Palo Alto Networks (PANW) - Get Report delivered an all-around beat in fiscal first quarter 2020, but investors turned their noses up at it. That was likely due to a combination of softer-than-expected second quarter guidance and product revenue growth that failed to impress.
As a result, the stock has shed most of the gains accumulated since the company's analyst day event in September, and now trades once again at September 2018 price levels.
Mixed Results, Same Full-Year Outlook
On the surface, nothing seemed wrong with Palo Alto Networks' fiscal first quarter performance. Revenues of $771.9 million topped consensus estimates by a narrow margin, while adjusted EPS of $1.05 also inched above expectations.
Adjusted op margin contracted substantially year-over-year to 15.8%. However, investors were probably not caught by surprise, as the cyber-security company continues to spend lavishly on acquisition integration, platform development and sales resources to support growth. Total billings were up 19%, in line with the guidance range for the full year and supported in large part by Palo Alto Networks' new offerings in cloud solutions (Prisma) and artificial intelligence applications (Cortex).
The problem came in the product revenue line, which saw a highly atypical drop of nearly 4% year-over-year. The firewall sales pipeline seems to have suffered as Palo Alto Networks pushed harder for results in next-gen cloud security and automation, AI and machine learning solutions. To illustrate the point, 40% and 25% of the company's core sales force sold Cortex and Prisma services, respectively, in the quarter, naturally diverting resources away from other products.
Yet, the management team expressed confidence in the earnings call that the company can "get the team to balance their focus both on Cortex, Prisma, as well as firewall" going forward. As a result, the target of 23% annual revenue growth in firewall as a platform through the next three years remained unchanged, despite the fiscal first quarter hiccup.
Looking Past the Quarter
Palo Alto Networks, under relatively new leadership, is a company in transition. As it moves from an integration and automation vendor to a more diversified cloud and IoT security provider, it is to be expected that not all moving pieces within the product and service portfolio will evolve at the same pace.
Firewall as a platform has been a disappointment in the fiscal first quarter. But the same can not be said of other SaaS and support services, accounting for 70% of total revenues, which combined grew at a respectable 30% pace. Meanwhile, the leadership team continues to be reshaped, with key sales managers assuming new roles as needed to address the weak spots.
Given the fluidity of Palo Alto Networks' business model transformation, the quarter-to-quarter noise can easily distract investors from the company's longer-term goals. In this regard, the security provider remains on track to achieve all of its fiscal 2020 targets, excluding the newly-announced acquisition of Aporeto that should drive up integration costs modestly, as well as its 2022 aspirations.
Despite the lack of meaningful changes in the full-year outlook, Palo Alto Networks stock, down almost 12% in post-earnings action, now trades at a significantly lower valuation multiple than it did in the past few weeks. While current-year P/E of 43x may still seem too aggressive to many investors, shares are valued at a slight discount to key peers Cisco (CSCO) - Get Report , Fortinet (FTNT) - Get Report and Check Point (CHKP) - Get Report , let alone the much more richly-valued Zscaler (ZS) - Get Report , once long-term EPS growth expectations are taken into account.
Because of the stock price pullback coupled with business fundamentals that continue to look solid, Palo Alto Networks seems like a buy on short-term weakness.
The author has a long position in CSCO.