Palo Alto Networks, Inc. PANW reported third-quarter fiscal 2015 adjusted loss per share (excluding amortization and other one-time items but including stock-based compensation) on a proportionate tax basis of 44 cents per share, which was significantly greater than the Zacks Consensus Estimate of a loss of 18 cents per share. Also, adjusted loss widened from a loss of 25 cents per share reported in the year-ago quarter.
Revenues
Palo Alto Networks reported revenues of $234.2 million, which not only increased 55.4% from the year-ago quarter but also came ahead of the Zacks Consensus Estimate of $221 million. Improvement in revenues was primarily due to growth in the company’s product lineup, recurring subscription and support.
Also, new customer wins coupled with expansion of existing customers positively impacted quarterly revenues. Customers at the end of the quarter ending Apr 30 were 24,000. Notably, better-than-expected growth across all its geographic theater was the other positive, which impacted revenues.
Product revenues increased 44.5% and came in at $121.5 million, primarily driven by growth in data center products. Also, a 69.2% increase in service revenues on a year-over-year basis positively impacted revenues in the quarter. SaaS-based subscription revenues (part of service revenues) increased 71% on a year-over-year basis.
Geographically, on a year-over-year basis, revenues from the Americas increased 60% and represented 67% of total revenue. Europe, the Middle East and Africa (EMEA) increased 42% and accounted for 20% of total revenue. Asia-Pacific was up 55% on a year-over year basis, representing 13% of total revenue.
Operating Results
The company’s adjusted gross margin (excluding amortization and other one-time items but including stock-based compensation) increased 53 basis points (bps) on a year-over-year basis to 74.5%, primarily due to favorable product mix and a higher revenue base.
Palo Alto Networks reported adjusted operating loss (excluding amortization and other one-time items but including stock-based compensation) of $31.6 million, which increased from a loss of $15.5 million reported in the year-ago quarter. Higher operating expenses (up 62.2% on a year over year basis) impacted operating results. Also, operating expenses, as a percentage of revenues increased 371 bps on a year-over-year basis.
The company’s adjusted net loss (excluding amortization and other one-time items but including stock-based compensation) came in at $36 million, which widened from a loss of $19.7 million reported in the year-ago quarter.
Balance Sheet & Cash Flow
Palo Alto Networks exited the third quarter with cash, cash equivalents and short-term investments of approximately $822.9 million compared with $675.1 million in the previous quarter. Receivables were $150.5 million versus $135.3 million in the previous quarter. Palo Alto Networks’ balance sheet does not comprise any long-term debt.
The company reported cash flow from operations of $87.2 million during the quarter and free cash flow came in at $77.4 million.
Guidance
For the fourth quarter of fiscal 2015, Palo Alto Networks expects revenues in the range of $252 million to $256 million (mid-point $254 million), up 41% to 44% year over year. The Zacks Consensus Estimate is pegged at $222 million. The company expects non-GAAP earnings per share for the fourth quarter of fiscal 2015 to be in the range of 24 to 25 cents (excluding stock based compensation expenses) as against the Zacks Consensus Estimate of a loss of 19 cents per share.
Our Take
Palo Alto Networks offers a network security platform that enables firms, service providers and government bodies to secure their networks. The company reported greater-than-expected loss in the third quarter of fiscal 2015 while revenues came ahead of the Zacks Consensus Estimate. The company provided encouraging fourth-quarter guidance.
Revenue growth seems to be steady and was positively impacted by strength across all its geographical regions and business segments. Also, new customer wins coupled with expansion of existing customers positively impacted quarterly revenues. We believe that the company’s product refreshes will boost revenues, going forward.
Palo Alto Networks replaced its competitor Juniper Networks JNPR as the agency wide security provider for a Canadian government agency. It also became the agency wide security provider for a large U.S. retailer, replacing Cisco CSCO.
The company is also keen on expanding its cloud exposure. Nevertheless, a volatile spending environment and competition from Check Point Software Technologies Ltd. CHKP remain concerns.
Currently, Palo Alto Networks has a Zacks Rank #3 (Hold).
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