A month has gone by since the last earnings report for Palo Alto Networks (PANW). Shares have added about 26.5% 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 drivers.
Palo Alto Networks Q2 Earnings & Revenues Top Estimates
Palo Alto reported strong second-quarter fiscal 2022 results, wherein both earnings and revenues not only surpassed the respective Zacks Consensus Estimate but also improved year over year.
The company reported non-GAAP earnings of $1.74 per share, beating the Zacks Consensus Estimate of $1.65. The bottom line improved 12% from the year-ago quarter’s non-GAAP earnings of $1.55 per share.
Palo Alto’s fiscal second-quarter revenues of $1.32 billion surpassed the Zacks Consensus Estimate of $1.28 billion. The top line grew 30% from the year-earlier reported figure.
The top line was aided by several deal wins, increased adoption of Palo Alto’s next-generation security platforms due to hybrid work culture and the heightened need for stronger security.
Palo Alto’s strong quarterly performance reflects its sustained focus on product innovation, a shift in the business model to subscription-based services, platform integration and continued investments in the go-to-market strategy.
Quarterly Details
Product revenues increased 20.9% year over year to $308 million and contributed 23.4% to total revenues. The company’s subscription and support revenues, which accounted for 76.6% of total revenues, improved 32.4% to $1008.9 million.
Billings jumped 32% to $1.61 billion. Deferred revenues at the end of the second quarter were $2.96 billion. Palo Alto’s remaining performance obligation climbed to $6.3 billion, reflecting a year-over-year surge of 36%.
Palo Alto’s Next-Gen Security (NGS) annualized recurring revenues (ARR) were $1.43 billion in the reported quarter compared with $840 million in the year-ago quarter and $1.27 billion in the previous quarter.
The company’s non-GAAP gross profit increased 27.4% to $975 million. However, non-GAAP gross margin contracted 130 basis points (bps) to 74% primarily due to heightened costs associated with the supply chain issues.
Non-GAAP operating income rose 20% to $242.7 million. However, non-GAAP operating margin contracted 140 bps to 18.4%, mainly due to lower gross margin.
Balance Sheet & Cash Flow
Palo Alto exited the fiscal second quarter with cash, cash equivalents and short-term investments of $3.34 billion compared with $3.46 billion at the end of previous quarter. The company’s balance sheet does not carry any long-term debt.
The company generated an operating cash flow of $482.6 million and a non-GAAP adjusted free cash flow of $441 million during the second quarter. Non-GAAP adjusted free cash flow margin came in at 33.5%.
Guidance
Buoyed by strong second-quarter performance, Palo Alto raised its fiscal 2022 guidance.
The company now anticipates fiscal 2022 revenues of $5.425-$5.475 billion, suggesting growth in the range of 27-29% from the fiscal 2021 level. Earlier, it had projected revenues between $5.35 billion and $5.40 billion, which indicated year-over-year growth of 26-27%.
Total billings are now estimated to be $6.80-$6.85 billion for fiscal 2022, indicating a year-over-year increase of 25-26%. Earlier, it had estimated billings in the range of $6.675-$6.725 billion, implying a 22-23% increase from the year-ago quarter.
Palo Alto raised its non-GAAP earnings guidance ranges from $7.15-$7.25 per share to $7.23-$7.30 per share.
However, non-GAAP adjusted free cash flow margin is still expected in the range of 32-33%.
For the third quarter of fiscal 2022, Palo Alto projects revenues between $1.345 billion and $1.365 billion, suggesting year-over-year growth to be 25-27%.
Total billings are anticipated between $1.59 billion and $1.61 billion, indicating an increase of 24-25% from the year-ago quarter. Non-GAAP earnings are projected to be $1.65-$1.68 per share.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
The consensus estimate has shifted 25.46% due to these changes.
VGM Scores
At this time, Palo Alto has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. 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 #3 (Hold). We expect an in-line return from the stock in the next few months.
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