Why Is Palo Alto (PANW) Down 14.4% Since Last Earnings Report?

A month has gone by since the last earnings report for Palo Alto Networks (PANW). Shares have lost about 14.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Palo Alto due for a breakout? 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 Beats Q2 Earnings Estimates

Palo Alto Networks reported second-quarter fiscal 2021 non-GAAP earnings of $1.55 per share, which surpassed the Zacks Consensus Estimate by 7.64%. Moreover, the bottom line compared favorably with the year-ago quarter’s earnings of $1.19 per share.

The company’s revenues of $1.02 billion improved 25% year over year. The figure also beat the Zacks Consensus Estimate of $986 million.

The top line was primarily aided by several deal wins and increased adoption of the company’s next-generation security platforms on the rise in the remote-working trend and heightened need for stronger security. Growing traction in the Prisma and Cortex offerings also acted as a tailwind.

Quarterly Details

Product revenues increased 3% year over year to $254.7 million and contributed to 25% of the total revenues. The company’s subscription and support revenues, which accounted for 75% of the total revenues, improved 34% to $762 million.

Further, billings improved 22% year over year to $1.2 billion. Deferred revenues jumped 30% to $4.2 billion.

Region-wise, revenues from the Americas climbed 27% while Europe, the Middle East and Africa, and Asia Pacific revenues rose 24% and 14%, respectively.


Palo Alto continued to see penetration of the Cortex portfolio into large companies. Management noted that about 35% of Palo Alto’s Global 2000 customers and 66% of its Fortune 100 customers have adopted Cortex, highlighting the importance of automation and advanced threat detection.

Notably, Palo Alto ended the second quarter with 9,038 employees, including 176 employees from Expanse.

Palo Alto’s non-GAAP gross margin contracted 110 basis points (bps) on a year-over-year basis to 75.3%. However, non-GAAP operating margin improved 190 bps to 19.8%. Operational efficiencies, and lower travel and event expenses due to COVID-19, which more than offset the incremental investment in headcount, drove operating margin expansion.

Palo Alto exited the fiscal second quarter with cash, cash equivalents and short-term investments of $4 billion compared with $3.22 billion recorded at the end of the previous quarter.

During the quarter, it generated cash flow from operations of $365 million and free cash flow of $332 million.

Guidance

For third-quarter fiscal 2021, Palo Alto anticipates year-over-year revenue growth of 21-22% to $1.05-$1.06 billion. Billing growth is anticipated between 20% and 22%, ($1.22 billion-$1.24 billion).

Non-GAAP earnings per share are estimated in the range of $1.27-$1.29.

Encouraged by the strong second-quarter performance, the company raised its guidance for fiscal 2021. Palo Alto now projects revenues of $4.15-$4.20 billion, up from the previous guidance of $4.09-$4.14 billion, indicating year-over-year growth of 22-23%. Billing growth is now anticipated between 19% and 20% ($5.13 billion-$5.18 billion).

Palo Alto forecasts fiscal 2021 adjusted earnings between $5.80 and $5.90 per share. Earlier, the company had projected adjusted earnings between $5.70 and $5.80 per share.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

VGM Scores

At this time, Palo Alto has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Palo Alto has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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