Dive Brief:
- Shares of Palo Alto Networks fell sharply Tuesday after the company warned of a lull in revenue growth as it pursues a strategy of deferred billings and other incentives to consolidate customers on its various cybersecurity platforms.
- Palo Alto Networks anticipates lower-than-expected revenue growth for 12 to 18 months, as it pursues its strategy of “platformization” and allows customers to defer payments until they transition out of their legacy contracts.
- “We believe we can build customer confidence in our platforms by approaching them well before their point product contracts expire,” Palo Alto Networks CEO Nikesh Arora said Tuesday during the company’s fiscal second quarter conference call. “After we gain their contractual commitment, we have offered an extended roll out period where we can demonstrate our ability to deliver these platform benefits.”
Dive Insight:
Palo Alto Networks is aggressively pursuing incident response contracts in the wake of the new incident reporting requirements from the Securities and Exchange Commission.
The company launched a program in November to offer no-cost incident response to its largest customers, as the new SEC rule requires publicly traded firms to report a breach or attack four business days after determining the incident will have a material impact.
About 400 out of 1,500 top Palo Alto Networks customers took up the offer for free incident response offer over the past 90 days, Arora said.
Companies are encountering aggressive threat activity from nation-state threat groups and criminal hackers, forcing them to make additional investments in cybersecurity to protect their IT networks from attack.
Arora said these developments have created competitive pressures, as rival companies countered with incentives to retain their customers.
“We’re beginning to see rogue behavior by some vendors in the space who are keen to retain their customers, primarily in the legacy vendor space and the startup space,” Arora said during the call.
Customers looking to consolidate their cybersecurity platforms are also experiencing “spending fatigue” where they can’t afford to pay multiple security vendors during the transition period.
Despite those pressures, demand for cybersecurity products remains strong and at the end of the 12-18 month lull, the company will have customers locked up in long-term contracts, Arora said.
Palo Alto Networks’ “platformization” strategy is not new or novel. Rival firms such as Microsoft, CrowdStrike and Google have been pushing customers to consolidate their cybersecurity spending as companies look to consolidate the number of single point security products they use.
Many companies feel overwhelmed by the volume of products being pitched to them and want to consolidate with single vendors, according to Eric Bell, managing director at Cyber Advisory Partners.
Yet, consolidating those agreements leads to concerns about getting stuck with multiple obligations, Bell said.
“Many customers are locked into long-term contracts with other vendors and fear the execution risks of consolidating,” Bell said via email. “They also don’t want to double pay for cyber capabilities.”
Palo Alto Networks expects fiscal third-quarter billings of $2.3 billion to $2.35 billion, representing 2% to 4% in year-over-year growth. Revenue is projected in the range of $1.95 billion and $1.98 billion in the quarter.
For the full fiscal year 2024, the company anticipates billings between $10.1 billion and $10.2 billion, representing annual growth of 10% to 11%. Revenue is expected to come in between $7.95 billion and $8 billion, representing 15% to 16% growth.
