10-QPeriod: Q2 FY2017

Palo Alto Networks Inc Quarterly Report for Q2 Ended Jan 31, 2017

Filed March 1, 2017For Securities:PANW

Summary

Palo Alto Networks (PANW) reported solid revenue growth for the six months ended January 31, 2017, with total revenue increasing by 29.9% year-over-year to $820.7 million. This growth was primarily driven by a substantial 55.3% increase in subscription and support revenue, which now constitutes 59.5% of total revenue, indicating a successful shift towards a recurring revenue model. While product revenue saw a slight decrease year-over-year, the overall revenue growth highlights continued strong demand for the company's next-generation security platform. The company maintained a healthy gross margin of 73.9% for the six-month period. However, operating expenses increased significantly, particularly in sales and marketing, leading to an operating loss of $103.4 million for the six-month period. Despite the operational loss, the company reported positive cash flow from operations of $417.8 million, demonstrating strong cash generation capabilities, and a free cash flow of $352.2 million.

Financial Highlights

46 data points
Beta

Revenue

$422.60M

73.2% Gross Margin

Net Income

-$60.60M

-14.3% Net Margin

EPS (Diluted)

$-0.11

Total Assets

$3.17B

Cash & Equivalents

$761.40M

Free Cash Flow

$214.30M

Financial Statements
Beta
Revenue$422.60M
Cost of Revenue$113.20M
Gross Profit$309.40M
R&D Expenses$89.90M
Operating Expenses$363.80M
Operating Income-$54.40M
Interest Expense$6.10M
Net Income-$60.60M
EPS (Basic)$-0.11
Shares Outstanding (Basic)544.20M

Key Highlights

  • 1Total revenue grew 29.9% to $820.7 million for the six months ended January 31, 2017.
  • 2Subscription and support revenue surged by 55.3% to $488.1 million, now representing 59.5% of total revenue.
  • 3Gross margin remained strong at 73.9% for the six-month period.
  • 4Operating expenses increased by 31.3% to $709.7 million, primarily due to investments in sales and marketing.
  • 5The company reported a net loss of $117.5 million for the six-month period.
  • 6Cash flow from operations was robust at $417.8 million for the six-month period.
  • 7The company repurchased $170.1 million of its common stock during the six months ended January 31, 2017.

Frequently Asked Questions

The primary driver of revenue growth was the significant increase in subscription and support revenue, which grew by 55.3% year-over-year. This indicates a successful transition and strong customer adoption of Palo Alto Networks' recurring revenue model.

The operating loss was primarily due to a substantial increase in operating expenses, particularly in sales and marketing. The company continued to invest heavily in expanding its sales force and marketing initiatives to drive further growth, which outpaced revenue gains in the period.

Palo Alto Networks demonstrated strong cash flow generation from operations, with $417.8 million for the six-month period. This was complemented by a free cash flow of $352.2 million, indicating effective management of cash despite operational losses.

Effective August 1, 2016, the company changed its accounting policy for sales commissions. Previously expensed when incurred, these commissions are now deferred and amortized over the contract term. This change is intended to better match commission expenses with the associated revenue and has been applied retrospectively to prior periods, impacting comparability of some prior period figures.