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Palo Alto Networks Seeks $2.6 Billion Valuation: IPO Shares 'Exponentially Oversubscribed'

Palo Alto Networks IPO 'Exponentially Oversubscribed' - Revised Price Range Could Value Company At More Than $2.6 Billion on IPO Day

Palo Alto Networks, the network security company known for coining the term “Next Generation Firewalls” (NGFWs), is set to go public and likely will start trading on Friday. In a vote of confidence, the company and its underwriters raised the price range for its IPO to a range of $38 to $40 a share, up from $34 to $37 a share that the company originally set.

At these levels, the IPO could net the company upwards of $250 million in cash proceeds and support a market cap that tops $2.6 billion.

Palo Alto Networks Company HQ

To get an idea of the chatter on Wall Street surrounding the company’s IPO, SecurityWeek spoke with Scott Sweet, Senior Managing Partner at IPO Boutique, an IPO and secondary advisory services firm.

“Demand is considered, in the business, as exponentially oversubscribed,” Sweet told SecurityWeek. “This means there is multiple times more demand than supply.”

“There is no doubt that based upon the tremendous numbers and growth Palo Alto Networks has put out, of all these [tech] companies that have [had an IPO] this year and have done extremely well, it’s very likely that this is the best of the bunch,” Sweet said.

In terms of disclosure, Sweet said that neither he, nor his firm, hold any pre-IPO shares nor does his firm have a relationship with Palo Alto Networks. “We like the story very much, and we likely will be buying shares in the company,” he admitted. “I know two companies who don’t like [the story]—Cisco and Juniper Networks, as they are scared to death of this company.”

While Juniper Networks is a much larger company with product offerings that extend well beyond firewall and security products, the company is paying attention to Palo Alto Networks—enough that it filed suit against the company late last year. In what could turn into a long, drawn-out legal battle, Juniper’s lawsuit alleges that Palo Alto Networks’ appliances infringe six of its patents. The company plans to defend the lawsuit vigorously. “Given the early stage in the litigation, we are unable to predict the likelihood of success of Juniper’s infringement claims,” the company's S-1 filing notes.

Interestingly, Palo Alto Networks founders Nir Zuk and Yuming Mao are the named inventors of the patents being asserted against the company, as both Mao and Zuk were employed by NetScreen Technologies, which was acquired by Juniper in April 2004. Zuk left Juniper and founded Palo Alto Networks in 2005 and was joined by Mao in 2006.

Despite the fact that the company coined the term “Next Generation Firewall” and is considered to be a disruptive innovator in the security space, other security firms have followed with their own NGFW’s and competitive offerings, including products from Sourcefire, Cisco, Check Point, Fortinet, SonicWALL (recently acquired by Dell), WatchGuard and others.

While competitors may disagree, Palo Alto Networks still believes its products have a leg up on the competition, and that it continues to out-innovate the competition. One other consideration that may give the company a competitive advantage in itself, is the fact that 100% of its design and manufacturing takes place on United States soil. This is becoming increasingly important as stories emerge about security vulnerabilities in the technology supply chain, and components manufactured in other countries such as China—where reports have surfaced that backdoors have been embedded into the hardware of some high tech networking products.

Palo Alto Networks IPO Information

According to IDC’s Worldwide Quarterly Security Appliance Tracker, factory revenue and unit shipments for security appliances both grew in the first quarter of 2012, marking the eighth consecutive quarter of year-over-year growth. The Firewall/VPN segment saw the largest year-over-year revenue growth at 23.3% and accounted for 28.3% of the overall security appliance market during the quarter.

Leading up to the coming IPO, Palo Alto Networks has raised approximately $64 Million, with the most recent round taking place in 2008.

In August 2011, the company hired former VeriSign CEO, Mark D. McLaughlin, to take the reigns as president and CEO.

The company’s fiscal 2009, 2010, and 2011 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.

According to data compiled by Bloomberg, at the midpoint of the price range, Palo Alto would be valued at approximately 12 times sales in the 12 months through April, compared with an average of 5.7 times for competitors. “While Palo Alto is asking investors to value it more richly than peers, its sales multiple is still less than half the 26 times revenue at which Menlo Park, California-based Facebook went public,” Bloomberg BusinessWeek notes.

Where does Scott Sweet think the shares will price? “I would expect it to price, in all likelihood, at the higher end of the revised range,” he opined.

Shares are expected to price Thursday night after the bell and begin trading on Friday, July 20, 2012 on the New York Stock Exchange under the ticker symbol “PANW.”

If the IPO goes well, we’re sure to see many happy faces from the company at the Black Hat conference next week.