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Palo Alto Networks Falls as Growth Decelerates

By Steve Symington - May 26, 2016 at 8:25PM

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Disappointing guidance is obscuring the next-gen security specialist's latest quarterly beat.



Palo Alto Networks (PANW 2.90%) reported fiscal third-quarter 2016 results Thursday after the market close, marking its eighth consecutive quarterly beat. But thanks to a light outlook as its growth begins to slow, shares are down around 10% in after-hours trading as of this writing.
Let's take a closer look at what the next-gen security company achieved in its latest quarter.

Palo Alto Networks results: The raw numbers


Fiscal Q3 2016 Actuals

Fiscal Q3 2015 Actuals

Growth (YOY)


 $345.8 million

 $234.2 million


Adjusted net income

 $38.5 million

 $20.5 million


Adjusted EPS





What happened with Palo Alto Networks this quarter?

  • Revenue was above Palo Alto's guidance, which called for a range of $335 million to $339 million, and adjusted earnings per share arrived at the high-end of its per-share outlook of $0.41 to $0.42.
  • Revenue growth was driven by a 33.4% year-over-year increase in product sales, to $162.1 million, and 63% growth from services, to $183.7 million.
  • Billings climbed 60.9% year over year, to $486.2 million.
  • Based on generally accepted accounting principles (GAAP), Palo Alto Networks' net loss widened to $70.2 million, or $0.80 per share, compared to a GAAP net loss of $45.9 million, or $0.56 per share in last year's fiscal third quarter. As a reminder, Palo Alto Networks consciously chooses to forsake bottom-line GAAP profitability in favor of investing to drive its top-line, and gain market in these early stages of growth.
  • Cash flow from operations and free cash flow each rose 95% year over year this quarter, to $170.1 million and $150.8 million, respectively.
  • Palo Alto also extended its breach-prevention solutions to multi-cloud environments and SaaS applications with the introduction of its PAN-OS 7.1 operating system, which included more than 50 feature enhancements for all major cloud environments, including Microsoft Azure.
  • Palo Alto partnered with PwC to design a next-gen security framework that will serve as a guide for customer organizations to establish a breach-prevention-oriented security architecture.
  • Palo Alto entered into an agreement to integrate its next-gen security platform into BT's global portfolio of security services, through which BT customers will benefit from the combination of Palo Alto's breach-prevention platform and the global reach of BT's security services.

What management had to say 

Palo Alto CEO Mark McLaughlin stated:

Our record fiscal third quarter 2016 results continue to underscore the market demand for our unique Next-Generation Security Platform as more than 31,000 new and existing customers are working with Palo Alto Networks to solve their most difficult security needs. Security has never been more critical than it is today, and our platform delivers natively integrated and highly automated prevention outcomes, allowing us to continue to significantly outpace the competition as we further establish ourselves as the leader in cybersecurity.

Palo Alto CFO Steffan Tomlinson added:

Robust new customer additions and expansion in existing accounts resulted in market-leading, year-over-year growth as customers increased their investments in our Next-Generation Security Platform, with particular strength in our subscription services. We continue to balance growth and profitability and once again delivered record revenue, billings, and cash flow, with cash flow from operations margin of 49 percent and free cash flow margin of 44 percent.

Looking forward 

For the current quarter, Palo Alto anticipates revenue of $386 million to $390 million, representing growth of 43% to 45% over the same year-ago period. That should translate to adjusted earnings per diluted share in the range of $0.48 to $0.50, up from adjusted EPS of $0.28 per share in last year's fiscal Q4. However -- and keeping in mind we typically don't pay much attention to Wall Street's short-term demands -- analysts' consensus estimates predicted fiscal fourth-quarter revenue and earnings at the high-end of both Palo Alto's guidance ranges.

That's not to say that Palo Alto Networks isn't under promising with the intention of over delivering. But it's also no mystery that Palo Alto can't sustain these torrid rates of growth forever as it builds from a continually larger base.

It will eventually need to show that it can translate all that top-line growth to bottom-line profitability -- though that's something I have little doubt it can do considering its long track record of outperformance. For now, while it's no surprise the market is bidding shares down today given this soft guidance, long-term investors should be more than happy with Palo Alto's latest quarterly beat.

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