Palo Alto Networks, Inc. (PANW) on Q1 2024 Results - Earnings Call Transcript

Walter Pritchard: Good day, everyone, and welcome to Palo Alto Networks' Fiscal First Quarter 2024 Earnings Conference Call. I am Walter Pritchard, Senior Vice President of Investor Relations and Corporate Development. Please note that this call is being recorded today, Wednesday, November 15, 2023 at 1:30 p.m. Pacific Time. With me on today's call to discuss first quarter results are Nikesh Arora, our Chairman and Chief Executive Officer; and Dipak Golechha, our Chief Financial Officer. Following our prepared remarks, Lee Klarich, our Chief Product Officer, will join us for the question-and-answer portion. You can find the press release and other information to supplement today's discussion on our website at investors.paloaltonetworks.com. While there, please click on the link for events and presentations to find the Q1 2024 earnings presentation and supplemental information. During the course of today's call, we will make forward-looking statements and projections regarding the company's business operations and financial performance. These statements made today are subject to a number of risks and uncertainties that could cause our actual results to differ from these forward-looking statements. Please review our press release and recent SEC filings for a description of these risks and uncertainties. We assume no obligation to update any forward-looking statements made in the presentations today. We will also refer to non-GAAP financial measures. These measures should not be considered as substitute for financial measures prepared in accordance with GAAP. The most directly comparable GAAP financial metrics and reconciliations are in the press release and the appendix of the investor presentation. Unless specifically noted otherwise, all results and comparisons are on a fiscal year-over-year basis. We also note that management is participating in the UBS Conference on November 29. I will now turn the call over to Nikesh. Nikesh Arora: Thank you, Walter, very good afternoon, everyone, and thank you for joining us today for our earnings call. Q1 was the first quarter of our three-year plan we presented in August. If I were to summarize the quarter I would say the following. We continue to execute amazingly well in what is a volatile environment. On the geopolitical front, we've been contending with what's happening in Israel and Ukraine. On the hardware or product front, as you see, there has been normalization in the industry, it's something we've been indicating for a while. Backlogs is being shipped, supply chain issues are behind us and product growth is normalizing in the industry, we continue to seize normal strength as we indicated in prior quarters in that category. On the macroeconomic front, business practices continue to adapt and adjust to a new normal with higher interest rates for longer. Internally, on the product side, we've had one of the strongest start to our fiscal year. In addition to various recognitions, we have delivered strong innovation across all three platforms. We launched an AI-enabled Cloud Manager and Network Security to continue our consolidation platformization efforts towards Zero Trust. In SASE, we announced our intent to deliver enterprise browsers, the Talon acquisition, which will solve one of the critical issues that more access, which is not addressed today by any SASE vendor. We released the industry's first integrated UI for Code to Cloud and Prisma Cloud and announced the acquisition of Dig Security, double-down on data security for Generative AI and Prisma Cloud. Last but not the least, in Cortex, we launched XSIAM 2.0 to bring your own AI. On-the-go to-market side, Q1 is seasonally a slower start as we kick off the new year, but the team delivered superior revenue and profitability and we had our highest cash collection quarter in our history. We continued to see steady execution - excuse me, in our firewall cloud and endpoint businesses and SASE, we continue to position ourselves in larger and more strategic deals, and XSIAM while in it's early days, continues to garner tremendous interest, giving us more comfort around our long-term intentions. So in summary, a strong start in Q1 towards our three-year journey, early days, but confidence is fired. Let's dig in the details. Our Q1 revenue grew 20% and our billings grew 16%, while our RPO growth of 26% exceeded both of these and was driven by our next-generation security capabilities. I would like you to pay particular attention to RPO versus billings, Dipak will talk about the difference at plan and explain why the street might be confused with our future billings guidance. Our Q1 non-GAAP operating margins expanded by 760 basis points, driving 1.38 in non-GAAP earnings per share and we generated record $1.5 billion adjusted free cash flow in Q1. If you look at what's going on from an overall cybersecurity perspective, we have never seen as much adversarial and consistent activity at scale as we have seen in the first quarter. Unfortunately, we don't expect this to abate anytime soon. As a consequence of this increased activity and in recognition of our customer's commitment to us, this week we announced the Unit 42 Rapid Incident Response Retainer at no cost to all of our strategic customers, and are providing additional support during this escalating threat landscape. Ransomware attacks are increasing in frequency and severity, the ransom amounts being paid are also increasing. Bad actors are doing damage in a much shorter amount of time. As an example, in the recent engagement of our Unit 42 team, we saw an instance where bad actors extracted 2.4 terabytes of data in just 14 hours. There is also some evidence that the adversaries are beginning to leverage Generative AI as a tool to make attacks more sophisticated. Not just that, based on what we're seeing in Unit 42, most attacks are not happening on the back of vulnerabilities in widely used software and APIs such as a widely exploited move it file transfer software. Unfortunately, these bad actors remain elusive with no apparent significant increase in convictions and high-profile attacks, and therefore not surprisingly this malicious activity continues. At the same time, U.S. publicly listed companies in the Board are confronted with new SEC disclosure requirements that are on prompt public reporting a material cybersecurity incident, the enhanced oversight responsibility that comes with them. This result is a continued focus across organizations and understanding security posture, cybersecurity risks, and how to mitigate this risk effectively. This increasingly involves not only the CISO, but the entire IT organization, legal, finance, and the CEO and the full Board of Directors. This pace of malicious activity and the Board-level focus on cyber security risk is fueling a strong demand environment. Customers have often have multiple strategic priorities in cyber security and our broad portfolio enables us to align with these priorities. In Q1, the cost of money remained a constant discussion and customers' significant focus on this topic is becoming the new normal. The way it manifests itself in our business is that there's always a payment in duration discussions in final negotiations. Given our strong balance sheet, we can use a mix of strategies to navigate the environment. This includes annual billing plans, financing through PANFS, and partner financing. Whilst this does not impact our business demand or the impact to annual revenue or annual metrics, it does create variability on total billings more than before depending on financing used or the duration of contracts. I'm not concerned about the demand for cyber security, for this quarter and upcoming quarters, though my concern about our ability to execute, the billings variability is a pure consequence of the payment conversation that we're having with our customers and this is validated by the fact that we continue to see strong RPO and low churn suggesting this is a cosmetic impact to our business. We continue to see strong interest across our next-generation security portfolio, and we're making progress on our platformization journey. I'll highlight a few deals to talk about the diversity of opportunity, cross-platform buys, as well as the geographical distribution of our deals. For example, the federal government agency signed a $25 million expansion transactions including adding Cortex XDR and Prisma Access in highly competitive situations, expanding the network security footprint. This customer has now spent over $100 million for its lifetime across SASE platform. A large global SaaS provider signed an $18 million Prisma Cloud transaction to consumer modules across the portfolio. The customer is already a customer for our network security and Cortex platforms. A large education organization expanded its relationship with us in the first quarter in a $15 million transaction adding XSIAM, Prisma Cloud, and an expansion of its network security footprint. And lastly, a nation-state signed a $28 million deal that is a first-of-its-kind, standardizing on both SASE and XSIAM. This is a long sales cycle and represents our systematic approach to platformization. Storing these deals have been playing out across our large customers, as of Q1, 56% of the Global 2000 has transacted with us across Startup, Prisma, and Cortex. This continued focus on customer cyber transformation has fueled a 53% growth in NGS ARR we reported this quarter as we broke through the $3 billion milestone. Another exciting news, as of Q1, recurring revenue across Palo Alto is 83% of our total revenue from 77% a year ago. Let's turn on to updates from our three platforms that are the engine driving our success. First, in network security, we continue to drive innovation across our portfolio and see momentum as customers drive towards Zero Trust architecture. This month we unveiled PAN-OS 11.1 or Cosmos and Strata Cloud Manager, unifying the management of all of our three form factors and all security services in a single pane of glass, and also leveraging AI to analyze security policies, reduced miss configuration that predict and prevent disruptions. Customers who have invested in our platform by deploying all three form factors continue to grow rapidly, up 34%. Of our top 100 network security customers, 60% have purchased all three form factors, up from 63% a year ago. On average, these platform customers spend more than 15 times of the rest of our network security customers spend. The story is similar in SASE. Having just seen our innovations gain multiple industry recognition in SASE in the second half of our fiscal year, we've continued to invest to build on our leadership position. We're seeing strong momentum in SASE with ARR growth of approximately 60% in Q1. We also saw a 35% of our 5 million or greater network security transaction includes SASE, up from less than 10% a year ago. Today, it was the first day of our event called SASE Converge, where we unveil several enhancements. We were able to SASE to access applications with performance faster than the Internet. We added visibility and control over interconnect SaaS applications, and enable safe access to Gen-AI tools and ensure data isn't inadvertently leaked. Lastly, we added Remote Browser isolation technology for an extra layer of security. M&A has always been an important part of our strategy. Last week, we announced our intent to acquire Talon Cyber Security. We see an opportunity to expand the addressable market for SASE and solve an important customer problem. As many as 36% of workers classify themselves as independent workers, who often use unmanaged devices for work. In addition, employees increasingly use personal devices for accessing business applications. To enable access of these devices, security teams have an impossible trade-off. There are forced to either ignore security entirely in favor of flexibility and user experience or trade-off cumbersome technologies like VDI. Talon is a pioneer in the emerging enterprise browser category and when combined with Prisma SASE after closing, we will enable users to securely access business applications from any device, including mobile devices and non-corporate devices for the seamless user experience. We intend to include this capability with Prisma Access after closing and customers will be able to extend the same best-in-class security to unmanaged devices. Moving on to Prisma Cloud. We continue to see a strong endorsement of our integrated platform strategy. This traction is evident in the strong growth of our multi-module customers. We have seen particular success here with modules released over the last two and a half years. There has been a consistent pattern of seeing 100 plus customers for new modules in the first full quarter of launch and rapid growth after that, as the benefits of these new modules are broadly understood. This enthusiastic adoption has driven our strong conviction in adding key new modules, including some through acquisitions. our IaC scanning capability which came through the Bridgecrew acquisitions and CICD Security, which came through Cider are two such examples. This new module traction is helping to accelerate Prisma Cloud new business ACV in the last quarter. In Q1, we also unveiled a major new Prisma Cloud released Darwin. Darwin further differentiates our unique position across code cloud infrastructure and cloud runtime, Darwin enables a view across all elements of cloud applications including cloud services, infrastructure assets, compute workloads, API endpoints data, and code, Darwin can also help customers understand risks with deep context and overlay active attack attempts in near real-time. Our full coverage from code to cloud to enables fixes to be applied immediately versus the months most vulnerabilities stake to be passed. About two weeks ago, we announced our intention to acquire Dig Security, which will bring an award-winning Data Security posture management capability Prisma Cloud. With almost 70% of organizations having data stored in the public cloud, the sprawl of new cloud data services and the adoption of generative AI, we see an increased need to identify sensitive data, effectively manage user access, and implement robust security measures to prevent unauthorized internal and external access to this data stored in the cloud. After the close of proposed acquisition. Dig's capabilities will be integrated into Prisma Cloud platform to provide near real-time data protection from code to cloud. Moving on to Cortex, we continue to invest across our product portfolio and expand our customer count, as we see continued adoption of XDR, XSOAR, Xpanse, and XSIAM. In Q1, we had several industry recognitions of our innovation, Cortex XDR is the only product in the industry to achieve 100% protection and detection in the Round 5 MITRE evaluation. Additionally, XSOAR, Xpanse, and XSIAM are all name leaders by third-parties this quarter. We grew our Cortex active customer count by 25% to over 5,300 customers. Attraction overall in Cortex is essential, as it allows us to sell our transformational offering XSIAM. XSIAM has had a very fast start since we released the product just over a year ago. After a strong FY '23, XSIAM's first year release which included over $200 million in bookings, we followed up with a strong Q1. You saw our first expansion purchase of XSIAM, an eight-figure deal, and in Q1, our largest XSIAM customer to date was deployed with over 300,000 endpoints. We're seeing XSIAM transform customer security operations and significantly improve their security outcomes. This includes significant reductions in the meantime to detect and resolve security incidents. On the back of potential customers, hearing about early XSIAM success, our pipeline for XSIAM is over $1 billion of which $500 million was created just in this past quarter. As I began my remarks, Q1 was the first quarter of us delivering on the three-year plan we presented in August. We're driving profitable growth, investing in innovation, next-generation security, and the industry's largest dedicated security go-to-market organization, at the same time, leveraging the scale of Palo Alto Networks. Demand for cyber security is strong given the backdrop of attacks, the ever increasing focus and scrutiny around cyber risk, execution continues to be paramount given the macro conditions and we will continue to adapt and respond to changes in the environment. We will manage for long-term growth, operating margin, and free cash flow, and ensure we continue to transform the business and build revenue predictably. You will also see this through RPO and most importantly our current RPO. Our long-term forecast thesis remains intact whilst we expect short-term variability in billings, we don't expect this to have a meaningful impact on our ability to deliver our three-year targets. With that, I will turn it over Dipak. Dipak Golechha: Thank you, Nikesh, and good afternoon, everyone. I'll cover the specifics of our Q1 results, additional details on drivers behind the results and our Q2 and fiscal year 2024 guidance. For Q1, revenue was $1.88 billion and grew 20%. Product revenue grew 3%, total service revenue grew 25%, with subscription revenue of $988 million, growing 29%, and support revenue of $549 million, growing 17%. We saw consistent revenue contribution across all theaters, Americas grew 20%, EMEA was up 19%, and JPAC grew 23%. The strength of our next-generation capabilities continues to drive our results with NGS ARR exceeding $3 billion for the first time and growing 53%. We saw strong contributions across the portfolio in Q1. We delivered total billings of $2.02 billion, up 16%, total deferred revenue in Q1 was $9.4 billion, an increase of 32%. Remaining performance obligation or RPO was $10.4 billion, increasing 26%, with current RPO just under half of our IPO. As Nikesh mentioned, we saw the rising cost of money have an important and incremental impact on customer behavior in Q1. We're responding to this in the ways we have discussed previously, including using annual billing plans, financing through PANFS, and partner financing. In Q1, this had a negative impact on our billings, although as you can see, we saw strength in NGS ARR and revenue. Our non-GAAP earnings per share was significantly ahead of our guidance, growing 66%. This was driven primarily by the significant increase in our non-GAAP operating margins, which expanded 760 basis points year-over-year. We continue to benefit from the scale inherent in our business, especially as some of our next-generation security offerings scale. We again delivered strong cash flow in Q1 with trailing 12-month adjusted free cash flow of $3 billion, achieving trailing 12-month free cash flow margins of 41%. Moving beyond the top line, gross margin for Q1 of 78% increased 370 basis points year-over-year. We again saw year-over-year improvements in product margins with the Normalization of the supply chain environment. Service gross margin improved to 78% as our new offerings continue to gain scale. Our operating margin expanded by 760 basis points in Q1 as we saw higher gross margins and efficiencies across our three operating expense lines. We are pleased with our operating efficiency progress against our medium-term targets. We continue to make significant investments to support our top-line growth expectations, including investments in -product and engineering, building sales capability, and supporting our ecosystems in our go-to-market organization. Turning to the balance sheet and cash flow statements. We ended Q1 with cash equivalents and investments of $6.9 billion. Q1 cash flow from operations was $1.526 billion with the total adjusted free cash flow of $1.489 billion this quarter. As is typical for our Q1, this cash flow performance was primarily driven by strong collections in the prior quarter based on the strength of our Q4 bookings - sorry, collections in the quarter but based on the strength of our Q4 bookings. Over the last several weeks, we announced that we have entered into definitive agreements to acquire two companies. On October 31, we announced our intent to acquire Dig Security Solutions for approximately $232 million in cash, excluding the value of replacement equity awards. On November 6, we announced our intent to acquire Talon Cyber Security for approximately $435 million, excluding value of replacement equity awards and an inclusive of cash on Talon's balance sheet at closing. We expect both transactions will close in our second quarter of fiscal year '24. During Q1, we repurchased approximately 300,000 shares on the open market at an average price of approximately $227 per share for a total consideration of $67 million. As a reminder, our share repurchase program is opportunistic and we're committed to returning cash to shareholders over the medium-term. Stock-based compensation expense declined by 250 basis points as a percent of revenue year-over-year. As expected, stock-based compensation ticked up slightly as a percent of revenue quarter-over-quarter with the issuance of a portion of our fiscal year '24 grounds. On a year-over-year basis, we continue to manage our SBC down as a percent of revenue in-line with our long-term plans. Before turning to guidance, I want to frame some of the impacts that we're seeing in our billings. As Nikesh noted, we see strong demand in the market and continue to see customers make a technical selection of offerings across our portfolio. From here, we see more customers asking for deferred payment terms either with annual billings, financing through PANFS, or pursuing external financing. Some customers are looking for additional discounts upfront payments as they grapple with the cost of money. Our strong financial position which includes $7 billion in cash, cash equivalents, and investments, combined with our many options in dealing with this dynamic, it gives us significant flexibility. This can impact our billings trends quarter-to-quarter and we are reducing our billings guidance to account for this through fiscal year 2024. RPO and cRPO have more of a direct impact on future revenue this quarter with duration towards the low-end of the range we've seen over the last several quarters, we saw strong trends in cRPO. As we see low customer churn, we're confident that independent and specific billing terms and contract lengths, we can continue to grow RPO at levels that support our forward revenue growth ambitions. Now moving on to our guidance for Q2 In the year. For the second quarter of 2024, we expect billings to be in the range of $2.335 billion to $2.385 billion, an increase of 15% to 18%. We expect revenue to be in the range of $1.955 billion to $1.985 billion, an increase of 18% to 20%. We expect non-GAAP EPS to be in the range of $1.29 to $1.31 per share, an increase of 23% to 25%. For the fiscal year 2024., we expect billings to be in the range of $10.7 billion to $10.8 billion, an increase of 16% to 17%. We expect NGS ARR to be in the range of $3.95 billion to $4 billion, an increase of 34% to 35%. We expect revenue to be in the range of $8.15 billion to $8.2 billion, an increase of 18% to 19%. We expect our fiscal year '24 operating margins to be in the range of 26% to 26.5%, up 190 basis points to 240 basis points versus fiscal year '23. We expect non-GAAP EPS to be in the range of $5.40 to $5.53, an increase of 22% to 25%. And we expect adjusted free cash flow margin to be 37% to 38%. Additionally, please consider the following modeling points. We expect our non-GAAP tax rate to remain at 22% for the second quarter and fiscal year 2024, subject to the outcome of future tax legislation. We also expect cash taxes in the range of $230 million to $280 million. For the second quarter, we expect net interest and other income of $55 million to $60 million. We expect second quarter diluted shares outstanding of 339 million shares to 342 million shares. We expect fiscal year 2024 diluted shares outstanding of 338 million shares to 343 million shares. And we expect fiscal year 2024 capital expenditures of $175 million to $185 million and $40 million to $45 million in Q2. With that, I'll pass it back to Walter for the Q&A portion of the call. A - Walter Pritchard: Thank you, Dipak. To provide as broad participation as possible, please limit yourself to one question. Our first question will be from Saket Kalia with Barclays followed up by Hamza Fodderwala from Morgan Stanley, go ahead, Saket. Saket Kalia: Okay, great. Hi, guys, thanks for taking my questions here. Dipak, maybe the question is for you. Appreciate the revised billings guide in this macro backdrop and to your point the higher cost of money. I'm curious how you maybe thought about factors like pipeline, like close rates, and very importantly billing things duration for the rest of the year as we just try to get comfortable with how much that billings guide has maybe been derisked? Nikesh Arora: Saket, thanks for your question. I'm going to take this one because it's more about demand function. I think repetition doesn't spoil the prayer, so I will repeat. The billings difference is not a change in demand for us or not a function of our pipeline. The billings change is a consequence of negotiations with customers and the customer says, you want me to pay you for three years upfront, you got to give me a bigger discount. You want to pay me, want me to do a three-year deal, you got to go finance it in benefits. I can do that, but I can say just pay me on an annual basis, I'm okay. I'll collect my money every year. If I go in that direction my billings changes. It does not change anything in my pipeline, in my close rates or in my demand function. Those are my point. So we're just giving ourselves flexibility because this quarter we saw a lot more negotiations around those topics, we just don't want to be held hostage to those kind of negotiations where we have to go finance deals to get DCV in there. Billings is a DCV metric. DCV is important if I am concerned about churn. I have very low churn across many product categories. So I'm very happy to collect my money on an annualized basis and that's what's needed to make sure that I don't get pressure on financing, I don't get pressure on having to give larger discounts. I retain flexibility. I do a lot of TCV deals. I do a lot of financing. This allows me the flexibility. So all I want to make sure is, there is no change in the demand function in the market. There is no change in our revenue forecasts. Saket Kalia: Got it, very helpful. Thank you. Walter Pritchard: Thanks, Saket. Next up is going to be Hamza Fodderwala from Morgan Stanley. Followed by Brian Essex from JPMorgan. Hamza go ahead. Hamza Fodderwala: Hi, good evening. Thank you for taking my question. I just wanted to start by offering my thoughts and condolences to all your employees in Israel. You know, it's kind of similar vein to Saket's question, I mean, 16% billings growth is certainly not bad in the context of many of your peers growing single-digits, if at all. I'm just curious because your guidance is still assuming that growth will sustain for the full year. So what's giving you that confidence given the cost of money, given the hardware digestion that you can sustain that the high-teens billings growth given what you're seeing in the market? Nikesh Arora: So, Hamza, as, you know, Saket mentioned about pipeline, we have visibility to our pipeline, so we know there is business out there. We have not seen customers walk away from deals in Q1. It's not like people don't want to do business. We've been very consistent on hardware and hardware expectations for the last 12 months. We are regaining our consistent and expectations on hardware. We don't expect any lumpy movements up or down. We expect this is going to steadily in the 0% to 5% range as we've always been talking about. So I think from that perspective, I think to use Saket's word, we feel reasonably derisked on what's out there in the future. Q1 is the first quarter, allows us, you know, we have lots of pipeline, we have visibility to. I think I want to reiterate again, we are retaining flexibility. Can I go financing? Of course, I can. Can I go finance a three-year deal through PANFS or $7 billion of cash? I can, which will have a cosmetic impact of giving you better billings. But what I don't want to do is finance bad deals. This allows me the flexibility of not having to finance them nothing changes, I still get my revenue for the year. I still get my CRPO. I still get my annual billings. I just don't get year two and year three billings, but changes my total billings forecast for the year. It's cosmetic, it's mathematics, but it's interesting to see how the street interprets it. Hamza Fodderwala: Thank you. Walter Pritchard: Thank you, Hamza. Next up we have Brian Essex from JPMorgan, followed by Gabriela Borges from Goldman Sachs. Brian, go ahead, please. You're muted, Brian. Brian Essex: Thanks, Walter. Yes, thank you for taking the question. Nikesh, I was maybe wondering if I could dig in on M&A a little bit, pretty meaningful volume of M&A from a dollar spent perspective this quarter after not having done some for a while, how would you describe the overall environment and how would you, I guess message to investors the level of M&A that you might do over the next, I don't know, couple of years? Is this more of a one-off IP and aqua hire that you saw a great opportunity to pick up or might there be something meaningful in terms of longer-term trend or even dollars put through your sales pipeline as you scale this over your platform or scale both of them over your platform? Nikesh Arora: So, Brian, thanks for the question. Look, we have not changed our point-of-view. We have always maintained that we're going to sustain M&A at a level close to a billion here. So we haven't done one for a while or two. And if you see, if you split the two, we did a cloud security one, and we've been pretty consistent in that rough range in the $150 million to $250 million range in terms of adding cloud capability as we see the market evolves, so I think that's kind of consistent, where we are. We saw a unique opportunity, as I mentioned, 36% of workers are independent workers, they don't get SASE remote access solution. We saw more and more discussion in the market, where RBI was not covering every use-case and managed devices were not, all your mobile phones don't have management for security. Last few hacks that happened to mobile devices. So from that perspective customers asking, what is my solution, and now, what we didn't want to do is to have to deploy yet another independent solution, which is just disconnected from our overall SASE capability. And like we do, we will always pay attention to the market. We figured Talon had the best tech in the space and they were just about to go race to go to the go-to-market sort of implosion or explosion with other companies. So - and from that perspective, we saw an opportunity and we think it's a great fit. Actually, it makes us the most comprehensive SASE solution. We are going to integrate them deeply into our SASE solution. Our customers will be able to use Enterprise Browser RBI or our Prisma Access client, so it's - I don't want to call it a one-off, one-off sounds it will never happen again, but I think it's just happens to be the time where we did two at the same time, other than to different platforms, two different teams are integrating them, so it's not overhead to the organization. But we're going to keep our cautious approach towards meeting what we can digest. So you shouldn't expect anything that is off the regular pattern we've sort of shown it last time. Brian Essex: Got it, helpful. Thank you. Walter Pritchard: Great, thank you, Brian. Next question is going to be from Gabriela Borges of Goldman Sachs, with Roger Boyd at UBS on-deck. Go ahead, Gabriela. Gabriela Borges: Good afternoon. Thank you. I want to ask about the two dynamics that you're talking about in your business, the firewall cycle on the one hand and cost of money impacting billings duration on the other. How do you think about the potential that these two dynamics are actually connected, meaning product mix is also having an impact on billings duration and how do you think about the risk that cost of money dynamics get worse before they get better, thereby impacting the full-year guide of billings, again as we go through the year? Thank you. Nikesh Arora: So thank you, Gabriela. Look, the firewall business is actually is a one-shot business. You sell a piece of hardware and you get paid for it. It is not a ratable business, right? The ratability comes from our subscription and services part. It's usually there we have to look at it from an NGL perspective. Our duration this quarter was on the lower-end of duration. It reduced, went down, because we took more annual billing deals or we took shorter-duration contracts with our customers. So from that perspective, I think we feel comfortable given the visibility to our pipeline for the rest of the year that we have flexibility for ourselves on billing. You know, I think we're going to keep having this debate, where you keep calling it guiding down on billings, I'm going to keep calling it flexibility, you want to keep calling it guideline downward billing, so I'll keep telling it doesn't change my numbers. So we just agree that we're going to be saying that because I don't - nothing has changed the prospects of Palo Alto of three months ago. Gabriela Borges: Thank you. Walter Pritchard: All right. Thanks for your question, Gabriela. Dipak Golechha: May just to build on that, Walter, I'd say like just recognize that we're also maintaining our cash guidance, which would be the other area where we may get concerned, we're not concerned on that front. Walter Pritchard: Great, thanks, Gabriela there. Next question is from Roger Boyd at UBS, followed by Brad Zelnick at Deutsche Bank. Go ahead, Roger. Roger Boyd: Great, thanks for taking the question. Just looking at the XSIAM pipeline, that $1 billion dollars is a pretty impressive mark, just any color you can provide on the size of the length of those deals as we think about it from an ARR perspective? I know you've talked about the 3x ARR upsell or expansion potential, but just any color on the size of those deals and how we should think about that kind of flowing into opportunities over the course of fiscal '24. Nikesh Arora: Yes, I'm trying to make sure Lee gets to ask some questions otherwise he doesn't want to show up next time. Yes, exactly. Lee Klarich: Yes, look, we've obviously, over the last few quarters we have been talking about XSIAM, and the interest we're seeing from customers is very strong and it's been the fastest sort of growth of a new product that we've ever seen. I think it speaks to a couple of things. One is just the need in the market from customers to go through the SOC transformation. Nikesh, talked about the speed of attacks, increasing relative to disclosure requirements and things like that, and obviously the number of attacks going up as well. That's driving the technology needed to have a different solution, a better solution, one driven by AI and automation. That's exactly how XSIAM was built. And that is what was feeling the interest. The second part of this is, with XSIAM, we're able to replace several of the customer's legacy point solutions in the SOC. So we are consolidating multiple independent piece parts with a single XSIAM deployment. And third, with these deployments of XSIAM, this is a significant investment the customer is making in us [technical difficulty] investments are three-year investments and in some cases even longer because they're standardizing their stock on a new platform. They want that long-term runway with us. This is not a short-term decision they're making. So all of those factors are what are fueling the strong pipeline that we shared in the early customer success we're having with the saying. Walter Pritchard: Great, thank you for the question. Next question from Brad Zelnick at Deutsche Bank, followed by Fatima Boolani of Citi. Go ahead, Brad. Brad Zelnick: Great, thanks very much for taking the question. I wanted to ask about your new hardware lineup and the release of PANOS 11.1. I noticed some of the newer features like quantum security and advanced wildfire patient zero prevention. I just wanted to get your take on the extent to which the new platform can catalyze demand as customers try to look to take advantage of the innovation and maybe if you could, you know, help us compare contrast versus prior product cycles. Thanks. Nikesh Arora: Yes, thank you. I always get excited about the Next-Gen firewall releases of course. Look, what we announced was a new high-end chassis, so one that scales beyond a terabit per second. And so there is, obviously, this is the largest highest performance networks out there, service provider and in some cases large enterprise environments, at the same ruggedized platforms, platforms that can go to plus 50 degree Celsius, minus 40 degrees Celsius, because there are harsh environments out there that also need to be protected, right? So, this is expanding the use cases that we can support with our hardware next-gen firewalls. The other pieces you mentioned are also equally exciting from a software perspective. You know, Quantum is still likely a ways off, but there's a lot of companies that are starting to prepare for that, thinking about what happens in post-Quantum cryptography in the advent of potential computers and what that will mean, and so this is the start of a set of Quantum security capabilities that we're launching for our customers. You mentioned, advanced WildFire, we added proxy capabilities. We added ADEM capabilities, so there's a lot of innovation that's in this release. Generally in what this drives is customers to look to be on our latest Gen IV or newer hardware architectures, which over time means hardware refreshes and upgrades. And so all of that is good and helps our customers get to the most secure state. Brad Zelnick: Well, thank you. Walter Pritchard: Great, thank you for that. Next question is Fatima Boolani at Citibank, followed by Joel Fishbein from Truist Securities. Go ahead, Fatima. Fatima Boolani: Good afternoon, and thank you for taking my questions. Either for Nikesh or Dipak, some of your pipeline commentary is what I wanted to unpack. As you think about the composition of NGS ARR for the remainder of the year and bearing in mind some of your product pillars are, you know, I'm not going to say maturity, but certainly they are more penetrated than others, so I wanted to get a sense of how you're thinking about contribution by pillars? Your ARR expectations for the year and to the extent, anything there has changed and I recognize that you love all your product pillars equally, but any distinguishable - Nikesh Arora: It's very kind of you to remember prior answers, but I'll try to give - I tried to give a preview of that in our prepared remarks where I said we continue to see steady execution and hardware endpoint and cloud, so they're following expected trajectory. We see the pipeline and I said the excitement and upside is coming out of SASE and XSIAM. And we see that there are large SASE network transformation deals out there, which these things have anywhere from six months to 12-month closing cycles. So we would have to know what's in the pipe for the rest of the year. Do you have some sense of comfort? We also said we grew that business 60% in the first quarter on SASE. We already - we cannot gush enough about XSIAM as you know so far, so the billion-dollar pipeline, we're hoping will close in that six to nine months. Interestingly, XSIAM pipeline closes faster than SASE pipeline deals, because SASE is often very competitive. There are POCs involved. There are future comparisons between us and one or two other companies. In the case of XSIAM, you're really competing with the incumbent. Fatima Boolani: Helpful. Thank you. Walter Pritchard: Great, thank you, Fatima. Next question is from Joel Fishbein at Truist, followed by Joe Gallo at Jefferies. Joel, go ahead with your question. Joel Fishbein: Thanks for - thanks for taking the question. This is for Nikesh and Lee. Nikesh, you called out the recent ransomware attacks and also the SEC new requirements. I'm curious, number one, is there - is that helping to drive business and what products essentially would that be driving Palo Alto and why you're sort of in a unique position to sort of address some of these issues? Nikesh Arora: Yes, so that's interesting, Joel. Let me connect that to something we announced yesterday. So first of all, I said, the activity is at an all-time high. Every day you read about ransomware attacks, now the SEC regulations are actually not kicked in yet. I think they kick in December. But you're seeing some companies go out there and start to do sort of self-report in anticipation because they're all petrified, of course, when you get attacked. So I think you're going to see more and more disclosure and we've be trying to parse, is it more activity or more disclosure? That's a good question. I think it's more activity. We've seen more and more activity. Our team does a research. We've had the maximum number of inbounds to our Incident Response Team in the last month than we had before. So clearly, anecdotally also, it's sort of come true that this is what's happening. Now, typically, the anatomy of an attack for us from our vantage point is that when we get engaged in incident response, typically, we go and we deploy a production sort of suite, where we go in and put XDR everywhere and we'll go run a bunch of analytics to make sure we understand what happened and where there is sort of the - that access may be still be resident in a customer's infrastructure. Now, typically when you do that and we leave, they don't want us to leave with our stuff, they want us to be one step back in case the guys come back. So from that perspective, you know. The incident becomes a need unfortunately because of these act, but it because the lead for us and that creates a whole bunch of product conversation around whether we're going to deploy endpoints, whether we need to upgrade their firewalls or whether they need to go down a cybersecurity transformation. I'll tell you nine times out of 10, every one of those customers ends up in the cyber security transformation because they discover that they have a lot of stuff that they should have upgraded or changed in that process. So that's kind of what happens. Those are the products, which typically end-up those customers. Lee Klarich: Maybe I'll just add one point, Nikesh described the multi-extortion ransomware attacks being on the rise, 37% increase, the key to that is, a lot of companies sort of become used to, call it, normal encryption-only ransomware attacks. So they invested in backups so that when that happens, they backup from a green backup and they're back and operational. These multi-extortion attacks actually steal data and then extort the target, and so this can't simply be dealt with backups and this is driving a need for a better and greater investment in prevention of the attacks and not just the recovery cycle. So that connects the sophistication to the investment needed as well. Joel Fishbein: Thank you. Walter Pritchard: Great. Next question from Joe Gallo at Jefferies, followed by Gray Powell of BTIG. Joe, go ahead. Joe Gallo: Hi, guys, thanks for the question. You've made several acquisitions further bolstering Cloud, congrats on that 12th module. Nikesh, when do you think the platform message truly cement itself in that market as it currently feels like the Wild West and then has the pricing environment stabilized there at all? Nikesh Arora: Great questions. Yes, the pricing has stabilized, you know, we saw tremendous pricing pressure in the last fiscal year with the emergence of few competitors who are willing to do whatever it takes to try and dislodge our platforms or solutions. So I think it's fair to say that pricing is beginning to stabilize. I think what's interesting is, we're seeing customers come the second time around and start looking the platform. I think the first wave so far and there's still part of the customers are still in that wave. First wave is still very module driven. I want to see SPM solution, I want to see an app solution and I want to look at SCA. So you'll find that there are different people in the customer's organization who are responsible for different pieces of the cloud security pie and end up trying to look for best of breeze, kind of like replicating what happened in enterprise security. But as soon as they start putting big deployments of scale of any kind, they have to start having a platform. I just told you, we had an $18 million deal for a platform for a large SaaS company. Now, we don't have every large SaaS company which is deploying a platform - sorry, every large SaaS company needs a platform because they have eight different tools that they're not able to stitch together. So I think it's going to be sort of a --- sort of a recursive journey where we'll show that we'll land with some customers - and some customers, other people will land with their modules, but eventually, each of those customers has to go through a platform conversation. So we're sort of focused on our platform story. We're focused on making sure we make our platform more and more robust. I was at a CIO event before this morning. There are 30 of them there. And the first question was, it was interesting, you guys bought Dig or did a security posture management, how is that integrated into the following five things we have running and like, well, the following five things will talk to each other for you. Joel Fishbein: Thanks. Walter Pritchard: All right. Thanks for the question, Joe. Next question from Gray Powell at BTIG, followed by Ben Bollin at Cleveland Research. Gray, go ahead. Gray Powell: Okay, great. Thank you very much. Yes. So maybe a broader question. It's pretty clear that the firewall space or that there's headwinds across, you know, the firewall appliance space this year, it's impacting everyone. But you're still guiding Q2 billings to about 17% growth. Your closest competitor is guiding to minus 5%. Historically, you've been fairly correlated with them. So I know you can't speak to their business, but can you talk about what's different on your side? Why you're more insulated? Is it more the NGS portfolio? Is it data center exposure? Is it share gains? Is there just anything you can kind of help us to think through those dynamics? Nikesh Arora: Yes. All of the above. Sorry, I'm trying to - I mean I can't process which competitor he's talking about, but okay. Look, we are in multiple businesses. In our firewall business, as we said, on the hardware business, we see that 0% to 5% as being where the market is and some of that we achieved through refresh, some of that we achieved through our own customers expanding so that we achieved through the replacement of other people's firewalls. We've - in the last, I'd say, 18 months, we've been very diligent about making sure we normalize for the effects of backlog or supply chain in that guidance and that thinking and you see that in our numbers. So I don't think that's going to change much for us. I can't comment on other people's billing variability. We just saw the impact of billing variability to our numbers this quarter. So I'm sure they have the reasons of building variability. In terms of SASE, as I said, you know, we're - we can compete with a different set of people not with the hardware people. We saw 60% growth this quarter and we have visibility on the pipeline for the rest of the year, which gives us comfort that there is business to be had there. We told you about XSIAM, which is again a category which is more in the soft management space, which is a different set of competitors. If you're talking about XDR, it's a different set of competitors. And then cloud security, where our competitors want to startup. So I think the portfolio allows us to look at different growth rates in different pipelines, across the spectrum. As I said, the demand function is not going down for cybersecurity across the board. The only thing that's changing is people saying, I'll do a two-year, one-year deal or a three-year or a five-year deal, I'll pay you later, you finance it around year-over-year. That's the only confusion you're seeing. And I think if you do all that in the market, you can figure out the underlying growth rates are strong for some people in certain categories. Gray Powell: Okay. Thank you. Walter Pritchard: A follow-up - our next question comes from Ben Bollin at Cleveland Research, followed by Ittai Kidron from Oppenheimer. Go ahead, Ben. Ben Bollin: Good afternoon, everyone. Thanks for taking the question. I wanted to piggyback Gray - Gray's question a little bit. When you look at the underlying product revenue, how much of that is physical appliance versus the software form factor? And then a follow-on would be interested in your thoughts on how the trajectory of branch firewall looks over time as customers adopt, you know, more VMs and SASE to get that scale. That's it. Thank you. Dipak Golechha: Yes. So let me take the first part of the question. I mean, our product revenue when Nikesh talked about zero to five is actually across hardware, virtual firewalls, another software that's counted in product revenue. We talked about that last time then. I think it's very customer-specific in terms of what their actual needs are. So again, rather than trying to pass through each of them, I think it's looking at the aggregate. We feel pretty comfortable in that 0% to 5% range. So software is about 35% or about 30% this quarter, right? And then just -- Nikesh Arora: You can see that in the gross margins. Our gross margins continue to improve for product because software is obviously a higher gross margin product for us. Dipak Golechha: And then I think your second question was around what is the impact of this on the branch deployments. The - there's really primarily two models for the branch. One is a SD-WAN-only branch, that tends to be for smaller branches where all of the security or just about all the security moves into SASE is cloud-delivered. And the second model is a next-gen firewall typically with SD-WAN built-in branch, which is still often connected back to SASE for global network connectivity, et cetera. So there - so the shift to software in SASE doesn't replace the need for the branch to have that local intelligence and to be an extension of the customer's network and ultimately, the extension of the network security posture, zero-cost posture. Ben Bollin: Thank you. Walter Pritchard: Next up, Ittai Kidron from Oppenheimer followed by Patrick Colville from Scotiabank. Go ahead, Ittai. Ittai Kidron: Thanks, Walter. Dipak, can I just - not sure I got the answer for Ben's question quite right. On hardware, can you tell us exactly hardware, what percent of revenue that is? And Cisco in conjunction to you right now reported also results, and they've talked about - they've significantly took down their next quarter guidance in the view that for the last two, three quarters a lot of hardware was sold but not installed and so there'll be some digestment period in there. My question to you, when you sell firewalls, how much visibility do you have into how much of that is actually goes and sit on the shelf which is actually gets deployed in the field? And so is there a risk or is there a blind spot here, where you might not know exactly how your customers are handling hardware - firewall hardware and could that catch up somehow with our business as well. Nikesh Arora: Okay. So I don't - I did not listen to the Cisco call because we're here. And even if I had the time, I wouldn't. So I don't understand, it's a very large hardware business. Remember, hardware is a small part of our business, A. B, we only report in revenue what we sell and ship to the customer. So there's nothing - if it's sitting on the shelf at a customer then it's still sold from our perspective. Ittai Kidron: Yes. But I don't have any color to interact, but you have visibility especially again installing that. Dipak Golechha: Yes. Every share-based payroll is deployed has to be registered with us. So we have reasonably good visibility into firewalls that are sold to deployed. And any - I would say, it's fair to say and there are specific issues where a customer may have bought extra firewalls because [indiscernible] but there's no - I say there's no uncharacteristic or different activity we see in the last three months that has been away from the normal. So we don't have suddenly the last quarter, a lot of customers going a lot of firewalls. I think I'm going to try and guess, but there was this whole backlog situation and supply chain problem where people may have bought ahead because we're expecting supply chain prices to continue. And now they've got a bunch of stuff that is ordered sitting around that they can deploy, they don't order more, we don't have that situation. We never went down that path. We didn't hit a lot of backlog. We shipped - You know, we never went past 12 things of shipping in our product. So we did - I know that in the industry, some people are up to 1 year in terms of shipping backlog, we have 12 weeks or back to four to six weeks. So it really is not an impact for us from that perspective. So I think that should give you some better sense of what the spread is. We have reasonably decent visibility into our pipeline can be up or down the margin? Yes, but nothing as substantive as what you might have seen from other people. Ittai Kidron: Thanks you. Walter Pritchard: Thanks, Ittai. We'll take our last question from Patrick Colville at Scotiabank. Patrick, go ahead. Patrick Colville: All right. Thank you, Walter, for squeezing me in and got a sore throat, so sound a bit like Jason Statham. So forgive me for maybe quiet, to me, the standout metric was the non-GAAP operating margin, which was 28% typically 1Q is like the low watermark for margin, but based on your guidance is actually can predicted to be the high watermark. So I guess, you know, I presume Talon and Dig are going to be dilutive. But Dipak, are there any other puts and takes that you know we should consider around operating margin? Dipak Golechha: No. I mean, I think you obviously talked about the talent, which is part of the rationale for the annual thing. We did have some expects - expenses that we expected to incur in Q1 that will now come later in the year, some around the marketing areas as well. But I would say it's just a normal course of operating business. And fundamentally, I think Dig and Talen explains the majority of the rest. I will just say on a year-on-year comparison, we did have, you know, hiring that had a different, you know, level of hiring activity this year, it's a lot more normalized in terms of how we're ramping. So there's just a little bit of base factor calculation in there but nothing really added. Walter Pritchard: All right. Thank you, Patrick, for your question. Thanks everybody for participating. And with that, I'll pass it over to Nikesh for his closing comments. Nikesh Arora: Well, thank you very much again, everyone, for taking the time to attend our earnings call. I would be remiss if I did not use the opportunity to thank all of our employees across the world and the ones in Israel, especially given what's happening in that part of the world. I also wanted to thank all of our partners and customers for trusting Palo Alto Networks.
PANW Ratings Summary
PANW Quant Ranking
Related Analysis

Palo Alto Networks: A Leader in Cybersecurity

  • Palo Alto Networks (NASDAQ:PANW) has executed a 1-for-2 stock split, making its shares more accessible to a broader range of investors.
  • The company's stock price stands at $393.12, with a trading range for the day between $392.36 and $402.50.
  • With a market capitalization of approximately $128.98 billion, PANW showcases its strong position in the cybersecurity industry.

Palo Alto Networks, trading under the symbol NASDAQ:PANW, is a prominent name in the cybersecurity industry. Founded in 2005, the company has carved a niche for itself by offering a wide array of cybersecurity products through its "platformization" strategy. This approach has made it a key player in the sector, where cybersecurity is considered a critical investment due to its high-margin business model.

On December 16, 2024, PANW executed a 1-for-2 stock split, a move that has piqued the interest of investors. Stock splits can make shares more affordable and accessible to a broader range of investors, potentially increasing liquidity. As the split date approaches, many investors are evaluating the potential benefits of investing in PANW, given the essential nature of cybersecurity services.

Currently, PANW's stock is priced at $393.12, reflecting a decrease of $7.09 or approximately 1.77% today. The stock's trading range for the day has been between $392.36 and $402.50. Despite today's decline, the stock has shown resilience over the past year, with a high of $410.23 and a low of $260.09, indicating significant growth potential.

Palo Alto Networks boasts a market capitalization of approximately $128.98 billion, underscoring its strong position in the market. The company's trading volume today is 1,915,154 shares, suggesting active investor interest. As cybersecurity remains a critical concern for businesses worldwide, PANW's stock continues to be an attractive option for investors seeking exposure to this essential sector.

Palo Alto Networks (NASDAQ:PANW) Announces 2-for-1 Stock Split

  • Palo Alto Networks (NASDAQ:PANW) is set for a 2-for-1 stock split, aiming to make shares more affordable.
  • The stock has seen a 47% increase in its price this year, with significant growth ahead of the split.
  • Stock splits have sparked interest among investors, with notable companies like Nvidia experiencing substantial growth post-split.

Palo Alto Networks, trading on NASDAQ under the symbol PANW, is a prominent player in the cybersecurity industry. The company is set to undergo a 2-for-1 stock split on December 16, 2024. This means that for every share an investor currently holds, they will receive an additional share, effectively halving the price per share while maintaining the overall value of their investment.

Stock splits, like the one PANW is planning, have become less common in recent years. However, the past year has seen several notable splits, including those by Broadcom, Chipotle Mexican Grill, Sony, and Walmart, as highlighted by 24/7 Wall Street. One of the most anticipated was Nvidia's 10-for-1 split in June, which occurred during a period of fluctuating stock prices.

Despite the stock split, Nvidia's share price was more significantly impacted by investor concerns over delays in new chip shipments. Interestingly, Nvidia's stock has seen a remarkable 175% increase in 2024, with most of this growth occurring before the split. This trend has sparked renewed interest in stock splits and their potential benefits in the current market landscape.

Palo Alto Networks has experienced a significant 47% increase in its stock price this year. The stock is currently priced at $405.90, with a recent change of $2.87, reflecting a 0.71% increase. The stock has traded between a low of $402.62 and a high of $409.16 today, with the latter marking its highest price over the past year. The lowest price in the past year was $260.09.

The company's market capitalization stands at approximately $133.18 billion, with a trading volume of 1,934,449 shares for the day. The upcoming stock split could make shares more affordable and enhance liquidity, potentially attracting a wider range of investors. This development raises questions for investors about whether to invest now or wait until after the split.

Palo Alto Networks Tops Q4 Earnings and Provides Strong Guidance

Palo Alto Networks (NASDAQ:PANW) shares rose more than 2% pre-market today after the company delivered strong guidance after reporting fiscal fourth-quarter results that exceeded Wall Street expectations, driven by a surge in deal-making and increased demand for cybersecurity solutions.

The company posted earnings of $1.51 per share on $2.2 billion in revenue, outperforming analyst estimates of $1.41 per share and $2.16 billion in revenue.

The company's Next-Generation Security annual recurring revenue grew by 43% year-over-year, reaching $4.2 billion, as deal-making activity increased.

Looking forward, Palo Alto Networks projected fiscal first-quarter adjusted earnings between $1.47 and $1.49 per share, beating analyst estimates of $1.42 per share. Revenue guidance for the quarter is set between $2.10 billion and $2.13 billion, aligning with the consensus forecast.

For the full fiscal year 2025, the company expects adjusted earnings in the range of $6.18 to $6.31 per share, with revenue expected between $9.10 billion and $9.15 billion.

Palo Alto Networks' Fiscal Fourth Quarter Results Surpass Expectations

  • Palo Alto Networks (NYSE:PANW) reported adjusted earnings of $1.51 per share, exceeding Wall Street expectations.
  • Scotiabank upgraded Palo Alto Networks to Outperform, raising its price target from $337 to $385.
  • The company's performance reflects the growing demand for cybersecurity solutions and its strong position in the competitive landscape.

Palo Alto Networks (NYSE:PANW), a leading cybersecurity company, recently announced its fiscal fourth quarter results, which caught the attention of investors and analysts alike. The company, known for its advanced security solutions that protect organizations across cloud, network, and mobile devices, reported adjusted earnings of $1.51 per share. This figure notably surpassed the Wall Street expectations of $1.41 per share, as highlighted by Yahoo Finance. This performance underscores the company's robust operational efficiency and its ability to exceed analyst predictions, marking a significant achievement in its financial journey.

The positive earnings report comes at a time when cybersecurity is more critical than ever, with businesses and governments worldwide increasing their investments in security infrastructure to protect against growing cyber threats. Palo Alto Networks' ability to outperform expectations reflects not only the increasing demand for cybersecurity solutions but also the company's strong position in the competitive landscape. This performance could be a key driver in attracting more investors and customers to the company, bolstering its market position further.

Following this announcement, Scotiabank upgraded its rating on Palo Alto Networks to Outperform while maintaining a hold position previously. This upgrade, announced as the stock was trading at $333.23, signifies a vote of confidence in the company's future prospects. Scotiabank's decision to raise its price target for Palo Alto Networks from $337 to $385, as detailed by TheFly, further emphasizes the optimistic outlook on the company's performance. This adjustment by Scotiabank reflects a broader market recognition of Palo Alto Networks' growth potential and its ability to sustain momentum in the competitive cybersecurity industry.

The upgrade by Scotiabank, coupled with the company's impressive fiscal fourth quarter results, paints a promising picture for Palo Alto Networks. It suggests that the company is not only navigating the challenges of the cybersecurity market successfully but is also positioned for continued growth. The raised price target by Scotiabank indicates an expectation of upward movement in Palo Alto Networks' stock price, hinting at the potential for significant returns for investors.

Overall, Palo Alto Networks' recent achievements highlight its strength and resilience in a rapidly evolving market. The company's ability to exceed Wall Street expectations and the subsequent upgrade by Scotiabank underscore its solid financial health and the positive outlook for its future. As Palo Alto Networks continues to innovate and expand its offerings, it remains a key player in the cybersecurity space, well-positioned to capitalize on the growing demand for security solutions.

Palo Alto Networks Shares Plunge 6% on Weak Billings Outlook

Palo Alto Networks (NASDAQ:PANW) saw its shares fall by more than 6% in pre-market today as its underwhelming billings outlook overshadowed a solid fiscal third-quarter earnings performance.

The cybersecurity firm's revenue increased by 15% to $2.0 billion, surpassing both the analyst consensus of $1.97 billion and the previous year's $1.7 billion. Adjusted earnings per share (EPS) for the quarter came in at $1.32, beating the forecasted $1.25.

The company's remaining performance obligations grew by 23% year-over-year to $11.3 billion, slightly above the expected $11.28 billion. CEO Nikesh Arora attributed the strong results to customer interest in the company’s platform strategy, which incorporates artificial intelligence into security solutions.

CFO Dipak Golechha pointed to disciplined execution and investments in market and innovation as key factors driving the company's steady, profitable growth.

Looking ahead, Palo Alto Networks provided guidance for Q4 with an EPS range of $1.40 to $1.42, which is in line with the Street estimate of $1.41. Revenue is projected to be between $2.15 billion and $2.17 billion, matching the Street estimate of $2.16 billion.

However, the billings forecast for both the fourth quarter and the full fiscal year, with ranges of $3.43 billion to $3.48 billion for Q4 and $10.13 billion to $10.18 billion for the year, came in slightly below analyst expectations, contributing to the drop in stock price.

For the full fiscal year 2024, the company revised its guidance, projecting revenue between $7.99 billion and $8.01 billion, an increase from the previous range of $7.95 billion to $8.00 billion, compared to the Street estimate of $7.98 billion. Adjusted EPS is expected to be between $5.56 and $5.58, exceeding the consensus estimate of $5.52.

Palo Alto Networks' Fiscal Third-Quarter Earnings Overview

  • Palo Alto Networks reported an EPS of $1.32, surpassing the estimated EPS of $1.25 and marking the fourth consecutive quarter of beating consensus EPS estimates.
  • The company announced revenue of approximately $1.98 billion, a 15% increase from the previous year, exceeding both the estimated revenue and the Zacks Consensus Estimate.
  • Despite strong financial results, PANW shares dropped by more than 8% in extended trading, reflecting the complex dynamics of investor expectations and market sentiment.

Palo Alto Networks recently made headlines with its fiscal third-quarter earnings report, which not only surpassed analysts' expectations but also showcased the company's robust financial health and growth trajectory. As a leading entity in the cybersecurity sector, Palo Alto Networks has consistently demonstrated its ability to navigate the competitive landscape, outperforming estimates and reinforcing its market position. The company's latest earnings report is a testament to its operational efficiency and strategic initiatives aimed at driving growth.

On May 20, 2024, PANW reported an earnings per share (EPS) of $1.32, beating the estimated EPS of $1.25. This performance not only reflects an improvement from the previous year's earnings of $1.10 per share but also marks the fourth consecutive quarter where Palo Alto Networks has exceeded consensus EPS estimates. Such a streak of positive surprises, including a notable 5.60% earnings surprise this quarter, underscores the company's consistent operational excellence and ability to exceed market expectations.

In addition to its impressive EPS, Palo Alto Networks reported revenue of approximately $1.98 billion for the quarter, a figure that not only surpasses the estimated revenue of roughly $1.97 billion but also represents a significant 15% increase from the previous year. This revenue growth is a clear indicator of the company's expanding market presence and the increasing demand for its cybersecurity solutions. The reported revenue also exceeded the Zacks Consensus Estimate by 0.91%, marking the third time in the last four quarters that the company has outperformed consensus revenue estimates.

Despite these strong financial results, PANW shares experienced a more than 8% drop in extended trading following the announcement. This reaction may seem counterintuitive given the company's positive performance, but it highlights the complex dynamics of investor expectations and market sentiment. Additionally, Palo Alto Networks provided revenue guidance for the upcoming period that aligns closely with analysts' estimates, suggesting a steady outlook for its financial performance.

Palo Alto Networks' valuation metrics, such as its price-to-earnings (P/E) ratio of approximately 52.94 and price-to-sales (P/S) ratio of around 18.02, indicate a premium valuation compared to some of its peers. These ratios reflect investors' willingness to pay a higher price for the company's shares, based on its growth prospects and market position. The enterprise value to sales (EV/Sales) and enterprise value to operating cash flow (EV/OCF) ratios further highlight the company's premium valuation in the market. Despite a moderate level of debt, as indicated by a debt-to-equity (D/E) ratio of around 0.34, Palo Alto Networks maintains a solid financial standing, with an earnings yield of roughly 1.89% and a current ratio of approximately 0.84, pointing to potential challenges in covering short-term liabilities with short-term assets.

Palo Alto Networks Fiscal Third-Quarter Earnings Preview

  • Projected quarterly revenue of $1.97 billion and an EPS estimate of $1.25, highlighting the financial health and expectations for Palo Alto Networks.
  • The company's adjustment of its outlook is due to "spending fatigue" among clients, setting a cautious tone for the upcoming earnings amidst economic headwinds.
  • Focus on Palo Alto Networks' "platformization" strategy as a means to consolidate its position as a leading cybersecurity solutions provider.

Palo Alto Networks (NASDAQ:PANW) is on the brink of revealing its fiscal third-quarter earnings, a moment that has garnered significant attention from Wall Street and investors alike. The cybersecurity behemoth, known for its comprehensive suite of security solutions, faces a critical juncture as it navigates through an environment marked by client spending concerns. With an earnings per share (EPS) estimate set at $1.25 and projected quarterly revenue of $1.97 billion, the stakes are high. This upcoming earnings report is not just a reflection of the past quarter's performance but a litmus test for the company's strategic direction amidst economic headwinds.

The backdrop of this earnings release is particularly intriguing, given Palo Alto Networks' recent adjustment of its outlook, citing "spending fatigue" among its clientele. This adjustment has set the stage for a quarter where, despite anticipated year-over-year growth in revenue and net income, there's an expectation of a sequential dip from the second quarter. This scenario underscores the challenges faced by the cybersecurity sector at large, where customer spending patterns are increasingly unpredictable. Analysts, as compiled by Visible Alpha, are keenly awaiting not just the numbers but also insights into how Palo Alto Networks plans to navigate these choppy waters.

A focal point of interest for those tracking PANW's performance is the company's "platformization" strategy. This ambitious approach aims to consolidate its position as a one-stop cybersecurity solutions provider. By offering a broad spectrum of services under a unified platform, Palo Alto Networks is betting on its ability to attract and retain customers looking for comprehensive security solutions. This strategy is pivotal, especially at a time when businesses are looking to streamline their cybersecurity investments in response to broader economic pressures.

The financial metrics surrounding Palo Alto Networks further paint a picture of a company at a crossroads. With a price-to-earnings (P/E) ratio of approximately 44.47, investors are showing a willingness to pay a premium for the company's earnings, a sign of confidence in its future growth prospects. However, the price-to-sales (P/S) and enterprise value-to-sales (EV/Sales) ratios suggest a market that is closely scrutinizing the company's revenue generation capabilities. Moreover, the debt-to-equity (D/E) ratio of about 0.50 indicates a balanced approach to financing, leveraging both debt and equity in its capital structure. These financial indicators are crucial for investors as they assess the company's valuation, profitability, and financial health in the lead-up to the earnings announcement.

As Palo Alto Networks (NASDAQ:PANW) prepares to unveil its fiscal third-quarter results, the broader narrative extends beyond the numbers. It's about the company's ability to adapt and thrive in a fluctuating economic landscape, the effectiveness of its strategic initiatives, and its ongoing quest to redefine the cybersecurity industry. With projected revenues of $1.97 billion and an EPS estimate of $1.25, all eyes are on PANW as it seeks to reassure stakeholders of its resilience and strategic foresight in an ever-evolving market.