Palo Alto Networks: We’re Not Looking For More Large M&A

‘I principally do not believe in having two products in the same category because there is confusion, it destroys the strategy and creates lots of unnecessary kerfuffle in the organization,’ says CEO Nikesh Arora.

Palo Alto Networks doesn’t plan to pursue any more large acquisitions after spending a whopping $3.46 billion on 12 megadeals since 2018.

The Santa Clara Calif.-based platform security vendor has needed to be careful when probing potential acquisition targets since Palo Alto Networks already has a product in pretty much every category where it wishes to play, said Chairman and CEO Nikesh Arora. Any deals in spaces where the company already has a product would lengthen the integration process and create uncertainty for customers, Arora said.

“I principally do not believe in having two products in the same category because there is confusion, it destroys the strategy and creates lots of unnecessary kerfuffle in the organization,” Arora told Wall Street investors Monday. “So that’s why our opportunities to go expand in categories is limited.”

[Related: Palo Alto Networks Nabs Barracuda Networks CEO BJ Jenkins As President]

Arora said there are certain security categories like identity where Palo Alto Networks isn’t looking to play, so even if there are potential acquisition targets in the space, the company isn’t biting. Palo Alto Networks has decided to focus its investments on three areas where the company believes it will be the market leader, according to Arora: cloud security, SOC automation, and network firewalls.

“At this time, we believe we have assembled the key pillars needed to execute on our platform strategy,” Chief Financial Officer Dipak Golechha told investors Monday. “We expect only incremental M&A activity in fiscal year ‘22 as compared to the recent past.”

There were many high-growth cybersecurity sectors such as Secure Access Service Edge (SASE) and cloud security where Palo Alto Networks wasn’t a player when Arora joined the company in June 2018. Palo Alto Networks additionally wasn’t a full player in the Security Operations Center (SOC) or Extended Detection and Response (XDR) at the start of Arora’s tenure, according to Arora.

The cost and time required to organically build capability in cloud security, SASE, XDR and SOC would have taken Palo Alto Networks four-to-five years, Arora said. As a result, Palo Alto Networks determined that scouring the market for the best-in-class players in key categories and buying them was the right approach. Three years and 12 deals later, he said Palo Alto Networks has coverage in those categories.

“Does it mean we might tuck in a product company [acquisition] here or there? Yes,” Arora said. “But it also means that we’re not looking for substantive acquisitions at this current point in time.”

Those acquisitions have paid dividends, Arora said, with much of Palo Alto Networks’ next-generation security billings coming from inorganic capabilities that have been integrated into the company’s platform. There are parts of the acquisitions where Palo Alto Networks would like to see more traction and is focusing more investment, but for the most part, he said the acquired assets have been digested.

Palo Alto Networks’ largest transactions include: the $800 million buy of attack surface management vendor Expanse in October 2020; the $560 million buy of analytics and automation vendor Demisto in February 2019; and the $420 million purchase of SD-WAN player CloudGenix in March 2020. But the company hasn’t made any deals since February, when it announced the $156 million buy of Bridgecrew.

“We’re building lots and lots more data capability in the last few years,” Arora said. “It’s all showing up hopefully in the billings that you’re seeing that we’re able to provide more capability to our customers.”

Palo Alto Networks sales for the quarter ended July 30 jumped to $1.22 billion, up 28.3 percent from $950.4 million a year ago. That beat Seeking Alpha’s estimate of $1.17 billion.

The company recorded a net loss of $119.3 million, or $1.23 per diluted share, 102.5 percent worse than a net loss of $58.9 million, or $0.61 per diluted share, the year before. On a non-GAAP basis, net income jumped to $161.9 million, or $1.60 per diluted share, up 11.7 percent from $144.9 million, or $1.48 per diluted share. That crushed Seeking Alpha’s net income projection of $1.44 per diluted share.

Palo Alto Networks’ stock soared $37.93 (10.18 percent) to $410.50 per share in after-hours trading Monday. That’s the highest the company’s stock has ever traded since going public in July 2012.

On a full-year basis, revenue skyrocketed to $4.26 billion, up 24.9 percent from $3.41 billion a year earlier. Net loss for the fiscal year worsened to $498.9 million, or $5.18 per diluted share, 86.9 percent larger than a net loss of $267 million, or $2.76 per diluted share, the year prior.

Subscription and support revenue for the quarter leapfrogged to $879.9 million, up 36.5 percent from $644.8 million last year. Product revenue for the quarter climbed to $339.4 million, up 11.1 percent from $305.6 million the year prior.

For the coming quarter, Palo Alto Networks expects diluted non-GAAP net income of $1.55 to $1.58 per share on total sales of $1.19 billion to $1.21 billion. Analysts had been expecting non-GAAP earnings of $1.60 per share on total revenue of $1.15 billion, according to Seeking Alpha.