Palo Alto Networks’ (PANW) Strong Results Overshadowed by CEO Succession, Says Evercore ISI

This morning, Palo Alto Networks (NYSE:PANW) posted strong fiscal third-quarter results exceeding consensus estimates and increasing FY18 revenue and billings guidance.

Specifically, the security software maker reported total revenue of $567.1 million, which was above consensus estimate of $545.8 million. Non-GAAP EPS of $0.99 was also above consensus estimate of $0.95. For F4Q18, management expects total revenue of $625-635 million, non-GAAP EPS of $1.15 to $1.17, and total billings of $815-830 million. This compares to consensus estimates of $618 million for revenue, $1.21 in EPS, and $805.8 million for billings.

Subsequently, the company unexpectedly announced Friday that Nikesh Arora is succeeding Mark McLaughlin as CEO and chairman effective June 6th.

Evercore ISI analyst Kenneth Talanian commented, “We remain encouraged on PANW’s growth prospects but expect there to be a debate on product revenue growth for F19. Prior consensus called for ~8% y/y growth and we now model ~11% y/y product revenue growth for F19 as we expect continued traction as a result of the company’s ongoing product refresh, which offers an opportunity to grow wallet share of the existing customer base as well as competitive displacements.”

“Perhaps the biggest news this quarter (and the reason for the preannouncement) was a CEO succession plan where Mark McLaughlin is stepping down to a Vice Chairman role and Nikesh Arora will take the reins as CEO and Chairman. We believe this came as a surprise to the investment community and is being viewed as marginally negative in that C-level transitions inherently present some risk, but more importantly because Mr. McLaughlin was a well-liked and highly effective CEO. The choice of Mr. Arora, however, in our view represents a clear signal that the company intends to scale to a significantly larger organization. Though not without risk, we believe debates on future growth prospects and the direction a new CEO may take the company create investment opportunity,” the analyst continued.

Net net, Talanian reiterates an Outperform rating on PANW stock, with a price target of $220, which represents a potential upside of 6% from where the stock is currently trading. (To watch Talanian’s track record, click here)

The initial word out on the Street echoes Talanian’s bullish conviction on the cybersecurity firm, as TipRanks analytics showcase PANW as a Buy. Based on 17 analysts polled in the last 3 months, 13 are bullish on Palo Alto stock, 3 are sidelined, and only 1 is bearish. The 12-month average price target stands at $220.59, marking a 6% upside from where the stock is currently trading.

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