Citi Lowers Palo Alto's Price Target To $140

Although Palo Alto Networks Inc PANW reported its Q4 revenue ahead of expectations and the underlying metrics appear solid, the guidance reflects a product revenue slowdown, Citi’s Walter H Pritchard said in a report. He maintained a Neutral rating on the company, while reducing the price target from $145 to $140.

Palo Alto reported its revenue at $401 million, beating the Citi estimate of $392 million and the Street expectation of $390 million. Total billings came in at $572 million, ahead of the Citi estimate of $526 million and the Street expectation of $563 million. Analyst Pritchard pointed out, however, that the beat was “largely driven by longer duration.”

Underlying Metrics

At 2,000, customer adds were healthy, add-on service attach continued to increase and renewal rates remained the same. “There was qualitative progress on non-appliance businesses (VM-series, TRAPs, AutoFocus, Aperture), although these remain small and not significant drivers,” Pritchard wrote.

Guidance Woes

Management guided to October quarter and FY17 revenue below Street expectations, reflecting a product slowdown, which can be attributed to “normalization of industry growth rates and law of large numbers,” the analyst commented.

The EPS guidance of $2.75-$2.80 includes a $0.25 benefit from deferring sales commissions, excluding which the range falls to $2.50-$2.55, missing the Street’s expectation of $2.65. “Troubling to some may be that (ex. accounting change) leverage in business is at low-end of long-term rate, despite mix shift to more profitable subscription business,” Pritchard stated.

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