Palo Alto Networks (NYSE:PANW) investors are eagerly anticipating another round of strong results that could help sustain the stock's recent momentum. The cybersecurity specialist has made a terrific comeback after a negative start to the year, driven by a change in strategy that has boosted the customer count and enhanced the average deal size.
Here's what investors can expect from Palo Alto's fiscal fourth-quarter results that will be released after the market closes on Aug. 31.
Subscription growth will boost revenue
Palo Alto's subscription revenue has gained impressive traction this fiscal year. More specifically, subscription and support services supplied 60% of the company's total revenue in the first nine months of fiscal year 2017, up from 51% during the same period last year. It won't be surprising if Palo Alto was able to attract more subscribers to its services in the fourth quarter thanks to new product updates.
For instance, the cybersecurity specialist added new features to the TRAPS end-point security solution during the beginning of the fourth quarter, including an update that could help users find out and prevent ransomware attacks. This is a shrewd move from Palo Alto as corporate organizations and governments are scrambling to update their cybersecurity systems as such attacks have increased this year.
More importantly, the ransomware protection market could hit a size of over $17 billion in the next four years per an estimate from Markets and Markets. Additionally, Palo Alto has been making strides in the cloud security market of late.
First, it released a cloud-based framework to help customers deploy cybersecurity applications across different cloud service providers. The new framework will allow Palo Alto customers to deploy the applications based on a software-as-a-service model, which will lower start-up costs and help the company attract more subscribers.
Next, Palo Alto just announced an integrated security platform for customers of VMware Cloud. This platform allows VMware cloud customers to deploy Palo Alto's solutions both on-site, and also in the public cloud environment on Amazon Web Services.
This opens up another fast-growing opportunity for Palo Alto as the cloud security market could hit $12.7 billion in revenue by 2022, according to one estimate. Moreover, AWS is the biggest public cloud service provider with a market share of 40%, so Palo Alto is pulling the right strings to take advantage of the potential growth in this space.
Margins will get better
Palo Alto's improving subscription business will also enhance its margins. For instance, during the third quarter, the company's sales and marketing expenses fell to 52.5% of sales from 56.6% in the prior-year quarter. Consequently, its operating margin increased 70 basis points as the company gets more revenue from recurring sources, so it has to spend less money on customer acquisition.
Not surprisingly, Palo Alto reported better-than-expected adjusted earnings of $0.61 per share during the third quarter. Furthermore, the company is on track to substantially increase its earnings once again this time, forecasting a figure of $0.79 per share as compared to last year's $0.50 per share.
Palo Alto investors, however, should pay close attention to the growth in its customer count. As mentioned earlier, the cybersecurity specialist had struggled due to a weak sales strategy earlier this year, which it has now modified. Any further missteps in sales execution could pose a big threat for Palo Alto as networking giant Cisco's (NASDAQ:CSCO) cybersecurity business is gaining critical mass.
Cisco's cybersecurity revenue is expected to hit $2 billion this fiscal year, which is more than Palo Alto's $1.7 billion projection. As Foolish colleague Leo Sun pointed out, Cisco enjoys an inherent advantage as it can bundle its cybersecurity products with its networking hardware and software products.
Therefore, Cisco can land bigger cybersecurity deals that could hurt smaller players, which is why Palo Alto needs to get its sales strategy spot-on. Investors will keep a sharp eye on this week's report to see how things are going.