Palo Alto Networks (NASDAQ:PANW) Surprises With Q1 Sales But Stock Drops 10.3%

Full Report / November 15, 2023

Cybersecurity provider Palo Alto Networks (NASDAQ:PANW) beat analysts' expectations in Q1 FY2024, with revenue up 20.1% year on year to $1.88 billion. On the other hand, its full-year revenue guidance of $8.18 billion at the midpoint came in slightly below analysts' estimates. Turning to EPS, Palo Alto Networks made a non-GAAP profit of $1.38 per share, improving from its profit of $0.83 per share in the same quarter last year.

Palo Alto Networks (PANW) Q1 FY2024 Highlights:

  • Revenue: $1.88 billion vs analyst estimates of $1.84 billion (1.9% beat)
  • EPS (non-GAAP): $1.38 vs analyst estimates of $1.16 (18.7% beat)
  • Revenue Guidance for Q2 2024 is $1.97 billion at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed its revenue guidance for the full year of $8.18 billion at the midpoint
  • Gross Margin (GAAP): 74.8%, up from 70.5% in the same quarter last year

Founded in 2005 by cybersecurity engineer Nir Zuk, Palo Alto Networks (NASDAQ:PANW) makes hardware and software cybersecurity products that protect companies from cyberattacks, breaches, and malware threats.

The company started by offering traditional on-premise hardware firewalls and while that is still a big part of their business, it has in the last couple of years been successfully transitioning into offering cloud-based software-as-a-service products.

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. While the majority of Palo Alto’s revenue these days comes from selling software, a significant part of their business is still manufacturing hardware firewalls, and that type of business has higher costs than pure software.

Network Security

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.

Palo Alto is a well known brand in the network security space which includes competitors such as Fortinet (NASDAQ:FTNT), Check Point Software (NASDAQ:CHKP), and Cisco (NASDAQ:CSCO).

Sales Growth

As you can see below, Palo Alto Networks's revenue growth has been strong over the last two years, growing from $1.25 billion in Q1 FY2022 to $1.88 billion this quarter.

Palo Alto Networks Total Revenue

This quarter, Palo Alto Networks's quarterly revenue was once again up a very solid 20.1% year on year. However, the company's revenue actually decreased by $75.2 million in Q1 compared to the $232.4 million increase in Q4 2023. While we'd like to see revenue increase each quarter, management is guiding for growth to rebound in the next quarter and a one-off fluctuation is usually not concerning.

Next quarter's guidance suggests that Palo Alto Networks is expecting revenue to grow 19% year on year to $1.97 billion, slowing down from the 25.7% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 18.6% over the next 12 months before the earnings results announcement.


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 74.8% in Q1.

Palo Alto Networks Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.75 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 Q1 Results

With a market capitalization of $81.18 billion and more than $3.89 billion in cash on hand, Palo Alto Networks can continue prioritizing growth.

It was encouraging to see Palo Alto Networks beat analysts' revenue and EPS expectations this quarter, driven by better-than-expected ARR and cRPO. We were also glad its gross margin improved. On the other hand, its full-year revenue guidance missed analysts' expectations as its billings were negatively impacted by higher interest rates. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. Investors were likely spooked by the macro impact on Palo Alto Networks's top-line performance, however, and the stock is down 10.3% after reporting, trading at $229.76 per share.

Is Now The Time?

When considering an investment in Palo Alto Networks, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We think Palo Alto Networks is a good business. We'd expect growth rates to moderate from here, but its revenue growth has been solid over the last two years. On top of that, its very efficient customer acquisition hints at the potential for strong profitability.

Palo Alto Networks's price to sales ratio based on the next 12 months of 10.5x indicates that the market is certainly optimistic about its growth prospects. There's definitely a lot of things to like about Palo Alto Networks and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

Wall Street analysts covering the company had a one-year price target of $277.6 per share right before these results, implying that they saw upside in buying Palo Alto Networks even in the short term.

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