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Nikesh Arora: ‘We’re Seeing Channel Partners Get Very Savvy’

Michael Novinson

‘There is a bit of an arms race amongst themselves in the channel where the more qualified people are likely to get more customers to buy from them,’ says Palo Alto Networks CEO Nikesh Arora.

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An “arms race” has broken out within Palo Alto Networks’ channel since customers are likely to buy emerging technology from the most qualified solution provider.

“We’re seeing channel partners get very savvy and start building adoption teams and sales teams that are specific to cloud and specific to our portfolio because they see the market is shifting in that direction,” CEO Nikesh Arora told investors Tuesday. “There is a bit of an arms race amongst themselves in the channel where the more qualified people are likely to get more customers to buy from them.”

Arora said some customers are opting to purchase Palo Alto Networks’ Cortex security operations products or its Prisma Cloud or SASE tools from a different solution provider that they use to fulfill their firewall orders. Like virtually every cybersecurity vendor, Arora said Palo Alto Networks is starting to see customers buy some of its products on the public cloud marketplaces.

[Related: Palo Alto Networks 18 To 24 Months Ahead Of Cloud Rivals: Nikesh Arora]

“Almost all cybersecurity products are slowly and steadily being listed on public cloud marketplaces,” Arora said. “So all of us, including Palo Alto, are seeing some customers buy on those marketplaces.”

For products like Palo Alto Networks’ embedded native firewall on Google Cloud Platform, Arora said buying it directly from the marketplace makes sense since customers can also access and deploy the firewall from said marketplace. In some cases, Arora said customers are using unused credits on public cloud marketplace to buy third-party security product since that’s a feature the marketplaces offer.

But for the most part, Arora said how large enterprises engage with the channel hasn’t changed. The company last year opened up its Prisma Cloud portfolio for full resale globally, forgoing a contentious referral-only model for select products like RedLock cloud threat defense. Making Prisma Cloud available for resale simplified things from an operational perspective since the channel can now register all deals.

In November, Palo Alto Networks launched Cortex Extended Detection and Response (XMDR), allowing partners to combine Cortex XDR with their own managed services offering to help customers streamline SOC operations and mitigate cyberthreats. Cortex XMDR launched with four partners and is now up to 27 solution providers, with a pipeline of interested partners working through the certification process.

Palo Alto Networks hasn’t seen the double ordering and shadow ordering plaguing other vendors during the supply chain crisis since the company requires customers to pay at the time of order, Arora said. Some distributors have engaged in product stocking where they’ll pre-order common products and hold onto them to reduce the likelihood of partners and end customers experiencing product shortages.

But Arora said Palo Alto Networks requires that end customers be listed on every purchase order and makes purchase orders non-cancellable, which has allowed the company to avoid distribution stocking.

Palo Alto Networks sales for the quarter ended Jan. 31 jumped to $1.32 billion, up 29.5 percent from $1.02 billion a year ago. That edged out Seeking Alpha’s estimate of $1.28 billion.

The company recorded a net loss of $93.5 million, or $0.95 per diluted share, 34.4 percent better than a net loss of $142.3 million, or $142.3 million for diluted share, the year before. On a non-GAAP basis, net income surged to $185 million, or $1.74 per diluted share, up 20 percent from $154.2 million, or $1.55 per diluted share, last year. That beat Seeking Alpha’s net income projection of $1.65 per diluted share.

Palo Alto Networks’ stock jumped $33.49 (7.04 percent) to $509 per share in after-hours trading Tuesday. That’s the highest the company’s stock has traded since Feb. 17.

Subscription and support revenue for the quarter leapfrogged to $1.01 billion, up 32.4 percent from $762.2 million last year. Product revenue for the quarter climbed to $308 million, up 20.9 percent from $254.7 million the year prior. Sales in the Americas increased by 33 percent in the quarter, according to Chief Financial Officer Dipak Golechha.

For the fiscal year ending July 31, Palo Alto Networks expected diluted non-GAAP net income of $7.23 to $7.30 per share on total revenue of $5.425 to $5.475 billion. That beats analyst revenue expectations of $5.39 billion, according to Seeking Alpha.

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