Palo Alto 'Ripped Off The Band-Aid' For The Next Generation Security Platform

Palo Alto Networks Inc’s PANW Q4 results highlighted that growth outpacing the broader security market, new nonattached subscriptions gaining traction and FCF growth continuing to be strong, Moran Stanley’s Keith Weiss said in a report. He maintained an Overweight rating on the company, with a price target of $185.

Evolution Towards Platform

Palo Alto’s security business grew billings at 45 percent y/y in Q4, with FCF margins above 40 percent. Analyst Weiss mentioned that the growth was driven by:

1. Expansion of the customer base, with the business adding more than 2,000 customers in the quarter
2. Rising adoption of subscriptions attached to the next gen firewall, at 2.6 per appliance, up from 2.2 last year
3. Solid traction in non-attached subscriptions, with its Endpoint Security solution TRAPs rising from 300 customers in FQ2 to 500 in FQ4

Related Link: Goldman Sachs Still Bullish On Palo Alto

Addressing Concerns

Weiss commented that investors are likely to focus on the company’s product growth projection of 12-13 percent for FY17, which is significantly short of the MS estimate of 22 percent y/y. “Bears will likely interpret this outlook as a leading indicator of a business quickly maturing.”

The analyst pointed out, however, that with Palo Alto had guided to full-year revenue in-line with consensus, and this guidance appears to be “an expression of management's confidence in the traction of the broader platform story and a rebasing of product revenue expectations to very achievable levels.”

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