Palo Alto Networks (NASDAQ:PANW) Reports Sales Below Analyst Estimates In Q4 Earnings

Full Report / August 21, 2023

Cybersecurity provider Palo Alto Networks (NASDAQ:PANW) fell short of 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 4.77% 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.

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 2.45% 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

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.

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.

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 $1.22 billion in Q4 FY2021 to $1.95 billion this quarter.

Palo Alto Networks Total Revenue

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.


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.

Palo Alto Networks Gross Margin (GAAP)

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 $64.1 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.

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 bountiful generation of free cash flow empowers it to invest in growth initiatives.

Palo Alto Networks's price to sales ratio based on the next 12 months of 10.2x 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 $253.5 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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