ expenditures, which contributed to the overall growth. In the reported quarter, the company added over 2,500 new customers.

Product revenues increased approximately 14% to $186.5 million and surpassed its projected range of $170-$173 million. The company witnessed a 36% surge in subscription and support revenues ($319 million). SaaS-based subscription revenues also climbed 40% from the year-ago period. Support revenues increased 32% year over year.

Billings improved 15% year over year to $596.5 million and came ahead the mid-point of the company’s guidance range of $580-$600 million (mid-point $590 million).

Geographically, revenues from the Americas increased 25% on a year-over-year basis. The figures from Europe, the Middle East and Africa were up 35% while the same from Asia-Pacific rose 25%.

Operating Results

Palo Alto’ gross margin decreased 260 basis points (bps) on a year-over-year basis to 76.8%, mainly due to ongoing traction with the new products that  it had introduced in the year-ago quarter.

Adjusted operating expenses in the fiscal first quarter were $292.4 million, or 57.8% of revenues. This marks a year-over-year improvement of 360 bps backed by ongoing increasing leverage in sales and marketing.

Operating margin improved 100 bps to 19% as benefit from lower operating expenses (as a percentage of revenues) were more than offset by loss from reduced gross margin.

The company’s adjusted net income was $69.8 million or 13.8% of revenues compared with $51.2 million or 12.9% last year. On a per share basis, the company reported non-GAAP earnings of 74 cents marking a year-over-year growth of 34.5%. Quarterly earnings also surpassed the Zacks Consensus Estimate of 68 cents as well as the company’s projected range of 67-69 cents.

Palo Alto Networks, Inc. Price, Consensus and EPS Surprise

Palo Alto Networks, Inc. Price, Consensus and EPS Surprise | Palo Alto Networks, Inc. Quote

Balance Sheet

Palo Alto exited the quarter under review with cash, cash equivalents and short-term investments of approximately $2.3 billion compared with $1.4 billion at the end of fourth-quarter fiscal 2017.

Receivables were $350.8 million compared with $432.1 million in the previous quarter. Furthermore, the company’s balance sheet does not have any long-term debt. It reported cash flow from operations of $274.1 million in the quarter. Free cash flow came in at $241.9 million. In addition, the company repurchased 861,000 shares worth $134.10 million. At quarter-end, the company had approximately $455 million available under its ongoing share repurchase authorization.

Guidance

Palo Alto raised its outlook for fiscal 2018. The company now expects revenues to be in the range of $2.145-$2.185 billion, an improvement of 22-24% year over year compared with $2.125-$2.165 billion, projected earlier. The Zacks Consensus Estimate is pegged at $2.15 billion.

Product revenues are anticipated to come in the range of $755-$770 million, reflecting a year-over-year growth of 6-9% and higher than the previous guidance range of $735-$750 million. Billings are now expected to lie between $2.65 billion and $5.71 billion, which represent a growth of 16-18% from year-ago quarter. The new guidance range is projected higher than the earlier guidance of $2.64-$2.7 billion.

Non-GAAP earnings per share are expected to be in the $3.35-$3.41 band (mid-point $3.38 per share), up from $3.24-$3.34, anticipated earlier. The Zacks Consensus Estimate is pegged at $3.31 per share.

For the fiscal second quarter, Palo Alto anticipates revenues in a range of $518-$528 million, up 23-25% year over year. The Zacks Consensus Estimate is pegged at $520 million. Product revenues are forecasted to in the $185-$188 million range, up 10-11%.  Billings are projected to be between $640 million and $655 million, an increase of 14-17%. Non-GAAP earnings per share are expected to be in the range of 78-80 cents. The Zacks Consensus Estimate is pegged at 77 cents.

Bottom Line

Revenue growth seems to be steady aided by strength across all its geographical regions and business segments. Customer wins along with expansion of the company’s existing customer base are added positives. We believe that its product refreshes and acquisition synergies might boost top-line growth.

Going forward, Palo Alto is keen on expanding cloud exposure. To this end, this Zacks Rank #3 (Hold) company recently expanded ties with VMware, Inc. (VMW - Free Report) . You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Through the new collaboration, Palo Alto Networks will combine its security platform with VMware’s software platform, which provides private cloud-based service to make the cloud-computing environment more secure, simple, flexible, and efficient.

This deal is expected to better equip organizations to handle private cloud technology and control business applications securely. As VMware remains one of the leading companies in the virtualization and cloud computing space, we believe Palo Alto might gain significantly from this collaboration.

Nonetheless, a volatile spending environment and competition from Cisco Systems, Inc. (CSCO - Free Report) and Check Point Software Technologies Ltd. (CHKP - Free Report) remain concerns.

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