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Palo Alto Networks CEO Expects Security Vendor Won't Be Hit By Spending Slowdown

Many industry leaders have said they expect 2016 to be a slower year for security spending, but Palo Alto Networks is confident it can be the exception, CEO Mark McLaughlin said on the company's second-quarter earnings call.

Many of industry juggernauts have said they expect 2016 to be a slower year when it comes to security spending. But Palo Alto Networks is confident it can be the exception, CEO Mark McLaughlin said.

Comments alluding to a slowdown have come from Fortinet, FireEye, CyberArk, Check Point and more, as well as some analysts. Hack, the exchange-traded fund made up of many major security companies, is down more than 30 percent from the same point last year, closing today at $21.91.

But McLaughlin said Palo Alto Networks has seen the same linearity in sales that it has experienced in years past, and finds no reason yet for concern for its business. In fact, McLaughlin said, when he talks to customers, security remains a top spending priority for 2016.

[Related: Is The Security Spending Party Over in 2016?]

"We haven't seen anything to indicate that what we're seeing in the stock market means anything about the macro economy yet," McLaughlin said on the company's second-quarter earnings call Thursday. "But, we watch that closely."

Driving that confidence was continued strength of the company's platform security approach in the second quarter. McLaughlin said Palo Alto Networks saw platform growth with new customers, existing customers expanding within the platform, and a growing base of customers that will ultimately refresh their hardware.

"Our plan to drive high growth, capture market share and have all companies adopting our platform capabilities is working," McLaughlin said.

"We continue to capture mind share and market share at very high rates. ... We are unique in having this platform and as a result, customers are standardizing on Palo Alto Networks," he said.

Palo Alto Networks posted strong growth numbers for the quarter, with revenue rising 54 percent, to $334.7 million. Loss for the quarter was $62.5 million, compared with $43 million in the same quarter last year. Shares jumped more than 10 percent on the earnings reports to a high of $147.48.

The security vendor also announced as part of its earnings call that Frank Calderoni, former Cisco executive vice president and CFO, would be joining its board of directors. Calderoni is currently executive vice president of operations and CFO at Red Hat.

McLaughlin said customers were also accelerating the adoption of recurring subscription services on top of the platform. For example, more than 9,000 customers are now using Wildfire, the company's cloud-based advanced threat detection and prevention solution, including half of the Fortune 500, according to the company.


The company's newest subscription additions also saw increased traction during the quarter, McLaughlin said. The second quarter was the "largest quarter ever" for Traps, the company's endpoint offering. Companies are looking for better security protection on the endpoint, he said, and are doing away with traditional anti-virus in favor of more next-generation solutions.

"We feel good about the endpoint business and it helps complete our platform story," CFO Steffan Tomlinson said on the call.

Aperture, which launched in September, and AutoFocus also saw growth during the quarter, McLaughlin said. AutoFocus, the company's cyber threat intelligence service, is the fastest ramping product in the company's history, he said.

Going forward, McLaughlin said, he expects the pipeline to remain strong. The company expects third-quarter earnings to be between $335 million and $339 million, a year-over-year growth of 43 percent to 45 percent. It expects non-GAAP earnings per share to be between 41 cents and 42 cents.

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