Categories Analysis, Technology

Work-from-home tailwinds and higher security needs will continue to propel Palo Alto Networks (PANW) forward

Palo expects most of its growth to come from software and services

Shares of Palo Alto Networks (NYSE: PANW) have gained 13% since the beginning of this year. The company ended its fiscal year 2020 with strong results for the fourth quarter. The quarterly numbers benefited from the accelerated move to remote work and the increased need for cybersecurity in the current environment.

Quarterly performance

Revenue increased 18% year-over-year to $950.4 million in the fourth quarter of 2020 while adjusted EPS amounted to $1.48. Billings rose 32% to $1.39 billion, driven by work-from-home tailwinds and success in next-gen security.

Palo Alto saw revenue growth across all geographies. Product revenue remained flat versus the prior year but subscription and support revenue grew 29% and made up 68% of total revenue.

Cybersecurity

Palo Alto saw strong growth in its next-generation security business with billings rising 86% year-over-year to $357 million in the fourth quarter. In fiscal year 2018, NGS collective offerings made up around 8% of total billings. This number grew to 20% in fiscal year 2020, amounting to $928 million.

The company is in the process of transforming into a three-platform company with a focus on network security through Strata, cloud security through Prisma and artificial intelligence, machine learning and automation through Cortex. The Cortex XSOAR, which enables automation for security solutions, doubled customers and billings over the past year, making it a leader in the market.

In cloud security, the company’s integrated platform approach is seeing good results and Prisma Cloud is benefiting from the global shift to cloud computing. Prisma Cloud has acquired over 1,800 customers, several of whom are consolidating multiple solutions with its unified cloud security platform. Palo is planning to launch new cloud security modules in data security, network security and IAM security in the near future.

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Crypsis acquisition

Palo Alto agreed to acquire cyber consulting company The Crypsis Group for $265 million. The deal is expected to close in the first quarter of 2021. The acquisition is expected to help Palo expand its cybersecurity offerings as Crypsis brings its incident response, forensics and consulting capabilities to Palo’s Cortex XDR portfolio.

Remote work

The COVID-19 pandemic accelerated the shift to work from home and Palo witnessed strong conversion in its Prisma Access trials as companies rapidly moved their employees to remote work. The transition to work from home is beneficial for Palo as the need for cybersecurity increases once again as people work from remote locations.

Outlook

In 2021, Palo will continue to invest in its next generation security and security subscriptions and the company expects to face challenges in hardware due to the work from home transitions. Palo expects most of its growth to come from software and services.

For the first quarter of 2021, billings are expected to grow 15-17% year-over-year to $1.03-1.05 billion. Revenues are expected to grow 19-20% to $915-925 million. Adjusted EPS is expected to be $1.32-1.35. For the full fiscal year, billings are expected to grow in the mid-teens and revenue is expected to grow in the high-teens. Product revenue is expected to be flat to slightly down year-over-year.   

Click here to read the full transcript of Palo Alto Networks Q4 2020 earnings call

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