After two difficult quarters, Palo Alto Networks delivered the earnings report we have come to expect from one among the world’s best cybersecurity firms on Monday night. The stock rose one other 2% in after-hours trading. Palo Alto’s fourth-quarter fiscal 2024 revenue rose 12% yr over yr to $2.19 billion, beating the consensus estimate of $2.16 billion compiled by LSEG. Adjusted earnings per share rose 5% to $1.51 within the three months ended July 31, beating EPS estimates of $1.41, LSEG data showed. Total billings accelerated to a yr over yr growth rate of 11%, reaching $3.5 billion, beating the estimate of $3.46 billion, in keeping with FactSet. In the previous quarter, billings rose 3%, causing considerable concern on Wall Street, despite management reiterating that the remaining performance obligation (RPO) metric is a greater indicator of underlying trends. Palo Alto’s remaining performance obligation (RPO) rose 20% year-over-year to $12.7 billion within the fiscal fourth quarter. While that is not quite the 23% year-over-year growth rate we saw within the previous quarter, it’s still a big increase and above the previous quarter’s $11.3 billion. With the U.S. presidential election fast approaching and the campaign already in full swing, we would not be surprised to see a rise in cyberattacks and management’s mixed forecast prove conservative. We subsequently reiterate our rating of two, as it isn’t our style to chase a stock that is up about 20% in two weeks. However, we’re increasing our price goal to $380 per share from $360. On balance, Palo Alto’s quarterly results were strong, and all signs point to continued growth. While product sales performance was a little bit weak, the weakness was greater than offset by the strength of the corporate’s subscription and support offerings. Companywide gross profit and operating income were all above expectations, adding to the strength in earnings and revenue. Free money flow also exceeded expectations, allowing the board to approve a $500 million increase in the corporate’s repurchase plan, bringing the remaining repurchase plan to a complete of $1 billion. RPO guidance was a little bit low, but this was greater than offset, in our view, by management’s better-than-expected revenue, earnings, and recurring revenue guidance for each the present quarter (fiscal 2025 Q1) and full-year fiscal 2025. To de-emphasize billing results, which represent the overall dollars billed in a given period, and as a substitute place more emphasis on RPO, which represents the overall value of contracts contracted throughout the quarter, management has stopped providing billing forecasts entirely. The team now also provides annual recurring revenue (ARR) forecast. PANW YTD Mountain Palo Alto Networks YTD The problem with billing numbers in recent quarters has been that the high cost of cash has led to increased negotiations over terms and financing options. RPO will not be quite as concrete as billing because no money has been received yet. However, CFO Dipak Golechha said on the conference call after the outcomes were announced, “The contracts included in our RPO are all non-cancellable and non-refundable.” On the conference call, CEO Nikesh Arora emphasized the pressure the corporate, Palo Alto’s customers and prospective customers, are under to forestall cyberattacks. Due to recent government regulations, an organization often has to reveal a breach before it has even had a likelihood to evaluate the total extent of the damage, Arora said. Response time is as critical as ever, he added, saying the corporate’s research has found that in “nearly half of cases, attackers can exfiltrate customer data in less than a day of compromise.” The financial impact of a breach is just getting greater as data becomes more priceless. In fact, Arora said, “In the last six months, financial damages from a single breach exceeded $1 billion. In another case, the impact to the business was existential, requiring significant work to recover and rebuild the system.” This style of disclosure presents opportunities for Palo Alto’s Unit 42 group, which is brought in to remediate these breaches. In our previous in-depth evaluation of the corporate, Unit 42 is Palo Alto’s threat research and security advisory team. Palo Alto Networks Why We Own It: We imagine cybersecurity is a secular growth market because malicious actors are relentless and organizations simply cannot afford not to take a position in defense. It’s a never-ending arms race. We imagine Palo Alto Networks specifically is uniquely positioned to win due to its best-in-class tools and broad product portfolio that allows it to offer an all-encompassing cybersecurity “platform” solution. Competitors: CrowdStrike, Fortinet, Cisco Systems Last Purchase: August 2, 2024 Launch: February 15, 2023 In the decision, Arora was also asked concerning the July 19 CrowdStrike outage that caused worldwide IT disruptions, leading to flight cancellations and canceled doctor’s appointments. A faulty update to a Crowdstrike cybersecurity product with advanced detection and response (XDR) crashed computers and data center servers world wide. The CrowdStrike issue caused two things, in keeping with Arora: “Customers are asking us: You have the same product. How do you use it? … We have a fundamentally different way of doing content updates, and we’ve had that for a very long time.” The Palo Alto CEO added that the second problem was that a number of the customers were “busy fixing that [CrowdStrike] problem as we try to close our deals with them. … They say, ‘I’m so busy fixing this.’ So we’ve had to drag out our deals in some cases with all our might. … But I think it’s caused customers to step back and say, ‘Wait a minute, I need to make sure I’m evaluating all the XDR opportunities in the market.'” Arora identified that Palo Alto is in the highest 4 but not No. 1 in XDR. Add within the increasing use of artificial intelligence — utilized by criminals to launch cyberattacks and by firms like Palo Alto to thwart them — and also you’re left with a really optimistic long-term outlook for Palo Alto Networks, thanks largely to earlier management realignment to drive what the CEO calls platformization. “AI adoption is moving at a rapid pace, faster than I’ve seen any other new technology, frankly. However, it follows a typical pattern,” Arora said. “Innovation is driving the speed of adoption, while security may play a secondary role. At the same time, attackers are leveraging AI capabilities to expand their attacks, target organizations more specifically, and scale their malicious activities beyond the capabilities of defenses that rely solely on humans.” “This environment, coupled with an increasingly sophisticated threat landscape and a complex set of point products that are not well integrated or even coordinated, is driving a growing need for ‘platformization,'” Arora added. “We saw this translate into an acceleration in our bookings in the second half of the year.” Clearly, management’s efforts are paying off, with existing customers becoming “platform customers” and existing platform customers becoming “multiplatform customers.” Management continues to see platformization as key to achieving its goal of averaging $15 billion by fiscal 2030. Following the earnings release, Arora told Jim Cramer on “Mad Money” that platformization is the longer term. “It doesn’t matter whose platform you buy, you can’t go back. You can’t go back to point solutions and start stitching them together.” Forecast For the primary quarter of fiscal 2025, Palo Alto expects the next (all estimates are from FactSet): Total revenue of $2.1 billion to $2.13 billion, barely higher than the $2.1 billion estimate Non-GAAP earnings per share (EPS) within the range of $1.47 to $1.49, significantly higher than the $1.42 estimate, even on the low end. (GAAP stands for generally accepted accounting principles. Non-GAAP results exclude one-time items and other non-recurring situations to make quarterly and year-on-year comparisons more realistic and supply a clearer picture of core businesses.) Remaining performance obligation within the range of $12.4 billion to $12.5 billion, barely low from expectations of $12.68 billion ARR (annual recurring revenue) for Next Generation Security within the range of $4.33 billion to $4.38 billion, above the $4.32 billion estimate even on the low end. For full fiscal yr 2025, management expects: Total revenue within the range of $9.1 billion to $9.15 billion, above expectations of $9.106 billion on the midpoint. Non-GAAP EPS within the range of $6.18 billion to $6.31 billion, above the consensus estimate of $6.22 per share on the midpoint. RPO (remaining performance obligation) within the range of $15.2 billion to $15.3 billion, barely low versus expectations of $15.7 billion. ARR for Next Generation Security is predicted to be within the range of $5.42 billion to $5.47 billion, above the $5.278 billion estimate even on the low end. Adjusted free money flow margin of 37% to 38% (Jim Cramer’s Charitable Trust is long PANW. 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Palo Alto Networks is headquartered in Santa Clara, California, USA on Monday, August 14, 2023. Palo Alto Networks Inc. earnings release is scheduled for August 18.
David Paul Morris | Bloomberg |
After two difficult quarters Palo Alto Networks delivered the earnings report we expect from one among the world’s best cybersecurity firms on Monday evening. The stock rose one other 2% in after-hours trading.
