Palo Alto Networks Finds Another Acquiree, but Guides Low (Again)

Palo Alto Networks (PANW 1.03%) announced fiscal first-quarter 2020 results on Monday after the market closed, technically stepping over the low bar it set for itself with its last quarterly update in early September. The cybersecurity specialist also unveiled yet another strategic acquisition, this time in the form of a $150 million cash deal to absorb identity-based cloud-security specialist Aporeto.

But the cybersecurity platform company also issued near-term guidance that fell short of expectations yet again. With shares down 12% in Tuesday's trading as of this writing, let's dig in for a better idea of what Palo Alto Networks accomplished over the past few months, starting with its headline numbers:

Data source: Palo Alto Networks. *For the quarter ended October 31, 2019. GAAP = generally accepted accounting principles. N/A = not applicable.

IMAGE SOURCE: GETTY IMAGES.

Palo Alto Networks' top-line growth was driven entirely by a 30.1% increase in subscription and support sales to $540.7 million, which more than offset a 3.9% decline in product revenue to $231.2 million. Meanwhile, billings -- a key metric to help gauge future revenue growth -- rose 18% year over year to $897.4 million, and deferred revenue jumped 26% to approximately $3 billion. 

Note those GAAP results include the impact of items like stock-based compensation and acquisition costs. Excluding those items, Palo Alto Networks generated (non-GAAP) net income of $104.8 million, or $1.05 per share, down from $115.4 million, or $1.17 per share a year earlier.

For perspective, Palo Alto Networks' latest guidance called for more modest quarterly revenue growth in the range of 16% to 17%, deferred revenue growth of 15% to 17%, and lower adjusted net income of $1.02 to $1.04 per share.

Palo Alto Networks Chairman and CEO Nikesh Arora stated that the company's "multi-platform approach to security is clearly resonating" with customers, adding:

Our Next-Gen Security offerings performed extremely well in our first fiscal quarter, bolstering our confidence in our long-term prospects for Prisma and Cortex. At our recent Ignite conference, we introduced significant product enhancements, including Cortex XDR 2.0, SD-WAN and DLP capabilities for Prisma Access and the integration of Twistlock and PureSec into Prisma Cloud, that should sustain this momentum. Additionally, we expect our proposed acquisition of Aporeto, announced today, will further extend our leadership in cloud security.

Moving forward

For the (current) second quarter of fiscal 2020, however, Palo Alto Networks sees revenue ranging from $838 million to $848 million, good for year-over-year growth of between 18% and 19%, with total billings rising between 16% and 17% to a range of $985 million to $1 billion. On the bottom line, that should result in adjusted net income per share of $1.11 to $1.13.

By comparison, most analysts were modeling significantly higher fiscal Q2 adjusted earnings of $1.30 per share on revenue closer to $845 million ($2 million above the midpoint of Palo Alto Networks' guidance range).

As such -- and despite its relative outperformance to start the fiscal year -- Palo Alto Networks reaffirmed its full-year outlook for revenue of $3.44 billion to $3.48 billion (up 19% to 20% year over year). But it also lowered its guidance for full-year adjusted earnings per share of $4.90 to $5.00, down $0.10 per share from both ends of its previous guidance, due to the proposed acquisition of Aporeto. That said, the company did modestly raise its guidance for full-year billings to a range of $4.105 billion to $4.165 billion -- up from $4.095 billion to $4.155 billion previously -- driven by a $10 million increase in their expected next-gen security product billings, to a range of $810 million to $820 million. 

It's obvious the market isn't pleased with that light fiscal Q2 outlook and full-year top-line reiteration -- though it likely didn't help that Palo Alto Networks shares were up nearly 50% in the year leading up to today's report. Even still, Palo Alto Networks' long-term growth story appears to remain intact, and I'm not convinced investors should be jumping on their sell buttons in response today.