Palo Alto Networks, Inc. PANW reported better-than-expected results for the third quarter of fiscal 2024. The company reported non-GAAP earnings of $1.32 per share for the third quarter, which beat the Zacks Consensus Estimate of $1.25. The bottom line improved 20% from the year-ago quarter’s non-GAAP earnings of $1.10 per share and came above the company’s earlier guidance range of $1.24-$1.26.
Palo Alto’s third-quarter revenues of $1.98 billion beat the Zacks Consensus Estimate of $1.97 billion and rose 15% from the year-ago reported figure. Third-quarter revenues also came toward the higher end of management’s previously provided guidance range of $1.95-$1.98 billion.
The top line was primarily driven by growth across the Products, Services and Subscription segments. Additionally, the increased adoption of Palo Alto’s Next-Generation Security platforms, driven by the hybrid work culture and the heightened need for stronger security, also aided third-quarter results.
The company’s strong quarterly performance reflects its sustained focus on product innovation, a shift in its business model to subscription-based services, building sales capability, platform integration and continued investments in the go-to-market strategy.
Billings increased 3% to $2.33 billion in the third quarter and came within the company’s projection of $2.3-$2.35 billion.
Despite reporting stronger-than-expected third-quarter results, shares of Palo Alto plunged 8.6% during Monday’s extended trading session as the company’s fourth-quarter revenue forecast sparks concerns over IT spending by its customers.
Before delving deeper into guidance, let’s discuss the third-quarter performance first.
Palo Alto Networks, Inc. Price, Consensus and EPS Surprise 
Palo Alto Networks, Inc. price-consensus-eps-surprise-chart | Palo Alto Networks, Inc. Quote
Third-Quarter Performance
Product revenues increased 0.7% year over year to $391 million and contributed to 19.7% of the total revenues. The company’s Subscription and Support revenues, which accounted for 80.3% of the total revenues, improved 19.6% to $1.59 billion.
Deferred revenues at the end of the fiscal third quarter were $5.01 billion. Palo Alto’s remaining performance obligation climbed to $11.3 billion, reflecting a year-over-year increase of 23%.
Palo Alto’s next-generation security annualized recurring revenues were $3.79 billion in the reported quarter compared with $3.49 billion in the previous quarter and $2.57 billion in the year-ago quarter.
Non-GAAP gross profits increased 17.6% to $1.54 billion. The non-GAAP gross margin expanded 150 basis points (bps) to 77.6%, primarily driven by a higher software mix, normalization in the supply-chain environment and some efficiencies in customer support.
The non-GAAP operating income rose 24.9% to $507.9 million. Meanwhile, the non-GAAP operating margin expanded 200 bps to 25.6% compared with the year-ago quarter.
Balance Sheet & Cash Flow
Palo Alto exited the fiscal third quarter with cash, cash equivalents and short-term investments of $2.89 billion, down from $3.37 billion at the end of the previous quarter. As of Apr 30, 2024, the company had long-term operating lease liabilities of $369.8 million.
PANW generated operating cash flow of $528.9 million and non-GAAP adjusted free cash flow of $491.5 million in the fiscal third quarter. The non-GAAP adjusted free cash flow margin for the second quarter came in at approximately 25%. In the first three quarters of fiscal 2024, the company generated operating cash flow of $2.75 billion and non-GAAP adjusted free cash flow of $2.63 billion.
Guidance Update
Palo Alto raised its fiscal 2024 guidance for revenues and billings. The company now projects revenues between $7.99 billion and $8.01 billion, up from the earlier guidance range of $7.95-$8 billion. Similarly, the guidance range for fiscal 2024 billings has been raised to $10.13-$10.18 billion from $10.1-$10.2 billion anticipated earlier. The year-over-year growth ranges for updated revenues and billings guidance are 16% and 10-11%, respectively. The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $7.98 billion.
Palo Alto raised its non-GAAP earnings forecast to the $5.56-$5.58 per share band from the $5.45-$5.55 per share range anticipated previously. The company also raised its non-GAAP operating margin guidance for fiscal 2024 to 26.8-27% from 26.5-27% projected earlier. The consensus mark for fiscal 2024 non-GAAP earnings stands at $5.50 per share.
The guidance range for the non-GAAP adjusted free cash flow margin has been revised upward to 38.5-39% from 38-39% forecasted previously. The projection for next-generation security ARR has been revised upward to $4.05-$4.10 billion from $3.95-$4 billion anticipated previously.
Palo Alto initiated guidance for the fourth quarter. For the fourth quarter of fiscal 2024, PANW projects revenues between $2.15 billion and $2.17 billion, which suggests year-over-year growth of 10-11%. Total billings are anticipated between $3.43 billion and $3.48 billion, which indicates an increase of 9-10% from the year-ago quarter. Non-GAAP earnings are projected in the range of $1.40-$1.42 per share. The Zacks Consensus Estimate for revenues and non-GAAP earnings stands at $2.16 billion and $1.40 per share, respectively.
Zacks Rank & Other Stocks to Consider
Palo Alto currently carries a Zacks Rank #2 (Buy). Shares of PANW have increased 9.8% year to date (YTD).
Some other top-ranked stocks in the broader technology sector are NVIDIA NVDA, CrowdStrike Holdings CRWD and Paycom Software PAYC, each carrying a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for NVIDIA’s fiscal 2025 earnings has been revised 20 cents upward to $24.25 per share in the past seven days, which suggests year-over-year growth of 87.1%. The long-term estimated earnings growth rate for the stock stands at 30.9%. The NVDA stock has soared 91.4% YTD.
The Zacks Consensus Estimate for CrowdStrike’s fiscal 2025 earnings has been revised upward by 2 cents to $3.90 per share in the past 60 days, which calls for an increase of 26.2% on a year-over-year basis. The long-term expected earnings growth rate for the stock is pegged at 22.3%. CRWD shares have risen 36.6% YTD.
The consensus mark for Paycom’s 2024 earnings has been revised upward by 3 cents to $7.68 per share over the past 30 days, which indicates a marginal 0.9% decrease from that reported in 2023. It has a long-term earnings growth expectation of 10.4%. The PAYC stock has declined 12.8% in the YTD period.
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