Palo Alto Networks' (PANW) strong three-year growth outlook is overshadowing more mixed near-term numbers.
The security tech giant's shares rose 5% in Thursday trading following an eventful Wednesday afternoon. That's when Palo Alto not only posted its July quarter results, but also hosted an analyst meeting where it shared guidance for its October quarter and fiscal 2020 (it ends in July 2020), as well as its revenue, billings, operating margin and adjusted free cash flow expectations through fiscal 2022.
Separately, Palo Alto rival Zscaler (ZS) , which provides a cloud-based security platform that's pitched as an alternative to local security appliances, fell 1.4% amid a 1.8% Nasdaq gain after Palo Alto used its analyst meeting to discuss recent customer wins against Zscaler and take some shots at Zscaler's proxy-based security architecture.
Palo Alto slightly beat July quarter EPS and billings estimates, while reporting revenue that was roughly in-line. And during its analyst meeting, the company guided for October quarter revenue to be up 16% to 17% and (with spending related to recent acquisitions acting as a headwind) EPS to be in a range of $1.02 of $1.04, which was below consensus estimates for 20% revenue growth and EPS of $1.33.
The company's fiscal 2020 revenue guidance is stronger: It's for 19% to 20% growth versus a consensus of 19%. Palo Alto is also guiding for billings to be up 17% to 19% in fiscal 2020, which is above a consensus for 16% growth. However, thanks to acquisition-related spending, EPS guidance of $5.00 to $5.10 is below a $6.26 consensus.
But while Palo Alto's fiscal 2020 outlook is a mixed bag, the company's three-year guidance -- shared in its analyst meeting presentation -- is getting a thumbs-up. Against a backdrop of a strong IT security spending environment, the company forecast that both its revenue and billings would see a 20% compound annual growth rate (CAGR) from fiscal 2019 to fiscal 2022.
Palo Alto Networks' 3-year revenue and billings growth outlook. Source: Palo Alto Networks.
"Firewall platform" billings -- they cover Palo Alto's traditional next-gen firewall sales, as well as software-based firewalls and its Prisma Access cloud security solution for branch offices and mobile users -- are expected to see a 23% CAGR through fiscal 2022. And "next-gen security" billings, which cover Palo Alto's broader Prisma cloud security suite and its Cortex platform for security operations teams, are forecast to grow nearly 300% from fiscal 2019 to fiscal 2022, to roughly $1.75 billion.
Palo Alto, which reported $1.07 billion in adjusted free cash flow (FCF) for fiscal 2019, also said it expects to produce about $4 billion in adjusted FCF over the next three years in spite of the headwinds caused by aggressive near-term spending. And the company said it's aiming for a long-term FCF margin of more than 30%, as well as a long-term, non-GAAP, operating margin of more than 25% (above a fiscal 2019 level of 22%).
All things considered, Palo Alto's three-year guidance soothed concerns about the impact of slowing growth for its traditional firewall hardware business, as well as its growth expectations for software and cloud-based offerings in a hotly competitive IT security environment that's awash with venture funding. In addition, CEO Nikesh Arora and other execs arguably did a good job at the analyst meeting of outlining Palo Alto's end-to-end vision for protecting a company's local networks, endpoint devices and cloud apps and services.
With Palo Alto sporting a moderate valuation heading into its investor meeting -- shares were valued at 19 times the company's fiscal 2019 adjusted FCF, and 14 times the average adjusted FCF Palo Alto expects to see over the next three years -- its guidance and commentary are going over well with Wall Street.