What to Expect From Palo Alto Networks Inc Q2 Earnings

By Harsh Chauhan Markets Fool.com

Image source: Palo Alto Networks.

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Palo Alto Networks (NYSE: PANW) will look for redemption when it releases its second-quarter fiscal 2017 results after the bell on Feb. 28. The network security specialist had offered a weaker-than-expected outlook in its last quarterly report as some of its deals requiring "additional approvals" got pushed back.

Data by YCharts.

However, Palo Alto shares have gained some momentum over the past few months. A robust earnings report from peer Check Point Software in January has lifted cybersecurity stocks as a whole, and Palo Alto will look to extend its positive momentum with a strong outlook of its own. Here's what investors should expect from the fiscal second-quarter report.

How the numbers might look like

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Wall Street expects Palo Alto revenue to rise 28% year-over-year to $429 million during the quarter, matching the midpoint of the company's own expectations. Analysts were originally more bullish,but longer lead times in deal completion forced the company to dial back its guidance.

The company should not have much difficulty in hitting this range. Earnings, meanwhile, are expected to rise from $0.40 per share in the prior-year period to a midpoint of $0.62 per share.

As it turns out, Palo Alto has a trend of beating both revenue and earnings expectations by comfortable margins, barring a slight hiccup in the first quarter of fiscal 2017.

Quarter

Revenue outlook

Actual revenue

EPS outlook

Actual EPS

Q2 2016

$314 to $318

$334.7

$0.38 to $0.39

$0.40

Q3 2016

$335 to $339

$345.8

$0.41 to $0.42

$0.42

Q4 2016

$386 to $390

$400.8

$0.48 to $0.50

$0.50

Q1 2017

$396 to $402

$398.1

$0.51 to $0.53

$0.55

Q2 2017

$426 to $432

TBD

$0.61 to $0.63

TBD

Dollars in millions, except for per share amounts. Data Source: Palo Alto Networks quarterlyreports.

Palo Alto appears on track to beat both estimates for the second quarter as well thanks to consistent customer growth. It had 35,500 customers at the end of the previous quarter, up considerably from the 30,000 it logged last year.

More importantly, the company is trying to increase the lifetime value of its customer base with a subscription model. For example, Palo Alto enjoyed such gains of 50% for its top 25 customers in the first quarter. So if the company once again adds around 1,500 to 2,000 clients, like it has done over the past three quarters, it will have nice tailwinds heading into the report.

All eyes will be on the outlook

The forward-looking outlook will also be crucial. Weaker-than-expected revenue guidance sent the stock packinglast time. CEO Mark McLaughlin, however, had a seemingly valid excuse for the company's disappointing outlook:

We are seeing purchasing decisions have to go through additional approvals, particularly in larger companies on the increasingly larger opportunities we are winning. As a result, we saw some deals push. Our win rates remain as high as ever, a good number of the pushed deals have closed, and we are benefiting long-term as the security provider of choice.

Now, bigger and more complex deals do take some time to execute, but they ideally lead to more revenue once closed. This is why investors should not panic as Palo Alto is working to maximize the value of each customer.

And this is exactly what Wall Street is expecting to see on Tuesday. Consensus estimates pin third-quarter revenueat $454.5 million. This translates into year-over-year revenue gains of about 31%, topping the second quarter's growth projections. Investors should look out for the release to see if Palo Alto Networks is able to hold onto or even extend its recent gains.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.