‘Material' Supply Chain Improvement Unlikely for a Year: Palo Alto CEO

Total Palo Alto Networks revenue for fiscal Q4 ended July 31 grew 27% year over year to $1.6 billion, and its 44% billings growth “was the highest we've reported in four years,” said CEO Nikesh Arora on a Monday earnings call. Still, the company isn't impervious to “the macro environment" and how it's "impacting our business and the markets we serve,” he said.

The past year arguably brought “the most challenging supply chain conditions the technology industry has ever seen,” said Arora. “We expect conditions will eventually ease,” but the company is “assuming a material improvement won't be seen” before the July 31 end of fiscal 2023, he said. “As the supply challenges fade, we expect this will start to have a favorable impact on our product gross margins.”

Palo Alto remains attuned to the “continuing debate on inflation,” including its “nature and duration,” said Arora. “We saw some labor and other inflationary pressures in the second half of the fiscal year,” he said. “We do not anticipate these pressures going away in the next fiscal year.”

Despite the “exceptional” 44% billings growth fed by the “Q4 magic” of Palo Alto’s enterprise sales, “we did, however, see some marginal changes in the macro environment" in Q4, said Arora. Though still early, “it is important to see how the overall macroeconomic conditions develop over the next year.” The stock closed 12.1% higher Tuesday, closing at $569.51.

Palo Alto tracked more “longer-duration deals” as customers “increasingly have the confidence to make large long-term commitments with us,” said Arora. But it also saw “some isolated instances of customers extending the life of hardware, potentially driven by macro forces,” he said. The vast majority of Palo Alto customers continue sustaining their investment patterns “despite the expected short-term macro impacts,” he said. “Security spending is tied into our customers' desires to move to the cloud,” he said. “Coupled with heightened awareness and the need to do something around cybersecurity, we expect secular tailwinds to persist in cybersecurity.”

To address the tech talent shortage, “another trend I would like to highlight is the return to Palo Alto Networks by employees who had left for seemingly greener pastures,” said Arora. “Over a six-month period, as part of our Welcome Home Program, we have engaged with many former employees. To date, dozens of top performers have been rehired with many more in the funnel.” Half the returnees are coming back to Palo Alto from startups, the next largest percentage from “peer companies,” he said.

Still, Palo Alto estimates 3.5 million cybersecurity jobs globally remain unfilled, said Arora. “Our view is that more training and hiring alone will not effectively and efficiently counter the growing use of automation employed in attacks and the volume of alerts that is overwhelming the security operations center.” A new “paradigm” in cybersecurity is needed “that heavily leverages AI and automation,” he said.