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Palo Alto (PANW) Q1 Earnings Surpass Estimates, Down Y/Y

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Palo Alto Networks (PANW - Free Report) 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.

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

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

Palo Alto Networks, Inc. price-consensus-eps-surprise-chart | Palo Alto Networks, Inc. Quote

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.

Zacks Rank and Stocks to Consider

Palo Alto currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Alteryx, Inc. (AYX - Free Report) , Cirrus Logic, Inc. (CRUS - Free Report) and Fortinet, Inc. (FTNT - Free Report) , each flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Alteryx, Cirrus Logic and Fortinet is currently pegged at 39.85%, 15% and 14%, respectively.

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Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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