Palo Alto Networks Inc. Extends Its Market Leadership

For the third time in as many quarters, Palo Alto Networks just easily exceeded Wall Street's high expectations.

This time for its fiscal second quarter 2015, Palo Alto's revenue climbed 54% year over year to a company-record $217.7 million, including 43% growth in product revenue to $115.62 million, and a 69% increase in recurring subscription revenue from services to $102.03 million. That means recurring revenue now represents almost 47% of Palo Alto's total, up from around 42.7% in the same year-ago period.Meanwhile, adjusted net income more than doubled to $16.9 million, or $0.19 per diluted share.

For perspective, both figures are also above the guidance Palo Alto provided three months ago, when it told investors to expect fiscal Q2 revenue and adjusted earnings per share in the ranges of $200 million to $204 million, and $0.16 to $0.17, respectively. Analysts were looking for results at the high end of those ranges, with the consensus calling for earnings of $0.17 per share, and sales of $204 million.

Meanwhile, Palo Alto grew billings 51% year over year to yet another company-high $282.8 million, and deferred revenue climbed 65% to $535.8 million. Palo Alto also generated cash flow from operations of $76.8 million, and, after accounting for $6.1 million in property and equipment purchases, free cash flow of $70.7 million.Again, this helps Palo Alto at least partially fund its ongoing heavy investments in both research and development ($46.9 million) and sales and marketing ($122.9 million) during the quarter -- both crucial not only to maintain, but also to extend its position of leadership in the cyber security market.

"[W]e continue to capture significant market share."Palo Alto CEO Mark McLaughlin elaborated on the unique issues it's tacking with those R&D funds, saying: "Given the increasing rate and severity of today's highly sophisticated cyber attacks, enterprises worldwide are turning to us to help them solve their most complex security challenges. Our highly differentiated approach to enterprise security has resulted in growth that outpaces the security market as we continue to capture significant market share."

You might recall that last quarter, Palo Alto published a report on a new family of malware it discovered called WireLurker, calling it a "new era in malware" based on the unique manner with which it capitalized on attacking Apple's desktop and mobile platforms. At the time, WireLurker had been used to trojanize hundreds of OS X apps, and downloaded hundreds of thousands of times via a popular third-party app store in China.

Lucky for us, Palo Alto didn't slow its assault on such malware over the past three months; Its "Unit 42" threat intelligence team recently revealed a novel "backdoor" authentication weakness contained inmillionsof Android mobile devices. Palo Alto also expanded upon its PA-3000 series hardware firewall line with the new PA-3060, designed for mid-range data center environments, and participated in White House Cybersecurity Summit discussions "to improve protection for consumers and companies against cyber threats."

And the evidence of that growing trust shows. CFO Steffan Tomlinson credited both new customer additions and expansion in existing customers for the company's record billings, revenue, and deferred revenue in the quarter.

The future is brightFinally, Palo Alto Networks offered guidance for the current quarter, saying it expects revenue to grow between 45% to 48% to a range of $219 million to $223 million, while adjusted earnings per diluted share should be $0.19 to $0.20. Wall Street, for its part, was modeling lower fiscal Q3 revenue and earnings of $214.2 million and $0.19 per share, respectively.

Once again, however, the market doesn't seem particularly impressed, with shares of Palo Alto down slightly in after-hours trading. But whatever the market's short-term reaction, keep in mind the stock climbed nearly 3% on Monday by the time the closing bell rang and is already up 19% year to date in 2015 as of this writing -- and that's after the market exhibited a similar "meh" reaction immediately following last quarter's impressive results. Over long-term, assuming Palo Alto can continue to extend its lead and grab market share in this burgeoning industry, patient investors should continue to reap the rewards.

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