Investors were worried about Palo Alto Networks' (PANW 0.11%) fiscal third-quarter earnings release, but those fears were overblown. The cybersecurity software specialist on May 19 reported solid demand for its cloud services through late April.
But the even better news for shareholders is that management sees those positive trends extending at least through the end of its current fiscal year, which runs through late July.
Let's take a closer look.
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Billings and sales
Palo Alto's sales trends showed no sign of stress from any slowdown in enterprise spending. On the contrary, sales jumped 29% to comfortably outpace the 25% forecast that management issued a few months ago.
The company won more business and had no trouble convincing existing customers to renew annual commitments at higher contract values. These gains imply a strong market-share position, which should expand along with Palo Alto's growing portfolio of services.
"We continue to see success in consolidating share within the enterprise market," CEO Nikesh Arora said in a call with Wall Street analysts. Arora cited the company's multiplatform approach as a key competitive advantage.
Still losing money
Palo Alto is still losing money, and that's a big factor behind the stock's slump in recent months. Yet operating losses shrank to $48 million from $110 million a year ago. The company's cash flow trends are improving, too, as you would expect with a cloud services-based business. Palo Alto has generated $1.5 billion of operating cash over the past nine months compared with $1.2 billion in the year-ago period .
PANW Operating Margin (TTM) data by YCharts
Looking at its finances in yet another way, non-GAAP (adjusted) operating margin expanded by 1.2 percentage points to 18.2% of sales despite supply chain challenges that hurt the hardware segment. "We drove efficiencies across the business, CFO Dipak Golechha said.
Looking ahead
The cybersecurity specialist's business is increasingly tilting toward large enterprise clients, and the timing of these contract deals might create volatility from one quarter to the next. But the Q3 outperformance wasn't simply a matter of grabbing sales from the next period.
Management sees a positive selling environment ahead as companies continue prioritizing digital security. Its hardware, software, and support platforms all appear primed to capitalize on that shift, too.
As a result, Palo Alto raised its 2022 outlook for a second consecutive time. Billing should grow by between 30% and 31%, up from the prior range of 25% to 26%.
The stock might stay pressured if investors continue to stay away from unprofitable businesses. However, with growth accelerating and cash flow trends improving, Palo Alto Networks might finally be on a path toward sustainable profitability.
