3 Hot Topics for Palo Alto Networks

There was a lot to like when Palo Alto Networks (NYSE: PANW) reported its third-quarter financial results. The company generated revenue of $567 million, which grew 31% compared to the prior-year quarter, while adjusted earnings per share of $0.99 soared 62% year over year. Both metrics eclipsed both the company’s forecast and analysts’ consensus estimates for the quarter.

While the company reported all of the expected metrics in its financial release, Palo Alto provided much more color in the conference call with analysts to discuss the results. Read on to find out what Palo Alto’s management had to say about the inevitability of cloud computing, the opportunity presented by existing customers, and the recent adoption of consumer data privacy protections in Europe.

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Cloud migration

Incoming CEO Nikesh Arora pointed out during the call that the world is “still in the very early stages of the cloud revolution for enterprises,” and Palo Alto believes this was one of the most compelling growth opportunities for the company. Outgoing CEO Mark McLaughlin said:

For cloud security, we have shown that you must protect all applications in all platforms through the combination of inline, host, and API-based security, which we do … [and] we now provide continuous monitoring of public cloud deployments, cloud storage protection, and compliance validation and reporting.

He pointed to Palo Alto’s recent acquisition of Evident.io, “a leader in public cloud infrastructure security,” saying that the data collected using its system would “enhance the effectiveness of other applications in the application framework.”

The company believes the transition to the cloud is “evitable,” and the need for cloud-based security will only grow, providing an ever-increasing opportunity for Palo Alto Networks.

Land and expand

One of the ways Palo Alto Networks has driven its remarkable results is with the strategy of “land and expand.” For those unfamiliar with the concept, the company illustrates the value of its next-generation firewall (as an example), and once customers use it and see how well the product works, the company is able to sell additional products and services, like its hybrid cloud software-as-a-service (SaaS) platform.

In response to an analyst question, McLaughlin said he sees the company’s existing customer base as its biggest opportunity:

As you can see, about 51,000 customers we’re serving today, the size of the customer base continues to grow very nicely over time, quarter over quarter … I think most prevalent today is the expansion opportunity with so many customers where you can see the lifetime value creation goes up very significantly. We think that’s the biggest driver.

In prepared remarks, McLaughlin pointed out that Palo Alto’s top 25 customers each made a purchase during the quarter, spending “a minimum of $28.7 million in lifetime value,” up 43% year over year. As the customer base grows, the opportunity to serve those customers increases.

Image source: Getty Images.

Privacy regulations

Like many tech executives this quarter, Palo Alto Networks addressed the issue of data protection and the recent passage of far-reaching privacy regulations enacted by the European Union (EU) — titled the General Data Protection Regulation (GDPR) — which aims to enforce the privacy rights of its citizens while protecting their data.

With many companies working feverishly to ensure compliance, Palo Alto has garnered a lot of interest from customers seeking to limit their liability under the new EU law, which requires “state-of-the-art capabilities for cybersecurity.” McLaughlin said, “We think everything that we provide across the platform fits very uniquely.” President Mark Anderson pointed out that the recent regulations “heightens awareness of customers to do something different than what they’ve been doing for the last two decades.”

The combination of this increased awareness and Palo Alto’s “relevance in Europe … has really ramped in the last four or five quarters and you see that in the performance. We get invited to the dance a lot more.”

He was referring, of course, to the company’s results in the region. The company has been able to leverage that interest into increased performance, as revenue grew 35% compared to the prior-year quarter, and has been outpacing year-over-year growth rates in other regions, on average, over the previous four quarters.

In a word: growth

If there’s a common thread to these discussions, it shows the many opportunities the company has to leverage its growth. The combination of secular tailwinds and a compelling strategy show why Palo Alto Networks will continue to thrive for years to come.

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Danny Vena has no position in any of the stocks mentioned. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.

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