Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Palo Alto Networks' Results Accelerated During Its Second Quarter

By Nicholas Rossolillo - Updated Apr 11, 2019 at 10:47AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The company made the cloud security transition, and it’s breaking ground on new territory again.

Shares of cybersecurity outfit Palo Alto Networks ( PANW -3.77% ) rallied after the company reported another strong advance in its business during the second quarter of its 2019 fiscal year. Companies around the world are transitioning legacy operations to more-efficient digital ones, but that creates the need for new security measures.

And that's where Palo Alto comes in. The provider of firewall software (which manages access to a network) has successfully made its way into the cloud computing universe after a number of acquisitions the last couple of years. And the launch of new artificial intelligence-based products has it positioned for further growth.

Business results are accelerating

Palo Alto is riding a wave of digital change. Traditionally concerning itself with firewalls, the company made a handful of buyouts to help it get into the growing cloud-computing security market. Those moves have kept double-digit top- and bottom-line growth intact -- revenue and adjusted earnings were up 29% and 47%, respectively, last fiscal year. And those metrics have accelerated so far in the 2019 fiscal year.

Metric

Six Months Ended Jan. 31, 2019

Six Months Ended Jan. 31, 2018

Y-O-Y Change

Revenue

$1.37 billion

$1.05 billion

30%

Gross profit margin

71.8%

71.3%

0.5 p.p.

Operating expenses

$1.01 billion

$823 million

23%

Earnings (loss) per share

($0.44)

($0.98)

N/A

Adjusted earnings per share

$2.67

$1.80

48%

YOY = year over year. P.P. = percentage point. Data source: Palo Alto Networks.

Palo Alto needs to keep its foot on the gas, though, as cyberattacks continue to increase in frequency and complexity. A myriad of solutions from peers in the cybersecurity industry have emerged, but Palo Alto has responded by continuing to broaden its offerings to be a one-stop solution for customers. The latest move is into services powered by artificial intelligence (AI).

Just before second-quarter earnings, the company announced the $560 million acquisition of Demisto -- a start-up in the emerging security orchestration, automation, and response (SOAR) segment of the cyberworld. In a separate statement on the day of earnings, Palo Alto also announced the launch of several new services, including a cloud software AI-based security platform called Cortex. Those moves should set up Palo Alto for the next wave of expansion as it tries to capture a larger slice of the growing security industry.

Check out the latest earnings call transcript for Palo Alto Networks.

An illustrated shield on top of digits, depicting data security.

Image source: Getty Images.

First cloud, now AI

But why AI-based solutions now, and why a hefty $560 million price tag on a smaller peer? The answer is that while companies are dealing with complex threats from the bad guys, they are also having to navigate an increasingly complex set of solutions to stay protected. In light of the situation, Palo Alto thinks it has a chance to simplify things using AI and automation and gain market share. Chief product officer Lee Klarich had this to say:

"While detection and response are integral components of cybersecurity defense, the current model of disjointed stand-alone products leaves organizations with blind spots and conflicting data. We believe the only way to solve this is with best-in-class prevention, combined with the ability to normalize and analyze data at scale from as many sources as possible, applying AI and machine learning to automatically detect and quickly respond to threats."

The stage has therefore been set for another evolution of the cybersecurity industry, and Palo Alto is helping lead the way into AI. Sales momentum should equate to further gains for the company as it lands lots of new customers around the globe and progressively expands on those relationships over time.

Management said it expects revenue in the next quarter to climb between 23% and 25% higher from a year ago. That's a slowdown from the first half of the fiscal year, but Palo Alto has a history of underpromising and overdelivering -- the second quarter of 2019 being the latest example when it forecast 24% to 26% top-line growth but ended up posting a 30% increase.

So that outlook seems like a low hurdle for the company to clear. Either way, management is backing up its confidence with more share repurchases. A new $1 billion buyback authorization good through the end of 2020 was announced on top of the $1 billion in buybacks just completed at the end of 2018. That should help offset dilution from stock-based compensation that Palo Alto awards to its employees and keep earnings headed north.

Palo Alto Networks isn't simply enjoying success from the growing need to secure online data, it's helping lead the charge in the industry. It's all adding up to strong double-digit growth in sales and an even faster growing bottom line.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Palo Alto Networks, Inc. Stock Quote
Palo Alto Networks, Inc.
PANW
$501.22 (-3.77%) $-19.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/06/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.