Palo Alto Networks (PANW -1.22%) is growing briskly. Revenue surged 25% in its fiscal first quarter of 2023 to $1.56 billion, slightly above the high end of its guidance range. A big driver is that companies are increasingly turning to Palo Alto's integrated cybersecurity platform to simplify their security architecture.
Typically, fast-growing companies are unprofitable and consume cash to fund their expansion. However, Palo Alto Networks is different. It's increasingly profitable and producing an extraordinary amount of free cash flow. That's putting it in a strong competitive position to weather the currently uncertain macroeconomic environment so it can continue growing shareholder value.
Focused on making money
Palo Alto Networks stands out in the tech sector. It reported a GAAP profit of $20 million, or $0.06 per share, in its fiscal first quarter. While that might not sound impressive, it was the company's second straight quarter of posting a GAAP profit after four consecutive years of losses.
Meanwhile, its non-GAAP profits have continued to grow. Palo Alto reported $266.4 million, or $0.83 per share, of non-GAAP net income. That was a 44% improvement from the year-ago period and exceeded the top-end of its $0.68 to $0.69 per-share guidance range.
After spending the last several years building its next-generation security platform, Palo Alto Networks has increasingly focused on improving profitability, which is paying off. CEO Nikesh Arora stated on the quarterly conference call:
As the macroeconomic environment changes, we are accelerating our efforts to drive incremental operating leverage in our business. Given that we're the largest independent cybersecurity business, we can meaningfully improve our margins over the next phase of our company's life cycle. Our focus on profitability in the quarter drove operating income growth of 44% year over year, with operating margins up 260 basis points during the same period.
Overall, its operating income margin was 20.6% for the period. That strong showing now has the company expecting its operating margin will be between 19.5% and 20% this year, an improvement from its initial 19% to 19.5% guidance range. Meanwhile, Palo Alto Networks expects to generate positive GAAP income for the year.
Becoming a free-cash-flow machine
An even more extraordinary number was the company's free cash flow, which came in at a record $1.2 billion. However, that's an outlier. The company posted such high cash flow because of strong collections in the quarter and the strength of its business heading into the period.
Still, Palo Alto Networks expects to generate a lot of cash this year. It anticipates its adjusted free-cash-flow margin to be 34.5% to 35.5% this year, an improvement from its initial 33.5% to 34.5% guidance range. With revenue predicted to rise to as much as $9 billion this year, Palo Alto is on track to produce well over $3 billion in free cash flow.
That strong free-cash-flow generation gives it even more financial flexibility. It ended its fiscal first quarter of 2023 with over $3.8 billion in cash against a little less than $3.7 billion of debt via convertible senior notes.
The company recently used some of that financial flexibility to make another acquisition. It agreed to purchase Cider Security for $195 million, bolstering its Prisma Cloud platform. With ample cash and a cash-flowing business, it has the resources to continue making acquisitions to bolster its capabilities as opportunities arise.
Palo Alto is also returning cash to shareholders. It increased its share repurchase authorization by $915 million earlier this year to $1 billion. While the company didn't buy back any shares in its fiscal first quarter, CFO Dipak Golechha stated on the quarterly call that "our share repurchase program is opportunistic, and we're committed to this method of returning cash to shareholders over the medium term."
The company is also trying to keep dilution in check by managing its stock-based compensation plan to be a smaller percentage of its revenue. By striving to keep dilution to a minimum, it will help keep some pressure off the stock price since outstanding shares won't rise quite as fast as they would otherwise.
A different kind of growth stock
Palo Alto Networks stands out among fast-growing tech companies. Golechha stated in the earnings release, "We will continue to balance growth with profitability and cash generation to further strengthen our position in the market." That's putting it in a strong competitive position to capitalize on opportunities to make acquisitions and repurchase shares. Those features make it a compelling growth stock to consider owning.
