Palo Alto Networks CEO: Big Q4 Revenue Gains Follow Successful Sales Reorg

Six months after a sales reorganization, Palo Alto Networks CEO Mark McLaughlin said the security vendor is starting to see "solid gains" from the changes as it reported a 27 percent increase in fourth quarter sales.

McLaughlin said on the Santa Clara, Calif.-based company's year-end earnings call Thursday that the company is progressing along its reorganization, completing the design, communication, and implementation of the new plan. He said the company is now in the "run time" phase of the reorganization to re-establish and strengthen relationships with customers.

"[We are at the] bottom of the fifth [inning]," McLaughlin said. "We're exactly where we expected to be at this time, and we're very happy with the progress."

[Related: Palo Alto Networks Sales SVP To Retire, Will Be Replaced By Salesforce EVP]

Palo Alto Networks took an earnings hit in the second quarter from sales execution issues that resulted in a "disappointing" sales performance.

The go-to-market problems stemmed from the company's sales playbook, which McLaughlin said has driven high growth in years past, but no longer sees the same return on investment. The playbook had the company splitting territories by industry and by customer size, as well as investing in sales and marketing. McLaughlin said those changes occurred too quickly, over-complicating the go-to-market strategy and leading to weaker relationships with customers.

Palo Alto Networks has since worked to recalibrate its sales go-to-market by reorganizing its account coverage model, re-tooling its sales and marketing resources and updating its second half revenue expectations. The company had said it expected to see the effects in the second half of 2017.

McLaughlin (pictured) said Palo Alto Networks is "seeing the fruit of those efforts in the Q4 results." He highlighted the addition of 3,000 new customers in the quarter, bringing the company's total customer base to more than 42,500 customers.

"This is by far the strongest quarter for new customer acquisition in our history," McLaughlin said.

McLaughlin said the sales reorganization also was a large driver in the company's sales growth during the quarter. Palo Alto Networks reported sales of $509.1 million for Q4, a 27 percent increase. The company's quarterly net loss increased to $38.2 million from $31.4 million in the same quarter last year.

For the full year, Palo Alto Networks reported sales of $1.8 billion, up 28 percent year-over-year. The company's net loss for the full year was $216.6 million, up $23.9 million over the net loss of $192.7 million reported in 2016.

Palo Alto Networks executives also addressed the retirement of Senior Vice President of Americas Sales John Spiliotis. Spiliotis has been replaced by former Salesforce.com executive Patrick Blair. President Mark Anderson said Spiliotis did an "incredible job building the business" and stayed with the company through the sales reorganization despite expressing a desire to retire earlier in the year due to family health reasons.

"As we went through our transition challenges, John was there leading the changes and really driving that and finished up with a really strong Q4. Hats off to him … He's a good friend and tremendous guy and deserves to take a rest," Anderson said.

Anderson said the company was "excited about what Patrick brings to the mix," calling out his experience managing scale.

Palo Alto Networks CFO Steffan Tomlinson said on the call that he is retiring from the company as CFO, and will take some time to figure out what he will do next. Palo Alto Networks also announced the promotion of Lee Klarich from executive vice president of product management to chief product officer, giving him responsibility for both engineering and product management.

McLaughlin said Palo Alto Networks continued to see its portfolio grow "across the board," including growth in both hardware and subscription services. He said the company now has 1,400 Traps endpoint security customers and continue to "take market share" with its overall security platform. Product sales for the quarter were $212.3 million, up 9.9 percent year-over-year. Subscription and support sales were up 29 percent year-over-year to $296.8 million.

McLaughlin said Palo Alto Networks also received "positive feedback" for its technology innovations launched in the quarter, including Global Protect Cloud and new logging services, both of which will be available in September. He said the company also looks forward to the 2018 launch of its "game changing" Application Framework, which he said will "further disrupt the market and take market share."

Tomlinson said Palo Alto Networks predicts sales for the first quarter to be between $482 million and $492 million, up 21 to 24 percent year over year, and billings between $580 million and $600 million, up 12 to 16 percent year over year. He said he expects product billings between $170 million and $173 million, up 4 to 6 percent year over year. The company expects non-GAAP earnings per share between $0.67 and $0.69.

For the full year, Palo Alto Networks expects sales from $2.125 billion to $2.165 billion, up 21 to 23 percent. It expects non-GAAP earnings per share between $3.24 and $3.34. 

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