PANW - 8-K - Q3'15 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)
May 27, 2015
 _____________________
Palo Alto Networks, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
001-35594
20-2530195
(State or other jurisdiction of
incorporation)
(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 May 27, 2015, Palo Alto Networks, Inc. (the “Company”) issued a press release announcing its financial results for its fiscal third quarter ended April 30, 2015. 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 (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, 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 May 27, 2015.





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: May 27, 2015






EXHIBIT INDEX
Exhibit Number
Description of Exhibit
99.1
Press release dated as of May 27, 2015.


Ex 99.1 (Q3'15 Earnings Release)


Exhibit 99.1

Palo Alto Networks Reports Fiscal Third Quarter 2015 Financial Results

Fiscal third quarter total revenue grows 55 percent year-over-year to $234.2 million
Billings grow 56 percent year-over-year to $302.2 million
Deferred revenue grows 64 percent year-over-year to $603.9 million

SANTA CLARA, Calif., May 27, 2015 - Palo Alto Networks, Inc. (NYSE: PANW) today announced financial results for its fiscal third quarter 2015 ended April 30, 2015.

Total revenue for the fiscal third quarter 2015 grew 55 percent year-over-year to a record $234.2 million, compared with $150.7 million for the fiscal third quarter 2014. GAAP net loss for the fiscal third quarter 2015 was $45.9 million, or $0.56 per diluted share, compared with GAAP net loss of $146.6 million, or $1.96 per diluted share, for the fiscal third quarter 2014.

Palo Alto Networks recorded fiscal third quarter 2015 non-GAAP net income of $20.5 million, or $0.23 per diluted share, compared with non-GAAP net income of $8.7 million, or $0.11 per diluted share, for the fiscal third quarter 2014. A reconciliation between GAAP and non-GAAP information is contained in the tables below.

“We reported record revenue in the fiscal third quarter 2015 as we continue to expand market share with growth rates that significantly outpace the market. Our ongoing success is due to our natively integrated and highly automated enterprise security platform that delivers prevention capabilities at every step in the cyber-attack lifecycle,” said Mark McLaughlin, president and chief executive officer of Palo Alto Networks. “Our customers are benefitting from the leverage gained by our flexible and extensible platform, the network-effect of insights from across our customer base, and our consistent delivery of innovative technology that extends the value of the platform and enhances our customers’ security.”
 
Steffan Tomlinson, chief financial officer of Palo Alto Networks, commented, “Year-over-year revenue growth of 55 percent was driven by new customer acquisition and expansion in existing accounts, resulting in substantial growth across all three components of our business: product, recurring subscription and support. At the same time we continued to realize the leverage inherent in our ramping hybrid-SaaS

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model, delivering sequential and year-over-year expansion of non-GAAP operating margin, non-GAAP earnings per share, and cash flow from operations.”

Recent Highlights
Acquired CirroSecure - This acquisition expands the functionality of our enterprise security platform by providing additional security for SaaS applications and is expected to be available as a new subscription-based service in the second half of 2015.

Introduced new AutoFocus threat intelligence offering - At Ignite, our annual user conference, we introduced our newest subscription service AutoFocus, which provides prioritized, actionable intelligence to help customers take quick, preventive action against targeted cyber threats. More than 750 customers have already submitted requests to enroll in the AutoFocus community access program.

Positioned in the “Leaders” quadrant of Gartner, Inc.’s April 2015 Magic Quadrant for Enterprise Network Firewalls - This is the fourth consecutive year in which Palo Alto Networks has been recognized as a leader in the Magic Quadrant for Enterprise Network Firewalls report.[1]

Received Superior Security Score in head-to-head product test - In the NSS Labs 2015 Next-Generation Intrusion Prevention System (NGIPS) test, our platform achieved the highest security efficacy ratings of any other offering tested when exposed to live (real-time) drive-by exploits.

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

For the fiscal fourth quarter 2015, we expect:
Total revenue in the range of $252 to $256 million, representing year-over-year growth between 41 percent and 44 percent.
Diluted non-GAAP earnings per share in the range of $0.24 to $0.25 using 88.5 to 90.5 million shares.

______________
[1]    Gartner, “Magic Quadrant for Enterprise Network Firewalls”, Adam Hils, Greg Young, Jeremy D’Hoinne; April 22, 2015.

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Guidance for non-GAAP financial measures excludes share-based compensation and related payroll taxes, amortization of acquired intangible assets, acquisition related expenses, discrete tax benefits, non-cash interest expense related to our convertible senior notes, and certain non-recurring expenses. We have not reconciled diluted non-GAAP earnings per share guidance to GAAP net income (loss) per diluted share because we do not provide guidance on GAAP net income (loss) or the various reconciling cash and non-cash items between GAAP net income (loss) and non-GAAP net income (loss). Items that impact these measures are out of our control and/or cannot be reasonably predicted. 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 third quarter 2015 results and outlook for its fiscal fourth quarter 2015 today at 4:30 PM Eastern time/1:30 PM Pacific time. Open to the public, investors may access the call by dialing 1-877-795-3635 or 1-719-325-4784 and entering the passcode 6909255. 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 1-719-457-0820 and entering the passcode 6909255.

Forward-Looking Statements
This press release contains forward-looking statements that involve risks and uncertainties, including statements regarding our financial outlook for the fiscal fourth quarter of 2015, the expected timing of when we will offer CirroSecure as a new subscription-based service, our ability to continue to expand market share with growth rates that significantly outpace the market and continued leverage resulting from our hybrid-SAAS model. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including: our limited operating history; risks associated with our rapid growth, particularly outside of the United States; our limited experience with new product introductions and the risks associated with new products, including software bugs; our ability to successfully integrate our operations with those of recently acquired CirroSecure; the failure to timely develop and achieve market acceptance of new products as well as existing products and services; rapidly evolving technological developments in the market for network security products; and general market, political, economic and business conditions.

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Additional risks and uncertainties that could affect our financial results are included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our quarterly report on Form 10-Q filed with the SEC on March 3, 2015, which is available on our 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 we make with the SEC from time to time. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we do 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 related charges including share-based payroll tax expense, acquisition related costs, amortization expense of acquired intangible assets, litigation related charges including legal settlements, non-cash interest expense related to the company’s convertible senior notes, and intellectual property restructuring related charges. The company also excludes from non-GAAP net income the foreign currency gains (losses) and tax effects associated with these items in order to provide a complete picture of the company’s recurring core business operating results. The Company defines non-GAAP net income per share as non-GAAP net income divided by the weighted average diluted shares outstanding after giving effect to the anti-dilutive impact of the company’s note hedge

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agreements. The anti-dilutive impact reduces the potential economic dilution that otherwise would occur upon conversion of the company’s convertible senior notes. Under GAAP, the anti-dilutive impact of the note hedge is not reflected in diluted shares. 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 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.

Billings. Palo Alto Networks defines billings as total revenue plus the change in deferred revenue, net of acquired 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.

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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.

Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner's research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.

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



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

Three Months Ended April 30,
 
Nine Months Ended April 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Product
$
121,524

 
$
84,128

 
$
338,621

 
$
240,436

Services
112,648

 
66,572

 
305,552

 
179,512

Total revenue
234,172

 
150,700

 
644,173

 
419,948

Cost of revenue:
 
 
 
 
 
 
 
Product
32,851

 
20,425

 
92,632

 
58,600

Services
31,544

 
19,285

 
84,549

 
52,421

Total cost of revenue
64,395

 
39,710

 
177,181

 
111,021

Total gross profit
169,777

 
110,990

 
466,992

 
308,927

Operating expenses:
 
 
 
 
 
 
 
Research and development
48,486

 
27,837

 
132,739

 
71,983

Sales and marketing
131,026

 
83,995

 
360,267

 
228,095

General and administrative
26,989

 
23,717

 
72,989

 
57,575

Legal settlement

 
121,173

 

 
141,173

Total operating expenses
206,501

 
256,722

 
565,995

 
498,826

Operating loss
(36,724
)
 
(145,732
)
 
(99,003
)
 
(189,899
)
Interest expense
(5,631
)
 
(13
)
 
(16,659
)
 
(35
)
Other income (expense), net
(55
)
 
430

 
630

 
665

Loss before income taxes
(42,410
)
 
(145,315
)
 
(115,032
)
 
(189,269
)
Provision for income taxes
3,525

 
1,272

 
3,979

 
5,125

Net loss
$
(45,935
)
 
$
(146,587
)
 
$
(119,011
)
 
$
(194,394
)
Net loss per share, basic and diluted
$
(0.56
)
 
$
(1.96
)
 
$
(1.47
)
 
$
(2.66
)
Weighted-average shares used to compute net loss per share, basic and diluted
82,320

 
74,967

 
80,828

 
73,127



7



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

Three Months Ended April 30,
 
Nine Months Ended April 30,
 
2015
 
2014
 
2015
 
2014
GAAP net loss
$
(45,935
)
 
$
(146,587
)
 
$
(119,011
)
 
$
(194,394
)
Share-based compensation related charges
64,175

 
29,197

 
164,312

 
67,228

Acquisition related costs
349

 
3,681

 
349

 
7,480

Amortization expense of acquired intangible assets
1,725

 
614

 
4,993

 
679

Litigation related charges [a]
3,065

 
125,905

 
9,195

 
150,447

Non-cash interest expense related to convertible notes 
5,610

 

 
16,609

 

Foreign currency loss associated with an acquisition related tax liability
514

 

 
514

 

Income tax and other tax adjustments related to the above
(9,025
)
 
(4,079
)
 
(26,778
)
 
(8,769
)
Non-GAAP net income
$
20,478

 
$
8,731

 
$
50,183

 
$
22,671

 
 
 
 
 
 
 
 
GAAP net loss per share, diluted
$
(0.56
)
 
$
(1.96
)
 
$
(1.47
)
 
$
(2.66
)
Share-based compensation related charges
0.76

 
0.38

 
1.99

 
0.90

Acquisition related costs
0.00

 
0.05

 
0.00

 
0.10

Amortization expense of acquired intangible assets
0.02

 
0.01

 
0.06

 
0.01

Litigation related charges [a]
0.04

 
1.68

 
0.11

 
2.06

Non-cash interest expense related to convertible notes 
0.07

 
0.00

 
0.21

 
0.00

Foreign currency loss associated with an acquisition related tax liability
0.01

 
0.00

 
0.01

 
0.00

Income tax and other tax adjustments related to the above
(0.11
)
 
(0.05
)
 
(0.33
)
 
(0.12
)
Non-GAAP net income per share, diluted
$
0.23

 
$
0.11

 
$
0.58

 
$
0.29

 
 
 
 
 
 
 
 
GAAP weighted-average shares used to compute net loss per share, diluted
82,320

 
74,967

 
80,828

 
73,127

Weighted-average effect of potentially dilutive securities [b]
5,711

 
5,248

 
5,618

 
5,350

Non-GAAP weighted-average shares used to compute net income per share, diluted
88,031

 
80,215

 
86,446

 
78,477

 
 
 
 
 
 
 
 
Revenue
$
234,172

 
$
150,700

 
$
644,173

 
$
419,948

Change in deferred revenue, net of acquired deferred revenue
68,047

 
43,190

 
181,312

 
118,551

Billings
$
302,219

 
$
193,890

 
$
825,485

 
$
538,499

___________
[a]    Litigation related charges during the three and nine months ended April 30, 2015 includes the amortization of intellectual property licenses entered into as part of the legal settlement with Juniper Networks, Inc. (“Juniper”). Litigation related charges during the three and nine months ended April 30, 2014 includes expenses for legal services, the legal settlement with Fortinet, Inc. of $20.0 million, and the legal settlement with Juniper of $121.2 million.
[b]    Non-GAAP net income per share, diluted, includes the potentially dilutive effect of options, restricted stock units, and convertible senior notes outstanding. In addition, Non-GAAP net income per share, diluted, includes the anti-dilutive impact of the company’s note hedge agreements, which reduced the potentially dilutive effect of the convertible notes for the three and nine months ended April 30, 2015 by 1.3 million shares and 0.6 million shares, respectively. The potentially dilutive effect of the convertible notes for the three and nine months ended April 30, 2014 was nil.

8



Palo Alto Networks, Inc.
Preliminary Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
 
 
 
 
 
April 30, 2015
 
July 31, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
454,123

 
$
653,812

Short-term investments
368,850

 
118,690

Accounts receivable, net
150,523

 
135,518

Prepaid expenses and other current assets
67,013

 
50,306

Total current assets
1,040,509

 
958,326

Property and equipment, net
59,546

 
48,744

Long-term investments
408,465

 
201,880

Goodwill
155,402

 
155,033

Intangible assets, net
43,885

 
47,955

Other assets
76,625

 
66,528

Total assets
$
1,784,432

 
$
1,478,466

Liabilities, temporary equity, and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
14,661

 
$
14,526

Accrued compensation
53,467

 
48,727

Accrued and other liabilities
28,535

 
25,000

Deferred revenue
365,384

 
259,918

Convertible senior notes, net
481,960

 

Total current liabilities
944,007

 
348,171

Convertible senior notes, net

 
466,875

Long-term deferred revenue
238,506

 
162,660

Other long-term liabilities
54,601

 
32,177

Temporary equity
93,040

 

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock
8

 
8

Additional paid-in capital
908,867

 
804,406

Accumulated other comprehensive income (loss)
140

 
(105
)
Accumulated deficit
(454,737
)
 
(335,726
)
Total stockholders’ equity
454,278

 
468,583

Total liabilities, temporary equity, and stockholders’ equity
$
1,784,432

 
$
1,478,466



9



Palo Alto Networks, Inc.
Preliminary Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
 
 
Nine Months Ended April 30,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net loss
$
(119,011
)
 
$
(194,394
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Share-based compensation for equity based awards
155,498

 
66,685

Depreciation and amortization
20,273

 
11,638

Amortization of investment premiums, net of accretion of purchase discounts
2,308

 
1,180

Amortization of debt discount and debt issuance costs
16,610

 

Excess tax benefit from share-based compensation arrangements
(518
)
 
(758
)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable, net
(15,005
)
 
(27,220
)
Prepaid expenses and other assets
(30,885
)
 
(7,926
)
Accounts payable
(3,896
)
 
8,965

Accrued compensation
4,750

 
6,792

Accrued and other liabilities
27,543

 
131,043

Deferred revenue
181,312

 
118,551

Net cash provided by operating activities
238,979

 
114,556

Cash flows from investing activities
 
 
 
Purchases of investments
(666,471
)
 
(316,911
)
Proceeds from sales of investments
7,000

 
6,630

Proceeds from maturities of investments
200,798

 
198,080

Business acquisitions, net of cash acquired

 
(85,726
)
Purchases of property, equipment, and other assets
(21,862
)
 
(31,379
)
Net cash used in investing activities
(480,535
)
 
(229,306
)
Cash flows from financing activities
 
 
 
Proceeds from exercises of stock options
23,136

 
25,431

Proceeds from employee stock purchase plan
18,213

 
12,869

Excess tax benefit from share-based compensation arrangements
518

 
758

Repurchases of restricted common stock from terminated employees

 
(132
)
Net cash provided by financing activities
41,867

 
38,926

Net decrease in cash and cash equivalents
(199,689
)
 
(75,824
)
Cash and cash equivalents - beginning of period
653,812

 
310,614

Cash and cash equivalents - end of period
$
454,123

 
$
234,790


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