Palo Alto Networks, Inc. (PANW)

Q2 2013 Earnings Call

February 28, 2013, 04:30 pm ET

Executives

Maria Riley - IR, The Blueshirt Group

Mark McLaughlin - Chairman, President & CEO

Steffan Tomlinson - SVP & CFO

Analysts

Greg Dunham - Goldman Sachs

Joel Fishbein - Lazard

Jayson Noland - Robert W. Baird

Harris Heyer - Credit Suisse

Jonathan Ho - William Blair

Walter Pritchard - Citigroup

Ron Zember - Bank of America Merrill Lynch

Erik Suppiger - JMP Securities

Brent Thill - UBS

Gregg Moskowitz - Cowen

Aaron Schwartz - Jefferies

Keith Price - Morgan Stanley

Frederick Grieb - Nomura

Presentation

Operator

Good day ladies and gentlemen and welcome to the Q2 2013 Palo Alto Networks, Inc. Earnings Call. I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Maria Riley, Investor Relations with The Blue Shirt Group. Please proceed ma’am.

Maria Riley

Good afternoon and thank you for joining us on today's conference call to discuss Palo Alto Networks’ fiscal second quarter 2013 financial results. This call is also being broadcast live over the web and can be accessed on the Investors Section of Palo Alto Networks website at, investors.paloaltonetworks.com. With me on today's call are, Mark McLaughlin, Palo Alto Networks’ Chairman, President and Chief Executive Officer and Steffan Tomlinson, Chief Financial Officer.

After the markets closed today, Palo Alto Networks issued a press release announcing results for the fiscal second quarter ended January 31, 2013. We would like you to have you the release you can access it online at the company's website or even call The Blue Shirt Group at 415-217-7722 and we will email you a copy.

We would like to remind you that during the course of this conference call Palo Alto Networks’ management will make forward-looking statements including statements regarding continued revenue growth and overall momentum of the Palo Alto Networks’ business, turns in its business and operating results including the gross margin, operating margin and non-GAAP effective tax rate and Palo Alto Networks’ revenue and non-GAAP earnings per share for the third fiscal quarter of 2013 ending April 30, 2013.

These forward-looking statements involve a number of risks and uncertainties some of which are beyond our control which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today and you should not rely on them as representing our views in the future and we undertake no obligation to update these statements after this call.

For a more detailed description of these risks and uncertainties please refer to our quarterly report on Form 10-Q filed with the SEC on December 10, 2012 and our earnings release posted a few minutes ago on our website.

Also please note that certain financial measures we use on this call are expressed on a non-GAAP basis that have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in the Investors Section of our website located at, investors.paloaltonetworks.com.

Before I turn the call over to Mark, I would like to remind that Palo Alto Networks is hosting its inaugural Analyst Day in New York City on March 21st. If you would like to attend, please contact me or (inaudible) at The Blue Shirt Group or email ir@paloaltonetworks.com. In addition, a live audio webcast of the meeting will be accessible from the Investor Relations section of the company’s website.

Now I would like to introduce, Mark McLaughlin, Chairman, President and Chief Executive Officer of Palo Alto Networks. Mark?

Mark McLaughlin

Thanks, Maria and thanks everyone for joining us. I am delighted to be here today to share with you our achievements in our fiscal second quarter of 2013. We had a strong second quarter and our results continue to demonstrate Palo Alto Networks recognition as the global leader in next-generation enterprise network security. This leadership position is driven by our high value, disruptive technology which we believe, provides the highest level of security available in the market today.

As customers rapidly adopt our technology as their strategic enterprise network security platform, we continue to demonstrate the ability to drive growth, bar in excess of any other competition and with continued improving leverage.

In the second quarter, we continue to see enterprise investment and security as a top of mind issue, strong end of calendar year purchasing, improving customer sentiments in EMEA and continued adoption of our technology as the primary firewall by new and existing customers.

As we've discussed in the past, our growth model is based on our ability to land in new customers that are best-in-class provider for any enterprise network security use case, expand across that customers network with additional devices and extend our value to the customer with subscription services that provide great performance and total cost of ownership advantages.

And looking at the LAN component of our growth in the second quarter, we added over 1,000 new customers in the quarter. This is the fifth consecutive quarter where we have added over 1,000 new customers. We now have the privilege of servicing over 11,000 total end customers around the globe, most of which are choosing us over the legacy common firewall provider.

On the expand and expense side of our business, we continue to see strong increased buying and loyalty from our customers. Our business coming from services continues to grow at impressive rates as our existing customers buy additional services and for longer-terms. For example, in the second quarter our top 25 customers’ follow-on purchases averaged 11.4 times of initial purchase. This is up from 9.9 times last quarter and to make the top 25 list in the second quarter our customer had to spend minimum $2.8 million with us, which is up from $2.5 million last quarter. This is all translated in the second quarter results where we posted $96.5 million in revenue which is a 70% year-over-year increase and 12% sequential increase along with non-GAAP EPS of $0.05 per diluted share. Demonstrating our continued ability, the substantially outpacing competition and with continue growing leverage in the business.

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