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May 20, 2022, 7:15 a.m. EDT

Palo Alto Networks stock rockets more than 10% as cybersecurity company hikes annual guidance a third time

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By Wallace Witkowski

Palo Alto Networks Inc. shares rallied more than 10% in the extended session Thursday after the cybersecurity company beat Wall Street’s expectations on its earnings report, and increased its full-year guidance for a third quarter in a row.

Palo Alto Networks  /zigman2/quotes/207599953/composite PANW -0.75% executives boosted their full-year outlook to adjusted earnings of $7.43 to $7.46 a share, revenue of $5.48 billion to $5.5 billion, and billings of $7.11 billion to $7.14 billion. Last quarter , the company hiked its outlook to adjusted earnings of $7.23 to $7.30 a share,  versus a previous forecast of $7.15 to $7.25 a share , and raised forecasts for revenue and billings once again.

Analysts were expecting $7.29 a share on revenue of $5.46 billion and billings of $6.82 billion after the last increase, according to FactSet. Chief Executive Nikesh Arora credited broad-based demand for the company’s security products.

“On the back of this strength across our portfolio, we are again raising our guidance for the year across revenue, billings and earnings per share,” Arora said in a statement, before going into more detail about how the company is succeeding despite macroeconomic issues later Thursday in a conference call.

“As you are aware, the industry is dealing with unprecedented supply-chain issues which are likely to persist for another year,” Arora told analysts on the call. “Our team is deftly managing these with our partners.”

“The teams work hard every quarter with our suppliers and partners,” Arora said. “Not just this quarter but over the next four quarters, and they’re no longer depending on the lead times with the items.”

“In terms of the demand, the backlog, and what we have been promising, we have reasonable line of sight if all things work in terms of what we’re likely to get on a quarterly basis, hence our guidance is consistent with the what our best guess on what will be available is and that’s why we keep telling you guys that this is not a demand problem, this is the supply challenge that we’re trying to address as an industry,” Arora told analysts.

Going forward, the company’s navigation of the current supply-chain environment is going to depend heavily on how operating expenses can remain lean as the company tries to keep pricing reasonable.

“The cost pressures are really all within the supply-chain area,” Dipak Golechha, Palo Alto Networks chief financial officer, told analysts. “We recently did realization about pricing, which has been good, but obviously the supply-chain environment remains fluid. I think when it where it comes to where we been able to focus on operating expenses to offset that, it really is just a laser focus.”

Part of that focus is keeping a close eye on the labor market and the higher costs to attract and keep talent. The company reported that operating expenses have crept higher over the past eight quarters, while gross margins have slipped over the past three.

Regarding the persistent talent shortage in the cybersecurity industry in a time of heightened vigilance given Russia’s history of cyberwarfare , Arora was optimistic about the tight labor market going forward.

“My personal view is the labor markets going to become easier in the next six to 12 months,” Arora said. “If you think about it, six months ago we were losing people to startups. We were losing people to competitors whose stock prices were going up.”

“The market rationalization is causing people to take stock and say, ‘Wait do I really want to go make this move?’” Arora said. “Already seen anecdotally, startups start to stop hiring because they’re trying to hold onto their cash because they don’t expect to be able to raise money in the market for the next 12 to 18 months.”

That said, the company expects wage inflation, given that cybersecurity talent is in high demand, but not ”off the charts.”

For the fiscal third quarter, Palo Alto Networks reported a loss of $73.2 million, or 74 cents a share, compared with a loss of $145.1 million, or $1.50 a share, in the year-ago period. Adjusted earnings, which exclude share-based compensation charges and other items, were $1.79 a share, compared with $1.38 a share in the year-ago period.

Revenue rose to $1.39 billion from $1.07 billion in the year-ago quarter. Billings, which reflects future business under contract, rose to $1.8 billion, compared with $1.27 billion a year ago.

Analysts had forecast earnings of $1.68 a share on revenue of $1.36 billion and billings of $1.6 billion, while Palo Alto Networks had forecast earnings of $1.65 to $1.68 a share on revenue of $1.35 billion to $1.37 billion and billings of $1.59 billion to $1.61 billion.

Palo Alto Networks said it expects adjusted fiscal-fourth quarter earnings of $2.26 to $2.29 a share on revenue of $1.53 billion to $1.55 billion and billings of $2.32 billion to $2.35 billion, while analysts surveyed by FactSet had forecast $2.22 a share on revenue of $1.53 billion and billings of $2.23 billion.

Palo Alto Networks shares are up 30% over the past 12 months. In comparison, the ETFMG Prime Cyber Security ETF  /zigman2/quotes/207892345/composite HACK +0.18%  is down 19%, the S&P 500 index  /zigman2/quotes/210599714/realtime SPX -0.04%  is off 5%, and the tech-heavy Nasdaq Composite Index  /zigman2/quotes/210598365/realtime COMP +0.05%  is down 14%.

Back in December, Palo Alto Networks joined the Nasdaq 100 Index  /zigman2/quotes/210598364/realtime NDX +0.30% , which is down more than 10% over the past 12 months.

Other cybersecurity companies appeared to get a lift after hours from Palo Alto Networks’ report. Shares of CrowdStrike Holdings Inc. /zigman2/quotes/212513426/composite CRWD -1.15% were up 4.5% at last check, while shares of Zscaler Inc. /zigman2/quotes/203585803/composite ZS -1.49% were up 3.9%, Fortinet Inc. /zigman2/quotes/205733290/composite FTNT +1.08% shares rose 2.3%, and the HACK ETF was up 1.7%.

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