Palo Alto Networks’ Results Accelerated During Its Second Quarter

FAN Editor

Shares of cybersecurity outfit Palo Alto Networks (NYSE: PANW) rallied after the company reported another strong advance in its business during the second quarter of its 2019 fiscal year. Companies around the world are transitioning legacy operations to more-efficient digital ones, but that creates the need for new security measures.

And that’s where Palo Alto comes in. The provider of firewall software (which manages access to a network) has successfully made its way into the cloud computing universe after a number of acquisitions the last couple of years. And the launch of new artificial intelligence-based products has it positioned for further growth.

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Business results are accelerating

Palo Alto is riding a wave of digital change. Traditionally concerning itself with firewalls, the company made a handful of buyouts to help it get into the growing cloud-computing security market. Those moves have kept double-digit top- and bottom-line growth intact — revenue and adjusted earnings were up 29% and 47%, respectively, last fiscal year. And those metrics have accelerated so far in the 2019 fiscal year.

Palo Alto needs to keep its foot on the gas, though, as cyberattacks continue to increase in frequency and complexity. A myriad of solutions from peers in the cybersecurity industry have emerged, but Palo Alto has responded by continuing to broaden its offerings to be a one-stop solution for customers. The latest move is into services powered by artificial intelligence (AI).

Just before second-quarter earnings, the company announced the $560 million acquisition of Demisto — a start-up in the emerging security orchestration, automation, and response (SOAR) segment of the cyberworld. In a separate statement on the day of earnings, Palo Alto also announced the launch of several new services, including a cloud software AI-based security platform called Cortex. Those moves should set up Palo Alto for the next wave of expansion as it tries to capture a larger slice of the growing security industry.

First cloud, now AI

But why AI-based solutions now, and why a hefty $560 million price tag on a smaller peer? The answer is that while companies are dealing with complex threats from the bad guys, they are also having to navigate an increasingly complex set of solutions to stay protected. In light of the situation, Palo Alto thinks it has a chance to simplify things using AI and automation and gain market share. Chief product officer Lee Klarich had this to say:

The stage has therefore been set for another evolution of the cybersecurity industry, and Palo Alto is helping lead the way into AI. Sales momentum should equate to further gains for the company as it lands lots of new customers around the globe and progressively expands on those relationships over time.

Management said it expects revenue in the next quarter to climb between 23% and 25% higher from a year ago. That’s a slowdown from the first half of the fiscal year, but Palo Alto has a history of underpromising and overdelivering — the second quarter of 2019 being the latest example when it forecast 24% to 26% top-line growth but ended up posting a 30% increase.

So that outlook seems like a low hurdle for the company to clear. Either way, management is backing up its confidence with more share repurchases. A new $1 billion buyback authorization good through the end of 2020 was announced on top of the $1 billion in buybacks just completed at the end of 2018. That should help offset dilution from stock-based compensation that Palo Alto awards to its employees and keep earnings headed north.

Palo Alto Networks isn’t simply enjoying success from the growing need to secure online data, it’s helping lead the charge in the industry. It’s all adding up to strong double-digit growth in sales and an even faster growing bottom line.

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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Palo Alto Networks. The Motley Fool has a disclosure policy.

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