Palo Alto Plucks Aporeto

Palo Alto Networks (NYSE: PANW) prefaced its quarterly earnings call Monday night by announcing plans to acquire cloud security firm Aporeto for $150 million. The deal is expected to close next quarter.

It's a quick exit for Aporeto, which has only been around for four years and raised $34.5 million in funding. The deal shows urgency on Palo Alto's part, as it looks to broaden its security offerings to address cloud-native concerns. Enterprise customers are eager to secure their cloud-based solutions, and this acquisition will be key to helping Palo Alto Networks stay competitive.

Why Aporeto?

Tiny Aporeto, based in San Jose, California, was founded in 2015 and has 64 employees. The startup has taken a unique approach to cloud security by pioneering the concept of workload fingerprinting -- or authenticating workloads by a variety of factors other than simply networking addresses. It made headlines last week by unveiling new products that extend its expertise in securing cloud applications via scrutinizing the workload patterns of microservices instead of IP addresses.

This is the type of expertise that Palo Alto Networks is after, and the cybersecurity vendor hopes to integrate Aporeto’s technology into its Prisma offerings, which secure public cloud networks based on Amazon AWS, Microsoft Azure, Google Cloud Platform, and other environments.

Notably, Palo Alto Networks shelled out $410 million in cash this past summer, when it purchased Twistlock, a leading Aporeto competitor.

Wall Street Grumbles

Palo Alto Networks’ latest acquisition will be expensive, and investors don’t like management’s prediction that purchasing Aporeto will shave 2 cents off earnings per share next quarter, representing an outlay of 100 to 102 million shares.

Palo Alto shares shares plummeted $27.15 to $223.06, down 10.85%.

But execs made it clear on Monday’s call that Palo Alto is investing in its future, and they’re not backing down from acquiring what they think they need to stay current.

According to CEO Nikesh Arora, while enterprises are moving to the public cloud, only 50 percent of the products needed to secure the new environments have been created. And Aporeto, he says, is one of the firms that has a key element of multi-cloud security.

Still, given Palo Alto Networks' emphasis on its Next-Generation Firewall, Aporeto may want to take down that “RIP FW” artwork on its site.

Revenue Falls Sequentially

For its first fiscal quarter of 2020, ended October 31, 2019, Palo Alto Networks reported $771.9 million in revenues, up 18 percent year-over-year, but down 4 percent sequentially. Non-GAAP net income was $104.8 million, or $1.05 per diluted share. GAAP net loss was $59.6 million.

Executives said that a 24 percent decrease in sales for Palo Alto’s products (firewall appliances, both physical and virtualized) versus an 8 percent increase in sales of support and subscriptions to real-time security updates resulted from too little sales incentive for products. That’s been fixed, they said.

SD-WAN, Cloud Integration Ahead

It’s clear that Palo Alto Networks is focused on keeping pace with enterprise digital transformation, even if Wall Street fusses about EPS. Still, there’s no time to lose. To stay ahead of competitors like Fortinet, the vendor must deliver on what it announced November 13, including software-defined wide-area networking (SD-WAN) integration across all its products by the middle of December 2019. This will be a vital step, since SD-WAN and cybersecurity are getting closer all the time.

One thing Palo Alto isn’t yet doing is opening its platform to developers, regardless of a trend toward homegrown applications among enterprise customers. Instead, the vendor’s approach is to integrate its wares with other suppliers’ products. Ironically, this means adding the ability to ingest firewall data from competing appliances.

“I think it’s fair to say that one of the times when Lee [Klarich, chief product officer] announced the ingestion of Check Point firewall data into our product was when he got a standing ovation,” said CEO Arora on Monday’s call. “It’s hard to get a standing ovation from a bunch of engineers at a conference. They must have liked that. And we are going to do the same thing with Cisco and Fortinet data.”

(Check out the Futuriom Cloud Tracker Pro research sale. Get both of our 2019 SD-WAN reports, as well as ALL premium research on the calendar for 2020, for one low price of $695 per subscriber.)