Palo Alto Networks, Inc. (PANW) on Q2 2021 Results - Earnings Call Transcript
Karen Fung: Good afternoon, and thank you for joining us on today’s conference call to discuss Palo Alto Networks’ Fiscal Second Quarter 2021 Financial Results. I am Karen Fung, Senior Director of Investor Relations. This call is being broadcast live over the web and can be accessed on the Investors Section of our website at investors.paloaltonetworks.com. Nikesh Arora: Thank you, Karen. Hello, everyone. I know Walter Pritchard, you are listening in. Enjoy your last earnings call from the other side. Next quarter, Walter will join us at this end as our new Senior Vice President of Investor Relations and M&A Finance. Well, moving on to the quarter. So let me start with SolarStorm, which many of you are describing as one of the most serious and sophisticated cyber attacks in history. The SolarStorm attack highlighted that enterprises need a comprehensive, up-to-date map of their full IT infrastructure environments, including understanding their own networks, as well as external attack surfaces and supply chains. In order for security teams to have an edge over the adverse adversaries, they need to embrace next-generation technologies that leverage AI, machine-learning and automation. To help our customers, we set up a rapid response program and when I say rapid, it was rapid. Our acquisitions of Expanse and Crypsis almost felt pre-assigned. The team swung into action. We updated XDR for all the new threat vectors. We offered free assessments from our Crypsis team. We also evaluated the attack surfaces from the outside in for Expanse and discovered that there were dozens of affected customers, including major government agencies and large companies, many of which were actively communicating with SolarStorm malware command and controlled infrastructure. So far, we've received over 1,000 assessment requests and have completed over 500. We believe that the SolarStorm attack raises the mid and long-term criticality of the cybersecurity industry as a whole. This will result in more awareness and focus on cybersecurity, which in all candor, is the need of the hour given the complete reliance on technology in these times. We expect that this attack will be a wakeup call to all enterprises to modernize cybersecurity and will serve as a net incremental tailwind, not just for us, but also for the industry. Before I turn to our fiscal Q2 2021 results, I have an admission to make. Perhaps I was too cautious at the outset of the pandemic. The current sustained performance, resilience of our teams, and execution has been turning more optimistic. We had a great second quarter with strong business momentum as the organization executed across all platforms and strategies. As a result, we beat Q2 guidance and consensus. Here are some highlights. We delivered billings of $1.2 billion, up 22% year-over-year with strong growth across the board. Luis Visoso : Thank you, Nikesh. Climate change is an existential threat and at Palo Alto Networks, we are all-in to do our part to address this crisis. We have done some important work up to this point including LED certifications, recycling, and community involvement. We plan to step up our efforts and contribute even more. I am proud of our commitment to be carbon-neutral by 2030. We have already activated renewable energy and high-quality carbon-offset strategies. We will be reducing our emissions aligned to science-based targets and we will work across our value chain to have a lasting impact and advocate stewardship. The Paris Agreement calls on all of us to limit global warming below two degrees Celsius by 2050. We plan to reach our commitments by 2030. We will keep you informed of progress along the way. We will continue to participate in the carbon disclosure project and start sharing plans and progress – and progress using protocols set by the task force on climate-related financial disclosures. During the World Economic Forum's Davos agenda last month, we committed to increase transparency by reporting on the International Business Council’s stakeholders, capitalism metrics over time. It will take creativity, collaboration, and visionary thinking to protect the planet, and we are up for the challenge. We call on others to join us, consider aligning to the Paris Agreement and make your commitment to do your part. Now turning on – turning to our financials, as Nikesh indicated, we had a great second quarter and we continue to deliver winning innovation and adding new customers at a fast pace. This strength gives us confidence to raise our guidance for the year. I would like to start with our performance in firewall as a platform or FwaaP, which had a great quarter as we continue to grow faster than the market. FwaaP billings grew 21% in Q2, as we continue to transition from hardware to software and SaaS form factors. As you can see, FwaaP billings declined 3% in Q2 2020 and over the last four quarters, we've been able to drive sustained execution and growth in this area to 21% in Q2 2021. Next-Generation Security or NGS continues to expand and now represents a quarter of our total billings at $309 million, growing 59% year-over-year. In Q2, we added over $120 million in new NGS ARR, reaching $840 million. Let me remind you, at our last Analyst Day in September of 2019, NGS was a gleam in our eye and we called for $1.75 billion in billings by 2022. We are on track to beat those numbers. In Q2, total revenue grew 25% to $1.0 billion. Looking at growth by geography, the Americas grew 27%, EMEA grew 24%, and APAC grew 14%. Q2 product revenue of $255 million increased 3%, compared to the prior year. Q2 subscription revenue of $462 million increased 35%. Support revenue of $300 million increased 32%. In total, subscription and support revenue of $762 million increased 34% and accounted for 75% of total revenue. Excluding revenue from Crypsis and Expanse, subscription and support revenue increased 31%. Turning to billings, Q2 total billings of $1.2 billion net of acquired deferred revenue increased 22%. Strength was broad based as we continue to see strong execution across the company. The dollar-weighted contract duration for new subscriptions and support billings in the quarter was slightly down year over year but remained at approximately three years. For the first half of fiscal 2021, billings of $2.3 billion increased 21% year-over-year. Product billings were $495 million, up 3% and accounted for 22% of total billings. Subscription billings were $1.2 billion, up 23%. Support billings were $733 million, up 34%. Total deferred revenue at the end of Q2 was $4.2 billion, an increase of 30% year-over-year. Remaining performance obligation or RPO was $4.6 billion, an increase of 41% year-over-year. In addition to adding approximately 2,400 new customers in the quarter, we continue to increase our wallet share of existing customers. Our top 25 customers, all of whom made a purchase this quarter, spent a minimum of $59 million in lifetime value through the end of fiscal Q2 2021, a 27% increase over the $46 million in the comparable prior year period. Q2 gross margin was 75.3%, which was down 110 basis points compared to last year, mainly driven by a higher mix of our NGS products, which are less mature. Q2 operating margin was 19.8%, an increase of 190 basis points year-over-year. The operating margin expansion is driven by operating expense leverage behind operational efficiencies, lower travel and event expenses due to COVID, which more than offset the incremental investment in headcount. We ended the second quarter with 9,038 employees, including 176 from Expanse at the close of the acquisition. On a GAAP basis, for the second quarter, net loss increased to $142 million or $1.48 per basic and diluted share. Non-GAAP net income for the second quarter increased 28% to $154 million or $1.55 per diluted share. Our non-GAAP effective tax rate for Q2 was 22%. Turning to cash flow and balance sheet items. We finished January with cash, cash equivalents, and investments of $4 billion. On December 4, 2020, our Board of Directors authorized an increase to our share repurchase program and extended the expiration date to December 31, 2021. As of January 31, 2021, $1 billion remained available for repurchases. Q2 cash flow from operations of $365 million increased by 19% year over year. Free cash flow was $332 million, up 29% at a margin of 32.7%. DSO was 60 days, an increase of three days from the prior-year period. Turning now to guidance and modeling points. For the third quarter of 2021, we expect billings to be in the range of $1.22 to $1.24 billion, an increase of 20% to 22% year-over-year. We expect revenue to be in the range of $1.05 to $1.06 billion, an increase of 21% to 22% year-over-year. We expect non-GAAP EPS to be in the range of $1.27 to $1.29, which incorporates net expenses related to the proposed acquisition of Bridgecrew using 100 million to 102 million shares. Additionally, I'd like to provide some modeling points. We expect our Q3 non-GAAP effective tax rate to remain at 22%. CapEx in Q3 will be approximately $30 million to $35 million. As Nikesh reviewed earlier, for the full fiscal year, we are again raising our guidance across most metrics. We expect billings to be in the range of $5.13 billion to $5.18 billion, an increase of 19% to 20% year-over-year. We expect next-generation security ARR to be approximately $1.15 billion, an increase of 77% year-over-year. We expect revenue to be in the range of $4.15 billion to $4.20 billion, an increase of 22% to 23% year-over-year. We expect product revenue to be flat year-over-year. We expect operating margins to improve by 50 basis points year-over-year. We expect non-GAAP EPS to be in the range of $5.80 to $5.90, which incorporates net expenses related to the proposed acquisition of Bridgecrew using 99 million to 101 million shares. Regarding free cash flow for the full year, we expect an adjusted free cash flow margin of approximately 29%. With that, I'd like to open the call for questions. Operator: Our first question comes from Keith Weiss of Morgan Stanley. Keith Weiss: Excellent. Thank you guys for taking the question and very nice quarter. I was hoping to dig in a little bit into SolarStorm and if you could talk to us about any impacts that you saw in this quarter and more expansively, how do you expect the impacts of that event to play out as we go through the year? Is there more on the comment? And what parts of the product portfolio do you think are going to get most impacted by that event? Nikesh Arora: Hey, Keith. Thanks. Look, as we said in the call, we launched a series of initiatives to make sure that our customers are protected vis-à-vis SolarStorm. That was a sustained attack, which was planned or a series of quarters, if not years. And what we realized that once you get in the supply chain and start being able to respond to 18,000 customers, the impact is going to be far reaching. What's happened is people were first reacting to that and starting to make sure on an emergency basis, there is nothing in their infrastructure, which is already infected and they have not effectively been compromised. Now with that slowly and steadily behind us, what's happening and we are noticing people are doing cybersecurity assessment. Every board is out there saying, take a look at what we've got, make sure that is - there is no breaches. Make sure that we won't be breached. The first question was, are we breached? The answer was, no, we are fine. Somebody think, wait a minute. Could we have been breached, if we had SolarStorm? The answer is, yes. So what we are noticing is there not going a rethinking of the cybersecurity architecture. In that context, our Crypsis acquisition was very helpful, because that's where we had the field force to be able to go out and address these situations, which kind of sort of came to light and I don't know if you know Wendi Whitmore, PAN-IBM X-FORCE until now and she is going to come join us. She has had a stint at CrowdStrike and FireEye and Mandiant as well. So she's going to come drive that effort even more aggressively for us. We also saw that in our own case, XDR protected us, which again becomes an important distinction for us, because it was a zero day attack and we found it because of behavior anomalies that were happening on the endpoint, which is effectively a key feature of XDR. So we are seeing a lot more conversations around that. And Expanse's ability to be able to look at what assets are exposed to the outside which, in this case with SolarStorm servers, we also used sort of an Expanse and out and looked and saw that there were hundreds of customers with open SolarStorm servers sitting on their network. So it's generally been useful for us in the XDR part, the XSOAR part, the Crypsis part, but more importantly, from a board focus on cybersecurity hygiene is been critical. Keith Weiss: Excellent. Thank you. Nikesh Arora: Thanks. Operator: Our next question comes from Philip Winslow of Wells Fargo. Philip Winslow : Great. Thanks for taking my question, and congrats on another fabulous quarter. Really want to focus in on Prisma Cloud and the VM and CN-Series. Obviously, you saw massive uptick in the number of workloads that you protect in the cloud with Prisma Cloud and then obviously a massive uptake year-over-year, I think, more than four x in terms of the number of firewall software customers. So I guess, kind of two related questions on here. First, Nikesh, why are you hearing that customers are choosing your Prisma Cloud obviously aside from the largest deal in that product's history this quarter. And then the follow-up to that, when you think about Prisma Cloud, plus the success you are seeing in the VM and CN-Series, are those two combined kind of changing the customer dialogue that you are having as you are seeing these customers see - accelerate their shift to cloud? Nikesh Arora: Yes, Phil. Thank you. Look, if you look at it, if you abstract yourself, we grew our firewall as a platform 21%. Right? And we've been talking about trying to get that to the 15% range. You can see all that growth has come from firewall in the cloud, i.e., Prisma Access 2.0, and has come from our VM and CN-Series firewalls. And it's kind of – it’s hard to understand if you are not sitting with the customer. We have seen a few deals flip from hardware to software in the last week. Literally, customers aim to buy a bunch of hardware and said, wait, hold on. You guys launched this Firewall FLEX, why don't we just go into this flexible credit program where we can spin-up as many firewalls we want and spin them down if you don't need them and they can carry those credits to the cloud. So what - I think what is something very important to understand, we are going through a hardware-to-cloud transition now in the industry. It does not mean as the demise of the hardware industry. It just means that the incremental shift is beginning to happen. It's gathering momentum. You can't keep posting tens of billions of dollars on billings for AWS, GCP and Azure and not see a decline in datacenter over time. It's going to happen. So if you look past the quarters and in that transition, it becomes very important, how are you going to protect yourself in the future? So we are beginning to see customers go from hardware to software and honestly, we are encouraging it to the extent the customer wants our opinion. We have the ability to sell the hardware, the best in the industry and the ability to sell them software firewalls, the ability to sell them Prisma Access 2.0 in the cloud. We are sitting now with them and saying, you pick the best architecture. You want we'll service it. You ask us, we'd rather you went down the software route. And that's when all of you guys start asking us, wait a minute if you go to software, do you lose money, well, so we put up a slide saying, look, we don't lose money. We make more money. We don’t say that not that loudly because that's not a good thing to say loudly, it’s a better security solution for the customer, reduced total cost of ownership, but we are seeing that transition. And I think that's the most important part of the story and as we highlighted, we did a big deal in the telecom space, where certainly, security matters in 5G. Right? Because, in no offense, when you and I walk around with our iPhones and Android devices, you got malware on them, tough luck buddy. But if you are a car driving down the highway, and that can be infected with malware, that's a problem. So the 5G enterprise networks have to be secure. All 5G networks are being built in the cloud. Philip Winslow : Okay. Great. Thank you very much. Nikesh Arora: Thanks, Phil. Operator: The next question comes from Sterling Auty of JPMorgan. Sterling Auty : Yes. Thanks. Hi, guys. So, in the context of the guidance increase, I did noticed that the next-generation security ARR is staying the same despite what looks like good results in the quarter. Was there any pull-forward or what additional commentary can you give us around that NGS ARR outlook for the year? Nikesh Arora: Honestly, there is no hidden meaning and there we are not trying to tweak it in such a way that, look, we've seen strength in cloud firewall. We've seen phenomenal strength in Prisma Access. I have to tell you that this pandemic has forced the network conversation about how do I make sure Sterling can access every application at home, not just the ones that I let him access. It's gone from a, it's good to have remote access, you have to have remote access and then the security and certainly start paying attention to network architecture. And then, and Lee and his team have delivered this phenomenal next upgrade where we can look at both web-based non-web-based apps. So we are seeing phenomenal success. So there is no tempering of our expectation and ambition on NGS. It's just how the math works right now. Sterling Auty : That makes sense. Thank you. Operator: Next question comes from Saket Kalia of Barclays. Saket Kalia : Okay. Great. Thanks for taking my question here guys. Nikesh, maybe for you, you touched on this in your prepared comments. Can you talk about the cloud and AI equity structure? What's the reason for setting up that structure now? And how is it going to work mechanically? Nikesh Arora: So, well, Saket, two-and-a-half years ago, when I came here, we talked about building a cloud security business and we talked about building an AI/ML-based business. Last quarter, we started showing you the two pieces of NetSec and ClaiSec. You've seen that we are aspiring against $735 million of ARR in cloud AI security. We also shared our left-hand side, our Network Security business actually has phenomenal cash flow margin, 38% going to 41%. So that's a cash-generative part of our business whilst we go through a hardware-to-software transformation. On the right-hand side, we are competing with behemoths out there today, like the CrowdStrikes of the world and in the XDR space and a bunch of start-ups in the cloud space. That's an area for investment. We think that the market inherently values both those business fundamentally differently. It values the network security business and cash flow. It values the cloud AI business and ARR. So we want to be able to create the opportunity for the market to value our businesses differently to create more transparency for the shareholders and it also allows us to keep investing in the cloud AI business and in the interest of driving more ARR. So what we've done is, as you saw, we've separated our financials, showed you both NetSec and ClaiSec. Luis and team have worked hard to get them audited and make sure that we can keep reporting them on a more regular basis going into next fiscal year and we are looking at various equity structures that allow us to create incentive plans as well as potentially in the future, monetize the ClaiSec business for a different set of investors compared to the Palo Alto investor. Operator: Our next question comes from Fatima Boolani of UBS. Fatima Boolani : Good afternoon. Thank you for taking the questions. My question is around the firewall as a platform business and the metrics there. Appreciate that deals sort of changed flavor in the 11th hour, to your point, Nikesh. So, what are some of the core assumptions we should leave with around the installed base refresh opportunity, as well as the R&D pipelines for hardware and appliance refreshes within the product portfolio on the Strata side? Nikesh Arora: Well, Lee, do you want to talk about the hardware refresh plans? All I am saying is, that we are not taking our pedal off the metal. We are going aggressively trying to continue to build the next generation of hardware and focus on refresh. I will tell you, in absolute dollars, we still sell the largest number of hardware firewalls in the industry. We get lost some percentages. It doesn't matter if other vendors are out there generating 18% growth. We still sell more absolute dollars of product in a quarter than anybody else. But Lee, can you talk about the hardware? Lee Klarich: Yes. We are always working on the next generation of hardware since the beginning of the company until now and we have some amazing new platforms coming. I won't tell you too much until they are out, but we are always working on that, really exciting stuff there. The software side as well with PanOS and new security capabilities, and another set of amazing things we are working on. One thing I'll point out in that though is the leverage we get across hardware, software and cloud-delivered. Part of what really resonates with our customers is not that they get two, pick which one they use from us, but their ability to actually use hardware where they need hardware, software form factors when they need software, cloud-delivered where they need that, with a set of consistent security capabilities, easy to manage and operationalize, that's something that only we can deliver to our customers. Fatima Boolani : Thank you. Operator: The next question comes from Brian Essex of Goldman Sachs. Brian Essex : All right. Great. Hi, thank you. Thank you for taking the question. I was wondering, Nikesh, if you could dig into a little bit Firewall FLEX and your credit-based licensing model for next-gen firewall. What was the timing of that roll out? How long has it been in market and how much adoption is that in terms of the way it's impacting your model? Nikesh Arora: I'll give you the preface of it and then Lee can jump in and give you the details. But look, we hadn't refreshed our VM pricing policy, it was set up more like a hardware business, where you had to tell us which particular model of software you wanted and you were basically stuck to that model. And if you think about software deployment, it's a key. I can give you a key with more capacity or a key with lower capacity. So, we just felt that we were being too pedantic in our approach in selling software in a very hardware-centric model, where you can only buy five subscriptions out of eight. So we worked hard over the last 18 months to get this all done into a new credit-based model where you can right size your requirements. So you can spin them up and spin them down. But if I say everything then Lee doesn't get to say much. So Lee, explain the – he often looks at me saying, why do you say you are going to help answer the second half and wait when you don't stop? So, Lee, I'll stop. Lee Klarich: Yes. In my defense, the - like when we came up with the model that was sort of, I call it, the normal model, and that's what others were doing. I am actually – and our customers are very excited about this new Firewall FLEX model, because it is the first of its kind in the industry, giving our customers the flexibilities, and Nikesh was saying to choose how many CPUs do they need? What subscriptions do they want? Where they want to deploy it. Cloud, on-prem, et cetera, that level of flexibility and to do in a credit model where each individual deployment can actually be different. So we've actually – it's one of those unique cases where we've given the customer a lot more flexibility and options yet made it simpler at the same time. The last piece that I addressed was in the old model, it was getting too cumbersome on how to offer all the different security subscriptions. This model allowed us to easily scale up to all of the current security subs, plus any future subscriptions we come out with. Nikesh Arora: How long it’s been working with this? Lee Klarich: Sorry. We just launched the beginning of February. So, it's only been out for a few weeks. We are already having customers respond incredibly positive to it. Brian Essex : All right. Very helpful. Thank you. Nikesh Arora: Thanks, Brian. Operator: Next question comes from Gray Powell of BTIG. Gray Powell : Hey, great. Thanks. Can you guys hear me okay? Nikesh Arora: Yes. Gray Powell : All right. Congratulations on the good numbers. So, yes, last week, you all announced cloud secure gateway features in Prisma Access. How important is that functionality to your customer base and do you think it creates an opportunity to gain incremental share from legacy players like Symantec or even some of the higher growth companies like Zscaler? Nikesh Arora: Well, sorry. Okay. Now he changed his definition of legacy. Never mind. Sorry, I was just kidding. We get punchy after too much coffee on our earnings call day. So, Lee, go ahead. This one is yours. Lee Klarich: Look, as I think all of you have seen or heard from us before, we used to set up this sort of either or approach, either it was next-gen firewall approach to security or it's a proxy approach and you've heard us talk a lot about the challenges associated with the proxy approach. Limited application support, some of the challenges with applications, and breakage and performance, but at the same time, we recognized is, there are certain use cases out there where there is a right way to do it. And it is a -- could be very complementary to what we do from a next-gen firewall perspective. And so with this release, we basically integrated that into Prisma Access, such that we can now give our customers the ultimate of flexibility on how they connect to the cloud through both the secure web gateway model, plus our next-gen firewall natively integrate it and provide all the great security capabilities we have. Nikesh Arora: So I think, Gray, what Lee is saying is, we changed near looks religion on proxies. Now we also support proxies as part of our product and we also support the app-based approach. So now you can go after web-based apps and non-web-based apps and you said 53% of your breaches come from non-web based apps, and proxies are used less in non-web based apps. But we cover both opportunities by doing it the proxy way or the non-proxy way. Gray Powell : Got it. Okay. Thank you very much. Operator: Next question comes from Patrick Colville of Deutsche Bank. Patrick Colville : Hey there. Thank you for taking my question. I appreciate it. Just want to ask about Bridgecrew. So, is that deployed on-prem in the cloud? Who buys it? Is it the kind of developer buying it with the kind of credit card type payment model? Or just help us understand that product better, please. Nikesh Arora: Yes, look, again, I’ll one, two, punch here. But we’ve been making bets for the last two-and-a-half years where the security is, in the cloud space especially. Went from workloads, went to containers, went to micro-segmentation, went to DLP, went to IAM. And what we come to the realization in what's happening is there is a bunch of – so what happens is you do, you build an application with a developer, you give it to your IT team and they deploy it and say, hey, you silly guy, you've got a bunch of security bugs and go fix it, the guy says, so what's my security bugs. Why didn't you tell me before? They started going to open source and trying to find security monitoring software to see, let me just make sure, I don't build stuff with security bugs in it. So what happens is what Bridgecrew has is such a – it's a open source, free, no credit card needed, piece of software just starts tracking the security bugs in your development side, CICD side. So it tells the developer, you are making a mistake, fix it. Now what happens is you fix it then you give it to the guy in security. The guy says, wait, you still have bugs. So wait a minute. I checked it. So what we've done is, we bought Bridgecrew. We'll take the open source tools that they have. We'll look at the policies there. We'll map them with the policies in the enterprise side to make sure that if you need to find data, if they are going to check for it in real-time and in production, you get to check for it for free as a developer. So, there is 26 million developers developing, they are similar security professionals. If you can get 26 million people to start checking it while they are building the application, building the software, then it's consistent with what they are going to be checked out in the enterprise side. That's the muscle we didn't have. That's a DevOps muscle. Most DevOps companies don't have security muscle. We have security muscle, we don't have DevOps muscle. We just bought DevOps muscle. Patrick Colville : Okay. And so the monetization is, it’s via… Nikesh Arora: So, what happened is, they have an enterprise version of the free software to giveaway to developers. It's kind of like Slack. It's kind of like Dropbox. If a lot of people started using it, you want that to be in the enterprise section, because you don't want it being checked against a different product set of policies. We are going to merge that enterprise capability in Prisma Cloud, because we already checked it. And we will say, whatever your developers check for free is what we are going to check in production, they are consistent. So, if they didn't find a bug when they were writing the code, unlike to find it when we are running it. Patrick Colville : Okay. Thank you. Operator: Next question comes from Tal Liani of BOA. Tal Liani: Hi, guys. I want to go back and ask about the legacy or the hardware piece. I am trying to understand the competitive landscape now and trying to understand the customers' reaction to the fact that market is migrating somewhere else. Are there still competitive replacements? Or is this a case where customers just keep the status quo, whatever they have today, because if they take a decision, it's going to be a decision to migrate out of hardware into a more modern solution? So, I am trying to understand the dynamics, the underlying dynamics in the market and from it to understand what's the competitive landscape like? Nikesh Arora: Yes, Tal. Thanks for the question. Look, what's going to happen in my version of the world is, you will still have 40% to 50% of the customers who will still stick to a datacenter and a hardware-based strategy. I think what the markets are not fully embraced and understood is when you move to cloud, the cloud can be expensive. And many companies will say, wait a minute. I don't need to do all the stuff in the cloud. I am going to still keep a datacenter and do some of the less expensive stuff here, why do I want to take everything and make it real-time bleeding edge in the cloud. So you are going to end up in a hybrid world, where people are going to maintain datacenters and maintain the cloud. So, I don't think every customer in the world is moving to the cloud, but I think that on the margin, yes, you are seeing a bigger shift to cloud than you are people sticking out to. So with that fact in mind, we do see competitive replacements when customers have end-of-life for existing hardware installs, right? They are sitting there and saying, I am coming to end of life for legacy vendor A, B, C, D or E. Should I go replace this with new versions of legacy A, B, or C? Or should I look at a new network architecture, which allows me flexibility of having hardware and software to more access. So the example we gave, we did a $20 million deal with a customer who built – who bought Prisma Access for half of their employees, who bought hardware firewalls for the datacenters and who bought virtual firewalls for their cloud and they make sure they are all consistent. So, we do see customers end of life in legacy hardware, which is dead ended, which doesn't have a software form factor or a firewall in the cloud capability and we do see them transitioning to a hardware and software model. So it's not zero sum. It's not either or. It sometimes ends up being this and that. Tal Liani: Got it. Thank you. Operator: Next question comes from Brent Thill of Jefferies. Brent Thill : Thanks. Nikesh, there is a lot of questions from investors about this proposed equity structure and the timing and what this means. I am curious if you could just double click on what you think this looks like and why are you doing this right now? Nikesh Arora: Thanks for the question. Look, it's not – first of all, we have spent the last six to eight months preparing for the financials visibility or transparency of ClaiSec and NetSec. It requires a lot of work on our accounting side, lots of rules to make sure how we do transfer pricing between the entities. How do we leverage our common sales force from Palo Alto Network. So, and again, we are not doing anything yet. All we'd have is we presented to the Board, and they have agreed that this is an area for us to go ahead and work further on, which means we are looking at seeing how can we make the ClaiSec equity more transparent if we believe the market value is that differently than the Palo Alto equity. Now the market could say, this is great, we just love your Palo Alto equity and we will help it achieve all the price targets some of the more enthusiastic and optimistic ones you have. In which case, we may not have to do anything. If not, we may actually go take a look at the ClaiSec equity and see how do we create more transparency, because fundamentally, if you look at it, you've got one business and generating $1.5 billion in free cash flow, which is fantastic. We like it, 38% margin now gone to 41% whilst we are going through hardware-software transition. On the other hand, we have a $735 million ARR business growing at 77%. That business has negative cash flows and the market looks them together and values us one certain way, maybe the market will value it differently if we look at it differently. So we are just exploring the opportunity of being able to make that value more transparent. We are not going to change the operating structure of the company. We are going to still run it as one company with two basically agile business units, if that makes sense. Operator: Our next question comes from Michael Turits of KeyBanc. Michael Turits: Hey. Good afternoon, everybody, and nice quarter. It was a really good quarter on firewall platform as a service and you raised Network Security, but the product itself was just a slight beat and you didn't raise it. So what's the delta? What really raised that guidance on networks for the year and drove the outperformance? Nikesh Arora: That’s software. Michael Turits: What was the biggest piece, VM-Series, Prisma Access, subscription attach, how would you rank those? Nikesh Arora: Access, VMs, and subscriptions. Not because subscriptions aren't doing well. It's just a very large number. So, sustaining a large number growing at 30% is a good thing. Michael Turits: Great. So it's really, Prisma Access was the big driver? Nikesh Arora : Yes. I mean, look at Access has gone to a – when I joined, it was called GlobalProtect Cloud servicse. It was barely $10 million in the quarter. Now it's going gangbusters. I just said, now I just said, we did $20 million deal across a customer's entire enterprise, which included Cortex and Prisma Access in there. So, we can get to $10 plus million deals in Access in one deal where we were doing $10 million in one quarter, three years ago. So, that makes it interesting. Michael Turits: Great. Thanks, Nikesh. Operator: Next question comes from Jonathan Ho of William Blair. Jonathan Ho : Hi there. I just wanted to get some additional color in terms of the subscriptions that you've been, I guess, selling with the firewalls. Is there any way that you can maybe provide some additional perspectives on, maybe which ones are doing well, and what the average number of subscriptions being taken are and, yes, that would be great. Thank you. Nikesh Arora : Yes, Jonathan, that the – obviously, we had four when I joined and they are all had over 50% attach rates even before. The one which has gone from zero to 500 is DNS secured in the last two years. As we just announced, we crossed the 5,000 customer mark. Many of the newer subscriptions were just launched as part of 10.0 with our software. So they are all very recent, which includes IoT, SD-WAN, DLP, those things. Yes, those things. Lee Klarich : Right. Nikesh Arora : And, sorry, I got Lee sitting next to me, socially distanced, I keep nodding, asking him what he - if I forgot anything. But, SD-WAN, you can see is combined with our CloudGenix efforts. So we see SD-WAN traction between the two of them. We are seeing a lot of interest in DLP, which is very early. It's only a few weeks old and IoT, we see situations but that's more of an architectural sales, because not just at that subscription. People want to look at the IoT architecture for the enterprise. But we launched healthcare IoT. So it's part of the IoT effort. So, I have expectations from DLP. I have expectations from SD-WAN, obviously a combination of CloudGenix and IoT, but I think we'll see different approaches and different sort of trajectories in terms of adoption. IoT is a bigger ticket when we sell it. DLP is a simple attach and it’s easy to deploy like DNS security is. So they take different trajectories at different prices. Operator: Our last question comes from Andy Nowinski of D.A. Davidson. Andy Nowinski : Great. Thank you for squeezing me in. So, you mentioned a number of eight-figure deals for both Prisma Access and Prisma Cloud, which were record deals for the company. Just wondering if you could provide any more color with regard to your overall large deal activity for the quarter? Was the activity up year-over-year? And if you did see an increase in the overall activity, kind of what drove the growth? Thanks. Nikesh Arora : Yes. Andy, I think purely math. And I am waiting for Luis to go look. But purely mathematically, we added the same number of customers we did this year than we did last year and our billings grew 20%. So we got – we definitely got to have more bigger deals in there. Hurry up, Luis, what are you doing? So, yes, we are seeing strength. But I would say, it's kind of interesting. If you look at the landscape, the higher end of the cloud sales see bigger deals, because you are comparing them to large GCP, AWS, Azure spend. So even if you get 2% to 5% of the GCP, Azure, AWS commitment, you end up with the large deal, which is typically the seven plus figure range. And you see a similar activity in Prisma Access, because it ends up being a three-year TCV style deal with – if you get the top end, like 100,000 plus users, you end up with a seven-and-a-half figure deal. XDR in the market typically ends up in the $1 million to $2 million range, because of competitive pressures and competitive activity. So you just need to do a lot more XDR deals to get there. So, it's different depending obviously, firewall, again, depends on the installed base, the estate and the end of life and ELAs have their own characteristics depending on again, how much estate is there and how much people are reupping and how much software they are buying. Luis? Luis Visoso : So, here is how I look at it. If you add up the billings of the last largest deals that we did this quarter and you compare that to a year ago, the total is 35% higher. So it just gives you a magnitude of how significant those large deals are for us. Andy Nowinski : Thanks, guys. That's really helpful. Nikesh Arora : All right. Well, see, Brad Zelnick, if you change your mind about us, you don't even get to ask a question. All right. Thank you everyone. Thank you for joining us, and thank you very much for all your questions. We look forward to seeing many of you in our upcoming investor events. I also want to thank our customers, partners, and of course, our employees at Palo Alto Networks. Have a great day. Luis Visoso : Thank you.
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.
