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Palo Alto (PANW) Down 2.1% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Palo Alto Networks (PANW - Free Report) . Shares have lost about 2.1% in that time frame, underperforming the S&P 500.

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

Palo Alto Networks Q4 Results

Palo Alto Networks reported fourth-quarter fiscal 2018 non-GAAP earnings of $1.28 per share, which improved 39% on a year-over-year basis and surpassed the Zacks Consensus Estimate of $1.17.

Palo Alto’s revenues of $658.1 million jumped 29% year over year, outpacing the Zacks Consensus Estimate of $632 million. For the fiscal year, the company reported total revenues of $2.3 billion, which grew 29% year over year.

The impressive results were mainly driven by a healthy demand environment, product strength and increasing adoption of the company’s next-generation security platforms. Management is optimistic about the continuous spending on security, which is backed by large-scale upgrade in IT infrastructure and transition to cloud.

Quarter Details

Product revenues increased approximately 26% to $267.6 million. The company witnessed a 32% surge in subscription and support revenues to $390.5 million. SaaS-based subscription revenues climbed 38% from the year-ago period. Support revenues increased 25% year over year.

Billings improved 29% year over year to $868.1 million.

Geographically, revenues from the Americas climbed 24% on a year-over-year basis. The figures from Europe, the Middle East and Africa were up 43% while the same from Asia Pacific rose 43%.

In the reported quarter, the company added nearly 3,000 customers, bringing the total count to 54,000. The company’s advancement in cloud security is evident from over 6,000 customers using its VM-Series, Aperture, Evident and GlobalProtect cloud service offerings.

Given the growth in the company’s cloud offerings, the company is gaining more from subscription services. Management notes that the company is benefiting from strong attached services revenues as well as non-attached subscriptions.

With Traps, the company now caters to more than 3,000 customers and protects over 5 million endpoints. Moreover, the company expects to expand its endpoint detection and response (EDR) capabilities with the acquisition of Secdo.

Operating Results

Palo Alto’s non-GAAP gross margin shrunk 110 basis points (bps) on a year-over-year basis to 76.2%. Non-GAAP operating expenses came in at $349.9 million or 53.2% of revenues. This marks a year-over-year improvement of 40 bps backed by increasing leverage in sales and marketing.

Non-GAAP operating margin contracted 70 bps to 23% owing to $13.4 million operating expenses related to acquisitions.

Balance Sheet

Palo Alto exited the quarter under review with cash, cash equivalents and short-term investments of approximately $3.4 billion compared with $1.62 billion at the end of the previous quarter.

Receivables were $467.3 million compared with $361.8 million recorded in the previous quarter. Furthermore, the company’s balance sheet does not have any long-term debt.

It generated cash flow from operations of $277.9 million in the quarter. Free cash flow came in at $252.5 million.

Guidance

For the fiscal first quarter of 2019, Palo Alto anticipates revenues of $625-$635 million, up 25-27% year over year.

Non-GAAP effective tax rate for the current quarter is projected to be approximately 22%. Non-GAAP earnings per share are expected in the range of $1.04-$1.06.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -380% due to these changes.

VGM Scores

Currently, Palo Alto has a strong Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

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

Outlook

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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