Palo Alto Networks (NYSE:PANW) started the first quarter of financial-year 2017 by missing revenue and billings estimates of the Street even though it did come out tops on earnings. The company reiterated its guidance for a bottoming by 2Q FY17, but this is still uncertain at this point. At the time of writing, the market has reacted negatively to PANW's results, with shares down over 12% at the open. Despite the lower-than-expected results, I think there are bright spots in the recent announcement, which should cap the downside in the midterm. That said, in the near term, I expect the analyst downgrades for full-year FY17 to continue driving PANW lower. I am currently sitting on the sidelines.
Results Miss Expectations
PANW reported 1Q FY17 results that missed Street estimates. For 1Q FY17, revenue grew 34% on a y-y basis, missing top-line estimates marginally. Billings also came in lower, at $517 million, which also missed the consensus estimate of $525 million. The company attributed this to enterprise deal delays, which saw revenue coming in lower than expectations.
I think the market will see the deceleration as a sign of a more competitive firewall space and persistent slowing demand that will threaten to undermine PANW's full-year FY17 forecast. I expect the Street to start cutting revenue expectations for FY17 in the next few weeks.
That said, there were two bright spots in the results announcement in my view. Total deferred revenue came in at $1.4 billion, which is a 69% increase on a y-y basis. This is driven by the strong adoption rates and renewals, signaling customers' confidence in its products. The second bright spot is a 150 basis point (bps) increase in gross margins to 79.4%. Management attributed this to a change in product mix and renewals, though I suspect the latter played a bigger role.
I am a little torn on the call for PANW. Despite a general slowdown in the broader network firewall space, PANW still managed to generate over 30% top-line growth. Regular followers of the cybersecurity space will also recall how I had argued that what is more important for most companies in this space now is the growth in new customers and continued recurring revenue as both are testament to the superiority of their products. During the quarter, management successfully added over 1,500 new customers and saw renewals from its top 25 lifetime value customers.
That said, I see the Street slashing earnings estimates for FY17 and FY18 in the next few weeks, which means I will be on the sidelines for the time being, but will look to take a position on any dip.
Disclosure: I am/we are long CYBR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.