Summary
Palo Alto Networks reported fiscal second quarter 2022 revenue of $1.32 billion, up 29.5% from the prior-year quarter. Gross profit rose 28.5% to $911.6 million. Gross margin slipped to 69.2%, down 0.5 percentage points. The company still posted an operating loss of $73.9 million, while operating margin improved to negative 5.6%, up 3.1 percentage points. Net loss was $93.5 million. For the first six months of fiscal 2022, revenue rose 30.6% to $2.56 billion and gross profit rose 29.1% to $1.78 billion. The six-month operating loss was $156.6 million, and the six-month net loss was $197.1 million. Non-GAAP net income for the quarter was $185.0 million, or $1.74 per diluted share. The gap between GAAP and non-GAAP results remains wide, largely because of share-based compensation and acquisition-related costs.
Billings, a non-GAAP key metric, were $1.6 billion for the quarter, up 32% year over year. Remaining performance obligations rose 37.0% to $6.30 billion. Current deferred revenue rose 29.2% to $2.96 billion. Operating cash flow for the quarter was $482.6 million, up 32.4% from the prior-year quarter. For the six months, operating cash flow was $1.07 billion, up 19.1%. Free cash flow (non-GAAP) was $956.2 million for the six months, as reported in the MD&A. The company said it returned capital to shareholders and had $450.0 million remaining under its share repurchase authorization as of January 31, 2022.
Management raised its full-year outlook and gave fiscal third quarter 2022 targets. For the fiscal third quarter, the company expects billings of $1.59 billion to $1.61 billion and diluted non-GAAP net income per share of $1.65 to $1.68 on 106 million to 108 million shares. For full fiscal year 2022, Palo Alto Networks expects billings of $6.80 billion to $6.85 billion, diluted non-GAAP net income per share of $7.23 to $7.30, and adjusted free cash flow margin of 32% to 33%. The company said it is raising guidance for the year across revenue, billings, and earnings per share. The non-GAAP outlook excludes share-based compensation-related charges, acquisition-related costs, amortization of acquired intangible assets, litigation-related charges, non-cash charges related to convertible notes, and related tax effects. Palo Alto Networks does not provide a GAAP reconciliation for its non-GAAP guidance because some items are uncertain or out of its control.
The quarter benefited from strength across the three security platforms. Management pointed to strong cybersecurity demand, organizations architecting for hybrid work, and growing hyperscale cloud footprints. In November 2021, the company launched Prisma Cloud 3.0 and Prisma Access 3.0. Headcount expanded as well. Research and development employees reached 2,880, up 31.2%. Sales and marketing employees reached 4,826, up 18.7%. Subscription and support employees reached 2,380, up 40.2%. Those additions support the product and subscription portfolio, but they also raise the cost base. The MD&A notes that supply chain challenges, including chip and component shortages, have increased costs and lead times for certain product deliveries.
Risks remain familiar for a high-growth cybersecurity vendor. COVID-19 could lead customers to delay or defer purchasing decisions and lengthen sales cycles. Supply chain constraints and component shortages could affect product delivery and costs. Competition is intense, and the company must keep developing new products and subscriptions that customers accept. The convertible senior notes add another consideration. The sale price condition was met, so holders may convert their notes during the quarter ending April 30, 2022. Management believes cash from operations, existing cash and investments, and available financing will be sufficient to meet its cash needs. Palo Alto Networks also has a share repurchase program, with $450.0 million remaining as of January 31, 2022.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2022 | Q1 FY2022 | QoQ | Q2 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.32B | $1.25B | +5.6% | $1.02B | +29.5% |
| Gross profit | $911.6M | $866.8M | +5.2% | $709.3M | +28.5% |
| Gross margin | 69.2% | 69.5% | -0.3 pp | 69.8% | -0.5 pp |
| Research & development | $359.0M | $339.5M | +5.7% | $266.7M | +34.6% |
| Sales & marketing | $528.8M | $505.9M | +4.5% | $427.4M | +23.7% |
| General & administrative | $97.7M | $104.1M | -6.1% | $104.0M | -6.1% |
| Total operating expenses | $985.5M | $949.5M | +3.8% | $798.1M | +23.5% |
| Operating income (loss) | -$73.9M | -$82.7M | +10.6% | -$88.8M | +16.8% |
| Operating margin | -5.6% | -6.6% | +1.0 pp | -8.7% | +3.1 pp |
| Net income (loss) | -$93.5M | -$103.6M | +9.7% | -$142.3M | +34.3% |
| Net margin | -7.1% | -8.3% | +1.2 pp | -14.0% | +6.9 pp |
Risks
Chip and component shortages, increased costs, and extended lead times have affected product deliveries and inventory availability. Product gross margin decreased for the three and six months ended January 31, 2022 compared to the same periods in 2021, primarily due to product mix and higher costs driven by supply chain challenges.
COVID-19 and ongoing global economic uncertainty could reduce technology spending, delay purchasing decisions, and lengthen sales cycles. Management stated the full impact of COVID-19 and other macroeconomic factors on ongoing business and financial performance cannot be reasonably estimated at this time.
The enterprise security market is intensely competitive, with larger competitors such as Cisco, Check Point, Fortinet, Zscaler, and Crowdstrike able to bundle products, offer concessions, or sell at zero or negative margins. Competitive pressures may result in price reductions, fewer orders, reduced revenue and gross margins, and loss of market share.
All 2023 Notes and 2025 Notes were convertible from February 1, 2022 through April 30, 2022, and if all holders converted, the company would be obligated to pay $3.7 billion in cash. Working capital was negative $2,537.8 million as of January 31, 2022, partly due to $3.7 billion of convertible senior notes included in current liabilities.
Sales to large enterprise end-customers involve longer sales cycles, in some cases over 12 months, and COVID-19 could lead customers to delay or defer purchasing decisions and lengthen sales cycles and payment terms. Supply chain challenges have also extended sales cycles and made forecasting operating results more difficult.
The company depends on hiring, integrating, training, and retaining highly skilled personnel, especially engineering talent, and the industry generally experiences high employee attrition. Headcount increased from 10,473 at the end of fiscal 2021 to 11,527 at the end of the second quarter of fiscal 2022, increasing the strain on management and operational resources.
Substantially all revenue is generated through channel partners, including distributors and resellers, and agreements may generally be terminated by either party with advance notice before each annual renewal date. If channel partners fail to perform or are not effectively managed, the company's ability to sell products and subscriptions and its operating results would be harmed.
Subscription and support revenue was 76.5% of total revenue in the six months ended January 31, 2022 and 74.9% in the six months ended January 31, 2021. Because revenue is recognized over service periods typically of one to five years, declines in new or renewed contracts in any quarter will not be fully or immediately reflected in revenue and will negatively affect future periods.
The company experienced revenue growth rates of 30.6% and 23.6% in the six months ended January 31, 2022 and 2021, respectively, and stated that prior quarterly or annual revenue should not be relied upon as an indication of future revenue or revenue growth. If the company cannot maintain consistent or increasing revenue growth, the market price of its common stock could be volatile.
The company has experienced significant growth in headcount, end-customers, and complex deployments with larger end-customers, placing strain on management, operational, and financial resources. Failure to improve systems, processes, and controls or manage future growth effectively could increase costs, disrupt customer relationships, or harm operating results.
SaaS KPIs
All quarters →Billings
Remaining performance obligation
Summary, forecast, risks and KPIs are extracted from Palo Alto Networks Inc's SEC filings for Q2 FY2022 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 1, 2026.