You can find a first batch of information on Palo Alto Networks here if you do not know the company.
Overview. Palo Alto concluded its 2024 fiscal year today, so we’ll talk a bit about their yearly results as well as the quarter itself.
EPS. $1.41 | $1.51 | +7.09% beat
Revenue. $2.16B | $2.19B | +1.39% beat
"As we look forward to fiscal year 2025 and beyond, we are focused on scaling our Next-Generation Security business through continued innovation and execution."
Nothing really standing out this quarter.
Business.
I will try to resume the entire call in a few sentences because quoting parts about each service would take too long. Palo Alto is growing and providing more & more solutions to address the new cybersecurity needs, with the rapid growth of AI and the constant growth of cloud services - both of which require new products.
And things are going well, without any fireworks. Their systems are in demand, and platformization is working well, with more and more demand as tech teams of companies start to understand the added value of this system.
“After a strong addition of approximately 65 new platformizations in Q3, we added over 90 new platformizations in Q4, now have well over 1,000 total platformizations among our 5,000 largest customers as we exit FY '24.”
As already mentioned last quarter, platformization isn’t just a better technical solution; it’s also a better business model.
“Beyond the number of platformization, we saw something interesting. We saw a sequential increase in average ARR per platformized customer in Q4. For perspective, our average ARR per platformization is up over 10% since Q1.”
Maybe it is finally time for the market to acknowledge that platformization is a positive, just as Palo Alto customers accepted it and converted their infrastructure to it.
“We saw acceleration in 2H driven by demand for platformization.”
Revenues.
The quarter & the year sure were better than the company expected.
“They exceeded our guidance range for quarterly revenue and EPS while exceeding our original annual guidance ranges for operating margin and free cash flow. We also grew RPO 20%. We saw strong growth in our next-generation security offerings, and we exceeded our next-generation security ARR guidance significantly, surpassing the $4 billion milestone in Q4. We grew NGS ARR 43% with strong contributions across the portfolio.”
We should focus on the year ending here, and the data is pretty good overall, with 16% YoY growth in revenues and a very strong 75%ish net income growth - not counting the benefits from taxes. A pretty great progression YoY with strong margin growth.
In terms of the balance sheet and cash flow, we’re also pretty strong with $1.7B net debt and a 39% FCF margin. No buybacks were done this quarter, as the company prefers to do them smartly - I won’t complain about that.
“We did not repurchase any shares in Q4, and our buyback strategy remains opportunistic. Our board of directors approved an additional $500 million buyback authorization, such that we now have $1 billion in authorization remaining through December 2025.”
RPO & NGS ARR.
We should talk about the company’s “new” metrics already. We will see them again later in the guidance because that is where the strength of the report lies.
RPO stands for Remaining Performance Obligations, while NGS ARR stands for Next-Generation Security Annual Recurring Revenue.
RPO. The first one is known and used by many subscription companies and reflects the total value of contracted revenue that has not yet been recognized as revenue. As was mentioned by management during the call.
“As a reminder, the contracts included in our RPO are all noncancelable and nonrefundable in nature.”
This data represents the amount of revenue Palo Alto will receive in the future, no matter what - we just don’t know exactly when. Although it was again stated in the call that the median contract length is about three years, you can make your own assumptions.
And RPO is going very well for Palo Alto, growing 7% YoY to $5.9B for this quarter.
NGS ARR. The second metric is about the annualized revenue of all active subscriptions for their Next-Generation Security services - which include all new tech cybersecurity services such as AI, cloud, and everything beyond traditional firewall and endpoint protections.
“We expect platformization to be a key driver toward achieving our goal of $15 billion in NGS ARR in fiscal year 2030.”
Those subscriptions grew 43% YoY to $4.22B at the end of this quarter—a value included in the RPO.
Globally, this should be understood as Palo Alto will receive $5.9B of revenue over the next few years without any doubts, of which $4.22B comes from their NGS products this year. Both metrics are growing rapidly, as you can see on the slide above.
But the company goes further than this, as their goal is to reach $15B of NGS ARR by 2030 - which means slightly more revenue than this number in 2031 as we’d have to include traditional cybersecurity revenue.
Assuming they reach their goal of NGS being 90% of recurring revenue, we’re talking about something around $17B of revenue by 2031, which means that the company intends to grow at least at a 13% CAGR until then and that’s what the market is enjoying.
Guidance.
Global guidance is pretty good for the company as they expect RPO to grow +19% and NGS ARR +28%-30% for the next quarter and also for the next twelve months, which means a stabilization of RPO growth at current levels.
The rest is also pretty correct overall.
My Take.
It’s a bit of a difficult quarter to correlate with the stock reaction, which seems to be overly optimistic. Business is good and thriving, revenue is also good and growing properly while guidance seems to point to continuous and stable growth for the next year. It also gives a pretty good long-term perspective.
Yet, even with a solid quarter, the stock is pretty overvalued and climbing even higher, close to its ATH. At today’s price, we’d need pretty crazy ratios by 2029 to yield proper returns on our investment, even if the company were to slightly beat its long-term guidance.
Seems pretty extended to me, and I stick with a buying price under $300 - as Palo Alto still deserves higher ratios than Checkpoint’s.
We’re still seeing a good quarter with more proof that cybersecurity companies have a bright future as our world moves toward more & more digitalization and tech services. Just have to wait for the right price now, although it already came some months ago.