What to Expect From Palo Alto Networks’ Q2 Earnings

The cybersecurity market will be enlarged this year, according to Gartner estimates. The research and advisory firm forecasts that spending on global corporate cybersecurity will increase by 8% this year to $ 96.3 billion as organizations improve their defenses against ever-evolving threats.

This sets the stage for Palo Alto Networks (NYSE: PANW) to maintain its impressive momentum in 2018 and beyond. The cybersecurity specialist executed a remarkable change after a difficult start last year, registering a large growth of customers thanks to a new sales strategy. Investors will wait for the company to extend its term with the help of a strong demonstration in its next fiscal report for the second quarter, on February 26. But can Palo Alto deliver again? We'll see.

The numbers of holders

Wall Street analysts expect Palo Alto to report adjusted earnings of $ 0.79 per share for the quarter in revenue of $ 524.75 million. This is in line with the guide issued by the company in November of last year.

However, Palo Alto could exceed expectations due to recent product updates and partnerships. For example, it updated its endpoint protection service Traps towards the end of the first quarter, adding ransomware protection to take advantage of one of the hottest cybersecurity trends.

It is estimated that ransomware attacks cost organizations more than $ 5 billion last year, according to Palo Alto, 15 times the losses caused by these attacks in 2015. So Palo Alto made a smart move by equipping his platform security with ransomware protection based on behavior that can prevent known and unknown attacks.

In addition, Palo Alto expanded its cloud security service by including application protection for several Amazon Web Services (AWS) solutions. As a result, users can implement Palo Alto's cloud security offerings in different AWS solutions after this update. And the cybersecurity specialist is now supporting the protection of cloud-based email on the cloud platforms of Microsoft and Alphabet. According to MarketsandMarkets, the company pursues the lucrative cloud security market, which expects to record an annual growth rate of 25.5% in the next five years.

In general, Palo Alto seeks to go after the right niches within the cybersecurity space, which should help it maintain its long-term momentum.
The cost profile should improve

Palo Alto has been receiving more and more of its revenue from the subscription business. Subscriptions and support provided 63% of its top line in the last reported quarter, up from 58.9% in the prior year period. This reduced the company's sales and marketing expenses to 51% of revenues, a drop of 420 basis points year-on-year.

This allowed the company to increase its non-GAAP net income by 36% year-over-year to $ 69.8 million. Palo Alto's subscription revenues should continue to improve. Last quarter, its deferred revenue soared 37% to $ 1.9 billion, surpassing the 27% jump in the top line.

This means that more customers are signing subscription contracts with Palo Alto Networks since the deferred revenue refers to the amount of money that a company collects in advance for the services that will be provided at a later date. Therefore, Palo Alto's margin profile should improve, since a subscription client guarantees a constant flow of recurring revenues and reduces customer acquisition costs.

In general, investors can expect a strong performance in the second quarter of Palo Alto, and a strong guide should be the icing on the cake.