After the bell on Tuesday, Palo Alto Networks (PANW) reported a top and bottom-line beat with its second-quarter fiscal 2019 results. Revenues of $711.2 million (up 30% year over year) topped the consensus of $682.1 million, and adjusted earnings per share of $1.51 (up about 44% year over year) crushed the consensus of $1.22.
Furthermore, deferred revenue grew 32% year over year to $2.5 billion, and billings increased 27% year over year to $852.5 million, smashing the consensus of $827.9 million. And at $275 million, cash flow from operations beat expectations of $265 million. On top of the beats across all these key metrics, gross margins were 76.3% and operating margins were 24.6%, representing increases of 30 basis points and 250 basis points year over year, respectively. To put that impressive operating margin expansion in perspective, one analyst on the conference call said, "I don't think anybody was modeling 250 basis point margin improvement."
All we can say is wow, what a quarter. Shares are surging in the after-hours market this evening, making a new all-time high in the process. At the time this was written, the stock traded more than 9% higher, settling near the $257 level, a far cry from November 2018's price in $160s when we added to our position here.
"We remain focused on delivering to our customers the best security in the market," CEO Nikesh Arora said in the company's press release. "Our recently introduced products and services, including Cortex XDR, Traps 6.0, PAN-OS 9.0, the DNS Security Service subscription, and our fastest ever Next-Generation Firewall, coupled with the proposed acquisition of Demisto, further enhance and expand our capabilities, making security simpler and more effective through the use of artificial intelligence, analytics, automation and orchestration."
And boy was Palo Alto Networks focused this quarter. The company added new customers "at a rapid pace" while also expanding the business. Impressively, every single one of the company's top-25 customers made a purchase in the quarter with a minimum spent of $35.6 million in lifetime value, an increase of 39% year over year.
By division, Product revenue of $271.6 million (consensus $244 million) represented an increase of about 33% year over year. There was no specific driver in the quarter to this significant upside, but Arora discussed on the call how there has been a "general level of activity" in the marketplace. Essentially, every time somebody gets breached, awareness and consciousness in the security market increases. With a strong Product beat in tow, the bear thesis that questions the sustainability of the firewall business has lost a leg to stand on.
On the Subscription and Support side, revenue of $439.6 million (consensus $438 million) represented an increase of about 39% year over year. Breaking down that number further, SaaS-based subscription revenue advanced 36% year over year to $249.37 million, while Support revenue of $189.9 million grew 21%. Even though it just edged the consensus, these were strong results and supports the good that comes with offering subscriptions on top of firewalls.
In addition to the results, management was upbeat when introducing Cortex, which is essentially Application Framework 2.0. First announced in a press release early today, Cortex is the industry's first and only open and integrated, AI-Based continuous security platform. "Cortex is the future," according to Arora.
Management also dedicated time to discuss Demisto, which we mentioned in our Alert here that the company intends to acquire. This business projects to have 2019 billings of approximately $50 million to $55 million. Demisto is already part of the Cortex platform, and it will further the company's plans in artificial intelligence and machine learning. Because Arora is known as a deal-maker, some analysts have been uneasy about Palo Alto's mergers & acquisition strategy, fretting either too many moves too fast or dilution. That being said, this deal looks favorable and will make the value proposition behind the Application Framework strategy even more compelling.
Taking a look at guidance, management expects fiscal third-quarter 2019 total revenue to be in the range of $697 million to $707 million, which at a midpoint is ahead of the $697 million consensus and represents year-over-year growth between 23% and 25% on an ASC 606 basis. Furthermore, non-GAAP net income per share is expected to be in the range of $1.23 to $1.25, which brackets the consensus of $1.24. Included in the earnings per share guidance is a $0.04 expense related to the proposed Demisto acquisition as well as a $0.01 impact from the U.S. tariffs on Chinese origin goods. Due to the recency of the proposed Demisto deal, we doubt its potential dilution was factored into next quarter's analyst estimates, implying possible upside from management's guide.
On top of all the fantastic news, management announced its the board of directors authorized a $1.0 billion share repurchase program. This buyback program follows the company's previous $1 billion share repurchase program that was effective through the end of 2018.
Overall, Palo Alto checked off the boxes in nearly all the key categories: strong top and bottom-line beats, margin upside, robust billings growth and free cash flow, new platform announcements, etc. Given the size and scale of the company, the growth totals this quarter (30% revenue, 27% billings, and 33% product) were quite a feat. That's a tribute to the company's platform and the company being the best-in-class provider in a constantly evolving, high demand industry.
CEO Nikesh Arora has only been with the firm for about nine months, and those who doubted his strategy have been on the wrong side of the trade. We've profiled this name several times, addressing the importance of why we were sticking with this stock during the fourth quarter of 2019 bear market (which we broke down in our February members-only conference call here), and the results tonight back up our thesis in this leading cyber-security provider. It's taken some time, but what a magnificent run and what a reward for patience, discipline, and conviction.