Cyber security player Palo Alto Networks (NYSE:PANW) recently announced its first quarter results that outpaced market expectations. The company has had a strong run this year, with its stock growing 20% during the year. But a weak outlook for the second quarter sent its stock tumbling 11% in the after-hours trading session post result announcement.

Palo Alto Networks’ Financials
For the first quarter, its revenues grew 18% over the year to $771.9 million, ahead of the Street’s estimate of $769 million. Adjusted earnings fell 10% over the year to $1.05 per share, but were ahead of the market’s forecast of $1.03 per share.

While the quarter’s performance was impressive, sales in the product segment fell 4% over the year to $231.2 million – the first ever decline in the segment in the last 11 quarters. The shift reflects the growing importance of the subscription segment. Analysts stated that “the magnitude and timing of the over stimulating focus on cloud security products left the firewall pipeline drained for the first quarter”. Subscription and support revenues grew 30% over the year to $540.7 million driven by a 38% growth in subscription revenues and 21% increase in services revenues.

Billings for the quarter grew 18% to $897.4 million with deferred revenues growing 26% to $3 billion.

For the current quarter, the company expects earnings of $1.11-$1.13 per share, significantly short of the Street’s expected earnings of $1.28 per share. The lower than expected earnings were attributed to the cost of acquisitions. Palo Alto Networks expects revenues of $838-$848 million for the second quarter and $3.44-$3.48 billion for the current year. It forecast the year’s earnings at $4.9-$5 per share. The market was looking for revenues of $851.28 million for the quarter and $3.46 billion for the year.

Palo Alto Network’s Acquisition Growth

Palo Alto Networks is targeting $6 billion in billings and $5 billion in revenues by fiscal 2022. It has been on an acquisition spree to deliver on this target. Recently, it announced the $150 million acquisition of San Jose-based cloud security startup Aporeto. Set up in 2016, Aporeto offers a comprehensive cloud-native security for containers and microservices. It identifies workloads and applies micro-segmentation across all infrastructures, thus allowing customers to secure applications at scale.

Aporeto had been recognized as a Gartner Cool Vendor in Cloud Security in 2018 and was among the leading 100 players in CNBC’s Upstart list for 2019. Aporeto co-founders Dimitri Stiliadis and Satyam Sinha have agreed to join Palo Alto Networks. Aporeto was privately held prior to the acquisition and had raised $38 million from investors including Norwest Ventures Partners, Comcast Ventures, and Wing Venture Capital. Valuation and other financial details of the company were not disclosed.

Palo Alto Network’s Product Growth

Besides acquisitions, Palo Alto Networks has also been improving its product portfolio. It recently announced new enhancements to Prisma Access, the comprehensive secure access service edge (SASE) platform. The Prisma platform integrates Palo Alto’s cloud security solutions to provide end-to-end security solutions on a cloud platform. These services include IPsec VPN, SSL VPN, cloud-delivered malware analysis, DNS Security, and URL filtering capabilities.

The enhancements include a new Prisma Access SD-WAN service that delivers a simple, secure end-to-end SD-WAN infrastructure, with Prisma Access operating as the cloud-based SD-WAN hub and next-generation firewalls operating as the SD-WAN appliances in the branch; a new cloud-based management user interface that enables for a consistent security policy to be applied across physical and virtual firewalls; new SaaS service-level agreements to extend the uptime; and security processing performance SLAs and new DLP service that ensures comprehensive data protection and governance.

Besides Prisma, Palo Alto has also been expanding the Cortex offering, its detection and response platform. It introduced Cortex XDR 2.0 that adds third-party data to a unified platform to deliver enhanced endpoint security. It now extends Cortex XDR’s behavioral analytics capabilities to logs collected from third-party firewalls to accelerate detection across multi-vendor environments. It also leverages AI and machine learnings to drive malware detection and to stay ahead of attackers’ techniques. Additionally, it has introduced a new Device Control module so that organizations have granular USB access management on the endpoint to prevent malware and data loss caused by unsanctioned devices. Recently, Cortex was also awarded the FedRAMP in process designation to help the company target the government sector as well.

Palo Alto is making the right moves to hit its target in the next couple years. Acquisitions and product development will continue to impair its earnings in the short run. Its stock is currently trading at $227.22 with a market capitalization of $22.3 billion. It touched a 52-week high of $260.63 in March this year. It was trading at a 52-week low of $168.81 in December last year, when most tech stocks had fallen.