Palo Alto(PANW) - 2024 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial information, including statements, management's discussion, market risk, and controls Financial Statements This section presents Palo Alto Networks' unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, with accompanying notes Condensed Consolidated Balance Sheets This section provides a summary of the company's financial position, detailing assets, liabilities, and equity as of April 30, 2024, and July 31, 2023 Condensed Consolidated Balance Sheet Highlights (in millions) | Account | April 30, 2024 | July 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $1,373.7 | $1,135.3 | | Total current assets | $5,918.8 | $6,048.0 | | Goodwill | $3,372.7 | $2,926.8 | | Deferred tax assets | $2,291.9 | $23.1 | | Total assets | $17,930.8 | $14,501.1 | | Liabilities & Equity | | | | Deferred revenue (Current) | $5,014.9 | $4,674.6 | | Total current liabilities | $7,084.8 | $7,737.5 | | Long-term deferred revenue | $5,152.7 | $4,621.8 | | Total liabilities | $13,463.0 | $12,752.7 | | Retained earnings (deficit) | $992.5 | $(1,227.4) | | Total stockholders' equity | $4,467.8 | $1,748.4 | - Total assets increased significantly to $17.9 billion from $14.5 billion, primarily driven by a substantial increase in deferred tax assets and goodwill[6] - Total stockholders' equity more than doubled, moving from $1.7 billion to $4.5 billion, largely due to a shift from an accumulated deficit to retained earnings[6] Condensed Consolidated Statements of Operations This section details the company's financial performance, including revenue, gross profit, operating income, and net income for the three and nine-month periods ended April 30, 2024 Statement of Operations Summary (in millions, except per share data) | Metric | Q3 FY2024 | Q3 FY2023 | YTD FY2024 | YTD FY2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $1,984.8 | $1,720.9 | $5,838.0 | $4,939.4 | | Gross Profit | $1,471.2 | $1,246.1 | $4,352.5 | $3,536.5 | | Operating Income | $176.7 | $78.7 | $445.5 | $133.8 | | Net Income | $278.8 | $107.8 | $2,219.9 | $212.0 | | Diluted EPS | $0.79 | $0.31 | $6.27 | $0.63 | - Total revenue for Q3 FY2024 grew 15.3% year-over-year to $1.98 billion, driven by a 19.6% increase in subscription and support revenue[8][110] - Net income for the quarter more than doubled to $278.8 million from $107.8 million in the prior year period, significantly boosted by a tax benefit[8][110] - For the nine months ended April 30, 2024, net income surged to $2.22 billion, compared to $212.0 million in the prior year period[8] - This was primarily due to a significant benefit from income taxes of $1.55 billion, related to the release of a valuation allowance[8][98] Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities for the nine months ended April 30, 2024 Cash Flow Summary for the Nine Months Ended April 30 (in millions) | Cash Flow Category | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,744.9 | $2,363.4 | | Net cash used in investing activities | $(1,341.4) | $(2,396.4) | | Net cash used in financing activities | $(1,163.8) | $(91.5) | | Net increase (decrease) in cash | $239.7 | $(124.5) | - Cash from operations increased to $2.74 billion for the nine months ended April 30, 2024, up from $2.36 billion in the prior year, reflecting business growth[18] - Cash used in financing activities increased significantly to $1.16 billion, mainly due to repayments of convertible senior notes ($834.1 million) and common stock repurchases ($566.7 million)[18] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of significant accounting policies, financial statement line items, and material events affecting the company's financial position and performance - Remaining Performance Obligations (RPO) stood at $11.3 billion as of April 30, 2024, with approximately $5.4 billion expected to be recognized as revenue over the next 12 months[32] - In December 2023, the company completed two acquisitions: Dig Security Solutions for $255.4 million and Talon Cyber Security for $458.6 million, adding a total of $445.9 million in goodwill[49][53][59] - During the nine months ended April 30, 2024, holders converted $834.1 million of the 2025 Convertible Senior Notes, which were repaid in cash[67] - The company also net settled all 2023 Warrants by issuing 9.0 million shares of common stock[74] - The company accrued $180.5 million related to a jury verdict in the Centripetal Networks patent infringement lawsuit, which is included in general and administrative expenses for the nine months ended April 30, 2024[81] - A valuation allowance release resulted in a net tax benefit of $1.6 billion for the nine months ended April 30, 2024, as the company concluded it is more likely than not that its U.S. federal, certain U.S. state, and U.K. deferred tax assets will be realizable[98] - Subsequent to the quarter end, on May 15, 2024, the company entered into a definitive agreement to acquire certain QRadar assets from IBM for $500.0 million in cash, plus potential contingent payments[107] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the financial results for Q3 FY2024, highlighting 15.3% revenue growth to $2.0 billion driven by subscription and support, and analyzes trends in revenue, costs, margins, operating expenses, liquidity, and capital resources Overview This section provides an overview of the company's business model, key product areas, and highlights the overall financial performance for the quarter - The company's business focuses on four key areas: Network Security (ML-Powered Firewalls, SASE), Cloud Security (Prisma Cloud), Security Operations (Cortex portfolio), and Threat Intelligence (Unit 42)[110] - For Q3 FY2024, total revenue was $2.0 billion, a 15.3% year-over-year increase, reflecting increased adoption of the company's product, subscription, and support portfolio[110] Key Financial Metrics This section presents a summary of key financial performance indicators, including revenue, billings, operating margin, and cash flow metrics Key Financial Metrics (in millions) | Metric | Q3 FY2024 | Q3 FY2023 | YTD FY2024 | YTD FY2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $1,984.8 | $1,720.9 | $5,838.0 | $4,939.4 | | Billings | $2,334.0 | $2,256.2 | $6,705.7 | $6,034.3 | | Operating Margin | 8.9% | 4.6% | 7.6% | 2.7% | | Cash flow from operations | N/A | N/A | $2,744.9 | $2,363.4 | | Free cash flow (non-GAAP) | N/A | N/A | $2,635.5 | $2,254.3 | - Billings, defined as total revenue plus the change in total deferred revenue, grew 3.4% year-over-year for Q3 FY2024 to $2.33 billion[116][117] Results of Operations This section provides a detailed analysis of the company's revenue breakdown, gross margins, and operating expenses for the reported periods Revenue Breakdown (in millions) | Revenue Type | Q3 FY2024 | Q3 FY2023 | YoY Growth | | :--- | :--- | :--- | :--- | | Product | $391.0 | $388.1 | 0.7% | | Subscription and support | $1,593.8 | $1,332.8 | 19.6% | | Total Revenue | $1,984.8 | $1,720.9 | 15.3% | Gross Margin Analysis | Margin Type | Q3 FY2024 | Q3 FY2023 | | :--- | :--- | :--- | | Product Gross Margin | 80.1% | 75.9% | | Subscription and support Gross Margin | 72.7% | 71.4% | | Total Gross Margin | 74.1% | 72.4% | - Product gross margin increased due to lower product costs and increased software revenue[140] - For the nine-month period, the increase was also driven by an easing of supply chain challenges[140] - General and administrative expenses for the nine months ended April 30, 2024, increased by 62.2% YoY to $540.2 million, primarily due to a litigation accrual of $180.5 million related to a patent infringement lawsuit[149] Liquidity and Capital Resources This section assesses the company's cash position, investment portfolio, debt obligations, and share repurchase activities, confirming sufficient resources for future needs - As of April 30, 2024, the company had $6.4 billion in total cash, cash equivalents, and investments, up from $5.4 billion at July 31, 2023[157] - During Q3 FY2024, holders converted $661.8 million of the 2025 Notes, which were repaid in cash[159][67] - As of April 30, 2024, $1.2 billion of the 2025 Notes remained outstanding and were classified as a current liability[159][67] - As of April 30, 2024, $500.0 million remained available for future share repurchases under the current authorization, which expires on December 31, 2024[160] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is interest rate risk related to its investment portfolio, with a hypothetical 100 basis point increase in interest rates resulting in a $73.8 million decline in fair market value - The company's main market risk is interest rate risk[171] - A sensitivity analysis as of April 30, 2024, showed that a 100 basis point increase in interest rates would cause a $73.8 million decline in the fair market value of its investment portfolio[171] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of April 30, 2024, with no material changes to internal control over financial reporting identified during the quarter - Management concluded that as of April 30, 2024, the company's disclosure controls and procedures were effective at a reasonable assurance level[172] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[174] PART II - OTHER INFORMATION This section includes details on legal proceedings, risk factors, equity sales, and other disclosures Legal Proceedings This section refers to Note 10 for legal proceedings, highlighting an ongoing patent infringement case with Centripetal Networks, Inc., where a jury verdict of $151.5 million plus interest resulted in an $180.5 million accrual - The company is involved in a lawsuit with Centripetal Networks, Inc[81][178] - On January 31, 2024, a jury found non-willful infringement and awarded a lump sum of $151.5 million[81][178] - The company has accrued $180.5 million for the verdict and estimated interest[81][178] Risk Factors The company identifies numerous risks including adverse economic conditions, intense competition, reliance on channel partners, potential security incidents, product defects, supply chain dependencies, and complexities of international operations and data privacy regulations - Key risks include adverse economic conditions, intense competition from large companies and specialized vendors, reliance on channel partners for substantially all revenue, and potential supply chain disruptions for key hardware components from limited sources[180][182][193][218] - The company highlights risks related to the development and deployment of AI, which may result in reputational harm, legal liability, and increased costs[198] - A network or data security incident could allow unauthorized access, harm reputation, and create significant liability[202] - The company notes that as a well-known security provider, it may be an attractive target for such attacks[202] Unregistered Sales of Equity Securities and Use of Proceeds During the quarter, the company issued 4.6 million unregistered shares for 2025 Notes conversion and repurchased 1.7 million shares for approximately $500.0 million under its share repurchase program - During Q3 FY2024, the company issued 4.6 million shares of unregistered common stock to holders of the 2025 Notes for the conversion value in excess of the principal amount[244] Share Repurchase Summary (Q3 FY2024) | Month | Total Shares Purchased (millions) | Average Price Paid per Share | | :--- | :--- | :--- | | February 2024 | 0.4 | $284.26 | | March 2024 | 1.3 | $297.28 | | April 2024 | — | $277.71 | | Total | 1.7 | $293.81 | Other Information This section discloses the adoption of Rule 10b5-1 trading plans by key executives, including CEO Nikesh Arora, President William "BJ" Jenkins, and CTO Nir Zuk, during Q3 FY2024 Executive Rule 10b5-1 Trading Plans Adopted in Q3 FY2024 | Name | Title | Date Adopted | Total Shares to be Sold | | :--- | :--- | :--- | :--- | | Nikesh Arora | Chief Executive Officer | March 27, 2024 | 2,444,760 | | William "BJ" Jenkins | President | March 26, 2024 | 8,054 | | Nir Zuk | EVP, Chief Technology Officer | April 1, 2024 | 432,000 | Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial data formatted in Inline XBRL Signatures This section contains the official signatures of the company's Chief Financial Officer and Chief Accounting Officer, certifying the Form 10-Q filing - The Form 10-Q was signed on May 20, 2024, by Dipak Golechha, Chief Financial Officer, and Josh Paul, Chief Accounting Officer[253]