Palo Alto Networks' fiscal second-quarter earnings report and reduced 2024 guidance for PANW stock sent shares in cybersecurity companies plunging on Wednesday. Palo Alto's decision to bundle more products in discounted packages as part of a "Platformization" strategy could spark an industry pricing war, some investors worry.
Central to Palo Alto's strategy is giving new customers free products and services in trials on the expectation they will sign three -to- five year contracts. The free trials are expected to be about six months on average, but could be 12 months depending on the product bundle, Palo Alto told analysts.
Privately held cybersecurity companies might struggle competing against the Palo Alto bundling strategy because they typically sell fewer products, even if they are more advanced.
Meanwhile, Palo Alto released fiscal Q2 earnings after the market close on Tuesday.
On the stock market today, Palo Alto stock plunged 28.4% to close at 261.97. Shares in CrowdStrike Holding fell 9.7% to 292.36. Zscaler tumbled 14.1% to 213.92. Fortinet fell 3.8% to 65.34.
SentinelOne also took a hit as S stock fell 12.2% to 25.50. Shares in Rapid7 fell 7.9% to 54.27.
Shares in Check Point Software Technologies, Qualys, Okta and CyberArk Software also retreated.
Start Of Cybersecurity Price War?
"While some investors may view the decision as a de facto price cut or initiation of a price war, we believe that Palo Alto's strategy is akin to Microsoft's of bundling, where it can capture significant market share, thus becoming an increasingly important strategic partner," said William Blair analyst Jonathan Ho in a report.
Palo Alto's sales in computer network "firewall" products have slowed and growth is coming from services delivered from its cloud computing platform. With more business apps and workloads running on distributed cloud platforms, instead of on-premises data centers, demand for network firewall appliances has dropped.
Palo Alto Networks lowered guidance for the second straight quarter.
"Like many others, we're surprised by Palo Alto declaring a mid-year strategic pivot that results in cutting 2024 billings and revenue, while maintaining EPS and free cash flow," said Deutsche Bank analyst Brad Zelnick in a report. "This move will give Palo the latitude to better compete with price aggressive competitors, both venture backed startups and legacy firewall players."
In its new marketing strategy, Palo Alto will let new customers trial some of its products for free until contracts with their existing security vendors expire. That will lower switching costs for customers that move to the Palo Alto cloud platform.
CrowdStrike And Zscaler Impact
At Morgan Stanley, analyst Hamza Fodderwala said in a report: "In the short term, this effectively means higher discounting. Long term, Palo Alto plans to make up for the headwind with larger deals, longer-duration and higher average selling prices as the contracts ramp."
At Jefferies, analyst Joseph Gallo said in a report: "PANW's results will take the cyber complex down given fears of broad-based enterprise spend fatigue. While its logical for cyber fatigue in Palo Alto's megadeals, we haven't heard this from anywhere else and believe CrowdStrike and Zscaler are positioned to meet expectations."
Zscaler reports earnings on Feb. 29. Earnings for CRWD stock are due March 5.
UBS analyst Roger Boyd said in a report: "In our view, the reality could be that customer consolidation is not moving fast enough to offset a slowing firewall market and that faced with further billings headwinds, Palo Alto company chose to lean further into consolidation. Management suggests that in return for 3 to 6 months of free solutions they should be able to capture longer contract durations."
For fiscal Q2 ended Jan. 31, Palo Alto earnings rose 39% to $1.46 a share on an adjusted basis. Further, revenue for PANW stock rose 19% to $2 billion, including acquisitions.
Analysts expected earnings of $1.30 a share on sales of $1.97 billion.
PANW Stock: Billings Growth Misses
For the current quarter ending in April, Palo Alto forecast revenue in a range of $1.95 billion to $1.98 billion vs. estimates of $2.04 billion. The company predicted billings, a sales growth metric, in a range of $2.3 billion to $2.35 billion, missing estimates of $2.62 billion.
For full-year 2024, Palo Alto lowered guidance. The company expects revenue of $7.975 billion at the midpoint of guidance, up 15.5% versus previous guidance of $8.15 billion to $8.2 billion.
The cybersecurity firm forecast billings of $10.15 billion vs. previous guidance of $10.7 billion to $10.8 billion.
In November, Palo Alto lowered full-year fiscal 2024 billings guidance due to pressure in the network firewall business. Also, management told analysts that companies are taking longer to approve computer security purchases.
Firewall Market Growth Slows
In addition, sales for firewall network appliances have slowed. Firewall appliances protect computer networks by blocking online intrusions and monitoring web-based apps.
Further, Palo Alto Networks has spent over $4 billion making acquisitions to build a broad cloud-based security platform.
Palo Alto Networks has expanded into endpoint security and other areas. Endpoint tools detect malware on laptops, mobile phones and other devices that access corporate networks.
Also, some analysts expect upside from Palo Alto's cloud-based security operations center, which detects and responds to computer hacking incidents.
Heading into the Palo Alto earnings report, the cybersecurity stock had advanced 24% in 2023.
Meanwhile, PANW stock holds a perfect Relative Strength Rating of 97 out of a best-possible 99, according to IBD Stock checkup.
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