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Palo Alto Networks drags after tepid guidance

A logo sign outside of an office building occupied by Palo Alto Networks, Inc., in Reston, Virginia.
Sipa | AP
A logo sign outside of an office building occupied by Palo Alto Networks, Inc., in Reston, Virginia.

Shares of Palo Alto Networks dropped more than 12 percent Friday after the cybersecurity firm predicted lower-than-expected earnings in the fiscal fourth quarter.

The California-based company reported third-quarter earnings of 42 cents per share on sales of $346 million, above the 42 cents per share on $340 million expected by a Thomson Reuters consensus estimate. The revenue beat was due in part to particular strength in subscription services, Chief Financial Officer Steffan Tomlinson said.

Despite topping estimates and outpacing the industry in the latest quarter, Palo Alto Networks now expects upcoming quarterly earnings of 48 cents to 50 cents per share on $386 million to $390 million in revenue. Wall Street was expecting the upper end of that range: 50 cents per share in earnings on $389 million in sales.

Seasonality, the macroeconomic environment and longer sales cycles all seemed to be at play with Palo Alto Network's results, wrote UBS analyst Brent Thill.

Though funds that track the cybersecurity industry held their own Friday, Thill wrote that Palo Alto Networks' decline is likely to be perceived as a "harbinger for overall cybersecurity spending slowdown." Still, Pacific Crest analysts Rob Owens and Liz Verity wrote that the dip in Palo Alto Networks might be a buying opportunity for investors.

"While investors looked for the end of the security spending cycle, Palo Alto exceeded 60 percent year-over-year billings growth for the third consecutive quarter," according to the Pacific Crest note. "Palo Alto is not immune from a tough environment, and, in our view, was more conservative in its July-quarter guidance while also indicating that security remains a top priority with abundant demand."

Shares closed Friday at $129.86, down almost 12.4 percent. The stock is down 26 percent so far this year.