After two rough quarters, Palo Alto Networks on Monday evening delivered the type of earnings report we expect from one of the best cybersecurity companies in the world. The stock rose another 2% in after-hours trading. Revenue during Palo Alto’s fiscal 2024 fourth quarter increased 12% year over year to $2.19 billion, beating the consensus estimate of $2.16 billion that was compiled by LSEG. Adjusted earnings per share advanced 5% to $1.51 in the three months ended July 31, ahead of EPS estimates of $1.41, LSEG data showed. Total billings accelerated to an 11% year-over-year growth rate and came in at $3.5 billion, outpacing the $3.46 billion estimate, according to FactSet. In the previous quarter, billings increased 3%, causing quite a bit of concern on Wall Street, despite management reiterating that the remaining performance obligation (RPO) metric was a better gauge of underlying trends. Palo Alto’s remaining performance obligation (RPO) in fiscal Q4 increased 20% year-over-year to $12.7 billion, not quite the 23% year-over-year growth rate we saw in the prior quarter, but that’s a significant increase nonetheless and up from the $11.3 billion in the prior quarter. With the U.S. presidential election quickly approaching and campaigns now in full swing, we wouldn’t be surprised to see cyberattacks ramp up and management’s mixed outlook prove conservative. We therefore reiterate our 2 rating as it’s not our style to chase a stock up roughly 20% in two weeks. However, we are increasing our price target to $380 per share from $360. Bottom line Palo Alto’s quarterly results were strong, and all signs point to continued growth ahead. While product sales performance did come up a bit light, the weakness was more than offset by strength in the company’s subscription and support offerings. Companywide gross income and operating income were all ahead of expectations, compounding the strength in earnings and revenue. Free cash flow also beat and allowed the board to authorize a $500 million increase to the corporate buyback plan, bringing the total remaining repurchase plan to $1 billion. The RPO guide was a bit light. But it was more than offset, in our view, by management’s better-than-expected sales, earnings, and recurring revenue outlook for the both the current quarter (fiscal 2025 Q1) and full-year fiscal 2025. To deemphasize billings results, which represent the total amount of dollars invoiced in a given period, and put more emphasis on RPO, which represents the total value contracted during the quarter, management has stopped providing billings guidance altogether. The team is also now providing an outlook for annual recurring revenue (ARR). PANW YTD mountain Palo Alto Networks YTD The issue with billings in recent quarters has been that the high cost of money has resulted in increased negotiations on terms and financing options. RPO may not be quite as concrete as billings, since cash hasn’t been collected, however, CFO Dipak Golechha said on the post-earnings conference call, “Contracts included in our RPO are all non-cancellable and nonrefundable.” On the call, CEO Nikesh Arora highlighted the pressure companies, Palo Alto’s clients and would-be clients, are facing to prevent cyberattacks. Due to new government rules, Arora said an organization must often disclose a breach before it has even had a chance to assess the full extent of the damage. Response time is as crucial as ever, he added, saying the company’s research has found that in “nearly half of cases, attackers can exfiltrate customer data in less than a single day of compromise.” The financial toll of a breach is only growing larger as data becomes increasingly more valuable. In fact, Arora said, “For the last six months, financial damages from an individual breach topped $1 billion. In another case, the impact on business was existential and required significant work dedicated to system recovery and rebuilding.” That kind of exposure provides openings for Palo Alto’s unit 42 group, which is being called in to address these breaches. In our prior deep dive analysis of the company, unit 42 is Palo Alto’s threat research and security consulting team. Palo Alto Networks Why we own it: We believe cybersecurity is a secular growth market as bad actors are relentless and companies simply cannot afford to not invest in defense. It is a never-ending arms race. We believe Palo Alto Networks, in particular, is uniquely positioned to win due to its best-in-class tools and broad product portfolio that allows it to provide an all-encompassing “platform” solution to cybersecurity. Competitors: CrowdStrike , Fortinet , Cisco Systems Last buy: Aug. 2, 2024 Initiation: Feb. 15, 2023 On the call, Arora was also asked about the July 19 CrowdStrike outage that led to global IT disruptions, resulting in grounded flights to canceled medical appointments . A defective update to a Crowdstrike extended detection and response (XDR) cybersecurity product crashed computers and data center servers around the world. The CrowdStrike issue caused two things to happen, according to Arora, “Customers are asking us, you have the same product. How do you deploy it? … We have a fundamentally different way in which we do content updates and have been doing it for a very long time.” The Palo Alto CEO added the second thing was some of the customers were “busy remediating that [CrowdStrike] issue while we’re trying to get our deals done with them. … They say, I’m so busy fixing that. So we had to sort of drag our deals kicking and screaming in some cases. … But I think what it did do is it caused customers to step back and say, wait a minute, you know, I need to make sure that I’m evaluating all the XDR opportunities in the market.” Arora pointed out Palo Alto is top four but not the No. 1 player in XDR. Add in the growing adoption of artificial intelligence — used by criminals to carry out cyberattacks and by companies like Palo Alto to thwart them — and we’re left with a very bullish long-term outlook for Palo Alto Networks, thanks in large part to management’s prior pivot to drive what the CEO calls platformization. “AI adoption is proceeding at a rapid pace, faster than honestly, I’ve seen any other new technology. However, it is following a typical pattern,” Arora said. “Innovation is driving the speed of adoption while security might be an afterthought. At the same time, adversaries are leveraging AI capabilities to broaden attacks, better target organizations, and scale their malicious activity beyond the capabilities of defenses that rely solely on humans.” “This environment, paired with an ever more challenging threat landscape and a complex set of point products that are not well integrated or even coordinated, is driving a growing need for ‘platformization,'” Arora added. ”We saw this translate into an acceleration in our bookings in the second half of the year.” Clearly, management’s efforts are paying off big time as existing customers are becoming “platform customers” and existing platform customers are becoming “multi-platform customers.” Management continues to see platformization as the key to achieving its goal of $15 billion in average by fiscal year 2030. After earnings were released, Arora told Jim Cramer on “Mad Money” that platformization is the future. “It doesn’t matter whose platform you buy, you can’t go back. You can’t go back to point solutions and start stitching them.” Guidance For its fiscal 2025 first quarter, here’s what Palo Alto expects (all estimates are sourced from FactSet). Total revenue of $2.1 billion to $2.13 billion, which is slightly better than the $2.1 billion estimate Non-GAAP earnings per share (EPS) in the range of $1.47 to $1.49, well ahead of estimates of $1.42, even on the low end. (GAAP stands for generally accepted accounting principles. Non-GAAP results exclude one-time items and other non-recurring situations to make quarter-to-quarter and year-over-year comparisons more apples-to-apples and provide a clearer picture of core operations.) Remaining Performance Obligation in the range of $12.4 billion to $12.5 billion, a bit short versus expectations of $12.68 billion Next-gen security ARR (annual recurring revenue) between $4.33 billion and $4.38 billion, ahead of the $4.32 billion estimate, even on the low end. For the full-year fiscal 2025, here’s what management expects. Total revenue of $9.1 billion to $9.15 billion, ahead of expectations of $9.106 billion, at the midpoint Non-GAAP EPS in the range of $6.18 to $6.31, which at the midpoint, is ahead of the $6.22 per share consensus estimate. RPO (remaining performance obligation) in the range of $15.2 billion to $15.3 billion, a bit short versus expectations of $15.7 billion. Next-gen security ARR is expected to be between $5.42 billion and $5.47 billion, ahead of the $5.278 billion estimate, even on the low end. Adjusted free cash flow margin of 37% to 38% (Jim Cramer’s Charitable Trust is long PANW. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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After two rough quarters, Palo Alto Networks on Monday evening delivered the type of earnings report we expect from one of the best cybersecurity companies in the world. The stock rose another 2% in after-hours trading.