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Palo Alto investor sues over 28% share tumble

Palo Alto Networks (PAN) is facing a proposed class action lawsuit that alleges investors were deceived about the traction of its platform tactics and hurt by an unexpectedly low billings forecast that crashed the share price.

The US security biz last week reported a 19 percent bounce in sales to $1.975 billion for its Q2 ended January 31, and net income of $1.476 billion helped by a tax benefit. So far so good, until it came to projections for the next three months.

For Q3 of PAN’s fiscal 2024, it offered guidance that total billings are estimated to be between $2.3 billion to $2.35 billion, which if correct would equate to year-on-year growth of 2-4 percent. This was due to “softness” in federal government spending.

Investors didn’t like what they saw and the share price subsequently tumbled $104.12 – or 28.4 percent.

In a would-be class action complaint [PDF] filed with the United States District Court of the Northern District of Northern California, plaintiff Martin Schlaegel proposed the case on behalf of investors that bought stock between August 2023 and February 2024 and were financially “damaged” by the events of last week.

PAN, CEO Nikesh Arora, CFO Dipek Golechha, and head of product management Lee Klarich are named as defendants.

The lawsuit claims PAN made “false and/ or misleading statements” and didn’t reveal that “platformization initiatives” were not driving market share rises to a “significant degree”; or that the corp would need to offer free products to “entice” customers to “adopt more of their platforms.”

It also alleges that PAN’s high growth in billings was “not sustainable”; that new AI products were “not facilitating greater platformization and consolidation”; and that based on the points above, PAN “lacked a reasonable basis for their positive statements about customer demand, billings and platformization.”

PAN hit upon the platform consolidation master plan about five years ago when customers were talking about selecting “best of breed” suppliers for their security needs. PAN said on last week’s conference call where it discussed its earnings that its successes were underpinned by this “shift” from customers to adopt PAN’s Strata, Cortex and Prism platforms.

CEO Nikesh Arora said on the call: “We know this is the right strategy as we see compelling economics with multi-platform wins. Our two platform customers have an average customer lifetime value that is more than five times that of our single platform customer. For our three platform customers, that is more than 40 times larger.

“While we are driving platformization, I personally think we should be doing this faster.”

The lawsuit highlights Arora’s other statement on the call: “Our guidance is a consequence of us driving a shift in our strategy in wanting to accelerate both our platformization and consolidation and activating our AI leadership.” And it goes on to home in on his comments about the “significant shortfall” in US government business after several projects failed to close.

Back in August last year, when discussing Q4 fiscal 2023 results, the CEO said on another conference call that PAN “added more new annual recurring revenue than any other pure-play cybersecurity company.” He continued to wax lyrical about this, and he talked up the platforms in later calls with analysts in September and November.

The company had talked of using using discounts and deferred payments terms to bring on board more customers but “that there was strong demand in the market and that Palo Alto Networks had a strong financial position and flexibility,” the lawsuit adds.

As such, the plaintiffs and class suffered “economic loss” or “damages” when the last guidance was issued, the filing claims.

The lawsuit adds:

“The decline in Palo Alto Networks’ stock price is directly attributable to the announcements about the accelerated platformization and reduced guidance,” the lawsuit continues.

It says the “omissions and misrepresentations were material”; and the “misrepresentations alleged herein would tend to induce a reasonable investor to misjudge the value of the Company’s common stock.”

We’ve asked Palo Alto to comment. ®