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Palo Alto Networks Builds Through Acquisition to Take on Competition

Posted on Tuesday, Jun 11th 2019

Cyber security player Palo Alto Networks (NYSE:PANW) recently announced its third quarter results that surpassed market expectations. The company continues to build its portfolio through acquisitions within the highly fragmented industry. It is focused on securing the cloud environments for its enterprise customers as it builds its arsenal to take on big competitors like Cisco in the space.

Palo Alto Network’s Financials
Palo Alto Network’s third quarter revenues grew 28% over the year to $726.6 million, ahead of the market’s forecast of $704 million. Adjusted earnings of $1.31 were up 26% and surpassed the Street’s forecast of $1.25.

By segment, Product revenues grew 28% to $278.4 million and Subscription and Support revenues grew 28% to $448.2 million. SaaS-based Subscription revenues rose 35% to $258.8 million and Support revenues increased 21% to $189.9 million. Billings grew 13% to $821.9 million.

For the current quarter, Palo Alto Networks expects revenues of $795-$805 million with an adjusted EPS of $1.41-$1.42. The market was looking for revenues of $793.5 million with an EPS of $1.55 for the quarter.

Palo Alto Network’s Acquisitions

Palo Alto Networks has continued to add to its portfolio through acquisitions. Earlier last month, it announced the acquisition of container security company Twistlock and serverless security company PureSec.

Portland, Oregon-based Twistlock was founded in 2015 by Ben Bernstein and Dima Stopel. Twistlock is an automated and scalable container cyber security platform that provides precise, actionable vulnerability management for run-time protection and firewalls. Its services help protect applications across the development lifecycle and into production. Twistlock has been built for containers, serverless, and other leading technologies and provides developers with the speed they want and the technology offices with the control they need.

Prior to the acquisition, Twistlock was privately held and had raised $63 million from investors including Dell Technologies Capital, Rally Ventures, ICONIQ Capital, YL Ventures, Polaris Partners, TenEleven Ventures, and Rally Ventures. Its annual revenue is estimated to be $2.5 million. The $410 million acquisition of Twistlock will help Palo Alto expand within the container security segment and provide access to over 400 customers.

Israel-based Puresec was founded in 2016 by Avi Shulman, Ory Segal and Shaked Zin. PureSec is a serverless security services provider of end-to-end security for serverless functions that cover vulnerability management, access permissions, and run-time threats. Its products help its customers build and maintain secure and reliable serverless applications. PureSec had raised $10 million from investors including Entrée Capital, Square Peg Capital, and TLV Partners. Its annual revenue is estimated to be $1.5 million. The acquisition price was not disclosed, but analysts estimate it to be in the $60-$70 million range.

Palo Alto Network’s Cloud Focus

Recently, Palo Alto Networks announced the release of its new cloud security suite Prisma. Prisma has been designed to help enterprise customers consistently govern access, protect data, and secure applications. It consists of four key components – Prisma Access1 that secures access to the cloud for branch offices and mobile users anywhere in the world with a scalable, cloud-native architecture, blending enterprise-grade security with a globally scalable network; Prisma Public Cloud2 that provides continuous visibility, security, and compliance monitoring across public multi-cloud deployments; Prisma SaaS3 that is a multi-mode cloud access security broker (CASB) service to safely enable SaaS application adoption; and VM-Series, the virtualized form factor Firewall that can be deployed in private and public cloud computing environments.

Palo Alto Networks believes that the acquisitions and the continuing upgrade of its cloud offerings will help it become a more formidable opponent to companies like Cisco and Fortinet.

Its stock is trading at $195.54 with a market capitalization of $18.8 billion. It touched a 52-week high of $260.63 in March this year. It was trading at a 52-week low of $160.08 in November last year.

Despite beating the market’s expectations, Palo Alto’s stock hasn’t fared well. Post result announcement, its stock recorded a 6% decline. The company is being hurt by the cost of acquisitions, China tariffs, and its transition to the subscription-based model.

It is expecting to record expenses of $0.13 per share for the two acquisitions and the additional tariffs are on account of the government’s trade policy with China. The Street was looking for an EPS of $1.55 for the quarter, compared with Palo Alto’s estimated $1.41-$1.42. The market was also concerned about the slowdown in billings. For the third quarter, its billings rose 13% to $821.9 million, significantly short of the Street’s forecast of $872.6 million. The shortfall in billings was attributed to the shorter billings duration as it moves to annual subscriptions from three-year contracts. I think that Palo Alto Networks is making the right moves, and in the longer term, its stock should be able to recover.

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