Palo Alto's Poor Marketing Execution Will Take At Least A Few Quarters To Resolve

Following the disappointing second-quarter 2017 results reported by Palo Alto Networks Inc PANW, while meaningfully cutting the Q3 and full-year guidance on February 28, the stock declined 24 percent on March 1.

Argus’ Joseph Bonner downgraded the rating on the company from Buy to Hold.

Disappointing Results

Palo Alto Networks reported EPS growth of 47 percent on revenue growth of 26 percent for Q2 2017, missing the low end of the revenue guidance as well as the consensus expectations.

“Management attributed the weak performance to poor marketing execution, and if this is indeed the cause, we believe that it will take at least a few quarters to resolve,” the analyst stated.

Bonner believes if the weakness is a reflection of increased competition, growth issues are likely to persist for the company.

The analyst prefers to remain on the sidelines till management is able to demonstrate that its turnaround efforts are gaining traction.

In addition, Bonner believes that Palo Alto Networks could become an acquisition target for a larger tech firm, especially given the decline in the stock valuation.

Related Link: Palo Alto Networks Completes Acquisition of LightCyber

Poor Marketing Execution

Management explained that the weak performance was due to the company being “overly aggressive” in splitting sales territories as the business grew.

“This changed the coverage model for many customer relationships and resulted in lower sales productivity, slower pipeline conversion, and less accurate forecasting,” the analyst explained.

Palo Alto Networks is now implementing initiatives to reorganize its account coverage model in order to ensure greater accountability. The company is also in the process of recalibrating its investments in sales and marketing resources.

“Of course, these moves will further disrupt the company’s sales efforts, resulting in the lowered guidance,” Bonner noted.

The EPS estimates for FY 2017 and 18 have been lowered from $2.79 to $2.46 and from $3.62 to $2.98, respectively.