| | |
Market Snapshot
briefing.com
| Dow | 33686.38 | +137.03 | (0.41%) | | Nasdaq | 11066.56 | -18.25 | (-0.16%) | | SP 500 | 3957.91 | +11.28 | (0.29%) | | 10-yr Note | -4/32 | 3.820 |
|
| | NYSE | Adv 1804 | Dec 1226 | Vol 961 mln | | Nasdaq | Adv 2446 | Dec 2141 | Vol 4.0 bln |
Industry Watch
| Strong: Utilities, Real Estate, Financials, Health Care |
| | Weak: Energy, Communication Services |
Moving the Market
-- The market showed resilience yesterday, recovering from larger losses, which is boosting investor sentiment
-- Better-than-expected earnings news from retailers like Gap (GPS), Ross Stores (ROST), and Foot Locker (FL) and tech companies Palo Alto Networks (PANW) and Applied Materials (AMAT)
-- Economic slowdown worries are still in play, manifesting in falling oil and copper prices
-- Treasury yields are moving higher and the dollar is strengthening
-- Mega cap stocks drive index performance
|
Closing Summary
18-Nov-22 16:25 ET
Dow +199.37 at 33748.72, Nasdaq +1.10 at 11085.91, S&P +18.78 at 3965.41
[BRIEFING.COM] On this options expiration day, the stock market started the session on an upbeat note. Investor sentiment was boosted by the market's resilient performance yesterday and a slew of better-than-expected earnings reports out of the retail and technology sectors.
Palo Alto Networks (PANW 167.48, +10.92, +7.0%) was a winning standout for the tech sector while Ross Stores (ROST 107.59, +9.66, +9.9%) and Foot Locker (FL 35.88, +2.88, +8.7%) enjoyed some of the biggest gains for the retailers.
The initial upside momentum was dampened following a report of the ninth straight monthly decline in existing home sales and a dour-looking 0.8% month-over-month decline in the Leading Economic Index that marked the eight straight monthly decline for that series.
Stocks then took another leg lower around midday as Treasury yields crept higher and the dollar built up strength. The U.S. Dollar Index was up 0.3% to 106.98. The 10-yr Treasury note yield rose four basis points to 3.82% and the 2-yr note yield rose five basis points to 4.50%.
The performance of mega cap stocks also contributed to this midday lull, but they eventually found their footing.
By 2:00 p.m. ET, some fairly broad buying interest picked up again and the major averages were able to close well off session lows. Nine of the 11 S&P 500 sectors closed in the green, led by utilities (+2.0%) and real estate (+1.3%). The communication services (-0.4%) and energy (-0.9%) sectors were the lone holdouts in negative territory. The latter felt the pinch of falling oil prices today. WTI crude oil futures fell 2.2% to $80.13/bbl.
The pullback in oil prices was a reflection of market participants' continued worries over an economic slowdown. Comments from Boston Fed President Collins (2022 FOMC voter) piled onto this concern. She said in a CNBC interview that the Fed is not done raising rates and that a 75 basis point rate hike in December is still on the table.
The Vanguard Mega Cap Growth ETF (MGK) closed flat while the S&P 500 logged a 0.5% gain.
Advancers led decliners by a 3-to-2 margin at the NYSE and an 11-to-10 margin at the Nasdaq.
Looking ahead to Monday, Li Auto (LI), Jacobs Engineering (J), J.M. Smucker (SJM) will report earnings ahead of the open.
There is no U.S. economic data of note on Monday.
Reviewing today's economic data:
- Existing home sales decreased 5.9% month-over-month in October to a seasonally adjusted annual rate of 4.43 million (Briefing.com consensus 4.38 million) versus an unrevised 4.71 million in September. That is the ninth straight month that existing home sales have fallen and it is the weakest pace of sales since late 2011, excluding the 2020 pandemic period. Total sales in October were down 28.4% from a year ago.
- The key takeaway from the report is that higher mortgage rates are taking a bite out of existing home sales, having created affordability pressures for prospective buyers and deferred listing decisions for potential sellers who see an expensive repurchase proposition.
- The Leading Economic Index for October fell 0.8% (Briefing.com consensus -0.5%) after the prior revised decline of 0.5% (from 0.4%).
- Dow Jones Industrial Average: -7.1% YTD
- S&P Midcap 400: -11.7% YTD
- Russell 2000: -17.6% YTD
- S&P 500: -16.8% YTD
- Nasdaq Composite: -28.8% YTD
Market climbing ahead of close
18-Nov-22 15:35 ET
Dow +181.56 at 33730.91, Nasdaq -1.92 at 11082.89, S&P +16.92 at 3963.55
[BRIEFING.COM] The stock market is climbing higher ahead of the close.
The 10-yr Treasury note yield rose four basis points today, but fell one basis point this week, to 3.82%. The 2-yr note yield rose five basis points today, and 19 basis points this week, to 4.50%.
Looking ahead to Monday, Li Auto (LI), Jacobs Engineering (J), J.M. Smucker (SJM) will report earnings ahead of the open.
There is no U.S. economic data of note on Monday.
Oil prices climb off lows
18-Nov-22 15:05 ET
Dow +137.03 at 33686.38, Nasdaq -18.25 at 11066.56, S&P +11.28 at 3957.91
[BRIEFING.COM] Recent trading saw the major averages move mostly sideways.
Oil prices have been climbing off their lows. WTI crude oil futures, at $77.59 earlier, sit at $80.00/bbl now. Natural gas futures tipped into positive territory, up 0.4% to $6.77/mmbtu.
On a related note, the S&P 500 energy sector remains buried in last place, down 1.1%.
Live Nation dented by reports of DoJ investigation
18-Nov-22 14:30 ET
Dow +85.36 at 33634.71, Nasdaq -43.35 at 11041.46, S&P +3.25 at 3949.88
[BRIEFING.COM] The S&P 500 (+0.08%) has snuck back into positive territory in the last half hour, up about 3 points.
S&P 500 constituents Elevance Health (ELV 492.34, +15.33, +3.21%), Juniper Networks (JNPR 31.36, +0.85, +2.79%), and Estee Lauder (EL 233.25, +5.09, +2.23%) pepper the top of the standings. Managed care stocks, including ELV, host solid gains today, JNPR gains in sympathy to Palo Alto Networks' (PANW 167.23, +10.67, +6.82%) move, while EL continues yesterday's rebound off lows.
Meanwhile, Live Nation (LYV 68.02, -3.83, -5.33%) is today's worst performer after reports the company is going to be investigated by the Dept. of Justice.
Gold cements weekly losses on Friday
18-Nov-22 14:00 ET
Dow +35.21 at 33584.56, Nasdaq -62.48 at 11022.33, S&P -3.88 at 3942.75
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (-0.56%) remains the worst-performing major average
Gold futures settled $8.60 lower (-0.5%) to $1,754.40/oz, down about -0.8% on the week, settling into a bit of a groove as investors eye the signals for the Fed's next move on interest rates.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $106.93.
Page One
Last Updated: 18-Nov-22 09:02 ET | Archive
A decent batch of earnings news puts market back on rebound track
This long week is going to give way to a holiday-shortened week next week, but not before the stock market makes another attempt to reclaim some of the ground it has lost this year.
The S&P 500 futures are up 35 points and are trading 0.9% above fair value, the Nasdaq 100 futures are up 117 points and are trading 1.0% above fair value, and the Dow Jones Industrial Average futures are up 227 points and are trading 0.7% above fair value.
Today is a monthly options expiration day and that is said to be playing a role in boosting the futures market this morning, yet there are other less esoteric factors at work.
Specifically, retailers Gap (GPS), Ross Stores (ROST), and Foot Locker (FL) delivered better-than-expected earnings reports that have those stocks trading markedly higher in pre-market action. Their good news/better-than-feared news has mitigated some of the weakness seen earlier this week following Target's (TGT) disappointment.
The concerns about a slowdown in consumer spending haven't been eradicated, however. Fellow retailer Williams-Sonoma (WSM) is down 8.3% after coming up shy of the Q3 consensus earnings estimate and stating that it will not reiterate or update guidance through FY24 due to the macro uncertainty.
That "macro uncertainty" is the big overhang for retail stocks and the broader market in general. A lingering assumption that the Fed will overtighten and force the economy into a hard landing can be seen in the deeply inverted Treasury yield curve. The 3-mo/10-yr spread is inverted by 43 basis points while the 2-yr/10-yr spread is inverted by 68 basis points.
Slowdown worries are also manifesting themselves in falling oil prices (-10.1% this week to $79.97/bbl) and fading copper prices (-6.1% this week to $3.67/lb).
These slowdown worries have raised questions about how much investors will be willing to pay for every dollar of earnings and those questions have slowed some of the post-CPI rebound momentum this week.
Still, things will be running at a faster pace at today's open as market participants have also turned their attention to the better-than-expected earnings results and guidance from tech companies Palo Alto Networks (PANW) and Applied Materials (AMAT).
Their good news is bleeding over to other growth stocks, a number of which are concentrated in the heavily-weighted information technology sector.
It is looking like a pretty good open, then, for stocks, but what will matter more is how they look when the market closes. How the Treasury market behaves today should hold some sway on how the stock market gets from here to there.
Currently, the 2-yr note yield is up three basis points to 4.48% and the 10-yr note yield is up two basis points to 3.80%.
-- Patrick J. O'Hare, Briefing.com
The Big Picture
Last Updated: 18-Nov-22 15:40 ET | Archive
About that Walmart earnings report
Walmart (WMT) is the world's largest retailer. It is also a Dow component and member of the S&P 500 consumer staples sector thanks to its status as the largest grocer in the U.S.
On November 15, Walmart reported its fiscal third quarter results and they were good results. The company easily topped the consensus EPS estimate, aided by an 8.8% year-over-year increase in revenues of $152.8 billion and an 8.2% increase in comparable sales for its Walmart U.S. division, excluding fuel. Its adjusted operating expenses as a percentage of net sales decreased by 75 basis points and helped drive a 3.9% increase in adjusted operating income.
But we're not here to talk about Walmart's earnings. We're here to talk about what Walmart said about its third quarter performance, because what it said ultimately said a lot about the U.S. economy.
Points of Emphasis
CEO Doug McMillon got right to [our] point on the earnings conference call. The first thing he chose to highlight was the following:
"We delivered strong results on the top line across our segments, and our value proposition is resonating with customers and members around the world. We see this in our grocery business in stores and online in key markets like the U.S. and Mexico. Customers that came to us less frequently in the past are now shopping with us more often, including higher-income customers (emphasis our own).
CFO John David Rainey noted later on the call that "High fuel prices and mid-teens food inflation have forced customers to manage household budgets more tightly, making frequent trade-offs and biasing spending toward everyday essentials (emphasis our own)."
He later added that "...we've continued to gain grocery market share from households across income demographics, with nearly three-quarters of the share gain coming from those exceeding $100,000 in annual income. This quarter, our private brand penetration in food categories increased about 130 basis points, reflecting customer's increased focus on quality products at value prices. We observed incremental trade-down in categories including proteins, baking goods, baby, and dog food."
Mr. Rainey detailed that food sales continues to lead the Walmart U.S. division with mid-teens growth, but that general merchandise sales declined low-single digits with softness in electronics, home, and apparel (emphasis our own).
The company's earnings presentation pointed out that the 8.2% comparable sales growth in U.S. was led by a 2.1% increase in transactions and a 6.0% increase in average ticket (i.e., inflation), driven by strength in food categories and private brand sales.
For Walmart International, the double-digit net sales growth for the Walmex division was paced by continued strength in food and consumables. Strong growth in Sam's Club and eCommerce led a 6.9% increase in net sales for China, and for Canada, which registered a 5.5% increase in net sales growth, it was said that sales in food and consumables outpaced general merchandise.
Finally, Sam's Club achieved 10.0% comparable sales growth, led by comparable sales gains in every category except technology, office and entertainment, which saw a mid-single digit decline on softness in consumer electronics.
Impressions
What are some of the key takeaways from what was heard from Walmart?
- Consumers are feeling the effects of persistently high inflation, including higher-income consumers, so they are seeking lower-cost providers.
- Consumers are starting to spend more now on what they need as opposed to what they want.
- Consumers are increasingly price conscious and, consequently, are trading down to private brands.
- Consumers see the cost benefits of buying in bulk, which is contributing to the ongoing strength at Sam's Club (and Costco for that matter).
- Inflation is a global problem, and with the current high rates of inflation, it is not just an issue for low-income consumers.
What are some likely outcomes in coming months/quarters as we read between the lines of the report?
- Growth will slow as consumers rein in their discretionary spending.
- Inflation should ebb as end demand weakens at the same time supply chains improve.
- Companies are going to start losing pricing power as more consumers, out of necessity, refrain from paying full prices.
- Corporate profit margins should be under pressure, absent more aggressive cost-cutting actions.
- Branded products should see market share erosion as consumers shift purchases more to private label/generic products.
- Concerns about job security should lead to more prudent spending behavior.
A Hammer and a Nail
The main takeaway is that the economic environment is deteriorating in large part because of the strain that high inflation is putting on household budgets, particularly for things that are needed the most -- like food and energy -- but also now because of the lag effect, and psychological effect, of the Fed's rate hikes.
Some things are slowing naturally, yet it is the fear, too, that things will slow much more as the cumulative effects of the rate hikes make their way through the economy.
The Fed is working feverishly to get inflation under control. Its main policy tool has been to hike the target range for the fed funds rate. It is using that tool like a hammer, too.
Fittingly, Fed officials keep hammering home the point that the fed funds rate is not yet at a sufficiently restrictive level, that more rate hikes are necessary, and that the terminal rate (whatever that ends up being) is apt to remain in place for a while once it is reached.
The concern for the market is that the Fed is going to nail the economy to the ground with its rapid rate hikes and possibly six feet under. That concern has manifested itself in the Treasury market where there are deep inversions along the yield curve.
The 3mo-10yr spread, which some regard as the best recession harbinger, is inverted by 43 basis points and the 2yr-10yr spread is inverted by 67 basis points.
 
What It All Means
To be fair, there were some pleasing reports from other retailers, like Home Depot (HD), Lowe's (LOW), and Foot Locker (FL), as well as a stronger-than-expected October Retail Sales Report, which pointed to some ongoing vibrancy in the U.S. consumer.
Things are by no means at a dire level yet. In fact, the Atlanta Fed GDPNow model estimate for Q4 real GDP was raised (emphasis our own) to 4.4% from 4.1% following the Retail Sales Report. It currently sits at 4.2%.
That is a long way from a contraction in growth, but the message from the Walmart report is that changes in consumer spending behavior are happening on the margin and are starting to move inward; hence, the migration of more higher-income households to Walmart's shopping aisles.
That migration is destined to persist as the Fed keeps raising rates, as more companies announce layoffs, as the housing market continues to cool, as debtors face higher repayment burdens on variable rate debt, and as consumers continue to draw down excess savings.
As an aside, the personal savings rate as a percentage of disposable personal income is 3.1% versus 33.8% at its pandemic peak. Other than the 3.0% rate seen in June, that is the lowest it has been since the financial crisis.
That's not a good starting point with the Fed desiring some weakening in the labor market to tame wage-based inflation pressures. It leaves many consumers in a precarious position should they lose their job. On that note, CNBC highlighted a LendingClub report that indicated 60% of Americans were living paycheck to paycheck as of October, up from 56% a year ago.
This understanding could ultimately work more in Walmart's favor, but what's good in coming months for Walmart -- the world's largest retailer and the U.S.'s largest grocer -- won't necessarily be associated with an economy that is in good shape.
Right now, the shape of the yield curve and the low level of personal savings suggests Walmart should have more business coming its way.
-- Patrick J. O'Hare, Briefing.com
(Editor's Note: the next installment of The Big Picture will be published the week of November 28)
Ross Stores is operating in a retail sweet spot and capitalizes on trade-down effect (ROST)
Following in the footsteps of TJX (TJX), Ross Stores (ROST) reported better-than-expected 3Q23 results and bumped its Q4 guidance higher as more shoppers turn to off-price retailers to seek out bargains. ROST's beat-and-raise performance represents a major improvement from last quarter when the company missed on the top-line and issued weak guidance for Q3 and Q4. In the Q2 earnings press release, CEO Barbara Rentler commented that consumer demand was impacted by inflationary pressures, causing the retail environment to become more promotional. As a result, the company planned to ramp up discounting and markdown activity to clear out inventory, putting a significant dent into merchandise margins.
However, as Q3 played out, a shift in consumer behavior transpired that benefitted both ROST and TJX. Specifically, it appears that more affluent customers who would typically shop at full-price or higher-end stores began trading down to the off-price category. This development has offset the pull-back in spending from some of ROST's lower-income customers, leading to a much better-than-feared quarterly report.
- Last quarter, ROST guided for operating margin to slide to just 7.8-8.7% due to the projected higher markdowns. For context, Q2 operating margin came in at 11.3%, which was down by 280 bps yr/yr. Ultimately, the company easily exceeded its forecast, posting operating margin of 9.8% for the quarter.
- There was still plenty of promotional activity during Q3, but it wasn't as bad as ROST had anticipated. In fact, it appears that the company benefitted from the greater struggles of full-price competitors, many of which were dealing with bloated inventory levels.
- Due to those high inventory levels, Rentler stated that some name-brand manufacturers that typically don't supply to ROST turned to the company to sell their products. In turn, this led to better-than-expected average selling prices and basket sizes.
- Similarly, comparable store sales also comfortably exceeded ROST's expectations. After guiding for a decrease of 7-9%, Q3 comps were -3% on top of a 14% increase in the year-earlier period. Importantly, the sales momentum is continuing into the core of the holiday shopping season, illustrated by ROST increasing its Q4 comp guidance to flat to -2% from -7% to -4%.
- Although ROST outperformed Q3 expectations by a wide margin, Rentler cautioned that she still expects a very promotional holiday selling season and that the company's low-to-moderate income customers will continue to be pressured by inflationary headwinds. Relative to other retailers, though, ROST is better positioned to compete in this environment, especially with a higher quality product assortment for the holidays.
The main takeaway is that ROST is operating in a sweet spot as consumers increasingly trade down to off-price retailers. It remains a very challenging business climate due to inflation and the highly promotional market, but ROST seems poised to emerge as a winner during this holiday shopping season.
Williams-Sonoma falls on a rare EPS miss and lack of confidence in its FY24 outlook (WSM)
The current climate remains unfavorable for Williams-Sonoma (WSM -6%), evidenced by its first earnings miss in over five years and slowing sales growth in Q3 (Oct). Making matters worse, the current uncertainty in the economy, particularly with how consumers will respond to increasing interest rates, led WSM to neither reiterate nor update its FY24 guidance, which called for revs to grow to $10 bln. Therefore, despite some comforting developments in Q3, the rough patches were far more unsettling, driving today's negative reaction.
- Starting with the good, WSM's B2B business again shone brightly in Q3. This business is one of WSM's primary competitive advantages, highlighted by another quarter of double-digit gains yr/yr, this time jumping 17% despite lapping nearly 100% growth in the year-ago period.
- Another plus in Q3 was WSM's global business, which exhibited strength in franchise and company-owned channels. WSM continues to see India as its most significant overseas opportunity, focusing on expanding its presence throughout 2023.
- A few other notable highlights were sales of $2.19 bln, topping analyst expectations driven by the Pottery Barn banner, which delivered +19.6% comp growth. WSM's West Elm banner also performed nicely in the quarter, boasting a +4.2% comp as inventories continued to improve.
- However, speaking of inventories, this is where things take a slight turn. Supply issues are keeping backlogs at historically high levels and leaving sales on the table. Management noted that the problem will persist into Q4 (Jan) and the first half of 2023 but should normalize sometime after.
- It is unclear how firm WSM's backlog is, so given the current environment, WSM may see increasing cancellations if it does not resolve the situation quickly.
- At the same time, the demand backdrop is souring. WSM endured deceleration and choppiness in demand in Q3 and is finding it challenging to accurately predict where things are headed.
- In the meantime, the company is controlling costs by not running site-wide promotions as it did before the pandemic. WSM is also in discussions with its vendors to reduce other costs to keep merchandise margins stable, which in Q3 remained flat yr/yr.
- With one quarter remaining in FY23, WSM did have enough insight into Q4 to reiterate its FY23 guidance of $8.56-8.99 bln in revs and operating margins relatively in line with FY22. The upcoming quarter is typically WSM's biggest, given the holiday season, which is partly why management was confident in reiterating its FY23 outlook.
We were nervous heading into WSM's Q3 report after Leggett & Platt (LEG), a major furniture hardware supplier, reduced its FY22 forecast last month. Even though Wayfair (W) alleviated some of these fears with its Q3 beat earlier this month, the uneasy demand backdrop still lingered. Still, WSM could have also alleviated fears had it shown more confidence in its FY24 guidance, which it reiterated just three months ago. Finally, we do not like what WSM's results could mean for competitor La-Z-Boy (LZB), which reports OctQ earnings on November 30.
Applied Materials' strong Q4 results fuel its optimism about outperforming a weakening market (AMAT)
Applied Materials (AMAT) is receiving a nice push today after its Q4 (Oct) results were much higher than the semiconductor equipment giant forecasted just over one month ago. After the U.S. government implemented new export regulations for semiconductor technology sold in China, including wafer fab equipment (AMAT's bread and butter), AMAT immediately slashed its Q4 EPS and sales forecasts. The company also cautioned that even after an estimated $250-550 mln hit to its Q4 sales, subsequent quarters would still be affected, predicting a similar sized ding to Q1 sales.
Therefore, even though AMAT's Q1 outlook of $1.75-2.11 in adjusted EPS and $6.3-7.1 bln in sales was only in line with estimates, it is still considered a win. Furthermore, AMAT commented that it may be able to mitigate an estimated $2.5 bln impact on FY23 revs by around $0.5-1.0 bln depending on how quickly the U.S. provides licenses and approvals and how impacted companies refocus investments.
Further helping offset the estimated negative impact of the China export regulations, as well as a challenging macroeconomic backdrop, were AMAT's excellent numbers and other positive developments from Q4.
- Adjusted EPS of $2.03 smashed AMAT's previously cut outlook of $1.54-1.78 and lined up nicely with its initial forecast of $1.82-2.18.
- A major factor in the big beat was an improving supply chain. AMAT noted it made incremental progress, expecting to close gaps over the next few quarters. Most of the ongoing hiccups surround AMAT's most prominent business: metal deposition. This business also supplies to a market that AMAT remarked is expanding considerably, so healthy progress on the supply chain front is vital.
- Meanwhile, sales climbed 10.2% higher yr/yr to $6.75 bln, again easily exceeding AMAT's prior forecast of $6.15-6.65 bln, lining up with its initial prediction of $6.25-7.05 bln.
- While consumer-driven markets, such as electronics and PCs, remain weak, the industrial, automotive, and power markets remain robust, a theme consistent amongst many of AMAT's peers. The strength in these markets, underpinned by an ongoing transition to EVs, industrial automation, and renewable energy, helped drive AMAT's double-digit sales gains in Q4.
- AMAT's backlog is also the highest in its history, positioning it to offset some market weakness next year.
The road ahead is anything but smooth. AMAT conceded that the economic backdrop is resulting in a pullback in overall wafer fab equipment spending in FY23. However, the company was optimistic that its business would be more resilient than the underlying market for three reasons: a robust backlog, demand exceeding supply in some cases, and a well-positioned service business where customers continue to convert to subscriptions. Lastly, long-term conditions remain unchanged. Technology complexity is increasing, helping equipment intensity stay at today's levels or rise even further, translating to the wafer fab equipment market likely growing faster than the overall semiconductor industry.
Palo Alto Networks securing some nice gains following another upside earnings report (PANW)
Palo Alto Networks (PANW) continues to impress and deliver strong results in a challenging business climate, demonstrating the resiliency of the cybersecurity market, as well as the company's exceptional execution and technological leadership. For the eleventh consecutive quarter, PANW beat top and bottom-line estimates as 1Q23 billings of $1.70 bln came in at the high end of its prior guidance range. PANW also ratcheted its forward guidance higher -- another common occurrence for the company -- forecasting FY23 EPS of $3.37-$3.44 and revenue of $6.85-$6.91 bln. The company's initial outlook called for EPS and revenue of $3.13-$3.17 and $6.85-$6.90 bln.
In an environment in which many enterprises are cutting back on spending, including for some IT-related categories, PANW's beat-and-raise performance shows that cybersecurity is still a priority. During the earnings call, CEO Nikesh Arora described the cybersecurity market as resilient, but not completely immune to the macroeconomic headwinds. For instance, he stated that some deals are seeing increased scrutiny and that negotiations around payment terms and discounts are causing deal cycles to elongate. When cybersecurity peer Fortinet (FTNT) guided Q4 billings below expectations in early November, the company cited the difficulty of forecasting the timing of larger transactions as a main consideration in its outlook.
PANW is experiencing these same issues and has seen some deals get downsized, but the impact has been manageable as it has dealt with very few outright cancellations. Furthermore, these changes in the market landscape have largely been mitigated by PANW's best-of-breed technology and its operational focus on driving margins and profits higher.
- The company's next-generation security (NGS) offerings, including Cortex and Prisma Cloud SASE, are a key factor behind its outperformance. These cloud-enabled products crossed the $2.0 bln annual recurring revenue (ARR) mark in Q1, increasing by 67% yr/yr.
- SASE, or, Secure Access Service Edge, now represents PANW's largest pipeline, even though the company's bread-and-butter firewall customer base is more than 15x larger than its SASE customer base. Broadly speaking, SASE technology combines wide area networking and network security offerings, like Zero Trust, into a single, cloud-based service.
- On the hardware side of the business, improvements in the supply chain are providing a boost and should support low double-digit growth in the near-term, according to Arora. In the appliance market, Arora believes that PANW gained about three percentage points of market share on a yr/yr basis.
- Although business has remained healthy, PANW is cognizant of the macro risks and changing customer behaviors. Accordingly, the company says that it's focusing more on execution and driving incremental operating leverage. Its efforts are paying off as operating margin expanded by 260 bps yr/yr to 20.6%, driven by lower expenses as a percent of revenue across all expense lines. For example, sales and marketing as a percent of revenue decreased to 39.3% from 40.6% in the year-earlier period.
One knock is that billings growth did decelerate to 27% from 44% last quarter, and PANW's Q2 guidance calls for a further drop in growth to 20%. In Q2, PANW is lapping strong yr/yr billings growth of 40%, so the decline isn't overly alarming. The bottom line is that PANW's solid results and outlook highlight its leadership position in a resilient cybersecurity market.
|
|
