Inside Palo Alto's 'Recovery Quarter'

Q3 Review

Analyst Bill Choi said the results showed signs of stabilization in sales cycles and improved predictability of business amid the ongoing sales force reorganization. The analyst noted that Palo Alto reported third-quarter revenues of $431.8 million and earnings per share of $0.61, ahead of his estimates.

Among other metrics:

• Product sales: Up 1.3 percent, exceeding the analyst's estimate.
• Subscription: Up 55 percent to $143 million.
• Number of new customers added: 2,000.
• Billings: Up 12 percent to $544.1 million.
• Average duration of new subscription and support contracts: three years.

Among the sore points, the analyst noted that the company experienced gross margin pressure from new hardware launch and free cash flow of $163 million was impacted by BS items unfavorably.

Sales Force Reorganization Helping

Wunderlich noted that the sales force reorganization helped in improving sales productivity. Sales cycles, through extended, remained stable, the firm added. Given the increased focus and account coverage shift from inside to field sales, the firm said predictability of deal closure also improved.

"PANW is off to a good start on recovering its footing, although competitive concerns may linger," the firm opined.

Raising FY 2017 Estimates

The firm noted that the company guided fourth-quarter revenues to $481 million to $491 million and earnings per share to $0.78–$0.80. This compares to the consensus estimates, which call for revenues of $485.2 million and earnings per share of $0.74.

The firm expects a 100-basis-point improvement in organic margin in 2017. Assuming billings growth of 18.5 percent to $2.26 billion, the firm raised its 2017 revenue estimate to $1.74 billion from $1.72 billion and earnings per share estimate to $2.59 from $2.48.

Based on an analysis of the historical refresh patterns and applying to the current customer base, the firm sees favorable refresh potential in 2017 and 2018. However, the firm cautioned that refresh could be delayed or footprint expansion may not follow historical patterns.

Trading At A Discount

On valuation, the firm said, "While the stock looks attractive on a FCF basis, investors are concerned about lengthy duration for new subscriptions and support contracts (3 years) and PANW may continue to trade at a discount to the group."

Wunderlich maintains its Hold rating and $150 price target on the shares of Palo Alto.

At the time of writing, Palo Alto shares were soaring 15.52 percent to $137.