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Palo Alto (PANW) Q2 Earnings Beat Estimates, Revenues Miss

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Palo Alto Networks (PANW - Free Report) reported second-quarter fiscal 2020 non-GAAP earnings of $1.19 per share, which surpassed the Zacks Consensus Estimate by 6.25%. However, the bottom line declined 21.2% year over year.

The company’s revenues of $816.7 million improved 15% year over year. However, the figure missed the Zacks Consensus Estimate of $843 million.

The top line was primarily driven by several deal wins and increasing adoption of the company’s next-generation security platforms. Growing traction in Prisma and Cortex offerings also acted as a tailwind.

However, revenues were below the company’s expectations primarily due to the negative impact of sales incentives related to Next-Generation Security products, which continued from the prior fiscal year.

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 9.24% to $246.5 million.

However, the company’s subscription and support revenues improved 29.7% to $570.2 million, driven by a 37% increase in SaaS-based subscription revenues and 20% rise in support revenues. This segment of Palo Alto’s business constituted 70% of total revenues in the fiscal second quarter.

Further, billings improved 17% year over year to $998.9 million. Deferred revenues surged 27% to $3.2 billion.

During the reported quarter, Palo Alto continued to acquire new customers — adding more than 2,500 customers— and increase wallet share with existing customers.

Region wise, revenues from the Americas climbed 15% while Europe, the Middle East and Africa, and Asia Pacific revenues rose 12% and 20%, respectively.

Margins

Additionally, Palo Alto’s non-GAAP gross margin expanded 10 basis points (bps) on a year-over-year basis to 76.4%.

Non-GAAP operating margin contracted 670 bps to 17.9% due to a headwind of about $79 million in net expenses related to the recent acquisition.

Balance Sheet

Palo Alto exited the fiscal second quarter with cash, cash equivalents and short-term investments of approximately $3.5 billion compared with $3.3 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 $306.9 million compared with $225.2 million in the previous quarter. Free cash flow came in at $257.8 million.

Guidance

For third-quarter fiscal 2020, Palo Alto anticipates revenue growth of 15-17% year over year between $835 million and $850 million. Billings growth is anticipated between 19% and 22%, ($980 million-$1 billion).

Non-GAAP earnings per share are estimated in the range of 96-98 cents.

Capital expenditure of approximately $85-$90 million is expected in the third quarter with approximately $50 million allocated for future expansion of Palo Alto’s headquarters in Santa Clara.

For fiscal 2020, the company estimates billings to grow in the range of 17-18% 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 between $3.35 billion and $3.39 billion, suggesting an improvement of 16-17% year over year.

Non-GAAP earnings per share are estimated in the band of $4.55-$4.65.

Zacks Rank & Stocks to Consider

Intuit currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Cirrus Logic, Inc. (CRUS - Free Report) , SYNNEX (SNX - Free Report) and Silicon Motion Technology Corporation (SIMO - Free Report) , all sporting a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Cirrus, SYNNEX and Silicon Motion is currently pegged at 15.27%, 10.37% and 7%, respectively.

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