Cybersecurity provider Palo Alto Networks (NASDAQ:PANW) reported results in line with analyst expectations in Q3 FY2023 quarter, with revenue up 24.1% year on year to $1.72 billion. The company expects that next quarter's revenue would be around $1.95 billion, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Palo Alto Networks made a GAAP profit of $107.8 million, improving on its loss of $73.2 million, in the same quarter last year.
Is now the time to buy Palo Alto Networks? Access our full analysis of the earnings results here, it's free.
Palo Alto Networks (PANW) Q3 FY2023 Highlights:
- Revenue: $1.72 billion vs analyst estimates of $1.72 billion (small beat)
- EPS (non-GAAP): $1.10 vs analyst estimates of $0.93 (18.8% beat)
- Revenue guidance for Q4 2023 is $1.95 billion at the midpoint, roughly in line with what analysts were expecting
- Gross Margin (GAAP): 72.4%, up from 68.2% same quarter last year
"Our team again executed well in a market that continues to become more challenging," 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 quarterly revenue of $1.07 billion in Q3 FY2021, to $1.72 billion.
This quarter, Palo Alto Networks's quarterly revenue was once again up a very solid 24.1% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $65.8 million in Q3, compared to $91.7 million in Q2 2023. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates Palo Alto Networks is expecting revenue to grow 25.9% year on year to $1.95 billion, in line with the 27.2% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 23.1% over the next twelve months.
In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. 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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 72.4% in Q3.
That means that for every $1 in revenue the company had $0.72 left to spend on developing new products, marketing & sales and the general administrative overhead. Trending up over the last year this is around the lower average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market so it is important to track.
Key Takeaways from Palo Alto Networks's Q3 Results
Sporting a market capitalization of $58.1 billion, more than $3.96 billion in cash and with positive free cash flow over the last twelve months, we're confident that Palo Alto Networks has the resources it needs to pursue a high growth business strategy.
While revenue was roughly in line with expectations, EPS beat nicely. Also, the company raised its full year guidance for billings, revenue, and non-GAAP EPS, all of which are now above current expectations. This was a major positive. The company is up 3.21% on the results and currently trades at $195.97 per share.
Should you invest in Palo Alto Networks right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable 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 70% 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.