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Palo Alto Reports Q1 Loss; Shares Up on Y/Y Revenue Growth

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Shares of Palo Alto Networks Inc.PANW gained about 3.8% in after-hour trade yesterday in response to the better-than-expected revenue growth during first-quarter fiscal 2016. The robust top-line performance was mainly driven by customer addition and expansion of the existing customer base. Also, encouraging second-quarter guidance boosted the share price.

However, higher operating expenses more than offset the benefits of robust revenue growth resulting in wider year-over-year loss. Palo Alto Networks reported adjusted loss per share (excluding amortization and other one-time items but including stock-based compensation), on a proportionate tax basis, of 36 cents. The figure was significantly greater than the Zacks Consensus Estimate of a loss of 16 cents. The company suffered a loss of 26 cents in the year-ago quarter.

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Revenues

Palo Alto Networks reported revenues of $297.2 million, which not only surged 54.6% year over year but also beat the Zacks Consensus Estimate of $280 million. Improvement in revenues was primarily backed by the strength in the network security market, strong product line-up, deal wins and investment plans.

Product revenues jumped 45.5% to $147.7 million, mainly driven by growth in data center products. Also, a 64.6% surge in service revenues on a year-over-year basis positively impacted results. SaaS-based subscription revenues (part of service revenues) climbed 69% from the year-ago period.

Geographically, on a year-over-year basis, revenues from the Americas increased 60% and represented 71% of total revenue. Europe, the Middle East and Africa (EMEA) went up 40%, accounting for 18%. Asia-Pacific was up 46% and brought in the rest of the total revenue.

Also, customer wins coupled with expansion of the existing customer base supported quarterly revenues. Moreover, billings jumped 61% year over year to $297.2 million during the quarter.

Operating Results

Palo Alto Networks' adjusted gross margin (excluding amortization and other one-time items but including stock-based compensation) increased 120 basis points (bps) on a year-over-year basis to 73.4%, primarily backed by favorable product mix and higher revenue base.

The company reported adjusted operating loss (excluding amortization and other one-time items but including stock-based compensation) of $20.6 million, which widened from a loss of $13.7 million suffered a year ago. Higher adjusted operating expenses (up 56.4% year over year) also impacted operating results. Additionally, adjusted operating expenses, as a percentage of revenues, increased 90 bps year over year.

The company's adjusted net loss (excluding amortization and other one-time items but including stock-based compensation) came in at $30.4 million, wider than a loss of $21.4 million reported last year.

Balance Sheet & Cash Flow

Palo Alto Networks exited the first quarter with cash, cash equivalents and short-term investments of approximately $761.3 million compared with $789 million in the previous quarter. Receivables were $196.4 million as against $212.4 million in the last quarter. Palo Alto Networks' balance sheet does not have any long-term debt.

The company reported cash flow from operations of $146.7 million during the first quarter and free cash flow of $127.2 million.

Guidance

For the second quarter of fiscal 2016, Palo Alto Networks expects revenues in the range of $314 million to $318 million (mid-point $316 million), up 44% to 46% year over year. The Zacks Consensus Estimate is pegged at $306 million. The company expects non-GAAP earnings per share within 38 cents to 39 cents (excluding stock-based compensation expenses), while the Zacks Consensus Estimate stands at a loss of 20 cents.

Our Take

Palo Alto Networks allows firms, service providers and government bodies to impose tighter security measures through its network security platform. The company reported wider-than-expected loss in the first quarter, while revenues comfortably surpassed the Zacks Consensus Estimate. The company provided encouraging second-quarter guidance.

Revenue growth seems to be steady, aided by strength across all its geographical regions and business segments. Also, customer wins coupled with expansion of the existing customer base positively impacted revenues. We believe that the company's product refreshes will boost revenues, going forward.

The company is also keen on expanding its cloud exposure. Nevertheless, a volatile spending environment and competition from Cisco Systems, Inc. CSCO and Check Point Software Technologies Ltd. CHKP remain the concerns.

Currently, Palo Alto Networks has a Zacks Rank #3 (Hold). A better-ranked stock in the broader technology sector is Demand Media, Inc. DMD , sporting a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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