Palo Alto warns on earnings as guidance disappoints

Palo Alto Networks forecast lower-than-expected earnings for its next quarter despite reporting a rise in fiscal second-quarter profit, as spending linked to recent acquisitions and ongoing integration work weighed on per-share guidance.

Shares fell in after-hours trading after the company projected diluted non-GAAP net income per share of $0.78 to $0.80 for the fiscal third quarter. That range lagged market expectations cited by analysts covering the results.

Revenue in the January quarter rose 15% year on year to USD $2.6 billion. GAAP net income increased to USD $432 million from USD $267 million. Diluted GAAP earnings per share were $0.61, up from $0.38.

On a non-GAAP basis, net income rose to USD $732 million from USD $566 million, and diluted earnings per share increased to $1.03 from $0.81. Even so, the forward guidance highlighted a sharp sequential drop in the quarterly earnings range compared with the latest reported figure, which investors often treat as a signal of near-term margin pressure.

Guidance Gap

The fiscal third-quarter earnings outlook came alongside a sharply higher revenue forecast. Palo Alto Networks projected total revenue of USD $2.941 billion to USD $2.945 billion. It also forecast Next-Generation Security ARR of USD $7.94 billion to USD $7.96 billion and remaining performance obligation of USD $17.85 billion to USD $17.95 billion.

That combination created a mixed read-through for markets. The company pointed to faster revenue growth and expanding contracted backlog, while the earnings range implied weaker profitability per share in the period ahead.

For the full fiscal year, Palo Alto Networks kept a wide earnings range. It forecast diluted non-GAAP net income per share of $3.65 to $3.70 and a non-GAAP operating margin of 28.5% to 29.0%. It also guided for an adjusted free cash flow margin of 37%.

Cost Pressures

The quarter showed continued cost growth. Operating expenses rose to USD $1.51 billion from USD $1.42 billion a year earlier. Sales and marketing remained the largest expense line at USD $823 million, up from USD $758 million. General and administrative costs rose to USD $178 million from USD $154 million, while research and development was broadly flat at USD $511 million versus USD $505 million.

GAAP operating income rose to USD $397 million from USD $241 million. Non-GAAP operating income rose to USD $785 million from USD $641 million, and non-GAAP operating margin increased to 30.3% from 28.4%.

The reconciliation between GAAP and non-GAAP results again underscored the scale of adjustments. Share-based compensation-related charges were USD $321 million in the quarter. Acquisition-related costs were USD $24 million and amortisation of acquired intangible assets was USD $38 million, alongside litigation-related charges of USD $5 million.

Deal Hangover

Balance sheet movements highlighted the effect of recent deal activity and the accounting that follows. Goodwill rose to USD $6.93 billion at the end of the quarter from USD $4.57 billion at the end of the prior fiscal year. Intangible assets, net, increased to USD $1.25 billion from USD $763 million.

Cash and cash equivalents increased to USD $4.16 billion from USD $2.27 billion, while long-term investments fell to USD $3.36 billion from USD $5.56 billion. Deferred revenue, split between current and long-term, totalled USD $12.43 billion, down from USD $12.75 billion.

The company has been integrating Chronosphere and CyberArk, which management cited in prepared remarks alongside its platform strategy. It framed the current period as one that combines growth with integration execution and operational discipline.

"We once again delivered strong top-line growth, complimented by operating efficiency, with our third straight quarter of 30%-plus non-GAAP operating margins," said Dipak Golechha, Chief Financial Officer, Palo Alto Networks.

Management plans to discuss the quarterly results and its outlook with analysts and investors on a webcast, with integration work across CyberArk and Chronosphere remaining a focus.