A month has gone by since the last earnings report for Palo Alto Networks (PANW - Free Report) . Shares have added about 0.5% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Palo Alto due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Palo Alto Q3 Earnings and Revenues Beat Estimates
Palo Alto Networks reported third-quarter fiscal 2020 non-GAAP earnings of $1.17 per share, which surpassed the Zacks Consensus Estimate by 28.6%. However, the bottom line declined 10.7% year over year.
The company’s revenues of $869.4 million improved 20% year over year. Moreover, the figure beat the Zacks Consensus Estimate of $829 million.
The top line was primarily driven by several deal wins and increasing adoption of the company’s next-generation security platforms, attributable to the rise in remote work environment and need for stronger security. Growing traction in Prisma and Cortex offerings also acted as a tailwind.
However, revenues were affected by the negative impact of sales incentives related to Next-Generation Security products, which continued from the prior fiscal year.
Product revenues grew approximately 1% to $280.9 million.
The company’s subscription and support revenues improved 31% to $588.5 million, driven by a 37% increase in SaaS-based subscription revenues and 24% rise in support revenues. This segment of Palo Alto’s business constituted 68% of total revenues in the fiscal third quarter.
Further, billings improved 24% year over year to $1.02 billion. Deferred revenues rose 28% to $3.4 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 19% while Europe, the Middle East and Africa, and Asia Pacific revenues rose 24% and 15%, respectively.
Additionally, Palo Alto’s gross margin contracted 130 basis points (bps) on a year-over-year basis to 75.2%.
Non-GAAP operating margin contracted 450 bps to 16.4% due to a headwind of about $3 million in net expenses related to the recent acquisition.
Palo Alto exited the fiscal third quarter with cash, cash equivalents and short-term investments of approximately $2.2 billion compared with $3.5 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 $169.9 million compared with $306.9 million in the previous quarter. Free cash flow came in at $83.6 million.
For fourth-quarter fiscal 2020, Palo Alto anticipates revenue growth of 14-15% year over year between $915 million and $925 million. Billings growth is anticipated between 13% and 14%, ($1.19 billion-$1.21 billion).
Non-GAAP earnings per share are estimated in the range of $1.37-$1.40, taking into account approximately $8 million of net expenses related to the acquisition of CloudGenix.
For fiscal 2020, the company estimates billings to grow approximately 18% year over year.
Revenues for the fiscal year are estimated between $3.37 billion and $3.38 billion, suggesting an improvement of 16-17% year over year.
Non-GAAP earnings per share are estimated in the band of $4.78-$4.81.
How Have Estimates Been Moving Since Then?
Estimates revision followed an upward path over the past two months. The consensus estimate has shifted 90.63% due to these changes.
At this time, Palo Alto has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Palo Alto has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.