Why Palo Alto Networks' earnings offered ammunition for both bulls and bears

By Emily Bary

Palo Alto Networks said it's seeing progress as it seeks to drive customer adoption of a broader suite of services, but some investors may quibble with deceleration on a key metric

Despite a beat on headline metrics, Palo Alto Networks Inc.'s latest earnings didn't quite settle a major investor debate around its stock.

While bulls noted the company's progress on its "platformization" strategy, which is meant to get customers to adopt a fuller suite of offerings, some more cautious analysts weren't necessarily sold on Palo Alto Networks' (PANW) platform approach so far, and they noted a change to the preferred metrics that management will discuss going forward.

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Piper Sandler's Rob Owens titled his note to clients: "I've Heard it Both Ways."

While platformization deals were up 50% in the fiscal fourth quarter, the traction there "was not enough to drive an inflection in [remaining performance obligations] however," he wrote, as the company saw a deceleration there on a sequential basis.

"This should add arrows into the quiver of both bulls and bears alike, with the jury still out on if platformization is truly accelerating [Palo Alto Networks'] share gains, in our view," he wrote. Owens rates the stock at neutral with a $330 price target, up from $300 before.

The stock is up 2.5% in premarket trading Tuesday.

Palo Alto Networks' management explained on the earnings call that some customers wishing to expand their business with the company may have a bit of time left on existing contracts with other vendors for certain products. Palo Alto Networks can provide an "economic bridge for them" until the other contracts lapse, according to Chief Executive Nikesh Arora.

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Raymond James analyst Adam Tindle discussed the company's plan to deemphasize the billings metric in favor of remaining performance obligations, a metric he said gets "further away from actual cash collections from customers."

"To be fair, management did provide a one-time disclosure that billings growth for FY25 would have been 12%" relative to a year before, which is in line with the consensus view, Tindle wrote. "However, this included a caveat that this assumes no change in mix of billing programs which is unlikely, but there will be no accountability to that statement."

"In other words, this seems like a creative way to avoid guiding down a core metric while moving the goal post to metrics that are showing better trends," he added, while sticking with his market-perform call on the stock.

Other analysts were more upbeat. "As we've discussed previously, we think their platform consolidation offering and enterprise support relationship is well appreciated by overwhelmed" corporate-technology executives, Bernstein's Peter Weed wrote.

He'll be monitoring whether Palo Alto Networks can maintain growth in platformizations each quarter and grow their value, as the company looks to reach $15 billion in annual recurring revenue by 2030.

Weed also highlighted the company's revenue beat, marking "the third quarter in a row expanding [its] beat margin, and one of the largest beats since the heady days of 2021." He rates the stock at outperform and has a fresh price target of $399 on the stock, up from $364 before.

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William Blair's Jonathan Ho wasn't concerned about the reporting change around billings, and he thinks a greater emphasis on metrics like next-generation-security annual recurring revenue and remaining performing obligations could be a positive.

"In our view, RPO helps investors better understand the long-term trend of the company, and we believe it is more relevant because it accounts for distortions like timing of renewals/invoicing and the use of...financing," he wrote.

He was also optimistic about the addition of 90 platformization customers in the latest quarter.

"We view this momentum as a promising sign that large enterprise customers are willing to trust Palo Alto with many of their security products and the company's goal of having 2,500-3,500 platformization customers by fiscal 2030 is within reach," Ho said in his note to clients. He rates the stock at outperform.

-Emily Bary

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08-20-24 0757ET

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