When revenue in Palo Alto Networks Inc.'s (PANW -1.22%) latest quarter fell short of Wall Street's expectations a few weeks ago, shares of the next-gen security specialist plummeted more than 20% in a single day. To blame, according to Palo Alto, were execution challenges that the company insists it's "moving quickly to address."
With shares now more than 30% below their 52-week high set this past December, that raises the question: Are Palo Alto's best days ahead?
For investors who don't mind some potential volatility along the way, I think so.
IMAGE SOURCE: PALO ALTO NETWORKS
The root of Palo Alto Networks' problem
That's not to say Palo Alto's results looked bad on the surface. For its fiscal second quarter of 2017, revenue climbed 26.3% year over year, to $422.6 million, while adjusted net income per share increased 46.5%, to $0.63. But by contrast, while earnings came in near the high end of expectations, Palo Alto's guidance called for higher revenue of $426 million to $432 million.
Speaking to those execution issues during the subsequent conference call, Palo Alto CEO Mark McLaughlin elaborated that the company has seen great success in the past by splitting its sales territories each year, continually segmenting the market both vertically and by customer size, and investing accordingly in future sales and marketing resources. Over the past two quarters, however, McLaughlin states that the company has "overcomplicated [its] go-to-market motion with a lot more territory splits and segmentation than [it has] done in the past."
The silver lining
What's more, similar to its deceivingly strong results last quarter, Palo Alto is increasingly winning larger deals, which has meant weathering some longer sales cycles as these bigger customers take more time to solidify their purchase orders.
And though competition is always looming in the fast-changing world of network security, McLaughlin noted that Palo Alto continued to "capture market share at high rates" last quarter, securing several major competitive wins against the likes of Cisco, McAfee, and Check Point Software both at large North American and multi-national businesses. In fact, Palo Alto saw repeat purchases last quarter from each of its top 25 lifetime customers -- a list those customers would have had to spend a minimum of $16.6 million (up 46% year over year) in lifetime value to make. All told, Palo Alto added roughly 2,000 new customers last quarter to bring its total to over 37,500 worldwide.
Palo Alto's plan of action
Palo Alto also swiftly put a plan in place to address its execution missteps, including implementing a reorganization of its account coverage model "to drive more accountability and clarity." Next, it's reallocating its sales and marketing resources to match its new structure.
In the meantime, however, Palo Alto Networks knows all too well that the reorganization will probably disrupt its near-term growth. For the current quarter, the company anticipates that revenue will grow "just" 17% to 20% year over year. And looking further out, it expects full fiscal-year 2017 revenue growth of roughly 25%, which is below guidance of 30% annualized revenue growth provided by the company in previous investor presentations.
That said, there's a chance those predictions could prove too conservative. Also during the call, Palo Alto CFO Steffan Tomlinson suggested, "We're purposefully being prudent and cautious around the guide because we understand that the execution issues will take a while to get through."
So if Palo Alto's sales restructuring efforts prove fruitful in increasing productivity, and as the company grows accustomed to more accurately forecasting those longer sales cycles for its bigger deals, Palo Alto believes it should be able to reaccelerate growth down the road. For investors willing to buy now and patiently track Palo Alto's progress as that happens, I think the rewards should be more than worth any volatility you endure between now and then.
