Why Palo Alto Networks' earnings report missed the mark once again

By Emily Bary

There was hope Palo Alto Networks might get back into a beat-and-raise pattern, but that didn't happen

After Palo Alto Networks Inc. dramatically cut its full-year outlook three months back, some were hopeful that the cybersecurity company was just clearing the decks.

But shares of Palo Alto Networks (PANW) are falling more than 6% Tuesday morning in the wake of earnings, after the company's latest forecast failed to wow investors.

See more: Palo Alto Networks' stock falls after earnings as forecast fails to impress

"Apparently, our assumption that management had reset expectations after last quarter in order to return to a beat-and-raise cadence was incorrect," Guggenheim analyst John DiFucci wrote.

He noted that Palo Alto Networks came in "well below buy-side expectations" with its latest results, even as it met or slightly exceeded sell-side estimates.

Guidance for the fiscal fourth quarter "was in line with the Street, which looks reasonable, but after F3Q results, it can't help but be called into question, and next year's consensus estimates could be at risk," DiFucci wrote.

He maintained a neutral rating on the stock.

Opinion: Palo Alto Networks continues to play the long game, much to Wall Street's chagrin

Rob Owens of Piper Sandler took a similar view.

"Following last quarter's controversial platformization discussion and lowering of expectations, an in-line result was not what many were looking for," he wrote.

Palo Alto Networks flagged some signs of traction with the "platformization" approach, which refers to the company's attempt to get customers to adopt a broader suite of its offerings in part by giving away some for free at the outset in a bid to drive paying contracts down the road. Owens highlighted that platformization deals were up 40% on a quarter-over-quarter basis.

Still, he said he was staying "cautious as risks surrounding the aggressive [go-to-market] strategy shift remain, driving elevated uncertainty in the story over the near-term and creating a balanced risk/reward tradeoff at current levels."

Owens has a neutral rating and $300 target price on Palo Alto Networks shares.

Evercore ISI's Peter Levine wrote that "seeing billings remain under pressure with a slight miss vs. consensus will be difficult for some to accept." That billings performance doesn't relate to the platformization shift, but rather to "a greater volume of large deals opting for deferred payments terms," he said.

"The feedback we're receiving post-print is primarily frustration that [management] didn't fully reset the bar, along with concerns on how de-risked the (+9.3%) billings guide is" for the fiscal fourth quarter.

He kept his outperform rating on the stock, however, writing that "our thesis on the defensibility of cyber is not changing and our [long-term] view on PANW remaining the dominant the cyber vendor still holds."

Levine has a $385 target price on the stock.

William Blair analyst Jonathan Ho also maintained a bullish view.

"We believe investors should focus more on RPO," or remaining performance obligations, "which should translate in future periods to stronger billings growth and provide a more accurate indicator of forward performance," he said, while sticking with his outperform rating.

-Emily Bary

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05-21-24 0940ET

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