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Why Palo Alto’s Stock Fell after It Posted Its 4Q16 Results

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Fiscal 1Q17 expectations

Earlier in the series, we discussed Palo Alto Networks’ (PANW) performance in its recently announced fiscal 4Q16 results. Even though its fiscal 4Q16 revenues and billings exceeded analysts’ expectations, its stock fell 3% on August 30, 2016, in after-hours trading.

A likely reason for this fall is that Palo Alto’s guidance for the current quarter failed to meet analysts’ expectations. For fiscal 1Q17, Palo Alto expects its revenue to grow by 33%–35%—this translates to $396 million–$402 million. It expects the EPS (earnings per share) to be $0.51–$0.53. Palo Alto’s 1Q17 guidance failed to meet analysts’ estimates. They expected the company to provide revenue and EPS guidance of $402.2 million and $0.56, respectively.

For fiscal 2017, the company expects its EPS to be $2.75 billion–$2.80 billion. This exceeded analysts’ expectations. They expected the EPS guidance to be $2.64. The revenue guidance wasn’t provided in the release.

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Cisco threatens Palo Alto’s growth

As the above chart by International Data Corporation shows, Cisco Systems (CSCO) leads the security appliance space with 17.4% market share in 1Q16. It’s followed by Check Point (CHKP) and Palo Alto with 13.8% and 12.4% market share, respectively. Fortinet and Blue Coat are the other leading players in this space.

Though Palo Alto has threatened Cisco in the security software space in the past, it would be difficult to do so currently and in the future. Now, Cisco is keen to strengthen its presence in the security space. To achieve this, Cisco recently announced the layoff of 7% of its workforce.

For technology companies, employee costs form a significant part of operating expenses. This explains why technology companies often resort to layoffs to reduce costs.

It isn’t just Cisco that’s keen to deepen its presence in the security space. Symantec (SYMC) announced the acquisition of Blue Coat for ~$4.7 billion—the company’s largest acquisition since 2005 when it acquired Veritas for $13.5 billion. IBM (IBM) is also keen in this space, as shown by the acquisition of Resilient Systems.

Increased consolidation and the funds and scale that larger players enjoy will likely pressure Palo Alto. This will impact its stock and shareholders.

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