Given that the world has changed so much in the last two months, Palo Alto Networks' (NYSE:PANW) third quarter of fiscal 2020 (the three months ended April 30, 2020) was going to be chock-full of information. The company didn't disappoint, producing strong financial results and providing lots of details on the direction it's headed, the future of cybersecurity, and how technology continues to play an increasingly dominant role in our lives.
The raw numbers
Palo Alto Networks' Q3 revenue was $869 million, 20% higher than a year ago and representing much higher growth than management had forecast earlier in the year. Billings (revenue collected in the period) increased 24% to $1.0 billion, and deferred revenue (revenue sitting on the balance sheet for which service has not yet been rendered) increased 28% to $3.4 billion. The acquisition of software-defined network security leader CloudGenix closed on April 21, which contributed some to the results, but it's been Palo Alto's aggressive cloud-based security-vendor purchasing over the last two years that accounted for most of the big jump.
As for the bottom-line, adjusted net income was $115 million, down 12% from a year ago. Free cash flow (basic profitability measured as revenue minus cash operating and capital expenses) declined 70% to $83.6 million, mostly due to a $51.7 million charge related to its headquarters expansion and another $50 million in litigation settlement. Free cash flow should rally from here on out. Guidance for full-year 2020 was also upgraded, and revenue is now expected to grow 16% to 17% from 2019.
Tech upgrades are accelerating
The addition of CloudGenix at the end of Q3 is looking particularly fortuitous. Because of the lockdown to slow the spread of COVID-19, Palo Alto said organizations are accelerating their investment into technology. Many of the new trends that are emerging will need to make extensive use of the company's security and monitoring for cloud computing. CEO Nikesh Arora said the global economy will likely be negatively affected by coronavirus through the end of 2021. But as a result, investment in "digital transformation" to reduce potential future disruption is on the rise.
In his letter to shareholders, Arora outlined a number of trends his company expects to see emerge in the months and years ahead:
- Work-from-home is here to stay. Securing homes as well as offices will be increasingly important to keep digital operations safe.
- Migrating to cloud-based systems will accelerate to support remote work and update legacy operating procedures.
- As work-from-home and the cloud become commonplace, organizations will need to automate parts of business -- like logistics and billing -- using AI.
- Many organizations will begin looking to reduce the number of cybersecurity and technology vendors they use to simplify their processes.
Palo Alto's strategy of aggressively acquiring smaller but fast-growing cloud security and data-monitoring companies has drawn fire in recent years, but recent events are proving the worth of the drastic moves the company has made. While the future remains cloudy and growth trajectory in coming years uncertain, Arora said the current crisis is an opportunity to continue aggressively investing for more growth. And the large suite of services Palo Alto now offers should serve it well if organizations do start looking to simplify and consolidate who they do business with.
The company remains in excellent shape to execute on this plan after its last report. At the end of April, cash and short-term investments totaled $2.04 billion and long-term debt (in the form of notes that could be converted into stock) at $1.48 billion. With COVID-19 forcing technological change, Palo Alto Networks looks primed to continue consolidating cybersecurity market share to itself.