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Palo Alto Networks, first Silicon Valley IPO since Facebook, rises more than 30 percent in debut
Jul 20, 2012 (San Jose Mercury News - McClatchy-Tribune Information Services via COMTEX) --
Silicon Valley's first post-Facebook initial public offering seemingly faced little static from the social network's problematic public debut, as Palo Alto Networks increased as much as 47.8 percent in its first day of trading.
The Santa Clara network-security startup sold 6.2 million shares at $42 apiece, higher than the company expected just one day before it locked in the price Thursday, collecting more than $260 million at a valuation of roughly $2.8 billion. When shares began trading on the New York Stock Exchange slightly before 7 a.m. Pacific time Friday, the increased price was justified: The stock debuted at $55.15, 31.3 percent higher, and sold for as high as $62.07 in the morning session; trades settled at a level between $55 and $57 and shares were going for $56.09, a 33.6 percent increase from the IPO price, at noon Pacific time.
Founded in 2005 by former Check Point engineer and OneSecure co-founder Nir Zuk, Palo Alto Networks is known for its enhanced firewall technology; last year, former VeriSign CEO Mark McLaughlin was brought in as CEO to lead the company through its public debut.
"We've reinvented the firewall," McLaughlin boasted in a telephone interview from New York on Friday. "Our next-generation firewall allows enterprises for the first time to safely use any application they want to use."
The company is headed for its first year of profitability, showing
a net gain of $5.3 million in the first nine months of its fiscal 2012, which ends July 31. In fiscal 2011, the company lost $6.5 million, its best performance up to that point.
Revenues have been building quickly for the company, however, as they have risen from $13.4 million to $48.8 million to $118.6 million in the past three fiscal years, and the company raked in just shy of $180 million in the first nine months of this fiscal year.
The IPO values Palo Alto Networks at a much higher price-to-earnings ratio than competitors such as Check Point, however, creating doubts that the company can continue to grow revenues at a high enough rate to justify its initial valuation.
Check Point Chairman and CEO Gil Shwed called out the company in an interview with an Israeli journalist earlier this week, saying "Palo Alto is a competitor, but it's still a niche player. We have better technology and we have many more customers and installations," later adding "I think that there is little chance that Palo Alto will be a success."
McLaughlin has combated the negative views, however, saying Friday "We told the employee base from Day One that if we just pay attention to innovation and serving the customers that the value creation would take care of itself. On the ratios, we're growing at a factor faster than the market, so that's why you're seeing those valuations."
Analysts tend to agree with McLaughlin.
"There's an appetite for innovation and growth out there and there's going to be a premium placed on growth, whether it's tech or anywhere else," Robert W. Baird analyst Jayson Noland told Bloomberg News earlier this week.
"The numbers on Palo Alto are outstanding -- of all the cloud-based IPOs that have debuted in 2012 and prior, the numbers in growth in the top and bottom line stand apart," Scott Sweet, senior managing partner of IPO Boutique, told The Street.
Morningstar analyst Jim Krapfel compared Palo Alto Networks to the only other major tech company to debut since Facebook, San Diego-based ServiceNow, which provides cloud-based IT software services. That company's stock priced above its initial range and still increased 37 percent in its debut June 28
"ServiceNow shows that the appetite for fast-growing tech companies in their growth cycle will be massive. I expect there to be good demand for Palo Alto," Krapfel told Reuters last week.
The IPO market has been stagnant for two months, as Facebook's bungled Wall Street debut and unstable price -- along with concerns about the macroeconomic situation and general stock instability -- have kept startups on the sideline.
Facebook debuted on May 18 and the inability of Nasdaq to handle the volume of trades, along with whispers of falling revenue projections, led to the stock falling hard in its first two weeks of public availability. Facebook also increased its range in the week leading up to its debut, moving the possible price from $28 to $35 to a range of $34 to $38; however, the Menlo Park social network stayed within its final range at IPO, charging $38 a share after also increasing the number of shares it sold.
Facebook's IPO price did not last however, as the company's stock fell below that level on its second day of trading and has stayed lower since. Facebook stock closed Thursday at $29, 23.7 percent lower than its IPO price.
The fallout resulting from Facebook's IPO was seen in June, when only four companies went public, the lowest total for any month since the deepest point of the Great Recession, in 2008, according to financial analysis firm PrivCo. Before that, an average of more than 13 companies were moving to the U.S. market every month in 2012, which was still below the pace set last year.
However, companies that target big businesses as customers, as does Palo Alto Networks, have proven strong in the past year -- Silicon Valley enterprise software companies Splunk, Jive Software, Proofpoint and Infoblox are among those that have gone to market and have share prices higher than their IPO prices.
McLaughlin, the Palo Alto Networks CEO, said that his company did not fear going public in the wake of Facebook's problematic IPO.
"(If) Investors view a strong franchise that gives a lot of value to its customers, it doesn't really matter when you go (public)," he said Friday.
Palo Alto Network's IPO brought in $260.4 million, with the company receiving 75.8 percent of the proceeds and the rest going to early investors. Before settling on $42 as a price, the company filed for a range of $38 to $40 Wednesday, up from the previously stated range of $34 to $37. The company is trading under the ticker symbol PANW.
Morgan Stanley was the lead underwriter on the IPO, as it was for Facebook. After reports that Morgan Stanley advised large investors of downgrades to Facebook's revenue forecasts, but did not do the same for smaller, retail investors, the investment bank faced withering criticism, making subsequent efforts more important.
McLaughlin was impressed, however.
"Pretty flawless execution on the part of our advisers," he said Friday.
Norwalk, Conn.-based Kayak Software, which runs a popular travel website, is also expected to debut for public trading Friday, with Kayak also fronted by Morgan Stanley.
___ (c)2012 San Jose Mercury News (San Jose, Calif.) Visit the San Jose Mercury
News (San Jose, Calif.) at www.mercurynews.com Distributed by MCT Information
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UPDATED 12:33 PM EST - May 19, 2013
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