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Strong Next-Gen Security Demand Gave Palo Alto Networks a Q4 Lift

Continued demand for new and innovative cybersecurity products helped Palo Alto Networks report strong results for its fourth quarter (ended July 31), according to Nikesh Arora, CEO and chairman of Palo Alto Networks.

“Next-Generation Security growth, driven by our rapid pace of innovation and strong sales execution, drove our results,” Arora, said Aug. 22, in an earnings news release. “As cybersecurity posture remains critical, our integrated three-platform strategy continues to drive large deal momentum as we consolidate and simplify our customers’ security architectures,” he noted.

In Q4, the company “again saw very strong results, starting with top line results that were well ahead of the guidance we initially outlined” for fiscal 2022, he told analysts on an earnings call.

Palo Alto Networks “delivered this growth while balancing our profitability commitments,” he said. “We also made significant investments to continue to transform our company and take advantage of the large and rapidly growing market opportunity we see in cybersecurity,” he noted.

Total company revenue for Q4 grew 27% from a year earlier to $1.6 billion, Palo Alto Networks reported. The company, meanwhile, swung to a $3.3 million (3 cents a share) profit from a loss of $119.3 million ($1.23 a share) a year earlier.

“On the top line, billings growth of 44 percent was the highest we’ve reported in four years,” Arora said.

Within the company’s core network security business, firewall as a platform billings grew 26%, he noted, explaining: “When we started reporting this metric, the intent was always to show that we continue to take share in the network security market,” while working to “transform the business to a software business.”

There were other positives for the company in the quarter, he said. For one thing, he noted: “We saw more longer duration deals as customers increasingly have the confidence to make large long-term commitments with us. This is important to the transformation objectives we set out for Palo Alto Networks. It confirms and validates our view that customers will consolidate if we give them constant best-of-breed products and ensure that they are integrated to deliver better security outcomes.”

Another upbeat trend: Several employees who left the firm returned to Palo Alto Networks., he noted. “To date, dozens of top performers have been rehired with many more in the funnel. Over 70 percent of people reached out to have expressed a desire to come back to us and a significant number already have. Fifty percent are returning from start-ups, the next largest percentage coming from peer companies.”

Over the past year, “we arguably saw the most challenging supply chain conditions the technology industry has ever seen,” he went on to say. But he told analysts: “We executed through this well during the year with modest impacts to our gross margins.”

Palo Alto Networks expects those conditions will “eventually ease,” he said. But he warned: “For our planning, we’re assuming a material improvement won’t be seen prior to the end of fiscal year ’23. However, as the supply challenges fade, we expect this will start to have a favorable impact on our product gross margins.”

Meanwhile, “there’s a continuing debate on inflation, its nature and duration,” he said, telling analysts: “We saw some labor and other inflationary pressures in the second half of the fiscal year. We do not anticipate these pressures going away in the next fiscal year and we have planned for it to persist through fiscal year ’23.”

The firm’s transformation, meanwhile, “has taken us far,” he said, adding: “We are a recognized leader in 11 cybersecurity categories across our three platforms. Next-generation security contributed more than 38 percent of our billings, helping to accelerate our growth. In network security, we now have the most comprehensive solution across three form factors that share a common architecture and also offer a suite of market-leading security subscriptions. We have built, assembled and integrated capabilities in nine modules that make up Prisma Cloud, which is now the leader in cloud native security.”

Palo Alto Networks now has “three anchor products in Cortex,” he also said, adding: “The proof that this transformation is working is in the momentum we are seeing in our customers. The number of customers that spend over $1 million annually with us continues to grow, with the millionaire count now in excess of 1,200 and the number of Global 2000 customers that have purchased products in all three of our platforms … now 50 percent.”