Palo Alto Networks has announced results which appear to vindicate its decision to pursue a "platformization" strategy.
When the cybersecurity firm first committed to driving consolidation and moving away from point products, stocks nosedived amid fears that the move would hit revenues.
Now Palo Alto Networks has announced new results which have prompted CEO Nikesh Arora to say that he is "very, very positively excited by the response to platformization."
"We're delighted with our Q4 results," he said in an earnings call. "We drove the top line ahead of the overall cybersecurity market and delivered improved profitability and strong cash generation."
He added: "I know there was significant consternation around our platformization strategy six months ago. All I want to say is: I wish we had started down that path sooner. The amount of interest and activity around it has certainly been hardening and shows promise."
After a "strong addition" of approximately 65 new platformizations in Q3, Palo Alto added more than 90 new platform customers in Q4 and now has "well over 1,000 total platformizations" among its 5,000 largest customers.
Platforms and pitfalls
When the platformization strategy was first announced earlier this year, investors were "scared" because the term implies bundling, discounts and, ultimately, a dent in profits.
Arora himself warned that the benefits of the new stance would take time to turn into tangible revenue. The firm also reduced its full-year guidance for revenue and billings, before it suffered a 28% drop in share price, the worst hit to its stock price since an IPO in 2012.
"We expect a typical customer entering into a platformization transaction will not pay us for our technology for a period of time,” Arora said in February 2024. “As these programs ramp up over the next year, we expect a change to our billings and revenue growth for the next 12 to 18 months. As customers move into the period [with] contracts of full billing and revenue contribution, we expect to see an acceleration in our top line metrics.”
The gamble now appears to have paid off. Total revenue for the fiscal fourth quarter 2024 grew 12% year over year to $2.2 billion, compared with total revenue of $2.0 billion for the fiscal fourth quarter of 2023. Fiscal year 2024 revenue shot up by 16% year over year to $8.0 billion.
GAAP net income for the fiscal fourth quarter of 2024 was $357.7 million, or $1.01 per diluted share, compared with GAAP net income of $227.7 million, or $0.64 per diluted share, for the fiscal fourth quarter of 2023.
"We expect platformization to be a key driver toward achieving our goal of $15 billion in NGS ARR in fiscal year 2030," Arora said in the latest earnings call. "And our Q4 performance bolsters our confidence and our ability to reach this goal."
The CEO also revealed that the number of senior-level customer meetings grew by 70% year during second half of the year and "even faster in Q4".
"We've literally had customers reach out now," he said. "Most recently, customer we were about to close a deal. Customers said no. I don't want to do this one deal."
All aboard... why Palo Alto Networks prefers platforms
Arora said that the evolving threat landscape and growing interest in products such as SASE (Secure Access Service Edge) were driving an acceleration in demand for platforms.
"AI adoption is proceeding at a rapid pace, faster than honestly I have seen any other new technology," he continued. "However, it is following a typical pattern. Innovation is driving the speed of adoption, while security might be an afterthought. At the same time, adversaries are leveraging AI capabilities to broaden attacks, better target organizations, and scale the malicious activity beyond the capabilities of defenses that rely solely on humans.
"This environment, paired with an ever more challenging threat landscape and a complex set of point products that are not well-integrated or even coordinated, is driving a growing need for platformization."
On its website, Palo Alto Networks claimed that a platform approach to cybersecurity has "significant and measurable benefits in the form of consolidation, simplification, cost savings and better security" and said platforms have helped customers reduce the number of security tools from an average of 40+ down to less than 10, which "has a huge impact on cost and manageability."
