Palo Alto Networks, Inc. Rides Customer Growth to a Strong Quarter

By Steve Symington Markets Fool.com

Palo Alto Networks (NYSE: PANW) announced better-than-expected fiscal third-quarter 2017 results on Wednesday after the market closed, easily exceeding its financial guidance on both the top and bottom lines as new customers continue to flock to its novel next-gen security platform.

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With shares of Palo Alto Networks up around 12% in after-hours trading as of this writing, let's dive deeper and see what the network and enterprise security specialist accomplished over its latest three-month reporting period.

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Palo Alto Networks results: The raw numbers

Metric

Fiscal Q3 2017*

Fiscal Q3 2016

Year-Over-Year Change

Revenue

$431.8 million

$345.8 million

24.9%

GAAP net income (loss)

($60.9 million)

($64.1 million)

N/A

GAAP earnings (loss) per share.

($0.67)

($0.73)

N/A

Data source: Palo Alto Networks. *For the quarter ended April 30, 2017.

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What happened with Palo Alto Networks this quarter?

  • On an adjusted (non-GAAP) basis, which adds perspective by excluding items such as stock-based compensation and acquisition expenses, Palo Alto's net income increased 35% year over year to $57.1 million. Adjusted net income per share rose 32.6% to $0.61.
  • These results compare favorably with Palo Alto Networks' latest outlook, which called for fiscal third-quarter revenue of $406 million to $416 million, and adjusted net income per share of $0.54 to $0.56. To be fair, we should note that management was clear in stating that guidance was "prudent and cautious" as the company worked through execution issuesthat held back last quarter's results.
  • Top-line growth included a 1.3% increase in product revenue to $164.2 million, and 45.7% growth in subscription and support revenue to $267.6 million.
  • Billings grew 11.9% year over year to $544.1 million.
  • Cash flow from operations totaled $211.2 million, and free cash flow came to $162.6 million. Palo Alto Networks ended the quarter with $2.1 billion in cash, cash equivalents, and investments -- roughly flat from last quarter.
  • Traps version 4.0 was launched, with an expanded multi-method prevention approach to block malware and exploits before they compromise endpoints. The company also rolled out new ransomware detection and mitigation, and support for macOS and Android.
  • Palo Alto expanded the availability of its Aperture security software-as-a-service to Europe and Asia-Pacific, with new data centers in Germany and Singapore.
  • A new Internet of Things (IoT) cybersecurity alliance was formed with AT&T, IBM, Nokia, Symantec, and Trustonic to help customers "demistify IoT security, share best practices, and raise awareness" surrounding security for the IoT ecosystem.

What management had to say

"We reported record revenue of $432 million in our fiscal third quarter and added the second highest number of new customers in the company's history," stated Palo Alto CEO Mark McLaughlin. "The integrated and highly automated prevention capabilities of our next-generation security platform continue to differentiate us in the market as we help our customers protect our digital way of life."

CFO Steffan Tomlinson added, "Expansion within our existing customer base and new customer acquisitions in the quarter drove growth in revenue, billings, and deferred revenue."

Looking forward

For the current fiscal fourth quarter, Palo Alto expects revenue in the range of $481 million to $491 million, good for year-over-year growth of 20% to 23%. That should translate to adjusted net income per diluted share of $0.78 to $0.80. By comparison -- and though we don't usually pay close attention to Wall Street's demands -- consensus estimates predicted lower fiscal Q4 adjusted earnings of $0.74 per share on revenue of $484.4 million.

All things considered, this was a great quarter from Palo Alto Networks -- especially as it appears to have corrected the aforementioned execution issues that effectively caused last quarter's post-earnings drop. If Palo Alto can sustain its momentum as it works to take market share and continue to drive growth in these early stages, investors should be more than pleased with the resulting gains.

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Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.