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Palo Alto Has Healthy Growth, Continues to Post Losses

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Palo Alto’s losses widen

Previously in the series, we looked at Palo Alto Networks’ (PANW) recently announced fiscal 4Q16 results. Although the company’s revenues and billings exceeded analysts’ expectations, it continued to post a loss on a GAAP (generally accepted accounting principles) basis.

In fiscal 4Q16, Palo Alto’s net loss stood at $54.5 million—compared to $46 million in fiscal 4Q15. On a non-GAAP basis, in fiscal 4Q16, its net income stood at $46.2 million—compared to $25 million in fiscal 4Q15. Non-GAAP excludes share-based compensation-related charges that increased from $68.9 million in 4Q15 to $112.7 million in 4Q16. The significant increase in share-based compensation charges explains the widening loss in fiscal 4Q16.

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Increasing operating expenses, especially S&M (sales and marketing) expenses as a percentage of revenue, have impacted Palo Alto’s margins and profitability. In fiscal 4Q16, Palo Alto’s S&M expenses stood at ~57% of its total revenues. In comparison, its peers Fortinet (FTNT) and Check Point Software Technologies (CHKP) spent about 52% and 25%, respectively, of their revenues on S&M expenses, according to their recent fiscal quarterly reports.

Compared to its peers, Palo Alto allocates far more toward S&M expenses as a percentage of revenues.

Cash, debt, and cash flow

In the midst of losses, Palo Alto Networks reported double-digit growth in fiscal 4Q16 cash flows. Its CFO (cash flow from operations) doubled to $187.5 million from $111.3 million in fiscal 4Q15. Its free cash flow grew 72% to $171.2 million. In 4Q16, Palo Alto’s cash and short-term investments stood at ~$1.29 billion, while its total debt stood at $508.2 million. Its entire debt is short term.

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