Why Is Palo Alto (PANW) Down 18.4% Since Last Earnings Report?

A month has gone by since the last earnings report for Palo Alto Networks (PANW). Shares have lost about 18.4% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Palo Alto due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Palo Alto Q2 Earnings Beat Estimates, Revenues Miss

Palo Alto reported second-quarter fiscal 2020 non-GAAP earnings of $1.19 per share, which surpassed the Zacks Consensus Estimate by 6.25%. However, the bottom line declined 21.2% year over year.

The company’s revenues of $816.7 million improved 15% year over year. However, the figure missed the Zacks Consensus Estimate of $843 million.

The top line was primarily driven by several deal wins and increasing adoption of the company’s next-generation security platforms. Growing traction in Prisma and Cortex offerings also acted as a tailwind.

However, revenues were below the company’s expectations primarily due to the negative impact of sales incentives related to Next-Generation Security products, which continued from the prior fiscal year.

Quarterly Details

Product revenues declined approximately 9.24% to $246.5 million.

However, the company’s subscription and support revenues improved 29.7% to $570.2 million, driven by a 37% increase in SaaS-based subscription revenues and 20% rise in support revenues. This segment of Palo Alto’s business constituted 70% of total revenues in the fiscal second quarter.

Further, billings improved 17% year over year to $998.9 million. Deferred revenues surged 27% to $3.2 billion.

During the reported quarter, Palo Alto continued to acquire new customers — adding more than 2,500 customers— and increase wallet share with existing customers.

Region wise, revenues from the Americas climbed 15% while Europe, the Middle East and Africa, and Asia Pacific revenues rose 12% and 20%, respectively.

Margins

Additionally, Palo Alto’s non-GAAP gross margin expanded 10 basis points (bps) on a year-over-year basis to 76.4%.

Non-GAAP operating margin contracted 670 bps to 17.9% due to a headwind of about $79 million in net expenses related to the recent acquisition.

Balance Sheet

Palo Alto exited the fiscal second quarter with cash, cash equivalents and short-term investments of approximately $3.5 billion compared with $3.3 billion at the end of the preceding quarter.

The company’s balance sheet does not have any long-term debt.

It generated cash flow from operations of $306.9 million compared with $225.2 million in the previous quarter. Free cash flow came in at $257.8 million.

Guidance

For third-quarter fiscal 2020, Palo Alto anticipates revenue growth of 15-17% year over year between $835 million and $850 million. Billings growth is anticipated between 19% and 22%, ($980 million-$1 billion).

Non-GAAP earnings per share are estimated in the range of 96-98 cents.

Capital expenditure of approximately $85-$90 million is expected in the third quarter with approximately $50 million allocated for future expansion of Palo Alto’s headquarters in Santa Clara.

For fiscal 2020, the company estimates billings to grow in the range of 17-18% year over year. Moreover, it now expects billings growth of its next-generation security business (Prisma and Cortex) at 79-82%.

Revenues for the fiscal year are estimated between $3.35 billion and $3.39 billion, suggesting an improvement of 16-17% year over year.

Non-GAAP earnings per share are estimated in the band of $4.55-$4.65.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -269.36% due to these changes.

VGM Scores

Currently, Palo Alto has a subpar Growth Score of D, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Palo Alto has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.