Palo Alto Networks Overhauls Sales Strategy, CEO Says Channel Partners Not Affected

After a "disappointing" sales performance in its second quarter, Palo Alto Networks is retooling its sales strategy for the rest of the year, though it says its channel partners won't be affected by the changes.

Palo Alto Networks CEO Mark McLaughlin said the company saw "weaker performance caused by go-to-market execution issues" in its second quarter, leading to sales of $422.6 million. Sales were up 26 percent year-over-year but came in more than $7 million short of Wall Street's expectations.

The company reported a net loss for the quarter, which ended Jan. 31, of $60.6 million, compared to a net loss of $57.3 million in the same quarter last year.

[Related: Palo Alto Networks Acquires LightCyber For $105M, Adds Behavioral Attack Detection Capabilities]

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

McLaughlin said Palo Alto Networks will now be "recalibrating" its sales go-to-market by reorganizing its account coverage model, retooling its sales and marketing resources and updating its second half revenue expectations.

"While we continue to grow very quickly … the quality of execution at such a rapid pace is very important for the success of the company. We have accounted for these issues and believe we can fix them," McLaughlin said.

McLaughlin said he doesn't anticipate to change any of the company's strategy with the channel.

"We like our channel. The channel has been very good to us and we have great relationships with the channel, so we won't be changing that strategy," McLaughlin said.

Company president Mark Anderson reiterated that the channel strategy from Palo Alto Networks wouldn't change, saying all of the "execution issues" stemmed from the sales team, not the partners.

"The channel is a very good channel. They are executing very well. We are onboarding new channel partners … We know what we're doing to fix it, and we are going to be fixing it as we go on through the fiscal year," Anderson said.

McLaughin said he expects to see benefits from these changes in the latter half of 2017. He said activities to fix the issues are already underway and will process through the back half of the year.

McLaughlin said he doesn’t see the issues as being due to competition, saying the company continues to see competitive wins and added 2,000 new customers during the quarter. He said feedback has been particularly positive for the company's recent PAN-OS 8.0 release, which added more than 70 feature upgrades across cloud security, multi-method threat prevention, management at scale, credential threat prevention and new hardware.

"The feedback from the market seems positive. This appears to be something we did to ourselves and something we can fix," McLaughlin said.

The sales execution issues come as Palo Alto Networks approaches a critical refresh cycle for its flagship next-generation firewalls. CFO Steffan Tomlinson said he still expects to see a "significant refresh opportunity" in the months to come despite the sales execution challenges.

"Having execution headwinds doesn't help at all, but we're confident that people will want to refresh on the new product line," Tomlinson said.

For the coming quarter, Palo Alto Networks expects total revenue between $406 million and $416 million, up 17 to 20 percent year-over-year. It expects net income per share between $0.54 and $0.56, up 17 to 22 percent year-over-year and including a $0.04 per share investment in LightCyber.