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Palo Alto Networks Tumbles After Disappointing Sales Forecast

Palo Alto Networks Tumbles After Disappointing Sales Forecast

(Bloomberg) -- Palo Alto Networks Inc. fell in Tuesday trading after giving a downbeat forecast for the current period, renewing concerns about a slowdown in cybersecurity services.

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Revenue in the fiscal fourth quarter will be $2.15 billion to $2.17 billion, the company said in a statement Monday. Analysts had anticipated a number at the high end of that range, according to data compiled by Bloomberg.

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Fourth-quarter billings — a closely watched benchmark — will be $3.43 billion to $3.48 billion in the period, which runs through July, Palo Alto Networks said. Analysts had estimated $3.47 billion.

The tepid outlook follows another disappointing quarterly report in February, when Palo Alto Networks shares suffered their worst single-day drop ever. At the time, Chief Executive Officer Nikesh Arora said customers were facing “spending fatigue” in cybersecurity. That stoked fears that clients were tightening their budgets in spite of an uptick in attacks.

Arora said the cybersecurity company faced “short-term bumps” as the market absorbs shifts in its strategic ambition in an interview with Bloomberg TV on Tuesday. The cybersecurity sector remains “very robust,” he said.

The Company’s shares were down around 6% at 9:39 a.m. in New York, their biggest swing in three months.

Shorter contracts and strategy changes have been weighing on bookings at Palo Alto Networks, according to Bloomberg Intelligence. But management expects growth to pick up in the second half of 2024.

During a call with analysts, Chief Financial Officer Dipak Golechha acknowledged that the company had “significant volatility in our billings.” But he argued that it was due to payment terms and that there were other more relevant metrics, such as new subscription sales for next-generation products, which can include artificial intelligence.

Arora echoed that idea, saying that billings were “an artificial metric.” He prefers looking at subscription revenue and remaining performance obligations, and said he was surprised by the reaction of the market. “Using those numbers, the business is stronger than we expected it to be,” Arora said.

‘No Change’

Arora also said that cyberattacks continue unabated. He pointed to breaches by sophisticated nation-state actors and others that he said can wreak damage on systems within a matter of hours. Arora said he expects cybersecurity spending to continue, adding that customers are focused on securing the cloud.

“On spending for cybersecurity, we see no change in the space or trajectory,” he said. “Most customers have a series of projects they want to get done and the only limiting factor seems to be the execution capability.”

An April report backed by the US government highlighted the risks of cloud computing. It cited multiple problems with Microsoft Corp. specifically, but also raised concerns more widely about the ability of nation-state actors to compromise cloud service systems with increasing sophistication.

Even so, Palo Alto Networks and its peers have been suffering from a slowdown in firewall sales, according to Westpark Capital, while other product categories are facing “intense competition.”

Slower Sales

The company’s third-quarter revenue rose 15% to $1.98 billion, marking the slowest growth since the start of 2020. Earnings came in at $1.32 a share, excluding some items. Still, both figures topped analysts’ estimates.

The Santa Clara, California-based company reported a 3% rise in billings for the quarter, the smallest gain since its initial public offering in 2012.

But next-generation annualized recurring revenue — one of the figures touted by Palo Alto Networks executives — was $3.79 billion, beating the $3.71 billion estimate and up 47%. Remaining performance obligations, a measure of contracted sales that have yet to be billed, stood at $11.3 billion, up 23%.

(Updated to include quotes from Palo Alto Networks CEO in fifth paragraph.)

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