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Palo Alto (PANW) Q2 Earnings and Revenues Surpass Estimates

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Palo Alto Networks PANW reported second-quarter fiscal 2019 non-GAAP earnings of $1.51 per share, which not only improved 43.8% on a year-over-year basis but also surpassed the Zacks Consensus Estimate of $1.22.

The company’s revenues of $711.2 million surged 30% year over year, outpacing the consensus estimate of $683 million.

The impressive results were mainly driven by several deal wins and increasing adoption of the company’s next-generation security platforms.

In a parallel announcement, Palo Alto introduced open and integrated AI-based continuous security platform — Cortex, and Cortex XDR and Traps 6.0 Endpoint Protection.

Quarterly Details

Product revenues increased approximately 32.6% to $271.6 million. The company witnessed a 29% jump in subscription and support revenues to $439.6 million. SaaS-based subscription revenues rose 36% from the year-ago quarter to $249.7 million. Support revenues increased 21% to $189.9 million.

Billings improved 27% year over year to $852.5 million.

On a geographical basis, revenues from the Americas climbed 27%. Revenues from Europe, the Middle East and Africa and Asia Pacific were up 38% and 35%, respectively.

Management mentioned that Palo Alto’s first speedboat in cloud security, which was launched in the last reported quarter, was a positive, with approximately 8000 adoptions of the offering.

Its GlobalProtect cloud offering also recorded success with some of the large players during the reported quarter. A couple of the most significant wins are 25,000 users at a global financial services company and 80,000 mobile users for one of France's largest state-owned public services.

Palo Alto also continued to benefit from the Redlock acquisition, exceeding its quarterly expectations from the business by 50%.

Notably, during the quarter, the company signed a major deal with a data center at one of Europe's key car manufacturers.

Moreover, Palo Alto expanded its hardware footprint through deals with a major online gaming company and a major global retailer.

A mammoth deal was also signed between it and several subsidiaries of one the largest broadcasting companies in the United States over its VM-Series firewall.

Moreover, 47,000 endpoints were secured in a deal with a major U.S. university health care system.

Management also noted that over the last decade, the company experienced great success with attached subscriptions, the most successful ones having attach rates of about 90%.

Moreover, Palo Alto has added a new product to its hardware portfolio. The PA-7000 series features powerful throughput capabilities, and will aid customers with large data centers and high volumes of encrypted traffic.

Further, the company made its K2 series available, with which it expects to address the stringent security needs that come with the growing adoption of IoT and the advent of 5G in the service provider market.

Operating Results

Palo Alto’s non-GAAP gross margin expanded 30 basis points (bps) on a year-over-year basis to 76.3%.

Non-GAAP operating expenses of $367.5 million, as percentage of revenues, improved 220 bps to 51.7%.  Non-GAAP operating margin expanded 250 bps to 24.6%.

Balance Sheet

Palo Alto exited the fiscal second quarter with cash, cash equivalents and short-term investments of approximately $3.6 billion compared with $3.2 billion at the end of the preceding quarter.

Furthermore, long-term debt came in at $808.6 million. The company’s balance sheet was free of any long-term debt in the preceding quarter.

It generated cash flow from operations of $275.4 million compared with $252.3 million in the previous quarter. Free cash flow came in at $251.9 million.

During the quarter, Palo Alto completed its $1 billion share repurchase program. Approximately 1.9 million shares were repurchased at an average price of approximately $178 per share.

On Feb 22, the company announced a new $1 billion share repurchase program. Its authorization will expire on Dec 31, 2020.

Guidance

For the third quarter of fiscal 2019, Palo Alto anticipates revenues of $697-$707 million, up 23-25% year over year.

Non-GAAP effective tax rate for the current quarter is projected to be approximately 22%.

Non-GAAP earnings per share are estimated in the range of $1.23-$1.25, which includes expenses related to the impending acquisition of Demisto. The EPS also includes an expense of 1 cent per share as a result of the U.S. tariffs on Chinese goods.

The company expects Demisto billings of approximately $50 million to $55 million in the year following the completion of the buyout.

Palo Alto continued to invest in in Advanced Endpoint Protection with its newly launched behavior threat prevention engine Traps 6.0, which features container security protections. The company boasts approximately 4,000 Traps customers — a large chunk of them managing Traps from the cloud.

Zacks Rank & Stocks to Consider

Palo Alto currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Symantec Corporation SYMC, Fortinet, Inc. FTNT, and eGain Corporation EGAN, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Symantec, Fortinet and eGain is projected to be 7.9%, 16.75% and 30%, respectively.

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