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Why Is Palo Alto (PANW) Up 24% Since Last Earnings Report?

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A month has gone by since the last earnings report for Palo Alto Networks (PANW - Free Report) . Shares have added about 24% 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 the most recent earnings report in order to get a better handle on the important drivers.

Palo Alto Q1 Earnings Beat, Billings Miss Guidance

Palo Alto Networks reported better-than-expected results for the first quarter of fiscal 2024. However, shares of PANW declined 5.3% during Wednesday’s extended trading session as first-quarter billings came lower than the company’s forecast.

Though billings increased 15.8% to $2.02 billion in the first quarter, it fell short of the company’s projection of $2.05-$2.08 billion. Our estimates for billings were pegged at $2.07 billion.

The company reported non-GAAP earnings of $1.38 per share for the first quarter, beating the Zacks Consensus Estimate of $1.16. The bottom line improved 66.3% from the year-ago quarter’s non-GAAP earnings of 83 cents per share.

Palo Alto’s first-quarter revenues of $1.88 billion beat the Zacks Consensus Estimate of $1.84 billion and grew 20% from the year-ago reported figure. The top line was primarily driven by the normalization of supply chain and growth across Products, Services and Subscription segments. Additionally, 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 the first-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.

Quarterly Details

Product revenues increased 3.4% year over year to $341.1 million and contributed to 18.2% of the total revenues. The company’s Subscription and Support revenues, which accounted for 81.8% of the total revenues, improved 24.6% to $1.54 billion. Our estimates for Product and Subscription and Support revenues were pegged at $372.7 million and $1.45 billion, respectively.

Deferred revenues at the end of the fiscal first quarter were $4.73 billion. Palo Alto’s remaining performance obligation climbed to $10.4 billion, reflecting a year-over-year increase of 26%. Our estimates for deferred revenues and remaining performance obligation were pegged at $9.5 billion each.

Palo Alto’s next-generation security annualized recurring revenues were $3.23 billion in the reported quarter compared with $2.95 billion in the previous quarter and $2.11 billion in the year-ago quarter. Our estimate for first-quarter next-generation security annualized recurring revenues was pegged at $3.09 billion.

Non-GAAP gross profits increased 26.2% to $1.47 billion. The non-GAAP gross margin expanded 370 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 64% to $529 million. Meanwhile, the non-GAAP operating margin expanded 760 bps to 28.2% compared with the previous quarter.

Balance Sheet & Cash Flow

Palo Alto exited the fiscal first quarter with cash, cash equivalents and short-term investments of $3.89 billion, up from $2.39 billion at the end of the previous quarter. As of Oct 31, 2023, the company had long-term operating lease liabilities of $275.8 million.

PANW generated an operating cash flow of $1.53 billion and a non-GAAP adjusted free cash flow of $1.49 billion in the fiscal first quarter. The non-GAAP adjusted free cash flow margin for the first quarter came in at 79.3%.

Second Quarter and Fiscal 2024 Guidance

Palo Alto initiated guidance for the second quarter and updated the outlook for the full fiscal 2024. For the second quarter of fiscal 2024, PANW projects revenues between $1.955 billion and $1.985 billion, suggesting year-over-year growth of 18-20%. Total billings are anticipated between $2.335 billion and $2.385 billion, indicating an increase of 15-18% from the year-ago quarter. Non-GAAP earnings are projected in the range of $1.29-$1.31 per share.

For fiscal 2024, the company continues to project revenues between $8.15 billion and $8.20 billion, suggesting year-over-year growth of 18-19%.

Total billings of PANW are now estimated in the range of $10.7-$10.8 billion for fiscal 2024, down from the previous range of $10.9-$11 billion. The updated billings guidance reflects a year-over-year increase of 16-17% instead of 18-20% projected earlier.

Palo Alto raised its non-GAAP earnings forecast to $5.40-$5.53 per share from $5.27-$5.40 per share anticipated previously. The company also raised its non-GAAP operating margin guidance for fiscal 2024 to 26-26.5% from 25-25.5% projected earlier. The guidance range for non-GAAP adjusted free cash flow margin has been kept unchanged at 37-38%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

The consensus estimate has shifted 8.45% due to these changes.

VGM Scores

At this time, Palo Alto has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile 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 #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, Paypal (PYPL - Free Report) , has gained 8.9% over the past month. More than a month has passed since the company reported results for the quarter ended September 2023.

Paypal reported revenues of $7.42 billion in the last reported quarter, representing a year-over-year change of +8.4%. EPS of $1.30 for the same period compares with $1.08 a year ago.

Paypal is expected to post earnings of $1.36 per share for the current quarter, representing a year-over-year change of +9.7%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.3%.

Paypal has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of B.


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