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Palo Alto Networks Set to Drop Most in Seven Years on Outlook

In Business
February 21, 2024

(Bloomberg) — Cybersecurity company Palo Alto Networks Inc. plunged 22% in premarket trading after the company cut its annual revenue forecast, sparking concerns that customers are reigning in tech spending. If the decline holds, it will be the biggest intraday drop in almost seven years.

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Sales will be $7.95 billion to $8 billion this fiscal year, the company said in a statement Tuesday. It previously projected revenue of as much as $8.2 billion, and analysts were estimating $8.18 billion.

The outlook suggests that customers may be dialing back their spending ambitions, even as online attacks proliferate. The top end of Palo Alto Networks’ sales forecast represents an increase of 16%, well below its 25%-plus growth rate of recent years.

The stock fell 22% before New York exchanges opened on Wednesday, setting it up for the biggest decline since March 1, 2017. The news also weighed on shares of other cybersecurity companies, including Crowdstrike Holdings Inc. Palo Alto Networks shares had climbed 24% this year, outperforming most tech stocks, with shareholders betting that cyber investments would continue to surge.

The company did maintain its outlook for earnings and free cash flow for fiscal 2024, which Chief Financial Officer Dipak Golechha said reflected “disciplined execution on profitable growth.”

Chief Executive Officer Nikesh Arora echoed those remarks on a conference call, telling analysts that the company has been successfully executing its profitable growth strategy. But he also said customers were facing “spending fatigue” in cybersecurity.

“This is new,” he said. Customers are finding that adding incremental products “is not necessarily driving a better security outcome for them.”

The Santa Clara, California-based company posted sales of $1.98 billion in the second quarter, which ended Jan. 31, up 19% from a year earlier. Analysts had estimated $1.97 billion. Product revenue grew more slowly than service and support sales, underscoring an ongoing shift at the company. Excluding some items, earnings amounted to $1.46 a share.

Palo Alto Networks’ billings — a closely watched measure — will range as high as $10.2 billion this year, the company said. Its previous range went as high as $10.8 billion. The company also said it aims to generate $15 billion a year from what it calls next-generation security by fiscal 2030.

Arora, the CEO, said customers are becoming more demanding with security companies as hacking attacks get worse. “We’re increasingly focusing on working with companies impacted by breaches,” he said.

Spending by federal customers was a little soft, he said, partly because one government program the company had planned for failed to materialize.

“Once bitten, twice shy,” he said, saying the company would be cautious about that source of revenue in the future.

But Arora sees growth potential from artificial intelligence. Customers are asking for help protecting the “successful and responsible deployment of AI in their infrastructure,” he said.

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