Palo Alto Networks CEO Says Security Remains A Priority For Customers But Spending Decisions Are Taking Longer

Palo Alto Networks said it still continues to notch competitive wins, even as the company's sales came in less than expected due to what it said was a slowing sales cycle for security spending.

Sales for the Santa Clara, Calif.-based company rose in the first quarter, but were "not as robust as expected," CEO Mark McLaughlin said on the earnings call Monday. The company reported Q1 sales of $398.1 million, up 34 percent year-over-year.

Net loss for the quarter, which ended Oct. 31, was $61.8 million, compared to a net loss of $39.9 million in the same quarter last year.

[Related: BoB Conference Exclusive: Palo Alto Networks' Mark McLaughlin On The Problems Of Today's Security Solutions, Working With The Government, And Myths About Cyber Insurance]

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McLaughlin said customers are taking longer to make purchasing decisions around security, particularly as Palo Alto Networks targets larger companies looking to make architecture-based decisions and wait for the refresh cycle of older point solutions. He said he couldn’t pinpoint the slowdown on the election. However, he said "security remains a priority" for customers despite slower purchasing cycles.

Other vendors, including Fortinet, have cited seeing similar longer sales cycles in security impacting their sales.

McLaughlin said, despite the longer sales cycles, that Palo Alto Networks continues to win over its competitors. He gave examples of some competitive wins during the quarter, including a Check Point displacement in the data center at one of the world's busiest airports; a seven-figure displacement of Check Point and Cisco at an EMEA investment organization; a cloud deal with a system integrator that removed Cisco, Fortinet and FireEye; and a McAfee replacement for endpoint at an EMEA government agency.

"Our win rate remains as high as ever," McLaughlin said. "We are benefiting long term as a security provider of choice. In the short term, we have to take a longer sales cycle into account … We are highly technically differentiated, and our competitive position continues."

McLaughlin said those win rates and overall growth rates higher than the competition make him confident that it is the spending pattern of customers, and not the competitive market or market saturation that caused sales to miss expectations. He said he also "hasn't seen anything the competition has done differently" around technology to impact Palo Alto Networks from a competitive perspective.

"Those win rates are high, they have been consistently very high, and we expect them to remain that way into the future," McLaughlin said.

Palo Alto Networks CFO Steffan Tomlinson said Palo Alto Networks continues to see growth in its subscription services business, which accounted for 59 percent of the company's sales in the quarter. He said Palo Alto Networks would be changing its sales commission structure to be deferred and amortized over the course of the contract, rather than upfront, to match that going forward.

McLaughlin also highlighted growth in Palo Alto Networks' endpoint security offering, Traps, which he said added 600 new, paying customers in the quarter. Traps also saw a major updating during the quarter, as well as earned certification as an antivirus replacement.

Palo Alto Networks said it expects second quarter revenues to be between $426 and $432 million, up 27 percent to 29 percent year over year. Tomlinson said he expects a first half fiscal 2017 growth rate of 30 to 31 percent. The company expects non-GAAP earnings per share between 61 and 63 cents a share.

For the full year, Palo Alto Networks expects revenue growth between 30 percent and 31 percent.