Cybersecurity provider Palo Alto Networks (NASDAQ:PANW) slightly missed analysts' expectations in Q4 FY2023, with revenue up 26% year on year to $1.95 billion. Next quarter's revenue guidance of $1.84 billion was also less impressive, coming in 4.74% below analysts' estimates. Palo Alto Networks made a GAAP profit of $227.7 million, improving from its profit of $3.3 million in the same quarter last year.
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Palo Alto Networks (PANW) Q4 FY2023 Highlights:
- Revenue: $1.95 billion vs analyst estimates of $1.96 billion (small miss)
- EPS (non-GAAP): $1.44 vs analyst estimates of $1.29 (12% beat)
- Revenue Guidance for Q1 2024 is $1.84 billion at the midpoint, below analyst estimates of $1.93 billion
- Management's revenue guidance for the upcoming financial year 2024 is $8.18 billion at the midpoint, missing analyst estimates by 2.42% and implying 18.6% growth (vs 25.3% in FY2023)
- Gross Margin (GAAP): 74.1%, up from 68.2% in the same quarter last year
"We finished off the year with strong execution and the changing environment drove more customers towards platformization," said Nikesh Arora, chairman and CEO of Palo Alto Networks.
Founded in 2005 by a cybersecurity engineer Nir Zuk, Palo Alto Networks makes hardware and software cybersecurity products that protect companies from cyberattacks, breaches and malware threats.
Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks. The migration of businesses to the cloud and employees working remotely in insecure environments is increasing demand modern cloud-based network security software, which offers better performance at lower cost than maintaining the traditional on-premise solutions, such as expensive specialized firewall hardware.
Sales Growth
As you can see below, Palo Alto Networks's revenue growth has been strong over the last two years, growing from $1.22 billion in Q4 FY2021 to $1.95 billion this quarter.
Even though Palo Alto Networks fell short of analysts' revenue estimates, its quarterly revenue still grew a very solid 26% year on year. On top of that, its revenue increased $232.4 million quarter on quarter, a very strong improvement from the $65.8 million increase in Q3 2023. This is a sign of acceleration of growth and great to see.
Next quarter's guidance suggests that Palo Alto Networks is expecting revenue to grow 17.4% year on year to $1.84 billion, slowing down from the 25.3% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $8.18 billion at the midpoint, growing 18.6% year on year compared to the 25.3% increase in FY2023.
While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Palo Alto Networks's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 74.1% in Q4.
That means that for every $1 in revenue the company had $0.74 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, Palo Alto Networks's gross margin is around the average of a typical SaaS businesses. Gross margin has a major impact on a company’s ability to develop new products and invest in marketing, which may ultimately determine the winner in a competitive market. This makes it a critical metric to track for the long-term investor.
Key Takeaways from Palo Alto Networks's Q4 Results
Sporting a market capitalization of $63.5 billion, more than $2.39 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Palo Alto Networks is attractively positioned to invest in growth.
It was great to see Palo Alto Networks improve its gross margin and beat analysts' EPS estimates this quarter. That really stood out as a positive in these results. On the other hand, its revenue came in below Wall Street's expectations along with its full-year revenue guidance for FY2024. Overall, this was a mixed quarter for Palo Alto Networks, but the market is reacting favorably as its new AI-based security automation platform, XSIAM, is gaining early traction. The stock is up 7.63% after reporting and currently trades at $226 per share.
Palo Alto Networks may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.
The author has no position in any of the stocks mentioned in this report.