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Palo Alto Networks's (NYSE:PANW) Q3 Sales Top Estimates, Stock Jumps 11.5%


Full Report / May 19, 2022
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Cybersecurity provider Palo Alto Networks (NYSE:PANW) beat analyst expectations in Q3 FY2022 quarter, with revenue up 29.1% year on year to $1.38 billion. The company expects that next quarter's revenue would be around $1.54 billion, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Palo Alto Networks made a GAAP loss of $73.2 million, improving on its loss of $145.1 million, in the same quarter last year.

Palo Alto Networks (PANW) Q3 FY2022 Highlights:

  • Revenue: $1.38 billion vs analyst estimates of $1.36 billion (2.03% beat)
  • EPS (non-GAAP): $1.79 vs analyst estimates of $1.68 (6.63% beat)
  • Revenue guidance for Q4 2022 is $1.54 billion at the midpoint, roughly in line with what analysts were expecting
  • Gross Margin (GAAP): 68.2%, down from 69.2% 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 year, growing from quarterly revenue of $1.07 billion, to $1.38 billion.

Palo Alto Networks Total Revenue

This quarter, Palo Alto Networks's quarterly revenue was once again up a very solid 29.1% year on year. Quarter on quarter the revenue increased by $69.8 million in Q3, which was in line with Q2 2022. This steady quarter-on-quarter growth shows the company is able to maintain its steady growth trajectory.

Guidance for the next quarter indicates Palo Alto Networks is expecting revenue to grow 26.3% year on year to $1.54 billion, in line with the 28.2% 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 22.2% over the next twelve months.

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 68.2% in Q3.

Palo Alto Networks Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.68 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Key Takeaways from Palo Alto Networks's Q3 Results

With a market capitalization of $43.1 billion and more than $3.87 billion in cash, the company has the capacity to continue to prioritise growth.

It was good to see Palo Alto Networks deliver strong revenue growth this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, there was a deterioration in gross margin. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 11.7% on the results and currently trades at $487.7 per share.

Is Now The Time?

When considering Palo Alto Networks, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Palo Alto Networks we will be cheering from the sidelines. Its revenue growth has been strong. Unfortunately, its customer acquisition is less efficient than many comparable companies, and its gross margins aren't as good as other tech businesses we look at.

Palo Alto Networks's price to sales ratio based on the next twelve months is 6.8x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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