Palo Alto Networks: Highlights from earnings call after the close on Friday (209.69)
- Co says it saw larger deals grow faster than the overall business in Q4 (Jul). Notably, PANW saw the number of deals greater than $20 mln grow faster than deals over $10 mln.
- Co saw strength across various metrics, starting with the top line. This was especially true in its NGS ARR and RPO. NGS ARR grew 56% while RPO grew 30%, well ahead of revenue growth.
- PANW concedes that the industry has experienced an increase in deal scrutiny, as well as deal pushouts. The environment has become more challenging this year. PANW says it got ahead of this changing environment by frontloading its sales hiring for the year, training its teams to address the tougher procurement processes, and by having sales teams apply additional scrutiny to the pipeline earlier in the quarter.
- As a result, PANW did not see a significant impact in Q4 from unexpected deal delays.
-
However, it did see two impacts on the top line from the changing environment:
- First, the rising cost of money has caused customers to hold on to their cash and more frequently seek deferred payment terms. The percent of bookings that included deferred payments increased approximately 45% yr/yr. Also, the proportion of its bookings that included billing plans more than doubled from Q3 to Q4. This increase negatively impacted billings relative to prior guidance. As a result, RPO is becoming a more important leading indicator for PANW's business because it is not impacted by billing terms.
- Second, PANW has seen the market return to a more normalized growth rate in hardware-based firewalls. Despite some positive and negative fluctuations, there's a relatively consistent level of underlying hardware growth in the low to mid-single-digits and PANW sees the industry returning to those levels. This return to normalized appliance growth is also happening on the backdrop of a broader transition from hardware to software in network security and growth in new security markets.
- Gross margin for Q4 of 77.3% increased over 400 bps yr/yr and gross margin expanded by 230 bps in FY23 as PANW saw a benefit from a higher software mix and some scale synergies on a customer support spending. Operating margin expanded well over 700 bps in Q4 and 500+ bps for the year.
- PANW was asked about broader trends it's seeing? PANW said that interest rates are higher. CFOs are scrutinizing deals, which means you have to be better prepared to answer their questions and show the business value that you bring to them with your cybersecurity products. There are deals that go through multiple levels. There are some that get pushed. There are some that get canceled. And again, you just have to get more at the top of the funnel.