This Week’s Earnings Review

Earnings season continued in full force yesterday, Monday, May 20th, with the latest quarterly results of three key companies hitting the markets. Palo Alto, Li Auto, and Zoom all provided the markets with plenty of information to chew on, so let’s dive right in:

Palo Alto Beats Forecasts

On May 20th, Palo Alto Networks (PANW) revealed its fiscal Q3 results to the public. The report turned out to slightly exceed Wall Street expectations despite lowered forecasts and a slowdown in its core network firewall market. The company’s profit and revenue guidance aligned with consensus estimates.

While as of the time of writing stateside trading has not yet begun, this earnings beat could have a say in whether Palo Alto shares continue the nearly 9.9% climb they’ve been on so far in 2024.

For the quarter ending April 30th, Palo Alto reported a 20% increase in adjusted earnings to $1.32 per share, with revenue rising 15% to $2 billion, including contributions from acquisitions. Analysts had anticipated earnings of $1.25 per share on $1.97 billion in revenue.

Looking ahead to the current quarter ending in July, Palo Alto forecasted earnings of $1.41 per share, in line with expectations. The company also projected revenue of $2.16 billion at the midpoint of its guidance, matching analyst estimates. Additionally, it predicted billings of $3.55 billion, slightly above the anticipated $3.45 billion.

Sales of firewall network appliances have slowed, but Palo Alto has expanded its offerings through acquisitions, building a broad cloud-based security platform. Revenue from cloud software is becoming an increasingly significant part of the company’s overall sales.

Li Auto’s Gear Downshift

Chinese EV industry leader Li Auto (LI) released its Q1 2024 report on Monday, May 20th. Weaker-than-expected earnings and guidance following a lacklustre launch of its first fully-electric model may have been among the key takeaways for traders.

Li Auto's operating loss and a significant profit miss may have been due to increased spending on research and development and other operating expenses. Although revenue grew 36% year-over-year, it was down 39% from the previous quarter, reflecting the challenges in launching its first all-electric model.

Li Auto’s outlook could also be seen as concerning by keen market observers, with second-quarter delivery guidance set at 105,000-110,000 vehicles and projected revenue up to 31.4 billion yuan (US $4.34 billion). This forecast was better than Q2 2023’s figures, but fell short of how Li did in the fourth quarter of the same year. CFO Tie Li noted that the April-June period would be the company's most challenging quarter this year.

Some have pointed out that Li Auto would need average monthly sales of about 60,000 vehicles in the second half to meet its annual target, which could turn out to be a significant challenge.

Despite maintaining a gross margin above 20% in the first quarter, vehicle margins fell to 19.3% from 19.8% a year ago and 22.7% in the fourth quarter due to pricing strategy changes. The company indicated no immediate plans for further price cuts, though some market experts have been predicting additional reductions in the second half due to fierce competition in China’s EV market. So far in 2024, Li Auto shares have dropped by over 40%; how various market trends will affect this trajectory as we move further into the year is as yet unknown. (Source: The Wall Street Journal)

Zoom Powers Up

Joining the earnings release party yesterday, Zoom Video Communications (ZM) reported better-than-expected earnings and revenue for the first quarter, driven by strong enterprise sales growth. However, its revenue guidance for the next quarter slightly undershot Wall Street expectations, highlighting ongoing concerns about slowing growth.

Zoom reported adjusted earnings of $1.35 per share, a 16% increase from the previous year, and revenue of $1.14 billion, up 3.2%. Analysts had anticipated earnings of $1.19 per share on sales of $1.13 billion.

In the enterprise sector, revenue grew 5.3% to $665.7 million, surpassing the forecasted $659 million. Despite this, some analysts remain cautious, noting that Zoom's sales growth has declined for over to years amid the firm’s attempts to adapt to the post-COVID landscape. During the pandemic era, demand for Zoom's video conferencing software soared as knowledge workers the world over were forced to shift to remote work.

For the upcoming quarter, Zoom projects revenue between $1.145 billion and $1.15 billion, slightly below the $1.15 billion estimate. Zoom continues to evolve its cloud-based software, which facilitates video calls and includes chat tools, aiming to become a comprehensive communications platform for businesses. Whether this strategy will assist in competing with Microsoft’s (MSFT) rival platform and reversing Zoom’s over 10% slide in share price so far in 2024 is an open question. 

Conclusion

This latest batch of quarterly reports contained some surprises as well as a few indications of the difficulties these three firms’ respective industries may be facing in the current macroeconomic environment. However, it is too early to say how traders will react over the longer term to Monday’s results; market watchers and investors alike will have to wait and see.