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What More Can Palo Alto Acquire?

Posted on Friday, Mar 8th 2019

Last week, Santa Clara-based Palo Alto Networks (NYSE:PANW) announced its second quarter results that surpassed market expectations and sent the stock soaring to a record high. Its stock climbed 11% in reaction to the result. The company has been growing steadily not only through innovative product releases, but also by following an aggressive acquisition strategy. Since 2018, it has spent over a billion dollars in acquisition of other complementary players. And, with a cash and equivalents balance of over $1.1 billion, those acquisitions are expected to continue.

Palo Alto Network’s Financials

Second quarter revenues grew 30% over the year to $711.2 million, ahead of the market’s forecast of $683 million. Adjusted earnings of $1.51 per share grew 44% over the year and surpassed the Street’s forecast of $1.22.

By segment, Product revenues grew 33% to $271.6 million. Subscription and Support revenues grew 29% to $439.6 million with SaaS-based Subscription revenues rising 36% to $249.7 million and Support revenues increasing 21% to $189.9 million. Billings grew 27% to $852.5 million.

For the current quarter, Palo Alto Networks expects revenues of $697-$707 million and EPS of $1.23-$1.25. The market was looking for revenues of $696.7 million with an EPS of $1.25 for the quarter. The company did not provide an outlook for the year.

Palo Alto’s Product Innovation

Earlier in the quarter, Palo Alto announced the release of the industry’s only open, and integrated, AI-based security platform – the Cortex. Cortex allows security teams to accelerate the analysis of data sets to find threats and deliver responses quickly. It operates on Cortex Data Lake which allows customers to securely and privately store and analyze large amounts of data. The release includes Cortex XDR that provides detection, investigation and response capabilities across network, endpoint and cloud data. It uncovers threats using behavioral analytics, and accelerates investigations and prevention through automation. It also released Traps 6.0, an endpoint protection and response system that includes a behavioral threat protection engine. Traps 6.0 can identify a sequence of events that could lead to malicious activity on a real time basis. Through its integration with Cortex Data Lake and Cortex XDR, Traps identifies and prevents damage across the entire digital infrastructure.

The market is pleased with the product release. Analysts believe that by releasing a product that spans “multiple subspaces“, Palo Alto is ensuring that it becomes more and more ingrained into the customer’s security needs.

Palo Alto Network’s Acquisitions

Palo Alto Networks has continued to add to its portfolio through acquisitions. Since last year, the company has spent more than $1 billion in acquiring smaller peers. The latest in the string of acquisitions is San Francisco-based Demisto. Founded in 2015, Demisto Enterprise is a security operations platform that focuses on security orchestration, automation, and response. Its technology uses machine learning capabilities to define workflows that can address security issues. Palo Alto plans to use Demisto’s technology to help its customers resolve their security alerts. Demisto had raised $69 million in funding from investors including Accel, Greylock Partners, ClearSky, Slack, and Wipro Ventures. Demisto was privately held at the time of the acquisition and did not disclose its financials. Palo Alto Networks acquired Demisto for an estimated $560 million.

Last year, Palo Alto had acquired a cloud threat defense company RedLock for an estimated $173 million. Menlo Park-based RedLock helped companies manage security risks across cloud services, including Google Cloud, Amazon Web Services, and Microsoft Azure. Prior to the acquisition, RedLock had raised $12 million in funding from investors including Sierra Ventures, Storm Ventures, and Dell Technology Capital. It was estimated to be earning $2.5 million in annual revenues.

Other acquisitions last year include SECDO and Evident.io. New York-based SECDO was founded in 2015 to provide innovative solutions that helped Security Operations teams reduce their incident response time. It automated endpoint forensic analysis and cyber investigations to reduce the skills needed to be an effective analyst and made security teams more effective. Prior to the acquisition, SECDO had raised $10 million and was estimated to be generating $15 million in annual revenues. Palo Alto is estimated to have acquired SECDO for $100 million.

San Francisco-based Evident.io was founded in 2013 and soon became a leader in cloud services infrastructure protection. Its agentless, API-centric platform integrated detection and analysis of misconfigurations, vulnerabilities, and risk to provide organizations with access to a single view and actionable intelligence needed for security management. Palo Alto planned on leveraging Evident.io’s capabilities to expand its API-based security capabilities. Prior to the acquisition, Evident.io had raised $49 million in funding from in-Q-Tel, True Ventures, Venrock, Bain Capital, and GV. It was estimated to be generating $4 million in annual revenues and was acquired for an estimated $300 million.

The enterprise cyber security market, that covers the entire range of application, endpoint, network, cloud and others, is estimated to grow 16% annually to $365.3 billion by 2023. Palo Alto Networks is ensuring that it touches all these segments to become a leader in the market. Can you think of other smaller, and bootstrapped startups that can offer complementary technologies that fit into Palo Alto’s growth plan?

Its stock is trading at $234.44 with a market capitalization of $22 billion. It touched a 52-week high of $260.63 earlier last week post result announcement. It was trading at a 52-week low of $160.08 in November last year.

  

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