Palo Alto Networks (PANW) Guidance Overly Conservative - Baird

Baird analyst, Jayson Noland, thinks Palo Alto Networks (NYSE: PANW) guidance will prove to be conservative considering the 62% billings growth. No change to Outperform rating.

Revenue/non-GAAP EPS of $335 million/$0.40 came in above the consensus estimate of $318 million/$0.39. Billings of $459 million exceeded the Street’s expectation of $419 million and was up an impressive 62% YoY. Palo Alto ended the quarter with 30,000 customers, an increase of 2,000 from the prior quarter.

SaaS subscription revenue of $84.3 million for the quarter was up 60% YoY. According to management, the strength of its subscription modules was underscored by growth in deferred revenue to approximately $929 million.

Management sees revenue/non-GAAP EPS in the range of $335-$339 million/$0.41-$0.42 versus consensus of $335 million/$0.45. The company also expects FCF margin of approximately 40% in both FQ3 and FQ4 which is well above consensus estimates.

Based on outperformance in subscription services, the company now expects slightly lower operating margins of 18-19% exiting FQ4. According to management, subscription commissions are paid at 100% of billings on ratable revenue, resulting in lower operating margins. In their opinion, this near-term headwind to earnings is more than outweighed by the long-term benefits to visibility and free cash flow.

Management noted that, despite competitors’ concerns on the macro environment, security remains a top priority for Palo Alto’s customers. The company also highlighted that its pipeline is at an all-time high.

The $180 price target is based on 10x EV/C16E revenue or 23x F17E EV/FCF.

For an analyst ratings summary and ratings history on Palo Alto Networks click here. For more ratings news on Palo Alto Networks click here.

Shares of Palo Alto Networks closed at $140.29 yesterday.

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