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Palo Alto Networks Reports Fiscal Second Quarter 2014 Financial Results

- Fiscal second quarter total revenue grows 46 percent year-over-year to reach a record $141.1 million

SANTA CLARA, Calif., Feb. 24, 2014 /PRNewswire/ -- Palo Alto Networks, Inc. (NYSE: PANW) today announced financial results for its fiscal second quarter of 2014 ended January 31, 2014.

(Logo: http://photos.prnewswire.com/prnh/20130508/SF04701LOGO )

Total revenue for the fiscal second quarter grew 46 percent year-over-year to a record $141.1 million, compared with $96.5 million in the fiscal second quarter of 2013. GAAP net loss for the fiscal second quarter was $39.9 million, or $0.55 per diluted share, compared with a net loss of $2.6 million, or $0.04 per diluted share, in the fiscal second quarter of 2013.

Palo Alto Networks recorded fiscal second quarter non-GAAP net income of $7.8 million, or $0.10 per diluted share, compared with non-GAAP net income of $4.1 million, or $0.05 per diluted share, in the fiscal second quarter of 2013. A reconciliation between GAAP and non-GAAP information is contained in the tables below.

"We reported very good Q2 results, driven by strong customer demand for our integrated and automated enterprise security platform," said Mark McLaughlin, president and chief executive officer of Palo Alto Networks. "Enterprises around the world are accelerating their investments in security to enable them to improve their business and protect them against the risks stemming from cyber attacks. We see evidence of this in continued new customer adoption and rapid expansion of our platform among existing customers. "

"Our business model is benefitting from higher attach rates of our SaaS-based subscription services, which, combined with continued strong product growth, contributed to record billings, revenue and deferred revenue," said Steffan Tomlinson, chief financial officer of Palo Alto Networks. "Non-GAAP gross margin, operating margin and free cash flow expanded both sequentially and year-over-year, and we finished the quarter with $501 million in cash, cash equivalents and investments."

Recent Highlights

  • Awarded Global Partner of the Year by VMware, which underscores the nature of the strategic partnership we have developed with VMware to transform security for the software-defined data center.
  • Completion of our first acquisition: Morta Security, which brings to our portfolio a team of cybersecurity experts and technologies that will enhance the detection and prevention capabilities of our platform.
  • Delivery of PAN-OS 6.0, which raises the bar on helping our customers protect their networks from sophisticated cyber attacks with advanced threat detection and prevention capabilities, among 60+ additional feature enhancements.
  • Unveiling of the PA-7050, which supports up to 120 Gbps, representing the most powerful next-generation firewall in the industry designed from the ground up to safely enable applications throughout enterprise networks – from the edge of the enterprise to the data center.

Conference Call Information

Palo Alto Networks will host a conference call for analysts and investors to discuss its fiscal second quarter of 2014 results and outlook for its fiscal third quarter of 2014 today at 8:00 a.m. Eastern time / 5:00 a.m. Pacific time. Open to the public, investors may access the call by dialing (877) 703-6104 or (857) 244-7303 and entering the passcode 10737720. 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 20172716.

Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties, including statements regarding continued 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; risks associated with Palo Alto Networks' rapid growth, particularly outside of the U.S.; rapidly evolving technological developments in the market for network security products; 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 quarterly report on Form 10-Q filed with the SEC on December 5, 2013, which is available on the company's website at investors.paloaltonetworks.com and on the SEC's website at www.sec.gov. Additional information will also be set forth in 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 and diluted net income per share. Palo Alto Networks defines non-GAAP net income as net income (loss) plus share-based compensation expense, tax adjustments related to the valuation allowance on deferred tax assets, expenses related to IP litigation, a payment for the mutual release of claims, and acquisition related costs. Palo Alto Networks believes that excluding these items provides management and investors with greater visibility into the underlying performance of the company's core business operating results, meaning its operating performance excluding these items and, from time to time, other discrete charges that are infrequent in nature, over multiple periods. The company also excludes from non-GAAP net income and non-GAAP diluted net income per share the tax effects, including income tax and payroll tax, associated with these items 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.

Billings.  Palo Alto Networks defines billings as total revenue plus the change in deferred revenue during the period. The company's management monitors billings because billings drive deferred revenue, which is an important indicator of the health and visibility of the company's business. The company considers billings to be a useful metric for management and investors, particularly as sales of subscriptions increase and the company experiences strong renewal rates for subscriptions and support and maintenance.

Investors are cautioned that there are a number of limitations associated with the use of non-GAAP financial measures as an analytical tool. In particular, many of the adjustments to the company's GAAP financial measures reflect the exclusion of items that are recurring and will be reflected in the company's financial results for the foreseeable future, such as share-based compensation.  Share-based compensation is an important part of Palo Alto Networks employees' compensation and impacts their performance.  In addition, the billings metric reported by the company includes amounts that have not yet been recognized as revenue.  The components that Palo Alto Networks excludes in its calculation of non-GAAP financial measures 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 these non-GAAP financial measures. 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.

About Palo Alto Networks

Palo Alto Networks is leading a new era in cybersecurity by protecting thousands of enterprise, government, and service provider networks from cyber threats. Unlike fragmented legacy products, our security platform safely enables business operations and delivers protection based on what matters most in today's dynamic computing environments: applications, users, and content. Find out more at www.paloaltonetworks.com.

Palo Alto Networks and the Palo Alto Networks Logo are trademarks of Palo Alto Networks, Inc. in the United States and in jurisdictions throughout the world. 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 January 31,


Six Months Ended January 31,


2014


2013


2014


2013

Revenue:








Product

$

80,823



$

61,944



$

156,308



$

117,458


Services

60,245



34,555



112,940



64,975


Total revenue

141,068



96,499



269,248



182,433


Cost of revenue:








Product

20,221



16,636



38,175



31,052


Services

17,283



10,982



33,136



20,756


Total cost of revenue

37,504



27,618



71,311



51,808


Total gross profit

103,564



68,881



197,937



130,625


Operating expenses:








Research and development

24,253



15,495



44,146



28,807


Sales and marketing

76,734



45,796



144,100



88,403


General and administrative

39,733



9,747



53,858



18,703


Total operating expenses

140,720



71,038



242,104



135,913


Operating loss

(37,156)



(2,157)



(44,167)



(5,288)


Interest income

187



116



347



214


Other expense, net

(371)



(60)



(134)



(230)


Loss before income taxes

(37,340)



(2,101)



(43,954)



(5,304)


Provision for income taxes

2,606



512



3,853



824


Net loss

$

(39,946)



$

(2,613)



$

(47,807)



$

(6,128)


Net loss attributable to
  common stockholders

$

(39,946)



$

(2,613)



$

(47,807)



$

(6,128)


Net loss per share attributable to
  common stockholders, basic and diluted

$

(0.55)



$

(0.04)



$

(0.66)



$

(0.09)


Weighted-average shares used to compute
  net loss per share attributable to common

  stockholders, basic and diluted

72,854



67,651



72,260



67,225


 


Palo Alto Networks, Inc.

Reconciliation of GAAP to Non-GAAP Financial Measures

(In thousands, except per share amounts)

(Unaudited)










Three Months Ended January 31,


Six Months Ended January 31,


2014


2013


2014


2013

GAAP net loss

$

(39,946)



$

(2,613)



$

(47,807)



$

(6,128)


Share-based compensation expense

21,000



8,754



35,411



17,096


Share-based payroll tax expense

2,355





2,620




Acquisition related costs

3,864





3,864




Payment for mutual release of claims

20,000





20,000




Litigation expense [a]

2,653



390



4,542



1,039


Income tax related to the above

(2,156)



(2,413)



(4,690)



(4,568)


Non-GAAP net income

$

7,770



$

4,118



$

13,940



$

7,439










GAAP net loss per share, diluted

$

(0.55)



$

(0.04)



$

(0.66)



$

(0.09)


Share-based compensation expense

0.29



0.12



0.47



0.24


Share-based payroll tax expense

0.03





0.04




Acquisition related costs

0.05





0.05




Payment for mutual release of claims

0.27





0.28




Litigation expense [a]

0.04





0.06



0.01


Income tax related to the above

(0.03)



(0.03)



(0.06)



(0.06)


Non-GAAP net income per share, diluted

$

0.10



$

0.05



$

0.18



$

0.10










GAAP weighted-average shares used to compute net loss per share, diluted

72,854



67,651



72,260



67,225


Weighted-average effect of potentially dilutive securities

5,329



9,833



5,427



10,430


Non-GAAP weighted-average shares used to compute net income per share, diluted

78,183



77,484



77,687



77,655










[a] IP litigation expenses are attributed to ongoing IP litigation with Juniper










Three Months Ended January 31,


Six Months Ended January 31,


2014


2013


2014


2013

Revenue

$

141,068



$

96,499



$

269,248



$

182,433


Change in deferred revenue

45,635



27,775



75,361



52,375


Billings

$

186,703



$

124,274



$

344,609



$

234,808










 


Palo Alto Networks, Inc.

Preliminary Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)






January 31, 2014


July 31, 2013

Assets




Current assets:




Cash and cash equivalents

$

261,867



$

310,614


Short-term investments

176,345



109,007


Accounts receivable, net

86,090



87,461


Prepaid expenses and other current assets

30,985



22,617


Total current assets

555,287



529,699


Property and equipment, net

45,735



32,086


Long-term investments

63,105



17,314


Other assets

24,899



6,507


Total assets

$

689,026



$

585,606


Liabilities and stockholders' equity




Current liabilities:




Accounts payable

$

10,341



$

15,544


Accrued and other liabilities

20,425



14,609


Accrued compensation

29,713



22,004


Deferred revenue

202,330



153,945


Total current liabilities

262,809



206,102


Deferred revenue – non-current

122,261



95,285


Other long-term liabilities

19,512



11,799


Stockholders' equity:




Common stock

7



7


Additional paid-in capital

441,475



381,703


Accumulated other comprehensive gain (loss)

43



(16)


Accumulated deficit

(157,081)



(109,274)


Total stockholders' equity

284,444



272,420


Total liabilities and stockholders' equity

$

689,026



$

585,606


 


Palo Alto Networks, Inc.

Preliminary Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)






Six Months Ended January 31,


2014


2013

Cash flows from operating activities




Net loss

$

(47,807)



$

(6,128)


Adjustments to reconcile net loss to net cash provided by operating activities:




Depreciation and amortization

7,082



4,468


Amortization of investment premiums, net of accretion of purchase discounts

747



822


Share-based compensation for equity based awards

38,729



17,030


Excess tax benefit from share-based compensation

(674)



(106)


Changes in operating assets and liabilities:




Accounts receivable, net

1,371



(22,944)


Prepaid expenses and other assets

(6,207)



(7,290)


Accounts payable

(4,387)



1,716


Accrued and other liabilities

16,062



17,640


Deferred revenue

75,361



52,375


Net cash provided by operating activities

80,277



57,583


Cash flows from investing activities




Purchase of property, equipment, and other assets

(25,483)



(10,236)


Purchase of investments

(249,803)



(252,633)


Proceeds from sales of investments

6,630



13,491


Proceeds from maturities of investments

129,096



57,150


Acquisitions, net of cash

(10,102)




Net cash used in investing activities

(149,662)



(192,228)


Cash flows from financing activities




Excess tax benefit from share-based compensation

674



106


Proceeds from exercise of stock options

14,085



2,554


Proceeds from employee stock purchase plan

5,988




Repurchase of restricted common stock from employees

(109)



(35)


Payments of initial public offering costs



(2,698)


Net cash provided by (used in) financing activities

20,638



(73)


Net decrease in cash and cash equivalents

(48,747)



(134,718)


Cash and cash equivalents - beginning of period

310,614



322,642


Cash and cash equivalents - end of period

$

261,867



$

187,924


 

SOURCE Palo Alto Networks

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