Drill Down Earnings: A quick look at Palo Alto Networks ($PANW) and its Fiscal Q2 earnings report

Summary

The video script provides an insightful analysis of Palo Alto Networks' latest earnings report, highlighting their slowing growth rate and challenges in selling individual cybersecurity fixes. As customers shift towards seeking holistic solutions and platform-based offerings, Palo Alto Networks is forced to re-evaluate its sales approach. The script delves into the company's conference call, where the CEO acknowledges the need for consolidation and platform plays, moving away from their traditional product-centric approach. The script also touches on the stock's steep after-hours decline, reflecting investors' concerns over Palo Alto Networks' ability to sustain its previous growth trajectory.

Takeaways

• 🔻 Palo Alto Networks reported fiscal Q2 2024 results with $2 billion in revenue, up 19% year-over-year, but growth has slowed from their typical 25% rate.
• ⚠️ The company provided weak guidance, projecting revenue growth as low as 16% for the next quarter, disappointing investors.
• 💰 Customers are scrutinizing their spending and seeking more comprehensive, platform-based solutions rather than individual fixes.
• 🔄 Palo Alto Networks needs to shift their go-to-market strategy towards consolidation and platform plays to meet customer demands.
• 📉 The stock plunged in after-hours trading, giving up all its gains for the calendar year 2024.
• 🗣 CEO Nish Arora acknowledged the need to adapt their sales approach and offerings to align with customer preferences.
• 📊 The company's billings growth, a key metric for future performance, has been decelerating over the past few quarters, reaching only 22.7% in Q2.
• 🕵️ Customers are taking a closer look at what they buy and how they buy it, leading to slower sales cycles and closure rates.
• 💼 Palo Alto Networks is reevaluating its product portfolio and sales tactics to better cater to the changing market dynamics.
• ⚡ The cybersecurity industry is evolving, and Palo Alto Networks needs to adapt quickly to maintain its competitive edge.

Q & A

What was the main financial performance of Palo Alto Networks in the reported quarter?

Palo Alto Networks reported $1.98 billion in revenue for the second fiscal quarter ended January 2023, representing a 19% year-over-year growth. However, this growth rate was lower than the company's typical growth rate of around 25%.

What guidance did the company provide for future growth?

Palo Alto Networks provided guidance indicating that their revenue growth rate could slow down to as low as 16% year-over-year at the high end of their guidance range for the upcoming quarter.

How did the market react to the company's earnings report?

The stock market reacted negatively to Palo Alto Networks' earnings report. The company's stock price dropped significantly in after-hours trading, falling from around $370 to $290 per share, erasing all the gains it had made in the current calendar year.

What was the primary reason cited for the slowdown in growth?

According to the company's CEO, Nikesh Arora, customers are taking a more holistic approach to their purchases and are no longer as eager to buy individual security solutions. Instead, they prefer to consolidate their purchases into platform deals and comprehensive solutions.

How is Palo Alto Networks planning to address this change in customer behavior?

Palo Alto Networks is shifting their go-to-market strategy towards offering more platform deals and consolidation plays, rather than focusing on individual product sales. The company aims to provide more holistic solutions to meet customer demands.

What metric did the company highlight as an important indicator of future performance?

The company emphasized that the Remaining Performance Obligations (RPO) metric, which reflects the underlying demand and book of business, is a key indicator to watch. However, the RPO growth rate of 22.7% was also slowing down, suggesting potential challenges ahead.

What was the stock price movement in after-hours trading?

After the earnings report, Palo Alto Networks' stock price dropped significantly in after-hours trading, falling from around $370 to $290 per share, erasing all the gains the stock had made in the current calendar year.

How did the company's growth rate compare to its historical performance?

The reported revenue growth rate of 19% was lower than Palo Alto Networks' typical growth rate of around 25%, indicating a slowdown in the company's growth trajectory.

What was the specific guidance provided by the company for the upcoming quarter?

For the upcoming quarter, Palo Alto Networks provided guidance indicating that their revenue growth rate could slow down to as low as 16% year-over-year at the high end of their guidance range.

What was the key takeaway from the earnings report, according to the script?

The key takeaway from the earnings report was that Palo Alto Networks' customers are no longer as eager to buy individual security solutions and are instead seeking more comprehensive platform deals and holistic solutions. This change in customer behavior is forcing the company to adapt its go-to-market strategy and product offerings.

Outlines

00:00

😮 Palo Alto Networks' Growth Slowdown and Customer Shift

The video discusses Palo Alto Networks' recent quarterly earnings report, where the company reported $1.98 billion in revenue, a 19% year-over-year growth, which is slower than their typical 25% growth rate. The guidance for future growth was even lower, with the top end of the range suggesting only 16% year-over-year growth. The CEO, Nesh Aurora, explained that customers are no longer as eager to purchase individual security solutions and are instead seeking more holistic platform deals and consolidated offerings. This shift in customer demand has led to slower sales cycles and close rates, impacting Palo Alto Networks' near-term sales performance. The stock price plummeted in after-hours trading, giving up all its gains from the current calendar year.

05:01

🔑 Palo Alto Networks' Billings Growth Slowing Down

The video highlights a key metric for Palo Alto Networks, their billings growth, which is the remaining performance obligations. This metric grew at only 22.7%, a decreasing rate over the last few quarters. This slower billings growth is considered a bad sign for the company's future performance, in line with the slowdown in sales and customer demand shift towards consolidated platform offerings instead of individual security solutions.

Keywords

💡Revenue growth

Revenue growth refers to the increase or decrease in a company's total sales or revenue over a specific period of time, usually year-over-year. In the context of this video, Palo Alto Networks reported 19% year-over-year revenue growth, which is lower than their typical growth rate of around 25%. This slower growth rate is concerning for investors, as it indicates a potential stagnation in the company's sales and market share.

💡Guidance

Guidance refers to a company's official forecast or projection of its future financial performance. In this video, Palo Alto Networks provided guidance that their revenue growth may only reach 16% at the high end of their projected range. This weaker guidance, lower than their historical growth rates, is cited as a significant factor contributing to the sharp drop in the company's stock price after the earnings report.

💡Customer behavior

Customer behavior refers to the patterns and trends observed in how customers interact with and make purchasing decisions about a company's products or services. According to the video, Palo Alto Networks' customers are becoming more selective and critical in their buying process, looking for comprehensive, holistic solutions rather than individual point products. This shift in customer behavior is forcing Palo Alto Networks to re-evaluate their product offerings and sales strategies.

💡Cybersecurity

Cybersecurity refers to the practice of protecting systems, networks, and programs from digital attacks and unauthorized access. Palo Alto Networks is a cybersecurity company that offers solutions to protect businesses from threats like ransomware and hacking. However, as mentioned in the video, customers are now looking for more comprehensive, platform-based cybersecurity solutions rather than individual point products to address specific threats.

💡Platform deals

Platform deals refer to larger, more comprehensive sales agreements that involve bundling multiple products or services into a unified solution. According to the CEO of Palo Alto Networks, the company is shifting its focus towards offering platform deals and consolidation plays, as customers are more receptive to these holistic solutions compared to individual point products. This transition is necessary to adapt to changing customer preferences and maintain growth.

💡Remaining performance obligations (RPO)

Remaining performance obligations (RPO) is a metric used to measure the amount of revenue that a company expects to recognize in the future from existing contracts or commitments. In the video, the CEO of Palo Alto Networks mentions that their RPO growth rate of 22.7% is a more accurate representation of the underlying demand for their products, despite the weaker guidance for overall revenue growth. RPO is considered a leading indicator of future revenue potential.

💡Billings

Billings refer to the total value of services or products that a company has invoiced or charged its customers, regardless of whether the revenue has been recognized or collected yet. In the context of the video, the CEO highlights that Palo Alto Networks' billings growth rate of 22.7% is an important metric to consider, as it reflects the underlying demand for their offerings, even though their reported revenue growth may be slower due to changes in customer buying behavior.

💡Consolidation

Consolidation, in the context of this video, refers to the process of combining multiple products or services into a single, integrated solution. The CEO of Palo Alto Networks states that the company is shifting its strategy towards offering more consolidation plays and platform deals, as customers are increasingly seeking comprehensive, unified solutions rather than individual point products to address their cybersecurity needs.

💡Go-to-market strategy

A go-to-market strategy is a company's plan for delivering its products or services to the target market. In the video, the CEO of Palo Alto Networks acknowledges that the company needs to re-evaluate its go-to-market strategy and how it sells its offerings to customers. This is in response to the changing customer behavior and preferences towards platform deals and consolidated solutions, as opposed to individual point products.

💡Stock selloff

A stock selloff refers to a significant decline in a company's stock price, typically triggered by negative news or disappointing financial results. In the case of Palo Alto Networks, the video mentions that the company's stock experienced a sharp selloff in after-hours trading, with the share price dropping from $370 to $290, erasing gains from earlier in the year. This selloff was a direct reaction to the company's weaker-than-expected guidance and the challenges it faces in adapting to changing customer demands.

Highlights

Palo Alto Networks reported second fiscal quarter results that were okay but not as strong as expected, missing guidance.

Revenues were $1.98 billion, up 19% year-over-year, but growth has slowed from the previous 25% clip.

The guidance at the top end of the range showed only 16% year-over-year growth, indicating stagnating sales.

Customers are taking a real look at what Palo Alto Networks sells and how they sell it, leading to slower times to sell products, slower close rates, and less sales in the near term.

Customers are digesting spend from multiple vendors and questioning the need for individual fixes from Palo Alto Networks.

The stock dropped significantly in after-hours trading, giving up all the gains of the current calendar year.

Customers are no longer buying individual fixes and instead want a more holistic approach and platform deals.

Palo Alto Networks CEO Nir Zuk acknowledged the need to shift towards consolidation plays and platform offerings.

The company's remaining performance obligations (RPO) growth rate of 22.7% is falling each quarter, indicating a potential sign of trouble.

The big earnings takeaway is weak guidance, customers preferring holistic solutions over individual fixes, and the need for Palo Alto Networks to change its sales approach.

The shift towards consolidation and platform deals means slower growth for Palo Alto Networks in the near term.

Palo Alto Networks has had a strong stock performance over the past year, but the earnings report caused a significant drop in after-hours trading.

The company's underlying demand, book of business, and pipeline are strong, but the timing of deals is being pushed out due to the shift towards consolidation and platform offers.

Palo Alto Networks' customers are looking at individual fixes they've already bought from other vendors and questioning the need for additional fixes from Palo Alto Networks.

The company acknowledges the need to change its go-to-market strategy and focus on consolidation and platform plays instead of individual best-of-breed offerings.

Transcripts

they're taking a real look at what they

sell and how they sell it that's going

to mean slower times uh to sell products

slower close rates slower sales means

less sales in the near

[Music]

term right welcome to the drill down

earnings I've got the latest results

from poo Alto networks the business

story behind One stock on a move I'm

Cory Johnson the chief Market strategist

from futurum group palto networks

reporting second fiscal quarter a

quarter that ended at the end of January

the results were okay but maybe not what

the excited investors have learned to

look for Wall Street just likes a beat

or a miss this was kind of right in line

but the guidance was certainly a Miss

for this company we want to dig into the

business here go beyond the beat or the

Miss here's the business at the actual

numbers 1.98 billion hell let's just

call it two billion in revenues that was

up 19% from the previous year but this a

business that used to grow to 25% clip

so not great growth for this company the

guidance even worse guidance at the top

end of the range they gave us a range

they said at the top end only 16%

year-over-year so palow Alto Network

sales are

stagnating uh and they've been kind of

the growth has been kind of tailing off

a little bit but I think this is a real

surprise here from what we might have

expected from this company let's look a

little bit deeper beyond that what are

we seeing from their customers so in the

conference call the company told us that

their customers are just digesting the

spend from so many other things that

they're buying when palot networks

knocked on the door used to say hey we

got cyber security for you we can help

you from ransomware we can help you from

hacking great we'll buy it where do we

sign not so easy anymore they say their

customers are looking hey we bought this

thing from this guy we bought another

thing from another guy we've got a third

vendor coming in here selling us a third

thing why are we going to sign with

palot toet what are you getting us

exactly so the company nashor the CEO

saying they're taking a real look at

what they sell and how they sell it

that's going to mean slower times uh to

sell products slower close rates slower

sales means less sales in the near term

that rocked the stock let's look at the

charts when you look at the after hours

trading this stock going from 370 down

to

290 wow big drop in the after hours

really giving up all the gains of well

kind of just this year it's it's

incredible the stock has had such a run

over the last year over this current

calendar year so the stocks right about

back to where they started uh about

Christmas time giving up all the the 25%

% gains or so they've had for the

calendar year but again the problem is

their customers are looking at the

individual fixes that they used to buy

for you can fix my ransomware problem

I'll buy right now now they want a more

holistic approach and Nash Aurora the

CEO of Palo Network saying we got to

kind of go back to the draw drawing

board we're going to sell some platform

deals bigger platform fixes for lots of

stuff but these little fixes aren't uh

customers aren't buying it literally

here's NES Aurora on the comp conference

call that just ended if you noticed that

we have a higher win rate on platform

deals we have a higher win rate in

consolidation plays as opposed to best

bre head-ons which end up costing more

time and energy and you see very I

called it Rogue Behavior where people

start trying to desperately hold on to

customers so we are trying to shift our

go market towards a consolidation play

and platform play um I think as I said

to uh earlier the right number to look

at in this context is RPO the underlying

demand is strong our book of business is

strong our pipeline is strong uh there

is nothing going on on the demand side

it's just that we see this pushing out

of the buildings towards later Parts as

we get more and more consolidation

offers and platform offers out there so

consolidation platform not individual

fixes that means slower growth for

paloalto networks what's the big

earnings takeaway we'll have that and

the bite one number that tells us a

whole lot right after this the drill

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futurum group all right here's your

quick drill down earnings Takeaway on

paloalto network work's most recent

quarter second fiscal quarter for the

company that ended in January results

were okay $2 billion in sales but only

19% growth that might be a lot for some

companies not for these guys used to

grow 25% so weak guidance going forward

that the growth rates might be as low as

16% or Worse stock selling off big time

after hours customers telling them they

don't want individual fixes they want

Holistic Solutions platform sales Pala

change having to change what they sell

and how they sell it and you can see

that in the bite the drill down earnings

bite one number that tells us a whole

lot

22.7% that's their Billings the

remaining performance obligations

growing at only

22.7% kind of falling each of the last

few quarters not great for this company

and probably a bad sign for things to

come all right thanks for listening to

drillon earnings I'm Corey Johnson check

us out on all the socials drillon

earnings part of the 65 Media

Group

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