Why Palo Alto Networks, Inc. Stock Plunged Today

By Steve Symington Markets Fool.com

What happened

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Shares of Palo Alto Networks Inc. (NYSE: PANW) were down 22.1% as of 11:45 a.m. EST Wednesday, after the next-gen network security specialist released disappointing fiscal second-quarter 2017 results and light forward guidance.

So what

Quarterly revenue increased 26.3% year over year, to $422.6 million -- a new company record -- and translated to 50.9% growth in adjusted net income, to $59.6 million. Adjusted earnings per share increased 46.5%, to $0.63.

For perspective, that adjusted EPS figure came in at the high end of Palo Alto Networks' earnings outlook range provided last quarter. But guidance also called for higher revenue of $426 million to $432 million. Management blamed "execution challenges" for the top-line shortfall, while at the same time insisting they "are moving quickly to address" those challenges.

Image source: Palo Alto Networks.

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During the subsequent conference call, Palo Alto CEO Mark McLaughlin elaborated:

[W]e believe that our weaker performance is primarily caused by go-to-market execution issues that are becoming more evident as we progress through the year. The impact from these issues is lower productivity than we planned for in the year, with a broader base of slower pipeline conversion than what we started to experience in the first quarter.

More specifically, McLaughlin noted the company believes it has "over-complicated" its go-to-market strategies with too many territory splits and market segmentation. As a result, the company is reorganizing its account coverage model "to drive more accountability and clarity," and adjusting investments in sales and marketing resources to more effectively support that model.

Now what

To be fair, Palo Alto continues to grab market share in these early stages despite its execution issues, adding roughly 2,000 customers globally to bring its current customer base to over 37,500 at the end of the quarter. Palo Alto also just acquired automated behavioral analytics company LightCyber for $105 million, and outlines plans to engineer the new technology as a new subscription within its own next-gen security platform by the end of this calendar year.

Nonetheless, for the fiscal third quarter of 2017, Palo Alto expects revenue of $406 million to $416 million (up 17% to 20% year over year), and adjusted net income per share of $0.54 to $0.56, including a $0.04 per share investment in LightCyber using 93 million to 95 million shares. Even then, Palo Alto's guidance would have fallen short of analysts' consensus estimates, which called for fiscal Q3 2017 adjusted earnings of $0.63 per share on revenue of $454.6 million.

In the end, investors should keep in mind these execution issues should be temporary. But our market hates uncertainty even in the near term, and it's hard to blame Palo Alto Networks investors for taking a step back today.

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Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.