Infoblox's Refresh Stronger Than Expected

• Infoblox Inc BLOX shares have been on a downward trajectory after touching a high of $27.94 on June 23.
• Morgan Stanley analyst James E Faucette maintained an Equal-Weight rating on the company, with a price target of $19.
• Although the company is reaping the benefits of its product refresh, increased investments are expected to limit operating leverage in FY16, Faucette said.

Infoblox reported better-than-expected FQ4 results, with revenues and EPS at $87 million and $0.12, respectively. Analyst James Faucette attributed the outperformance to the benefits derived from the company’s ongoing -A refresh cycle.

In the report Morgan Stanley noted, “We believe the biggest chunk of the refresh is likely complete and while we expect strong Y/Y product growth, we are now modeling for a Q/Q drop in product revenue.”

Faucette pointed out that Infoblox needs to develop additional products and pipeline in the post refresh period in order to achieve its 20 percent plus revenue growth target. The company also needs to expand its salesforce once the refresh is complete by the end of the current calendar year.

Although the company’s revenues are expected to continue to rise, driven by the strength of the refresh cycle and the consequent increase in service revenues, continued investment in R&D and S&M is likely to limit operating leverage.

Terming the company’s intent to invest in FY16 and forego operating leverage as the “right move,” Faucette added, “Continued acceleration in sales utilization beyond the refresh opportunity, increased op leverage and more traction with security products beyond the DNS Firewall could turn us more positive on the name.”