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How Did Palo Alto Networks’ Deferred Revenues Rise 70% in 1Q16?

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Palo Alto Deferred revenues and billings continued to report double-digit growth

Previously in this series, we’ve discussed Palo Alto Networks’ (PANW) fiscal 1Q16 results. We also discussed its operating segments’ contribution toward the company’s overall revenues as well as their performance. We saw that subscription services that are billed over time now contribute approximately 50% of the company’s overall revenues. Subscription revenues are recurring, which is why they’re preferable. They provide visibility to the future growth.

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Palo Alto subscription services like WildFire and Traps aided the company’s deferred revenue and billings growth. We’ll discuss Wildfire and Traps in a later part of this series. Deferred revenue rose 71% on year-over-year basis to $804.5 million while billings rose 61% to $388 million. Healthy growth in deferred revenues ensures that significant revenue growth can be expected.

Billings are an important metric to gauge growth in the cyber security space

As we’ve discussed in the past, billings are considered an important metric for cyber security players to gauge their future growth. When a company lowers billing expectations, it suggests growth is slowing. This is what happened with FireEye (FEYE), another cybersecurity company, that recently reported its fiscal 3Q15 results. Apart from failing to meet analysts’ revenue expectations, the company also lowered its billings expectations, which sent its share prices downhill. The company’s share price fell ~15% to $24.70 in after-market trading on November 4, 2015, the day the company announced its fiscal 3Q15 results.

Cybersecurity player Barracuda Networks (CUDA) announced its fiscal 2Q16 earnings on September 29, 2015. It was also forced to slash its billings guidance due to softness in enterprise storage demand due to the growing adoption of cloud storage and currency fluctuations—especially the strong dollar (UUP). FireEye’s peer Fortinet (FTNT) posted billings of $299.6 million in its recent fiscal 3Q15 results—the highest figure recorded since the company went public in 2009.

You could consider investing in the iShares S&P North American Technology-Multimedia Networking Index Fund (IGN) to gain exposure to Palo Alto. IGN invests 10.4% of its holdings in Palo Alto Networks.

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