Palo Alto Networks (PANW) fiscal fourth-quarter results came in ahead of Wall Street's estimates, but the cybersecurity firm's shares fell early Wednesday amid margin and cost pressures.
Adjusted gross margin came in at 74.8% for the quarter ended July, down from 75.8% the year before, the company said late Tuesday. The stock decreased 1.8% in the most recent premarket activity.
The decline reflected a mix shift toward Palo Alto's faster-growing software-as-a-service offerings, which continued to scale and "have yet to reach their gross margin maturity," Chief Financial Officer Dipak Golechha said during an earnings call, according to a FactSet transcript. "Looking ahead, the growing majority of revenue is cloud and SaaS, and we anticipate that mix shift will drive our cloud hosting costs faster than total revenue in fiscal year 2027," according to Golechha.
The company expects rising commodity costs to persist in its hardware business, especially related to memory and storage, Golechha said on the call. "We continue to manage our component cost exposure through our strategic supplier relationships and selective pricing actions across our portfolio of hardware products," the CFO added.
Palo Alto reported adjusted earnings of $1.02 a share for the fourth quarter, up from $0.95 in the prior-year quarter, ahead of the FactSet-polled consensus of $0.98. Revenue climbed 34% to $3.41 billion, topping the Street's view for $3.35 billion.
Subscription and support revenue increased to $2.67 billion from $1.96 billion, while product sales gained to $738 million from $574 million. Next-generation security annual recurring revenue, or ARR, surged 63% on a yearly basis to $9.1 billion, surpassing the average analyst estimate of $8.93 billion.
"This performance is a direct result of record-breaking platformization adoption and the growing urgency among customers to fortify their defenses as (artificial intelligence) fundamentally redefines the security landscape," Chief Executive Nikesh Arora said on the call.
The company expects AI tailwinds driving cybersecurity demand to intensify in the future, according to Arora. The development of global AI infrastructure is requiring trillions in investment, and the firm expects "more capital expenditure in the next five years than the preceding two decades," Arora told analysts.
"There is approximately $1 trillion of global cybersecurity debt that must be modernized to defend against automated threats," the CEO added.
Last month, Morgan Stanley said in a client note that Palo Alto was among the cybersecurity companies positioned to benefit from a shift toward new identity-security architectures and platforms as the growing use of autonomous AI agents creates new security risks.
For fiscal 2027, Palo Alto projects adjusted EPS to come in between $4.16 and $4.19 on a revenue range of $14.1 billion to $14.2 billion. The Street is looking for non-GAAP EPS of $4.14 and sales of $13.97 billion. In the previous fiscal year, adjusted EPS came in at $3.84 and revenue amounted to $11.48 billion.
Next-generation security ARR is pegged at $11.08 billion to $11.18 billion for the ongoing fiscal year, representing annual growth of 22% to 23%. The market's current forecast is for $11.02 billion.
Last week, rival CrowdStrike (CRWD) raised its full-year net new ARR outlook amid increasing demand for cybersecurity solutions to address AI risks, while the firm reported better-than-expected fiscal second-quarter results.
For the first quarter, Palo Alto anticipates adjusted EPS of $0.96 to $0.98 on revenue of $3.3 billion to $3.31 billion. The current consensus on FactSet is for non-GAAP EPS of $0.95 and sales of $3.26 billion. Next-generation security ARR is seen at $9.54 billion to $9.56 billion, reflecting a year-over-year gain of 63%.
