Summary
Palo Alto Networks reported fiscal third quarter revenue of $1,073.9 million, up 23.5% from $869.4 million a year earlier. Billings, a non-GAAP metric defined as revenue plus the change in total deferred revenue, grew 26.7% to $1,286.4 million. Through nine months, revenue was $3,036.8 million, also up 23.5%. Management tied the growth to large customer commitments across the company's three major platforms and to a security spending environment shaped by remote work.
Recurring business is doing the work. Subscription and support revenue accounted for 73.1% of total revenue in the quarter and grew 33.4% year over year, while product revenue edged up 2.8%. That mix shift shows up in margins. Gross profit rose 21.6% to $743.3 million, but gross margin fell to 69.2% from 70.3% a year earlier, a decline of 1.1 percentage points. Cloud hosting and support capacity are the main costs behind that pressure.
Operating expenses ran ahead of revenue. Research and development rose 58.4% year over year, sales and marketing rose 15.3%, and general and administrative rose 14.2%, all in the quarter. The GAAP operating loss was $110.4 million, wider than the $56.5 million loss a year ago, pushing operating margin to negative 10.3% from negative 6.5%. The GAAP net loss widened to $145.1 million from $74.8 million, and diluted EPS was negative $1.50. Non-GAAP net income was $139.5 million, or $1.38 per diluted share, against $114.6 million and $1.17 a year earlier. Share-based compensation is the main bridge between the two pictures, and it is not going away: the company expects to recognize about $2.0 billion of it over roughly 2.7 years.
Cash flow is the standout. Operating cash flow for the quarter was $277.8 million, up 63.5% from $169.9 million, and nine-month operating cash flow was $1,177.2 million, up 67.7%. Capital expenditures fell 68.8% to $26.9 million in the quarter. Non-GAAP free cash flow, which subtracts purchases of property and equipment from operating cash flow, was $1,088.6 million for the nine months. Backlog signals held up. Current deferred revenue was $2,421.2 million, up 30.6% year over year, and remaining performance obligations were $4,900.0 million, up 40.0%. Cash, cash equivalents, and investments totaled $3,830.8 million at April 30, 2021.
Guidance for the fiscal fourth quarter 2021 calls for billings of $1.695 billion to $1.715 billion and non-GAAP diluted EPS of $1.42 to $1.44 on 101 million to 103 million shares. For the full fiscal year 2021, the company raised its outlook: billings of $5.28 billion to $5.30 billion, non-GAAP diluted EPS of $5.97 to $5.99, and adjusted free cash flow margin of approximately 30%.
The risk list in the 10-Q is familiar but real. COVID-19 could still curtail customer spending, delay purchasing decisions, and lengthen sales cycles and payment terms, and some partners or customers may become cash constrained. Interest expense rose 111.3% year over year on the 2025 convertible notes. The company closed the Bridgecrew acquisition in March 2021 and continues to carry integration and acquisition risk. Competition, new product execution, software bugs, and length of sales cycles round out the concerns.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2021 | Q2 FY2021 | QoQ | Q3 FY2020 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.07B | $1.02B | +5.6% | $869.4M | +23.5% |
| Gross profit | $743.3M | $709.3M | +4.8% | $611.1M | +21.6% |
| Gross margin | 69.2% | 69.8% | -0.5 pp | 70.3% | -1.1 pp |
| Research & development | $311.0M | $266.7M | +16.6% | $196.3M | +58.4% |
| Sales & marketing | $448.0M | $427.4M | +4.8% | $388.4M | +15.3% |
| General & administrative | $94.7M | $104.0M | -8.9% | $82.9M | +14.2% |
| Total operating expenses | $853.7M | $798.1M | +7.0% | $667.6M | +27.9% |
| Operating income (loss) | -$110.4M | -$88.8M | -24.3% | -$56.5M | -95.4% |
| Operating margin | -10.3% | -8.7% | -1.5 pp | -6.5% | -3.8 pp |
| Net income (loss) | -$145.1M | -$142.3M | -2.0% | -$74.8M | -94.0% |
| Net margin | -13.5% | -14.0% | +0.5 pp | -8.6% | -4.9 pp |
Risks
The ongoing COVID-19 outbreak has driven a global work-from-home policy through the nine months ended April 30, 2021 and is expected to continue into the fourth quarter of fiscal 2021. The company warns this could lengthen sales cycles, delay or defer end-customer purchasing decisions, increase requests for delayed payment terms or discounts, and make operating results harder to forecast.
For the nine months ended April 30, 2021, three distributors each represented 10% or more of total revenue and together accounted for 56.4% of total revenue, while three distributors represented 47.0% of gross accounts receivable as of April 30, 2021. Substantially all revenue flows through channel partners that can generally be terminated with advance notice before each annual renewal date.
The company depends on sole source manufacturers, primarily Flex, and on limited or sole source component suppliers, with the recent global shortage of semiconductors and COVID-19 cited as factors that could delay product revenue or cause lost sales. The company also notes it has raised, and may further raise, hardware prices due to tariffs on imported components.
The enterprise security market is described as intensely competitive, with named rivals including Cisco, Check Point, Fortinet, Zscaler, and Crowdstrike, some of which have greater resources and broader portfolios and may bundle or sell at zero or negative margins. Competitive pressure is cited as a risk to prices, revenue, and gross margins.
The company is substantially dependent on engineering personnel and faces intense competition for highly skilled staff, especially in the San Francisco Bay Area, and notes high industry attrition. Headcount grew from 8,014 at the end of fiscal 2020 to 9,715 at the end of the third quarter of fiscal 2021, increasing the challenge of hiring, integrating, and retaining personnel.
Rapid headcount and end-customer growth, including increasingly complex deployments with larger end-customers, places significant strain on management, operational, and financial resources. The company warns that failure to scale systems, processes, and controls, made harder by remote work, could increase costs and disrupt end-customer relationships.
Sales to medium and large enterprise end-customers involve longer sales cycles, in some cases over 12 months, and are subject to budget constraints, multiple approvals, and unplanned delays. The company also notes reliance on orders received in the last few weeks of each fiscal quarter, so any delay near quarter-end could cause revenue to fall below expectations.
The company has incurred losses in all fiscal years since inception other than fiscal 2012, with an accumulated deficit of $1.5 billion as of April 30, 2021. Operating loss widened to $110.4 million in the quarter and $243.7 million year to date, and operating margin fell to negative 10.3% in the quarter from negative 6.5% in the prior-year quarter.
As a well-known security provider, the company states it may be a more attractive target for attacks, and that a breach of its data, corporate systems, or third-party systems could expose customer information, harm reputation, and trigger regulatory investigations and litigation. It notes its cybersecurity insurance may be insufficient to cover all liabilities.
The company is subject to a broad range of federal, state, local, and foreign regulations including privacy and data-protection laws, anti-bribery laws, import/export controls, and environmental requirements such as RoHS and the WEEE Directive. Noncompliance could result in investigations, sanctions, fines, and mandatory product recalls.
SaaS KPIs
All quarters →Billings
Total deferred revenue
Summary, forecast, risks and KPIs are extracted from Palo Alto Networks Inc's SEC filings for Q3 FY2021 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 1, 2026.