What to Expect From Palo Alto Networks’ Q2 Earnings

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The cybersecurity market is going to get even bigger this year, according to Gartner's estimates. The research and advisory firm forecasts that worldwide enterprise cybersecurity spending will increase 8% this year to $96.3 billion as organizations shore up their defenses against ever-evolving threats.

This sets the stage for Palo Alto Networks (NYSE: PANW) to keep up its impressive momentum in 2018 and beyond. The cybersecurity specialist executed a remarkable turnaround after a difficult start last year, recording huge customer growth thanks to a new sales strategy. Investors will be hoping for the company to extend its run with the help of a strong showing in its upcoming fiscal second-quarter report, on Feb. 26. But can Palo Alto deliver once again? Let's take a look.

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The headline numbers

Wall Street analysts expect Palo Alto to report adjusted earnings of $0.79 per share for the quarter on revenue of $524.75 million. This is in line with the guidance issued by the company in November last year.

However, Palo Alto could exceed expectations because of recent product updates and partnerships. For instance, it updated its Traps endpoint protection service toward the end of the first quarter, adding ransomware protection to tap one of the hottest cybersecurity trends.

It is estimated that ransomware attacks cost organizations over $5 billion last year, according to Palo Alto, 15 times the losses caused by these attacks in 2015. So Palo Alto made a smart move by equipping its security platform with behavior-based ransomware protection that can prevent both known and unknown attacks.

Additionally, Palo Alto expanded its cloud security service by including application protection for a number of Amazon Web Services (AWS) solutions. As a result, users can deploy Palo Alto's cloud security offerings across different AWS solutions after this update. And the cybersecurity specialist is now supporting cloud-based email protection on both Microsoft's and Alphabet's cloud platforms. The company is going after the lucrative cloud security market, which is expected to clock an annual growth rate of 25.5% over the next five years, according to MarketsandMarkets.

In all, Palo Alto looks to be going after the right niches within the cybersecurity space, which should help it keep up its momentum in the long run.

The cost profile should improve

Palo Alto has been getting more and more of its revenue from the subscription business. Subscriptions and support supplied 63% of its top line in the last-reported quarter, up from 58.9% in the year-ago period. This brought down the company's sales and marketing expenses to 51% of revenue, a drop of 420 basis points year over year.

This allowed the company to boost its non-GAAP net income by 36% year over year to $69.8 million. Palo Alto's subscription revenue should keep improving. Last quarter, its deferred revenue shot up 37% to $1.9 billion, exceeding the 27% top-line jump.

This means that more customers are signing subscription contracts with Palo Alto Networks as deferred revenue refers to the amount of money collected by a company in advance for services to be provided at a later date. Therefore, Palo Alto's margin profile should improve, as a subscription customer ensures a steady stream of recurring revenue and lowers customer acquisition costs.

In all, investors can expect a strong second-quarter performance from Palo Alto, and a strong guidance should be the icing on the cake.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool recommends Gartner and Palo Alto Networks. The Motley Fool has a disclosure policy.