Palo Alto Networks Q2 sales fall short amid firewall malaise

Palo Alto's second quarter sales missed Wall Street projections and its third quarter outlook isn't much better.

Palo Alto's second quarter sales fell well short of expectations due to the incentives related to its next-gen products a year ago.

The company's reported second quarter revenue of $816.7 million, up 15% from a year ago, with a net loss of $73.7 million, or 75 cents a share. Non-GAAP second quarter earnings were $1.19 a share. 

Wall Street was looking for second quarter revenue of $843.3 million with non-GAAP earnings of $1.12 a share.

CEO Nikesh Arora said the company is implementing new go-to-market programs to boost its firewall sales. Arora said that the second quarter saw strong billings for its next-gen security offerings.

It's also worth noting that Fortinet recently launched its next-gen firewalls designed for hyperscale data centers. 

Palo Alto Networks also launched Cortex XSOAR, an extended security orchestration, automation and response platform. Cortex XSOAR was built in part using technology from Demisto, a company acquired by Palo Alto a year ago.

Cortex XSOAR, which replaces Demisto, includes automation tools for security use cases as well as response playbooks, alerts, collaboration tools and threat intelligence using data from multiple sources.

Arora added on a conference call:

In all fairness, we were expecting improvement this quarter, which hasn't arrived. Product performance did improve partly because the sales incentive change is going to take longer than expected. And partly, because we were too optimistic about some of the deals closing in the quarter. Upon deep inspection, I feel that the softness will take a little more time. So what are we going to do about this and what gives us comfort that performance will improve? First, we are following up with the success of our Prisma and Cortex speedboats and have created a new speedboat firewalls to drive entrepreneurial energy and momentum. 

The leadership for this people is now in place. We've hired Andy Elder, who joined us from Riverbed, and Alan Doswell, who joined us from Cisco, who will be leading this speedboat. Secondly, we recently launched SD-WAN across our entire power state. And when combined with Prisma Access, we believe this is a great SASE solution. We're still in early stages, but we have closed some deals and are seeing heightened interest from our customers and positive feedback on the vision and simplicity volition solution. Along with our technology partners, we have the capability to bring a full branch architecture solution and feel good about our ability to compete. Finally, we're seeing signs and early indicators that we track across our business where we are likely to see some product growth resumed in the fiscal fourth quarter. So let me revisit that in terms of what it means to our outlook going forward on product and its impact to Palo Alto Networks. We expect product growth to improve in the second half of fiscal '20 and turned positive in fiscal Q4. However, products will still be below our internal expectations. We expect that product will return to market growth next year in fiscal '21.   

As for Palo Alto Networks' outlook, the company projected third quarter revenue between $835 million to $850 million with non-GAAP earnings of 96 cents a share to 98 cents a share.

Wall Street analysts were modeling revenue of $873.08 million with non-GAAP earnings of $1.25 a share.

For fiscal 2020, Palo Alto Networks projected revenue between $3.35 billion to $3.39 billion with non-GAAP earnings of $4.55 a share to $4.65 a share.