Palo Alto Networks Ups Stock Price Range Before IPO

Palo Alto has seen significant revenue increases in recent years as it expands its next-generation enterprise firewall solutions.

Palo Alto Networks is bumping up the price it€™s looking for as it prepares for what will be the largest tech initial public offering since Facebook's controversial IPO in May.

The company, which makes next-generation network firewall software, is now expected to charge $38 to $40 a share in its initial public offering, up from the previously stated $34 to $37. The increase in share price could bring Palo Alto Networks as much as $250 million in the IPO, which is scheduled to start pricing after the close of markets July 19.

Company executives reportedly still plan to sell 6.2 million shares, which will begin trading July 20.

The IPO is the latest step for the fast-growing 7-year-old company, which has seen rapid growth in revenue over the past few years. The company in 2011 generated $164.4 million in revenue, a 134.1 percent increase from 2010 and enough to push Palo Alto to No. 6 on the list of vendors in the $4.5 billion global firewall equipment market, according to market research firm Gartner. So far this year, Palo Alto€™s revenue has jumped to $225 million, Gartner analyst Greg Young said.

Cisco, Check Point Technologies and Juniper are the top three vendors, according to Gartner.

Palo Alto Networks is doing this on the strength of what executives and analysts call the company€™s next-generation firewall technology. Traditional firewalls monitor traffic going over the corporate network looking for security issues. However, Palo Alto€™s next-generation firewall technology gives enterprises a more granular view, monitoring not only the kind of traffic that is moving over the network, but also enables businesses to identify and control the users, applications and content, according to Zeus Kerravala, principal analyst with ZK Research.

This gives enterprise IT staff greater tools for setting policies and controlling the network traffic, increasingly important capabilities considering the amount of traffic that is coming from outside the enterprise firewall, thanks to such trends as cloud computing, software as a service (SaaS), video and social media.

Kerravala pointed to YouTube as an example. Traditional firewalls, offered by the likes of Cisco Systems and Juniper Networks, can block YouTube traffic from coming into the enterprise if corporate officials deem it a security risk. With next-generation firewall technologies like that from Palo Alto, IT staff can allow some YouTube traffic in and block other traffic, and decide which employees can see what YouTube content.

€œThey really are leaders in next-gen firewalls,€ Kerravala said of Palo Alto Networks.

Gartner€™s Young said the company has done a good job of marrying enterprise firewall and intrusion-prevention system (IPS) technologies into a single, tightly integrated solution. Most firewall vendors offer IPS products as well, but they don€™t tend to be as integrated as Palo Alto€™s solutions. And the market is there€”according to Young, 60 percent of enterprises use firewalls and IPS solutions.

€œThe opportunity is in next-generation firewalls,€ he said.

Both Young and Kerravala said other firewall technology vendors are moving in the same direction as Palo Alto Networks. For example, Cisco now offers its ASA CX Context-Aware Security solutions that officials say gives enterprises greater visibility and control into their network traffic.

However, companies like Cisco and Juniper are still playing catch up to Palo Alto, Kerravala said, adding that both vendors €œtook their eye off the ball€ in the firewall space, giving Palo Alto Networks opportunity to move into the market. The analyst also noted that the security industry, more than most others, gives startups room to move in and grow.

€œFor these smaller companies, if they don€™t take their eye off the ball, they can keep a healthy lead,€ he said.

Palo Alto and similar companies may also have benefitted from the United States€™ tax code, which taxes companies 35 percent of their overseas earnings that are brought into the country, Kerravala said. Cisco has been a vocal proponent of a €œrepatriation€ holiday, which would provide U.S. businesses a one-time low-tax window to bring such earnings back into the country.

The current tax situation has kept Cisco, for example, from trying to bring much cash back into the United States, and most of the company€™s larger acquisitions have been of non-U.S. companies. With a repatriation policy in place in the United States, Cisco may have been encouraged to buy Palo Alto years ago to bulk up its firewall capabilities, the analyst said.

Juniper officials have questioned how Palo Alto has built its products, filing a lawsuit in December accusing the smaller company of infringing on six of its patents relating to firewall technology. The bulk of Palo Alto€™s founders were Juniper executives who left the larger vendor in 2005 to launch their startup. Palo Alto has denied the charges.

Facebook€™s monster IPO in May put a damper on initial public offerings for more than a month, according to some analysts, who noted a relatively small number of IPOs in June. Facebook€™s stock debuted May 18, and after problems with Nasdaq€™s handling of some trades and questions around the social network€™s revenue projections, the stock€™s price fell steadily for the first few weeks after the IPO.