PANW Earnings Preview: Watching RPO and ARR trends

Palo Alto Networks (PANW) is set to report its fiscal Q1 earnings on Wednesday, November 20th, after the market close**, with a conference call scheduled for 4:30 PM ET. Wall Street analysts anticipate adjusted EPS of $1.48 (within a range of $1.46-$1.51) and revenue of $2.12 billion, representing year-over-year growth of 12.9%. This follows a strong Q4 performance in which the company exceeded consensus expectations for both revenue and EPS, with robust billings and solid guidance. The implied stock movement post-earnings is estimated at +/-7.8%, underlining the significant investor interest and potential volatility.

A critical area for investors to watch will be Palo Alto's Next-Generation Security (NGS) Annual Recurring Revenue (ARR) and Remaining Performance Obligations (RPO). These metrics have become a central focus after management transitioned away from traditional billings metrics last quarter due to the volatility caused by longer billing durations and platformization efforts. In Q4, NGS ARR grew an impressive 43% year-over-year, and RPO expanded by 20%, reflecting strong momentum in its subscription-based business. Analysts are closely monitoring whether this growth trajectory continues, particularly given macroeconomic challenges and a competitive cybersecurity landscape.

The company's platformization strategy remains a key driver of growth. Last quarter, Palo Alto added 90 new platformization deals, building on its base of over 1,000 customers adopting integrated solutions across its product pillars, such as Cortex, Prisma Cloud, and Prisma SASE. Analysts and investors will be watching for updates on the success of this strategy, particularly as it relates to landing larger, long-term contracts. Reports from the channel indicate that deal sizes are growing, with some large enterprise agreements compensating for a softer volume of smaller deals. The expected continued traction in this area could provide upside to revenue and ARR expectations.

Additionally, Palo Alto's guidance for FY25 and Q2 (Jan) will be a critical focus. In Q4, the company issued its first RPO-based guidance, projecting 19-20% growth for both Q1 and FY25. While this was slightly below earlier expectations, management has historically been conservative, leaving room for potential upside. Analysts are also watching for any updates on operating margins, with consensus expectations of 30%+ operating leverage over the long term, as well as free cash flow margins exceeding 40%. A recently reported $1 billion Department of Defense agreement could add multi-year tailwinds, but the timing of revenue recognition remains uncertain.

Palo Alto Networks delivered a strong Q4 (Jul) report, exceeding expectations on both revenue and earnings while providing optimistic guidance for the upcoming fiscal year. Revenue for the quarter increased by 12% year-over-year to $2.19 billion, surpassing estimates, while non-GAAP EPS came in at $1.51, well above the consensus of $1.41. The company also authorized an additional $500 million for share repurchases, increasing its remaining authorization to $1 billion, highlighting confidence in its long-term strategy.

One of the most notable aspects of the report was the continued momentum in PANW's "platformization" strategy. The company added 90 platform customers during the quarter, bringing its total to over 1,000, with double-digit ARR growth within this cohort. This shift toward a platform-based approach has driven substantial growth in Next-Generation Security (NGS) Annual Recurring Revenue (ARR), which rose 43% year-over-year to $4.2 billion, and Remaining Performance Obligations (RPO), which grew 20% year-over-year to $12.7 billion. These metrics, which PANW now emphasizes over traditional billings, illustrate the company's increasing focus on subscription and recurring revenue streams.

The guidance provided by PANW for Q1 and FY25 further impressed investors. The company offered EPS guidance for Q1 that was notably higher than consensus, along with slight revenue guidance upside. For FY25, PANW projected ARR and RPO growth of 19-20%, alongside a robust operating margin outlook of 37-38%. While RPO guidance came in slightly below previous expectations, analysts view the conservative nature of this guidance as a prudent approach in the current macroeconomic environment.

Management's commentary during the earnings call struck a confident tone, noting that the platformization strategy has been a key driver of accelerating demand and ARR expansion in the second half of FY24. Chairman and CEO Nikesh Arora highlighted the growing adoption of AI-powered solutions, including Prisma Cloud and Cortex, which now contribute $700 million and $900 million in ARR, respectively. The company also mentioned progress in SASE (Secure Access Service Edge) adoption and expanding AI initiatives as critical components of its growth trajectory.

PANW closed FY24 on a strong note, driven by the success of its platformization strategy and robust growth in key metrics like NGS ARR and RPO. With its transition to emphasizing ARR and RPO over billings, PANW is aligning its guidance with longer-term growth trends, even as it navigates a dynamic cybersecurity market. The upbeat tone from management, combined with strong Q4 execution and forward-looking guidance, positions PANW as a leader in consolidating cybersecurity solutions and expanding its recurring revenue base. Investors will be closely watching the execution of its platformization efforts and AI product growth in FY25.

In summary, PANW is expected to deliver solid Q1 results, supported by its platformization efforts, robust NGS ARR growth, and expanding multi-year commitments. Investors will be looking for updates on key metrics like ARR and RPO, along with guidance revisions and commentary on deal activity. While the company has benefited from improving macro trends and customer consolidation, challenges remain, particularly around pricing pressures and competitive dynamics. The stock's performance post-earnings will likely hinge on how well the company aligns its results and outlook with elevated investor expectations.ings will likely hinge on how well the company aligns its results and outlook with elevated investor expectations