01—Abstract
Summary
Summary of the 10-K filed October 4, 2012. Cited figures are marked; the original filing is the authoritative source.
Palo Alto Networks (PANW) reported its first annual results as a newly public company in its fiscal 2012 10-K (fiscal year ended July 31, 2012).
Revenue grew 115% to $255.1 milliona (from $118.6 million), driven by product unit volume growth above 75% and a rising installed base of over 9,000 end-customers (up from roughly 4,700). Gross margin held near 72% (72.3%), and the company posted its first full-year net income of $0.7 million, compared with net losses of $12.5 million in fiscal 2011 and $21.1 million in fiscal 2010. Operating income turned positive at $3.9 million, and operating cash flow of $77.4 million produced free cash flow of $62.8 million, supported heavily by deferred revenue growth of $68.6 million.
The IPO on July 20, 2012 at $42.00b per share raised approximately $215.4 million in net proceeds to the company, leaving cash and equivalents of $322.6 million. Operating leverage was visible but still early: operating expenses were 70.8% of revenue, with sales and marketing alone at 45.4%. The company also disclosed that it expects revenue growth to decelerate from these levels, and that it plans to relocate its headquarters and sign leases totaling roughly $94 million.
The principal investor risk is concentration and litigation. Juniper Networks has sued for infringement of seven patents, and the trial is scheduled for February 2014, with the company unable to estimate potential loss.
Three channel partners accounted for 56%c of revenue, and insiders and 5% holders together control about 60% of the shares. Services revenue (subscriptions and support) is growing as a share of the mix, which supports recurring revenue visibility but also means near-term results lag bookings.
02—Key points
Key Highlights
- Revenue rose 115% to $255.1M in FY2012, following 143% growth in FY2011, with product revenue up 106% to $174.5M and services up 139% to $80.7M.
- First full year of GAAP profitability: net income of $0.7M versus a net loss of $12.5M in FY2011; operating income of $3.9M (1.5% margin) compared with a $10.4M operating loss a year earlier.
- Gross margin of 72.3% was stable, with product margin at 74.4% and services margin at 67.8%.
- Strong cash generation: operating cash flow of $77.4M and free cash flow of $62.8M, helped by a $68.6M increase in deferred revenue; cash ended the year at $322.6M after IPO proceeds of about $215.4M net.
- Geographic mix: Americas 63% of revenue, EMEA 24%, APAC 12%; over 9,000 end-customers in more than 100 countries.
- Material litigation: Juniper Networks alleges infringement of seven patents, with trial set for February 2014 and no estimate of possible loss provided.
- Concentration risk: three channel partners generated 56% of FY2012 revenue, and two partners represented 38% and 12% of gross receivables.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Palo Alto Networks Inc kept $0.00.
- Revenue$255.1M100.0%
- Cost of revenue−$70.6M27.7%
- Gross profit$184.6M72.3%
- Operating costs−$180.7M70.8%
- Operating income$3.9M1.5%
- Interest, other & tax−$3.2M1.2%
- Net income$737,0000.3%
Where FY2012 revenue went
$255.1M- Other operating costs: $142.1M, 56% of revenue
- Cost of revenue: $70.6M, 28% of revenue
- R&D: $38.6M, 15% of revenue
- Net income: $737,000, 0.3% of revenue
- Interest, other & tax: $3.2M, 1.2% of revenue
Kept 0.3% as net incomeNet income $737,000 · 0.3%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed October 4, 2012Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $255.14M$118.60M | +115.1% |
| Cost of Revenue | $70.55M$32.27M | +118.6% |
| Gross Profit | $184.59M$86.32M | +113.8% |
| R&D Expenses | $38.57M$21.37M | +80.5% |
| Operating Expenses | $180.69M$96.73M | +86.8% |
| Operating Income | $3.89M-$10.40M | +137.4% |
| Interest Expense | $36K— | — |
| Net Income | $737K-$12.53M | +105.9% |
| Shares Outstanding (Basic) | 117.41M85.21M | +37.8% |
05—Questions
Frequently Asked Questions
How fast is Palo Alto Networks growing, and is that growth expected to continue?
Revenue grew 115% in FY2012 to $255.1M, after 143% growth in FY2011. The company explicitly warns that it does not expect to repeat growth at these rates, so investors should model substantial deceleration in future periods.
Is the company profitable, and how durable is its cash flow?
It reported its first full-year net income of $0.7M and operating income of $3.9M. Operating cash flow of $77.4M far exceeded net income, largely because subscriptions and support are billed upfront and recognized ratably, which lifted deferred revenue by $68.6M. That working-capital tailwind will scale with bookings but will not persist at the same magnitude if growth slows.
What is the biggest legal risk?
Juniper Networks sued in December 2011 alleging that the company's appliances infringe seven of its patents. Remedies sought include injunctions, treble damages, and ongoing royalties. A claim construction hearing and summary judgment motions are scheduled for November 2013, and trial for February 2014. The company is vigorously defending the case and states it cannot estimate a possible loss or range of loss.
How concentrated is the business in its distribution channel?
Almost all revenue flows through distributors and resellers, and three partners accounted for 56% of FY2012 revenue. Agreements can be terminated with notice before each annual renewal, so the loss of one large partner could materially affect results.
What could limit shareholder influence on the company?
Directors, executive officers, and holders of more than 5% of the stock together own about 60% of the outstanding shares. The charter includes a classified board, a prohibition on written consent, and 66 2/3% supermajority requirements for certain amendments, and Delaware Section 203 applies. Together these provisions make a change of control difficult without insider support.
06—Continue