Nikesh Arora, CEO of Palo Alto Networks, speaks on CNBC’s “Squawk Box” at the WEF Annual Meeting in Davos, Switzerland on January 16, 2024.

Adam Galitsi | CNBC

Palo Alto Networks shares fell 28% on Wednesday, the worst trading session since the cybersecurity hardware and software maker’s initial public offering in 2012. The slump came a day after the company cut its full-year revenue guidance.

The stock doubled in value in 2023 as cyberattacks against 23andMe, Chinese bank ICBC, MGM Resorts and others inspired organizations to continue spending on security. This is despite widespread efforts by IT departments to find ways to save money due to concerns about the economy.

U.S. government agencies are working to strengthen their safeguards after an executive order from 2021. But a major federal contract “did not materialize at the pace and at the spending levels that we expected” in the quarter, said Nikesh Arora, CEO of Palo Alto , on a call with analysts on Tuesday.

The company lowered its full-year billings guidance to a range of $10.1 billion to $10.2 billion, from $10.7 billion to $10.8 billion. Revenue guidance moved to a range of $7.95 billion to $8 billion, from $8.15 billion to $8.2 billion.

Most of the updated billing estimate relates to the Defense Information Systems Agency’s $1.86 billion Project Thunderdome to implement a zero-trust architecture, Wells Fargo analysts Andrew Novinsky and Stefan Schwartz wrote in a note to clients. They maintained their buy-equivalent rating on the stock, but lowered their 12-month price target to $385 from $450.

Analysts wrote that the additional billing effects stem from Palo Alto’s continued push toward platformization, or attempts to get customers to use multiple products from the company. The idea is to position the company well in the long term.

“We expect that a typical customer who enters into a platform transaction will not pay us for our technology for a period of time,” Arora said. “As these programs grow over the next year, we expect a turnaround in our accounts and revenue growth over the next 12 to 18 months.” As customers enter the period [with] contracts for full billing and revenue contribution, we expect to see an acceleration in our top-line metrics.”

The demand picture has not changed much in the last few quarters, Arora said. Greater geopolitical stress is leading nation states to increasingly wage attacks on national infrastructure, he added.

But what’s new is that “we’re starting to see that customers are facing cybersecurity spending fatigue,” Arora said.

Loop Capital and Rosenblatt Securities downgraded the stock after the report.

— CNBC’s Rohan Goswami contributed to this report.

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