Palo Alto Networks CEO Says Company Is Converting Partners From Legacy Security Vendors

Palo Alto Networks is continuing to see partners shift their investments over from legacy competitors, CEO Mark McLaughlin said on the company's third-quarter earnings call Thursday, resulting in another quarter of double-digit sales growth for the network security vendor.

"The NextWave partner community is thriving, with new and existing partners de-focusing on legacy vendors and shifting their investments to Palo Alto Networks," McLaughlin said, though he didn't name which vendors those were.

"We have achieved the size in the market, and continue to have very high growth rates, where everyone is paying attention to that, and they definitely want to have Palo Alto Networks as a place where they invest in and partake in that growth. We're delighted with that," he said.

[Related: Palo Alto Networks Updates Platform With New Cloud, SaaS Application Security Features]

McLaughlin said Palo Alto Networks is continuing to expand its partner ecosystem with new routes to market through systems integrators, as well as building out its service provider vertical. The company launched a dedicated team around service providers about nine months ago and are "aggressively" working with them and launching new capabilities for that market, he said.

Sales overall for the quarter, which ended April 30, were $345.8 million, up 48 percent year over year. Net loss for the quarter was $70.2 million, compared with a loss of $45.9 million in the same quarter last year. Shares of Palo Alto Networks stock dropped 9.6 percent in after-hours trading, to $133.95.

McLaughlin said Palo Alto Networks is "continuing to widen the gap in a continually competitive market," citing examples of big competitive wins over Check Point, Juniper, Symantec, FireEye and Cisco for both subscription and appliance technologies. McLaughlin said Palo Alto Networks is "well-positioned" for the shift from legacy vendors, one reason he said it is seeing growth in its partner base.

"On the technology side, we haven't seen the competition do anything technically interesting there that would cause us any concern," McLaughlin said, saying that is reflected in customer additions, lifetime value increases and strong penetration rates into customers.

That is particularly true on the endpoint, where Palo Alto Networks has its Traps next-generation endpoint security offering, McLaughlin said. He said endpoint security discussions are getting pushed high up in security conversations with customers, driving growth for its Traps solution.

"Obviously legacy technology isn't working well for [customers]. … We think we've got the right technology to solve a very important problem and that problem is growing," McLaughlin said.

CFO Steffan Tomlinson highlighted the company's subscription and services growth rates, which were up 69 percent year over year and 57 percent year over year, respectively. McLaughlin said Santa Clara, Calif.-based Palo Alto Networks is seeing customers adopt more and more capabilities across the platform, with third quarter growth in its Traps, AutoFocus and WildFire lines.

Palo Alto Networks said it expects revenue for the fourth quarter to be between $386 million and $390 million, up 36 percent to 37 percent year over year. It expects net income per share to be between 48 cents and 50 cents.