Palo Alto Networks’ stock tanks 21% as latest push comes with growing pains

Palo Alto Networks Inc. shares tumbled in Tuesday’s extended session after the cybersecurity company came up short with its forecasts for the current quarter and trimmed its full-year revenue outlook.

The company models fiscal third-quarter revenue of $1.95 billion to $1.98 billion along with $2.30 billion to $2.35 billion in billings, a metric that takes into account deferred revenue. The FactSet consensus was for $2.04 billion in revenue and $2.62 billion in billings.

Palo Alto Networks

also projects $1.24 to $1.26 in adjusted earnings per share, while analysts were expecting $1.29.

The stock sank 21% in after-hours trading Tuesday. Shares have only ever logged one decline of at least 20% in a regular session, with that being a 24.2% daily plunge seen March 1, 2017.

The company is in the midst of trying to become a “platform” within the cybersecurity sector — akin to what management says ServiceNow Inc.

and Workday Inc.

are in their own spheres. The idea is to get customers to use more of the company’s products and have those offerings work together, whereas clients might otherwise rely on products from different vendors that don’t smoothly integrate.

“With all the promise that platformization holds, adoption is not always easy for many of our customers,” Chief Executive Nikesh Arora said on the earnings call. “Until now, we have primarily assumed that our customers will adopt our platforms on their own pace,” but now the company is launching various programs meant to make the shift easier for customers.

Palo Alto Networks ”must bear the cost of the transition through lower upfront financial outcomes, but we are convinced these will yield amazing outcomes for us in the mid- to long term,” he continued.

The company took down its full-year forecast, which now calls for $10.1 billion to $10.2 billion in total billings as well as $7.95 billion to $8.00 billion in total revenue. Palo Alto Network’s earlier forecast was for $10.7 billion to $10.8 billion in billings and $8.15 billion to $8.20 billion in total revenue.

“Our guidance is not a consequence of a change in the demand outlook out there,” Arora said. “Our guidance is a consequence of us driving a shift in our strategy in wanting to accelerate both our platformization and consolidation and activating our AI leadership.”

For the fiscal second quarter, Palo Alto Networks brought in $1.98 billion in revenue, up from $1.66 billion a year before. Analysts were modeling $1.97 billion.

Net income was $1.75 billion, or $4.89 a share, compared with $84 million, or 25 cents a share, in the year-before period. GAAP net income for the latest quarter included a $1.5 billion net tax benefit related to the release of the company’s valuation allowance.

On an adjusted basis, Palo Alto Networks earned $1.46 a share, whereas analysts were projecting $1.30 a share.

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