Palo Alto Networks Integrates IoT Security, Firewall With Zingbox Buy

Palo Alto Networks Chief Product Officer Lee Klarich said the proposed $75 million purchase of Zingbox will allow customers to get IoT security capabilities without any additional hardware required.

Palo Alto Networks will become the only vendor capable of delivering IoT security as an integrated service through the firewall following its planned acquisition of Zingbox, said Chief Product Officer Lee Klarich.

The Santa Clara, Calif.-based platform security vendor said firms have until now been stuck with the operational burden of finding a best-of-breed IoT security tool and attempting to deploy it throughout their network, Klarich said. But the proposed $75 million purchase of Zingbox means that customers will now be able to get a relevant and important security service without any additional hardware required.

"This is a very powerful approach we're able to take by delivering this as an integrated service," Klarich said.

[Related: Palo Alto Networks CEO Nikesh Arora: Twistlock, PureSec Are Best In Market]

IoT security is very much a growing issue in the enterprise, Klarich said, with hackers using IoT devices as both initial insertion points as well as to move laterally across networks. In fact, Klarich said even fish tanks have been used to break into enterprises and move laterally.

Devices with IoT capabilities have become ubiquitous across the enterprise, Klarich said, with about three different IoT-enabled devices in the organization for every employee on the payroll. These devices are often unpatched and unmanaged, Klarich said, even though by definition they have to be connected.

"Every single one of our 65,000 customers has a growing IoT security need," Klarich said.

The Zingbox transaction is a great opportunity for Palo Alto Networks to increase the size of its network security total addressable market and replaced outsourced manual labor with products and automation. Mountain View, Calif.-based Zingbox was founded in 2014, employs 70 people, and has raised $23.5 million in three rounds of outside funding, according to LinkedIn and Crunchbase.

Zingbox co-founders Xu Zou, May Wang, and Jianlin Zeng will join Palo Alto Networks, and the company's products will continue to be available to customers after the transaction closes. The deal was announced late Wednesday, and is expected to close in the quarter ending Oct. 31, 2019.

Palo Alto Networks has already started talking with Zingbox about what the product integration could look like, and want sto get that work done as quickly as possible, according to Chairman and CEO Nikesh Arora. The company has a track record of improving the business plans of best-of-breed technology companies by 40 percent in the months following acquisition, Arora said.

Palo Alto Networks has made seven acquisitions in the cloud, endpoint and security operations spaces since the start of 2018, and currently employs more than a dozen company founders across its product organization, Arora said. The company requires all founders to remain with the business for at least two-to-three years following the acquisition as a condition of the deal, Arora said.

"If we believe we're not going to be able to get there fast enough, we'll make acquisitions," Arora said, "but the acquisitions will be guided by smart product teams."

Palo Alto Networks sales for the quarter ended July 31 skyrocketed to $805.8 million, up 22.4 percent from $658.5 million a year earlier. That edged out Seeking Alpha's projection of $803.6 million.

The company recorded a net loss of $20.8 million, or $0.22 per diluted share, down from net income of $7 million, or $0.07 per diluted share, the year before. On a non-GAAP basis, net income climbed to $146.9 million, or $1.47 per diluted share, up 11.5 percent from $131.7 million, or $1.34 per diluted share, last year. That beating Seeking Alpha's net income projection of $1.42 per diluted share.

On a full-year basis, revenue climbed to $2.9 billion, up 27.5 percent from $2.27 billion last year. Net loss improved to $81.9 million, or $0.87 per diluted share, a 33 percent improvement from the net loss of $122.2 million, or $1.33 per diluted share, recorded the year prior.

Palo Alto Networks' stock jumped $14.51 (7.24 percent) to $215 per share in after-hours trading Wednesday, which is the highest the company's stock has traded since Aug. 14.

Subscription and support revenue for Palo Alto Networks increased to $500.1 million, up 29.4 percent from $386.4 million the year before. And product revenue climbed to $305.7 million, up 12.3 percent from $272.1 million last year.

For the coming quarter, Chief Financial Officer Kathy Bonanno said the company expects non-GAAP net income of $1.02 per share to $1.04 per share on total sales of $760 million to $770 million. For the company's 2020 fiscal year, which ends July 31, Bonanno said Palo Alto Networks expects revenue of between $3.44 billion and $3.48 billion.