Palo Alto Networks Is a Screaming Buy

Palo Alto Networks (PANW) announced second quarter ended January 31, 2016 total revenue of $334.7 million, up 54 percent year-over-year from $217.7 million of total revenue during the same period last year. Going forward, the company estimates third quarter of 2016 total revenue in the $335 to $339 million range, illustrating 43 percent to 45 percent of year-over-year growth.

Palo Alto declared second quarter of 2016 non-GAAP net income of $36.3 million, or $0.40 per diluted share as against adjusted net income of $16.9 million, or $0.19 per diluted share during second quarter of 2015.
Moving ahead, adjusted diluted net earnings per share for third quarter of 2016 is projected to be in the range of $0.41 to $0.42 leveraging approximately 90 to 92 million shares.

The enterprise security platform provider reported continued year-over-year growth in both its top and bottom lines primarily driven by significant customer traction for the company’s advanced set of cyber security solutions, driving sustainable long-term company growth.

Impressive growth  

Top line for Palo Alto grew at a CAGR of 54% coupled with nearly 56% of billings expansion, driving sustainable long-term company growth. Therefore, the global cyber security major is much ahead of the average market revenue CAGR of 7.4% over the fiscal years 2012 till 2015. In addition, Palo Alto seems hugely committed to delivering attractive year-over-year profitability and growth through significant expansions of operating margin, free cash flow margin and billings.

Palo Alto is continuously delivering significant year-over-year billings growth and thus driving notable top line expansion along with remarkable growths in operating income and free cash flows which uniquely positions the company for delivering sustainable long-term growth while offering attractive shareholder returns.

The continued commitment of Palo Alto towards investing strategically in developing and delivering advanced security solutions is believed to increasingly attract several new enterprise customers for adopting Palo’s sophisticated security products which would further draw strategic key investors to invest in the company and harness impressively growing returns.

Increasing adoption  

The advanced security platform of Palo Alto is witnessing continuing robust adoption across all the key growth segments which has allowed the company to currently serve over 30,000 customers worldwide. Importantly, Palo has strategically partnered with Proofpoint to exchange intelligence on complicated attacks, allowing the development of coordinated and automated protection all through Proofpoint’s SocialPatrol and Targeted Attack Protection system, Palo’s advanced security platform. Moreover, attractive subscription and support renewable growth rates of nearly 90% and 100% respectively are acting as a key enabler of continued long-term company growth and superior adjusted operating margins.

The billings mix of Palo Alto has strategically shifted to include greater revenue contributions from the services segment compared to revenue contributions from the product segment during the fiscal year 2015 as against the fiscal year 2012 that comprised of greater revenue contributions from the product segment. The unique mix shift has delivered over 5 points enhancement in the company’s key gross margins. However, this mix shift has generated a timing discrepancy between revenue and commission expense which is putting downward pressure on near-term company margins.

The growing pipeline of new customers, increasingly being attracted to the company’s advanced set of cyber security solutions is offering the notable power of renewals and thus driving favorable impact on key margins while encouraging the company to continue to focus on the services growth segment.

Precisely, Palo Alto has delivered 62 percent year-over-year billings growth to about $459.0 million in the quarter along with 100 percent of year-over-year operating cash flows growth to nearly $153.8 million as well as 93 percent year-over-year growth of free cash flows to approximately $136.4 million which is expected to encourage the company to make future growth investments while delivering outstanding shareholder returns.

Conclusion

Overall, the investors are advised to “Hold” their position in Palo Alto Networks, Inc. considering the company’s notable long-term growth prospects being supported by a solid financial position with significant total cash of $964.60 million and smaller total debt position of $497.50 million, encouraging Palo to make future growth investments while delivering attractive shareholder returns. The PEG ratio of 1.94 indicates healthy company growth and somewhat better than the industry’s growth average of 1.05. However, the profit margin of -16.79% seems disappointing and misguiding.
Published on May 12, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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