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Enterprise security company Palo Alto Networks (NYSE: PANW) ended its fiscal year with a bang, handily beating its own guidance for revenue while matching its expectations for earnings. The fast-growing cybersecurity company broke quarterly revenue and billings records during the quarter, and guidance for next quarter calls for continued rapid growth. Here's a look at Palo Alto's results.
Growing on all fronts
Total revenue grew 59% year-over-year during the fourth quarter to $178.2 million, well above the guidance range of 41% to 44% growth given by management last quarter. The company recorded a net loss of $32.1 million, or $0.41 per share, on a GAAP basis, nearly twice as large as the $0.22 loss per share during the same period last year. On a non-GAAP basis, Palo Alto earned $0.11 per share, up 57% year-over-year.
Palo Alto's business is split into two reporting segments: products and services. Product revenue, which includes hardware like the company's firewall platforms, grew by 52% year-over-year, while services revenue from subscription products rose by 74%. Billings, which is an indication of future revenue, jumped by 64% year-over-year.
Operating expenses grew by 74.2% year-over-year, outpacing revenue growth significantly as the company spends heavily to acquire new customers. The company claimed a customer base in excess of 16,000 earlier this year.
Palo Alto expects revenue growth between 39% to 42% next quarter, with non-GAAP earnings per share expected to rise to $0.12.
For the full year, revenue grew by 51%, and the company recorded a GAAP net loss of $226.5 million, or $3.05 per share. However, $160 million of this loss was related to litigation charges stemming from legal settlements with Fortinet and Juniper Networks, leaving the company with a non-GAAP EPS of $0.40 for the full year.
The big picture
The cybersecurity industry has evolved over the past few years as sophisticated cyber-attacks become increasingly common. Palo Alto Networks offers both hardware and subscription services meant to protect organizations from these threats at every level, and according to the company the scope of its products is unmatched by any of its competitors. Palo Alto's total addressable market is estimated at about $16 billion, and it's expected to grow at a CAGR of 7.3% through 2017.
Palo Alto currently claims a small fraction of this market, with annual revenue of just $600 million, and it greatly expanded its total addressable market by acquiring privately held Cyvera earlier this year.
High profile events, like the credit card breach at retailer Target last year, the more recent credit card breach at Home Depot, and the leak of celebrity pictures reportedly related to a flaw in Apple's iCloud, have highlighted the importance of cybersecurity, and as cybercriminals become more sophisticated, so must cybersecurity solutions. This arms race creates an opportunity for companies like Palo Alto Networks.
Although Palo Alto is rapidly growing revenue and winning market share, rising costs are one area of concern. During the fourth quarter, total operating expenses ate up 87% of revenue, with sales and marketing costs accounting for nearly 60% of revenue. The upside to spending so much to acquire new customers is that the renewal rates for the company's subscription services is high, in excess of 90%. This means that once Palo Alto wins a customer, they're likely to remain a customer.
The bottom line
Palo Alto Networks blew past its prior revenue guidance, posting strong growth during the fourth quarter and guiding for continued growth going forward. Palo Alto claims a small share of a large and growing industry, and the company is spending heavily to grow its share, winning and retaining customers at high rates.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Palo Alto Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.