Palo Alto Surges On Strong Q4 Revenue Growth; Incurs Loss

Shares of Palo Alto Networks Inc. (PANW - Snapshot Report) gained about 5% in after-hour trade yesterday in response to the strongest revenue growth reported by the company in the last 10 quarters. The robust fourth-quarter fiscal 2015 top-line performance was mainly driven by increased spending by corporate and governments to protect themselves from cyber attacks.

However, higher operating expenses more than offset the benefits of robust revenue growth resulting in wider year-over-year loss. Palo Alto Networks reported adjusted loss per share (excluding amortization and other one-time items but including stock-based compensation), on a proportionate tax basis, of 44 cents. The figure was significantly wider than the Zacks Consensus Estimate of a loss of 23 cents as well as 26 cents loss suffered last year.

Palo Alto Networks Inc. - Earnings Surprise | FindTheBest

Revenues

Palo Alto Networks reported revenues of $283.9 million, which not only increased 59.3% year over year but also came ahead of the Zacks Consensus Estimate of $255 million. Improvement in revenues was primarily backed by the strength in the network security market, strong product line-up, deal wins and investment plans.

Product revenues increased 54.5% to $154 million, primarily driven by growth in data center products. Also, a 65.4% surge in service revenues on a year-over-year basis positively impacted results. SaaS-based subscription revenues (part of service revenues) surged 70% from the year-ago period.

Geographically, on a year-over-year basis, revenues from the Americas increased 68% and represented 71% of total revenue. Europe, the Middle East and Africa (EMEA) went up 32%, accounting for 18%. Asia-Pacific was up 61% and contributed the remaining 11%.

Notably, over the past few quarters the demand for cyber security has increased manifold because of a series of data breaches at high-profile business houses and government agencies. As a result, the industry is flourishing and companies like Palo Alto Networks, Fortinet Inc. (FTNT - Snapshot Report) and Cisco (CSCO - Analyst Report) are capitalizing on the opportunities.

Also, customer wins coupled with expansion of existing customers positively impacted quarterly revenues. The company’s customer base grew 35% to 26,000 with more than 2,000 additions during the fourth quarter. Moreover, billings jumped 69% year over year to $393.6 million from $232.9 million in the fourth quarter of fiscal 2014.

Operating Results

Palo Alto Networks’ adjusted gross margin (excluding amortization and other one-time items but including stock-based compensation) increased 110 basis points (bps) on a year-over-year basis to 73.8%, primarily due to favorable product mix and a higher revenue base.

The company reported adjusted operating loss (excluding amortization and other one-time items but including stock-based compensation) of $29.1 million, which widened from a loss of $13.7 million incurred a year ago. Higher adjusted operating expenses (up 66.5% year over year) impacted operating results. Also, adjusted operating expenses, as a percentage of revenues, increased 370 bps on a year-over-year basis.

The company’s adjusted net loss (excluding amortization and other one-time items but including stock-based compensation) came in at $35.6 million, wider than a loss of $22.2 million reported in the year-ago quarter.

Balance Sheet & Cash Flow

Palo Alto Networks exited the fourth quarter with cash, cash equivalents and short-term investments of approximately $789 million compared with $822.9 million in the previous quarter. Receivables were $212.4 million versus $150.5 million in the last quarter. Palo Alto Networks’ balance sheet does not have any long-term debt.

The company reported cash flow from operations of $111.3 million during the fourth quarter and free cash flow of $99.4 million.

Guidance

For the first quarter of fiscal 2016, Palo Alto Networks expects revenues in the range of $280 million to $284 million (mid-point $282 million), up 46% to 48% year over year. The Zacks Consensus Estimate is pegged at $267 million. The company expects non-GAAP earnings per share in the range of 31 cents to 32 cents (excluding stock-based compensation expenses) as against the Zacks Consensus Estimate of a loss of 11 cents.

Our Take

Palo Alto Networks offers a network security platform that helps firms, service providers and government bodies to impose tighter security measures. The company reported wider-than-expected loss in the fourth quarter of fiscal 2015 while revenues came ahead of the Zacks Consensus Estimate. The company provided encouraging first-quarter guidance.

Revenue growth seems to be steady aided by strength across all its geographical regions and business segments. Also, customer wins coupled with expansion of existing customers positively impacted revenues. We believe that the company’s product refreshes will boost revenues, going forward.

The company is also keen on expanding its cloud exposure. Nevertheless, a volatile spending environment and competition from other cyber security providers remain the concerns.

Currently, Palo Alto Networks has a Zacks Rank #3 (Hold). A better-ranked stock in the broader technology sector is Mellanox Technologies Ltd. (MLNX - Snapshot Report), sporting a Zacks Rank #1 (Strong Buy).