Palo Alto results proved that the rumor that AI would bury cyber was exaggerated

Following a 100% jump in the stock since the beginning of the year, investors developed impossible expectations for Palo Alto. The world's largest cybersecurity company, which is also traded in Tel Aviv, where its market value is already approaching a trillion shekels, published excellent financial reports and no less good forecasts for the future. However, the stock, which fell by 9% on the eve of the publication, continued to lose height and fell by another 8% yesterday. Although it is the middle of the calendar year, for Palo Alto this is the end of the fourth quarter, so this is its most important annual report, in which it also provides a forecast for the upcoming fiscal year.

The company, founded by Nir Zuk, which completed the acquisition of the Israeli CyberArk six months ago for $25 billion, beat expectations for the last quarter in every possible parameter. Revenue stood at $3.4 billion, compared to a forecast of $3.3 billion, and reflects a growth rate of 34%. In the annual summary, revenue reached $11.5 billion, a slower growth of 25%, as Palo Alto consolidated the results of CyberArk and the company Talon, which was acquired for $3 billion, only in the second half of the year. Net profit excluding one-time items also rose by 25% compared to the corresponding period to $2.9 billion, and cash flow stood at $4.4 billion.

The forecast for the current quarter is slightly conservative with revenue of $3.3 billion, but it reflects a high annual growth rate of 34%. On an annual level, Palo Alto expects revenue of about $14 billion, a growth of 24% compared to the past year. These are higher numbers than what analysts in the cyber industry estimated. The numbers from Palo Alto, which come after good reports from CrowdStrike and Okta, other large cyber players, signal that concerns about the impact of AI giants on the cyber industry were exaggerated.

Nikesh Arora, CEO of Palo Alto, who is known for his colorful language, said yesterday in a conversation with investors:

"Nine months ago we were convicted and almost sentenced to death along with the entire software industry based on the assessment that AI companies would eat our breakfast, lunch, and dinner. But in the last half year it turned out that this is not happening and we can all enjoy the meals together. We saw that OpenAI, Anthropic, and even Google are coming to the table and talking about partnership. They give us access to models and we can test them. In the long run, AI will be a tailwind for cyber companies."

The change in perception that Arora is talking about happened in recent months, when alongside the exposure of cyber capabilities by AI companies, the understanding sharpened that they would not be able to replace cyber solutions, even the opposite. This is because even attacks built by AI agents, sometimes even those that get out of control of the giants themselves as happened in recent weeks, only create demand for solutions from companies specializing in this. Arora noted that following the launch of Mythos by Anthropic, for detecting security vulnerabilities by AI, the company only received more inquiries from lost customers who wondered how to deal with the new reality.

As part of the change in direction, which was also well reflected in Palo Alto's stock, it also announced another acquisition, this time of a small startup called Console that develops AI solutions for cyber. Referring to CyberArk, whose product line name for identity management in organizations was changed to Idira, Arora repeated compliments and defined the acquisition as "phenomenal". The activity grew on an annual basis at a rate of 21% and generated revenue of $1.26 billion. In the last quarter, the growth rate of Idira accelerated to 27%, but for the current year, Palo Alto is settling for a fairly conservative forecast and estimates that the growth rate will be maintained or slow down slightly and revenue will reach $1.5 billion. The main growth engine for Palo Alto, which until today did not have a product in the field of identity management, is selling it to its existing customer base. According to the company, it has already made 200 such deals, while the number of large contracts worth more than $5 million each jumped by 50% in the last quarter. At the same time, the company's management continues to address the expense side and the synergy of CyberArk, which has already become more profitable than it was as an independent company.