Palo Alto Networks' Stock Drops Despite Strong Q1

Palo Alto Networks saw its stock price drop despite reporting better-than-expected earnings for the first quarter of its fiscal 2024.

For the quarter, Palo Alto Networks reported $1.9 billion in revenue versus estimates of $1.82 billion. However, second-quarter billings guidance of $2.34 billion-$2.39 billion fell short of the $2.43 billion estimate.

Shares of Palo Alto Networks fell 6.3% on Thursday.

According to MarketWatch, Wells Fargo analysts said the focus on billing trends “takes away from all the positives.” And Evercore analysts called Palo Alto Networks’ outlook “merely a macro-level distraction.”

However, BofA Securities analysts downgraded shares of Palo Alto Networks to neutral, despite what they said was a “healthy” quarter. They said shorter deals sought by Palo Alto Networks customers were “likely not a one-time phenomenon.”

Profit for the first quarter totaled $466.3 million, compared to $266.4 million for the year-ago quarter.

Palo Alto Networks' Nitesh Arora

"An unprecedented level of attacks is fueling strong demand in the cybersecurity market," said Nikesh Arora, Palo Alto Networks’ chairman and CEO. "We continue to execute on 'platformization' as customers recognize the benefits we can provide in simplifying security architectures and driving better security outcomes.”

Cost of Money Impacting Palo Alto Networks

In the first quarter, the cost of money remained a constant discussion and customers' significant focus on this topic is becoming the new normal, Arora said.

“The way it manifests itself in our business is that there's always a payment and duration discussion in final deal negotiations,” he said. “Given our strong balance sheet, we can use a mix of strategies to navigate the environment. This includes annual billing plans, financing through Palo Alto Networks Financial Services and partner financing. While this does not impact our business demand or the impact to annual revenue or annual metrics, it does create variability on total billings more than before depending on financing use or the duration of contracts. I am not concerned about the demand for cybersecurity for this quarter and upcoming quarters, nor am I concerned about our ability to execute. The billings variability is a pure consequence of the payment conversations that we're having with our customers. And this is validated by the fact that we continue to see strong remaining performance obligation (RPO) and low churn, suggesting this is a cosmetic impact to our business.”

Palo Alto Networks expects fiscal second-quarter revenue in the range of $1.955 billion-$1.985 billion, representing year-over-year growth of between 18% and 20%.

For fiscal 2024, Palo Alto Networks expects revenue in the range of $8.15 billion-$8.20 billion, representing year-over-year growth of between 18% and 19%.

“Our revenue, next-generation security annual recurring revenue (ARR), and current remaining performance obligations (cRPO) metrics best represent our top-line performance in Q1, while our billings were impacted by the cost of money," said Dipak Golechha, Palo Alto Networks’ chief financial officer. "Our record cash flow generation and strong Q1 non-GAAP operating margin, illustrate our commitment to driving profitable growth."