Venture Capitalist at Theory

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3 minute read / Feb 21, 2024 /

The First $100m ARR AI Security Company

Palo Alto Networks, the largest security software company in the world, worth roughly $82b, announced earnings this week.

There are three interesting themes :

  1. AI is a big business for them already. Internally, the efficiency gains are impressive.
  2. They’ve embarked on a platform strategy 5 years ago & there are some positives but also some significant challenges.
  3. The company is buying out customer contracts for six months to win over new business.

They have developed a $100m ARR security line in a few quarters :

In Q2, our AI offerings, which include XSIAM, Autonomous Digital Experience Management, or ADEM and AI ops crossed $100 million in ARR milestone. We are possibly the first security companies to cross $100 million ARR in AI security.

In addition, AI is enabling them to reduce their service costs by 50%, which is similar to the productivity gains ServiceNow reported.

The combination of process reengineering, automation and AI is still in progress, but we have already seen positive savings and have a target of automating 90% of the more than 300,000 manual interventions. By the end of Q2, we roughly halved the cost of our T&E servicing.

The company embarked on a suite strategy 5 years ago to capture more customer budget by cross-selling products. Since then, Palo Alto has acquired 16 companies.

That idea works …

Our 2 platform customers have an average customer lifetime value that is more than 5 times that of our single platform customer. For our 3 platform customers, that is more than 40x larger.

…but only up to a point. The return on the investment has to materialize :

We began to notice customers are facing spending fatigue in cybersecurity…Adding incremental point products is not necessarily driving a better security outcome for them.

In addition, the practical realities of swapping out products is real :

Key friction points we’ve noticed include the challenge of replacing multiple products simultaneously as well as the issues around double playing while working through complex contract terms.

To ease the transition, Palo Alto Networks is selling the products at half-price the first year :

Our estimate is approximately it works out at about 6 months’ worth of free product capabilities to our customers on a rolling basis.

Buying out contracts requires a large balance sheet & multiyear deals. It enables growth in competitive market share. But it does depress the growth rates at least temporarily.

We will see many more of these suite companies that build internal tools or acquire new capabilities.

The potential for budget capture is big (40x!) but the path to platforms isn’t always easy..

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