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Palo Alto Networks CEO: ‘We’re Taking Share From Everyone’

Investors heaved a collective sigh late Thursday, relieved that a slowdown in network security spending didn’t batter Palo Alto Networks ( PANW ), which delivered view-crushing fiscal Q2 earnings on its simplified platform approach. Midday on the stock market today , Palo Alto Networks stock was up 2%, near 143, after earlier rising as much as 9.7%. IBD’s 41-company Computer Software-Security industry group rose as much as 4% in early trading Friday. For its fiscal second quarter ended Jan. 31, Palo Alto reported 40 cents earnings per share ex items on $334.7 million in sales, up 110.5% and 54%, respectively, vs. the year-earlier quarter. Both metrics topped the consensus view for 39 cents and $318.3 million. Sales and EPS growth, however, decelerated for the second consecutive quarter. Billings Surge To Undercut EPS During Q2, Palo Alto reported record billings growth of 62% year over year to $459 million, vs. consensus expectation for $417 million, Needham analyst Scott Zeller wrote in a research report. Zeller maintained his buy rating but cut his price target on Palo Alto Networks stock to 171 from 202. Palo Alto Networks isn’t a “fad” in security, but the company will likely face some challenges in continuing billings acceleration, he wrote. Billings accelerated on 2,000 added customers and a 68% jump in subscription sales to $84.3 million. But Palo Alto Networks is a “victim of its own success,” Pacific Crest analyst Rob Owens wrote in a report. Palo Alto Networks cut its fiscal 2016 operating margin guidance to 18%-19% vs. earlier views for 22%-25%, noting commissions on subscription sales will impact sales-and-marketing expenses. Those expenses jumped by $16 million sequentially in Q2. “The upshot is strong free cash flow and free cash flow margin,” Owens wrote. The company expects 40% free cash flow margin in Q3, suggesting fiscal 2016 free cash flow should reach $730 million, according to Zeller. ‘Go-To’ Broad Purchase Current-quarter guidance for $335 million-$339 million in sales topped Wall Street views for $334.9 million. But the EPS outlook for 41-42 cents missed analysts’ consensus forecast for 45 cents. Sales and EPS would be up 44% and 80%, respectively, at the midpoints of Palo Alto Networks’ guidance and are expected to decelerate for the third consecutive quarter. Yet Palo Alto Networks’ Q2 sales increased by 50%-plus for the seventh consecutive quarter, and billings surged to the highest point in 11 straight quarters, amid concerns of a slowdown in security spending. A “paradigm shift” from legacy systems is buoying Palo Alto Networks, CEO Mark McLaughlin told analysts on the company’s earnings conference call late Thursday. He sees Palo Alto Networks taking share from Cisco Systems ( CSCO ), Check Point Software Technology ( CHKP ), Fortinet ( FTNT ) and Juniper Networks ( JNPR ). Some analysts tend to agree . “I think it’s very obvious we’re taking share from everyone in the space,” McLaughlin said. William Blair analyst Jonathan Ho sees Palo Alto Networks as on track to become the largest pure-play cybersecurity company. Currently, Check Point and Symantec ( SYMC ) have a narrow lead with $14.8 billion and $12.7 billion market values, respectively, to Palo Alto Networks’ $12.6 billion. Blair maintained his outperform rating on Palo Alto Networks stock. “Palo Alto continues to gain market share behind what we believe is flawless execution,” Piper Jaffray analyst Andrew Nowinski wrote in a report. Nowinski retained his overweight rating and 208 price target on Palo Alto Networks. The company’s platform vision is beginning to bear fruit, Zeller wrote. “Platform (is) an overused term, but it’s key to why we hear Palo Alto continues to grow 60%-plus (in billings) as others decelerate,” he wrote. “In an environment where there was much anxiousness about buying the point-solution of the moment, Palo Alto has crafted a position as the ‘go-to’ broad purchase for re-architecting security.” Image provided by Shutterstock .

Palo Alto Networks Q2 Beats Amid Market Share Gains

Palo Alto Networks ( PANW ) stock rocketed Thursday as the cybersecurity firm’s model of providing a simplified product boosted market-share gains and helped fiscal Q2 results as well as Q3 sales guidance top projections. For its fiscal Q2 ended Jan. 31, Palo Alto’s earnings per share soared 110.5% to 40 cents, beating estimates by a penny. Sales jumped 54% to $334.7 million, above views of $318.3 million. Both measures, however, decelerated for the second consecutive quarter. Shares closed up 9.7% and rallied another 4% in after-hours trading. Customers aren’t interested in puzzle-piecing together their security solution, CEO Mark McLaughlin said on a conference call. That platform focus drove Palo Alto to add 2,000 new customers to its 30,000-strong client base. He also noted a “paradigm shift” from reactive security to the platform. ‘Buying All Elements’ “People are not interested in adding one more agent onto the endpoint,” he said. “So simplified on the endpoint is a driver and it’s very analogous to when people say, ‘Hey, I don’t want firewall and plus, plus, plus (more products).” Billings also surged 62% to $459 million during Q2 as customers began “buying all elements of our platform,” CFO Steffan Tomlinson said on the call. Subscription revenue of $84.3 million grew 68% vs. the year-ago quarter. “We’re seeing customers standardizing on our platform,” McLaughlin said. And with that, “they’re adopting a lot more subscription services than they have in the past.” Current-quarter sales guidance for $335 million-$339 million topped analyst forecasts for $334.9 million, but Palo Alto’s EPS ex items outlook for 41-42 cents missed Wall Street expectations for 45 cents. The company’s Q3 sales would be up 44% at the midpoint of guidance, and EPS ex items would rise 80% at the midpoint. But both metrics would also decelerate for the third consecutive quarter. On a seasonal basis, Q1 and Q3 tend to be weaker, Tomlinson said. While McLaughlin said security remains a top priority globally, IBD’s 41-company Computer Software-Security group has fallen 20% year to date. Over the same time period, Palo Alto Networks stock has lost 26%. McLaughlin acknowledged the stock shake-up — likely related to disappointing guidance from tech firms like Tableau ( DATA ) and LinkedIn ( LNKD ) — but said there’s nothing to indicate the macro environment will play out along stock market lines. Taking Market Share Palo Alto also appears to be swiping market share from Cisco ( CSCO ), Check Point Software Technology ( CHKP ), Fortinet ( FTNT ) and Juniper Networks ( JNPR ), McLaughlin said. Of the $300 million in added 2015 revenue across the five vendors, Palo Alto accounted for $120 million. “The average is $58 million,” he said. “I think it’s very obvious we’re taking share from everyone in the space for the math to work out that way.” During Q2, Palo Alto also announced a data-sharing partnership with Proofpoint ( PFPT ), similar to a deepened IBM ( IBM )-Check Point alliance unveiled Thursday. The Palo Alto-Proofpoint alliance will drive automated and coordinated protection across Palo Alto’s platform, Proofpoint’s targeted attack protection and SocialPatrol. The Big Picture Customers are fed up with cybersecurity vendors that try to monetize data threat intelligence, McLaughlin said. “The big picture is the way we monetize intelligence is in the platform itself,” he told analysts. “The more intelligence we have in the platform, the better job we do. And we have an insatiable desire for platform intelligence.” He added: “You better be able to take intelligence and put it in your platform, and do something with it. That’s where the value will lie.”

Arista Networks’ Q4 Connects With Investors; Sellers Unplug Alliance

Starting what almost surely will be its first year with revenue of $1 billion, Arista Networks ( ANET ) connected with buyers, who drove the stock up by double-digit percentages Friday, while sellers unplugged Alliance Fiber Optics ( AFOP ), its stock falling by double digits, after both companies reported Q4 earnings late Thursday. Guess which did better. Both companies compete with bigger computer networking product makers  Juniper Networks ( JNPR ) and much bigger Cisco Systems ( CSCO ). Cisco stock was flat in early afternoon trading Friday, while Juniper was up 1%. Arista stock rose as much as 16% Friday and was up 11%, near 65, in early afternoon trading in the  stock market toda y, still 27% off an eight-month high of 88.56 set June 24. Meanwhile, Alliance’s Q4 results were hurt by cutbacks from its top customer,  Alphabet ‘s ( GOOGL ) Google. Alliance stock fell as much as 17% Friday, touching a nearly 16-month low, and was down 15% in early afternoon trading, near 12. It’s 45% off a nearly two-year high set July 24 at 22.35. Helped by Microsoft ‘s ( MSFT ) Azure public cloud, Arista said Q4 earnings jumped 51% to 80 cents per share minus items, as revenue rose 41.5% to $245.4 million. Wall Street analysts polled by Thomson Reuters expected 61 cents and $241 million. Arista provides a network operating system, data center storage and other products. Arista’s non-GAAP gross profit margin settled at 64%, near the high end of the 62%-65% range it had forecast, but that was down from the 67.4% in Q4 2014 and 69% in Q1 2014, said FBN Securities analyst Shebly Seyrafi in a research note. “Therefore, there is some downside risk on the (gross margin) line going forward,” he wrote. Still, he and other analysts said Arista had solid momentum. Arista guided the Q1 non-GAAP gross margin to 62% to 65%, and revenue at $232 million to $240 million. Analysts expect Q1 EPS to rise 14% to 57 cents, on sales up 30% to $233.48 million. Reiterating Needham’s buy rating with a 105 price target, analyst Alex Henderson said in a Friday research note that “the news should only get better over 2016. “We think the shift to (faster-bandwidth) 25G architectures will accelerate Arista’s share gains,” he wrote. “We think Arista could pick up 3-5 points of market share on a base of 12%, driving continued stronger-than-forecast growth. This company is best in breed.” Seyrafi had noted that when FBN began covering Arista in September 2014, “one of the key bear points” was that Microsoft revenue was “quite robust,” comprising 11% of total Arista sales, as Microsoft built out Azure. He thought, though, that revenue for Arista might decline after the buildout. Instead, Arista said 2015 revenue from Microsoft topped $100 million, 12% of total sales, “so sales to MSFT do not appear to be slowing down,” said Seyrafi. FBN retained its outperform rating with an 80 price target for Arista stock. So what’s happening with little Alliance Fiber Optics, where adjusted EPS crashed 80% to 5 cents in Q4, while sales fell 13% to $16.4 million? Google “plummeted from 45% of revenue to 20% in (Q4) as it sharply reduced inventory at the behest of its new (Alphabet/Google) CFO (Ruth Porat) and cut capex by 40%,” said Needham’s Henderson in a separate research note Friday. Alliance “was caught in the crossfire,” he said. “But all indications are that that’s over. Google is expected to meaningfully increase spending in 2016, and the shift to 25G architectures should strongly improve AFOP’s results. … Despite the miss in (Q4), we are maintaining our 2016 and 2017  EPS estimates and reiterating our buy rating and 20 target price.” Needham expects adjusted EPS of $1.18 for 2016, up from  95 cents in 2015. Image provided by Shutterstock .