Prospectus Summary
PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including “Risk Factors,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and our consolidated financial statements and related notes before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, the terms “Palo Alto Networks,” “the company,” “we,” “us,” and “our” in this prospectus refer to Palo Alto Networks, Inc. and its subsidiaries. Our fiscal year end is July 31, and our fiscal quarters end on October 31, January 31, April 30, and July 31. Our fiscal years ended July 31, 2009, 2010, and 2011 and our fiscal year ending July 31, 2012 are referred to herein as fiscal 2009, 2010, 2011, and 2012, respectively.PALO ALTO NETWORKS, INC.
Overview
We have pioneered the next generation of network security with our innovative platform that allows enterprises, service providers, and government entities to secure their networks and safely enable the increasingly complex and rapidly growing number of applications running on their networks. The core of our platform is our Next-Generation Firewall, which delivers natively integrated application, user, and content visibility and control within the firewall through our proprietary hardware and software architecture. Our platform offers a number of compelling benefits for our end-customers, including the ability to identify, control, and safely enable applications while inspecting all content for all threats in real time. We believe our platform also offers superior performance compared to legacy approaches and reduces the total cost of ownership for organizations by simplifying their network security infrastructure and eliminating the need for multiple, stand-alone security appliances. Our products and services can address a broad range of our end-customers’ network security requirements, from the data center to the network perimeter, as well as the distributed enterprise, which includes branch offices and a growing number of mobile devices.
Our platform is based on an innovative traffic classification engine that identifies network traffic by application, user, and content. As a result, it provides in-depth visibility into all traffic and all applications, at the user level, at all times, and at line-speed in order to control usage, content, risks, and threats. This enables our end-customers to transform their organizations by safely enabling applications through a positive security model with fine-grained policy implementation capabilities.
Our platform is delivered in an appliance form factor and includes a suite of subscription services as well as support and maintenance. Our subscription services can be easily activated on any of our appliances without requiring additional hardware or processing resources, thereby providing a seamless implementation path for our end-customers. All of our appliances incorporate our PAN-OS operating system and are based on our proprietary identification technologies, App-ID, User-ID, and Content-ID, which allow security policies to be defined within the context of applications, users, and content. We deliver these capabilities through an innovative, single-pass parallel processing architecture that simultaneously performs multiple identification, security, and networking functions. As a result, our end-customers achieve safe application enablement and advanced levels of security, while maintaining high network performance.
Our team has substantial experience in network security. As a result, we understand the architectural limitations of legacy network security approaches and have designed our platform to avoid these limitations in order to address current network security requirements. We released our Next-Generation Firewall in 2007, and since then, we have grown significantly faster than industry growth rates. We have been recognized as a technology and market leader. Gartner categorized us as a market leader in its “2011 Magic Quadrant for Enterprise Network Firewalls” based on our ability to execute and completeness of vision. As of January 31, 2012, we had more than 6,650 end-customers in more than 80 countries.
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We serve the enterprise network security market, which consists of Firewall/VPN, Unified Threat Management (UTM), Web Gateway, Intrusion Detection and Prevention (IDP/IPS), and Virtual Private Network (VPN) technologies. According to IDC, the worldwide enterprise network security market, defined as IDC’s Network Security market and Web Security market, was $10.2 billion in 2011 and is projected to grow to $13.4 billion by 2015.
We sell our platform through a high touch, channel fulfilled sales model. Our business is geographically diversified, with 62% of our total revenue from the Americas, 27% from Europe, the Middle East, and Africa (EMEA), and 11% from Asia Pacific and Japan (APAC) for the six month period ended January 31, 2012.
We have experienced rapid growth in recent periods. For fiscal 2009, 2010, and 2011, our revenues were $13.4 million, $48.8 million, and $118.6 million, respectively, representing year-over-year growth of 265% for fiscal 2010 and 143% for fiscal 2011, and our net losses were $19.0 million, $21.1 million, and $12.5 million, respectively. For the six month periods ended January 31, 2011 and 2012, our revenues were $47.2 million and $113.8 million, respectively, representing year-over-year growth of 141%. For the six month period ended January 31, 2011, we recorded a net loss of $3.8 million, and for the six month period ended January 31, 2012, we recorded net income of $4.5 million. For the six month period ended January 31, 2011 and 2012, we generated $9.6 million and $47.7 million, respectively, of cash flow provided by operating activities, and we have generated positive cash flow provided by operating activities for each of our last seven fiscal quarters.
Our Industry
Fundamental Shifts in the Application Landscape, User Behavior, and IT Infrastructure Have Led to Increased Network Vulnerability Organizations are transforming the way they do business as a result of IT innovation. New technology trends, such as the adoption of web-based applications, including SaaS, the consumerization of IT, the proliferation of mobile devices, virtualization, and cloud computing, are changing the way employees consume and organizations manage IT. By embracing these new technology trends, organizations have become more susceptible to security breaches and compromised data.
Legacy approaches to network security have significantly limited the ability of organizations to adopt many of the new applications that leverage new technology trends. Organizations can have thousands of enterprise and consumer applications running on their networks that can be either safe or unsafe depending on the user and usage. In today’s complex application landscape, organizations need the ability to selectively enable certain applications for certain users, while protecting against a wide array of security threats.
The Legacy Network Security Model Prevents Organizations from Safely Enabling Modern Web Applications
Despite the rapidly changing application and threat landscape, the firewall, the mainstay of network security, has remained largely unchanged for decades. These legacy firewalls examine the port and protocol of the data packets through a classification approach known as stateful inspection, which was designed to decide whether or not to let traffic associated with the inspected packets pass into the network. This approach worked well for basic email and web browsing applications, which behaved in a predictable fashion and adhered to standard ports and protocols. Today, however, modern application categories, such as Web 2.0, social media, and SaaS, are becoming increasingly and often deliberately more complex and unpredictable and are therefore challenging to the legacy firewall.
Because the relationship between applications and ports and protocols is becoming less standardized and less predictable, legacy stateful inspection firewall technology can no longer provide the level of security, control, and intelligence required by organizations to safely enable and control today’s applications. In an -2- attempt to compensate for the limitations of the stateful inspection firewall, three approaches have evolved, including stateful inspection “helpers” (such as web filters and IDP systems), UTM appliances, and application control blades that supplement legacy firewalls. However, these approaches still fundamentally rely on stateful inspection technology at their core and are unable to truly identify and safely enable applications. As a result, by using legacy approaches, organizations have to either unsafely allow or completely block modern applications, such as social media, Web 2.0, SaaS, and other productivity enhancing applications.
Organizations Need a Fundamentally New Approach to Network Security
We believe organizations require a next-generation network security platform that can safely enable applications for certain users while protecting against a wide array of security threats. Such a platform must incorporate the following key elements:
Our Solution
Our platform offers a fundamentally new approach to network security and allows organizations to secure their networks and safely enable the increasingly complex and rapidly growing number of applications running on their networks. The core of our platform is our Next-Generation Firewall, which delivers natively integrated application, user, and content visibility and control through our proprietary hardware and software architecture.
The key benefits of our next-generation network security platform include its ability to:
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Our Strategy
Our goal is to be the global leader of network security solutions for enterprises, service providers, and government entities. The key elements of our growth strategy are:
Competitive Strengths
We believe we have a number of competitive advantages that will enable us to maintain and expand our leadership position in next-generation network security. Our competitive strengths include:
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Our Go to Market Strategy
In addition to redesigning the fundamental architecture of the firewall, we have also redesigned the traditional go to market approach in the network security industry. Key elements of our go to market strategy include:
Risks Affecting Us
Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:
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Corporate Information
Our principal executive offices are located at 3300 Olcott Street, Santa Clara, California 95054, and our telephone number is (408) 753-4000. Our website is www.paloaltonetworks.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus. We were incorporated in 2005 as Palo Alto Networks, Inc., a Delaware corporation.
The Palo Alto Networks design logo and the marks “Palo Alto Networks,” “PAN-OS,” “App-ID,” “User-ID,” “Content-ID,” and “WildFire” are the property of Palo Alto Networks, Inc. This prospectus contains additional trade names, trademarks, and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.
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