Q1 2020 Earnings Call

Please standby.

Good day and welcome to the Palo Alto Networks' fiscal first quarter 2020 earnings Conference call. Today's conference is being recorded I just don't like to turn the conference over to Mr., David Letterman, Vice President Investor Relations. Please go ahead Sir.

Afternoon, and thank you for joining us on today's conference call to discuss Palo Alto Networks' fiscal first quarter 2020 financial result is called being broadcast live over the web and can be accessed on the investors section of our website and investors dot helping that works dotcom with me on today's call aren't attest to Laura our chairman and Chief Executive Officer, Kathy Banana.

Chief Financial Officer, and required Archie Park offers or this afternoon, we issued a press release announcing our results for the fiscal first quarter ended October 31st 2019, just like a copy of the release you can access it online on our website.

We'd like to remind you that during the course of this conference call management will make forward looking statements, including statements regarding our financial guidance and modeling points for the fiscal second quarter full fiscal year 2020 enter next three years, our competitive position and the demand in marketing opportunity for products and subscription benefits and timing of new products and subscription offerings and.

Trends in certain financial results in operating metrics. These forward looking statements involve a number of risks and uncertainties and some of which are beyond our control, which could cause actual results to differ materially and those anticipated by these statements. These forward looking statements apply as of today, you should not rely on them as representing our views in the future and we undertake no obligation to update.

These statements. After this call for more detailed description of factors that can cause actual results to differ please refer to our annual report on Form 10-K filed with the FCC on September 19, 2019, and our earnings release posted a few minutes ago on our website and filed with the FCC on form 8-K.

Also please note that certain financial measures. We use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges for storyful periods. We provided reconciliations of these non-GAAP financial measures to GAAP financial measures in the supplemental financial information that can be found in the investor section of our website located at investors Dot Pals and networks Dot com.

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Finally, once we've completed our formal remarks, we'll be pushing them to our investor Relations website under the quarterly results section.

We also like to inform you that we will be attending to investor conferences next month, we will participate at the Wells Fargo TMT summit in Las Vegas on December Threerd.

Barclays Global Technology Media and Telecommunications conference on December 11 in San Francisco, and with that I'll turn the call or to the cash. Thank you David Good afternoon. Thank you everyone for joining our call [laughter] as most of you know this quarter I'm laughing My first do you want it both network.

And my very first call I talked about my observations of industry and our goals as a company.

About a year ago, we were great single bought a company focusing on integration automation.

We have made some only moves towards aspirations of cloud, we're beginning to build products with <unk> and the mill.

Recognizing the evolving trends the technology.

One of your made it I couldn't be happier without achievements.

Significant progress moving into a leading position in cloud security, making great strides and automation using yeah and another across our product portfolio.

Speed both are working we're delivering integration this is bearing fruit and our customers seem to benefit and bedding more and more bundled in hours.

A few months ago, we set up to your plan for the company has shared it with you during our analyst in September .

Well I intend to share our progress during this quarter I also want to provide a report card on how I feel are progressing towards the lower drone goals that it gets set for ourselves and perhaps more importantly, I like to share wherever they were feeling more confident and also where we need more work.

The first quarter, we're marking ourselves against the target that we presented in September .

We are published a slight does available investor relations website that he can download to follow along with my comments will be talking about progress against this plan.

Let's start with a world buildings targets and how they're tracking.

We are delighted to have done better than our guidance as I'm learning the rhythm up on an enterprise business.

I understand that enterprises, but a lot of effort in driving go to year end.

And they have to kick start new years.

I was advice and sometimes it can be challenging standing momentum into new fiscal year.

Teams have delivered we're off to the races.

As I spoke with investors opt for analyst day. Many asked me what makes you confident that he can achieve billings of 800 plus million dollars in next generation security this year.

I'm delighted to report that offer great Q4, we have maintained the momentum and I've been able to better our plans delivering next generation security billings of $170 million, which is 217% error here.

So sticking by scorecard I have more confidence that our ability to continue to deliver here show our growing confidence we're increasing our guidance for next generation security building for the full year to date Dent a $20 million.

One area that we did not delivered to our expectation the quarter as product.

Which weighed on the go to the final one of the platform category and grew only 11% year over year category. If I was glad from grew only 11% error here.

In fiscal 2019 people what incentives to our teams to build our next generation security business.

Thank you for the showed us that could very strong results.

That momentum carried into the startup fiscal 2020 with strong extenders and security pipeline going into Q1.

However, even though we a balanced ourselves incentives this year.

Looks like it's going to take up a little more product change to take effect.

Despite our performance this quarter, we continue to have confidence in our ability to deliver a 22% CAGR over the next two years into part one of the platform category, but contributions from all three formfactors hardware work to another service.

Well what efforts in this area, we have established our third speedboat to coincide with our security Enterprise Butler.

The speed board will be led by and the other was recently the Chief revenue Officer River, but.

Yes, I met our president so used to be able to leaders along with our regional leaders.

Would that change we have children love to replace the position of had a failed and on a flatter organization, allowing us to continue to be nimble and our transformation to a multiproduct company.

Backdoor scorecard.

Our revenues remain on target.

Well, let's sell down to our NPS margins and cash flow.

I didn't get to read many of you know it's important to topic I want to help you appreciate appointment made at our analyst day.

This fiscal year is out here of investment in transformation.

We're not looking to cut costs, we're looking to invest.

Oh, we're holding our teams will play.

A blend of supposed to deliver need B S. A $5 to five Dan.

For this year, and we intend to stick to it.

Without accounting of course, the proposed acquisition of or auto, which I just announced.

Our Q1, adjusted free cash flow marginal light compared to I know target due the timing of certain cash flows. However, we remain on track for the animal guidance.

With that let's dive into the exciting product announcements, we debuted at a exact conference in Boston earlier this month.

Maybe if our customers are taking integrated bets across the enterprise cloud and the I animal products. While the here go we're just talking about a mission today, we see the three platforms emerging and our box.

As you know we have branded our cloud solutions, but an application framework and you know animal products cortex.

Let's start Bible business needing event today, we're announcing strada brand for files and adoption.

This means we had innovations we're making to secure the enterprise at some of you might be aware, you know DLP and SD Wan for Prisma access.

Ignite event in Buffalo two weeks ago, we will extend as he went capabilities to our next generation firewall, but then if that subscription to be available shortly.

Then I OATI and 2020.

And the span of 18 months, they will take our debt subscriptions on four to seven.

These new subscriptions will be simultaneously available in a virtual firewall format.

As a big site note the into security not boasts over 1000 customers and <unk> and is our fastest growing at that subscription having long just in February of this here.

In this category, we continue to garner recognition for our technical leadership and were named to the lead on the Gartner Magic quadrant for network firewall eight consecutive time.

We're also recognized as a leader by force turned their recent zero cross extended ecosystem platform providers, we have report.

We feel good about the overall global potential firewalls and by Paul.

Cited about the ongoing innovation, we have done this area.

Moving to securing the cloud and access to the club I mean first talk about Prisma axis.

We're very excited about the recent innovations we have allows including SD Lan and they'll be services, a new cloud based management and use that service level agreements.

First of access is now the industry's most comprehensive secure access secure surface edge platform.

Just gets because my axis of potential to be leader and a new market category defined by Gawker go sassy or secure access service edge.

That sees a convergence of networking cloud security that recognizes the new demands acquired to secure cloud and mobile workforce.

While also delivering on integration and he's a management.

Because of axis is perfectly suited to be neither in the selection category or incredibly excited to bring this as product to our customers.

Boy across different Mcleod well the questions I often get asked is are you deploying the string of pearls strategy. The answer is no ought to point out we're doing something different we're integrating into three platforms.

Our goal is to make life easier for our customers through integration. A Prime example is mcleod as soon as we acquired Red luck well integrated into the evident functionality in Portland.

This past week, we have announced inhibition of Red lobster smoking door second to what platform, Yes, one platform Prisma club now for our SaaS version, you can only by one product, which is the integrated product.

Very proud of our president team have delivered this effort in record time, a five months since acquisition and of course, you will continue to work on delivering more cross product capability or the next year.

There's macleod allows organizations tilting a full and unified view their cloud security and compliance Buster across any type of cloud workloads, including container Serverless and hosted environment under a single pane of glass.

'cause Mcleod also had a good security the software development workload, allowing developers have the ability to see vulnerability status every time they run a built without having to run a separate tools.

I personally believe prison Mcleod is fast becoming the essential multi club multi technology platform now with over 1000 customers.

Keeping to the theme of providing more capability today, we announced I intend to acquire operetta.

After an extensive markets cannon thinking through how we believe microsegmentation can fundamentally be reinvented, we decided to exit at our efforts of the proposed acquisition of operetta.

Operator has unique machine identity based micro segmentation capabilities that complement the existing cloud native security platform capabilities deliver Revpas Mcleod.

Incredibly excited to welcome the team to balls networks.

In addition to the acquisition our team continues to drive hardened division was up as Mcleod level.

Now, let's turn to cortex I'm also proud the steam steam has outperformed their billings forecast for the fourth quarter by almost 20%.

We introduced cortex Xdr <unk> at ignite. This is an integrated version with both endpoint protection. The next yacht given abilities.

Launched cortex, 1.0 about six months ago, but the only vendor the DDR and reinvented with network did after that Auryxia.

Isn't gratifying to see several other vendors follow suit and offer their own xdr Trump crop.

We continue to stay on the bleeding edge in this category, we're extending cortex ziosk behavioral analytics capabilities to include include data and logs collected from third party firewalls, enabling detection across multi vendor environments, we announced the inclusion of checkpoint firewall did that ignite. We also hope to be able to accept it up before the Cisco before the years.

Over this is probably only time, you'll hear me talk about our competitors and the neutral way.

The first nine months of Fortyx xdr.

Enable organizations reduced alert volumes by up to 50 eggs and speed investigation time by about either.

Filtering out the noise and allowing Ellis to focus the most critical platts.

Turning to Mr., which is part of our cortex, but a couple of months ago, we enhanced our comprehensive security orchestration automation response platform the mistral by adding a number of new capabilities.

The mystify point, all redefines the limits of sore customize the ability, enabling users to visualize incident and indicator flows and it completely tailored matter.

Improving the clarity and speed of security operations.

Well see more exciting is what lead talked about at our ignite event, our ability to collect telemetry data on how to Mr is being used we're starting to get this did on customers will start to see the benefits or we can use the more insight and how to get the most of this platform, including which playbooks are the most valuable which integrations work the best.

Finally, we're very pleased to announce a new high end support off in gold platinum support for a physical and virtual firewall and I've been around the management system.

This is a continuation of our goal to provide the highest level service to our customers.

Let them support is enhanced version of our premium support offering and will feature dedicated teams and best in class response times and also several other new features designed to ensure our customers peace of mind going that balls networks deep expertise in the corner or whatever they need it.

This is just an overview of all that we've introduced at ignite and I encourage you to review the archive presentations from that event.

As a continued measured over that confidence during the quarter, we repurchased nearly $200 million was more shares to conclude.

We had a great first quarter I feel more confident in our ability to deliver to the plan we set up for this year.

Got it teams and rolled out exciting innovations and have us on the leading edge and multiple categories from firewall just yard to soar to sassy in cloud security.

As I contemplate a road left them next 12 months I.

I become even more excited to see the security category strengthening knowing that our products will continue to mature and be deployed by customers around the world with that I'll turn the call over to Kathy.

Thank you in a cash before I start I'd like to know that except for revenue and billings figures all financial figures are non gap and growth rates are compared to the prior year period unless stated otherwise.

Ethnic cash indicated we had a good start to our fiscal year and are tracking well against the targets. We had outlined during our analyst day in September .

In the first quarter, we continue to add new customers that a healthy clip and sustained momentum in our nexgen security products.

Let's look at some key customer wins.

We signed an eight figure deal with a leading casino company spanning each of our three pillars.

This engagement well positioned with their entire I.T. leadership team from the director level, all the way to the CIO and the comprehensive outcome based security transformation project.

The large retail customer we highlighted last quarter expanded their Palo Alto networks footprint this quarter with a seven figure cortex deal.

Its customer purchase cortex, Xdr and data lake setting them up for comprehensive data analysis going forward.

We beat checkpoint and replaced Cisco when a substantial deal with a major European toy manufacturer, who purchase nexgen firewall prisma access and trap.

This customer has selected Palo Alto networks, if their strategic security partner and in the coming years, we expect them to replace their current firewall with next generation firewall from Palo Alto networks.

Their current VPN solution will be replaced by Christmas access.

And endpoint protection will be covered by trap.

These wins are excellent examples of our success in articulating our vision of security and being able to demonstrate our value proposition to customers.

And I'm pleased to report that wins, such as these helped us deliver another strong quarter financially.

In Q1 total revenue grew 18% to $771.9 million.

Looking at growth by geography, the Americas grew 18% and they agree 16% and APAC grew 21%.

You want product revenue of $231.2 million declined 4% compared to the prior year [noise].

Q1, SAS based subscription revenue of $318.6 million increased 38%.

Port revenue of $222.1 million increased 21%.

In total subscription and support revenue of $540.7 million increased 30% and accounted for 70% share of total revenue.

Turning to billing Q1, total billings of $897.4 million net of acquired deferred revenue increased 18%.

The dollar weighted contract duration for new subscription and support billings in the quarter remained at approximately three years, but declined by approximately three month year over year.

Total deferred revenue at the end of Q1 was $3 billion an increase of 26%.

In addition to new Pester acquisition, we continue to increase their wallet share with existing customers.

Our top 25 customers all of which made a purchase this quarter spent a minimum of $41.7 million and lifetime value through the end of fiscal Q1 2020.

24% increase over that $33.6 million in the comparable prior year period.

Q1, gross margin was 76.6%, which was down 10 basis points compared to last year.

You want operating margin was 15.8% a decline of 500 basis points year over year and includes a headwind at approximately $7 million net expense associated with our recent acquisition.

We ended the first quarter with 7382 employees.

On a GAAP basis for the first quarter net loss increased by 56% to $59.6 million or 62 cents per basic and diluted share.

non-GAAP net income for the first quarter declined 9% to $104.8 million a one dollar five cents per diluted share.

Our non-GAAP effective tax rate for Q1 was 22%.

Turning to cash flow and balance sheet items, we finished October with cash cash equivalents and investment of $3.3 billion.

During the first quarter, we repurchased over 947000 shares.

Of common stock at an average price of approximately $209 per share.

Leaving a remaining repurchase authorization of approximately $800 million.

You want cash flow from operations of $225.2 million.

Decreased by 11% year over year.

Free cash flow with $178 million down 18% at a margin of 23.1%.

Adjusting for cash charges associated with our headquarters in Santa Clara free cash flow in the quarter was $202.7 million, representing a margin of 26.3%.

Capital expenditures in the quarter was $47.2 million of which 22.7 million with associated with our headquarters in Santa Clara.

Yeah, So with 63 days, an increase of five days from the prior year period.

Turning now to guidance and modeling point.

For fiscal Q2, 20, we expect revenue to be in the range at $838 million to $848 million, an increase of 18% to 19% year over year.

We expect billings to be in the range of 985 million to $1 billion, an increase of 16% to 17% year over year.

We expect Q2 20, non-GAAP EPS to be in the range of $1.11 cents to $1.13 cents, which incorporates approximately $3 million of net expense or two cents per share related to the proposed acquisition of apparatus using approximately one.

Hundred two 102 million shares.

For the full year fiscal 2020, we expect revenues to be in the range of $3.44 billion to $3.48 billion, representing year over year growth of 19% to 20%.

We are increasing our prior billings guidance by $10 million to $4.105 billion to $4.165 billion, representing growth of 18% to 19% year over year.

Ethnic cash said earlier, we're also increasing prior guidance for next Gen security billings by $10 million to be in the range of $810 million to $820 million representing year over year growth of 79% to 82%.

We expect fiscal 20, non-GAAP EPS to be in the range of $4.90 to $5, which incorporates approximately $13 million net expenses or 10 cents per share related to the proposed acquisition of apparatus using approximately 102 to 104.

Million shares.

Finally, turning to free cash flow for the full year, we continue to an ex expect and adjusted free cash flow margin of approximately 30%.

This excludes approximately $20 million and net expenses and acquisition transaction costs attributable to the proposed acquisition of apparatus.

Including these net expenses, we would expect adjusted free cash flow margin of approximately 29%.

As a reminder, the adjustments to free cash flow include Capex associated with the completion of our headquarters in Santa Clara.

You can review these adjustments to free cash flow in our supplemental financial information document, which is posted on our Investor Relations website.

Before I conclude I'd like to provide some additional modeling point.

Expect our Q2 and fiscal 20, non-GAAP effective tax rate to remain at 22%.

Capex in Q2 will be approximately $50 million with approximately $25 million related to our headquarters in Santa Clara.

For the full year, we continue to expect capex to be approximately $170 million to $180 million with approximately $50 million related to our headquarters.

With that I'd like to open the call for questions. Operator, Please poll for questions.

Thank you if you'd like to ask your question. Please signal by pressing star one on your telephone keypad, if you're using your speaker phone. Please make sure. Your mute function is turns off to lever. So try equipment. That's would you. Please limit yourself to one question one follow up again press star one to ask the question.

Well take our first question a day from Keith Weiss with Morgan Stanley .

Excellent. Thank you guys for taking the question [laughter] National teaches drill down a little bit more into the Gi firewall in the platform started equation.

You guys are a little bit disappointed it sounds like the incentives that you guys had in place last year, just sort of push more like the new business activity or more of the pipeline building onto the next gen cloud stuff unless you guys little the short on pipeline heading into the 21 am I thinking about that correctly in terms of kind of where.

You guys came up a little bit short and into how do you guys think when you're looking at sort of assessing the problem. How do you that out what comes from sort of that kind of execution issue versus what might be more of a macro or competitive issue.

Thanks, Keith your question Youre thinking about it right up as you know many of for next generation security products are very early in their lifecycle. So literally there's stuff like to US locally acquired in July a there's stuff like this to all these things I would love to one here. So we put a lot of effort towards getting our core team to book learn understood.

And bill pipeline, and a and sell and in that process. We set up some some good incentives for them to focus and next generation security because it was pretty must see him talk on division for my first year. There was that love. The fact that their grid Farwell company. How are you guys going to keep cross forming a favorable market transitions.

And you know we set out our team and me, we set out to prove to ourselves and nobody can we go the products. In addition, firewalls, but if we can make this a multiproduct company. So part of that as you know lease team did a great job and getting products and plays and become the integration work I talked about it was the go to market people starting to make sure that improved so they can sell this stuff and we're very excited.

That approximately 40% of our core sales people. So cortex. This past quarter, approximately 25% of them. So BRISMET. So we are tracking to the targets. We set ourselves in terms of getting our core engaged but because of the incentives are people make their decisions that they could make more money southern cordis in Britain line Q4, then so.

Moving barrels as a consequence, we saw a huge pipeline build a lot of deals gone in Q4, the momentum will end up going into Q1, you recognize this coming to the or we right size the incentives, but it takes a little bit along over the pipeline do we get back into place I don't think there's a systemic issue I don't think it's a market shares you I just think its.

Taking the Iowa football and we've already put stuff into place and Oh, we wouldn't be saying, we feel confident of delivering 22% long term. If you didn't believe that he could actually got the team to balance of focus both on the court Express my sort of affordable.

Excellent. Thank you yes.

Next we'll hear from Sterling Auty with JP Morgan.

Yeah. Thanks, Todd maybe just following on the last question can you help us understand I think the EPS guidance for the year includes the acquisition you know the revenue guidance is unchanged. So just so we get a sense of what looks like lowering the organic revenue for the year how.

Maybe the order of magnitude how much acquisition revenue are you kind of baking into you know the reiterated full year revenue number.

Yeah look we've acquired its going to go up or read over in the process of acquiring it.

This is slightly earlier in the technology lifecycle off cloud security. This is a back when making in terms of how micro segmentation will need to be done on the future and would that but it's going to take us a while to integrate this and drop is macleod offerings, we're not anticipating a much revenue uplift. This year. So we're holding revenue flat from as inside of them in line.

Guidance.

Without expecting any revenue impact this fiscal year from up or at all but we obviously have to be the cost of the company.

Okay, and then one follow up on Prisma, specifically talked on the other side I'd pick up like through the prepared remarks, I think last quarter, you talked about need some early prisma wins can you give us just maybe a little bit more color on the traction that you saw in the quarters, especially on the competitive dynamics would bridge.

Well look up both on Prisma cloud and Prisma Axa and I'm sure you'll remember there's a emotional explanation I listed on Prisma axis, which is the product that competes.

In the secure access space, but we're very excited we're seeing a we continue to see traction we continue to see large seven figure deals.

In that space, it's a space where were seeing the market is going there was a cloud transformation happening as you start transforming your applications as a cloud you start thinking about how to transform your network and start getting more you know high bandwidth secure access to all if you're using a bunch of so we see the market moving there we see I probably.

Getting stronger and more mature as we said if you know the keep availability of SD Lan and DLP and the product where it which makes it a comprehensive solution the markets we're seeing the traction.

Those deals take a big the same time as far all deals take to close because customers. After go through a strategic transformation of the network. So they're not as quick as Macleod deals on the other side as I said, we've we've I think in record time gone past a thousand pure cloud security customers across red logs are evident to us.

<unk>, which in our minds is one of the fastest ramps in terms of our ability to get it thousand customers to deploy our cloud security products and this is when we were selling them individually and just last week integrated all of them into one skews. We believe that gives us more traction. So we're very excited about the traction we're seeing the prisma product.

Got it thank you.

Next we'll hear from 15 minute Boolani with you yes.

Good afternoon. Thank you for taking the questions I'd one from cashing once the Cathy you.

Cash for you I'm, just harkening back to you the analyst day, Oh, we did talk about a contract restructuring.

The mechanism to allow you to introduce new functionality into the installed base. So I'm wondering with regard to the expansion in the unattached portfolio and even attached portfolio subscriptions I was wondering if you could share some of the details that you know what has changed or what is different and you start this new fiscal year.

Around some of the new where expanded capabilities and personal cloud and certainly this new acquisition as well as a on the DNS nasty weighing attached side and then I have a follow up for Kathy.

Okay great.

Thank you for the question for Tim I think as we discussed at the Analyst Day. We had said that we don't want to have to settle every module of prisma cloud to a customer's individually and we want to create a structure, where they can actually by ones and use our products on the consumption basis and effectively this integrated platform we have.

Role that started rolling out last week, Prisma cloud, where you have one skew where all read log to a slug feel sick functionalities available. If you bought Red law SAS version, you will be able to use container security with upcoming in signing a new deal. It was just use up some of your credits that you bought if you bought closed block functionality you'd be able to do the same thing with Red law.

Or pure sick, so we have simplified our contracts and our ability to consume in this relieves a far product last week, we out in the process is rolling it out to all of our Prisma I'm sorry follow up just looking for a lot customers. It should be accomplished in the next few weeks I hope and those customers they'll have the ability to consume the product without actually you have.

Going to come and by those individual products from us, which is which is particularly a lot of the friction in the process.

In terms of as the wine and DLP, there will be available integrated and borrow prisma access. So you will not have to go by a different products and integrate them. This will come in a good oh out of the software ball because there's some such thing and you'll be able to use lift a with a single club pain.

Fair enough that makes it kind of sense on khaki for you I was wondering if you could give us an update on just kind of that the tariff escalation that's happening in that sort of how that's impacting or financially impacting your supply chain and how we should think about those costs rolling through the model I know historically you.

Quantify some of the negative financial impact on EPA actually I'm wondering if there's any sort of I think there given some of the what signing off on the trade War and.

Yeah, I terrorists related escalations, reaching thanks a lot.

Sure. Thanks for the question, we do manufacture our products in the U.S. However, there are certain components. If we as we've talked about in the path that we sourced from China that the only place where we're able to purchase these components.

And we've seen that list of products expand as the.

As the terrorists situation has expanded in the U.S.

As it relates to China products. So.

We have felt the impact of that and we've been talking for a while about the impact to E. P. S. However, just at the start as this new fiscal quarter fiscal Q2, we did increase pricing on our firewalls and that increase in pricing is intended to offset the.

Tariff impact.

So that's why you don't see us outlining a specific financial impact this quarter.

That's super clear. Thank you so much Kathy.

Yes.

[laughter] whenever I hear from.

Phil Winslow with Wells Fargo.

Hi, Thanks, guys.

Question.

Just wanted to understand all the national platform space, Yeah, Kathy into cash.

Just to refresh.

The older models the old sold in the past.

To sort of what you're you're seeing right now and thinking for this year relative to past years in terms of the contribution from just refresh.

And then just one quick.

Yeah sure we've been talking about refresh activity in a couple of different ways. One in terms of what we see with our customers refreshing competitive boxes and of course, that's been emotion that weve been competitively trying to address since the start of the company and.

And as you know there's rarely a company that we go into that doesn't already have firewalls and so it's always been I competitive displacement go to market approach for us when we talk about our own internal refresh cycle. We continue to see we continue to see our.

Customers refreshing however in terms of driver of growth, we pointed out that in terms of just pure magnitude as customers are new customer acquisition as well as our customer expansion opportunity is a much bigger driver of our overall growth.

And last much left so refresh of our own boxes that we sold to customers previously.

Great and then.

The platform side.

Cortex, obviously talking about the AI based continuous operations.

At the analyst day, Yeah, what's the feedback been from different customers in terms of developing their own absent.

Third party thanks.

Great.

Yeah, no as I mentioned in my prepared remarks, this team outperform their numbers by approximately 20% so.

There were seeing tremendous amounts of tractions, both destruction, both on the xdr side and the Domestos side. The Miss was performing well ahead of our acquisition plan.

We haven't opened up the capability for customers to write their own applications on our platforms. Just yet we have some apps in the old version of the application framework, but right now we focus more on providing integration out of the box with third party vendors. So customers don't have to try and take that and normalize the data which has been a bit of a shift in Austin.

How did you, but we're seeing extraction I think it's fair to say that one of the times when we announced the ingestion of checkpoint firewall data into our product flows when he goes down English and you know, it's it's hard to get a standing ovation for a bunch of engineers at a conference. So there must have like that and we are going to do the same thing with Cisco unfortunate far away.

The data so that we would've customers trying to look at alerts across firewall and endpoint data you can just any firewall data as well as match it up with our endpoint. So we're seeing traction in cortex across both product categories, but we have not opened up the ability for people who are doing UBS just yet.

Great. Thanks, guys.

Next we'll hear from Carl Kierstead with Deutsche Bank.

Thank you maybe I'll I'll address both during the cash so in the cash the product revenue.

Disappointment is coming relatively soon after a series of sales leadership changes at Pollo also for the last six nine months and I'm. Just wondering if you believed that those.

Changes might have contributed to the product performance and in that spirit.

You might just repeating youre your rationale for not replacing the head of sales. So the first part of the question is on the on the sales leadership and then then all Oh last my second thank you.

Sure I think we're taking two random points and try to draw straight line I I personally don't think there's any correlation between the changes and are our challenge on the product. This quarter. If there was a challenge Buda felt across the board across every category not just a not just our firewalls. So the fact that are.

Teams have gone out and that's the billings targets for Q4 in Q1.

And we've had a mix shift in terms of what we've been able to sell validates the at least be purely we're putting out or for the facts were pretty out around the fact, the incentives contributor to it as opposed to leadership changes, although leadership change front, yeah. We have very strong leaders in our regions or repeat order recalling that has been around for many years Apollo.

No we're still doing phenomenal job in Q4 to run our Americas business.

We have Christian Henshall in Europe , where you've talked about in past earnings calls as well as weve up from what are some going green to allow for Chippac business without Asia Pacific for US. So we didn't go see we feel we have strong leadership in the regions and bullets are for his mind cortex leaders are doing really well given the performance we've seen lens, yes, and we felt that a it you know we were not.

We don't have is laser focused leader on the firewall as a platform category. So you're able to her Andy elder Who's an amazing sales leader from riverbed, who is going to run that part of our business in terms of focusing and making sure. The as we deploy new products like prisma access or virtual firewalls or going for force with southern subscriptions, they're the same go to <unk>.

Market focus W pattern, prisma cortex, and with that sort of two black Sea matrix you feel you.

I mean, they sing gears in the transformation with these teams and putting another layer between him and these six people would be detrimental to our ability to go and execute so we've decided not to replace the head of sales position.

Got it Okay. That's helpful. And then again in the spirit of just trying to unpack what what might be going on this this to might be drawing an incorrect conclusion, but is it possible. The cash that that to you guys saw an accelerated hardware to software form factor shift that that might just touch a little bit by surprise and contributed to that.

Product number, but it would obviously show up in Super strong the M series billings numbers.

I wish that was the case the Rubin caught unawares I really liked to be surprised by phenomenal growth many product category [laughter]. Unfortunately, it's just the fact that our teams had a only so many dollars they could sell in Q4 and they sold a lot of them, but this old them in the category, we're gonna make them a lot of money, which is a good thing you.

Yourself seems to be motivated by the incentivize incentives are not working.

But oh, we fixed the focus to make sure. They are focused on boat category. So we.

We think it's nothing systemic we think it happened in this quarter and to be honest, if you look at the numbers.

Another $20 million of deals would have gotten us a number which would have made all if you're happy I mean, I was happy, but we that's kind of the quantum of the change on and on an $897 million with a billing so putting it all showed up in more next generation security then showed up in product, which is why role.

Getting unhappy about this but hopefully we can fix that and upcoming quarters. If he can we can deliver to the long term guidance would probably be person digger got it I'm sure you well. Thank you very much Nicole thank you.

Jonathan Ho with William Blair has our next question.

Hi, Good afternoon, I, just wanted to sort out with maybe the opera no acquisition and could you maybe give us a little bit of a sense of what to say, what's your overall solutions side as well as the role that Microsegmentation plays in the cloud.

Sure look up and as you said in the past is that.

There are tons and does the people selling the transition to the public cloud a across the various large cloud providers around the world whether it's a you know Ali Baba cloud sales, Oracle, Amazon or GCP or Azure, they're all trying to convince us towards cloud.

Personally eyeballs to have moved to the cloud for that reason because we think that's right outcome of the long term, but we don't believe that a lot of a cloud security products exists to be able to deliver the amount and quality and capability of cyber security that exist into it as enterprise work and as you make that transition as they start putting more and more mission critical applications onto the cloud it is going to be important do.

To reinvent the way cyber security is delivered it made for the cloud by the cloud Oh, the third part of it but someone [laughter] my back of industries. Because then it should be but anyway. So as we go down that box, we believe only 50% of the cloud security products have been invented so far and you know instead.

To sit down and trying to build them all ourselves we had acquired red lock in evident in the first instance, secure workloads the market move swiftly to containers, we acquired twist lock the market was heading to serverless required pure SEC.

We're also a in the process of building our own modules. In addition to those which we will obviously as far as were product roadmap and we look to the world of micro segmentation and said we micro segmentation is deployed today in the data center is not the way it needs to be deployed in the cloud micro segmentation relies on.

I for your dressing in the data center, which.

He is very good for the enterprise, but not really how the cloud operates and appear Pareto has a really good way they've been working at it for the last two and after three years perfecting and approach, which they have deployed and to US we very large customers at scale. We looked at instead look this would be a phenomenal set of capabilities to have a cloud security platform.

Be talks to company were like them, we'll look to whole market and said this was a we want to do this in the future as a consequence.

The acquired them and this will become part of a Prisma talk platform. So we don't intend this to be a separate and separate skew the expected to be part of it a good capability as Barbara Prisma cloud platform and we hope the underlying capability to bring well allow us to create more features in the future using their backbone.

Thank you and then just as a follow up can you talk a little bit about maybe what you're seeing in terms of your customers from a budgeting activity standpoint for 2020 specific to Prisma cloud and what types of trends are you seeing around that thank you.

Look I haven't been in this industry very long, but I'm told by my colleagues and they'll give you watch. This it's very rare to start a cyber security company auto product and start closing seven figure deals in short order and it's fair to say, where we're seeing your health.

He healthy amount of seven figure deals and Prisma cloud, which tells us that there isn't need out there for this product as a product market fit it kind of makes sense. If you think about you know average customer this spending tens of millions of dollars in their cloud transition moving to the public cloud providers and I've said this in the past if we can get due to 5% of that spent for cloud.

Security will get a good place and I think I think we're tracking to that as we go to customers and we see them. They're spending you know 30 $50 million here in the public cloud, we're tracking to the 2% to 5% numbers for those customers and there's a possibility that that goes up a little bit because there's a whole bunch acute really that doesn't exist yet.

Well, we've got running to budget constraints that our customers, who are moving into the cloud and saying well I've moved a club, but I don't know the money through cloud security.

Thank you went out here from Saket Kalia with Barclays.

Hey, guys. Thanks for taking the questions here first maybe for unit cash just to go back to an earlier question on as Steve Wynn.

You know I I think we understand the integration of opt out into Prisma access, but can you just talk about your thoughts on Asti win as part of the firewall appliance and what do that's something you feel is driving some customer purchase decisions right now.

[noise] it seems to have become a consideration in the purchase decision but.

Let's remember there's over 40 as the van providers out there in the world and customers also choose whether they want a separate SD wan with more capability or indicated as anyone in the firewall, but given that has become a consideration. We've launched a analysis do you want as part of because my axis and you can logically expect us to be able to deliver that across every.

Form factor in the near future.

Got it okay, even going so okay, yeah, absolutely than what the west where it was going maybe.

Maybe for you Kathy just as a quick follow up can you just talk about the gross margins on the recurring revenue part of the business you know so much of that as that nice higher margin attached subscription and maintenance, but of course, there's a nice growing piece from nexgen as well you don't ask the latter grows can you just talk about how that affects the gross margin profile if at all.

Yeah sure Yeah aren't the gross margin range that we've provided in the past that we expect to operate within its 75% to 78% crest margins and we continue to operate within that range.

For many many quarters now the.

Services margin in particular, which we which you see in our financial has been at the higher end at that range as you rightly point out and its contents in fact actually come down a little that over the last couple of years, they're not as a result, if that's building out the next Gen security products many of them which have.

Hosting and data management costs and those costs are higher than the typical software type margins that you've seen on our attached subscriptions in the past so a slightly different profile, but still operating.

Overall service margins at the highest that range.

Got it.

Thank you.

Yep.

Walter Pritchard with Citi has our next question.

Hi, crush in front of cash and then one for Kathy So on a on Prisma cloud you talked about integrating those products probably faster than in most were expecting I'm wondering how you're thinking about integrating the a the Bakken management of the prison cloud products as well as other products into into Panorama, what's the timeline looks for that in or are there some customers that are.

That are waiting for that unified management to make bigger commitments to those products.

Well there what do we have notice is that people want integration of.

The SD Wan capability or DLP capability into the Prisma access being so it can be integrated solution as they go deploys isn't that branches and that's a deployed for more users. We're not seeing a lot of asking we don't believe that's the right thing to merge our cloud security being into our firewall <unk>.

Our call security pain is self standing independent payments you believe is more relevant to the SEC offs and the CIO teams. Then it is to the network security team, So which is what we said, we just announced the integrated or sort of deploying the integrated platform across rattle off course law feel sick evident last week.

And we believe that's going to become the mainstay or the cloud security front end no lead to do you want to add something.

Yes, its or just favorite concern around where the cash left off so for Prisma quote.

We do have a single unified you are.

For all different Prisma cloud offering so for customers that are securing their applications in the cloud. They would go to one you I for that.

Within prism axis as we deliver additional integrated services, we haven't ability to do that.

Within panoramic to be able to we call plugins there can expand cramped panorama to include the additional capabilities as they come out. So again customer can go to one unified you are to see all those different pieces in one place.

Great. Thanks, Lee and then Kathy on that on the acquisition I guess, just looking up on Linkedin looks like the company operetta had about 65 employees. I guess is we think about you know smaller kind of tuck in M&A like this I guess, maybe some of US would've expected given you you out a couple of hundred employees kind of organically every quarter you could kind.

To do this Sunday organic.

Hiring plans, how should we thinking about that going into the future do we do we need to worry about kind of margins coming down with with tuck ins.

Well, we've talked about the impact which is pretty modest impact two cents on the earnings per share for the quarter.

And.

You know, we we are investing in order to ensure that we can integrate these products and make sure that we are successful in our go to market efforts and so there is real expense associated with us.

So the the framework that we've given you isn't organic framework.

And when we do M&A will point out any any incremental financial impact to that.

Okay. Thank you.

Our next question will come to curtail pads with Stifel.

Hi, guys is actually Chris Verizons for Gore.

For the cash you noted earlier that didn't this though is performing ahead of plan.

Can you talk about the dynamics behind what's driving this outperformance.

Yeah look I think.

The whole automation use case is resonating with our customers where they are building data legs to look into their systems, but they're realizing there getting he was barrage of alerts as a deploy more and more cyber security solutions into either the enterprise and the cloud and if it still is turning out to be the versatile automation tool with the number of integrations that has wall security.

Vendors out there so we're seeing traction our core team was able to explain it sell it across the board as I mentioned that approximately 30 plus percent of our core sales team is selling cortex, which includes gonna still so so it's really the the expanded go to market the expanded capabilities doesn't need to Mr. Product has is really driving that.

Got a and of course, the good product market fit out there.

Great. That's that's awesome and one for Kathy if I may was more large prisons deal starting to close can you walk us through the relative economics of a prisma deal versus a traditional upon sale.

Yeah, you know prisoner access.

And the functionality that it provides is typically slightly higher somewhat higher price than a typical firewall sale that we would see of course, depending upon the firewall and the number of attached subscriptions.

Overtime over a five year period, which is a typical lifecycle of a firewall we would expect to see more revenue from the person access deal.

Great. Thank you asked.

Yeah.

Our next question will come from Patrick Coville with Air to research.

Thank you for taking my question, what got you mentioned on your own the cool the Dsos had risen spike debut on yet I mean is the the product.

Shoot anything related to the trees and Dsos I mean, those things correlate well they separate.

No no there's really no correlation there.

Okay understood I think probably just switch over to do you want Munich stuff married that we're getting a little in coming on the books from investors on from C. So so the you mentioned the Apollo he's going to release appliances with SD Wan functionality Bill to so that's why.

Correct right now the devices have SD Wan without seeing the roadmap is that correct.

Yes, that's correct.

And I mean can you give us a rough timeline for that and you know and or.

At this early stage.

Yeah. So so a couple weeks ago, it or EMEA Ignite conference, we announced that's due when and.

We plan to deliver as to ran across all three form factor, so hardware virtual and Prisma access around the mid December timeframe. So next month.

Thank you for who asked the questions.

Our next question will come from Brian Essex with Goldman Sachs.

Great. Good afternoon. Thank you for taking the question.

Maybe a couple for any cash I guess, one would be you know is you as you targeted products, where they develop or environment.

To what extend your customers already integrated you know development with security and is that an evolution I still has to come.

Well I'm going to let Lee answer their questions [laughter] sitting here, but not a whole lot [laughter] can repeat the question Oh, we're listening [laughter], how many of the customers are going to get a security into into the of Oh.

Look in the into cloud, there's a whole movement towards cautious left which is a really focused on.

Integrating due to the security processing and functionality and and posture as close to the point of development as possible. So that by the time and application is running in production in the crowd all of the security is already there and was developed as part of the application.

This was something that twist block and container security was very focused on it's it's a very common practice within container development to to have the show fluff mentality and as we look to this going forward, we see it becoming a bigger part of cloud security practice.

Got it that's helpful and maybe just a follow up you know jump ball and this one whoever wants to kind of grab it but you've done quite a bit at M&A over the past a couple of years you what what percentage of your sales force did you say is fully ramped on selling the entire suite or is there still some progress that needs to happen there in terms of getting everyone.

Kind of up to speed and fully productive.

Yeah, no as I mentioned earlier, approximately 39% afar core sales team is selling cortex Kartik suite of products at approximately 25% sought out prisma suite of products of course, there's a lot of room for us to go from 40% into more and more far celsion being able to sell these products, but having.

He said that many of these products have been in play only for about six months. So yeah. We right. We have 2000 people out there in the field and it takes a while to get them all comfortable up to speed being able to sell if not only that we have lots of partners out there and part of our efforts I'm not so as to.

Motivate and and create our team, but also to make sure apartments fully understand our capabilities are able to sell so yes, we can make more progress, but again very excited about the progress we've made so far with the new product categories.

Got it very helpful. Thank you very much.

My final question will come from Michael Turits with Raymond James.

Hey, guys. Thanks, I'll squeeze two and quickly one the cash in prison access are you seeing primarily just see scalar or is it a wider field, including people like me coordinate with carriers that scope buybacks et cetera, and then Kathy how fast.

Do you expect it you can get the product goes back to the kind of levels that we're expecting to trend.

So in terms of your first part of the question.

BRISMET access will be sitting out there you know prism axis is is part of a network transformation decision to the customer mix and depending on how their current network operates and what they want to make it look like going into the cloud there can be hardware based solutions are software solutions and depending on whether it's a small though.

Smaller footprint of larger data centers versus a larger footprint to smaller branches or you lose the architectures can vary. So you can solve this problem with different architects and different products.

But you know we from our side I can tell you that our software based solution a software based approach and our security first approach is resonating with them because as it goes the cloud security is getting distributor and they want to make sure that at the start accessing mission critical applications straight into the cloud or back to the data centers that security is a priority. So we're seeing try.

Action in that space I'm sure. There are many other lenders out there who have different solutions, which are adapting to that product portfolio.

And in terms that product gross yeah, we don't guide products, specifically that you can tell from the guidance that we've given both for Q2 and I'm sort of full year looking at typical trends.

That we've seen in the past in terms of product as a percent at the touched all you can I'm sure back into what what we're expecting for product are pretty closely.

Thanks, guys.

So before I close I want to thank everybody again for joining us today and I wish you and your families a very safe and happy Thanksgiving.

We look forward to see many of whom they are coming weeks at some of our investor conferences I also want to thank our customers are partners employees around the world.

Wonderful evening.

That will conclude today's conference call. Thank you for your participation you may now disconnect.