(Bloomberg) — Palo Alto Networks Inc. fell in late trading after giving a gloomy forecast for the current period, reigniting concerns about a slowdown in cybersecurity services.
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Fiscal fourth-quarter revenue will be between $2.15 billion and $2.17 billion, the company said in a statement Monday. Analysts had expected a figure at the high end of that range, according to Bloomberg data.
Fourth-quarter billings – a closely watched benchmark – will be between $3.43 billion and $3.48 billion in the period through July, Palo Alto Networks said. Analysts had estimated $3.47 billion.
The tepid outlook follows another disappointing quarterly report in February, when shares of Palo Alto Networks suffered their worst one-day decline ever. Chief Executive Officer Nikesh Arora said at the time that customers were experiencing “spending fatigue” in cybersecurity. That fueled fears that customers were tightening their budgets despite an increase in attacks.
In aftermarket trading Monday, shares fell as much as 10% to $291.55. That wiped out the stock’s 9.8% gain at the close this year. The shares of industry peers Crowdstrike Holdings Inc., Zscaler Inc. and Fortinet Inc. also fell during extended trading.
Shorter contracts and strategy changes are weighing on bookings at Palo Alto Networks, according to Bloomberg Intelligence. But management expects growth to pick up in the second half of 2024.
On a call with analysts, Chief Financial Officer Dipak Golechha acknowledged that the company was experiencing “significant volatility in our billings.” But he argued that this was due to the payment terms and that there were other more relevant metrics, such as sales of new subscriptions for next-generation products, which can also include artificial intelligence.
Arora echoed that idea, saying invoices were “an artificial benchmark.” He prefers to look at subscription revenues and remaining performance obligations and says he is surprised by the market’s reaction. “Using these numbers, the company is stronger than we expected,” Arora said.
‘No change’
Arora also said that cyber attacks continue unabated. He pointed to breaches by advanced nation-state actors and others that he said could wreak havoc on systems within hours. Arora said he expects cybersecurity spending to continue, adding that customers are focused on securing the cloud.
“In terms of cybersecurity spending, we don’t see any change in the space or trajectory,” he said. “Most clients have a range of projects they want to execute and the only limiting factor seems to be execution capacity.”
An April report backed by the US government highlighted the risks of cloud computing. The report specifically cited multiple issues with Microsoft Corp., but also raised broader concerns about the ability of national actors to compromise cloud service systems with increasing sophistication.
Still, Palo Alto Networks and its peers are experiencing a slowdown in firewall sales, while other product categories face “intense competition,” according to Westpark Capital.
Slower sales
The company’s third-quarter revenue rose 15% to $1.98 billion, marking its slowest growth since early 2020. Profit came to $1.32 per share, excluding some items. Still, both figures exceeded analyst expectations.
The Santa Clara, California-based company reported a 3% increase in billings for the quarter, its smallest gain since its 2012 initial public offering.
But next-generation annualized recurring revenue — one of the numbers touted by Palo Alto Networks executives — was $3.79 billion, better than the $3.71 billion estimate and up 47%. Remaining performance obligations, a measure of contracted sales yet to be invoiced, were $11.3 billion, up 23%.
(Updates with more commentary from management, starting in the fourth paragraph.)
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