PANW Platformization: Key Value Proposition, or Margin Pressure Risk?

**SPEAKER_1** (0:00)
And here to help us make sense of really what we are seeing with, of course, Palo Alto and the brighter cybersecurity space is Ron Westfall, VP of Networking and Infrastructure at Hyperframe Research. So Ron, really appreciate you joining the show today. Palo Alto Networks has been seen as one of these real leaders in cybersecurity, but this is also pretty competitive space. And so as you assess an earnings event coming off of the heels of really strong reports from some of its peers, how do you think through this name?

**Ron Westfall** (0:26)
Yeah, I think that definitely frames it very effectively. That is Palo Alto in itself is very attractive in terms of its revenue picture and I would say its overall fiscal performance. And that is actually alongside what's going on across the entire cybersecurity market segment. And so I think the consensus for 3.35 billion in Q4 will ring true. And what that is also indicating is a 32% year over year acceleration.
And you can combine that with the fact that Palo Alto Networks, I think, is differentiating itself very effectively. That is, it's pushing its customers to consolidate their multi-vendor IT stacks onto its unified platform. And so as a result, I'm looking for growth in terms of the remaining performance obligations and also net retention rates to demonstrate that enterprises are indeed committed to signing these larger multi-year platform deals with Palo Alto networks. And thus underpin their growth projections over the next couple of years. So this is all looking positive in terms of not just Palo Alto networks uniquely, but also the entire cybersecurity segment.

**SPEAKER_3** (1:40)
Ron, I'm really curious what your thoughts are on that strategy. It's been obviously successful for Palo Alto as they sort of look to be, if I use layman, almost like a one stop shop for cybersecurity. But then I also remember, just a few years ago, just how much risk there is to IT when one platform, when you saw CrowdStrike go down that summer day, how much things can like screech to a halt. So you have this desire from the finance department of businesses to spend as little as possible and get the most, but then you have the security and data security side of things wanting to have platform integrity and keep things up and running. How are those two things gonna mesh together? Can Palo Alto actually accomplish this platform? Is it, what is it, platformization that they call it? Have trouble saying that.
When the needs to be diversified are also still there for these big companies.

**Ron Westfall** (2:36)
That's a good question. And I think that hits the nail on the head as to what will define Palo Alto's success, not just for the next quarter, but certainly I would say over the next two years plus. And that is, yeah, their platformization strategy is something that is on going with other players. And the reason why I think we'll be successful, despite some of the built in concerns, is that many organizations out there are looking really for a trusted advisor to help simplify or streamline all these different silos. And that certainly applies to endpoint security and overall security buckets that have to be all tied together. And so as a result, Palo Alto is offering, I would say, a very impressive discounting or revenue, recognition, delay mechanisms and so forth to help encourage the enterprises, the organizations out there to go with their specific platform. And I would say, ironically, the other concern is that you have other players out there pursuing the same strategy except across a broader swath of the portfolio. For example, Cisco is saying, not only can you platformization your security, but also network. So that could be a competitive concern for Palo Alto Networks is that Cisco could in effect outflank them in terms of the platformization strategy.
And likewise, when it comes to Google, certainly with this with portfolio capabilities, but also Microsoft with its security capabilities, looking at it from an AI stack perspective like, hey, if you really want to combine more capabilities with one trusted advisor, while maintaining multi-vendor supply chain flexibility, we can fill that role. So I think there'll be enough to go around though, where some organizations because of the way they are set up, will prefer a Palo Alto to really focus on the security part. But there'll be other organizations that say, hey, I need network and security combined, or I need the AI stack combined from one of these other players. So all this is going to create more competitive open-endedness, but there's plenty of opportunity for Palo Alto to capitalize.

**SPEAKER_1** (4:50)
Okay, I like that. I think that's a great explanation of what has been coined as a Palo Alto network specific platformization related strategy, but it's being seen in that same regard across all of these various companies, even outside of cybersecurity. But what Palo Alto Networks has been busy is they've also used acquisitions to expand their platform and capabilities. So what are then the key metrics that you're watching to determine whether those deals are actually adding value without necessarily pressuring margins?