The cybersecurity stocks have been climbing steadily higher for months now, ever since Wall Street figured out that this industry wouldn't be made obsolete by artificial intelligence. Take Palo Alto Networks, a long-time holding of my charitable trust. Here's a stock that's more than doubled from its April lows to its highs a few weeks ago. That's why it's been pulling back lately, going into earnings. When Palo Alto reported after the close, they delivered a much better than expected result on almost every key line. Plus, their guidance for the current quarter and the full year were both very strong. Now, is it enough to get the stock running? Let's dig deeper with Nikesh Arora, the Chairman and CEO of Palo Alto Networks, fresh from his conference call. Mr. Arora, welcome back to Mad Money.
Nice to see you again, Jim.
Yeah, I missed you, too. Guess you had some quarter. I mean, I was just looking at some of the facts: roughly 220 net new platforms in the fourth quarter, double the 110 from the last quarter—not year-over-year, but the last quarter. What's going on?
It's Q4, it's party time, Jim. Look, you know, nine months ago, I said we were guilty and convicted of near death because AI was going to eat our lunch, breakfast, and dinner. It seems like that's not the case. Seems like we're going to have to have the feast with them. And the Mythos moment has just become a net new beginning for the cybersecurity industry because the world has realized that we have to pay attention to cyber because AI is going to be weaponized by bad actors, and they will need the large players in the cybersecurity space to help protect them. So I think that's what we're seeing. We're seeing the early signs of customers wanting to adopt platforms. We're seeing the early signs of customers wanting to get a head start on what is coming with AI getting better and better at cyber attacks.
Well, you're talking about the need for accelerating the urgency to modernize $1 trillion of legacy security. That just means hackable security, $1 trillion worth.
Well, think about it. If the average life is seven years and you're spending $200 to $300 billion a year, you've got $1 trillion of security infrastructure that's out there. Nothing that was deployed 7 or 10 years ago is prepared or ready to handle AI at machine speed. So you have to make sure that you rethink your cyber architecture. You have to make sure that you are ready for what's coming down the pike from a bad actor perspective. And that's where the $1 trillion and the need for modernization comes from, not to miss the fact that, on top of that, you're going to see $5 trillion of CapEx spend in the next five years with people building AI data centers and having tons and tons of agents running around. You also have to build a net new security stack for that.
Nikesh, how worried are you? I mean, there are too many companies that are not protected. And if there are that many companies that are not protected, we've got all these agents running around. How can we stop them? What is Palo Alto doing to stop them?
Well, the good news is, Jim, that we have been very consistent in our approach of making sure that we build an AI-first product. You and I have talked about this over the last few years. We built a brand new product, XSIAM. We bought a company called Chronosphere, which focuses on AI-driven observability. We are focusing on the AI security operations and IT operations space. We've always had this ethos that AI was going to be big. That's the one thing I brought with me from Google when I worked there 10 years ago, that AI was going to be big. I wasn't quite sure when and how big, but that's where the ethos of Palo Alto is: that we have to build something that is able to work at machine speed and resolve security incidents at machine speed. We've been able to get ourselves to one minute of resolution. We think we can get our customers there. The good news is not all customers are unprepared. Many of our customers have taken that bet, have worked with us to go deploy XSIAM as a capability. Many of the customers are having immense conversations. And I'll tell you finally, Jim, I've been trying for eight years to tell customers they're not ready, and Dario did it in one event just by launching Mythos. He made every CEO aware that AI has capabilities which we have not all ever thought about. And that's been an amazing tailwind where CEOs want to reach out and talk about how do they modernize their infrastructure, how do they get ready for what's coming from a vulnerability discovery perspective? That's been great.
Are governments ready, Nikesh?
Well, governments have a phenomenal property because a lot of them are not cloud-first, because they've been very particular about air-gapped systems, about sovereign systems. To be fair, they actually have done a much better job. It's not a well-known fact, but governments spend 7% to 8% of their budgets of IT on cyber; enterprises spend 4% to 5% of their budgets on IT on cyber. So I have to tell you that many of the governments are well prepared, and they have very, very qualified people historically, like our NSA or people of equivalent ilk around the world. They have a lot of capability from a knowledge, security, and offense perspective, and they've seen the worst attacks or worst attempts in the world. So I think they are aware, they are prepared, and whether or not, they're making sure they're going to be prepared.
Well, what kinds of companies are calling to find out about your AI critical defense program that you announced?
Jim, we've had about 2,000 companies that we've had a conversation with. So what we have been able to do is, thanks to our friends in the frontier LLM space, we actually are the first certified commercial partner for Mythos. So we can actually bring Mythos with our people and test our customers to see how vulnerable they are, not just on Mythos; we can also do that with OpenAI's 5.6 Cyber. So we actually come up with multiple models to test our customers, work on a plan to fix what we find with them, and also work on a plan how to modernize their infrastructure going forward. So that's 2,000 conversations. Not everything's going to happen next quarter, but all I say is this changes the long-term growth rate and duration of cybersecurity, not just for Palo Alto, but as an industry, because suddenly people are paying attention that you cannot deploy AI successfully if you don't get cybersecurity.
