Palo Alto Networks To ‘Reinvent’ Microsegmentation With Aporeto Buy

Palo Alto Networks CEO Nikesh Arora says Aporeto has over the past 2.5-to-3-years perfected an approach to cloud-based microsegmentation that they have successfully deployed to two or three very large customers.

Palo Alto Networks plans to bolster its Prisma cloud security platform through the proposed $150 million acquisition of machine identity based microsegmentation startup Aporeto.

“The way microsegmentation is deployed today in the data center is not the way it needs to be deployed in the cloud,” said Chairman and CEO Nikesh Arora. He told investors Monday that Palo Alto Networks had undertaken an extensive market scan to determine how microsegmentation could “fundamentally be reinvented.”

Microsegmentation in the data center relies on IP addressing, which Arora said is very good for the enterprise but is not consistent with how the cloud operates. But Arora said San Jose, Calif.-based Aporeto has over the past 2.5-to-3-years perfected an approach to cloud-based microsegmentation that they have successfully deployed to two or three very large customers.

[Related: Palo Alto Networks Integrates IoT Security, Firewall With Zingbox Buy]

“We looked at Aporeto and said, ‘Look, this would be a phenomenal set of capabilities to have in our cloud security platform,’” Arora said. “This is the bet we’re making in terms of how microsegmentation will need to be done in the future.”

Going forward, Arora said Aporeto will be fully integrated into Santa Clara, Calif.-based Palo Alto Network’s Prisma cloud security platform and will not be sold as a separate SKU. Palo Alto Networks hopes to use Aporeto’s backbone and underlying capabilities to create more Prisma features in the future, Arora said.

Palo Alto Networks isn’t anticipating much revenue uplift from Aporeto this year since it will take a while to integrate the capabilities into the Prisma cloud offering, Arora said. That’s because Aporeto’s capabilities fall fairly early in the cloud security technology lifecycle, according to Arora.

The proposed acquisition is expected to decrease earnings per share of Palo Alto Networks by $0.02 per share for the quarter since there is real expense around the product integration and go-to-market efforts associated with Aporeto, according to Chief Financial Officer Kathy Bonanno. The deal is expected to close in Palo Alto Networks’ current fiscal quarter, which ends Jan. 31, 2020.

Arora said it takes a while to get Palo Alto Networks’ internal sales force and channel community comfortable and up to speed on selling new product categories like microsegmentation. Roughly 25 percent of the company’s core sales force is selling the Prisma cloud platform, Arora said, with approximately 9 percent selling the Cortex security operations suite.

Palo Alto Networks sales for the quarter ended Oct. 31 skyrocketed to $771.9 million, up 17.7 percent from $656 million a year ago. That edged out Seeking Alpha’s projection of $769.3 million.

The company recorded a net loss of $59.6 million, or $0.62 per diluted share, 55.6 percent worse than a net loss of $38.3 million, or $0.41 per diluted share, the year before. On a non-GAAP basis, net income dipped to $104.8 million, or $1.05 per diluted share, down 9.2 percent from $115.4 million, or $1.17 per diluted share, last year. That beat Seeking Alpha’s net income projection of $1.03 per diluted share.

Palo Alto Networks’ stock plunged $21.64 (8.65 percent) to $228.64 per share in after-hours trading Monday, which is the lowest the company’s stock has traded since Oct. 31.

Subscription and support revenue for Palo Alto Networks leapfrogged to $540.7 million, up 30.1 percent from $415.5 million the year before. And product revenue sunk to $231.2 million, down 3.9 percent from $240.5 million last year.

For the coming quarter, Bonanno said the company expects non-GAAP net income of $1.11 per share to $1.13 per share on total sales of $838 million to $848 million.