According to a recent research report, the $222.66B global cyber security market is expected to grow at 12% CAGR from 2023 to 2030. Despite the strong market outlook, Palo Alto Networks (NYSE: PANW) recently cut down its outlook for the year. The stock fell 19% in the after-hours trading session after the result announcement.
Palo Alto Network’s Financials
Its second quarter revenue grew 19% to $1.98 billion, ahead of the Street’s estimate of $1.97 billion. Net income was $1.7 billion, or $4.89 per share, compared to $84 million, or $0.25 per share a year ago. Adjusted EPS of $1.46 was significantly ahead of the market’s forecast of $1.30 for the quarter.
By segment, Product revenue increased 10.7% to $390.7 million and contributed to 20% of the total revenue. Subscription and Support revenue improved 21.7% to $1.58 billion.
Among other key metrics, deferred revenue was $4.92 billion. Palo Alto’s remaining performance obligation climbed 22% to $10.8 billion.
For the third quarter, Palo Alto expects revenue of $1.95-$1.98 billion and an EPS of $1.24-$1.26. The market was looking for revenue of $2.04 billion and an EPS of $1.29. For the fiscal year, Palo Alto expects revenue of $7.95-$8 billion compared with an earlier outlook of $8.15-$8.20 billion. It forecast an EPS of $5.45-$5.55 which was higher than the earlier outlook of $5.27-$5.40. The market was looking for revenue of $8.19 billion and an EPS of $5.51.
While the market was not happy with Palo Alto’s outlook, the management had a well-defined strategy to justify it. In the coming quarters, Palo Alto plans to give away products for free, temporarily, to help customers consolidate around its products as a single-stop-shop for cyber security needs. A lot of Palo Alto’s customers have different vendors for different products. Their internal reports suggest that there is a “fatigue” of cyber managers in organizations since an average organization is dealing with as many as 75 different cyber solutions.
Palo Alto wants its customers to sign up for its end-to-end packages of Cloud, SASE, and Cortex. To attract customers to adopt more of its services, Palo Alto is now providing access to these services for free while the customer is still under contract with another vendor, until the existing contract runs out up to a maximum of 6 months. The move will make the transition to Palo Alto’s products cost neutral to the customers while helping Palo Alto increase its wallet share once the free term runs out. But for the initial six months, Palo Alto will see a decline in its outlook.
Palo Alto Network’s Acquisitions
Last quarter, Palo Alto also announced two acquisitions – Talon Cyber Security and Dig Security. Israel-based Talon Cyber Security was founded by entrepreneurs Ofer Ben-Noon and Ohad Bobrov in 2021 and had raised $125 million in funding prior to the acquisition.
The $625 million Talon purchase will provide Palo Alto with new technology to enable unmanaged devices to securely access enterprise apps and protect them from malware, phishing, and keylogger-type attacks. Talon is known for its enterprise browser technology that provides organizations with an innovative solution that, when combined with Prisma SASE, will enable users to securely access business applications from any device, including mobile and other non-corporate devices.
Dig Security is also based out of Israel and is a cloud security startup specializing in data security posture management. Its solution helps an organization understand where their assets reside across the cloud so that the security teams can see asset movement and initiate lockdowns in the event of a breach. With the growing adoption of AI-enabled applications, the amount of data transferred to the cloud is expected to increase significantly. Dig’s DSPM technology will help safely enable this shift, and its team will complement and help advance Palo Alto Networks’ strengths across cloud security.
The terms of the acquisition were not disclosed, but reports suggest that the deal was closed at $400 million. Dig Security was founded by Dan Benjamin, Ido Azran, and Gad Akuka. They had raised $45 million in funding at an undisclosed valuation.
Palo Alto’s stock is trading at $316.15 with a market capitalization of $102.1 billion. It was trading at a 52-week low of $176.30 in May last year and had climbed to a 52-week high of $380.84 earlier this month.
Disclosure: All investors should make their own assessments based on their own research, informed interpretations, and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article. I am an investor in this company.
