Palo Alto Networks Shares Dive on Q4 Forecast

The cybersecurity firm's third-quarter sales were up 48% but analysts say its days of remarkable growth may be over.
Matthew HellerMay 30, 2016

Palo Alto Networks’ third-quarter sales beat analysts’ estimates but the cybersecurity firm’s shares took a big hit Friday on a weaker-than-expected forecast for the current quarter.

For the quarter ended April 30, Palo Alto reported $345.8 million in sales and 42 cents earnings per share excluding items, up 48% and 83%, respectively, from a year earlier. Sales topped the consensus analysts’ estimates $339.5 million, while earnings were in line with expectations.

The company exceeded its guidance for the eighth consecutive quarter. “We continue to balance growth and profitability and once again delivered record revenue, billings and cash flow,” CFO Steffan Tomlinson said in a news release.

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But Palo Alto’s forward guidance gave Wall Street cause for concern. Its shares fell 18.3% on Friday, closing at $129.86.

For the fourth quarter, Palo Alto forecast $386 million to $390 million in sales and 48 to 50 cents in earnings per share. At the midpoints, the outlook missed the consensus model for $389.3 million and 50 cents.

In an earnings call, Tomlinson explained that while Palo Alto continues to enjoy “robust pipeline coverage and strong demand,” its guidance takes into account the current volatile macro economic environment.

According to Reuters, analysts “expect the company to continue to gain market share from traditional security service providers as Palo Alto shifts to more lucrative subscription-based services and customers move to newer cloud platforms.”

But the days of remarkable growth may be over. The third quarter was Palo Alto’s first in eight that sales haven’t grown by at least 50%.

“Palo Alto has been growing at multiples of the industry,” Pacific Crest analyst Rob Owens told Investor’s Business Daily. “But 50%-60% growth is unsustainable … Palo Alto will continue to perform well but it can’t continue to grow at four times the industry.”

CEO Mark McLaughlin said the third-quarter results “continue to underscore the market demand for our unique Next-Generation Security Platform as more than 31,000 new and existing customers are working with Palo Alto Networks to solve their most difficult security needs.”

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