Palo Alto's (PANW) Q3 Earnings & Revenues Beat, Rise Y/Y

Palo Alto Networks (NYSE:PANW) reported third-quarter fiscal 2019 non-GAAP earnings of $1.31 per share, which not only improved 26% year over year but also surpassed the Zacks Consensus Estimate of $1.25.

The company’s revenues of $726.6 million increased 28%, outpacing the consensus estimate of $704 million.

The impressive results were mainly driven by several deal wins and increasing adoption of the company’s next-generation security platforms. The company continued to outperform the network security market. Growing traction in products launched in the last reported quarter was another tailwind.

In a parallel announcement, Palo Alto revealed its intent to acquire container security company Twistlock, and serverless security firm PureSec, to better protect customers’ journey to the cloud. The company also introduced its comprehensive cloud security suite, Prisma.

Containers are one of the fastest growing segments of both private and public cloud workloads. Hence, the acquisition of Twistlock will add container security capability to Palo Alto’s portfolio. These proposed buyouts are expected to further boost the company’s cloud security suite.

Quarterly Details

Product revenues increased approximately 27.6% to $278.4 million. The company witnessed a 28% jump in subscription and support revenues to $448.2 million. SaaS-based subscription revenues rose 35% from the year-ago quarter to $258.8 million. Support revenues increased 21% to $189.9 million.

Billings improved 13% year over year to $821.9 million. Deferred revenue increased 27% to $2.6 billion.

Region wise, revenues from the Americas climbed 28%. Revenues from Europe, the Middle East and Africa, and Asia Pacific were up 26% and 29%, respectively.

During the quarter, Prisma surpassed $25 million billings run rate and already has approximately 9,000 customers.

RedLock surpassed $100 million billings run rate in the quarter. Moreover, the company won more than 10 RedLock deals in the fiscal third quarter — the maximum number of them being in the Global 2000.

Its GlobalProtect cloud offering also recorded success with some of the large players during the reported quarter. A couple of the most significant wins are 27,000 mobile users at a global consumer company and 40,000 mobile users at a leading car manufacturer.

The acquisition of Demisto was completed in March this year, and the combination of Demisto and Palo Alto’s operations are already yielding positive results.

Moreover, in February, Cortex XDR was introduced, which secured more than 50 deals in its first quarter of availability. The most notable among these deals were a 7-figure deal with a U.S. health insurance organization and a deal with a major Asia-based airline.

Cortex XDR APIs were successfully integrated into Demisto in the quarter.

Palo Alto exited the fiscal third quarter with 6,503 employees.

Margins

Palo Alto’s non-GAAP gross margin expanded 30 basis points (bps) on a year-over-year basis to 76.5%.

Non-GAAP operating margin contracted 50 bps to 20.9% due to a net expense of about $7 million associated with the recent acquisitions.

Balance Sheet

Palo Alto exited the fiscal third quarter with cash, cash equivalents and short-term investments of approximately $3.7 billion compared with $3.6 billion at the end of the preceding quarter.

Furthermore, the company’s balance sheet was free of any long-term debt in the quarter against $808.6 million in the preceding quarter.

It generated cash flow from operations of $275.4 million compared with $252.3 million in the previous quarter. Free cash flow came in at $251.9 million.

Guidance

For the fourth quarter of fiscal 2019, Palo Alto anticipates revenues of $795-$805 million, up 21-22% year over year.

Non-GAAP effective tax rate for the current quarter is projected to be approximately 22%.

Non-GAAP earnings per share are estimated in the range of $1.41-$1.42, which includes about $15 million in net expenses related to the acquisitions of Demisto, Twistlock and PureSec. Earnings also include an expense of 2 cent per share as a result of the U.S. tariffs on Chinese goods.

Billings are expected to grow approximately 21% year over year, which includes the impact of shorter contract lengths.

Zacks Rank & Stocks to Consider

Palo Alto currently has a Zacks Rank #3 (Hold).

A few stocks worth considering in the broader Computer and Technology sector are Silicon Motion Technology Corporation (NASDAQ:SIMO) , eGain Corporation (NASDAQ:EGAN) and Cirrus Logic, Inc. (NASDAQ:CRUS) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for Silicon Motion, eGain and Cirrus is projected to be 5%, 30% and 15%, respectively.

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