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Palo Alto Networks's (NASDAQ:PANW) Q1 Earnings Results: Revenue In Line With Expectations, Gross Margin Improves


Kayode Omotosho /
2022/11/17 4:10 pm EST
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Cybersecurity provider Palo Alto Networks (NASDAQ:PANW) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue up 25.3% year on year to $1.56 billion. The company expects that next quarter's revenue would be around $1.64 billion, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Palo Alto Networks made a GAAP profit of $20 million, improving on its loss of $103.6 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) Q1 FY2023 Highlights:

  • Revenue: $1.56 billion vs analyst estimates of $1.55 billion (small beat)
  • EPS (non-GAAP): $0.83 vs analyst estimates of $0.69 (20.3% beat)
  • Revenue guidance for Q2 2023 is $1.64 billion at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year, at $6.88 billion at the midpoint
  • Gross Margin (GAAP): 70.4%, up from 69.4% same quarter last year

"Our growth in Q1 was driven by customers continuing to increase their commitments to our security platforms as they are able to choose our best-of-breed capability and simplify their security architecture," 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 $946 million in Q1 FY2021, to $1.56 billion.

Palo Alto Networks Total Revenue

This quarter, Palo Alto Networks's quarterly revenue was once again up a very solid 25.3% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $12.9 million in Q1, compared to $163.8 million in Q4 2022. 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 24.9% year on year to $1.64 billion, slowing down from the 29.5% 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 24.4% 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 70.4% in Q1.

Palo Alto Networks Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.70 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, 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 Q1 Results

Sporting a market capitalization of $47.7 billion, more than $3.8 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.

We enjoyed seeing Palo Alto Networks’s improve their gross margin materially this quarter. And we were also glad to still see good revenue growth. On the other hand, revenue growth has been slowing down a little and guidance is conservative. Zooming out, we think this was still a decent quarter, showing the company is staying on target. The company is flat on the results and currently trades at $155.98 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.