Palo Alto Networks (NYSE:PANW) shareholders have endured a brutal 2016 that sent the stock down by 25% to trail the broader cybersecurity market by a wide margin. Much of that decline can be explained by a pessimistic attitude by investors regardeing the software specialist's earnings outlook as IT budgets around the world remain tight.
Yet there's plenty more to this business than just profit growth. With that in mind, let's look at the key metrics that put Palo Alto Networks' latest operating trends in context.
Slowing growth pace
Palo Alto Networks' sales growth has been on a serious decline, falling from a near 60% pace at the end of fiscal 2015 to 34% in the most recently closed quarter. The company isn't alone in seeing its growth pace plummet. Rival cybersecurity specialists including Cyberark (NASDAQ:CYBR) and FireEye (NASDAQ:FEYE) have posted similar declines as big companies delay IT purchases and stretch out the product lifecycle. For the coming quarter, Palo Alto projects sales growth of about 28%, which would likely beat the broader market but mark yet another quarter of decelerating sales gains.
Healthy gross profit
Palo Alto ranks in the middle of the pack when it comes to gross profit margin. Its hybrid sales model is split almost equally between one-time product purchases and recurring revenue from subscription and support contracts, and that mix helps the company generate impressive returns at the gross profit level. In its most recent quarter, gross profit margin expanded by nearly 2 percentage points to just under 75% of sales.
Negative operating margin
The company is unprofitable at the operating level, where it has lost money in four of the last five fiscal years. Like many of its peers, Palo Alto spends a large chunk of earnings on share-based compensation for employees. Back those charges out, and you'll see profit strength that stacks up fairly well against rivals. Non-GAAP operating margin was 20% in the fiscal year that just closed, compared to 25% for Cyberark.
Improving cash flow
Cash flow is an especially important financial metric for a company like Palo Alto that's booking net losses due to hefty investments in expanding the business. The software specialist is managing solid gains on this score, with operating cash up 38% in the most recent quarter, to $200 million. On a trailing-12-month basis, Palo Alto's operating cash is over $700 million, putting it ahead of peers and giving management room to invest in the business while still building up its war chest.
Most companies in the cybersecurity space have gotten cheaper lately, and Palo Alto Networks is no exception. The stock is valued at less than 8 times the past year's sales -- down from a price-to-sales multiple of nearly 15 at the start of the year.
That decline still leaves it priced at a premium to slower-growing peers like Symantec (NASDAQ:SYMC) and FireEye, though. For that price to turn out to be a bargain, CEO Mark McLaughlin and his executive team will need to balance spending on building out the sales infrastructure and improving the product offering against growing investor demands for higher profits.
The weakening industry conditions aren't making that challenge any easier, and so far, at least, investors appear to be losing confidence that Palo Alto Networks will begin generating consistent earnings any time soon.