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Shares of Palo Alto Networks Inc. slid on Thursday after the company a day earlier lowered its full-year outlook for billings, a key measurement of demand.
But despite a downgrade from one analyst, many others over the past day said the despair from investors was unfounded, and echoed commentary from the company that demand was still strong, amid what executives called an “unprecedented level” of data breaches.
Palo Alto Networks
PANW,
on Wednesday trimmed its full-year outlook for billings — a metric that factors in subscription and support revenue — to a range of $10.7 billion to $10.8 billion from a prior outlook for $10.9 billion to $11 billion.
Executives said the change was due to customer demands for more flexibility in how they pay for Palo Alto’s security services — via discounts, deferments and shorter-length deals — as businesses grapple with higher interest rates and an uncertain economic backdrop that has crimped tech spending for more than a year.
Even as shares fell 6.3% on Thursday, however, at least two analysts called the outlook and sell-off “noise.”
Wedbush analysts on Thursday said they were trying to look past “the billings noise.” And they said demand remained “rock solid.”
“Billings overreaction not to be mistaken for the road forward,” Wedbush analyst Daniel Ives said in a research note Thursday. “The Street naturally was hyper-focused on the billings number seen this quarter, which we believe was a slight overreaction from the Street when looking into Palo Alto’s overall business.”
“Similar to our checks,” he continued, “the company is seeing strong demand in the market, however is guiding to a more conservative billings number with customers asking for more deferred payment terms given the duration of deals.”
Analysts at Stifel, the other firm that saw more “noise” in Palo Alto’s results, said it wasn’t surprising to see shorter billings, adding the trend was consistent with industry peers Fortinet Inc.
FTNT,
and Check Point Software
CHKP,
“We largely view this as noise,” they said, “and more broadly retain our bullish stance on Palo’s strong positioning and growing cybersecurity platform opportunity, and believe Palo has a number of drivers to sustain at least high-teens top-line growth and operating margin / (free cash flow) expansion in coming years.”
Similarly, Wells Fargo said the focus on billings trends “takes away from all the positives.” And Evercore analysts called Palo Alto’s outlook “merely a macro-level distraction.”
Still, BofA Securities analysts downgraded shares of Palo Alto Networks to neutral, despite what they said was a “healthy” quarter. They said shorter deals sought by Palo Alto’s customers were “likely not a one-time phenomenon,” after financing fattened Palo Alto’s billings in recent quarters.
“Palo Alto’s vendor financing activity has increased over the last few quarters, providing financing in exchange for long-term deals and greater deal sizes, which resulted in large billings balances,” BofA analyst Tal Liani said.
“As this financing activity gained momentum and as macroeconomic conditions weakened, the risk to Palo Alto increased, with customers demanding greater discounts in exchange for three-year deals,” he said.
Shares of Palo Alto Networks are up 74.6% so far this year. By comparison, the S&P 500 index
SPX
is up 17.7% over that period.
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