Palo Alto Networks Secures Another Quarterly Win, Guides Light Again

Palo Alto Networks (PANW 0.11%) released fiscal fourth-quarter 2019 results on Wednesday after the market closed, easily beating the light revenue and earnings guidance it provided three months ago thanks to continued market-share gains and broader adoption of its industry-leading cybersecurity product portfolio. The company also unveiled its latest strategic acquisition.

But in an extended analyst meeting following its press release to discuss its plans for the new fiscal year and its longer-term aspirations, the cybersecurity platform specialist also offered forward earnings guidance that fell starkly short of Wall Street's models yet again. Palo Alto Networks shares seesawed between positive and negative territory in after-hours trading as a result.

Let's have a closer look at how Palo Alto Networks ended the fiscal year, as well as what investors should be watching going forward.

Image source: Getty Images..

Palo Alto Networks results: The raw numbers

Data source: Palo Alto Networks. *For the quarter ended July 31, 2019. GAAP = generally accepted accounting principles.

What happened with Palo Alto Networks this quarter?

• Adjusted for one-time items, Palo Alto Networks generated (non-GAAP) net income of $146.9 million, or $1.47 per share, up from $131.7 million, or $1.34 per share in the same year-ago period. 
• By comparison, Palo Alto Networks' guidance provided in May called for lower revenue of $795 million to $805 million and lower adjusted earnings per share of $1.41 to $1.42.
• Product revenue grew 12.3% year over year to $305.7 million, while subscription and support revenue soared 29.4% to $500.1 million.
• Deferred revenue increased 27% to $2.9 billion.
• In a separate press release Wednesday, Palo Alto Networks announced it has agreed to acquire Internet of Things (IoT) security specialist Zingbox for $75 million in cash. The purchase should close by the end of the (current) first quarter of fiscal 2020.

What management had to say

Palo Alto Networks Chairman and CEO Nikesh Arora elaborated:

We had a strong fourth quarter, surpassing a billion dollars in billings within the quarter for the first time, and achieving approximately 180% year-over-year growth in our newer Prisma and Cortex offerings. This year we acquired and released important new technologies and built a robust go-to-market framework for driving their success in the market. It's gratifying to see all the team's hard work translate into strong market results. The addition of our proposed acquisition announced today, Zingbox, Inc., a differentiated player in IoT security, continues our strategy of extending our platforms. Zingbox will add to the capabilities of our Next-Generation Firewall by offering a first-of-its kind subscription that will make it easier for organizations to protect IoT devices from attackers. It will also be available as a service on our Cortex platform.

Looking forward

During the subsequent conference call, Palo Alto Networks management also told investors it's targeting full fiscal-year 2020 revenue of $3.44 billion to $3.48 billion -- or growth of 19% to 20% year over year -- with total billings of $4.095 billion to $4.155 billion and earnings per share of $5 to $5.10. Similar to guidance provided three months ago, that bottom-line outlook includes expenses related to Palo Alto Networks' recent acquisitions, as well as its decision to invest to capture significant opportunities for incremental growth.

By comparison -- and though we don't usually lend much credence to Wall Street's models -- most analysts were predicting significantly higher fiscal 2020 earnings of $6.25 per share on revenue right at the midpoint of Palo Alto Networks' target range.

Looking out over the next three years to fiscal 2022, Palo Alto Networks expects to maintain a compound annual growth rate of 20% for total revenue (to approximately $5 billion) and billings (to roughly $6 billion), with adjusted operating margin hovering around 21% to 22% (from 22% in fiscal 2019). Over the longer term, Palo Alto Networks management added that it's targeting adjusted operating margin of at least 25%.

That helps explain why -- after initially plunging in Wednesday's after-hours trading -- shares of Palo Alto Networks later recovered to trade up around 6% as the market absorbed the news. In the end, Palo Alto Networks' understandable bottom-line guidance shortfall relative to expectations notwithstanding, this quarter was as strong as any long-term investor could have hoped. And there's no denying the underlying momentum Palo Alto Networks' business is enjoying today.