Here’s the secret sauce that fueled Palo Alto Networks’ beat and raise despite tough times
Balancing profits with growth are what cybersecurity leader Palo Alto Networks (PANW) continues to excel at, leading to a better-than-expected quarter and strong earnings guidance. The late Tuesday release, which was rewarded in after-hours trading with a nearly 4% gain, came despite a more challenging deal-making environment. Revenue for PANW's fiscal 2023 third quarter increased 24% year-over-year to $1.72 billion, beating analysts' expectations for $1.71 billion, according to estimates compiled by Refinitiv. GAAP earnings-per-share (EPS) increased to 31 cents, compared with a loss of 25 cents a year prior, and handily beating forecasts for a 13-cents profit. Adjusted EPS grew 83% year-over-year to $1.10, ahead of estimates by 17 cents. Total billings increased 26% annually to $2.26 billion, edging estimates of $2.23 billion and beating the top-end of management's $2.2 billion to $2.25 billion forecast. Billings provide insight into the health of a subscription software business by measuring what has been invoiced to customers for products and services. Bottom line Once again, Palo Alto Networks delivered an upside quarter despite uncertainty related to the slowing and more cost-conscious macroeconomic environment. Some smaller players in the cybersecurity industry may have recently struggled with earnings or with their outlooks, but Palo Alto hit the mark. At the same time, it's doing more with less, and it's committed to efficiency with that margin upside. Palo Alto Networks isn't cheap on a classical earnings basis. But if margins continue to surprise, like they have over the past few quarters, the stock will ultimately prove to be a much better value than what it initially appears. As a leader in cybersecurity, still one of the most resilient areas of tech spending, we continue to believe Palo Alto Networks has a long runway ahead. Quarterly commentary Palo Alto Networks CEO Nikesh Arora started Tuesday evening's post-earnings call off again cautioning about the current macro environment and how it has created greater deal scrutiny and "cost and value consciousness" among its customers. But Palo Alto Networks has stayed ahead of the curve, with results that indicate that it's performing much better than some of its cybersecurity peers which reported more checkered results this earnings season. Again, we can't say it enough, the margin upside in fiscal Q3 was very noteworthy. Long-term tailwinds around cloud adoption, automation, and hybrid have not changed, but a more recent theme that continues to work in the company's favor is customers seeking out cybersecurity platforms and consolidating their budgets around them, instead of pulling together different cybersecurity products from all sorts of vendors. "Within cybersecurity complex architectures and long vendor rosters have come into focus, and many customers see this as an opportunity to simplify and drive consolidation," Arora said on the call. It's a trend he predicted five years ago when he first became CEO, and it's why he was aggressive in developing an industry-leading three-platform approach in network security, cloud security, and security operations. "We have the opportunity to do to security, what we have seen done in financial software, HR software, or CRM [customer relationship management] where customers have adapted to platforms," Arora said. The fiscal Q3 results clearly show Palo Alto Networks as a preferred partner despite industry headwinds related to elongated sales cycles. Total bookings from accounts valued at over $1 million grew 29% year-over-year in the quarter. Accounts valued at more than $5 million and more than $10 million increased by 62% and 136%, respectively. As one analyst remarked on the call, the growth in Palo Alto's large deals "defy those headwinds." Outside the numbers, it's worth remembering that Palo Alto Networks became eligible for the S & P 500 last quarter when it reached profitability on a cumulative basis over its last four quarters. However, the reported fiscal Q3 results should further cement its case. If the cybersecurity leader were to get added to the broad market index (which we think it will at some point), it would likely be greeted with a solid one-day boost in the stock price. PANW YTD mountain Palo Alto Networks (PANW) YTD performance Outlook For Palo Alto Networks' current fiscal 2023 fourth quarter, the company sees rosy times ahead. It expects total billings to grow 17% and 19% year-over-year in a range of $3.15 billion to $3.2 billion. The $3.175 billion midpoint is slightly higher than analysts' estimates of $3.158 billion. Total revenue is seen growing 25% and 27% year-over-year in a range of $1.937 billion to $1.967 billion. The $1.952 billion midpoint is in line with estimates. Management expects adjusted EPS to be in the range of $1.26 to $1.30, increasing 58% to 63% year over year. This midpoint of $1.28 is well above estimates of $1.20. Adding it all together, management sees EPS for full-year 2023, which ends in July, at $4.25 to $4.29. That's nicely above the $3.97 to $4.03 range they forecasted in February. Other key metrics raised were full-year guidance on total billings , Next-Gen Security ARR (annual recurring revenue), product revenue , and operating and adjusted free cash flow margins . (Jim Cramer's Charitable Trust is long PANW. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Signage outside Palo Alto Networks headquarters in Santa Clara, California, U.S., on Thursday, May 13, 2021. David Paul Morris | Bloomberg | Getty Images