Palo Alto Networks Falls Most Since July Initial Offer

Palo Alto Networks Inc. (PANW) fell the most since its July initial public offering after an earnings report by the network security provider failed to meet analysts’ most bullish expectations.

While the company reported a fourth-quarter profit yesterday that exceeded the average analyst estimate, it fell short of the high end of projections.

The shares tumbled 7.2 percent to $66.60 at today’s close in New York, the biggest decline since July 20. Through Sept. 10, Palo Alto had gained 71 percent since its market debut, fueling speculation that the company would top predictions by a wider margin, said Jonathan Ho, an analyst at William Blair & Co. in Chicago.

“It wasn’t a weak quarter -- they clearly beat the consensus expectations,” Ho said in an interview. “But I think the investor expectations were ahead of the Street and they couldn’t meet those numbers. It’s still a very healthy growth rate for the company, but given the run-up in the stock, we think there was an investor disconnect there.” Ho has an outperform rating on the shares.

Helped by rising demand for anti-hacking technologies and other security products, Palo Alto reported profit before certain costs in the July period of 3 cents a share, compared with a break-even estimate, according to data compiled by Bloomberg. The highest analyst estimate was for a profit of 9 cents a share.

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Photographer: Eightfish/Getty Images

The net loss was $4.6 million, or 18 cents, it said in a statement. Sales rose to $75.6 million, higher than the prediction for $71.3 million.

Big Competitors

On a conference call yesterday, the Santa Clara, California-based company forecast first-quarter profit before some items of 3 cents a share, matching the average analysts’ estimate. Revenue will be $80 million to $84 million, Palo Alto said, compared with an average projection of $80.9 million.

Palo Alto sales are rising as companies seek to defend themselves amid an increase in sophisticated hacking attacks that traditional security technologies have had difficulty stopping. The company is challenging bigger security-technology providers, including Cisco Systems Inc. (CSCO) and Juniper Networks Inc. (JNPR), as well as Check Point Software Technologies Ltd. (CHKP) and Fortinet Inc. (FTNT)

Worldwide security software revenue rose 7.5 percent last year to $17.7 billion, driven by growth in threats and regulatory requirements, according to market researcher Gartner Inc. Palo Alto’s technologies are a combination of hardware and software. The company raised $299.5 million in its July 19 IPO, when it sold 7.13 million shares.

Although Palo Alto is still a small player in security technology, its valuation exceeds those of its larger rivals. The company’s shares trade at 13 times estimated sales over the next four quarters, compared with a price-to-sales ratio of 7.5 for Fortinet and 6.9 for Check Point Software. Cisco and Juniper, the two biggest U.S. providers of computer-networking equipment, each trade for about 2 times revenue over the next year.

-- With assistance from Ari Levy and Jillian Ward in San Francisco. Editor: Jillian Ward, Niamh Ring

To contact the reporter on this story: Jordan Robertson in San Francisco at jrobertson40@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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