Sales Reorg Progress at Palo Alto Networks

The stock has rebounded 38% from the April low

The strong Palo Alto Networks (PANW, $149.21) earnings report released in late August moved the stock out of the doghouse. Shares of the security solutions vendor rose 10% in one session after the company said a solid demand environment powered the above-consensus results for fiscal Q4 (July).


Palo Alto is a core holding in the Tech-Stock Prospector Vulture Portfolio, added in June 2013, when the stock was trading at $39.42.


A number of large institutional investors had turned cautious on Palo Alto after the company’s FQ2 revenue miss earlier this year, but signs of improvement in FQ3 brought some encouragement to the bulls.

In the July quarter, Palo Alto started to show real signs of positive business momentum, with record new customer additions (of roughly 3,000) and robust expansion sales to existing accounts. Management said the sales reorganization is now in the bottom of the fifth.

Revenue in FQ4 rose 27% to $509.1 million, topping the consensus estimate by 4.5% (after a 4.8% beat in the previous quarter). Recurring services revenue (58% of total revenue) advanced 42%, driven by healthy subscription revenue growth of 46%. Product revenue of $212.3 million rose 11%, acceleration from growth of just 1% in FQ3. Billings also showed upside, rising 17% to $670.8 million, acceleration from 12% growth in the previous quarter.

Solid underlying FQ4 metrics helped fortify the bullish case for Palo Alto. First off, price discounting was down both sequentially and year over year, indicating a less hostile competitive environment. The company’s performance was solid across all geographies, even in the EMEA region (revenue up 28%), where some other security companies have struggled a bit recently. Growth in the important Americas region accelerated to 27% from 22% in the previous quarter.

In the latest quarter, Palo Alto added a record number of lucrative Global 2000 accounts, a good sign when it comes to building enterprise market share versus key competitors (mainly Cisco Systems and Check Point Software). Palo Alto continues to score prime competitive displacements, including an eight-figure Cisco replacement deal in FQ4 at one of the world’s largest pharmaceuticals companies that included multiple add-on subscription services.

Palo Alto now has a customer base totaling more than 42,500, including 1,250+ Global 2000 accounts. Once again, all of the company’s top 25 lifetime value customers were buyers in the latest quarter, a sign of increased wallet share where it really counts. To make that top 25 list, customers need to have spent $21.9 million in lifetime value (up 56% from the year-ago level), representing a multiple of nearly 100x their initial purchase, up from a 50x multiple a year ago.

On the product front, Palo Alto’s WildFire service, aimed at protecting organizations from highly evasive zero-day exploits and malware, continues to perform well, adding 2,000 accounts in FQ4, bringing the customer total to 19,000+ (+50% year over year).

The newer TRAPS endpoint protection solution (on the market for three years) is still gaining traction with customers and the partner community. TRAPS, now at 1,400 accounts (up 40% sequentially), has plenty of upside potential, as the penetration rate across the entire customer base is just 3%.

The brand new GlobalProtect cloud-based service holds plenty of promise because it extends protection to mobile workforces located in customer branch offices and remote locations. With the rise in enterprise mobility, users and applications are increasingly shifting to locations outside the traditional network perimeter, where maintaining visibility into traffic is a major challenge. GlobalProtect helps secure the endpoint regardless of the location.

For fiscal 2018 (July), Palo Alto looks to be on firmer footing thanks to a stable demand environment coupled with improved sales execution. The company offered initial revenue guidance for the year of $2.125 billion to $2.165 billion, with the midpoint of $2.145 billion (representing growth of 19%, vs. 28% top-line growth in FY’17) coming in slightly above the consensus. EPS guidance of $3.24 to $3.34 compared favorably to the consensus at the time of $3.27.

Feeling better about Palo Alto’s overall outlook, institutional investors are starting to recommit to the stock, with T. Rowe Price (reversing course from Q1) boosting its position in Q2 by 159%. American Century, the #1 buyer in Q2, picked up 1.46 million shares and now owns 1.74 million shares. Other big Q2 buyers: Northern Trust, Citadel Advisors and Two Sigma.