Cloud Stocks: Should Palo Alto Networks Acquire ZScaler?

This week has been slow for the stock markets. The growing fear of the spread of Coronavirus, coupled with the uncertainty about the elections and overall economic conditions have sent the stocks tumbling. It was not the best week for cyber security player Palo Alto Networks (NYSE: PANW) to announce its disappointing quarterly results. Not only did the company fail to meet market expectations on revenues for the quarter, but its outlook was also weak.

Palo Alto Network’s Financials
Q2 revenues grew 15% to $816.7 million, missing the Street’s estimate of $844 million and the management’s forecast of $838-$848 million for the second quarter. GAAP net loss was $73.7 million, compared with a net loss of $2.6 million a year ago. On an adjusted basis, net income was $1.19 per share, compared with $1.51 per share reported a year ago. The market was looking for an EPS of $1.12 per share.

By segment, Product revenues fell 9% to $246.5 million. Subscription and support revenues grew 30% to $570.2 million driven by a 37% increase in SaaS-based subscription revenues and 20% rise in support revenues.

Among other metrics, billings improved 17% to $998.9 million and Deferred revenues grew 27% to $3.2 billion. Palo Alto added more than 2,500 customers during the quarter.

For the current quarter, Palo Alto expects revenues of $835-$850 million with an EPS of $0.96-$0.98 per share. It expects to end the year with revenues of $3.35-$3.39 billion and EPS of $4.55-$4.65. The market was looking for revenues of $873 million with EPS of $1.25 for the quarter and revenues of $3.47 billion with EPS of $4.95 for the year.

Palo Alto Network’s Product Concerns

Palo Alto attributed its weak revenue performance to the continued impact of sales incentives related to its Next-Generation Security products. This was represented in the 9% reduction of its products business.

Its sales incentive changes that went into effect last year had impacted its sales team’s focus on product versus next generation security. The company had addressed the issue by implementing several go-to-market programs to reignite the firewall sales growth. It was counting on the programs to deliver improvement this quarter, but that did not happen. Product performance continued to decline and it now realizes that the sales incentive change will take longer than expected.

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Sramana Mitra is the founder of One Million by One Million (1M/1M), a global virtual incubator that aims to help one million entrepreneurs ...

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