PANW - 8-K - Q1'15 Earnings Release


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8‑K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
November 24, 2014
 _____________________
Palo Alto Networks, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
001-35594
20-2530195
(State or other jurisdiction of
incorporation or organization)
(Commission File Number)
(I.R.S. Employer
Identification No.)
4401 Great America Parkway
Santa Clara, California 95054
(Address of principal executive office, including zip code)
(408) 753-4000
(Registrant's telephone number, including area code)
 
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 






Item 2.02 Results of Operations and Financial Condition.
On November 24, 2014, Palo Alto Networks, Inc. (the “Company”) issued a press release announcing its financial results for its fiscal first quarter ended October 31, 2014. A copy of the press release is furnished herewith as Exhibit 99.1 and is incorporated herein by reference.
The information contained in this Item 2.02 and in the accompanying Exhibit 99.1 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference in any filing under the Securities Act of 1933, as amended, regardless of any general incorporation language in such filing, unless expressly incorporated by specific reference in such filing.
Item 9.01 Financial Statements and Exhibits.
(d)      Exhibits.
Exhibit Number
Description of Exhibit
99.1
Press release dated as of November 24, 2014.





SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
PALO ALTO NETWORKS, INC.
 
 
By:
/s/ MARK D. MCLAUGHLIN
 
Mark D. McLaughlin
 
President and Chief Executive Officer

Date: November 24, 2014






EXHIBIT INDEX
Exhibit Number
Description of Exhibit
99.1
Press release dated as of November 24, 2014.


Ex 99.1 (Q1'15 Earnings Release)


Exhibit 99.1

Palo Alto Networks Reports Fiscal First Quarter 2015 Financial Results

Fiscal first quarter total revenue grows 50 percent year-over-year to a record $192.3 million
Billings grow 52 percent year-over-year to a record $240.5 million
Product revenue grows 34 percent year-over-year to $101.5 million; recurring subscription revenue grows 76 percent year-over-year to $43.7 million
Deferred revenue grows 69 percent year-over-year to a record $470.7 million

SANTA CLARA, Calif., November 24, 2014 - Palo Alto Networks, Inc. (NYSE: PANW) today announced financial results for its fiscal first quarter 2015 ended October 31, 2014.

Total revenue for the fiscal first quarter grew 50 percent year-over-year to a record $192.3 million, compared with $128.2 million in the fiscal first quarter of 2014. GAAP net loss for the fiscal first quarter was $30.1 million, or $0.38 per diluted share, compared with a net loss of $7.9 million, or $0.11 per diluted share, in the fiscal first quarter of 2014.

Palo Alto Networks recorded fiscal first quarter non-GAAP net income of $12.8 million, or $0.15 per diluted share, compared with non-GAAP net income of $6.2 million, or $0.08 per diluted share, in the fiscal first quarter of 2014. A reconciliation between GAAP and non-GAAP information is contained in the tables below.

“We had a strong start to fiscal year 2015, outperforming expectations across all of our reported metrics. As the leading provider of the next-generation enterprise security platform, we delivered 52 percent billings growth and 50 percent revenue growth on a year-over-year basis,” said Mark McLaughlin, president and chief executive officer of Palo Alto Networks. “In today’s increasingly complex threat environment, enterprise customers recognize that a true, integrated and automated platform delivering prevention capabilities offers superior security with a superior total cost of ownership advantage. Our results demonstrate the differentiation and sustainability of that unique platform, the scalability of our go-to-market model and our ongoing growth potential.”

“We are very pleased with our first quarter performance. Once again robust new customer acquisition and expansion within our existing customer base drove record billings, revenue and deferred revenue,” said Steffan Tomlinson, chief financial officer of Palo Alto Networks. “We delivered this top-line performance

1



while continuing to grow our non-GAAP operating margin, both sequentially and year-over-year, and generating $74.9 million in cash flow from operations and $69.0 million in free cash flow.”

Recent Highlights

Discovered WireLurker malware - Underscoring our thought leadership in cybersecurity, this finding by our Unit 42 threat intelligence team marks a new era in both Mac OS and iOS malware.

Extended VMware partnership - Building on our strategic partnership with VMware, we announced our VM-Series support for VMware vCloud® Air™, enabling customers to apply the same rich next-generation security policies across their private and public virtualized infrastructure, whether an application is virtual, physical, on- or off-premise.

Launched Advanced Endpoint Protection offering - Further extending our technology leadership, we announced availability of Traps, our revolutionary preventative approach to stop cyber threats on the endpoint, sparing IT security teams from cumbersome remediation, patching, and often futile recovery measures.

Honored as a customer support leader - Recognizing our effective use of process and technology to achieve excellent customer satisfaction, we were given by the Technology Services Industry Association the STAR Award for innovation in the delivery of support services.

Announced Stanley J. Meresman to the Board of Directors - He joined our audit committee and serves as an audit committee financial expert. Mr. Meresman brings a wealth of valuable experience cultivated during current and previous positions on a number of public and private companies' boards, such as LinkedIn and Zynga.

Financial Outlook
Palo Alto Networks provides guidance based on current market conditions and expectations.

For the fiscal second quarter of 2015, Palo Alto Networks expects:
Total revenue in the range of $200 to $204 million, representing year-over-year growth between 42 percent and 45 percent.
Diluted non-GAAP earnings per share in the range of $0.16 to $0.17 using 85 to 87 million shares.


2



Guidance for non-GAAP financial measures excludes share-based compensation, amortization of acquisition-related intangible assets, acquisition expenses, discrete tax benefits, non-cash interest expense related to the company’s convertible senior notes, and other non-recurring expenses. The company has not reconciled diluted non-GAAP earnings per share guidance to net income (loss) per diluted share because the company does not provide guidance on net income (loss) or the various reconciling cash and non-cash items between GAAP net income (loss) and non-GAAP net income (loss). As items that impact these measures are out of the company’s control and/or cannot be reasonably predicted, the company is unable to provide such guidance. Accordingly, a reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measures is not available without unreasonable effort.

Conference Call Information
Palo Alto Networks will host a conference call for analysts and investors to discuss its fiscal first quarter 2015 results and outlook for its fiscal second quarter of 2015 today at 4:30 PM Eastern time / 1:30 PM Pacific time. Open to the public, investors may access the call by dialing 1-877-545-1409 or 1-719-325-4940 and entering the passcode 7873236. 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 1-888-203-1112 or 719-457-0820 and entering the passcode 7873236.

Forward-Looking Statements
This press release contains forward-looking statements that involve risks and uncertainties, including statements regarding the company’s financial outlook for the fiscal second quarter of 2015, the company’s expectations regarding gross margins, seasonality, revenue growth, future investment in Traps, capital expenditures and non-GAAP operating margin, the company’s ability to accelerate growth in its market share, growth trends, demand for and adoption of the company’s products and services, expected availability and efficacy of new products, the company’s competitive position, and 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 United States; Palo Alto Networks’ limited experience with new product introductions, including the introduction of the Advanced Endpoint Protection offering; risks associated with new product releases, including software bugs; the failure to timely develop and achieve market acceptance of new products as w

3



ell as existing products and services; 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 annual report on Form 10-K filed with the SEC on September 18, 2014, 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 and related payroll taxes, acquisition related costs, amortization expense of acquired intangible assets, litigation related charges including legal settlements, and non-cash interest expense related to the company’s convertible senior notes. Palo Alto Networks believes that excluding these items from non-GAAP net income and non-GAAP diluted net income per share provides management and investors with greater visibility into the underlying

4



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 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.

Free Cash Flow. Palo Alto Networks defines free cash flow as cash provided by operating activities less purchases of property, equipment, and other assets. The company 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 our business, making strategic acquisitions, and strengthening the balance sheet.

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.


5



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.



Media Contact:
Jennifer Jasper Smith
Head of Corporate Communications
Palo Alto Networks
408-638-3280
jjsmith@paloaltonetworks.com

Investor Relations Contact:
Kelsey Turcotte
Vice President of Investor Relations
408-753-3872
kturcotte@paloaltonetworks.com

Chris Danne/Maria Riley
The Blueshirt Group
415-217-7722
ir@paloaltonetworks.com



6



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

Three Months Ended October 31,
 
2014
 
2013
Revenue:
 
 
 
Product
$
101,476

 
$
75,485

Services
90,870

 
52,695

Total revenue
192,346

 
128,180

Cost of revenue:
 
 
 
Product
29,141

 
17,954

Services
24,320

 
15,853

Total cost of revenue
53,461

 
33,807

Total gross profit
138,885

 
94,373

Operating expenses:
 
 
 
Research and development
37,305

 
19,893

Sales and marketing
106,366

 
67,366

General and administrative
18,977

 
14,125

Total operating expenses
162,648

 
101,384

Operating loss
(23,763
)
 
(7,011
)
Interest expense
(5,489
)
 
(8
)
Other income, net
341

 
405

Loss before income taxes
(28,911
)
 
(6,614
)
Provision for income taxes
1,157

 
1,247

Net loss
$
(30,068
)
 
$
(7,861
)
Net loss per share, basic and diluted
$
(0.38
)
 
$
(0.11
)
Weighted-average shares used to compute net loss per share, basic and diluted
79,388

 
71,681



7



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

Three Months Ended October 31,
 
2014
 
2013
GAAP net loss
$
(30,068
)
 
$
(7,861
)
Share-based compensation expense
38,475

 
14,411

Share-based payroll tax expense
1,054

 
265

Amortization expense of acquired intangible assets
1,544

 

Litigation related charges [a]
3,065

 
1,889

Non-cash interest expense related to convertible notes 
5,478

 

Income tax and other tax adjustments related to the above
(6,711
)
 
(2,534
)
Non-GAAP net income
$
12,837

 
$
6,170

 
 
 
 
GAAP net loss per share, diluted
$
(0.38
)
 
$
(0.11
)
Share-based compensation expense
0.47

 
0.20

Share-based payroll tax expense
0.01

 
0.00

Amortization expense of acquired intangible assets
0.02

 
0.00

Litigation related charges [a]
0.04

 
0.03

Non-cash interest expense related to convertible notes 
0.07

 
0.00

Income tax and other tax adjustments related to the above
(0.08
)
 
(0.04
)
Non-GAAP net income per share, diluted
$
0.15

 
$
0.08

 
 
 
 
GAAP weighted-average shares used to compute net loss per share, diluted
79,388

 
71,681

Weighted-average effect of potentially dilutive securities [b]
5,341

 
5,518

Non-GAAP weighted-average shares used to compute net income per share, diluted
84,729

 
77,199

 
 
 
 
Revenue
$
192,346

 
$
128,180

Change in deferred revenue
48,142

 
29,726

Billings
$
240,488

 
$
157,906

 
 
 
 
Net cash provided by operating activities
$
74,928

 
$
38,881

Less: purchases of property, equipment, and other assets
5,935

 
15,680

Free cash flow
$
68,993

 
$
23,201

Net cash used in investing activities
$
(201,093
)
 
$
(93,959
)
Net cash provided by financing activities
$
16,100

 
$
10,646

___________
[a]    Litigation related charges during the three months ended October 31, 2014 and 2013 includes the amortization of intellectual property licenses entered into as part of the settlement with Juniper and expenses for legal services, respectively.
[b]    Non-GAAP net income per share, diluted, includes the potentially dilutive effect of our options and restricted stock units outstanding. The potentially dilutive effect of the convertible notes for the three months ended October 31, 2014 and 2013 was nil.

8



Palo Alto Networks, Inc.
Preliminary Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
 
 
 
 
 
October 31, 2014
 
July 31, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
543,747

 
$
653,812

Short-term investments
227,752

 
118,690

Accounts receivable, net
116,224

 
135,518

Prepaid expenses and other current assets
45,844

 
50,306

Total current assets
933,567

 
958,326

Property and equipment, net
49,823

 
48,744

Long-term investments
289,011

 
201,880

Goodwill
155,033

 
155,033

Intangible assets, net
47,451

 
47,955

Other assets
65,471

 
66,528

Total assets
$
1,540,356

 
$
1,478,466

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
10,497

 
$
14,526

Accrued compensation
35,935

 
48,727

Accrued and other liabilities
27,852

 
25,000

Deferred revenue
286,682

 
259,918

Total current liabilities
360,966

 
348,171

Convertible senior notes, net
471,856

 
466,875

Long-term deferred revenue
184,038

 
162,660

Other long-term liabilities
30,285

 
32,177

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock
8

 
8

Additional paid-in capital
859,010

 
804,406

Accumulated other comprehensive loss
(13
)
 
(105
)
Accumulated deficit
(365,794
)
 
(335,726
)
Total stockholders’ equity
493,211

 
468,583

Total liabilities and stockholders’ equity
$
1,540,356

 
$
1,478,466



9



Palo Alto Networks, Inc.
Preliminary Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
 
 
Three Months Ended October 31,
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net loss
$
(30,068
)
 
$
(7,861
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Share-based compensation for equity based awards
38,443

 
14,383

Depreciation and amortization
6,115

 
3,146

Amortization of investment premiums, net of accretion of purchase discounts
667

 
386

Amortization of debt discount and debt issuance costs
5,478

 

Excess tax benefit from share-based compensation
(346
)
 
(56
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
19,294

 
(3,978
)
Prepaid expenses and other assets
3,409

 
(1,707
)
Accounts payable
(4,460
)
 
(205
)
Accrued compensation
(12,792
)
 
1,614

Accrued and other liabilities
1,046

 
3,433

Deferred revenue
48,142

 
29,726

Net cash provided by operating activities
74,928

 
38,881

Cash flows from investing activities
 
 
 
Purchase of investments
(247,849
)
 
(122,238
)
Proceeds from sales of investments
1,999

 

Proceeds from maturities of investments
50,692

 
43,959

Purchase of property, equipment, and other assets
(5,935
)
 
(15,680
)
Net cash used in investing activities
(201,093
)
 
(93,959
)
Cash flows from financing activities
 
 
 
Proceeds from exercise of stock options
7,963

 
4,610

Proceeds from employee stock purchase plan
7,791

 
5,988

Excess tax benefit from share-based compensation
346

 
56

Repurchase of restricted common stock from terminated employees

 
(8
)
Net cash provided by financing activities
16,100

 
10,646

Net decrease in cash and cash equivalents
(110,065
)
 
(44,432
)
Cash and cash equivalents - beginning of period
653,812

 
310,614

Cash and cash equivalents - end of period
$
543,747

 
$
266,182


10