Why Palo Alto Networks Is a Buy

Palo Alto Networks (PANW) posted strong results for the first quarter of 2016. The company posted better-than-expected results for the quarter and surpassed the revenue and earnings per share estimates.

A strong performance

The revenue for the quarter increased by 55% on year-over-year basis to $297.2 million, beating the revenue estimates of $280 million from $192.3 million for the first quarter, 2015, as a result of increase in product revenue to $147.7 million from $101.5 million for the first quarter, 2015, driven by the rise in data center products and increase in services revenue to $149.5 million from $90.8 million for the first quarter, previous year.
The strong revenue growth of Palo Alto was primarily driven by strong customer acquisition, strong line-up of products, strength of network security market, investment plans and deal wins.

On geographical basis, the revenue from Americas segment for Palo Alto increased to $211.3 million from $131.8 million for the first quarter, 2015, contributing the largest portion to the total revenue. The revenue from Europe, Middle East and Africa segment went up to $53.7 million from $38.5 million for the same period, last year and the revenue from Asia Pacific and Japan went up to $32.2 million from $22 million for the first quarter, 2015, driven by the investment made by the company which increased the size of sales force and also increased the number of company’s channel partners in theaters.

The cost of revenue for the quarter went up to $79.2 million from $53.4 million for the first quarter, 2015. Furthermore, the Non-GAAP gross profit scaled up to $231.4 million from $147.6 million for the same period, 2015.

Moving ahead to expenses, the total operating expenses for Palo Alto scaled up to $181.1 million for the quarter from $127.2 million for the first quarter, 2015, as the Research and Development expense went up to $34 million from $22.8 million for the first quarter, 2015, the Sales and Marketing expense went up to $130.1 million from $90.1 million for the first quarter, 2015, and the General and Administrative expense rose to $17.7 million from $14.3 million for the first quarter, 2015.

In addition, company’s Operating Income scaled up to $49.6 million for the quarter from $20.4 million for the same period, previous year. The Net Income of the company on Non-GAAP basis went up to $31.6 million from $12.8 million for the same quarter, 2015. But, on GAAP basis, the company suffered a net loss of $38.7 million compared to net loss of $30.1 million for the first quarter, 2015.

Palo Alto Networks’ Non-GAAP Diluted Earnings per share increased to $0.35, beating the analyst estimates by 3% from $0.15 for the first quarter, 2015.

A positive outlook

The rising demand of mobile network will drive the industry of mobile communication to 5G in 2016. Also, 2015 will be backed by a huge annual increase of 59.3% among LTE devices, as around 610 million units are estimated to be shipped in 2015. Also the annual shipment of the devices in 2016 is expected to reach 900 million.

Further, the cyber security market is expected to reach to $170 billion by 2020 from $77 billion for 2015, opening up opportunity for Palo Alto.

Furthermore, in order to deal the increasing cyber attacks, the company has revealed a new “BackStab” attack, which would be helpful in stealing the private information from the backup files of mobile devices, which are stored in the computers of victim.

In addition, Palo Alto has introduced “Aperture”, which is offered as security-as-a-service, for helping the organizations to safely strengthen and enable security for sanctioned SaaS applications.

Cash flow profile and valuation

The cash flow from Operating Activities increased to $146.7 million for the quarter from $74.9 million for the first quarter, 2015. The cash used in Investing Activities went up to $263.5 million for the quarter, from $201.1 million for the first quarter, 2015. Further, the cash flow from Financing Activities went up to $16.8 million from $16.1 million for the first quarter, 2015. Also, the cash and cash equivalents at the end of the period, declined to $275.8 million for the quarter from $543.7 million for the first quarter, 2015.

Palo Alto Networks has a PEG ratio of 2.58. The company further has a Price/Sales ratio of 16.10, which is very high compared to industry’s ratio and has Enterprise Value/Revenue of 15.55. The Current ratio for the quarter dropped to 0.96 from 2.59 for the same period, last year. Further, the Debt/Equity ratio skidded to 0.91 from 0.96 for the first quarter, 2015 and the Interest Coverage Ratio skidded to 5.31 from 4.33 for the first quarter, 2015.

Conclusion

To wrap up, Palo Alto Networks delivered better-than-expected results for the first quarter, as the company surpassed the revenue and earnings per share estimates. Looking ahead, I think that the improvement in the company’s financial performance will continue due to its impressive moves.
Published on Dec 15, 2015
By Yaggyaseni Mittra

Copyrighted 2017. Content published with author's permission.

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