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Palo Alto (PANW) Up 1.7% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Palo Alto Networks (PANW). Shares have added about 1.7% in that time frame, underperforming 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 Q3 Earnings and Revenues Beat Estimates

Palo Alto Networks reported better-than-expected results for the third quarter of fiscal 2024. The company reported non-GAAP earnings of $1.32 per share for the third quarter, which beat the Zacks Consensus Estimate of $1.25. The bottom line improved 20% from the year-ago quarter’s non-GAAP earnings of $1.10 per share and came above the company’s earlier guidance range of $1.24-$1.26.

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Palo Alto’s third-quarter revenues of $1.98 billion beat the Zacks Consensus Estimate of $1.97 billion and rose 15% from the year-ago reported figure. Third-quarter revenues also came toward the higher end of management’s previously provided guidance range of $1.95-$1.98 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 third-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 3% to $2.33 billion in the third quarter and came within the company’s projection of $2.3-$2.35 billion.

Third-Quarter Performance

Product revenues increased 0.7% year over year to $391 million and contributed to 19.7% of the total revenues. The company’s Subscription and Support revenues, which accounted for 80.3% of the total revenues, improved 19.6% to $1.59 billion.

Deferred revenues at the end of the fiscal third quarter were $5.01 billion. Palo Alto’s remaining performance obligation climbed to $11.3 billion, reflecting a year-over-year increase of 23%.

Palo Alto’s next-generation security annualized recurring revenues were $3.79 billion in the reported quarter compared with $3.49 billion in the previous quarter and $2.57 billion in the year-ago quarter.

Non-GAAP gross profits increased 17.6% to $1.54 billion. The non-GAAP gross margin expanded 150 basis points (bps) to 77.6%, 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 24.9% to $507.9 million. Meanwhile, the non-GAAP operating margin expanded 200 bps to 25.6% compared with the year-ago quarter.

Balance Sheet & Cash Flow

Palo Alto exited the fiscal third quarter with cash, cash equivalents and short-term investments of $2.89 billion, down from $3.37 billion at the end of the previous quarter. As of Apr 30, 2024, the company had long-term operating lease liabilities of $369.8 million.

PANW generated operating cash flow of $528.9 million and non-GAAP adjusted free cash flow of $491.5 million in the fiscal third quarter. The non-GAAP adjusted free cash flow margin for the second quarter came in at approximately 25%. In the first three quarters of fiscal 2024, the company generated operating cash flow of $2.75 billion and non-GAAP adjusted free cash flow of $2.63 billion.

Guidance Update

Palo Alto raised its fiscal 2024 guidance for revenues and billings. The company now projects revenues between $7.99 billion and $8.01 billion, up from the earlier guidance range of $7.95-$8 billion. Similarly, the guidance range for fiscal 2024 billings has been raised to $10.13-$10.18 billion from $10.1-$10.2 billion anticipated earlier. The year-over-year growth ranges for updated revenues and billings guidance are 16% and 10-11%, respectively.

Palo Alto raised its non-GAAP earnings forecast to the $5.56-$5.58 per share band from the $5.45-$5.55 per share range anticipated previously. The company also raised its non-GAAP operating margin guidance for fiscal 2024 to 26.8-27% from 26.5-27% projected earlier.

The guidance range for the non-GAAP adjusted free cash flow margin has been revised upward to 38.5-39% from 38-39% forecasted previously. The projection for next-generation security ARR has been revised upward to $4.05-$4.10 billion from $3.95-$4 billion anticipated previously.

Palo Alto initiated guidance for the fourth quarter. For the fourth quarter of fiscal 2024, PANW projects revenues between $2.15 billion and $2.17 billion, which suggests year-over-year growth of 10-11%. Total billings are anticipated between $3.43 billion and $3.48 billion, which indicates an increase of 9-10% from the year-ago quarter. Non-GAAP earnings are projected in the range of $1.40-$1.42 per share.

How Have Estimates Been Moving Since Then?

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

The consensus estimate has shifted 10.05% due to these changes.

VGM Scores

Currently, Palo Alto has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile 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.

Performance of an Industry Player

Palo Alto belongs to the Zacks Internet - Software industry. Another stock from the same industry, Sea Limited Sponsored ADR (SE), has gained 4.1% over the past month. More than a month has passed since the company reported results for the quarter ended March 2024.

Sea Limited reported revenues of $3.79 billion in the last reported quarter, representing a year-over-year change of +27.8%. EPS of $0.21 for the same period compares with $0.61 a year ago.

Sea Limited is expected to post earnings of $0.54 per share for the current quarter, representing a year-over-year change of -34.9%. 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 Sea Limited. Also, the stock has a VGM Score of D.

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