(Bloomberg) — Palo Alto Networks Inc. fell in late trading after releasing 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 were predicting a number at the upper end of that range, according to data compiled by Bloomberg.
Fourth-quarter revenue — a closely watched benchmark — will be $3.43 billion to $3.48 billion for the period through July, Palo Alto Networks said. Analysts estimated US$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, CEO Nikesh Arora said customers were facing “spending fatigue” on cybersecurity. This fueled fears that customers were tightening their budgets despite the increase in attacks.
In post-market trading on Monday, shares fell as much as 10% to $291.55. That erased the stock’s 9.8% gain this year through the close. Shares of peer Crowdstrike Holdings Inc., Zscaler Inc. and Fortinet Inc. also fell in extended trading.
Shorter contracts and strategic changes have weighed on Palo Alto Networks’ reserves, 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 revenue.” But he argued that this was due to payment terms and that there were other more relevant metrics, such as new subscription sales for next-generation products, which may include artificial intelligence.
Arora echoed this idea, saying that revenue was “an artificial metric”. He prefers to look at remaining underwriting revenue and performance obligations and said he was surprised by the market’s reaction. “Using these numbers, the business is stronger than we expected,” Arora said.
‘No change’
Arora also said that cyber attacks continue unabated. He pointed to breaches committed by sophisticated nation-state actors and others that he said could cause damage to systems in a matter of hours. Arora said he expects cybersecurity spending to continue, adding that customers are focused on securing the cloud.
“In cybersecurity spending, we don’t see any change in space or trajectory,” he said. “Most clients have a number of projects they want to undertake and the only limiting factor seems to be the ability to execute.”
An April report backed by the US government highlighted the risks of cloud computing. He cited several specific problems with Microsoft Corp., but also raised broader concerns about the ability of nation-state actors to compromise cloud services systems with increasing sophistication.
Still, Palo Alto Networks and its peers have suffered from a slowdown in firewall sales, according to Westpark Capital, while other product categories face “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 were $1.32 per share, excluding certain items. Still, both numbers surpassed analysts’ estimates.
The Santa Clara, California-based company reported a 3% increase in revenue for the quarter, the smallest gain since its initial public offering in 2012.
But next-gen annualized recurring revenue – one of the numbers released by Palo Alto Networks executives – was $3.79 billion, beating the $3.71 billion estimate and increasing 47%. Remaining performance obligations, a measure of contracted sales that have not yet been invoiced, stood at $11.3 billion, an increase of 23%.
(Updates with further executive commentary starting in fourth paragraph.)
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