Palo Alto Networks To Acquire IR Firm The Crypsis Group For $265M

The deal creates tremendous cross-sell potential for Palo Alto Networks’ Cortex XDR platform since clients are typically open to deploying products used during an incident response engagement on a larger scale.

Palo Alto Networks will move into the incident response space with its proposed $265 million purchase of risk management and digital forensics consulting firm The Crypsis Group.

The Santa Clara, Calif.-based platform security vendor said McLean, Va.-based The Crypsis Group serves more than 1,700 organizations across the healthcare, financial services, retail, e-commerce and energy industries. The company’s more than 150 security consultants respond to upwards of 1,300 security engagements annually, and the deal is expected to extend the capabilities of the Cortex XDR platform.

“We’re very careful when we do M&A,” Nikesh Arora, Palo Alto Networks chairman and CEO, told investors Monday. “And so far, our track record has shown that we’re able to significantly accelerate their capabilities [of acquired companies] from both a product perspective and from a go-to-market perspective.”

[Related: Palo Alto Networks CEO Arora: ‘Eventually Great Products Win’]

The deal creates tremendous upsell and cross-sell potential for Palo Alto Networks’ Cortex XDR detection and response platform since customers are typically open to deploying products used during an incident response engagement on a larger scale, according to Chief Product Officer Lee Klarich. The Crypsis Group CEO Bret Padres will join Palo Alto Networks, according to the company.

Even prior to having an incident response team, Klarich said Cortex XDR has been of assistance to customers in the wake of a security incident or breach. In almost all those cases, Klarich said customers have embraced and deployed Cortex XDR in a sweeping fashion across their organization.

Palo Alto Networks has followed a very disciplined approach to mergers and acquisitions, Arora said, and is constantly looking at new capabilities in the industry since hackers are always coming up with new ways to breach customers. To wit, Palo Alto Networks has spent roughly $2.5 billion on acquisitions since the start of 2018, scooping up ten firms in the cloud, endpoint and security management spaces.

The company has taken a proactive approach to cyber defense, Arora said, since forcing customers to integrate disparate security technologies from different vendors together can result in coverage gaps that are exploited by an adversary. At the same time, Arora said Palo Alto Networks isn’t trying to be all things security to all people, and is only looking to acquire in areas where the company can add value.

Palo Alto Networks prioritizes deals which fit well with the company’s long-term strategy and where key talent can be retaining and value unlocked through the company’s go-to-market engine. This approach has paid dividends, Arora said, since under Palo Alto Networks, the acquired firms have been able to exceed the targets in their internal business plan by 30 percent to 40 percent within the first 12 months.

All told, the aggregate annual run rate of businesses acquired since Arora started at the company in June 2018 is four times greater than their pre-acquisition run rate, according to Arora.

Palo Alto Networks sales for the quarter ended July 31 jumped to $950.4 million, up 17.9 percent from $805.8 million a year ago. That crushed Seeking Alpha’s estimate of $924.3 million.

The company recorded a net loss of $58.9 million, or $0.61 per diluted share, 183.2 percent worse than a net loss of $20.8 million, or $0.22 per diluted share, the year before. On a non-GAAP basis, net income dipped to $144.9 million, or $1.48 per diluted share, down 1.4 percent from $146.9 million, or $1.47 per diluted share, last year. That beat Seeking Alpha’s net income projection of $1.39 per diluted share.

For the fiscal year ended July 31, 2020, revenue soared to $3.41 billion, up 17.5 percent from $2.9 billion last year. However, net loss sunk to $267 million, or $2.76 per share, 226 percent worse than the net loss of $81.9 million, or $0.87 per share, in the fiscal year ended July 31, 2019.

Palo Alto Networks’ stock sunk $9.07 (3.4 percent) to $258 per share in after-hours trading. Earnings were announced after the market closed Monday.

Subscription and support revenue for the quarter leapfrogged to $644.8 million, up 28.9 percent from $500.1 million last year. However, product revenue for the quarter dipped to $305.6 million, down 0.03 percent from $305.7 million the year prior.

For the coming quarter, Palo Alto Networks expects non-GAAP net income of $1.32 to $1.35 per share on total sales of $915 million to $925 million. Analysts had been expecting earnings of $1.19 per share on total revenue of $901.2 million, according to Seeking Alpha.