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Palo Alto (PANW) Up 1.7% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Palo Alto Networks (PANW). Shares have added about 1.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Palo Alto due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Palo Alto Outpaces Q2 Earnings & Revenue Expectations

Palo Alto Networks reported strong second-quarter fiscal 2023 results, wherein both earnings and revenues surpassed the respective Zacks Consensus Estimate and improved year over year.

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The company reported non-GAAP earnings of $1.05 per share, beating the Zacks Consensus Estimate of 78 cents. The bottom line improved 81% from the year-ago quarter’s non-GAAP earnings of 58 cents per share.

Palo Alto’s fiscal second-quarter revenues of $1.66 billion surpassed the Zacks Consensus Estimate of $1.65 billion. The top line grew 26% from the year-ago reported figure.

The top line was aided by several deal wins and increased adoption of Palo Alto’s Next-Generation Security (NGS) platforms driven by the hybrid work culture and the heightened need for stronger security.

The company’s strong quarterly performance reflects its sustained focus on product innovation, a shift in its business model to subscription-based services, platform integration and continued investments in the go-to-market strategy.

Quarterly Details

Product revenues increased 15% year over year to $352.9 million and contributed to 21.3% of total revenues. The company’s subscription and support revenues, which accounted for 78.7% of total revenues, improved 29.1% to $1.30 billion.

Billings increased 26% to $2.03 billion. Deferred revenues at the end of the fiscal second quarter were $3.94 billion. Palo Alto’s remaining performance obligation climbed to $8.8 billion, reflecting a year-over-year increase of 39%.

Palo Alto’s NGS annualized recurring revenues were $2.33 billion in the reported quarter compared with $2.11 billion in the previous quarter and $1.43 billion in the year-ago quarter.

Non-GAAP gross profits increased 28.1% to $1.25 billion. Non-GAAP gross margin expanded 150 basis points (bps) to 75.5% with easing global supply chain pressures.

Non-GAAP operating income rose 55% to $376.8 million while non-GAAP operating margin expanded 440 bps to 22.8%.

Balance Sheet & Cash Flow

Palo Alto exited the fiscal second-quarter with cash, cash equivalents and short-term investments of $3.35 billion, down from $3.80 billion at the end of the previous quarter. As of Jan 31, 2023, the company had a long-term operating lease liabilities of $274.2 million.

PANW generated an operating cash flow of $694.6 million and a non-GAAP adjusted free cash flow of $685.2 million during the fiscal second quarter.

Non-GAAP adjusted free cash flow margin came in at 41.4%.

Raised Guidance

The management of Palo Alto raised the fiscal 2023 guidance for billings, non-GAAP earnings and adjusted free cash flow margin, while it still anticipates fiscal revenues in the range of $6.85-$6.91 billion. This suggests top-line growth of 25-26% from the fiscal 2022 level.

Total billings of the company are now estimated to be $9.10-$9.20 for fiscal 2023, indicating a year-over-year increase of 22-23%. Previously, billings were expected to be in the $8.95-$9.10 billion band, which suggested a year-over-year increase of 20-22%.

Palo Alto projects non-GAAP earnings to be in the $3.97-$4.03 per share band compared with the prior guided range of $3.37-$3.44 per share.

Non-GAAP adjusted free cash flow margin forecast is also raised from the range of 34.5-35.5% to 36.5-37.5% band for fiscal 2023.

For the third quarter of fiscal 2023, Palo Alto projects revenues between $1.695 billion and $1.725 billion, suggesting year-over-year growth of 22-24%.

Total billings are anticipated between $2.20 billion and $2.25 billion, indicating an increase of 22-25% from the year-ago quarter. Non-GAAP earnings are projected to be 90-94 cents per share.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

The consensus estimate has shifted 55.39% due to these changes.

VGM Scores

At this time, Palo Alto has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Palo Alto has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

Performance of an Industry Player

Palo Alto is part of the Zacks Security industry. Over the past month, Check Point Software (CHKP), a stock from the same industry, has gained 0.5%. The company reported its results for the quarter ended December 2022 more than a month ago.

Check Point reported revenues of $638.5 million in the last reported quarter, representing a year-over-year change of +6.6%. EPS of $2.45 for the same period compares with $2.25 a year ago.

For the current quarter, Check Point is expected to post earnings of $1.74 per share, indicating a change of +10.8% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.1% over the last 30 days.

Check Point has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of D.

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