Barclays Not Worried About Palo Alto's Guidance Miss

Palo Alto Networks Inc PANW reported its 3Q16 results, with 61 percent year-on-year billings growth, while issuing its Q4 guidance below consensus.

Barclays’ Saket Kalia maintained an Overweight rating on the company, with a price target of $184.

Kalia believes “the increasing mix of subscription speaks to our thesis that there are more subscription/maintenance contracts up for renewal, which we think supports $7/share in FCF in FY17 and $10+ in FY18.”

Results

The analyst mentioned that the billings growth for the quarter was driven by subscriptions and offset lower product billings due to seasonality.

The revenue and non-GAAP EPS for the quarter were mostly in-line with the consensus, with billings significantly beating expectations, at $486 million.

“Bears will point to the higher mix of long-term deferred, which we think is a phenomenon the whole industry has seen and excluding multi-year contracts would have still grown billings 51 percent y/y,” Kalia stated.

Guidance

The Q4 guidance was lower at its midpoints than the consensus forecasts, “giving more weight to longer sales cycle commentary,” as well as “pockets of weakness” in certain regions, such as Canada, Brazil, the Middle East and Australia.

The analyst believes this reflects more macro volatility rather than changes in competition.

Although Q4 is likely to see tough year-on-year compares, Kalia expects increasing seasonality to benefit Palo Alto during the quarter.