Palo Alto Networks Looks to Beat Wall Street Expectations for 14th Straight Quarter

When Palo Alto Networks (PANW) reports results for the first quarter of fiscal 2017 after Monday's closing bell, investors will watch for the security platform provider to indicate that demand for its offerings is growing.

Analysts surveyed by FactSet expect the Santa Clara, Calif.-based company to report adjusted earnings of 52 cents a share on revenue of $400.3 million. Product revenue is projected to be $166.9 million, while services revenue is forecast at $233.5 million. Wall Street is modeling billings of $525 million for the quarter.

In the first quarter last year, Palo Alto Networks earned 35 cents per share. Revenue was $297.2 million, with $147.7 million from product sales and $149.5 million from services. Billings for the quarter were $388 million.

"We continue to believe that Palo Alto Networks' billings growth and free cash flow generation are the best indicators for the company's business, and estimate 34% year-over-year growth in total billings in the fiscal 2017 first quarter with about 40% free cash flow margins (on billings)," Evercore's Ken Talanian, Kirk Materne and Fenn Hoffman said in a Nov. 17 note. "We continue to believe that there is significant upside in the stock, should the company continue to show strong year-over-year billings growth with 40%+ free cash flow margins."

While investors have shown concern about slowing product revenue growth, the analysts noted that Palo Alto Networks' ratable services revenue is still growing rapidly. Evercore, which maintained a "buy" rating and $215 price target on Palo Alto, expects subscription revenue, part of services business, to climb 72.5 percent year-over-year in fiscal 2017.

Piper Jaffray analysts Andrew Nowinski and Andrew added that demand trends have improved since last quarter. "While there is definite pricing pressure across the broader security market, we did not pick up any indications that Palo Alto was getting aggressive on price or was pushing hard at the end of the quarter," Nowinski and Boyce noted.

Palo Alto Networks, which has beat Wall Street's expectations for thirteen consecutive quarters according to Piper, reset investors' expectations recently by estimating that full-year product revenue would increase only 12 percent to 13 percent year-over-year, verses 36.2 percent annual growth in fiscal 2016, the analysts said. Due to these changes, the analysts said that "the setup heading into the earnings is the best it has been in 12 months," as they raised their price target on the stock to $184 from $170 and reiterated an "overweight" rating.

"We believe trends are becoming more predictable-compared to prior quarters-and Palo Alto Networks' fiscal 2017 first quarter set up is attractive," Oppenheimer analysts Shaul Eyal and Tanner Hoban said in a Nov. 17 note. The firm has an "outperform" rating and $184 price target on the stock.

Oppenheimer said that they remain confident in both the company's "consistent product execution" and momentum for its subscription offerings, as industry trends like the shift toward subscription-based solutions are now better understood.

Evercore, meanwhile, said that the set up for this quarter is "reasonable."

Wells Fargo's Gray Powell said he is looking for Palo Alto Networks to give positive commentary on its VM Series firewall products and Traps endpoint solutions on Monday, as demand for those offerings "continue[s] to improve."

The analyst expects solid first-quarter results due to a "fairly consistent demand environment" and "modest improvement from resellers."

In the future, Palo Alto Networks will face its most difficult year-over-year comparison in January 2017. In the same period in 2016, the company's product revenue and billings growth both peaked at 47 percent and 62 percent, respectively, Powell said in a note on Nov. 18 adding that comparisons should be easier going forward.

Powell has an "outperform" rating on Palo Alto Networks stock.

Deutsche Bank analyst Karl Keirstead, however, is bearish on demand in the segment. After completing security reseller checks, Keirstead said in a note on Nov. 17 that Wall Street's sentiment toward the market is "stabilizing after 3-4 quarters of deceleration," as investors consider whether an increase in government security spending could boost security companies.

"At the risk of over-staying our welcome with our more cautious call, we still don't see enough evidence of a demand recovery to switch to a more bullish view of the group," Keirstead noted. He has a "hold" rating and $150 price target on the shares.

Palo Alto Networks stock slipped about 1 percent to $160.34 midday Monday. Shares are down approximately 10 percent year-to-date.

In other cybersecurity news, security provider Optiv filed for an initial public offering of up to $100 million in common stock on Friday.

The company, which is backed by Blackstone Group LP (BX) , Bahrain-based asset manager Investcorp and Sverica Capital Management LLC, plans to be listed on the New York Stock Exchange under the ticker "OPTV," and will use the proceeds from the offering to repay some of its debt.

Morgan Stanley (MS) and Goldman, Sachs & Co. (GS) are lead underwriters. A host of other banks are also involved in the underwriting including: Barclays, Citigroup, Raymond James, William Blair, Evercore, Guggenheim Securities and PJT Partners.

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