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Palo Alto Networks Reports Fiscal Fourth Quarter and 2012 Financial Results

September 10, 2012

SANTA CLARA, Calif., Sept. 10, 2012 /PRNewswire/ — Palo Alto Networks, Inc. (NYSE: PANW) today announced financial results for its fiscal fourth quarter and fiscal year 2012 ended July 31, 2012.

Total revenue for the fiscal fourth quarter grew 88 percent year-over-year to $75.6 million, compared with $40.2 million in the fiscal fourth quarter of 2011. GAAP net loss for the fiscal fourth quarter was $4.6 million, or $0.18 per basic and diluted share, compared with a net loss of $6.0 million, or $0.40 per basic and diluted share, in the fiscal fourth quarter of 2011.

Palo Alto Networks recorded fiscal fourth quarter non-GAAP net income of $1.9 million, or $0.03 per diluted share, compared with a non-GAAP net loss of $5.1 million, or $0.34 per basic and diluted share, in the fiscal fourth quarter of 2011. A reconciliation between GAAP and non-GAAP information is contained in the tables below.

For fiscal 2012, total revenue grew 115 percent to $255.1 million, compared with $118.6 million in fiscal 2011. GAAP net income was $0.7 million, or $0.00 per diluted share, in fiscal 2012, compared with a net loss of $12.5 million, or $0.88 per diluted share, in fiscal 2011. Non-GAAP net income for fiscal 2012 was $14.7 million, or $0.14 per diluted share, compared with a net loss of $7.8 million, or $0.55 per basic and diluted share, in fiscal 2011.

“The fourth quarter was a strong finish to a great year for Palo Alto Networks,” said Mark McLaughlin, president and chief executive officer of Palo Alto Networks. “In our first quarter as a public company, we achieved record revenue and grew our customer base to over 9,000 customers. For the year, we grew revenue 115 percent, clearly outpacing the market and demonstrating the power of our technology.”

“We have pioneered the next generation of network security by completely reinventing the firewall. Our unique and innovative approach to network security resonates with enterprises around the world as they look for ways to protect their networks and safely enable the explosion of application use driven by productivity trends in cloud computing, SaaS, mobility and social networking,” continued McLaughlin.

Commenting on the company’s financial results, Steffan Tomlinson, chief financial officer of Palo Alto Networks, added, “Our 88 percent year-over-year revenue growth in the fourth quarter was well diversified across all theaters and verticals. In the quarter we generated $16.3 million in free cash flow, bringing the total to $62.8 million for the year, and we ended the quarter with $322.6 million in cash and equivalents, including $215.4 million in net proceeds from our IPO in July.”

Recent Highlights

  • Raised $215.4 million in net proceeds from its July 20, 2012 initial public offering.
  • Appointed Mark Anderson as our head of worldwide field operations, a new organization in the company that encompasses sales and customer support and services.
  • Expanded presence throughout Latin America, including opening offices in Sao Paulo, Brazil and Mexico City, Mexico.
  • Earned the NSS Labs ‘recommended’ rating in its inaugural Next-Generation Firewall Group Test. NSS Labs tested Palo Alto Networks PA-5020 and PAN-OS 4.0.5 against the fourth version of its Next-Generation Firewall test methodology, comprised of 1,486 live exploits and across a wide variety of traffic, payload sizes and protocols. Palo Alto Networks also blocked 95 percent of attacks against client applications within the test bed.
  • Expanded the Technology Partner Program by adding Avaya as a new Data Center Infrastructure Partner, as well as Mobile Iron and Zenprise as new Mobility Partners. Palo Alto Networks also expanded its technology scope with partnerships from leading vendors in network security management, security incident and event management (SIEM), network access and NetFlow analytics with partners such as: AlgoSec, Network Critical, LogRhythm, and Plixer International.
  • Palo Alto Networks next-generation firewall PA-500, PA-2000 and PA-4000 series solutions were thoroughly tested and officially certified by ICSA Labs, an independent division of Verizon. Each next-generation firewall series was evaluated against and passed ICSA Labs Modular Firewall Product Certification Criteria version 4.1x for general purpose network firewalls, corporate category.

Conference Call Information

Palo Alto Networks will host a conference call for analysts and investors to discuss its fiscal fourth quarter and fiscal year 2012 results and outlook for its fiscal first quarter of 2013 today at 4:30 p.m. Eastern time / 1:30 p.m. Pacific time. Open to the public, investors may access the call by dialing (866) 543-6408 or (617) 213-8899 and entering the passcode 95920447. A live audio webcast of the conference call along with supplemental financial information will also be accessible from the “Investors” section of the company’s website at investors.paloaltonetworks.com. Following the webcast, an archived version will be available on the website for one year. A telephonic replay of the call will be available two hours after the call and will run for five business days and may be accessed by dialing (888) 286-8010 or (617) 801-6888 and entering passcode 21239287.

Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, including statements regarding momentum in the company’s business. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including: Palo Alto Networks’ limited operating history, particularly as a new public company; risks associated with Palo Alto Networks’ rapid growth, particularly outside of the U.S.; and general market, political, economic and business conditions.

Additional risks and uncertainties that could affect Palo Alto Networks’ financial results are included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the company’s final prospectus for its initial public offering, which was filed with the U.S. Securities and Exchange Commission on July 20, 2012, and is available on the company’s investor relations website at investors.paloaltonetworks.com and on the SEC’s website at www.sec.gov. Additional information will also be set forth in Palo Alto Networks’ annual report on Form 10-K and other filings that the company makes with the SEC from time to time. All forward-looking statements in this press release are based on information available to the company as of the date hereof, and Palo Alto Networks does not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.

Non-GAAP Financial Measures

Palo Alto Networks has provided in this release financial information that has not been prepared in accordance with generally accepted accounting principles in the United States (GAAP). The company uses these non-GAAP financial measures internally in analyzing its financial results and believes that the use of these non-GAAP financial measures is useful to investors as an additional tool to evaluate ongoing operating results and trends and in comparing the company’s financial results with other companies in its industry, many of which present similar non-GAAP financial measures.

Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with the company’s consolidated financial statements prepared in accordance with GAAP. A reconciliation of the company’s non-GAAP financial measures to their most directly comparable GAAP measures has been provided in the financial statement tables included in this press release, and investors are encouraged to review the reconciliation.

Non-GAAP net income (loss) and diluted net income (loss) per share. Palo Alto Networks defines non-GAAP net income (loss) as net income (loss) plus share-based compensation expense less the related tax effects. Non-GAAP diluted net income (loss) per share is defined as non-GAAP net income (loss) divided by the weighted-average shares outstanding. Palo Alto Networks considers these non-GAAP financial measures to be useful metrics for management and investors because they exclude the effect of share-based compensation expense so that management and investors can compare the company’s “core business operating results,” meaning its operating performance excluding not only share-based compensation but also discrete charges that are infrequent in nature, over multiple periods. The company also excludes from non-GAAP net income (loss) and non-GAAP diluted net income (loss) per share the tax effects associated with share-based compensation expense in order to provide a complete picture of the company’s recurring core business operating results. Without excluding these tax effects, investors would only see the gross effect that excluding these expenses had on the company’s operating results. There are a number of limitations related to the use of non-GAAP net income (loss) and non-GAAP diluted net income (loss) per share versus net income (loss) and diluted net income (loss) per share calculated in accordance with GAAP. First, non-GAAP net income (loss) and non-GAAP diluted net income (loss) per share exclude share-based compensation expense. Share-based compensation has been and will continue to be for the foreseeable future a significant recurring expense in the company’s business. Second, share-based compensation is an important part of Palo Alto Networks employees’ compensation and impacts their performance. Third, the components of the costs that Palo Alto Networks excludes in its calculation of non-GAAP net income (loss) and non-GAAP diluted net income (loss) per share may differ from the components that its peer companies exclude when they report their non-GAAP results of operations. Palo Alto Networks compensates for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP net income (loss) and non-GAAP diluted net income per share and evaluating non-GAAP net income (loss) and non-GAAP diluted net income per share together with net income (loss) and diluted net income per share calculated in accordance with GAAP. In the future, the company may also exclude non-recurring expenses and other expenses that do not reflect the company’s core business operating results.

Free Cash Flow. Palo Alto Networks defines free cash flow as net cash provided by (used in) operating activities less purchases of property, equipment, and other assets. Palo Alto Networks considers free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after the purchases of property, equipment, and other assets, can be used for strategic opportunities, including investing in the business, making strategic acquisitions, and strengthening the balance sheet. A limitation of using free cash flow versus the GAAP measure of net cash provided by (used in) operating activities as a means for evaluating the company is that free cash flow does not represent the total increase or decrease in the cash balance from operations for the period because it excludes cash used for purchases of property, equipment, and other assets. Palo Alto Networks compensates for this limitation by providing information about its purchases of property, equipment, and other assets on the face of the cash flow statement and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Financial Metrics” in its filings with the SEC.

About Palo Alto Networks

Palo Alto Networks(TM) is the network security company. Its innovative platform allows enterprises, service providers, and government entities to secure their networks and safely enable the increasingly complex and rapidly growing number of applications running on their networks. The core of Palo Alto Networks’ platform is its Next-Generation Firewall, which delivers application, user, and content visibility and control integrated within the firewall through its proprietary hardware and software architecture. Palo Alto Networks’ products and services can address a broad range of network security requirements, from the data center to the network perimeter, as well as the distributed enterprise, which includes branch offices and a growing number of mobile devices. Palo Alto Networks’ products are used by more than 9,000 customers in over 100 countries. For more information, visit www.paloaltonetworks.com.

Palo Alto Networks, “The Network Security Company,” the Palo Alto Networks Logo, App-ID, GlobalProtect, and WildFire are trademarks of Palo Alto Networks, Inc. in the United States. All other trademarks, trade names or service marks used or mentioned herein belong to their respective owners.

                                                                         Palo Alto Networks, Inc.
                                                       Preliminary Condensed Consolidated Statements of Operations
                                                                  (In thousands, except per share data)
                                                                               (Unaudited)

                                                                                          Three Months
                                                                                             Ended                          Year Ended
                                                                                           July 31,                          July 31,
                                                                                           --------                          --------
                                                                                                      2012            2011                   2012      2011
                                                                                                      ----            ----                   ----      ----
    Revenue:
    Product                                                                                        $49,439         $29,084               $174,462   $84,800
    Services                                                                                        26,203          11,142                 80,676    33,797
                                                                                                    ------          ------                 ------    ------
    Total revenue                                                                                   75,642          40,226                255,138   118,597

    Cost of revenue:
    Product                                                                                         12,533           7,763                 44,615    21,766
    Services                                                                                         9,034           3,590                 25,938    10,507
    Total cost of revenue                                                                           21,567          11,353                 70,553    32,273
                                                                                                    ------          ------                 ------    ------

    Total gross profit                                                                              54,075          28,873                184,585    86,324

    Operating expenses:
    Research and development                                                                        11,746           6,929                 38,570    21,366
    Sales and marketing                                                                             37,721          23,507                115,917    62,254
    General and administrative                                                                       8,852           3,818                 26,207    13,108
    Total operating expenses                                                                        58,319          34,254                180,694    96,728
                                                                                                    ------          ------                -------    ------

    Operating income (loss)                                                                         (4,244)         (5,381)                 3,891   (10,404)

    Interest income                                                                                     11               -                     18         3
    Other expense, net                                                                                 (77)           (456)                (1,110)   (1,651)
                                                                                                       ---            ----                 ------    ------
    Income (loss) before income taxes                                                               (4,310)         (5,837)                 2,799   (12,052)
    Provision (benefit) for income taxes                                                               289             143                  2,062       476
    Net income (loss)                                                                              $(4,599)        $(5,980)                  $737  $(12,528)
                                                                                                   =======         =======                   ====  ========

    Net income (loss) attributable to common                                                       $(4,599)        $(5,980)            $        -  $(12,528)
    stockholders, basic and diluted

    Net income (loss) per share attributable to                                                     $(0.18)         $(0.40)                 $0.00    $(0.88)
    common stockholders, basic and diluted

    Weighted-average shares used to compute                                                         25,919          14,969                 19,569    14,201
    net income (loss) per share attributable to common
    stockholders, basic and diluted
                                                                                                                                                    Palo Alto Networks, Inc.
                                                                                                                              Reconciliation of GAAP to Non-GAAP Financial Measures - Fiscal Year
                                                                                                                                            (In thousands, except per share amounts)
                                                                                                                                                          (Unaudited)

                                                   Year Ended July 31, 2012                                                                Year Ended July 31, 2011
                                                   ------------------------                                                                ------------------------
                                                       GAAP                                       Adjustments                                           Non-GAAP                                    GAAP            Adjustments            Non-GAAP
                                                      Results                                                                                           Results                                   Results                                  Results
                                                      -------                                                                                           -------                                   -------                                  -------
    Net income (loss)                                                  $737                                      $13,915             (a)                              $14,652                             $(12,528)             $4,724 (b)          $(7,804)
                                                                       ====                                      =======                                              =======                             ========              ======              =======

    Net income (loss) attributable to common stockholders:
    Basic                                             $                   -                                       $3,053             (a)                               $3,053                             $(12,528)             $4,724 (b)          $(7,804)
                                                      =====================                                       ======                                               ======                             ========              ======              =======
    Diluted                                           $                   -                                       $3,701             (a)                               $3,701                             $(12,528)             $4,724 (b)          $(7,804)
                                                      =====================                                       ======                                               ======                             ========              ======              =======

    Net income (loss) per share attributable to common
     stockholders:
    Basic                                                             $0.00                                        $0.16             (a)                                $0.16                               $(0.88)              $0.33 (b)           $(0.55)
                                                                      =====                                        =====                                                =====                               ======               =====               ======
    Diluted                                                           $0.00                                        $0.14             (a)                                $0.14                               $(0.88)              $0.33 (b)           $(0.55)
                                                                      =====                                        =====                                                =====                               ======               =====               ======

    Weighted-average shares used to compute
      net income (loss) per share attributable to common
       stockholders:
    Basic                                                            19,569                                            -                                               19,569                               14,201                   -               14,201
                                                                     ======                                          ===                                               ======                               ======                 ===               ======
    Diluted                                                          19,569                                        6,737             (c)                               26,306                               14,201                   -               14,201
                                                                     ======                                        =====                                               ======                               ======                 ===               ======

    (a) To eliminate share-based compensation expense of $13,925 offset by related tax effect of share-based compensation of $10 for the year ended July 31, 2012
    (b) To eliminate share-based compensation expense of $4,733 offset by related tax effect of share-based compensation of $9 for the year ended July 31, 2011
    (c) Difference between weighted-average shares outstanding on a diluted basis under GAAP and non-GAAP due to application of the treasury stock method for dilutive shares

                                                                                                                                                              Palo Alto Networks, Inc.
                                                                                                                                       Reconciliation of GAAP to Non-GAAP Financial Measures - Fiscal Quarter
                                                                                                                                                      (In thousands, except per share amounts)
                                                                                                                                                                    (Unaudited)

                                                            Three Months Ended July 31, 2012                                             Three Months Ended July 31, 2011
                                                            --------------------------------                                             --------------------------------
                                                                    GAAP                                      Adjustments                                                              Non-GAAP                 GAAP           Adjustments           Non-GAAP
                                                                   Results                                                                                                              Results               Results                                Results
                                                                   -------                                                                                                              -------               -------                                -------
    Net income (loss)                                                           $(4,599)                                       $6,548                               (a)                                $1,949         $(5,980)              $921 (b)          $(5,059)
                                                                                =======                                        ======                                                                  ======         =======               ====              =======

    Net income (loss) attributable to common stockholders:
    Basic                                                                       $(4,599)                                       $5,398                               (a)                                  $799         $(5,980)              $921 (b)          $(5,059)
                                                                                =======                                        ======                                                                    ====         =======               ====              =======
    Diluted                                                                     $(4,599)                                       $5,550                               (a)                                  $951         $(5,980)              $921 (b)          $(5,059)
                                                                                =======                                        ======                                                                    ====         =======               ====              =======

    Net income (loss) per share attributable to common stockholders:
    Basic                                                                        $(0.18)                                        $0.21                               (a)                                 $0.03          $(0.40)             $0.06 (b)           $(0.34)
                                                                                 ======                                         =====                                                                   =====          ======              =====               ======
    Diluted                                                                      $(0.18)                                        $0.21                               (a)                                 $0.03          $(0.40)             $0.06 (b)           $(0.34)
                                                                                 ======                                         =====                                                                   =====          ======              =====               ======

    Weighted-average shares used to compute net income (loss) per
     share attributable to common stockholders:
    Basic                                                                        25,919                                             -                                                                  25,919          14,969                  -               14,969
                                                                                 ======                                           ===                                                                  ======          ======                ===               ======
    Diluted                                                                      25,919                                         9,602                               (c)                                35,521          14,969                  -               14,969
                                                                                 ======                                         =====                                                                  ======          ======                ===               ======

    (a) To eliminate share-based compensation expense of $6,552 offset by related tax effect of share-based compensation of $4 for the three months ended July 31, 2012
    (b) To eliminate share-based compensation expense of $923 offset by related tax effect of share-based compensation of $2 for the three months ended July 31, 2011
    (c) Difference between weighted-average shares outstanding on a diluted basis under GAAP and non-GAAP due to application of the treasury stock method for dilutive shares

                                                                       Palo Alto Networks, Inc.
                                              Reconciliation of Cash Provided by Operating Activities to Free Cash Flow
                                                                            (In thousands)
                                                                             (Unaudited)

                                                                          Three Months Ended                             Year Ended
                                                                               July 31,                                   July 31,
                                                                               --------                                   --------
                                                                                           2012                    2011                 2012      2011
                                                                                           ----                    ----                 ----      ----
    Net cash provided by operating activities                                           $19,592                 $10,141              $77,368   $32,102
    Less: purchases of property, equipment,                                               3,284                   2,098               14,565    13,000
    and other assets
    Free cash flow                                                                      $16,308                  $8,043              $62,803   $19,102
                                                                                        =======                  ======              =======   =======
    Net cash used in investing activities                                               $(3,284)                $(2,098)            $(14,565) $(13,000)
                                                                                        =======                 =======             ========  ========
    Net cash provided by financing activities                                          $216,051                  $1,116             $219,322    $2,580
                                                                                       ========                  ======             ========    ======

                 Palo Alto Networks, Inc.
    Preliminary Condensed Consolidated Balance Sheets
                      (In thousands)
                       (Unaudited)

                                                   July 31,
                                                   --------
                                                 2012       2011
                                                 ----       ----
    Assets
    Current assets:
      Cash and cash equivalents              $322,642    $40,517
      Accounts receivable, net of
       allowance for doubtful accounts         45,642     29,677
      Prepaid expenses and other current
       assets                                  13,373      6,646
                                               ------      -----
     Total current assets                     381,657     76,840

    Property and equipment, net                20,979     12,666
    Other assets                                5,168      1,666
    Total assets                             $407,804    $91,172
                                             ========    =======

    Liabilities, redeemable convertible
      preferred stock, and stockholders' equity (deficit)
    Current liabilities:
      Accounts payable                         $9,214     $5,435
      Accrued liabilities                      15,189      6,957
      Accrued compensation                     11,307      9,456
      Deferred revenue                         86,296     45,253
                                               ------     ------
      Total current liabilities               122,006     67,101

    Deferred revenue - non-current             49,512     22,002
    Preferred stock warrants liability              -      2,068
    Other long-term liabilities                 7,215      6,964

    Redeemable convertible preferred
     stock                                          -     64,491

    Stockholders' equity (deficit):
      Common stock                                  7          2
      Additional paid-in capital              309,092      9,309
      Accumulated deficit                     (80,028)   (80,765)
                                              -------    -------
      Total stockholders' equity (deficit)    229,071    (71,454)
                                                         -------
    Total liabilities, redeemable
     convertible                             $407,804    $91,172
      preferred stock, and stockholders' equity (deficit)
                                                             ---

                    Palo Alto Networks, Inc.
    Preliminary Condensed Consolidated Statements of Cash Flows
                         (In thousands)
                           (Unaudited)

                                                        Year Ended July
                                                              31,
                                                      ----------------
                                                         2012       2011
                                                         ----       ----
    Cash flows from operating activities
    Net income (loss)                                    $737   $(12,528)
    Adjustments to reconcile net income (loss) to
      net cash provided by operating activities:
      Depreciation and amortization                     6,134      2,189
      Share-based compensation for equity
       based awards                                    13,837      4,733
      Excess tax benefit from share-based
       compensation                                      (215)         -
      Change in fair value of preferred stock
       warrant                                            958      1,577
      Changes in operating assets and liabilities:
      Accounts receivable, net                        (15,965)   (15,436)
      Prepaid expenses and other assets               (11,063)    (5,114)
      Accounts payable                                  3,779      2,734
      Accrued and other liabilities                     9,912      6,340
      Deferred revenue                                 68,553     43,134
      Reimbursement of cost of leasehold
       improvements                                       701      4,473
                                                          ---      -----
    Net cash provided by operating activities          77,368     32,102

    Cash flows from investing activities
    Purchase of property, equipment, and
     other assets                                     (14,565)   (13,000)
                                                      -------    -------
    Net cash used in investing activities             (14,565)   (13,000)

    Cash flows from financing activities
    Proceeds from initial public offering,
     net of offering costs                            215,375          -
    Excess tax benefit from share-based
     compensation                                         215          -
    Changes in restricted cash                          1,221          -
    Proceeds from exercise of stock options             1,956      1,775
    Proceeds from settlement of note
     receivable                                           637        895
    Repurchase of restricted common stock
     from terminated employees                            (82)       (90)
                                                          ---        ---
    Net cash provided by financing activities         219,322      2,580

    Net increase in cash and cash equivalents         282,125     21,682
    Cash and cash equivalents -beginning of
     period                                            40,517     18,835
    Cash and cash equivalents - end of period        $322,642    $40,517
                                                     --------    -------

SOURCE Palo Alto Networks, Inc.


Source: PR Newswire