Palo Alto's Conservative Approach Fails To Impress

On Monday, Palo Alto Networks PANW shares plunged upon its fiscal third quarter report that failed to impress due to a conservative guidance. Last week, Palo Alto Networks revealed it is buying cloud security software assets from International Business Machines Corporation IBM via a joint press release, also suggesting Palo Alto is in need of a power boost.

Fiscal Third Quarter Highlights

For the quarter ended on April 30th, Palo Alto reported that revenue grew 15% YoY to $1.98 billion. Net income amounted to $278.8 million, or 79 cents a share, while adjusted earnings amounted to $1.32 per share, surpassing FactSet consensus of $1.25 a share.

Fiscal fourth quarter guidance that failed to impress.

For the current quarter, Palo Alto guided for revenue in the range from $2.15 billion to $2.17 billion with billings ranging from $3.43 billion to $3.48 billion, accounting for deferred revenue. 

A Narrowed Down Full Year Guidance

Palo Alto did not lift the outlook it provided in February, just narrowed it down. For the full-year, Palo Alto guided for bookings between $10.13 billion and $10.18 billion while it previously expected them to come in between $10.1 billion and $10.2 billion. Palo Alto guided for revenue in the range between $7.99 billion and $8.01 billion, narrowing down its prior range between $7.95 billion to $8.00 billion.

Palo Alto Enlists Help From IBM

As part of a broader partnership, IBM will provide the cybersecurity company access to more consultants and a bigger customer base. Palo Alto is acquiring the QRadar cloud software from IBM for an undisclosed sum, as well as migrating existing customers to its security platform, Cortex Xsiam. In addition, IBM will train more than 1,000 of its consulting employees on Palo Alto’s products. This strategic alliance between IBM and Palo Alto Networks reflects the current consolidation trend in the security software industry as companies join forces to get ready for the future attacks that will be empowered by AI. Palo Alto is growing much faster than IBM so IBM is also getting a needed boost through this alliance. IBM CEO Arvind Krishna

Expects that IBM is going to generate significant consulting business growth on Palo Alto’s products, much like with Microsoft Corporation MSFT Azure and Amazon.com Inc (NASDAQ: AWS) as IBM helps organizations run their software on the public clouds from both Microsoft and Amazon.

Consolidations are in the security software industry’s air.

For example, Cisco Systems Inc CSCO snapped up the leading provider of security information and event management (SIEM) software. Cisco wrapped up its biggest ever $28 billion acquisition earlier in March. Although the SIEM category has been around for more than two decades, Palo Alto just introduced Cortex Xsiam two years ago. Cortex Xsiam’s adoption has been rapid and Nikesh Arora, CEO of Palo Alto Networks also added it has been taking market share from “everone”.

Palo Alto former CEO acknowledges the company does not use the most sophisticated AI.

In a climate where ‘best of breed’ solutions are demanded, prioritizing quality, former CEO, Lane Bess emphasized Palo Alto’s ability to effectively defend against cyberattacks while acknowledging it does not use the most sophisticated AI. This is why the security alliance with IBM to jointly provide AI-powered offerings comes at a good time for the company to deliver on its promise of unleashing the power of AI to take cybersecurity to the next level.

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