SonicWALL (SNWL): Colour on quarter; Upgraded to Outperform at Baird

From Notable Calls

SonicWALL (NASDAQ: SNWL) is getting commentary this morning after posting stronger-than-expected Q2 results last night:

- Baird is upgrading SNWL to Outperform from Neutral and raising their price target to $10 (prev. $5). According to the analyst the upgrade comes on improving fundamentals and macro environment. SNWL's Q2 showed QoQ product revenue growth and significant improvement in operating margins. This is the inflection point the firm needed to see before theygot more positive about this story. Firm recommends purchase as valuation appears very inexpensive relative to its peers and set a new price target at $10.

Q2 results showed very good operating margins on $49 million of revenue and EPS of $0.10 (Street at $48 million / $0.07). Product revenue grew QoQ at its core UTM and its CDP segments. Geographically, EMEA showed the best growth sequentially (up 20%), while North America was flat as was APAC. Also, subscription deferred revenue grew 4% QoQ to $96 million, a record result.

Q3 guidance is based on a cautionary environment that management expects will continue: revenue of $46 - $49 million and operating EPS of $0.08 -- $0.09 versus consensus of $48 million and $0.08. While Q2 results were encouraging, SNWL is very guarded about the macro headwinds for Q3.

- JP Morgan gives SonicWALL credit for their ability to improve operating margins to 15.7% and good collections in the quarter. Similar to Amdocs earnings yesterday, the underlying tone on the macro environment however has not changed and remains tough. They believe a displacement promotion enacted in Q2 helped push the company over to exceed revenue and cash flow expectations, which they do not believe is sustainable.

SNWL is running a displacement promotion where if a customer displaces a competitive product and buys for the full cost a 3 year subscription service, the hardware is free and included in that price. JPM believes this promotion will continue for maybe another quarter, but do not see this as sustainable. Because cash is collected up front, this promotion they believe is what helped CFO reach $11.1M.

39K units shipped was a good sign. They do recognize that despite a tough market and promotions, they think SNWL has done a good job of capturing what they can in the SMB market evident by 39K units shipped as compared to our 36.2 unit estimate. Company also cited a government deal for 23 E Class UTM appliances which is their higher end product.

Raising Price Target to $7.50: new $7.50 price target, up from $6.00. Maintains Neutral.

Notablecalls: SNWL is mostly a subscription service play, which is something the market should appreciate in these volatile times. I think this Baird upgrade will invite some buyers.

The stock can do 10%+ in the n-t.

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