Palo Alto Networks, software industry to undergo AI ‘transformation’ over next 12 months, CEO says

Analysts estimate $1.20 a share on revenue of $1.95 billion and billings of $3.16 billion for the fourth quarter, and were projecting $4.02 a share on revenue of $6.88 billion and billings of $9.16 billion for the year. The company defines billings as “total revenue plus the change in total deferred revenue, net of acquired deferred revenue, during the period,” and is a metric used to account for subscriptions.

For the full year, executives had previously predicted $3.97 to $4.03 a share on revenue of $6.85 billion to $6.91 billion and billings of $9.1 billion to $9.2 billion.

Having gone on a break from a multiyear M&A spree, Chief Executive and Chairman Nikesh Arora stressed to analysts on the call that products like its Palo Alto Networks’ Cortex XSIAM AI-driven security platform was a “homegrown” effort, and that even though the company had $2 billion in cash, the market was too expensive from an M&A standpoint.

Read: Bill Gates lays AI tombstone on Amazon and Google

“I’d like to bust the myth of the notion that we’ve grown our innovation through M&A, because pretty much the entire XSIAM product that we’ve built — which is now the fastest platform going forward — is homegrown,” Arora said.

Most recently, Palo Alto Networks acquired application and software supply-chain security company Cider Security for about $195 million in cash, following a multiyear M&A spree that paused in August 2021. Palo Alto Networks had acquired a habit of announcing a new deal every quarter, having acquired 14 companies in about three-and-a-half years.

“I feel very comfortable with the amount of cash we have on our balance sheet and I believe it is our job to keep our heads down, and keep executing because it’s a tough market,” Arora said. “I think the opportunities from AI have not been fully comprehended by most enterprise businesses.”

Read: Microsoft’s Nadella: AI is taking the computer age from ‘the bicycle to the steam engine’

“I think we are going to undergo a transformation for Palo Alto Networks as well as generally an enterprise software industry over the next 12-24 months as we embrace generative AI, I think that’s the real opportunity and challenge in front of us and I think people out there will get it wrong, and hopefully we’re on the right side of history,” Arora said.

The CEO said the company has been studying “the adverse impact that generative AI could have in terms of ads using generative AI to build new malware, to try and attack our customers, and there’s a lot of work we’re doing as well to make sure we are able to protect our customers against any such activity that is conducted using generative AI.”

Read: Nvidia’s stock has more than doubled this year. Can earnings justify the AI hype?

Nvidia Corp.
NVDA,
-1.57%,
which also has a huge stake in AI, reports results after the bell Wednesday.

Palo Alto Networks reported fiscal third-quarter net income of $107.8 million, or 31 cents a share, versus a loss of $73.2 million, or 25 cents a share, in the year-ago period. Adjusted earnings, which exclude stock-based compensation expenses and other items, were $1.10 a share, compared with 60 cents a share in the year-ago period.

Revenue rose to $1.72 billion from $1.39 billion in the year-ago quarter, while billings rose 26% to $2.3 billion. Analysts surveyed by FactSet had forecast 93 cents a share on revenue of $1.72 billion and billings of $2.23 billion.

Shares rose more than 4% after hours, following a 1.2% decline in the regular session to close at $189.74.

From November 2022: Palo Alto Networks one of 2022’s best software stocks after another beat-and-raise quarter

Palo Alto Networks shares are up 36% year to date. In comparison, the ETFMG Prime Cyber Security ETF 
HACK,
-1.48%
is up 7%, the First Trust Nasdaq Cybersecurity ETF
CIBR,
-1.18%
is up 8%, the S&P 500 index
SPX,
-1.12%
 is up 8%, and the tech-heavy Nasdaq Composite Index 
COMP,
-1.26%
 is up 20%.