Take the ‘Weak’ Guidance from Palo Alto Networks Inc With a Grain of Salt

PANW earnings - Take the ‘Weak’ Guidance from Palo Alto Networks Inc With a Grain of Salt

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Surprise! Palo Alto Networks Inc (NYSE:PANW) shareholders who were prepping for a post-close earnings report from the cybersecurity outfit were thrown something of a curveball on Monday. Breaking from tradition, the company dished out its fiscal Q3 numbers on Monday morning instead.

The accelerated timeframe doesn’t change the numbers, of course, nor does it change the company’s forward-looking guidance… unfortunately. Palo Alto is still the biggest and arguably the best name in the firewall and digital security business — and it saw tremendous progress for the recently completed quarter. But the quarter underway may not be as thrilling as some investors were hoping.

PANW Earnings Recap

For the quarter ending in April, Palo Alto Networks earned an operating profit of 99 cents per share on revenue of $567.1 million. Both were well up from year-ago levels, when the company turned $431.8 million in sales into a profit of 61 cents per share of PANW stock. Both also topped analyst outlooks of 96 cents per share on revenue of $545.7 million.

Billings were up 33% to $721.0 million during the company’s third fiscal quarter, and deferred revenue ramped up 34% to $2.2 billion.

Outgoing CEO Mark McLaughlin commented of the Q3 numbers, “We delivered strong fiscal third quarter results with record revenue, deferred revenue and billings, while continuing to capture market share at rates that far outpace the competition.” CFO Kathy Bonanno echoed the observation, saying “We drove market-leading top-line results through robust new customer acquisition and lifetime value expansion in the third quarter,” adding “We also delivered continued leverage in our operating model and generated strong cash flow, ending the quarter with cash, cash equivalents and investments of $2.2 billion.”

She’s right, though with a significant footnote. That is, the PANW earnings report isn’t quite as solid as it may seem on the surface. After factoring in stock-based compensation, property purchases and the expenses related to a relocation of the organization’s headquarters, Palo Alto Networks logged yet another GAAP loss. This one to the tune of $46.7 million.

The GAAP losses are still shrinking, however.

Changing of the Guard

McLaughlin wasn’t wrong to suggest Palo Alto was winning market share. Although rivals like FireEye Inc (NASDAQ:FEYE) and Check Point Software Technologies Ltd. (NASDAQ:CHKP) are doing well in their own right by riding the rising tide of the overall cybersecurity market, Palo Alto’s sheer size gives it an edge over its competition.

And, the market seemed to know this well before the PANW earnings report was posted Monday morning. Shares were up more than 50% for the past year, with the last piece of the rally coming late last week in the wake of a raised price target from Stifel Nicolaus. Analyst Gur Talpaz deemed PANW stock worth $240 as of Wednesday — tied for the highest target among the professional stock-pickers — explaining “While the majority of our checks pointed to strength, we garner the most comfort from our checks into the company’s supply chain, where we again saw Palo Alto slow down shipments into the end of the quarter, a clear indication in our view of ‘cushion building’ for F4Q18.”

The stock could still get there, though it’s not going to do it immediately, and it’s not going to do it with McLaughlin at the helm. Shares were down almost 4% on Monday morning — largely in response to the company’s disappointing Q4 outlook — as Alphabet Inc (NASDAQ:GOOGL) and SoftBank Group Corp. (OTCMKTS:SFTBY) executive Nikesh Arora prepares to take the top spot with the organization.

Looking Ahead for Palo Alto Networks

Palo Alto Networks said it was modeling for revenue of $625 million and $635 million for the fourth fiscal quarter currently underway. That should be enough to yield between $1.15 and $1.17 per share. Analysts had been, on average, expecting a profit of $1.21 per share, but were also only looking for a top line of $618.1 million.

Given those numbers, the company is now expecting to report full-year revenue of between $2.24 and $2.25 billion, versus the analyst consensus of $2.21 billion, up 25.6% from last year’s $1.76 billion. Profit-wise, fiscal 2017’s bottom line of $2.71 was expected to grow to $3.89, while the company is modeling PANW earnings of between $3.86 and $3.89 per share.

While respectable, the stock’s mostly-unbridled strength for the past year implies investors were looking for growth.

Of course, the company’s topped estimates in almost every quarter for the past four years. It’s unlikely it wouldn’t continue doing so in the foreseeable future, possibly suggesting Palo Alto is lowballing to ensure a nice earnings beat three months from now.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

Article printed from InvestorPlace Media, https://investorplace.com/2018/06/weak-guidance-palo-alto-grain-salt/.

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