Palo Alto Networks (PANW) Incurs Loss In Q4; Revenues Top

Palo Alto Networks Inc. (NYSE:PANW) went down about 2.6% in after-hour trade yesterday in response to higher-than-expected loss reported for the fourth quarter of fiscal 2016.

Also, higher operating expenses more than offset the benefits of robust revenue growth resulting in a wider year-over-year loss. Palo Alto Networks reported adjusted loss per share (excluding amortization and other one-time items but including stock-based compensation), on a proportionate tax basis, of 51 cents. The figure was significantly higher than the Zacks Consensus Estimate of a loss of 24 cents. The company had suffered a loss of 44 cents in the year-ago quarter.

Quarter Details

Palo Alto Networks reported revenues of $400.8 million, which not only surged 41.2% year over year but also beat the Zacks Consensus Estimate of $390 million. The improvement in revenues was primarily backed by the strength in the network security market, strong product line-up and deal wins.

Product revenues jumped 24% to $191.1 million, whereas the company saw a 61% surge in service revenues ($209.7 million). SaaS-based subscription revenues (part of service revenues) climbed 66% from the year-ago period.

Geographically, on a year-over-year basis, revenues from the Americas increased 41% and represented 72% of total revenue. Europe, the Middle East and Africa (EMEA) also went up 41%, accounting for 17% of total revenue. Asia-Pacific was up 42% and brought in the balance.

Also, customer wins coupled with expansion of the existing customer base supported quarterly revenues. Moreover, billings jumped 45% year over year to $572.4 million during the quarter.

Palo Alto Networks’ gross margin increased 80 basis points (bps) on a year-over-year basis to 74.6%, primarily backed by improvements in recurring services gross margin and revenue base.

The company reported an operating loss of $45.4 million, which narrowed from a loss of $34.5 million suffered a year ago. Higher operating expenses (up approximately 41.1% year over year) also impacted operating results.

The company’s net loss was $54.5 million, wider than a loss of $46.1 million reported last year. On a non-GAAP basis, net income was $46.2 million compared with $25 million reported in the year-ago quarter.

Palo Alto Networks exited the fourth quarter with cash, cash equivalents and short-term investments of approximately $1.285 billion compared with $1.08 billion in the previous quarter.

Receivables were $348.7 million compared with $267.6 million in the last quarter. Palo Alto Networks’ balance sheet does not have any long-term debt. The company reported cash flow from operations of $658.1 million during the twelve months ended Jul 31, 2016. Free cash flow came in at $171.2 million during the quarter. On Aug 26, 2016, management authorized a $500 million share repurchase program

Guidance

For the first quarter of fiscal 2017, Palo Alto Networks expects revenues in the range of $396 million to $402 million (mid-point $399 million), up 33% to 35% year over year. The Zacks Consensus Estimate is pegged at $398 million. The company expects non-GAAP earnings per share within 51 cents to 53 cents (excluding stock-based compensation expenses).

The company provided fiscal 2017 earnings guidance. Non-GAAP earnings per share are expected to be in the range of $2.75 to $2.80.

Our Take

Palo Alto Networks allows firms, service providers and government bodies to impose tighter security measures through its network security platform. The company reported wider-than-expected loss in the fourth quarter, while revenues comfortably surpassed the Zacks Consensus Estimate.

Revenue growth seems to be steady, aided by strength across all its geographical regions and business segments. Also, customer wins coupled with expansion of the existing customer base positively impacted revenues. We believe that the company’s product refreshes will boost revenues, going forward.

The company is also keen on expanding its cloud exposure. Nevertheless, a volatile spending environment and competition from Cisco Systems, Inc. (NASDAQ:CSCO) and Check Point Software Technologies Ltd. (NASDAQ:CHKP) remain concerns.

Currently, Palo Alto Networks has a Zacks Rank #5 (Strong Sell). A better-ranked stock in the broader technology sector is NVIDIA Corporation (NASDAQ:NVDA) , sporting a Zacks Rank #1 (Strong Buy).

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