Palo Alto: Down, But Not Out

Palo Alto Networks Inc PANW reported disappointing results and guidance.

RBC Capital’s Matthew Hedberg said in a note he wasn’t “throwing in the towel at these levels as we have confidence in our new estimates and believe management, which we still have a high degree of respect for, can fix the go-to-market issues and deliver above peer growth.”

The analyst maintained an Outperform rating on the company, while lowering the price target from $170 to $140, on expectations that the stock would remain range bound in the near term.

The Problems

Palo Alto reported weak results for the quarter, with the revenue and billings missing expectations, driven by year-on-year product revenue decline.

“Management cited go-to-market execution issues due to lower sales rep productivity and slower pipeline conversion,” Hedberg mentioned.

The analyst pointed out the company had historically split territories and relied on productivity gains to drive growth. However, at this point in its maturity, management believes  the sales strategy has become “overly complicated” with more territory splits than can be “tolerated.”

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The Steps Being Taken

To address the problem, Palo Alto is reorganizing its account coverage model to ensure better accountability, while re-calibrating S&M spend to support the sales model more effectively.

Management also lowered its second half 2017 guidance to better reflect near-term disruption. The company now expects growth of 25 percent for FY2017, as compared to the earlier guidance of 30-31 percent, while stating that it could take two quarters for the benefits to be realized.

For FY2018, Palo Alto expects growth of at least 25 percent, although the analyst estimates that growth for FY2018 would stand at 20 percent, based on 5 percent license growth and 0 percent comp.