Q3 2021 Palo Alto Networks Inc Earnings Call
And using those approaches.
With that backdrop, let's focus on our results.
Overall, we saw continued strong demand environment and our own continued execution drove Q3 billings revenue and EPS ahead of guidance because of billings growth accelerated to 27 per cent in Q3, I had of our 24% revenue growth.
<unk> forecast withdrawing the ratable revenue contribution.
I want to highlight 1 dynamic routing of billings to help you better understand the drivers during COVID-19. Some customers are asking for annual billing plans to meet their needs.
We noted for you that we saw success with larger more strategic transactions in Q3.
Along with these deals you saw an uptick in animal of billings plans.
Normalizing for this our billings would have grown greater than 28 per cent nearly 2 points higher than we reported which is the highest billings growth we've seen in the third quarter since Q3 of fiscal year 2018.
Last year, we saw billings planning of an approximate 1 point impact along with billings. We also saw a 38% growth in the remaining performance obligation.
This metric is growing faster than both revenue and deferred revenue and will be of sorts of consistent revenue growth from the future.
Within the strong performance, we also saw 71% growth in IRR or annualized recurring revenue from our next generation security offerings, where we finished our third quarter of $917 million up from $840 million in Q2.
These are our billing and our pure trends drove 24% of your growth in our reported revenue.
It's worth noting given your attention to and yesterday our debt in the very first week and the first day of Q4, we transact with 1 of our largest next generation security deals in the history of Palo Alto networks for the Fortune 30 manufacturer, which brought in 7 million of N. G. S. IRR. So it already of $980 million on the first day of this quarter.
For the acceleration in incremental Engie S. A R. In Q3 and trends we see in the business. We continue to have confidence in our 2 for target of 1 point of 1.5 billion and then the N G S error.
As part of the strong Q3 performance. We saw notable momentum in the large transactions with 901 customers, having spent $1 million of part of networks. The last 4 quarters the.
This cohort of customers was up 29% of your ear going ahead of our overall revenue and billings growth.
This growth in active millions of customers has accelerated in recent quarters.
As part of this larger the performance our business is benefiting from growing adoption of multiple Palo Alto networks security platforms across startup Prisma and cortex in Q3, 70% of our global 2000 customers had purchased products from more than 1 of these platforms and 41% of purchase all 3 platforms. This is up from 58 per cent and 25 per cent 2 years ago.
Okay.
Turning to our product areas.
Earlier this year, we started the dialogue around the network security and cloud in the eye and shared additional financial metrics to give you more transparency, having these 2 product areas under the common umbrella for World class R&D and go to market organization is key to our strategy of being the largest cybersecurity company of the world.
Starting with the network security side of our business.
We are the leader in this business our strategy of selling customers. The leading firewall platform delivered 2 of hardware software, whereas the surface form factor underpins our success in this market.
This resulted in the business that is 28% of larger than our next year on a revenue basis. In Q3 also if you look at leading indicators that include deferred revenue and our P. O. Our scaled come through even further we already are 40% to 50% of larger.
All of these leading balance sheet metrics were growing faster than our peer.
2 years ago, when I joined Palo Alto networks.
Hardware based firewall company.
We had the vision of a hybrid world for the enterprise and data centers will remain predominantly hardware oriented growing adoption of software form factors like our BMC of firewalls.
Well the remote access to the more office, where this opportunity has been transformed by cloud adoption and work from home trends the feel secure access service edge of SaaS the adoption.
The reception to our strategy of delivering a firewall the multiple form factors has enabled the accelerating firewall as a platform of growth rates you just showed here.
Within our firewalls the platform billings, we've seen a distinct mixed shift towards software the software mix, which includes our vans and sassy business now makes up 40% of firewalls the platform.
Up 21 percentage points from a year ago. He saw 7 figure transactions for a software firewall, Quebec, Quebec capability, including the Havent seen cities for the U S Government agency of Fortune 30 manufacturer and the diversified financial services company.
While we have seen the significant transition and form factors, 1 driver of growth and value of our business are that subscription and support have grown at a steady rate over the last several quarters in the revenue base.
We expect the software mix the continued increase in the medium term, although along with the do you expect to continue to see attached subscriptions of the key cost driver.
We're showing you for the first time here the net take annualized recurring revenue, which was $2.6 6 billion at the end of Q3 and grew 25 per cent.
As a reminder, this does not include our hardware business, which continues to be significant.
This recurring revenue business the key driver the strong cash generation.
Got it of 42 per cent for Netflix in FY 'twenty 1.
We leave this high degree of recurring revenue and strong cash flow generated by an ethic is something that should be more clear now given the incremental disclosure for the last 2 quarters.
Now turning to innovation and focusing first on Christmas day.
Back at the beginning of the pandemic, we saw customers look to significantly expand the moored access capability, while not compromising security of user experience.
We met the demand with the freedom access trials of Broadcom proof of concepts, enabling customers to see that value and prisma access as well as supporting the network transformation as the move to the cloud.
We're seeing these efforts as well as the momentum generated from the 2 of the launch driving strong initial person the footprint expansion.
This quarter you saw a number of large prisma access transactions, including the global technology company of large manufacturer in the Fortune 10 Health care company, all 8 figures of greater Additionally, over 25 per cent of our Prisma access new customers in Q3 for net due to Palo Alto networks. Lastly, we're seeing early traction in a sort of as part of part Chris.
It doesn't accidently, the Comcast Verizon Orange business services. These relationships are part of the broader initiatives. The service providers that we see of the significant growth opportunity.
Just yesterday, we announced the significant relieves the network security focused around a comprehensive approach to zero Trust. This is timed well with last week's executive order out of the Whitehouse the defined zero trust in the way that is very consistent for the Palo Alto networks strategy.
There's been a lot of noise in the industry around Zero Trust network access the solutions continue to be fact minted around either of remote users.
Access control or the enterprise apps approach covers all users and devices all locations all apps and the Internet of blank consist of consistent access control and security of our new Pan of West and not 1 of the least brings cloud based identity controls integrated Cassidy and enhancements to our euro and DNS security services.
Paul of networks position across the appliance software and SaaS is unique and these new innovations of applicable to all of our customers across all form factors.
This is the 1 of the most significant innovation of leases for our next core next generation firewall franchise and gives us confidence and continued net debt.
As we look forward.
Now moving on to cloud and AI.
On the Prisma cloud front, we continue to build on our early leadership position in cloud security posture management cloud workload protection capability and marketplace delivered virtual firewalls or we are the largest player across the opportunity set of.
The strategy is to stay ahead of customer demand as the adopt cloud native security services across Hyperscale.
We believe we have staked out of leadership position in the cloud native security of the business.
We've achieved over $250 million in IRR across Prisma cloud in our marketplace. The M C N series fueling.
Fueling this growth is 39% growth in total customers and 38% growth in global 2000 customers across Prisma cloud are.
Our unique consumption volume Prisma cloud based on credit enables customers to use any of our modules across the cloud to avoid workloads, including using multiple capabilities per workload.
We're seeing strong growth in credit consumption with over 100% growth year over year in Q3.
Despite our strong position with the Prisma cloud targeting an early opportunity do you see the next big challenge the security of the developer level or shift left of security. We recently addressed this with the acquisition of bridge crew completed in Q3.
Traditionally security issues in court for the challenge for the seats organization and we're seeing leading companies drive of collaborative approach between the Sis the organization of the development organization for dresses.
Chip laugh integrate security into the Dev ops processes to cash these issues upfront with the easy and quick the fig.
It's the wind for developers in the wind for security.
Rescue has an open source product check all of this.
Of this product delivers significant value of the developers for a free download.
Both of the acquisition closed and the release of $2 of check all of you saw of British food downloads accelerated.
British who is also seeing strong momentum in our paid customers, including a 6 figure of customer in Q3 for <unk>.
Only in the very early stages of cross selling between rich for sulfur and Prisma cloud.
Within our cortex product area, we continue to focus on delivering significant volumes of innovation to xdr ex or in our recently acquired expense product in Q3, we delivered a new release of xdr, which expands the endpoint credit capability and improve the visibility into network activity with ex or significantly expanded our market based partner integrations to increase.
The set of automation and security Playbooks that customers can deploy.
We're seeing this result in steady cortex customer additions to ex yard in extra of customers.
Of all of 2004 hundred customers starting from essentially scratch 2 years ago.
Okay.
Our focus on innovation has been validated by the market as well we were particularly proud of the validation for cortex Xdr in Q3, where we garnered the best overall results in round 3 testing from rider also in the recently released Forrester wave covering endpoint security software the surface market, we were named the leader.
Cortex ex source of processed 100 partner contribute content back and now has over 250.650 content back from the marketplace.
Our expense offering was featured in terms of genius keynote this week at RSA for a research uncovered that 1 third of leading organizations of attack surface. It's the <unk>.
September the exposure that are the main avenue for rental there.
No other leading security company has the degree of visibility to identify and prevent today's most pernicious attack vector.
Within cortex, we are starting to see an uptick in large customer signings such as the 7 figure transaction with the financial centers from which included STR for the next door.
Lastly, during Q3 reform of the New unit 40 to 1 of the leadership of Wendy Whitmore, who comes to Palo Alto networks offer of building successful securities of the businesses. Our new team is the combination of 2 of the most capable team of the cyber security. The Triptans team is laser focused on the mission of conducting world class data breach investigations, while the unit forty-two team has focused on rapid.
The building sets of intelligence into volatile networks products.
The New unit 42 has completed over 1300 engagements of calendar 2020, bringing to bear the power of 140 consultants and the sponsor following rant and ransomware attacks, Microsoft weighted breach of the other tax if mobilizer of consultants and rapid response engagements, which help customers through these difficult times as we look forward for focused using services of becoming even more strength.
Part of our customers.
As I reviewed with you here and it should be evident in our Q3 for US we're seeing broad strength in our business across geographies and product areas. The seats, we see strength in our pipeline and continued demand until the remain strong leading us to raise our FY 'twenty 1 guidance.
I also wanted to update you on our plans we discussed in Q2 around exploring an equity structure for closer.
We continue to focus on providing transparency for each part of our business you'll notice the IRR for net second leaves you highlighted this quarter. We believe this has helped investors gain better insight into our overall financial profile and especially understanding both side of the business with the different growth and free cash flow characteristics.
Many of you have finished all of the work required to file any form of equity I'm quite thick. However.
However, given the state of the market and offer an extensive collection of shareholders. We have decided at this point is best to continue with the single equity structure and an integrated P&L of the postponed any decision to list of places like equity.
Lastly, we're excited to welcome the partner Barber, Chief operating Officer Zoomed up all of the networks Board of directors. She brings deep operational financial and legal expertise having served in diverse roles. The rapidly growing tech companies such as zoom agenda of nimble.
It comes off of the February appointment of Dr. Helene Gayle to our board. We continue to have a strong commitment of diversity of thought of networks, including at the most senior levels of governance in our company with that I will turn the call over to the deep of collateral. Our CFO. We're excited to have Deepak step into the CFO role and enable a smooth transition within our organization. He brings world class experience.
Already seeing him bring some of his experience to bear and driving improvements over to you deepa. Thanks.
Thanks for the cash.
I'm excited and humbled to be part of the World class leadership team and look forward to driving total shareholder return.
The cash indicated we had a strong third quarter as we continue to deliver winning innovation, while simultaneously, adding new customers of pace.
The strength gives us confidence to raise guidance for the year.
We delivered billings of $1.3 billion of 27% year over year with strong growth across the board and ahead of our guidance of 20% to 22% growth.
We've continued to see some customers off the billing plans many involving larger transactions as we've become a more strategic partner to our customers.
We've also used our Palo Alto networks financial services financing capability here.
The other weighted contract duration for new subscription and support billings in the quarter were consistent year over year and remained at approximately 3 years, we added approximately 2400, new customers in the quarter.
Total deferred revenue at the end of Q3 was for $4 billion, an increase of 30% year over year.
The remaining performance obligation or a P O with $4.9 billion, an increase of 38% year over year.
We continue to see these metrics is becoming more meaningful as we drive growth from a ratable business.
Our revenue of 1 point there were $7 billion grew 24% year over year ahead of our guidance of 21 for 22% growth driven by of billings.
All of the business strength and amidst an increase in a ratable subscription revenue.
We remain.
Focused on driving the high quality revenue with all new product offerings being pure or substantially all subscription in nature.
Looking at growth by geography, the Americas grew 24% EMEA grew 23 per cent and APAC grew 25%.
Showing broad execution excellence across the world.
Q3 product revenue of $289 million increased 3% compared the prior year.
Q3 subscription revenue of $474 million increased 34% support revenue of $311 million increased 33 per cent and total subscription and support revenue of $785 million increased 33 per cent and accounted for 73% of total revenue.
Total Q3, non-GAAP gross margin was 74, 6%, which was down 60 basis points compared to last year, driven by product mix, which of less mature.
Q3, non-GAAP operating margin was 17% an increase of 60 basis points year over year.
There were several factors driving our operating margin, we have revenue upside lower travel and event expenses to the COVID-19 and some shifts in spending out of Q3 at.
At the same time, we continued to aggressively invest for growth largely in the areas of sales capacity and R&D investments.
For the health conditions, improving in geographies of many of our facilities, including our Santa Clara headquarters, we're seeing more employees look to return to the office. We expect this trend will continue the gains seen in Q4 reversing some of the savings we had seen in the last few quarters and the Opex.
Non-GAAP net income for the third quarter increased 22% to $140.40 million or $1.3.8 per diluted share.
Non-GAAP effective tax rate for Q3 was 22% the EPS expansion was driven by revenue growth and operating expense leverage with an undertone of strong investments of growth.
On the count basis for the third quarter net loss increased to $140 million.
All of $1.50 per basic and diluted share.
We ended the third quarter with 9716 employees, including 39 from the bridge crew at the close of acquisition.
Turning to the balance sheet and cash flow statement, we finished April with cash cash equivalents and investments of $3.8 billion.
Free cash flow from operations of $278 million increased by 64% year over year free.
Free cash flow was $251 million up 200 per cent of the margin of $23.4 per cent.
DSO was 60 days the decrease from 3 days from the price period and flat from second quarter.
Our firewall as a platform or F Y had another strong quarter as we continue to grow faster than the market.
<unk> Billings grew 26 per cent from Q3, and we continue our transition from hardware to software and SaaS form factors and the cash highlighted.
Our next generation security or NGF continues to expand and now represents 27 per cent of our total billings of $346 million growing at 70% year over year.
In the third quarter, we added $133 million in new N G S era, reaching $973 million.
The acquisition of bridge crew out of an immaterial amounts of this number and we remain confident in our plan for achieving $1.15 billion and Ngls era exiting fiscal year 'twenty 1.
Turning now to guidance and modeling points.
For the fourth quarter of 'twenty 'twenty 1 we.
We expect billings to be in the range of $1.695 for $1.715 billion, an increase of 22 of 23% year over year.
We expect revenue to be in the range of 1.165 for 1 point of $175 billion, an increase of 23% to 24% year over year.
We expect non-GAAP EPS to be in the range of $1.42 to $144 using 101 for 103 million shares.
Additionally, I'd like to provide some modeling points, we expect our Q4 non-GAAP effective tax rate to remain at 22 per cent and our capex in Q4 to be approximately $30 million to $35 million.
As Nick has indicated we're seeing broad drivers across our business from Q3, driven by a foundation of the innovation and strong sales execution of.
Along with trends, we see in our pipeline and the non trail the demand tailwind that remains strong we're raising our fiscal year 'twenty 1 guidance.
We expect billings to be in the range of 5 to 8 to $5.3 billion, an increase of 23% year over year.
We continue to expect next generation security <unk> to be approximately $1.15 billion, an increase of <unk> 77 per cent year over year.
We expect revenue to be in the range of for 2 to $4 to $1 billion, an increase of 23.24 per cent year over year looks for.
<unk> product revenue growth of 1.2% year over year.
We expect operating margins to improve by 50% 50 basis points year over year.
We expect non-GAAP EPS to be in the range of $5.97, and $5.99, using 1990 to 101 million shares.
We expect forget regarding free cash flow for the full year, we expect an adjusted free cash flow margin of approximately 30%.
Okay.
Now, let's review, our fiscal year of projections and that second place overall.
Overall, we are confirming our place at protections, while raising on that affect billings by 300 basis points and revenue by 100 basis points given the strong performance of Safi, the M series and subscription business overall within that sector.
Moving on to adjusted free cash flow, we expect net what security will deliver of free cash flow margin of 42% in fiscal year 'twenty, 1 up from 38% in fiscal year 'twenty.
We continue to expect cloud and AI free cash flow margin of -43% in fiscal year 'twenty, 1 an improvement from negative 59% for fiscal year 'twenty.
While we are focused on growth investments in cloud and AI over time, we expect cloud and AI to create to achieve gross operating and free cash flow margin in line with industry benchmarks as we gain scale, our customer base matures and we become more efficient.
In Q3, we repurchased $350 million in our own stock at an average price of $322.
As of April 30th 'twenty, 'twenty, 1 we have $652 million remaining available for repurchases.
This is part of the broader capital allocation strategy focused on balancing priorities and maximizing total shareholder return.
We stopped with fueling organic investments and managing priority of the process innovation and go to market. The set the foundation for sustainable growth of Palo Alto networks.
Second we've deployed capital for targeted acquisitions, which accelerate this growth opportunity.
We rigorously evaluate targets focused on acquiring leading technology retaining key members of the team and following through with integrating these acquisitions into our businesses.
Finally, we worked to optimize our capital structure using the options available to us in this dynamic market that includes deploying debt using stock for M&A consideration and also buying back our own stock when we see it represents a good value.
With that let's move on to the Q&A portion of the call.
Both of them over to you.
In the interest of time, please limit yourself to 1 question. Our first question comes from Brian Essex from Goldman Sachs. The chemo the lani from UBS on debt.
Hi, Thank you good afternoon, and thank you for taking the question.
Maybe for for unit cash <unk>.
We've seen a lot of solid outperformance relative to expectations on the network security side and the nice performance this quarter with respect to you on the eye Anarch AOR growth Mark.
To get a better understanding given that the outperformance is day on the network security side. How confident are you in your ability to hit that 1 billion $1.50 guide for the for the full year.
How do we think about how that business has performed relative to your expectations.
So far this year.
Brian and I remember.
2 of 3 years ago, when we set our targets for the next generation security business. We didn't have the most of it I'd call. It the networks to figure out how we can get out of the firewall business and have that sales force go out and actually go sell cloud and AI. The good news is over the last 1 of our fears were building muscle. We're learning how the market operates it's kind of interesting every 1 of these markets operate slightly differently. If you look at Enzo.
Yes.
Combination of sassy.
First of all cloud and cortex of SaaS. He's characteristics are of all of the free trials, we gave a few quarters ago and this whole push to work from home is forcing customers to think hard about the security stack and is no longer you could access half of the apps of the time you need to be accessed stable ex everything from wherever you are so we're seeing network transformation then.
That's what's driving.
The success on the SaaS, even some of the huge wins you've had in Prisma access as I mentioned in 1 of the deals, which we closed and shipped in the first of the fun.
Is the largest SaaS deal ever which gave us $7 million of Engie S. L are so you can see.
Some of the the quantum of debt deal. So we're seeing a lot of traction on the access front.
And the SaaS upfront. So that's that's good our cortex and interesting space because we compete there of people like crowd strike in the sentiment of 1 of the others for a great on the product front as we've showed you with the Forrester wave in the mitral result, we're trying to create more muscle around being able to do the deal. Those deals are typically you gotta because it's the competitive market. He got it to a whole bunch of deals there.
And they all of the the range of the $1 million to $5 million range of at the higher end of the smaller below that so you don't get lumpy deals is having to do a lot more deals. So that's what we're doing on the cortex from last but not the least on the cloud from you've got turned 250 customers were there the deals end up being large deals theyre slightly lumpy and they have very a high variability and duration of income.
So some of the sound who's in the cloud out of by credit for the next 3 years, how many kind of do I need the suddenly find the deployment of slower because they haven't deployed fully on D. C P or AWS or azure, others, you'll say they've been customers of Austria that upping because they moved all of their workloads of the cloud and the workload ramp has increased so the all 3 of them has slightly different characteristics. That's why.
We end up in the portfolio situation.
For this quarter, we added about 132 million of net new and yes. There are I just told you about 7 more of it because I felt the Gaza extremely curious on Ngls and I don't want you guys to go out thinking we're not confident of our 11.50. So right now we all feel that we'll get to the 11.50 on N. G. S. L. R and it's going to end up being a portfolio of Covid in terms of something extremely doing extremely.
Well some things doing normal.
Got it alright. Thank you for that and then maybe the follow up of Deepak I. Appreciate the commentary on the improving operating efficiency of potential to improve the operating efficiency of cloud and.
And I think that's 1 of the thing things of that investors kind of struggle with when I think we've all looked at this business on the some of the parts basis.
And the performance of each on its own in the challenge the cloud in the eyes of the burning cash at the rate that it is what do you think about the firm.
The timeline for improving.
Profitability and cash flow generation from that business.
That might be of a trigger for investors, maybe look at that business on a standalone basis in the assigned it a little bit more value.
Yes, so maybe if I answer it in 2 different ways I mean, we look at what other companies have done is they've kind of like grown through that.
You know as they scaled over time.
And we often benchmark ourselves versus wherever they are at this time and all of the things that we continue to be able to get there, but at the same time.
We're not shy from like you know of making the right investments if we see the opportunity of that.
That's why I don't want to really box ourselves into the timeframe. It really is the question of what opportunities are out there at the time, so we have of baseline.
Yeah, that's constantly improving but we're also reflecting on the fact of this is a dynamic market and sometimes you need to lean in if it makes sense for the long term.
Yeah, if I can add.
Great. Thanks.
Yeah. There are 2 parts of 1 as you know for Deepak highlighted we continue to work hard towards getting gross margin efficiency on those products because of product development is in our control and Lee who is sitting to my right. He and his team work hard at trying to make sure of that we optimize the gross margin for the rest of it honestly is the question of how much do we want to invest in sales capacity.
To be able to drive those don't forget each of those areas. We are dealing with extremely competitive situations in the case of ex the arrow deal with dedicated salespeople gold strike the outflanked cause it to 1 of the number of salespeople. So we have to look hard at how much investment do you want to make on the sales side, we do get leverage of the Palo Alto salespeople or eventually end up in hand to hand combat on the.
Michael outside of I'd say, we were doing fine and we are doing fine, but suddenly the the equity of the venture markets had gone and you know provided phenomenal evaluations of dumped a lot of cash and some very early stage companies for now dangling large paychecks to ourselves people who've got the most qualified the unsecured yourself and so that's why I think the book is right in the same.
For that and we're going to watch the market carefully but again, we just told me the other number $250 million and they are in cloud security of Vms and and you know of public cloud security.
That's the number which is our flanks of our next competitor by probably 25 times.
Super helpful color. Thank you great. Thanks, and just remind us limit to 1 question. So next up is that the teams have a lot of you in on debt is Keith Weiss from Morgan Stanley.
And from there Nick asked me the I'll start with you very quickly.
After a lot of the areas of strength, China of chronic parent perspective, but in terms of just zooming back can you stack rank for us what specific product areas in the MBS portfolio really worthy of drivers of billings acceleration from the corner.
All right.
Yeah as I highlighted the necessity of strong the book highlighted the subscriptions are strong.
We're pleased with the way of cortex of evolving and cloud ends up being lumpy. So some quarters, we'll get some very large deals that make up the billing some quarters are the push but across the board and of the portfolio is performing in line with our expectations of slightly ahead as well.
That'd be at 973 or 980, depending on how you kind of.
The best place to kind of go to.
Let's just go 1 question, but we're gonna move on next to Keith Weiss with the Sterling Auty from Jpmorgan on debt.
Excellent. Thank you guys very nice quarter and thanks for taking the question.
I think you guys are doing a very good job of illustrating the theres a difference between firewall appliances and more generally firewall capabilities and you're seeing that firewalls of platform growth sustained really well actually accelerating in recent quarters and I think that's probably 1 of the key areas that debt investors are most cautious on is the.
The durability of growth and fire Walling can you talk to us a little bit about where you're seeing that strange from do you believe it to be durable over the next couple of years and is there anything that we should be watching out for in terms of tough compares or any 1 time items from a year ago period that might upset that that growth a trend that you've been seeing in firewalls of platform.
All of gave I'll make 2 comments Keith 1 is is there are situations, where the customers are looking for like you say of firewall and capability. We can walk in and say we can solve this problem of software.
Or you can go deploy tons of hardware to solve the same problem. So take of large retailer. They can go deploy 1200 firewalls in each of the stores if they choose to go down the hardware out which is more costly to deploy harder to maintain 1 of the upgrade overtime or we can go in and say, let's do that with Christmas assay, which is the software dependent solution, which has lower cost of ownership easier deployment.
As you saw so you're seeing us create some degree of substitution of our customer base. So if you compare like for like with some of the leading hardware firewall businesses, which don't have that.
And that's all for capability there the cannot deal with that substitution.
The capability, which we think is better for the long term because we just point of the Rpms I look for you can grow ARPA of 38 per cent that just means the future revenue coming down the pike on the F upfront, which is going to be harder to onto the kiln on a quarterly basis. If you were of hardware only business. So I actually think there's more resilience in our in our network security business and most hardware development dependent businesses.
The second piece I would say in the context says.
What was proxy based architecture is now full firewall in the cloud.
And we're seeing that in spades in Christmas the assay people are stepping back and saying, Okay. Let me understand this how do I get my trading system to be accessible from the employees' home you can't do that with proxy based architecture, we've talked about that AD nauseum and we're seeing that really bear out in the success, we're seeing in Brisbane for Abbvie.
My my fellow.
The colleagues Walter and depot for a lot of let me throw out more staff from that area, but I'll, just say I am extremely delighted with the progress we've made and sassy from where we came from 2 and a half peoples of ship your product called G. P. C F and B would charter like you said the 1 time items. There was the 1 deal when I came to volatile we of sweated the entire here to see how we lap that in the fall of linked quarter.
Now, we do 6 of those in the quarter.
And we've got tons and tons of lined up in our pipe going forward. So that's the is strong which should give us continued strength I think the network transformation is in a very very early stage you can think about it if you see AWS D. C. The Azure clipping $40.50 billion of billings in the quarter all of those customers are going to stand up and realized wait I'm the wrong on.
Mpls based architectures to go back to my data Center now I don't need to go there I need to go to the public cloud. They do that you Gotta go south of it.
And right now we firmly believe we have the best of SaaS solution of the market. We firmly believe that the of the most deployed customers out there at scale.
Great. Thanks next question from Sterling, Auty and soccer Kelly of from Barclays Non Jack.
Hi, Thanks, it's fun to see Walter on the other side trying to keep us to 1 question and after all items here.
I wanted to follow up on Steve's question as well on our plan.
GAAP help help us understand what are the metrics that we should look at in terms of and you gave a little bit of this last quarter, but when you look at your installed base of the on premise appliances and some of that starts to transition. The aflac is that happening and if it does how is the dollar per.
Dollar comparison in other words for your customers still end up spending more there.
So expanding under of Wap versus their traditional clients is the smaller for the same.
I'm gonna, bringing my colleague Lee Klarich share, who spends a lot of his time, making sure that these transitions work and we see these transitions will happen the sleek yeah banking.
Banking of cash are.
Good question and actually last quarter, we provided some insight into this if you remember the there's effectively 2 transitions that we see play out 1 transition has to do with the movement of applications from data centers to the cloud where.
Where the form factor off of is changing from a hardware form factor to software form factors of the I'm serious et cetera. The other.
The transition is from based on how the employees and users are moving increasingly.
Increasingly obviously moving off the network and soon moving to more of a hybrid state where in that case the.
The it often is moving from hardware to hardware plus cloud delivered SaaS the architectures in.
And so as you think about those the.
The.
The net effect of all of it is positive for us in terms of the overall spend from customers. There's some puts and takes hardware going to VM series and the cloud is is relatively similar hardware going to SaaS is actually typically an uptick in overall spend because it's not just like for like it's actually the SaaS the inquiry.
The network is the service and a lot of the networking components global network reach et cetera, and so the overall spend envelope becomes larger as more of the capabilities actually get integrated into the service that we're delivering to customers. So.
Overall positive and we've been tracking this and have a history of this for a few years to be able to actually see how that plays out.
Great. Thank you great. Thanks, Our next question from a stack of Italian from Barclays and then Matt Hedberg from RBC on debt.
Yeah.
Hey, great. Thanks for taking my question here.
The cash maybe for you can you hear me, okay both of them.
Yep.
Okay cool.
That was helpful commentary on the equity structure around around <unk>.
I guess the question is what were some of the things that went into your decision to explore that last quarter and then maybe reconsider it this quarter and is it a matter of timing given the volatility in the market or would you say that the probability of exploring that down the road is still relatively low.
I think Takeda as we went through the mechanics of creating all of the paperwork required to file a list of the debates began began to happen with some of our shareholders as I look the true value creation of and they actually can take this and separated because you'll still have a stub of some sort of a tracking stock.
And the challenge with separating it as you saw 70 per some of our customers that are buying multiple platforms for because of our customers that are buying all 3 platforms, we're getting into conversations with CIO of somebody goes through a breach of our ancillary when they want to go wall to wall and say listen from protect me protect my cloud protect my soft protect my network transformation and then if suddenly the saying what we have.
All of the vantage point from where we are where we can go pitch all 3 platforms and go in the envelope the customer with security and we're creating this artificial separation of amongst ourselves, where we're not gonna be the leverage that so that definitely went into the decision I think the question with the okay. I can't I can't keep practicing a sort of just as strong a 2 day parts about the funding.
Of course that will be net sac I think we'd still have to make that of self standing profitable entity.
It's on the of course, and I think it's too early to go think about separating that into distinct businesses, because we're getting phenomenal leverage from our from our.
Firewall sales teams, who kind of true.
1 of the half decades trying to build the relationships and get them better than the customer base.
Very helpful. Thanks, Great. Thanks, Our next question from Matt Hedberg from RBC them, then we've got totally out of it.
The next.
Thanks, Walter Hey, the cash I wanted to talk about all of these recent breaches.
You alluded to the president by talking about the importance of Zero Trust I guess.
Do you think about that impacting your federal business later this year.
And then also.
As these breaches continue accelerating of post Covid World do you think you can be the better position to consolidate security spending there's always the debate on best of breed versus the versus consolidations.
The accelerate your demand environment, even more so.
No matter, what's interesting is let's start of the second part first like clearly whatever the approach was used to buy security hasn't worked.
Right and we've traditionally been in the best of breed approach of go to the companies. They have 35, 25, 40 vendors and the act of stitching all of those solutions together is left on the shoulders of the customer give couple of out of the 2 biggest technological transitions that have ever happened in the history of computing..1 is the shift of the public cloud where you have to fundamentally change of.
I T architecture in the second of the network transformation that you're going to driven by the cloud. So CIO of the dealing with those 2 technology transitions and at the same time, having to take a hard look at security and bolstered up and I think there are if you look at historically.
I don't think there's been many security companies who've been able to give you a best of breed solutions across multiple capabilities. So our firewalls 9.
The 9 times.
The top right Magic quadrant.
All of our own capability, whether it's sassy or hardware firewalls, the EMS fit in that category. So they can get the best firewall and capabilities across 3 different architectures of all xdr, maybe at the top right in the Forrester wave for the only cloud security of Native Security company with Prisma Cloud, we are top right in SD Wan, where top right next sort of if there was the quarter. So we actually have the ability.
To give you of stitched set of products across 5 leadership positions, which it is not available today in the cybersecurity industry. So we're able to make the both the best of breed and stitched platform argument right now and is resonating because customers who are going through these agonizing times of stepping back and saying wait I need to look at it from a different approach and I can go how can.
Can I go with the partner like and hold accountable for my entire security footprint.
Great. Thanks, Matt next up is totally honey with the Keith Bachman from BMO on debt.
Hey, I have an accounting issue of constant question.
Great results E. R. R were better than expected at least some people expected the some issues there but.
I looked at your filing and you've changed the definition of our are a little bit. This quarter you added the language when I compare the language of this quarter versus last quarter. You added the language debt. This quarter. It includes certain cloud delivered security services to IRR would you mind to quantify. This. This addition was it material to the numbers this quarter.
Thanks.
Yeah, I'll I'll take that question, it's really not material.
For the overall number we added a couple of.
The cloud delivered.
Technology solutions like our Iot being 1 example.
When you add all of them that the relatively de Minimis.
In nature.
Got it. Thank you the early launches of our products and we wanted to make sure they fit in the right buckets.
For the Iot against cortex, Xdr of cortex data lakes.
And they sit in both places and our firewall business and of our cloudy either.
Great. Thank you.
All right next up is the key button and then the on deck as great Pal from <unk>.
Alright. Thank you very much non cash I wanted to ask you the flush out of cortex, a bit more in terms of.
Run rate and expectations feedback we've been getting from the channel. This cortex, certainly is doing better and I was wondering if you could talk about win rates.
Where are you winning.
Some of the reasons why is there any metrics you can give us on growth associated with the cortex brand, whether its revenues or billings.
The well like I'll give you a metric we havent given but I'll tell ya cortex comprises 3 products 1 of the ex D. R.
Which we compete with as you see with crowd strike in the central 1.
Well I think the challenge we have there as well our product as you can see as technically we now rank better than crowd strike in the bar with the central 1 another's. The challenge of receipts, we don't have as much coverage of Scott strike. So there are more deals than we are and that's the virtue of the fact that they have 8 times more dedicated salespeople chasing the ex yard category and we don't are aware of.
We do end up against them, we pretty much don't lose technical Poc's, obviously because of the you've seen the technical compared to the market then becomes the price war and we don't bend or on the price for it. So we see reasonably good win rates against them, where we are present I think of challenges were not present in as many deals of that we'd like to be present in.
Because they've got a they've been at it for 7 years, we've been out of for doing the half. So that's kind of like the ZR solution on ex for it used to be Phantom and day. Mr. For the most part we don't see much competition on the ex or category.
We think.
Pretty much where the customer believes they have a need they will go with ex or so we're not we don't feel of challenge in that market, but it's a it's a moderate deal side, that's not the real size of the cloud, which can get to the 8 figures.
It's a it's the deal size for the smaller than that but we do see less competitive activity in the XR category and last but not the least expensive access as management is the newer category where people are beginning to understand that the hackers can look at the entire vulnerably footprint from the outside so you're better off having a clear view of for example, any customer that goes into a breach of pulse.
So we're actually wants to understand their entire footprint and the vulnerability of associated with it. So we ended up having an engaged for the the expense whenever that happens.
What is going on is that with the formation of a unit 42, we're getting more and more involved and more incidents out there, that's allowing them to drag and drop like D. R and expansion of those it's early days, but we have merged the forensic capabilities. For example of trips as it used to be of protocol headroom that has been embraced into ex D. R. I won't go library.
Shortly where a couple of 1 of our where our incident responders can go deploy ex D. R and provide all of the forensic capabilities that they do when the breach happened. So early days, we are seeing more traction on cortex, I think we announced delivery of 2400 customers. The only the real upside and opportunity for US just to go ahead and execute at scale over there to get into more and more deals because of.
The product is there 2 years of at the.
12 months ago, we didn't have the product right.
Right. Okay terrific. Thank you. Thanks, Keith desktop is a great help from <unk>, Adam Tindle from Raymond James.
Hey, Greg can you hear me okay.
Alright, thanks for taking the question. So yeah, maybe back on Prisma access what what's been the reception with Prisma access to non <unk>, so far and do you see that product update with processing capabilities.
The Palo Alto in the more traditional secure web gateway replacement deals or potentially improving the pace of our new logo ads on the product set.
Yeah.
But where we were really excited about the crude out of launch a few months ago, great reception from customers really excited about.
Everything that was in that launch you remember this is where we introduced cloud management so of cloud native experience onboard you know easy on boarding.
The activation. This is also where we.
Launched the first ever autonomous digital experience management add on module. So this allows our customers to.
Monitor the actual end user experience that we're seeing through the service to the applications are accessing in addition to the proxy capabilities in cloud voice technology et cetera, So here's the big release very well received the.
The.
Adoption of almost all of the Prisma access customers have now been upgraded ciudadano and very smooth upgrade process. We're seeing a great adoption of the new cloud management are close to 100 customers are now using that.
Just the first couple of months of availability the autonomous the we're getting great feedback from customers from early adopters and growing the pipeline of that that's an add on module that we can go and sell back into the prisma access customers as well as new customers.
And you know the the proxy capabilities interesting is as you know the.
We still believe most customers are going to want the full fledged capabilities of Prisma access of not just the proxy of capabilities, but.
That can't really has achieved what we wanted is removed that as an.
An objection, it's allowed customers who need it to be able to move to prisma access and and just remove that as the criteria and so we're seeing a number of customers that are testing that and using it in a happy happy we added in and made the change.
Okay, great. Thank you very much.
Thanks, Craig Adam Tindle from Raymond James and then Michael for Q&A.
Okay. Thanks, good afternoon, congrats on the results.
I wanted to ask the unprofitability, whether it's in the cash would be talk wants to weigh in Youre seeing deal sizes increase you're seeing cross platform adoption and those were helpful metrics for us we typically associate those with very healthy contribution margin you did talk about 50 basis points of operating margin expansion. This year, but I wanted to ask beyond. This do you think that this is something.
Where you can build on your hitting a turning point, we could see sustained margin expansion from here you talked about 150 basis points annually of couple of years ago at an analyst day I'm wondering of the puts and takes to get back to that level of margin expansion. Thanks.
I I think I think the honest answer is it's pretty situational right. I mean, I think every every customer the deal is different and you know like what we're obviously going to.
Lean in if we have to you know in order to do that but I think what what really drives us is making sure that we don't leave any money on the table I certainly think that as the portfolio grows as the attack surface area of becomes more complicated.
Hopefully the leverage moves more.
Towards the all favor over time and that will help US you know over time, but I think in general I would standby, it's always a focus area for us and we believe that with scale will come from margin expansion over time.
But at the same time, we just don't want the leap opportunities on the table if that after the taking share.
The Saudis about Adam I already of note. Thank you for your initiation of an upgrade.
I noticed that you talk about operating margin leverage.
The many folks of highlighted in this call. We have 2 businesses for network security business, where you can see the leverage of 42% of free cash flow margin you know still growing at 26 for some of the links and 38 per cent of ARPA from.
Some number of other peers in that type of the different.
But so we see that's where the leverages, we'd love, we use that leverage towards the place ex the says.
In the history of cyber security Nobody's build the 735 million out of our business in 2 and a half years. So let's just like the stalking for them and we didn't buy all of it for you bought some products into it but it has been built by a lot of go to market capability. If you benchmark that against the cloud strife in the authors of the war of the reschedule of the World Youll see Theres a natural.
Evolution, which doesn't happen in 2 years sales do we believe there is operating leverage in the future is because we do it becomes a question of do I want to go hire another kind of salespeople and be the has many deals of the crowd strike or don't Wanna Hydro hundreds of salespeople and kind of a lower growth rate because I don't believe I have the capability of the product side.
All of the networks has never been in a position like today from a product capability perspective.
The products resonate the rarely get thrown out because of the products don't cut it and given the heightened security awareness in the market, we're seeing more traction because as you guys know other products on the margin slightly more expensive of premium than some of the other players in the market as the security of awareness of heightened desire.
The desire to have more secure product goes up the better for us because of the customers more willing to be.
The billing to be tolerant of a price point of associates of balls that 1 so honestly and I think I'm repeating what the Bucks that is that we don't want to.
Total of the growth opportunity for us when I came to volatile we were growing in the low twenties now we just show the 27 and you know maybe 20 of 29, if you adjust for the annual plan and stuff and that's the acceleration and we'd like to see if he can maintain high growth rates going forward in the that requires us to invest and look for leverage in the few.
Yes, we will do that for the management team.
Great. Thanks next question from Michael tourists of Keybanc, and after that Patrick Colville of Deutsche Bank.
Hey, guys. Thanks.
The cash I think the 1 of the investment thesis here has been good the company the most likely the knowledge consulting security, but to make the transition to software and kind of the club.
And you've proven it out like that.
That said, we've also been doing a great job this year on the product slash the appliance side of 3% per se versus what you guys are flat. So I'm just trying to get a sense for the dynamics of that in the next 3 calendar quarters.
You could we get.
The boost from refresh of what wasn't done last year and is there any constraint to that if it's going to happen from the supply chain components.
That's a great question of Michael I think the supply chain situation changes of weekly.
And the you can see all of those machinations play out of the market as you can imagine like other players in the market. We have some degree of yeah inventory of capability because of the our expected demand in the.
Upcoming in the shorter duration of the longer duration, all bets are off in the industry, depending on how they bring up more fabs to go print out of the chips and get them to us. So the good news is as the as I highlighted we moved 40 per cent of our firewall business software.
So if you if the industry starts to see supply constraints, we are able to solve the customers' problem by giving them capability with the software the base and we obviously will still have our baseline available hardware. We do have the units available for the recent announcements for our hardware launch, which we just did with Lee can talk about in the second.
But oh.
Again.
I know, we've talked about as Michael and we keep going back and forth from this is that I honestly look at the overall capability of the firewall and capability and kind of as much as I like product I also liked the idea of having more or less of less reliance of the hardware because I promise you in a few years from now you're going to tell me you Love your business, but you still got this hardware of hunt and kill requirement of every quarter Airings of Bunge.
They can give me of hardware. So we're trying to thread the needle with you here trying to give you a great firewall and growth keep the revenue growth I keep the cash flow of heightened still transform our business from hardware to software, but Lee do you want talk about the other ones.
Sure while we're transitioning.
Transition of the business there is still a wonderful business out there for hardware and the 2 new models that we just announced yesterday are.
You know pretty exciting really we introduced the new high end of clients scales up to 150 gig throughput with all security turned on 75 gig with full SSL decryption.
Just the amazing product for the large campus data center environments. The and then at a for the branch environments smaller enterprise environments. The we announced for new appliances, and the 400 series. The basically 10 X the performance of the previous platforms we had.
And 1 thing it's a I think particularly interesting about how we were bringing these new products to market as we have all of the leading security capabilities of the pellets networks is known for.
But we're bringing it out of price points that are incredibly competitive with.
Even the some of the lower cost vendors out there and silver for the same capability the same great capabilities leading capabilities.
But at Super competitive price points changes the dynamic in the hardware space a competitive space.
I can't get lead to say the stable [laughter].
So it keeps saying leading leading competitors.
Yes, [laughter] Palo Alto, great security at ex price.
Do it.
Okay fine.
Last question here from the Patrick Colville of Deutsche Bank go ahead.
Thank you for squeezing me in I was actually going to ask about the new plants is because I think that's a super interesting but.
I think Lee covered it pretty comprehensive that the.
The questions, we'd be getting from investors over the last of our has been about the definitional change on any or all of US could you mind, just quantifying what the certain cloud delivered security surfaces of services, how much is that in <unk> versus <unk>.
Yeah, Let me, let me give that of cracking when I said that it was de Minimis.
It's less than $5 million so.
Just the other kind of like our overall non Matilda well true.
Great very clear. Thank you so much grateful that none of that.
That concludes the Q&A portion of the call. Thank you all for joining and asking the question again I'm going to turn it back over and the cash for closing remarks.
Hey, I just wanted to take the opportunity to thank you all for joining our call I also want to take the opposite of the thank the employees of falls and that works for all the hard work and dedication to allow us to produce these results are we out here because of what they do so once again, thank you everyone and I look forward to see.
The thing you guys in our individual call backs.