Q1 2022 Palo Alto Networks Inc Earnings Call

Customers in the very early stages as his journey involves network transformation to enable access to all apps from any location only Palo Alto networks and provide a comprehensive solution with a constant consistent network security platform across all form factors, we see many customers in our installed base recognizing this so far we have 1400 fr.

57000 next generation firewall customers that have adopted our SaaS technology and network security sellers and channel partners are becoming increasingly proficient and just natural extension of our core firewall offering and we see this as a continuation of our of our growth in the southeast space, allowing us to get gain share in firewall as a platform.

As a category as well as some sassy.

Overall, we saw our SaaS customers grow 61% of urea at over 1700, we're happy with our progress selling SaaS into our installed base.

What is also interesting is over the last 12 months, we have seen more than 25% of our satisfied customers who have come from outside of our installed base, which is not just exciting to see because customers are choosing our network security stack. Despite having other people's firewalls. It is also a sign showing that in the future you can expect to see.

Sure.

Our innovation in hardware and software firewalls, those assay customers, allowing us once again to expand our installed base.

We believe this is an important indicator not just of the competitiveness of our SaaS offering but are also an opportunity for us to provide a comprehensive zero trust architecture to our customers.

We're also seeing good initial interest and our <unk> appliance would you expect to be part of our enterprise solution later in this fiscal year.

Switching to Prisma cloud.

Our Prisma cloud business continues to benefit from the dual drivers of customer adoption of Hyperscale public cloud technology as well as a growing awareness need for security and cloud environments. As I've noted earlier, we introduced significant new enhancements to our Prisma cloud offering to speak at ignite and again I encourage you to check out the highlights from the session that Lee and our CMO zenith.

On Tuesday.

Total prisma cloud customers grew 26% year over year beyond customer ads remained very focus of customers consuming credits across our platforms credit consumed increased to $2 2 million in Q1, including strength from some of our new modules credits being consumed our validation of customers driving value from our products.

Beyond this broadening of consumption were also seeing an uptick in expansion as you know volumes go and greater participation in Prisma cloud from a bad channel partners.

All important as we grow the business and focus on SaaS economics.

We've continued to see strong results from bridge group as a reminder, Richard who has a sales motion, whereas at target developers and combined with its popular open source offering check all we have seen strong traction in the market on a standalone basis, a five figure opportunity is a large deal or a breakthrough.

As part of all the networks, we have seen these deals get substantially larger as customers understand how to leverage bridge crew and a comprehensive prisma cloud roadmap. This quarter Bridge crew was an important driver of a million dollar deal in the insurance vertical overall prisma cloud is leading this important trend towards securing the cloud native environment is clear that the oil market has caught on to this.

Trend that'd be identified early and it has been aggressively funding companies and cloud Native security as you might've noticed.

I think we do more ore in one quarter and it pretty much the animal. They are most of these companies that are being funded at extremely lofty levels were.

We're growing quickly and executing well across with Mcleod, who we believe we have a long term ability to win.

Switching to our security automation capabilities.

Our cortex platform continues to deliver innovative integrated capabilities unifying our market leading technologies across xdr excellent expense.

Total customers across 60 are poor and external reached almost 2800, increasing over 75% year over year beyond new customer transact traction. We also saw an increase an expansion on the back of increased new activity in Q1.

Our cortex products again received strong industry recognition.

As I said it was identified as a strong performer in the 2021 and Forrester Xdr New deadweight. This was based on our $2 nine version in early in Q1, we just released extra you have to do zero significantly enhances xdr's capability in the cloud and also includes a built in forensics response capability to help soccer teams automate the full lifecycle of detection <unk>.

Mr. Gibson response.

<unk> continues its leadership position being named a leader in the Google home sort of valuation. We also continue to see traction on the partnership front as well across cortex.

Saw strong partner activity continuing around the extra marketplace with over 80% growth in bookings influenced by our systems integrators, and MSP partners and on cortex. At ignite we have just launched an X M D. Our partner specializing specialization within our partner program with launch Alliance partners, including Pwc Orange Cyber defense critical start and trustworthy.

Yeah.

On the back of very strong large deal performance in Q4, we followed this up with strength in Q1, driving a broad repeatable inefficient largely the motion is a key initiative for our sales organization in FY 'twenty to Amit Singh, our Chief business Officer is focused in partnership with our President and BJ Jenkins to drive deeper multi platform relationships with them.

Right a cohort for our customers.

While Q1 is seasonally seasonally our lightest quarter. There we closed 167 figure deals within the quarter. Furthermore, the total dollar value of the seven figure deals signed in the quarter were up 36% year over year.

Our millionaire customers were 1025 in Q4.

Q1, sorry, approximately 29% year over year. This is our fourth consecutive quarter, where either a growth or a millionaire customers was north of 30%.

We're close to it.

Turning to some of our larger wins in the quarter there.

There are several trends that should be evident in these large deals first.

Seeing success with multi product adoption.

Second.

Customer commitments are increasing in size, reflecting both the growing importance of cyber security as well as our leadership position across our platforms. The value for large deals is up materially year over year and growing faster than our business. Overall this is becoming a motivated with process for us and it is also an area for us to continue to mature and drive efficiency in our sales organization.

There are a few areas of success emerging where you see trends. These include an uptick in proxy replacement significant expansion and sassy deployments in the back of initial purchases driven by work from home Center.

Standardization on Prisma cloud across customers cloud footprints and consolidation across customers network security architecture. We highlight these deals because they are in line with our strategy to lead in each of our platform areas and also to drive cross platform success.

Bringing it altogether.

As I said I think we're on a much stronger long term secular trend for cyber security and Palo Alto networks is uniquely positioned in that trend to be able to leverage all of our investments in innovations that we've made last year across all three of our platforms. We've.

We've had a strong Q1.

I'm delighted by the innovation and execution of our teams.

We laid out our strategy for the air and a medium term vision in mid September at the analyst day, and we remain focused on these areas, we aspire to build that youre able business and lead the industry through this unprecedented period of growth. Our focus is on driving innovation betting on OTT platforms embedding AI and machine learning across our platforms to shift the balance between our customers and sovereign adverse adversaries.

We leverage our scale to grow our business and drive efficiencies across the company in order to be the trusted security partner for our customers.

Our revised guidance for the year reflects broad based strength across our portfolio, resulting in higher revenue and billings for FY 'twenty two we're holding our EPS guidance for the year to make sure. We can deliver on strong demand with the current supply chain backdrop with that let me turn the call over to Deepak go into more detail in the Q1 performance and our guidance.

Thank you very much and caching and good afternoon, everyone. Please note that all comparisons are on a year over year basis and financial figures are all non-GAAP, unless specifically noted otherwise.

We delivered results ahead of our guidance provided in August across all metrics as we continue to grow and transform our business in Q1, the acceleration of our topline continued driven by strength in our broad portfolio, including both our appliance offerings and on next generation security offerings.

The Q1 revenue of one point to $5 billion grew 32% and was above the high end of the guidance range.

Growth was driven by product revenue in all geographies in all three platforms.

Total deferred revenue in Q1 was $5, one $6 billion an increase of 31%.

By geography, Q1 revenue growth was strong across all regions. The Americas grew 30% EMEA was up 35% and Japan grew 38%.

Next generation security or N. G. S. A are all finished the quarter at one point to $7 billion continuing its steady growth trajectory within Ngls, we saw exceptional strength in our prisma platform as well as XOR and SCR.

In the first quarter of 'twenty, two we delivered billings of $1 38 billion.

Up 28% and above the high end of our guidance range.

As a reminder, billings as total revenue plus the change in total deferred revenue net of acquired deferred revenue.

Yes, billings of $366 million grew 38% year over year.

Remaining performance obligation or a P. O was $6.0 billion, increasing 37% with current L. P O growing in line with total <unk>.

As I mentioned at our Analyst day, we believe a P O adds meaningful insight into our future revenue as it includes both prepaid anchor contractual commitments from our customers.

Okay.

As we also forecasted during our recent analyst day in September our appliance business.

Accelerated in Q1, as we achieved 25% year on year product grows the fastest product growth in 10 quarters.

This was ahead of our guidance of low double digit growth as we saw both fulfillment a strong Q4 orders and also follow through in demand in our Q1 orders.

Customer reaction to the new appliance launch in late fiscal year 'twenty, one has been positive.

Cash noted strengthen our appliance business was broad based and whilst refreshed with a positive driver. We also see signs that demand is sustainable beyond this refresh activity as customers return to pre COVID-19 patterns of purchasing.

Subscription revenue of $579 million increased 35% support revenue of $373 million increased 33%.

In total subscription and support revenue of $952 million increased 34% and accounted for 76% of our total revenue.

Gross margin of 74, 4% was down 140 basis points year over year as we incurred additional costs related to appliances we.

We will continue to ensure that we're focused on enabling shipments to our customers in the current environment.

Operating margin of 18% was up sequentially and down year over year as expected as we absorbed the strong rate of hiring we had in the second half of fiscal 2021.

Our operating expenses came in below our forecasted levels as we focused on driving operating efficiencies to offset higher input costs on our products.

Net income for the first quarter grew 8% to $170 million or $1 $64 per diluted share.

Non-GAAP effective tax rate was 22% and a GAAP net loss was $104 million or dollar 0.6 basic and diluted share.

Turning now to the balance sheet and cash flow statement.

We finished October with cash equivalents and investments of $4 4 billion.

Hey.

Days outstanding on sales was 74 days a decrease of seven days from a year ago, driven by a combination of strong collections and improved billings linearity.

Flow from operations was $589 million and we generated record free cash flow of $554 million.

Free cash flow margin of 44, 4%.

It's also worth noting that in Q1, we moved our customer count methodology to active customers from our historical method is sold to customers as we continue to transform our business with the growth in software form factors and a R. R based solutions and next generation security, it's important across the mature accounts customer acquisition.

Retention and expansion framework.

As we are increasingly focused on active customers internally, we believe it makes sense to align our external reporting in this way.

In the appendix of our presentation, we've adjusted the customer counts provided over the last five quarters in our investor slides, the conformance to the access customer methodology.

Our capital allocation priorities.

As outlined in our September analyst day are unchanged and aligns with the optimization of long term shareholder returns.

Pillars of our total shareholder return framework or an action in Q1, we delivered industry leading growth for our revenue scale highlighted by 32% revenue growth and the highest Q1 growth rate Palo Alto networks as reported in five years, we're focused on investments that will continue to sustain this growth while delivering EPS ahead of our guidance.

The Street.

For Q1.

We did this with a bias towards making sure we could fulfill customer demand, while driving operating efficiencies to help offset higher product related costs.

We believe this additional expense is a good investment for us as a crude value in our long term customer relationships.

Free cash flow margin of 44% for this quarter was strong and puts us on track for our annual or multiyear goals we remain.

Focused on share repurchase as the largest use of our free cash flow generation. However, there were several material events in the quarter that made it challenging to buy back stock, including a mid quarter analyst day, and the transfer of our stock listing to NASDAQ.

We'll continue to be opportunistic buyers of our stock have you as you've seen over the last 12 months.

We have a $1 billion remaining on our share repurchase authorization expiring at December 31, 2022.

Lastly on the T S upfront as many of you have likely seen in our 2021 proxy statement, our compensation Committee revised Palo Alto Networks' executive compensation program to add in a tsi multiply until fiscal year 'twenty two plan to better align executive pay with shareholder interests.

We closed a very small acquisition during Q1 gamma networks that brings us additional technology and the D. L. P area and was part of the announcements about Nextgen Council. This week of ignite.

As we have assembled a key pillar as needed to execute on our platform strategy. We continue to expect only incremental M&A activity in fiscal year 'twenty, two as compared to the recent past.

Lastly, moving now to guidance and modeling points.

As Nick has mentioned and you are undoubtedly aware there is some disruption in the global supply chain. Our teams have navigated through these challenges extremely well, although we did incur some incremental cost of product revenue in Q1.

The guidance, we're giving today can considers the latest inputs, we have around the supply chain and all the factors we.

We do expect that we will incur additional cost of products in Q2, and the fiscal year, which we have factored in.

At the same time, we're focused on driving operational efficiencies and our overall business to help offset this.

In that context, we're pleased in our ability to hold our operating margin EPS and free cash flow margin guidance for the fiscal year.

2022, we note that at the high end of our guidance range, we would achieve the rule of 60, which was our aspiration at our analyst day, adding together, our revenue growth and free cash flow margin.

Okay.

For the second call for the second fiscal quarter of 2022, we expect billings to be in the range of $1 five $1 billion to $153 billion, an increase of 24% to 26%. We expect revenue to be in the range of $1 265 to $1 285 billion, an increase of 24% to 26%.

Non-GAAP EPS is expected to be in the range of $1 six three to 166.

Based on a weighted average dilution count of approximately 105 to 107 million chats.

For the full fiscal year 2022, we expect billings to be in the range of $6 675 to $6 $75 billion, an increase of 22% to 23%.

We expect revenue to be in the range of $5 35 to five $5.401 billion, an increase of 26% to 27% we.

We expect our next Gen security Ara to be 165 to $1 7 billion, an increase of 40% to 44%.

We expect our product revenue growth percentage to be in the mid teens year over year.

We expect our operating margins to be in the range of 18, 5% to 19%.

And our non-GAAP EPS is expected to be in the range of $7. One five to seven to five based on an average diluted count of approximately $106 million to 108 million shares.

Adjusted free cash flow margin is expected to be in the range of 32% to 33%.

Finally, please consider the following additional modeling points.

Based on the seasonality of spending we discussed last quarter as well as progress during the year, so far with forecasting that we will deliver slightly more operating income in the first half of the year that we noted on our Q4 call.

To help you further calibrate your modeling of our seasonality, we expect approximately 33% to 34% of our annual operating income to come in Q4.

We expect our non-GAAP tax rate to remain at 22% for Q2, 'twenty two fiscal year 'twenty two subject to the outcome of future tax legislation.

We expect net interest and other expenses of $5 million to $6 million per quarter.

And for Q2, 'twenty, two we expect capital expenditures of $80 million to $85 million.

Fiscal year 'twenty, two we expect capital expenditures of $205 million to $215 million, which includes approximately $39 million related to our Santa Clara headquarters.

With that I will turn the call back over to clay for the Q&A portion of the call.

Great. Thank you Deepak and to allow for broad participation I would ask that each person only ask one question and our first question will be from Brent Thill of Jefferies with Patrick Cold on Deutsche Bank to follow Brent you May ask your question.

Thanks, Good afternoon, Nick cash on when you think about some of the supply chain issues, you're going through or are you seeing clients being willing to trade off for cloud or are they accelerating their workloads faster.

To the cloud and therefore, just substituting your solution. There can you give some color of what you're seeing in the customer behavior based on on whats happening right now thanks.

Thank you for the question look I think there's a people I've highlighted and I said, we are seeing some customers get very sensitized. It I'll lead times and hence we are seeing them order ahead. We're also seeing customers think longer term what they want for capacity for the full year and so we are seeing more visibility in terms of what their needs are on the hardware front.

I am also sure that there is some substitution going on because we know that not every player in the industry has consistent lead times is what we're offering to our customers. So there is some substitution going on in the market from other vendors to us where they are already in the infrastructure as it is the first and second provider or it's and it will become a net new provider.

Outside of that yes to some degree we are seeing cloud adoption continue to accelerate across the market I think it's partly a function of the fact that people have made the shift to cloud faster given the pandemic I think there may be a marginal impact of people running into the hardware issues, but it's not as.

Widespread and broad based as a you know enough yet to call it a trend, but I'm sure on the margin that affect us there.

Alright, great and our next question comes from Patrick Colville of Deutsche Bank with Sterling Apollo Patrick You May ask your question.

Hey, Thank you so much for taking my question.

And actually switching to the mgs.

<unk>.

Very impressive has always grown to one spot two 7 billion.

I guess the sequential Delta was maybe slightly less than we've kind of seen the recent trends if I. If my math is correct.

About $90 million increase sequentially, which is about 8%.

Sequential growth.

Which is kind of a little bit below the trends, we've seen last year and before that so I guess can you just help me understand the puts and takes there of.

<unk>, yes, please theres a lot of momentum around and just Patrick as we highlighted both of the Prisma cloud side and the Prisma sassy side.

You experienced last year, our NDS business is very heavily backend loaded in terms of Q3 and Q4, because the team spent a lot of time getting the customer to a you know most of the products are either a part of their cloud transformation journey of a soft transformation journey or the network transformation journey. The keyword in all three of the transformation aspect and transformation.

Aspects require longer P O sees longer discussion with our customer we have ample confidence that we will we will handily meet our expectations for the familiar N. G. S. A or are they actually don't sweat the quarterly evolution, because we look at it as annual pipeline.

As I said, we feel it's a it's well in hand and our.

Couldn't be more enthusiastic about it.

Great and our next question comes from Sterling Auty of Jpmorgan with Phil Winslow up next chapter that Sterling you May ask your question. Yeah. Thanks, Hi, guys I, just don't want to go back to the supply chain, which I'm sure a lot of us well.

Is there any sense when you're talking to your customers how much of the timing of these orders is for lead time, meaning that you are just doing it in the first half maybe you would've gotten some of these orders in Q3 Q4, and how much of this might just be increased ordering because they're utilizing solution.

More wage so more micro segmentation and other kind of general architecture use cases, yeah. That's a great question, Charlie I honestly I think if I if I was a rank order the the impact we've seen 25% product growth remember, we've just done a hardware refresh refresh for part of our portfolio and that all.

With traditionally we see that whenever you do a hardware refresh your customers will step up and want the newest piece of hardware and they've kind of learned how to anticipated. So there. So that's clearly the number one effect we're seeing in the border I think the second effect is to your point increased consumption and increased deployment requirement that we're seeing because you can tell you can tell if a.

Customers Preordered ordering ahead or it's a net new customer net new customer has never been a customer follow up though is not ordering ahead, there actually transfer transferring to bottle off because I think that's the third impact in the fourth one to be honest, what I would consider it a 10% impact.

Take is approximately what we're seeing into the ordering ahead category.

Thank you.

Alright. Our next question is from Phil Winslow of Credit Suisse with sockets Korea. After that please proceed.

Great. Thanks, guys.

A question for you on Prisma cloud, obviously, you continue to put up good customer metrics positives consumption numbers and there's obviously been a lot of focus investors on that.

<unk> lifecycle and shipment securities two questions here, where are you do you think that customers in terms of their sort of adoption of these technologies, what sort of any inning are we in and then secondly, when you are winning these deals what are customers, telling you about why what's the differentiation.

So I I know I have the pleasure of having Mr. Lee Klarich, our chief product officer, and I don't want him to feel like he doesn't need to ask for anything on these calls so I'm going to ask him to jump in here, Phil but are the only two so I'll give you is that.

Whenever the customer has been partly through their journey and their decided their homegrown tools or their point solutions are not the right solution for their infrastructure is typically where we see large prisma cloud engagements.

Having said that I'm, not saying that they don't use us for those individual use cases, they do but eventually they step up and say I need to make a comprehensive comprehensive product that but I'm gonna have Lee jump in and talk about some of the shifts that stuff, we're seeing with bridge through a recent announcement yesterday of offering with like capabilities, which is amazing for scanning as well as.

Integrating our shift left capabilities of Prisma cloud enterprise platforms. So there's consistency.

[laughter] into cash.

<unk>.

B.

Look I think I think a lot of customers are still in their journey to fully operationalize cloud security. There's no question about it.

To some extent there even just still in their journey to even you know their shift to the cloud and really understanding all the different dynamics that need to change in order to fully take advantage of cloud architectures versus traditional data center architectures and.

And so as we go through these these shifts and in a lot of cases, where we're helping to enable and drive. These these changes there's a few that I would highlight for you here one is.

We believe very strongly that for cloud security to be effective it has to be embedded in the development and Dev ops processes. This is why the announcement from earlier this week.

We're starting the bridge crew.

<unk> integration into Prisma cloud is so important it's what enables.

The Prisma cloud security capabilities to be integrated into the sea ICD pipeline 50 developers and Dev ops teams use to develop their cloud applications absolutely critical second you're also seeing us with some of the recent advance advances we announced around Asia with security, we're making it easier for customers to get that initial adoption.

And then even supporting a hybrid model, where they can do it both Asian based and Asian with scanning where we're the only ones in the industry being able to offer our customers that choice.

And we continue to put the attention around cloud identity, and the permissions and entitlement and how that affects cloud security, which has long been an area of overlooked and not well understood and so these become some of the more advanced capabilities that our customers are now getting ready to adopt.

And like our Prisma cloud strategy. Our goal has always tried to stay a step ahead of those needs.

Yeah.

Great. Thanks Lee. Our next question comes from sockets layer of Barclays with Brian Essex After that socket. Please proceed.

Okay, Great Hey, Thanks for taking my question here.

And the cash I thought it was interesting to see on the Prisma sassy side that doesn't roughly 1400 of the 1800 customers. There are also firewall.

What next Gen firewall customers and so the question was asked earlier about the short term impact of substitution from one to the other I'm kind of curious about about how you think about that long term do you find the prisma sassy is additive to customer spending or do you find that more often it is substituting replacing what they are doing with <unk>.

Firewall does that makes sense of course, I think a few quarters ago. My colleague Mr. Lee Klarich had done a phenomenal job of highlighting that the prisma sassy customer is more valuable to us from an LTV perspective.

On a on a on a like for like basis, and also is a lower D. C O opportunity for the customer because now you're you're not upgrading every one of your hardware boxes and they take a case here 40, 100 stores somewhere I'm going to put a hardware box everywhere and you've got to upgrade them for every new software leaves we offer and that's a trucker wasn't requires you to be comfortable that.

You want to do it in the case of Prisma sassy read rolled it out so all of our Fortinet customers boom in two weeks, we have them upgraded to the next version of software, which allows us to do multiple software releases in quarters and in the case of our our firewalls. It takes one year to write the next big major release. It takes four months before our customers will be well tend.

Do we agree to go deploy it across their 40 under the stores because they're not they're not comfortable yet because it's going to be a big change and if that Jane doesn't work. So I think technically conceptually.

Five years from now, we're looking back and saying what a stupid idea to go roll trucks and upgrade hardware I'll give you a case I apologize for distracting, but a friend of mine is very much into electric cars and.

He bought an electric car I have one too when the Tesla It does over the air software updates. His he is to drive to the dealership and wait in line, but they put a USB stick and then upgraded you tell me, which one you want so I think in the long term I'm Gonna say SaaS is like a tesla to the drive the car to the dealership and stick a USB and that so far.

My perspective, SaaS. He has a better technical outcome, it's a better security outcome for the customer, it's a better value for us and it's a better value for the customer and the long term.

Alright, great. Thanks to catch the next question comes from Brian Essex with Goldman Sachs with time Liana <unk> after that.

Hey, Brian.

Thank you.

Thank you for taking Michelle Brian because it says it is called I forgot.

[laughter].

Yeah, Mike.

Turning to cash or Deepak.

Whichever one wants to build this one I think.

We heard the commentary around increased cost related to the product products.

Revenue and in I don't know, where we are in an inflationary environment everyone's used to being in market.

What levers might you have to offset that whether it's vendor consolidation on the call ask rate.

Increases how do you how would how might you think about.

Ways, you can offset those higher costs on the other side.

Yeah on the look is.

Deepak highlighted from a product revenue and product cost perspective, I guess translation, our some of our chip suppliers are asking for more money for the scarce chips that they offer us that's what it is so in the short term.

There's no offset he wanted the chip you pay for it you buy it in the broader scheme of Palo Alto, we can offset it with other cost containment strategies with depot because on top of dealing with them. Maybe you could talk about some of the supply chain efforts. Your team is doing because I'll tell you. It's kind of funny is as we said this is one of our highest product growth quarters in recent history in the Miss.

Have a supply chain crisis, and you guys know we can't book it until you ship. It. So we've not only been able to book it but ship. It so the box they must be doing something I don't happen.

Yes.

If we look at all the different <unk>.

We did take a price increase.

September.

The U S.

Internationally, we do look at that.

All of it.

But fundamentally I would say that.

One of the benefits that when you have very strong demand as you have better visibility.

With that strong demand with longer lead times.

It's happening now.

And then it all the time by a couple of weeks at Mckesson said that actually allows us a little bit more visibility and we have a world class team.

Visibility to try and make sure we can catch up as much as possible.

I think beyond that the levels that you have.

Look at everything and anything.

We're looking at.

All of our vendors.

To see how we can reduce cost and leverage.

Yes.

Lower costs.

Thanks.

Oh, sorry.

Alright.

Yeah.

And our shift to software helps.

Yes.

Play.

And in this play.

Yeah.

Yeah.

Alright.

Yes.

You got it I think I think.

I was muted as well next question coming from Hamzah <unk> of Morgan Stanley with Adam Tindle to fall monitor you May proceed.

Hey, guys. Thank you for taking my question, maybe just a quick one for Deepak in case, you're getting along are you there.

You gave a really strong total ARPA number I'm wondering if you can tell us what the current RP O was and do you think that.

You see our pure metric is going to be a cleaner metric to gauge.

Palo Altos underlying bookings growth as you shift more from hardware to software.

Ah Thanks, Hans So in my prepared remarks actually did say the current IPO grew in the at the same rate as total IPO. So I do think that both are important. The reality is I think total our appeal is critically important because I think that's all of our future obligations I think current apio is when I spend a.

A lot of time looking at because that really gives you a good understanding.

Ending of your predictability of revenue over the next 12 months.

I think both are important I think the macro comment is <unk> as important you have to look at both you have to look at your contract lengths you have to look at everything and anything around the IPO and candidly I'm surprised that more companies don't spend more time on it.

Okay.

Thank you.

Great. Thank you and our next question comes from Adam Tindle, Raymond James with Robalo, Just next Adam you May proceed.

Great. Thanks for taking the question the cash I wanted to ask on go to market and maybe you could tie in from feedback from new management members like Ah Ahmet BJ since joining but kind of a two parter first on the core sales team on the last call you talked about them driving the majority of cortex revenue and I'm wondering if that's something that you could continue to drive that.

Motion and apply to areas beyond cortex, and then in channel you had an inflection and partner led deals this quarter in core tax if you could maybe double click on the drivers of that and what the team can do to push further into other areas beyond cortex. Thank you great. Thanks for the question of you know what.

Having vijay here has been amazing yeah. It does.

We can actually now have Amit is in a room elsewhere doing a CIO meeting bj's in Europe meeting customers and I'm here doing an earnings call. So we've been able to you know.

Alright, and conquer in terms of being able to touch more and more customers are outside of your question on cortex, and when channel that stuff looks.

We've been on a journey, we caught this cloud thing early in our mind, but we are getting our motion right figuring it out and now we've started to enable channel partners. So as being able to channel partners, we have been able to amplify our ability to go and approach our customers with cloud capabilities. So as you can imagine this is a still a nascent market in terms of its I think this is gonna be a huge market and export.

Five to seven years, but wonder if singles lofty valuations for startups are out there I firmly believe are 18 to 24 months ahead from a comprehensive platform perspective, but we're not we're not standing quietly I still we still have more engineers are volatile building cloud security capability than all of the other startups roughly combined so.

We're not worried about our strengths and our ability we have to remain nimble we have to remain agile and we have to make sure. We amplify our go to market capabilities. So from that perspective, yes, you will see us continuing to amplify our cloud go to market capabilities and our cortex go to market capabilities. We are working on some very exciting product enhancements in our xdr front and cortex.

The more to come in future calls, but that gives us confidence that as it keeps seeding the market with NCR is going to open up a very large tam thereafter for us in future quarters or future years for the company, allowing us to strengthen the third pillar and last but not the least I will give you one more anecdote Adam and the lost.

90 days.

I have met more cio's personally that I met in the first three years of working abroad.

And that's not because I was amazed me first is because I have had the opportunity to go engage with them because now we have a comprehensive cyber security platform and many of them are things point solution stuff, that's not working I'm moving to the cloud. So now I have some sort of redundancy built into my Dev ops environment. Therefore, I may be willing to go.

Look at one vendor to help me an entire stack on one end or the other so that's the go to market update.

Alright, great. Thanks to cash our next question comes from Rob Owens with Piper Sandler followed by urban Lou Robert Rob You May take your questions.

Great Good evening and thanks for taking my question I'm curious on the first drop fronts. Given your end of quarter didn't span the end of the federal fiscal year, how things came in but I think more importantly, what you're seeing in terms of pipeline for the ensuing quarters given it feels like a more linear federal spend coming thanks.

Thank you. Thank you for the question look I think our as we talked about probably at the end of last quarter.

Administration early days, there were still trying to put there and the Doctor is process. He's got this stuff in order. So we did see obviously because there were there was ample fed business for us at the end of their fiscal quarter fiscal year, sorry, and are in the midst of our quarter that was strong what is what is even more heartening is that if you guys have time I actually did a keynote.

With Jenny Esterly yesterday morning for ignite event, and it's very fascinating to hear her because you were seeing there is a very strong a directive and well in the U S government right now to really treat cyber security seriously and you've seen that manifest at the various infrastructure bills, whether there are specific line items for.

Cyber security spend to the extent of your line items for attack surface management and various bill. So you can see that there is a lot of seeding of cyber security that's gone on in the federal.

Budgets are you now.

As with everything with government is thoughtful it's a it takes time and it happens slightly slower than than analysts since he was expected.

Alright, thank you.

Great next question is from Irvin Liu of Evercore with Matt Hedberg, followed Herman you may ask.

Hi, Thanks for taking the question. So you highlighted the completeness of your current platform and that.

Any acquisition in the near term would be incremental versus large scale, but I wanted to better understand how do you weigh build versus buy decisions looking ahead, and which areas of the market do you see yourself potentially having a product gap.

So erinn, we have are being very clear about certain areas of the market, which work well with us through an API or connectivity base. So like for example, we've been clear in identity access management, we think there's ample good players out there us going into that space is not going to add any incremental value are similarly with email security we have.

Clear of that space, not because because we believe that eventually people migrating to Google, Microsoft and proof points, there and there's a bunch of other people. So there are some areas, we've seen where I think the best way to think about it as we did this because it is exercised three years ago, we identified a bluish and go cloud and the move to the cloud and we said there's going to be a lot of new security products traded.

The cloud, let's get ahead of the trend early which is what we did for about six or seven companies in that space integrated and the results are in front of you you know I think we announced we're going to 270 are appropriate local outlets Q4. So you can expect that has grown this quarter.

Puts us as I said, you know add six to 10 times on many of these startups that are funded getting funded at the $6 billion to $8 billion. So now clearly that's not a right. So I'd like to pay for that kind of a R. Given I'm sitting on five to 10 times that are are myself. So from that perspective, it's both a an area of the market that we want to pursue ideally a blue ocean.

Which is cloud security or we have a disruptive technology that you believe will compel the customer to replace what they have today.

And that you are seeing happen in the SCR space they used to be an endpoint space of Mcafee, and Symantec, which is being structurally they placed by a crowd strike us similar one carbon black and the others. So that's those are the areas where I pay attention to a third one is a where our firewall teams are able to upsell and attach that capability to the firewall for example yesterday we.

Launched next generation Casspi I think that is a transformative product I think it will replace the majority of the cast to be out there you will not need to buy gatsby separately from any other vendor so.

Again.

Years ago, we had a lot of gaps and we are doing a lot of acquisitions, we've gotten to a point where it's almost in.

Eight nine times out of 10, it's better for us to build because we have a 60 50, 70% of the sensors the capabilities. We just have to build the other 30%.

Net new areas are.

A question and so far we havent found any compelling area, which which makes us jump out of bed and so I need to go look at it having said that you know what ice you know Walter Me Lee, we still see a five to <unk>.

One of the companies every quarter.

Seriousness not to acquire but to understand what they are doing that that is meaningful to the industry and we keep track of it.

Alright, our next question from Matt Hedberg of RBC, followed by key partner. That's go ahead.

Alright. Thanks, guys you need your question for Nick Casually I think what stood out to me and he said 25% of SaaS customers are from outside of your core which was great to hear and I think really to the point that some of the earlier questions on Palo Alto is not only a consolidator, but also best of breed. In these cases can you talk to how that trend is.

Progressed that 25%.

Customer concept and you're already seeing other things like that you know in other in other segments like cortex Xdr Prisma cloud.

Yes so.

Okay.

To your comment on being best of breed not just consolidated debt.

Is 100% spot on.

Our focus from a product perspective is everything we do we we strive to be best in class in that specific area such that when we bring it together and integrated for a customer who truly adding value and not just reducing number of vendors that they they they have to do business with.

So along those lines, that's what fuels. The number that you saw in terms of SaaS adoption from net new customers to Palo Alto networks, and it's a great starting point and it's an opportunity for us to expand into other areas of network security Prisma cloud cortex. After the fact, we've also shared.

Similar numbers for cortex in the past, where we see a similar level.

Adoption of customers that come in for the very first time into X or into xdr into expanse.

And quite frankly, Prisma cloud is right up there as well in terms of that new adoptions. So.

All of that is made possible by being best in class in these different product areas and then affords the opportunity to expand in some cases fairly rapidly once they get in our successful first product.

Thank you Lee our next question from Keith Bachman of BMO with Michael Church Flex Keith go ahead.

Very much I'd like to return to the supply chain and directors' duty packets or can you help us understand what the price increases have been for your products. Thus far in the anticipation going forward just trying to understand what the impact to the topline may have been from price increases and then the corollary question is.

Can you give us any kind of kind of quantification associated with the margin impacts you mentioned it was negatively impacted for the quarter would likely be for the year. Just wondering if you could flush that out I know, you're offsetting with the Opex line and doing a good job of holding the margins, but just wondering if you could quantify the cost associated with it.

Terms of the supply chain impact thank you.

So let me just start off with your comment about pricing. So we took pricing on September 15th and the U S.

The first internationally.

The amount that you really see in the in Q1.

It is really quite quite minimal in terms of that because.

You'll see the majority of that come through in Q2 and beyond.

There's much there and our results to date, obviously it has been factored in our guidance when it comes to the actual cost it's been a couple of million dollars like for Q1, we expect that will continue in Q2 Q3 and beyond.

As I mentioned before we're looking at everything on the table from Opex to other things that we can do with our suppliers offset to the best of our ability, but that's why we really held our guidance where it is just to give us enough flexibility to.

To manage the next few quarters.

Alright, well, we had a soft microphone on Deepak will try to get that into the transcript. If you didn't catch that our next question comes from Michael <unk> with Keybanc, followed by Jonathan Ho, who will be our last question for today Michael go ahead.

The cash couple of quarters ago, you mentioned that you felt there were certain growth go to market challenges for both cortex and for Prisma cloud relative to some competitors.

Do you know.

Give us some stuff you're talking to them.

Tim do you feel like we know do you need to do there.

Getting enough from those product lines to contributed to Nextgen IRR as you might've caused for this quarter.

Michael I don't like it.

They are live a historical perspective, the three rigs will be burned out of these businesses 18 months ago is when we launched many of these products are so today I delighted with where we are 100% are we ahead of my expectations for sure.

Do I have high expectations going forward, yes, heavy cleaned out some of the stuff. That's my job every day every week, we clean out stuff in our processes to make sure our go to market capabilities, our product capabilities get better and better.

As to the specific issues, we were dealing with in Prisma cloud and cortex.

We've hired some new people that are doing a phenomenal job.

This past quarter are we expect them to contribute to a job based on the visibility we have on Prisma cloud front. Similarly in the cortex front you know.

We're in a highly competitive market, yet we continued to deliver on our expectations and exceed them and as I said xdr is strategic in the context that I believe over time, there will be a convergence between what we do and Xdr next door and our teams are working hard towards making that happen also with all of this and that we do an expanse.

I think we have critical mass in the cortex space to really really continue to build product capability and overtime bring them to build out into a very large business. Similarly on Prisma cloud again, I think you can see from all the valuations people are getting I'm not it's not values and then we would see it as a validation that everybody has identified that as a big area and I honestly believe that.

I'm not just saying I believe that our teams have worked hard towards building an early lead and our job is to keep sustain that lead strengthen our product continually and make sure that capabilities are made apparent to our customers.

Okay and our last question for today comes from Jonathan Ho of William Blair. Jonathan. Please ask your question. Thank you for squeezing me in just wanted to.

Get a sense of where we are interim visit returned to work and refresh cycle uptick and what's maybe giving you the confidence that these trends will sustain longer term. Thank you.

So Jonathan I was kind of interesting and thank you for asking the question.

I as I mentioned I've been able to meet a lot more sales in the last 90 days that I've had in my three years here and I'll tell you every conversation with the CIO is a conversation of adapting their information security and it stack to the new reality in the market the new reality.

The majority of companies are not expecting everybody to come back to the office, they're all looking for architectures, which can make everything consistent the most number of cyber attacks, we've seen in the last year and a half or so have been in remote working and vpns because people have had to deploy their older VPN technology and make it be a functional from every.

Corner door. So people are seeing that that is the new threat vector if they are thinking about how do I take this and make this a sort of a long term sustainable network architecture, coupled that with their cloud transformation.

<unk> three years ago and that often the question they were predict dipping their toes in the cloud today all of them are in two or three clouds. So there is a very strong secular trends behind the sassy opportunity as well as the cloud opportunity and you pick your favorite sport analogy.

I think we're in the first innings of baseball and we bought the second over in cricket.

I understand thank you.

I don't understand the first one he says it's all good.

Fantastic well with that we're going to conclude the Q&A portion of our call today and I will turn it back over the cash for his closing remarks.

Thank you everybody for joining and I just want to reiterate in my three and a half years of being here I haven't felt more bullish on the business as I feel today, given the visibility into the pipeline and the results. Our team teams have been able to deliver in Q4 as well as the visibility we have going into our three year plan. After the first.

Quarter I want to thank you for attending I want to thank you and look forward to seeing at upcoming investor events as well as I want to thank all of our customers our partners and most of all our employees around the world for putting in the hard work to get us where we are but I see you next time.

Yeah.