Palo Alto Networks (PANW) Reports Q3 Loss; Revenues Beat

Shares of Palo Alto Networks Inc. (NYSE:PANW) went down about 9.9% in after-hour trade yesterday in response to higher-than-expected loss during third-quarter fiscal 2016. Also, a tepid fourth-quarter earnings guidance impacted the share price.

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 86 cents. The figure was significantly greater than the Zacks Consensus Estimate of a loss of 28 cents. The company had suffered a loss of 46 cents in the year-ago quarter.

Quarter Details

Palo Alto Networks reported revenues of $345.8 million, which not only surged 47.7% year over year but also beat the Zacks Consensus Estimate of $339 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 33.4% to $162.1 million, mainly driven by strong contribution from the PA-7050 and PA-7080 frameworks. Also, a 63% surge in service revenues, primarily due to higher adoption of subscriptions and high renewal rates on a year-over-year basis, positively impacted results. SaaS-based subscription revenues (part of service revenues) climbed 69% from the year-ago period.

Geographically, on a year-over-year basis, revenues from the Americas increased 56% and represented 71% of total revenue. Europe, the Middle East and Africa (EMEA) went up 34%, accounting for 18% of total revenue. Asia-Pacific was up 24% and brought in the rest of the total revenue.

Also, customer wins coupled with expansion of the existing customer base supported quarterly revenues. Moreover, billings jumped 61% year over year to $486.2 million during the quarter.

Palo Alto Networks’ gross margin increased 10 basis points (bps) on a year-over-year basis to 72.6%, primarily backed by favorable product mix and higher revenue base.

The company reported an operating loss of $58.6 million, which widened from a loss of $36.7 million suffered a year ago. Higher operating expenses (up approximately 50% year over year) also impacted operating results.

The company’s net loss came was $70.2 million, wider than a loss of $45.9 million reported last year. On a non-GAAP basis, net loss was $38.5 million compared with a loss of $20.5 million reported in the year-ago quarter.

Palo Alto Networks exited the third quarter with cash, cash equivalents and short-term investments of approximately $1.08 billion compared with $822.9 million in the previous quarter.

Receivables were $267.6 million compared with $150.5 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 $470.6 million during the nine months ended Apr 30, 2016. Free cash flow came in at $150.8 million during the quarter.

Guidance

For the fourth quarter of fiscal 2016, Palo Alto Networks expects revenues in the range of $386 million to $390 million (mid-point $388 million), up 36% to 37% year over year. The Zacks Consensus Estimate is pegged at $384 million. The company expects non-GAAP earnings per share within 48 cents to 50 cents (excluding stock-based compensation expenses), while the Zacks Consensus Estimate stands at a loss of 23 cents.

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 third 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 #3 (Hold). A better-ranked stock in the broader technology sector is TiVo Inc. (NASDAQ:TIVO) , sporting a Zacks Rank #1 (Strong Buy).