Palo Alto Networks Grows by Displacing Incumbent Network Security

Palo Alto Networks reported its third quarter fiscal 2016 financial results on May 26, showing continued growth for its portfolio of network security products and services. Much of that growth is coming by way of competitive displacements, which at least one analyst has called out as a concern.

For the quarter, Palo Alto reported revenue of $345.8 million, for a 48 percent year-over-year gain. On that revenue, the company reported a net loss of $70.2 million, up from a net loss of $45.9 million in the third quarter of fiscal 2015.

Looking forward, the company provided fourth quarter 2016 guidance for revenue to be in the range of $386 million to $390 million, which represents 36 percent to 37 percent growth year-over-year.

“Our results demonstrate not only that security is as important as ever and a priority spending item, but also that we are cementing our leadership position in the market at scale,” Palo Alto CEO Mark McLaughlin said on his company’s earnings call.

As had been the case with prior Palo Alto Networks earnings call, McLaughlin emphasized competitive wins during the quarter as a key highlight. In the third quarter of 2016, competitive wins included a Check Point and Juniper replacement at one of the largest life insurance companies in the U.S; a win with a global semiconductor company replacing Symantec and FireEye; a multi legacy vendor replacement at a U.S. Federal agency to secure their internet access; and a Cisco replacement at one of the world’s largest hosting companies to protect their infrastructure and ensure security compliance.

McLaughlin noted that he isn’t seeing his competitors making any substantial moves to combat Palo Alto Networks either.

“On the technology side, we haven’t seen the competition do anything technically interesting there that will cause us any concern,” McLaughlin said.

A key differentiator for Palo Alto Networks is the company’s prevention-oriented approach, which works both at the network level and at endpoints.

Krista Macomber, Senior Data Center Analyst at Technology Business Research (TBR), sees Palo Alto’s competitive displacement approach as being somewhat expensive.

“Palo Alto Networks faces the expensive challenge of displacing legacy security vendors as customers increase their annual security budgets yet show reluctancy to increase the number of security vendors they use,” Macomber wrote in a TBR research note. “During C1Q16 [fiscal 3Q16] specifically, Palo Alto Networks added approximately 1,000 new customers, bringing its customer base to 31,000, and TBR believes Palo Alto Networks attracted many of these customers by displacing legacy firewalls from Check Point, Cisco and Juniper Networks.”

Of note, TBR also observed that Palo Alto Networks has never been profitable since the company first went public in 2012. That said, there is still lots of opportunity for Palo Alto Networks to go after as TBR sees more opportunity for Palo Alto Networks to earn a larger share in the network security market.

“This opportunity is limited only by the time and effort required from the company to introduce new technologies and train sales and partners on the new offerings,” TBR wrote. “TBR believes Palo Alto Networks’s customers’ appetites for additional subscription services remain unsated.”

Sean Michael Kerner is a senior editor at Enterprise Networking Planet and Follow him on Twitter @TechJournalist.

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