Palo Alto’s Revenue Exceeds Projections, Yet Stock Takes Unexpected Hit

Palo Alto’s Revenue Exceeds Projections, Yet Stock Takes Unexpected Hit

Summary

• Palo Alto Networks beat analyst estimates for revenue and adjusted earnings in its first quarter of fiscal 2025.
• Next-Generation Security annual recurring revenue grew 40% from a year earlier.
• Shares still fell more than 5% after hours as full-year guidance only matched expectations and billings dropped.
• Several analysts stayed positive on the company’s platform strategy despite the drop.

Revenue Triumph: Surpassing Expectations

Palo Alto Networks reported results for the first quarter of fiscal 2025, which ended October 31, 2024, on November 20, 2024. Revenue rose 14% from a year earlier to $2.14 billion, a little ahead of the consensus estimate of $2.12 billion. Adjusted earnings came in at $1.56 per share, beating the $1.48 analysts expected. Subscription and support revenue, at about $1.8 billion, made up most of the total.

The company credited its push to sell customers a bundled “platform” instead of separate products. Next-Generation Security annual recurring revenue, which covers its newer cloud, AI-driven operations and secure access products, grew 40% to $4.5 billion. Remaining performance obligation rose 20% to $12.6 billion.

Why the Stock Still Fell

Even with the beat, shares fell more than 5% in after-hours trading. The stock had just hit an all-time high and was up about a third for the year, so investors wanted more than a small beat.

Full-year guidance was the main problem. Palo Alto raised its fiscal 2025 revenue outlook to $9.12 billion to $9.17 billion, but that only matched the Wall Street estimate of $9.13 billion. New billings fell 14%, a bigger drop than some analysts expected. Management said billings no longer reflect how it sells and that it would stop treating them as a key metric.

Analyzing Market Reactions: Mixed Sentiments

Analysts were split on what the drop meant. Some worried about a sequential decline in deferred revenue and what it could mean for free cash flow, since the company has been moving customers to annual invoicing.

Others took the dip in stride. RBC Capital Markets said it would be a buyer on any weakness. KeyBanc kept its Overweight rating and said the company was faring better than many security peers.

RBC’s analysts wrote that the “underlying momentum of the business remains strong” and that they still liked the opportunity for Palo Alto to consolidate customers’ cybersecurity spending.

Looking Ahead

Palo Alto also announced a two-for-one stock split, with split-adjusted trading set to begin on December 16, 2024. For the second quarter it guided revenue of $2.22 billion to $2.25 billion, in line with expectations.

The quarter showed how high expectations had climbed. Revenue and profit beat forecasts, yet the shares fell because the outlook did not move enough. Whether the platform strategy pays off will show up in recurring revenue over the next few quarters, not in a single night’s trading.

Frank Jones, CISSP

Frank Jones has loved computers from the age of 13. Frank got his hacking career started when he downloaded a war dialing program that he used to detect dial up modems in his hometown of Chicago. Frank Jones now works as a JAVA coder and cyber security researcher.