Q1 2021 Palo Alto Networks Inc Earnings Call
Im delighted to report this is no longer a coincidence our customers are investing our teams are executing and our strategy of innovating on our firewall business and focusing on the next generation of products on the cloud nearby in the industry is working as you can see we had a great start to fiscal year 2021, as the exceeded guidance across all metrics in Q1, yes.
Here are some of the highlights we delivered strong billings of $1.08 billion of 21% area. The strong growth across the board driven by continued strength in next generation security or Ngs billings growing of 52% error of year and Ngs era of $790 million.
Revenue was up 22% to $946 million driven by strength in our cloud based subscription and support revenue businesses.
Non-GAAP EPS was the dollar 62 of 57 cents from last year DBS expansion was driven by revenue growth and operating expense leverage to the efficiencies as we have seen across the industry from lower spend associated with traveling the events are on call. It.
Adjusted free cash flow margin of 52.4% as mentioned last quarter, we expected a strong cash quarter. Following the record Q4 2020 buildings. We think some of this will continue into the next quarter, but we expect this to normalize for the year around our full year guidance.
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The continued strength during the pandemic makes me cautiously optimistic about the future prospects of the business. While we expect the winter, we'll try all of our collective resolve the covered the worst case scenarios are unlikely to unfold and we expect our customers to continue investing technology.
I also feel the the strategic bets, we made a few years ago, a right for our customers in the current environment.
Against that backdrop, I feel comfortable raising guidance for the full fiscal year, even before including the contribution of our proposed acquisition of expense, which we announced last week.
Fiscal 2021.
And at the midpoint guide.
We expect total billings growth of 19% of 300 basis points from our prior guidance.
Total revenue growth of 20% to 21% of 300 basis points from our prior guide next.
The next generation security air out to the approximately of dollar billion won five of 77% year over year.
We also expect non-GAAP operating margin adjusted free cash flow expansion up from our prior guidance of flat year over year.
Subject to close this includes the benefit from expense of approximately 100 basis points of billings growth 50 basis points of revenue growth and $72 million an error.
We will absorb expenses operating expenses within the framework of our guide.
Let me now highlight some of the key innovation launched in Q1, and the very positive customer traction starting of the follow on business.
We continue to drive innovation within our firewall business, we recently extended on new enterprise DLP solution to integrate with the complete firewall platform.
Our DLP offerings is the cloud delivered service debt as powerful simple to deploy and protect sensitive data where the customer keeps the data in the cloud on Prem of takes of flexible approach.
This launch takes on number of potential of that subscriptions to aid from for just two years ago.
We also introduced the innovative joint solution with our Vmc as virtual firewall and AWB gateway load balancer on engineering level partnership with data of this enabled us to launch the new capability the significantly simplify the deployment improves the scale of the performance and the this is the total cost of ownership of our VM series customers.
Going forward, we will continue to provide leading innovation to our customers. One example of this is the upcoming launch of partnering of Fiveg Native security offering.
As the unique approach to find the security were the first to introduce Fiveg networks like security Fiveg context of the security and much more all isn't the containerized solution matching the preferred architecture of Fiveg not.
Not only will this allow mobile operators to secure the file the infrastructure, but it also enables and the launch of value added security services to the growing enterprise customers or leveraging fiveg from any new use cases.
As the result of our efforts to drive innovation, our federal business continues to the seed industry accolades I'm excited to share that Palo Alto networks of current again as the leader in Gartners Magic quadrant for networks. Carlos This is the ninth consecutive time, we of leader in the Magic quadrant.
Once again, you achieved the highest in furthers the overall position in the magic quadrant for our ability to execute and the completeness of vision.
Not only was our strength in actually in fall of product capability recognized but our service like DLP and focus on cloud security was cited as trends as well.
In Q1, we were also recognized the leader in the Forrester wave zero trusts extended the ecosystem platform providers. The boat, noting the we have assembled the robust portfolio. The delivers dealer trust everywhere on premise in the data center and in the cloud.
Our strategy in firewalls is working as far one of the platform grew billings by 16% in Q on 2021, and the added approximately 2000 more customers for a total of 71000 next generation firewall customers.
Our software and actually in firewalls, Liam cities and CNC continue to gain momentum as well and we now have over 10000 customers using our software firewalls.
Moving on to our sassy or secure access surface the solution person the axis of Docgenix.
As is the line has become the primary when architecture organizations are demanding solutions with the better user experience, while being simpler deploy on managed in the quarter. We introduced a number of new additions to our next generation as the U.S. solution of cloud Chantix. This included new animal based capabilities to enhance our ops approach and further simplify the network operations.
Two newest you on appliances, a small form factor appliance designed for retail and small office and home offices and high performance applications suited of blind suited for large campus and data center locations. The.
Also delivered the first flow Gen X the prisma axis integration with seamlessly enables cloud delivered broad security in just a few clicks in.
In addition to the Gartner Magic quadrant, the network firewalls, but also networks cloud Gen Xers do and was recognized as the leader in the 2020 Gartner Magic quadrant for line hedge infrastructure.
From many of our customers current accelerated the digital transformation timelines and we continue to see conversion of remote access trials and very strong pipeline generation. We now have more than 1000, prisma sassy customers more than doubled from a year ago.
To highlight the deal from the quarter the want a seven figure as the one deal where the U.S. retailer who has already been of power networks customer for a number of years was an early adopter of Prisma access the success that we had it was an access and the strong integration of the cloud Gentex was the winning combination and discussed in the now full sassy customer.
Switching to personal cloud Prisma cloud is very well positioned for sustainable growth as it is of the heart of the global shift of cloud computing in.
From Q1, 2021, we launched Prisma cloud to the auto introducing four new modules enable customers to easily and rapidly extend their cloud security coverage and the number of critical layers all within a single cloud Native security platform. These modules our data security the discovers and protect the cloud storage data at the scale in velocity common and public cloud environments.
And other dressing on of the most common debt exposure issues of cloud transformation includes.
Includes well application and if the I. security, which protects the web applications from attacks on approach addresses the challenge of the deployment complexity and scalability by leveraging the same agent as the container the whole security, making it very easy and horizontally scalable the.
The launch identity based microsegmentation, because the integration operetta of technology, enabling zero interest security for cloud application of the cloud native identity based approach and lastly, I am security, which a lot of security teams to gain visibility into effect of cloud identity permissions user activity implement governance and respond to issues.
While the only recently introduced were excited by the strong customer interest per se because Mcleod now serves 20% of the global 2000 companies, 70% of the Fortune 100 companies and secures 1.8 billion cloud resources disk.
This customer momentum is up from the 14% of global 2000 companies reported last quarter and up significantly from the 42% of Fortune 100 that we reported two quarters ago.
We're also seeing substantial increases in the cloud customers are using both cloud security posture management and clouds workload protection for containers of Serverless applications now at 45% up from a third the reported last quarter.
To highlight the benefits of our consumption model, we want a high seven figure deal with the leading technology company of use because macleod for CST and freed up the OS and cloud work of protection the.
This customer has quickly consumed the workers purchase and we are working with them to support the expansion of the new cloud the new workloads.
Moving to cortex core.
According to the on its weight of being the industry's first proactive security platform collecting data across the multiple security data sources applying machine learning techniques to detect sophisticated threats before they have a chance to succeed and fully automated response for no interest we've.
We've seen some incredible benefits to customers, who adopted cortex from customers seeing up to 50 ex induction alerts the customers automating more than 1 million incidents per day.
And based on preliminary we can see that view of recently passed the mark of $400 million actions automated up 100% in just four months of.
As a result of winning with customers the share of vision, including 34% of little of 2065% of Fortune 100.
We continue to drive product innovation cortex 60 on.
The recent xdr to Dot five release includes many new capabilities that of enabled us to catch up in a number of areas, surpassing leading LDR products. For example, we introduced horse insights our first add on module for STR, which provides the vulnerability assessment application visibility and our new search and destroy the feature.
And to our knowledge, we are the first idea of product to offer the search and destroy capability that will greatly speed up security response, and eliminate the need for additional endpoint agents.
Despite the a good time to highlight the customer when we had recently we want a seven figure deal and is the story here every day the customers. The small SEC ops team managing multiple point products of a generating too many of those the twoq of resources to investigate every other leaving them exposed the advanced threats bigger.
Being able to quickly investigate alerts on identifying the immediate threats was because of critical requirement.
The existing either of product was disjointed from the rest of the security infrastructure make it difficult and time consuming to correlate data and.
On the same time, the seamless consuming a lot chunk of the annual budget the little ROI.
We challenged the way of thinking by demonstrating how the court ex platform could automate and streamline the security operations allow them to consolidate multiple products, including the Sim into court. The demonstrated how cortex will help transform the SEC ops team by automating routine processes and knocking down other volume by more than 95%, allowing them to focus on the critical field.
In Q1, we also launched the exit of marketplace, which opened up the platform to both our partners and customers and the now have over 500 content packs available to customers. The enable automation for the security solutions. Additionally, we're seeing engagement of momentum within our partner ecosystem. The contributions and use cases, ranging from insider threat to cloud security and threat Intel none of it.
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The last of it I want to share with you.
Is a fortune 500 diversified financial services company prior.
Prior to implementing cortex ex or the customer was receiving over 1 billion threat alerts per week complete the overwhelming the security operations team leading to stayed where it looks the disregarded putting a significant security GAAP by leveraging ex or an ex sort of tech until the management. They were able to take full control of type of information by aggregating despairing from its source of information sources.
Automatically customizing, the scoring feeds and matching indicators against the environment as well as leveraging playbook automation driving selection. This combination of automation techniques tactics reduce the number of travelers the received by more than 99%, putting a significantly more secure alone.
Moving quickly to expenses last week, we announced the intend to acquire expenses and told you about what they do and how the fit within our overall the vision of cortex.
Expenses dedicated themselves to developing Internet collection attribution platform that constantly monitors the global Internet mapping the exposed and on track assets of the enterprise that comprised of attacks its attack surface.
This data gives organizations the crucial picture from the outside and that is to say the same view that an attacker seeds on hunting for potential weakness.
Is the goes inside that the technologies trusted by some of the world's largest and most complex organizations from members of the Fortune 500 to the U.S. military.
Well, our user conference ignite kicking off at a little over 24 hours were excited to share that outside in view with our customers. We worked with expense to offer all see items and csos attending and expands the exact report, which provides the vulnerability map and immediate insights to customers complete tech surface wrists and suspicious activity.
This is a great lead generation tool for our sales teams the hit the ground running once the closed on the transaction.
Expenses expenses transaction multiples are very favorable compared to other companies of equivalent size and even more so when adjusting for GAAP.
Now to the financials as he said on our call last week on a standalone basis, we expect expands to contribute $67 million of there are two of current fiscal year ending July 20, twond continuing its on a percent growth momentum.
With Palo Alto networks and subject to close the expect expands to contribute 72 million of here are in a fight 21, assuming.
Assuming a mid to late Q2 close we expect expenses billings to contribute about 100 basis points of our good to our overall billings were 521 and adjusting for purchase accounting the expenses and expect expenses revenue the contribute about 50 basis points for overall revenue roughly 21.
I know that you get concerned about our M&A strategy, perhaps because inorganic in backdoor piano of as hard to forecast in your models, but if you look at the $2.7 billion of acquisitions. The have done since 2019, they contribute approximately 15% of our forecasted of flight on the on doing.
Very large enterprise companies have been built by successful M&A strategies.
Good M&A strategies need to ensure the the products are easy to integrate their products customers want and that we had power networks can significantly change the trajectory, we believe that our ability to acquire integrate and leverage our go to market for acquisitions as a strategic competitive advantage and we expect the continued to be opportunistic to increase the long term growth strategy.
As I mentioned the reason I have spent a lot of time with all of you any of all highlighted that the lower business. Some of the of questioning whether our federal business is under pressure other wanted more transparency on our gross margins, while some of your one or more visibility on the out are eventually how to put it all together well.
Well the heard it is taking the herculean effort to share our quarterly results from the shortest period, we've ever done but also the deliver detailed reporting on two categories to show that our business is doing extremely well, let's take a look.
Over the last quarter as we have discussed our total part of the networks performance and provide a detailed for next generation security on file with the platform.
We had hoped that the fire was the platform metric shows you. How we are continuing to gain share in the firewall space. The channel has been the we did not provide anything below that number, but we've decided that perhaps the best way to layer concerns. The show you the pro forma BNL around Aesculap and show you how it enjoys great margin is actually higher quality business. Since we are transforming the hardware business to us.
Software and subscription business.
We like the shift of software revenues of higher quality increased increases revenue visibility.
Our next generation security business, which has been the thrust of on on innovation of the last two years has been highlighted the share with you on how we're building a bigger and better business faster than anyone else in next generation of security.
The next generation security provides the perspective on our fast growing SaaS business on the billings basis and use of nearly a quarter of total revenue up from 8% of the Fyeighteen and yes. They are close to one of several $19 million up from 66 $51 million in Q4, 2020 and up from $568 million in Q between the.
The provide a better understanding of our business the juggle the few pieces around.
For our far one of the black from business be added the related subscription support on professional services the call It networks security the.
The removes the sulfur firewalls from Ngs in order for the two areas to make the whole the called the cloud any I would.
With that context, we have prepared a recast of our full year guidance, which I just raised across both categories.
Let's double clicking on network security.
Our net debt was to grow the business Standalone basis is still the largest level of business in the industry by revenue and enjoyed double digit growth driven by transformation. The software form factors our success in VMD of business assay and increased subscriptions to attach this.
This has allowed us to of lesser and lesser reliance on hardware and provides better of revenue visibility we feel comfortable the these growth rates are robust and sustainable.
Our gross margins and operating margins of extremely healthy.
The gross margin of slightly of this less than where they could be because of our sassy gross margins, which given the early stage of the product scale dozens of firewalls. It has slightly lower margins.
As these kill us as the business and the new subscriptions, we have launched the expect these margins to improve over the next few years Needless to say these numbers speak for themselves and on a standalone basis. This would be a very valuable networks security business.
As we noted our firewall business the largest industry the of industry, leading financial and we're going to the transformation. We will continue investing this transformation Palo Alto networks has already transform.
Into highly valuable business, the ratable revenue as a percentage of total revenue is up from 59% or is the go to 71% of Q1 21.
Now on the cloud and the at the store has just started it if you ask every CIO. The two trends that they're all excited about are the transition to the cloud and the impact of the eye.
There is no transformation unless it is a secure transformation.
I think we have put the rest of any questions on the idea the customers would get their cloud security from the CSP is only with 70% of Fortune 100 being served by us.
Mark this is our opportunity to build upon.
The singularly focused on continuing to improve our platform to meet the needs of our customers as highlighted earlier.
On the I. front, we're in the second generation of the strength. The first trend was on collection of data and attempting to correlated for security. The next Gen. As you are well poised to capture is the trend to normalize data the use of signal to noise ratio and de Abreu the security posture using data.
Based practice security using court ex.
We have organized our financials for our cloud the security category. This business, which we started building two years ago is getting traction or ensuring that we build this or the assassination of our business.
We expect air for cloud in the had to go 89% area in if I 21.
Even when excluding the expense contribution you expect the growth to be 71%.
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While the gross margins look lower net by 21 competitive fight 20, partially because of the integration of scripts as we expect the this business will continue to improve gross margins of error improve significantly over the next to the four years.
Operating margins will naturally improve as ratable revenue recognized from the balance sheet of the piano.
We believe there is a large opportunity in cloudy I and the scope of the next 100 billion. All the time the security that said, we will continue to invest aggressively because the business.
In summary of you put it altogether, we have two great businesses doing exactly what the would like them to do.
In conclusion.
We had a great fiscal quarter across the board and as a result, we are raising our fiscal 2020 on guidance. We've been building two businesses. The followed networks. Our networks security business is the largest federal player, which sustained gross margins operating margins and the of fast growing cloud the AD business, where we expect the fytwenty, our reighty 9% area.
Lastly, I want to give you a quick update on what the call flexible.
I started this morning by calling on the continued resilience of our employees throughout code 19, Weve been supporting each and every employee of the flex work approach a series of initiatives to give voice forget of choice as the adapter challenges of this year in areas from worked location the benefits to the learning all underpinned by the way, we live and communicate the compassion of tend to see free cash.
You need the vast supports to Q1 the lost the first stage of phase of the flex benefits, giving our employees on additional thousand on allowance for the year to choose from a wide range of well being and child care options. We were a lot of the first module of flex learn an individualized learning path for our sales teams the leaders managers designed to support them as well as the work of lead remotely from.
Delighted to see of flex what proportion of gaining traction be on both networks.
Last month, we launched flex work and zoom Topia invite other companies of Jana open source discussions and share of case studies in the learnings.
The 600 attendees shows short interest and the work simultaneously the sea of some Hoover box Splunk and zoom all joining me on formally announcing the flex what coalition community of leaders coming together develop and share best practices as we focus on the future work. We all agree the pandemic has highlighted the areas of opportunity, where we can bring about enduring workplace change I look forward to can get cash.
Positions with the leaders about how we can accelerate the work practices that from the employees of the center with that I will turn the call over the lease.
Thank you on the cash and good morning to everyone before I start I'd like to know that except for revenue and billings all financial figures are non-GAAP and the growth rates are compared to the prior year on the periods on unless stated otherwise.
I think cash indicated we had a great first quarter as we delivered as we continue to deliver a winning innovation and add new of customers.
The strength gives us confidence to raise the old guidance one of the year in Q1 total revenue grew 23% to $946 million looking at growth by geography. The Americas grew 27% EMEA grew 16% and the bank grew 11% Q1 product revenue of two.
$137 million increased three per cent compared to the prior year.
The one subscription revenue of $428 million increased 34%, so poor revenue of $281 million increased 26% in total subscription and support revenue of $790 million increased 31% on accounted for 75% of total revenue.
Turning to billings Q1, total billings of $1.083 billion net of acquiring the fair revenue increased 21% strength.
The strength was broad based as we continue to see strong execution across the company the.
The dollar weighted contract on duration for the new subscriptions and support billings in the quarter was up slightly and remained at approximately three years.
So there are the fair revenue at the end of Q1, the west $3.9 billion, an increase of 31% year over year.
Remaining performance obligation or IPO was $4.4 billion, an increase of 40% year over year.
In addition to adding approximately 2.2 thousand 200, new customers during the quarter, we continue to increase our wallet share with existing customers on.
Our top 25 customers 24 of which made up purchase this quarter spend on minimum of $57.2 million in lifetime value through the end of fiscal Q1 21.
The 7% increase over the $41.7 million in the comparable period prior year period.
Q1, gross margin was 75.8%, which was down 80 basis points compared to last year, mainly driven by higher mix of our ngs products, which are less mature.
Q1 operating margin was 21.7 per cent an increase of 500 on 90 basis points year over year net operating margin expansion is driven by operating expense leverage as we benefited from lower travel any bank expenses due to cooperate which more than offset the incremental investing in headcount.
We ended the first quarter with 8376 employees, including a 156 from credit sales at the close of acquisition.
On a GAAP basis for the first quarter net loss increased to $92.2 million or 97 cents per basic and diluted share.
Non-GAAP net income from the first quarter increased 51% to $158.1 million or one dollar and 62 cents per diluted share our non-GAAP effective tax rate for Q1 was 22%.
Turning to cash cash on balance sheet items. We finished the October with cash cash equivalents and investments of $4.1 billion.
During the first quarter, we repurchased $500 million or 2.1 million shares of common stock at an average price of approximately $242 per share.
We have returned $2.7 billion to share haul there since Q1 2017 through the <unk> the repurchase of programs and yes, our quarter, we repurchased 15.1 million shares of common stock at an average price of approximately a $179 per share.
Q1 cash flow from operations of $535 million increased by 138% year over year.
Free cash flow was $505 million off the 140, 884% at a margin of 53.4%.
As we mentioned last quarter at least was driven by the of strong cash collections. Following Q4 2020 record billings.
The DSO was 81 day, an increase of 18 days from the prior year period, we expect another strong collections quarter in Q2, which is expected to bring our dsos down to historical levels.
Turning now to guidance on modeling points for the second fiscal quarter of 2021, we expect billings to be in the range of $1.17 billion to $1.19 billion, an increase of 17% to 19% year over year.
We expect revenue to be in the range of 975 million to $990 million, an increase of 19% to 21% year over year we.
We expect non-GAAP EPS to be in the range of one dollar and 42 cents to a one dollar and 44 cents using 98 to 100 million shares.
Additionally, I would like to provide some modeling points, we expect our Q2 non-GAAP effective tax rate to remain at 22%.
Capex in Q2 will be approximately $30 million to $35 million.
I think cash reviewed earlier for the full fiscal year 2021, we will be raising our guidance across all metrics we.
We expect billings to be in the range of $5.08 billion to $5.13 billion, an increase of 18% to 19% year over year.
We expect the next generation security per year are to be approximately $1.15 billion, an increase of 77% year over year.
We expect revenue in the range of $4.09 billion to $4.14 billion, an increase over 20% year over year.
We expect revenue product revenue to be flat year over year.
We expect operating margins to improve by 50 basis points year over year, we expect non-GAAP EPS the being the range of $5 on 70 cents to $5.80 using 99 to one on 1 million shares.
Regarding free cash flow for the full year, we expect on adjusted free cash flow margin of approximately 29%.
With that I'd like to open the call for questions.
In the interest of time, please limit queuing 18 line of question I guess first question comes from launch of friction from Citigroup.
Hi, Thanks can you hear me.
Yes, the older Alright, great. Thanks on the.
I guess, you know you've seen really strong customer adds around core tax on around Prisma on and have you know I think your global 2000 Fortune 500, penetrations pretty pretty strong here can you talk about where you are on in terms of standardization amongst some of those clients and how you think about revenue from the from those products around up sell versus new customers going forward.
Well the different answer for both of them as you know that our cortex ZR platform is the only about two quarters old and we're delighted the costing of thousand customers of the category.
We continue to see opportunity in benefiting both our existing customer base and new customers as far as ex Drs concern of as.
As you know, we keep launching more capability in the XT our platform, we want to go from being able to just normalized EBITDA across the endpoints and firewalls.
The more and more data sources and with the combination of expands we think thats a very powerful proposition. We think the in the future. It's no longer about aggregating data and throwing it into a lot of data lake and on analytics about being able to normalize the data. So I think we're early in the transformation of.
Data any idea security around cortex, and this is a very long runway ahead of it in terms of Prisma cloud, what's fascinating as we highlighted an example, and the call where we had a customer who kind of estimated how much work load of how much capacity of the need into gloves day ran through it in the quarter.
But that's what we think overtime happens to all of the cloud customers because you know the its kind of interestingly the the gap between how much people of actually.
The <unk> you sort of move to the cloud versus how much is ahead of them is huge I'd say it took us two years to get to the cloud forget 70, 70% or capacity of our data centers in the cloud we had to buy of during two years ago to start ramping up the get their leading all of our customers are early in the Rams relatively speaking some of them are for the along.
But we think most customers are early on maybe the first the second the names of the ramp and we think there's a long runway ahead as well from the cloud parts on cloud, we're really focused on customer acquisition lending customers. That's why the keep sharing with the 70% of the global at of Fortune 100 or towards the on the global 2000, because the thing the more customers. We can have the expect consumption to keep going.
Moving for each of those customers, hence we have the consumption based model for most of of products now because of the more they consume the expect recurring revenue to talk show up.
The give you a better sense for.
It does thank you.
Our next question comes from the Keith Weiss from Morgan Stanley.
Keith I think you might be on mute.
But going back to sleep.
[laughter].
And it was the long call Keith not that long well.
The only line cash the next caller on time.
Selling out of from JP, Mark and holding back the Kid afterwards.
Thanks, Hi, guys it.
Thank you very much for the additional disclosure incredibly helpful. But just wanted to make sure I understand how should we think about you gave the guidance for total product revenue improved to flat year over year, but I'm just kind of curious what impact you're seeing from SD win and other areas that might actually provide some further improvement in that product growth rate as we.
The move through the year.
The Sterling the thank you.
We include the SD Lan revenue is the mostly in our.
Prisma sassy product, which goes on the overall far all of the platform billings. So you will see the impact of as the land in our fall was the platform billings number.
And we continue to see strength on the SD Wan category as one of the entire sassy category as I mentioned I think most most remote work transformation on the network transformations are not done the early in the area and they're sort of journey and I think most of our customers of realizing that they're going to have to migrate their network infrastructure to more of an SD Lan styling.
The structure as well as that will probably have to sustain hundred percent capacity from what working for much longer the anybody thought.
But I thought the <unk> with the two products one of the it was on box I didn't know if that was going to have the ability to provide some pull church some additional product as well as you move through the year.
Even that on boxes, the when subscription as part of our subscriptions the number which again shows up from the fab billings number and.
And just on the new left hand side, we just showed you.
Understood. Thank you Rob.
Current try this again on the next question comes from the Keith Weiss from mining range.
Good morning, the stores.
Good morning.
Yeah sure I mean, yes excellent.
So I. Thank you for taking the question the.
And Whitney of my technical difficulties.
Very nice quarter on loved the expanse of disclosure I think the it's a really good view on the overall business I wanted to dig a little bit more on onto the firewall side of equation I think it.
Excuse me the surprise guys is both the growth in sort of the overall customer of day I think it was up 8000 on year on year day says as well as sort of the overall and the billings growth. The in that business can you talk to us a little bit about one kind of where the customers are coming from on how you guys are expanding the overall firewall based and then two what are the kind of the sectors.
The growth we should be thinking about on a go on for a day sales where are we in terms of subscriptions per customer or how far can that go on a going forward basis.
As well as kind of like the virtual of versus physical next like how how much further is.
Is that taking up your 70 per customer.
Yeah, the keep the best way to think about it.
Net.
The software side of that business continues to see strong growth the.
The sassy pieces of the Prisma access pieces, the SD Wan capability in cloud Genex. A that is also a recapture of subscription grows our subscriptions of gone from four to eight we just launched the LP, which is getting sort of lots of interesting a lot of interest from our existing customers I O T, which is very early still for US is also getting a lot of interest from our customers as the.
Line ends up being part of a larger as Steve on sort of infrastructure deal, where they will they will turn on the EPS. The when capability of the firewall and then they will also buy purest do on with transgenic since the the architectures work. So the work together. So we expect most of the goes on the come from the software side of the house as the shared the the EMS.
I've gone over 10000 customers, we've seen a lot of interest on activity there on the VM space as we highlighted we've launched the fiveg capability of containerized firewall advisory capability, which is unique in the industry, we're going back to our sort of strider partners of the thing lift the so what do you need to get Fiveg on right and to help your customers leverage Fiveg use case of the decline. So I expect a lot of the growth.
It should come in the software side the hardware of customers are mostly refresh on some of our existing customers on cases, you'll see people go away from legacy vendors, who provide hardware firewalls, sometimes you'll see hardware wins, which gum as part of an overall platform deal what people want to deploy the entire balls of blueprint across it infrastructure.
So hardware is harder than software, especially in the current environment.
Got it actually on the Super helpful. Thank you.
Next question comes from the team on the line from media.
Good morning. Thank you for taking the questions can you hear me, but just for you because you didn't believe that we're growing the business on the other side.
[laughter] I can see that thank you for that.
I think the tight and assets in the cash if I can ask you to penetrate the entre shack in interest fiscal 2000, the line youre going to have an even bigger portfolio. I think you get in total 20. So I'm wondering if you can speak to work at least quantify to what extent enterprise adoption agreements your enterprise licensing sales.
The agreements are becoming a bigger part of the overall sales no shame on particularly as you look to drive more on next Gen solution adoption of today.
Yeah, the enterprise agreements the typically kick in the stronger in renewals than in the first phases of our deals a lot of the deal a lot of the the original any of the only business comes as on the product by product basis until we get to the scale or customers is wait a minute. It makes much more sense from me to go consolidate all the stuff is to the rarely you'll see somebody walk in and sales of the 2030 minute on a deal.
And let's go rip out everything in on infrastructure and replace with Palo Alto networks, we see that it happens incrementally over time with our customers as they get one product the enjoy it they get the next set of products and we've seen that happen on the recurring basis. The last two two and half of that I've been here we.
We expect they will continue to be important but the typically kick in in the Neal. So we have reasonably good visibility as to which customers are up for renewal, where it makes sense for them to be pitched enterprise agreement, but they pay their fair role in our renewal capability well, we make sure that our teams understand that you cannot just renewed.
Somebody on called the enterprise agreements there has to be a significant amount of upsells and deployment of new products into the customer base before qualifies for enterprise agreement.
It is how does the little smaller.
I tried.
On the weekend.
The next question comes from the Chinese and how the from William Blair.
Hi, good morning, and congrats on the share results. Thanks.
One of the started out with on getting a sense for how the integration with cloud Genex's going and maybe what the initial customer feedback has been with the combined products. Thank you I'm.
I'm going on when I have my friend Lee clarity on so that question since you've been sitting on the smiling the Hadley banking.
Thank you on a cash.
Good question Jonathan the.
The.
What we've seen in the SD Wan space in particular is even though of provides obviously a lot of value to customers is still in the can be very conquered share can still be very difficult to to rollout deploy operationalize.
And obviously the approach of the Cogentix, we think we addressed many of those challenges, but further the integration with Prisma access where we can also deliver.
The cloud network and integrate those two together and as you heard the cash say earlier, we recently introduced a.
The ability for those to be deployed with basically one quick integration and so all of that combination.
The we bring together the sassy is starting to resonate with our customers and we see that as the the future architecture for how customers are going to.
Connect the branch offices remote sites.
To a cloud of the network with cloud security.
And address the its deployment challenges, while getting the the best security they can.
The next question comes from Brian Essex and.
[laughter] Goldman Sachs.
Hey, good morning, and thank you for taking the question yes.
Thank you for me as well on the additional metrics around NGL assets really helpful on new investors and waiting on while for that.
Maybe maybe the.
On the cash of the lease how should we think about two things one the gross margin progression of is that just a function of the delivery on on on cloud infrastructure.
And then she seasonality so comparing this to your overall business from a margin perspective at what rate might this business. The in parity with the rest of the business moving from a seasonality perspective, I noticed that the billings were seasonal this quarter similar to the larger business.
How do we think about that on a go forward basis. Thank you.
Yeah, I think we on to the second part of the question, we will always the little bit of seasonality with Q4 being stronger than the one rights of that that would be kind of normal turn south of gross margin. Yes. We have strong class as you would imagine and I think cash mentioned, we do expect the get very competitive gross more.
Things over the next few years, we have very clear plans that include efficiency thing in in you know the cloud on AI business. So you should expect that business the significantly improved over.
Over time.
No and as I said, no we have very concrete plans to achieve debt.
And then maybe just on infrastructure side or is there something else driving that Mark mentioned run of the last call. The the two largest parts of the gross margin on clearly our cloud infrastructure piece of.
And we have worked hard on the boats in the lease the him and and Luisa efforts of trying to reduce those costs down and we have a very clear line of sight as the how and when those cost of go down. So we're very comfortable saying the those gross margins should improve significantly in the next to the spheres. There's one part of the the other part is as you know of this is the revenue.
Against cost metrics and the revenue comes on Ratably the cost come in front of loaded of customer success, our deployment costs and the customer deployment requirement is like we have the deployed a million dollar deal into a month right now the call. The dark cost deploying the deals now the million dollars couple or three years. So you will see as that business scales the customers.
That's pieces in the pre Gourdes gross margin numbers pick on.
Relatively smaller compared to the total revenue side of the that also gives you a natural margin progression on the right direction.
Fair enough. Thank you.
Your next question comes from comes from tenants and perhaps the Mount side now.
Great. Thanks, again for taking my question and again, the thanks for the kind of transparency in terms of disclosure.
Obviously, a very strong quarter of a lot of very positive metrics, you're one of really stood out to me was the was the on Christmas day cloud.
Yes, sure lot of security so many of them Weve of course on for a while of it feels like that's hitting an inflection point. So I guess a question from the cash and Lee you. What are you hearing from customers about sort of adoption of of computer, but on your understanding of sort of the evolution of security of the club.
[noise] I think Weve, maybe mentioned before the I think a lot of early cloud adoption from enterprises was sort of more lift and shift we saw the taken application of the data center and simply moving to the cloud without re architecting it without leveraging a lot of the benefits of the cloud and.
The more mature companies from a cloud perspective.
We are now taking more of a cloud native approach.
And there's quite a repurchase sometimes is obviously leveraging past services, but one of the key aspects is increasingly.
Using containerized security architectures.
And the planet architectures.
Interesting enough that also sometimes comes back on premise as well and so is there is a greater and greater usage of cash.
Containerized architectures cloud native architectures the prison the cloud compute.
Security capabilities become of.
Very important and this obviously for US comes from the acquisition of course, like we made about a year and a half ago and at the time of is best in class. We continue to invest in it and continue to receive received great feedback from our customers when they do take advantage of it.
Great. Thanks, even given the great work thanks.
Thanks. Thanks.
Our next question comes from the Green power from BTG.
Great. Thanks can you hear me Okay Yep.
Oh Oh.
So yes, I mean, when you go back to an earlier question on Encore firewall side, how should we think about a cash subscription growth on the core of viral aside because I think you have.
For new subscriptions on some of them seem to be getting pretty good traction.
You've introduced a higher cost per lead support side here, but at the same time product revenue from its flattening out the installed base of subscriptions can attach of is flattening out. So I'm just trying to think like how those two things should net against each other.
Well they shouldn't net against each other because you'll see at the four new subsidiary of added the believe should be applicable to the majority of our customers and most of our customers on have them on the the one which has seen some traction which we talked about last quarter was our DNS securities of which is penetrated or five or 6% of our base. So we expect there.
It's still a lot of runway in the new subscriptions to be able to penetrate our base of 70 plus thousand firewall customers. So we don't think that that's you know that that should all be on top of the product base. So we have out there and was product revenues are flat our installed base continues to rise because of this is the onetime sale every time, we sell it's true hopefully new set of cost.
The summers on over time some of them the new so I think youre supersedes still see customer acquisition as is evident from the 8000. The customers. We have between last year of this year. Although there are prime candidates for subscriptions I'd get a debt. In addition to that some of these customers whilst they might be flat from product revenue. They are deploying prisma sassy of Prisma acts.
Yes also deploying the Atms, where we have the Prisma will also allow you to debt subscriptions. The subscriptions on not specific only two of hardware business you can get PRASM soon DLP. The Prisma access you can get Io D. would present the access so our subscriptions go fast the apply not only to the 70 70000 hardware.
Customers the applied to a significant part of our 10000 software virtual firewall of customers on 1000 prism assess the customers.
Yes, that's really helpful. Did you say you have to start of 5% to 6% penetration I pointed out like a year of.
About 18 months, Yeah, I'd say, we said 3000 last quarter of 2000, I think my mats phases.
Absolutely the rapid blood vessels good yes.
I started early in the morning from [laughter] sort of make sure the 5% was right.
The next question comes from Andy You mean ski from D.A. Davidson.
Okay, great. Thank you and congrats on the good start the fiscal 21.
You know.
On a high level question. When you look at the thousands of new customers. You added this quarter I'm curious what percentage started with just your cloud AI products or the most customers start with the networks security products on it you know just trying to get a better understanding of which one is driving the new logo growth. Thanks.
Yeah, My CFO will not let me tell you the number of exact number of new cloudy I customers, but I will tell you. There's a significant part of the both of the Fortune 100, Global 2000 days, where they have no interest in some of our hardware products. Because these are born on the cloud companies of they're going to of our transformation. So.
So we are seeing a civic sick reasonable lumber the significant number of customers.
Be our first time customers in Prisma cloud customers, who had no interest in buying a follow on because many of them don't have substantial data center, but they have a cloud presence because that's kind of what they chose to go with and now would the eight modules modules, we provided because mcleod they find it interesting to go down the platform rock many of our customers who are.
On the units with the defense side or the.
The financial services side, where we've not had it has such a strong presence are getting we've seen renewed interest both from the cloud transformation as well as the data collection capability is correct as they are and hopefully expands in the future. So we're seeing we're seeing a new set of customers, we're able to address with our cloudy EIS solutions, which we were not able to address the hardware capability.
Next the cash.
The next question comes from Saket Kalia from Barclays.
Okay, Hey, good morning can you hear me Okay. He has socket or you okay excellent. Good the cash are you.
Louise maybe maybe for you or maybe just shifting gears to profitability for a second.
I think the operating margin guide for fiscal 21 is going up slightly.
I believe that too is consolidating the expanse cost base. The maybe maybe the first part of question my thinking about that range and then secondly, more strategically longer term on that cloud the AI business, who do you sort of benchmark yourself against in terms of where that that profitability can go long term.
Yeah, absolutely. Your first question, yes margin they saw the slightly year over year. So yes, we are raising our guidance on the margins. So you are right and you're also right at our fiscal year margin is impacted by fans, which we basically offset all of that right. So we factor that in and we covered a day, they cost and even though even the.
Side of that were going on and he has we're benchmarking ourselves against the best do you have in the market dried and we want to get towards those margins as well and we think it's very recent other to do that.
We gain scale and as we as we deliver the savings that we talk just a few minutes ago right. Some of the savings that we are working with the with lease E. Lee and his team and some of the savings that we think we can get just as we gain more scale. So so that should clearly improved but that's kind of where we're going you know think about some of the best in class companies out there.
The basketball footwear benchmarking against two of the later in the second just to add to that are on this is not a reported question part of the reason we wanted to make sure you understand this the this split and the difference in the two businesses as you want to reinforce that our federal business is.
As good as any other favorable business out there in the industry because I got calls a lot of hey, you're seeing the overall decline on gross margins of because if I wasn't under pressure no stop I think the other part I want to make sure you see is that you know like it's kind of like maybe we're doing we're looking but.
It's very hard to build the seven I'm sorry, if I'm on the normally on our business from scratch in 18 months I want to show you that we're building that business in battle to continuing to focus on the firewall business and to an extent. The overall gross margin on operating margin are somewhat somewhat not fully in our control as management and we want to show of the reason that we're investing on the right of side of the because.
We can drive the they are our growth at very high double digit for a longer period of time for that need to come to the last.
And we're just showing the run we invest you'll see the as you will see the transparency, we're investing we're not investing wherever leveraging and showing your expansion, where we're continuing to invest we're investing in both obviously not to the same levels goodness assay the brand new product category for us on our federal business and to be honest I will tell you. This in two years from now on you look back of say, Yeah, you guys did a great job transform.
On your business the hardware to software because there's a high probability industry starts to slow down on hardware because people realize they are moving faster the network transformation of our transformation and when that happens you need two years of prep work together.
Very helpful. Thanks, guys.
Our next question comes from Patrick can tell from Deutsche Bank.
Hey, the thanks again for the the new disclosures on Echo the others I mean, absolutely awesome.
That's just want to circle back to fact from his question about in spite of agreements. So can you just help us understand.
I guess, the Palo Alto networks.
What you define as the enterprise agreement versus just the kind of regular multi product deals on the reason I asked is because we know in our conversations resellers hearing Palo Alto and it's probably the agreement a lot more sort of I guess and the I guess the second part of my question is you know is any disclosure you can give us around what proportion of the.
The lngs off from enterprise agreements. Thank you.
Thanks, Barry Thank you for the the congratulations and the.
First of all of us on looking at Lee just to confirm one and the say is that.
We have no enterprise agreements, where we blend cloudy and network security correct.
So first of almost any of the cloud in the eyes of does not get bundled with the hardware deals on the not get bundled with our software.
You probably have no enterprise agreements, where we blend all of our business assay and hardware and software we.
We don't because of US assay deals and also independent of that so most of our antibody enterprises, the Miss I still firewalls, plus subscription agreements, whether the hardware and software and subscriptions. There's still the agreements that we continue to follow networks for the last 15 years, none of the new stuff is included enterprise agreements because we don't believe that we have to create the cost per.
Lot of discounting the trying to encourage customers to use the and we want our new products to standard it on and be sold of their own and be able to be on the consumption model, which is much more transparent on much easier to manage the if they're not part of the large bundle of discount.
So that's also number one on enterprise deals fertile hardware plus subscription updates so that contracts any customer who wants to do on enterprise agreement with us, it's probably an existing hardware customer with subscriptions, where they're going to buy more subscriptions and promise to buy more hardware from us over the next three years.
Well, that's what you do and enterprise agreements, the Hey, I'm going to go from 105 was the 200 firewalls. If I paid you so much money for all your subscription of the next two years can I have a deal right I have to keep paying every day on the buy new firewall for subscription. So most of our enterprise deals take on the form of if you commit to a large amount of hardware purchase you can get a bundled price for subscriptions.
Which you don't have to be incrementally for that's the nature of our deals hence our ears are pretty much dependent on our hardware business and as I said to.
A question earlier that most of our ears are based on the newer deals because weren't nobody Watson upfront the thing I want to buy at the state of thousand Firewalls Tomorrow signed me up it's typically I've got 200 more on where they have 200 was on tour transformation of Palo Alto networks can I, just re up and get the renewal of the larger number if I can make the more hardware.
As I Love your volume.
Our next question comes from Nottingham current from RBC.
Hi, guys. Thanks for taking my question then I'll offer my congrats again, the disclosures are really really helpful. I guess I have a question for Lee yes.
On the post cold the distributed World I have to think DLP takes on on a new level of important can you talk a little bit more granular about how you guys differ in your approach to cloud DLP versus others and how much of that is the new business I'd like the results of distributed were per increased cloud migration or how much of it is legacy DLP replacement.
Yeah. Thanks for the question Matthew the you know you look at the to the European market. It's it's been around for a long time it hasn't changed a whole lot of during that time and it was therefore sort of designed and architected for a very on from world.
You know largely assumes that employees are short of the office applications or on the data center and everything's sort of well contained.
If you look at today's world users. Our employees are working from anywhere applications are increasingly running on the cloud and the that legacy DLP on from architecture does not work as well anymore and so what we've done is built the DLP.
Service other.
It runs in the cloud and then can connect into all the different enforcement points that are needed whether that's one of our hardware devices.
In the data center of Prime whether Thats a prison the access whether that's a prison Macleod for cloud workloads on and storage security and so we can take that single DLP cloud engine and integrate it with all of those enforcement points really designed for the new way in which.
Networks are deployed applications are deployed.
And so we think thats the.
Very.
A more appropriate architecture and we're getting you know it's early but we're getting very positive feedback from our customers and interest in that approach.
Thank you.
Our next question comes from Rob on links from from personally.
Good morning, and thank you for taking my question I'm, giving you are the first to reporting October quarter. On this really early Monday morning, I was curious if you can give us kind of a broader range in terms of what's going on internationally. It looks like domestic was strong the rest of the world growth rates ticked down a little bit versus where they were on the back.
Cash for even the quarter from a linearity standpoint, given your days billings outstanding ticked up I guess on the on a year over year basis. The went a little higher than it was previously thanks.
[noise].
Well, there's there's a.
Varied impact around the world given where people are on this pandemic scale and the degree of difficulty in terms of being able to execute on new environments. Here, we still see that the on a different parts of Asia are doing better than the other just because they're going through their their emotions of trying to deal with the pandemic see similar behavior in Europe. We saw in early part of the <unk>.
Order was it was normal in Europe, it's gotten so subsequently harder because Europe is starting to shutdown. So we're seeing different impacts across the board, but as you know these deals don't happen days. These deals happen in months. So that is already always work that's been going on for the last many months for these deals the culminate towards the end of the quarter. So generally speaking as I said.
Yeah. The Europe is okay h. as is the scattered the U.S. continues to be strong I think as I said, we are going to get tested in the and I don't mean called the testing. The code is gonna desktop [laughter] you do get this is the pretty much the very often but nobody is going to test the all of us in the next three months because I think the winners in the winter is coming.
And we're hoping that all the work of the teams have been able to do on the last few months will bear through the winter but.
Yeah, I think the international continues to be but the there's two parts of that one is native strength. The other investments. So we're continuing investing internationally because we were not as well the that's what I would say internationally to two and a half years ago, we're making investments around the world. We're also investing in making sure our cloud in the other businesses are visible across the various customer base with the because in many cases the.
Our business kind of.
Hadnt been able to be of much significant many countries on the lumber, we're going back and reinvest in the cloud now so the thing that counteract some of the natural weakness based on the pandemic.
But well see on absent axiom of.
All right. Thank you.
Our next question comes from the grant from asking rents from the day secure securities.
Okay. Thank you for taking the question.
The cash your next day and security Air on Billings growth remains impressive, especially now that are lapping tough comps. What I'm wondering are you know where the the one or two ngs products that haven't yet contributed much of that you think is only a matter of time before the move any longer.
Sure.
That was that was the quite in the back of the way to end the question.
But.
On the NDS products, the gets kind of interesting.
As I as I assume that's like the by parse them down and on.
We closed business assay, an ngs, we continue to see tremendous amounts of traction and Christmas on Prisma Axis continues to go consensus from you know as I am.
Mentioned, we think we you know.
Four or five.
10 quarters ago, Prisma access business access what's the GPC EPS didn't kind of have enough traction now, we see tough comps being lapped with great numbers, partly driven by the pandemic response, partly driven by the fact that in finally near standing of the top of the roof and claiming the proxy solution on the don't fully or if somebody is hearing him because people want a full stack fire.
Other than the firewall in the cloud so a lot of success of those boxes from we think that continues to sustain itself. The as the line and sassy going forward for the next few years on Prisma cloud, it's kind of the different story of.
It's kind of like we'll see more benefits on the future of because right now we're an expansion mode line mode, and we're getting more and more customers, but really we are depending on the customers the ability to transform their existing infrastructure of the crop. So we're getting in the ever getting on modules and we're kind of go do upsells give them the use more and more of our products you know as the spend more but more workloads on the cloud prisma.
Cloud, we'll see continued EBITDA growth in the future on the current Xsixty our front the it's competitive with the many ex the our vendors out there again, we're seeing traction because we have a large installed base of traps, which many of the just converting to ex yeah. We're also seeing your customers or recompete of the likes of silence crowd strike of the tender one et cetera.
And there we think a index or we think is now way larger than any of the automation product out there from a a secure the automation perspective, and we think the combination of expands the next day, our and ex Fluor holds tremendous promise, but I think that's more a.
The next fiscal year thing this fiscal year I expect the because of my access business I expect the business week to do really well and ex yard to really it's the our to do that the well independently I think we'll see more and more expense plus ex yard in the next fiscal year that gives you a better sense and of course, we EPS country of do great for us because people are finally, realizing you can put a virtual firewall against your balanced.
On some they need one.
The next question comes from Kelly any from the ending.
Okay. I don't think we have passed the on the line cash I last question on will come from Brent sales from Jefferies.
Thank you on the cash just on the go to market. This year can you speak to any changes that you're making the the go to market motion is it anything new this year on.
The largely unchanged from last year.
Kevin Thanks of the question look.
The last year the year before that when I started we had a large kicker to get our ngs.
Jumpstarted and hopefully a billion dollar they are on budget into this fiscal year of tells you that we were able to jump start it although that caused some consternation in our product business that you guys are fully aware of so we normalize that last year. So we did not create that much of the jump between Ngs then.
And the product and things of stabilized I'll tell you. The the one change we made this year and you should see it in the left side and white inside the show to you. We're focused on the cloudy I deem to believe the to believe CBNL.
Right and our networks security business, the more TCV oriented.
So if you were ever to see it impacts the shrubs the way what's going on there of billings worse. The there are and that's why we started this disclosure today about showing you. The left on site is very focused on revenue operating margin gross margin on billings. The right on the side is very much an out of our business because I believe the huge opportunity we have in front of assets should be focused on the CV and that's why.
And on on St. Patrick's question about what do we do with the yes, I don't want of I don't want to Barry next generation recurring revenue products and the is because sometimes the age of get customers buying a lot of stuff and the choose what they want to use later I'm focused on making sure everyone of our cloud in the air product gets deployed the times of values very high or the short the time the valley shortened value is very high on a mixture of the.
The consumption increase the only make sure of their contracts in place for a lot of people to spend more as they can do more so the big shift the made at this time of big of minor shift as we've made sure people focus both on the air side of the TCV side of our business of sales team.
As you can imagine we didn't have any of our business.
We can report on our but we didn't have any of our focus on on our apparel business.
That helps out of the question.
Thank you.
Okay.
That concludes the Queuing Inc. Question other comp. Thank you I'll take your question I'm going to turn it back to the cash for closing remarks.
Oh, Thank you Karen and thank you everyone for dialing in and you know I want to I want to know normally not what I would do on earnings call, but on the applaud the word of the the work of flu season. Our finance teams. This was a tough close to get done in 10 days before of user conference at the same time based on the feedback we spend a lot of time with the automakers and others to make sure. The we were able to show the split.
Because all of your one or more transparency on our cloud the eye business network security business I Hope you see by this disclosure we are building two great businesses up all the networks and we are going to continue to focus on trying to build.
Sure the value across both of these segments, we will keep looking as to what's the best way to increase more transparency and see if it makes sense on the longer term to be more regular about these updates, but hopefully you found the disclosure of useful on the thank you again I wish your families. The new a very safe and happy Thanksgiving next week.
We look forward to seeing many of you in our upcoming weeks at our Investor conferences I know all the talking to some of you. Shortly after I also want to once again shout out to our Palo Alto networks family our employees our customers into our ecosystem. Thank you very much everybody on the go follow the networks.
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