Is Palo Alto Networks Getting Ready For An Acquisition Spree?

| About: Palo Alto (PANW)

According to a recent Gartner report, global enterprises are transforming their security spending strategy by moving away from prevention-only approaches to more detection and response-related ones. Gartner believes that the global spending on information security will grow 7.6% in 2017 to $90 billion and predicts this market to grow to more than $113 billion by 2020.

Palo Alto Networks’ Offerings

Santa Clara-based Palo Alto Networks (NYSE:PANW) is a leading player in the network security market. It offers products that allow organizations to secure their networks while making it available for an increasing number of applications. It is tackling the emerging trend by enabling organizations to establish controls within the firewall through their proprietary hardware and software architecture while inspecting content for all threats in real-time. Palo Alto Network’s products are based on a traffic classification engine that identifies network traffic by application, user, and content and provides deeper visibility into traffic and applications at the user level.

Palo Alto Networks was founded in 2005 by Yuming Mao, Fengmin Gong, Rajiv Batra, Dave Stevens, and Nir Zuk. I had spoken with co-founder Nir Zuk a few years ago when he revealed several interesting facts about how the company was set up from being a $9.4 million concept finance company to, now, a multi-Billion Dollar Unicorn.

Palo Alto Networks’ Financials

Palo Alto Networks recently reported its fourth quarter results. Revenues grew 27% over the year to $509.1 million, making it the first quarter where revenues were over half a billion dollars. The market was looking for revenues of $488 million. The company continued to report losses and ended the quarter with a loss per share of $0.42. Losses have reduced from last year when it reported $0.69 per share. Adjusted EPS for the quarter came in at $0.92, ahead of $0.66 reported a year ago, and beating the market’s expected $0.79.

By segment, revenues from products grew 11% over the year to $212.3 million. Revenues from services grew 42% to $296.8 million.

It ended the year with revenues growing 28% to $1.8 billion. Non-GAAP net income for the fiscal year 2017 was $253.4 million, or $2.71 per diluted share, compared with $172.9 million, or $1.89 per diluted share, a year ago.

For the current quarter, Palo Alto Networks expects revenues of $482-$492 million and EPS of $0.67-$0.69. It expects to end the year with revenues of $2.125-$2.165 billion and an EPS of $3.24-$3.34.

Palo Alto Networks’ Product Expansion

During the recent quarter, the company has made several enhancements to its products. It continues to build on the cloud and recently announced the GlobalProtect cloud service which enables customers to extend the protections of its Next-Generation Security Platform to remote networks and mobile users. It also released a new Logging Service. The subscription-based cloud service allows access to enhanced logs generated by Palo Alto Network’s security offerings and allows customers to collect data without needing to plan for, deploy, or operate local compute and storage.

It is also building on the Networks Application Framework by introducing a SaaS consumption model that will allow customers to rapidly access, evaluate, and adopt new security technologies as an extension of the Next-Generation Security Platform that is already available to them. The framework enables Palo Alto Networks, third-party developers, MSSPs, and customers to build and deploy cloud-based security services through a suite of cloud APIs, services, compute and native access to customer-specific data stores. The general availability of the suite is expected by early calendar year 2018.

The market is pleased with Palo Alto Networks’ performance. The stock is trading at $144.10 with a market capitalization of $13.2 billion. It touched a 52-week high of $165.69 in November last year and has recovered from the 52-week low of $107.31 that it had fallen to in April this year. Palo Alto Networks had gone public in 2012 when it raised $260.4 million by selling 6.2 million shares at $42 each.

Market Trends

The Cyber Security market is very crowded with a plethora of point products that are continuously getting funded by VCs. CIOs and CISOs are wary of having to deal with so many vendors and tend to try to keep the number of vendors manageable. Palo Alto Networks is in the enviable position of being one of those trusted vendors. As such, if it wants to roll up a set of startup products into its portfolio to create a broader offering, it would be at a significant advantage.

So far, it has acquired LightCyber, CirroSecure, Cyvera, and Morta Security. LightCyber was acquired earlier this year for an estimated $105 million. It was a leading player in the development of automated behavioral analytics capabilities and it leveraged sophisticated machine learning to quickly and accurately identify attacks based on identifying behavioral anomalies inside the network.

In 2015, Palo Alto Networks had acquired CirroSecure for an undisclosed sum. CirroSecure provided a security service to monitor provisioned cloud applications. Prior to that, Palo Alto Networks had added Cyvera and Morta Security in 2014. Cyvera developed cyber-defense products that prevent remote attacks on Microsoft-based servers and end-points and was bought for an estimated $200 million. Terms of the acquisition for Morta Security are not known as the company was still in stealth mode when it was acquired.

The acquisition spree is likely to continue.

A few analysts also believe that Palo Alto Networks may be gearing up for acquisitions. Brad Zelnick, an analyst at Credit Suisse, believes that the company may be evaluating ForeScout, Gigamon (NYSE:GIMO), or even Tanium as potential targets. Last year, competitor Symantec had acquired Blue Coat Systems for $4.65 billion and LifeLock for $2.3 billion to build up its cyber security portfolio. Some believe that Symantec may even be looking at Splunk as the next target. Palo Alto Networks would be looking to up its arsenal before Symantec acquires other players in the market.

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Tagged: , M&A, , Security Software & Services
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