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Strategies & Market Trends : The New Economy and its Winners

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From: Bill Harmond	5/29/2014 10:21:19 AM
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Deutsche Bank: Palo Alto Networks (PANW.N) Buy, Price Target USD95 - Karl Keirstead: Tgt USD90 to USD95. The surprising and positive settlement of the PANW-JNPR IP lawsuit overshadowed what was a very strong 3QF14 qtr. The $175m cash and share settlement (with no royalty fee) was considerably better than buy-side expectations (which we believe were for a ~$500m payment and a 2%-3% royalty). Coupled with PANW’s $20m payment last quarter to FTNT to release their legal claims, PANW has now materially de-risked the investment story. Maintain Buy. Last Close USD69.51 - PANW also exceeded its guidance and Street expectations, highlighted by 38% product license growth (above our 34% estimate), total rev growth of 49% (above our 44% estimate) and billings growth of 46% (well above our conservative 36% estimate). Subscription revs were up 71% (now 21% of the mix) and the WildFire anti-malware solution added 600 new customers (up 40%+) and a higher attach rate (to 35% of appliances shipped, up from 30% last qtr). WildFire has been sold into just ~12% of the installed base and we see no reason that this metric can’t approach that of the more mature Threat Prevention subscription, sold into 75%+ of PANW’s base. The 4QF14 guidance for total revs of $158 $162m (up 41%-44%) topped our estimate of $157m and non-GAAP operating margins of 9.1% exceeded our 8.6% estimate. In our view, PANW results are a positive read-through to the broader security software sector (following mixed 1Q14 sector results) and we conclude that the advanced threat detection market is too early-stage for PANW’s strong WildFire results to be anything but a bullish read-through to rival FEYE.

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