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Palo Alto Networks (NYSE:PANW) Exceeds Q1 Expectations


Full Report / November 18, 2021
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Cybersecurity provider Palo Alto Networks (NYSE:PANW) announced better-than-expected results in the Q1 FY2022 quarter, with revenue up 31.8% year on year to $1.24 billion. The company expects that next quarter's revenue would be around $1.27 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 $103.6 million, down on its loss of $92.2 million, in the same quarter last year.

Palo Alto Networks (PANW) Q1 FY2022 Highlights:

  • Revenue: $1.24 billion vs analyst estimates of $1.2 billion (3.58% beat)
  • EPS (non-GAAP): $1.64 vs analyst estimates of $1.57 (4.5% beat)
  • Revenue guidance for Q2 2022 is $1.27 billion at the midpoint, roughly in line with what analysts were expecting
  • The company lifted revenue guidance for the full year, from $5.3 billion to $5.37 billion at the midpoint, a 1.41% increase
  • Gross Margin (GAAP): 69.4%, down from 70.6% 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 are also contributing to increasing demand for modern cybersecurity software.

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 $946 million, to $1.24 billion.

Palo Alto Networks Total Revenue

This was a standout quarter for Palo Alto Networks, with the quarterly revenue up 31.8% year on year, which is above average for the company. But the growth did slow down compared to last quarter, as the revenue increased by just $28.1 million in Q1, compared to $145.4 million in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 22.4% over the next twelve months, although estimates are likely to change post earnings.

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 69.4% in Q1.

Palo Alto Networks Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.69 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 Q1 Results

Sporting a market capitalization of $50.3 billion, more than $3.46 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.

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. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. But investors might have been expecting more and the company is down 1.47% on the results and currently trades at $512.35 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. Although we have other favorites, we understand the arguments that Palo Alto Networks is not a bad business. Its revenue growth has been solid. And while its gross margins aren't as good as other tech businesses we look at, the good news is 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 twelve months is 9.1x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. In the end, beauty is in the eye of the beholder. While Palo Alto Networks wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.

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