Why Is Palo Alto (PANW) Up 7.7% Since Last Earnings Report?
A month has gone by since the last earnings report for Palo Alto Networks (PANW). Shares have added about 7.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Palo Alto due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Palo Alto Q2 Earnings Beat, Cut FY24 Revenue Guidance
Palo Alto Networks reported better-than-expected results for the second quarter of fiscal 2024. The company reported non-GAAP earnings of $1.46 per share for the second quarter, beating the Zacks Consensus Estimate of $1.30. The bottom line improved 39% from the year-ago quarter’s non-GAAP earnings of $1.05 per share and came toward the higher end of the company’s earlier guidance range of $1.29-$1.31.
Palo Alto’s second-quarter revenues of $1.98 billion beat the Zacks Consensus Estimate of $1.97 billion and grew 19% from the year-ago reported figure. Second-quarter revenues also came toward the higher end of management’s previously provided guidance range of $1.955-$1.985 billion.
The top line was primarily driven by growth across the Products, Services and Subscription segments. Additionally, the increased adoption of Palo Alto’s Next-Generation Security platforms, driven by the hybrid work culture and the heightened need for stronger security, also aided second-quarter results.
The company’s strong quarterly performance reflects its sustained focus on product innovation, a shift in its business model to subscription-based services, building sales capability, platform integration and continued investments in the go-to-market strategy.
Billings increased 16% to $2.35 billion in the second quarter and came within the company’s projection of $2.335-$2.385 billion.
Second-Quarter Performance
Product revenues increased 10.7% year over year to $390.7 million and contributed to 19.8% of the total revenues. The company’s Subscription and Support revenues, which accounted for 80.2% of the total revenues, improved 21.7% to $1.58 billion.
Deferred revenues at the end of the fiscal second quarter were $4.92 billion. Palo Alto’s remaining performance obligation climbed to $10.8 billion, reflecting a year-over-year increase of 22%.
Palo Alto’s next-generation security annualized recurring revenues were $3.49 billion in the reported quarter compared with $3.23 billion in the previous quarter and $2.33 billion in the year-ago quarter.
Non-GAAP gross profits increased 23.3% to $1.54 billion. The non-GAAP gross margin expanded 250 basis points (bps) to 78%, primarily driven by a higher software mix, normalization in the supply-chain environment and some efficiencies in customer support.
The non-GAAP operating income rose 49.7% to $564.2 million. Meanwhile, the non-GAAP operating margin expanded 580 bps to 28.6% compared with the previous quarter.
Balance Sheet & Cash Flow
Palo Alto exited the fiscal second quarter with cash, cash equivalents and short-term investments of $3.37 billion, up from $3.89 billion at the end of the previous quarter. As of Jan 31, 2024, the company had long-term operating lease liabilities of $362.7 million.
PANW generated an operating cash flow of $690 million and a non-GAAP adjusted free cash flow of $654.8 million in the fiscal second quarter. The non-GAAP adjusted free cash flow margin for the second quarter came in at 33.2%. In the first half of fiscal 2024, the company generated operating cash flow of $2.22 billion and a non-GAAP adjusted free cash flow of $2.14 billion.
Lowered Fiscal 2024 Guidance
Palo Alto lowered its fiscal 2024 guidance for revenues and billings. The company now projects revenues between $7.95 billion and $8 billion, down from the earlier guidance range of $8.15-$8.20 billion. Similarly, the guidance range for fiscal 2024 billings has been lowered to $10.1-$10.2 billion from $10.7-$10.8 billion anticipated earlier.
Nonetheless, Palo Alto raised its non-GAAP earnings forecast to the $5.45-$5.55 per share band from the $5.40-$5.53 per share range anticipated previously. The company also raised its non-GAAP operating margin guidance for fiscal 2024 to 26.5-27% from 26-26.5% projected earlier.
The guidance range for the non-GAAP adjusted free cash flow margin has been revised upward to 38-39% from 37-38% forecasted previously. The projection for next-generation security ARR has been kept unchanged at $3.95-$4 billion.
Palo Alto initiated guidance for the third quarter. For the third quarter of fiscal 2024, PANW projects revenues between $1.95 billion and $1.98 billion, suggesting year-over-year growth of 13-15%. Total billings are anticipated between $2.3 billion and $2.35 billion, indicating an increase of 2-4% from the year-ago quarter. Non-GAAP earnings are projected in the range of $1.24-$1.26 per share.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
VGM Scores
At this time, Palo Alto has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Palo Alto has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Palo Alto belongs to the Zacks Internet - Software industry. Another stock from the same industry, HubSpot (HUBS), has gained 6.2% over the past month. More than a month has passed since the company reported results for the quarter ended December 2023.
HubSpot reported revenues of $581.91 million in the last reported quarter, representing a year-over-year change of +23.9%. EPS of $1.76 for the same period compares with $1.11 a year ago.
HubSpot is expected to post earnings of $1.47 per share for the current quarter, representing a year-over-year change of +22.5%. Over the last 30 days, the Zacks Consensus Estimate remained unchanged.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for HubSpot. Also, the stock has a VGM Score of C.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Palo Alto Networks, Inc. (PANW) : Free Stock Analysis Report
HubSpot, Inc. (HUBS) : Free Stock Analysis Report
