Q2 2022 Palo Alto Networks Inc Earnings Call
Still early so customers can initiate their partnership journey with balls networks whatever their current need is but over time, we work with them to both expand across any one of our platforms and also work with them to do.
Check all open source tool momentum that has significantly accelerated since the acquisition close and downloads are up to five times year over year.
Building on the British good technology in Q2, we delivered our fifth Prisma cloud pillar Cloud Court security, which is part of our two ever released.
Standalone, which grew product has about 70 customers. We're pleased to see desktop desktop pops customer momentum building as Prisma cloud customers adopt cloud called security to several weeks off grid integrators leads into our platform.
Let's talk about agent of scanning.
You've seen a number of smaller provider focused on small niches and cloud native security, providing only agent must scanning is one of them.
What we hear clearly from our customers that they want a platform approach to cloud security, which offers the flexibility of both agent and agent less scanning.
Depending on the architecture security needs towards this end our teams rallied and delivered agent must scanning in record time. This makes sure that our customers can deploy either approach via the integrated platform that is prisma cloud.
Now turning to cortex, our endpoint security security analytics and automation solutions, we continue to see significant customer demand.
For automation and security as a threat data and volume security of Ensco at exponential rates.
The human only approach to integrating data and respond to events are not keeping pace, we're seeing strong customer adoption of our market leading technologies across xdr, XOR and expense total customers across xdr Pro and XL reached 3232 and increased over 69%.
Q2 was a strong quarter for new customers. Both those that are brand new to both networks and also cross sells to cortex.
We also saw curious trends across all of our geographies for cortex.
At our ignite event last November we launched our managed partnership program X MTR and we continue to see partners joined the program to further align the opportunity across our product portfolio. We now have 27 partners here and have a strong pipeline of interested partners working through the certification process.
Corridor growing success with cortex as the innovation investments we have made over the last years next year excellent expense with market leading capabilities Beach.
Shortly after losing X jets euro in Q1 to enable cloud detection response.
<unk> tier one and Q2 to further enhance our cloud asset visibility and insights.
Could it also marked the release of our intelligence module for XOR, providing end to end real or threat intelligence drove identify and discover new malware familiar families. Our campaigns or attack techniques that are related to security incidents. This morning, we announced our cortex extended security intelligence and automation management or <unk> platform and shared our vision to provide an autonomous.
Cyber security solution as a modern alternative to stem solutions, we believe security operations teams have an urgent threat detection remediation problems and only by leaning into immediately adjuvant platform, we will be able to bring down response times from hours and days to seconds and minutes.
We are on a mission to revolutionize how data analytics and automation is leveraged in cyber security and <unk> is a product of years of research and development. We have been doing this area. <unk> is currently available to a limited number of customers and will be broadly available later this year in summary.
I'm very pleased with our Q2 results.
We both continue to benefit from strength in our core next generation firewall business and is a strong sign of our future growth prospects significant strength across our next generation security portfolio.
This balanced performance is a hallmark of our long term strategy to drive durable growth on the back of the strength and based on what we're seeing in our pipeline heading into the second half of fiscal year 2022, where.
We are raising our total revenue product revenue and total billings guidance for the year.
Within this top line given our confidence in both our pipeline and our sales execution and yes, theyre also raising and GSA or for the year. Lastly, we're delivering this top line, while we continue to make significant investments in our business for future growth.
We continue to see strong near term demand, but also a strong medium term trends of cybersecurity fueled by underlying stent that it spending and secular trends like hybrid work and cloud native adoption.
We have aligned investments book to billing sales capacity for fiscal year, 'twenty, three as well as medium term investment and product capability.
These investments have been made while also absorbing unexpected supply generally a cautious here. Despite this we have been able to deliver upside to our non-GAAP EPS forecast. So far this year, we're lifting our non-GAAP EPS guidance for the year, reflecting much of the upside we saw in Q2 with that I will turn the call over to Deepak to go into more detail on the performance of our guidance.
Thank you and our cash and good afternoon, everyone. We again delivered results ahead of our guidance across all metrics as we continue to transform our business topline growth remained strong in Q2 with balanced strength across our portfolio, including product and especially in our next generation security offerings.
<unk> by the strength in our differentiated offerings, we're raising our full year guidance.
So Q2 revenue of $1 $32 billion grew 30% and was above the high end of our guidance range.
Products grew 21% and total services grew by 32% we saw strong growth in all geographies and across all platforms.
By geography, the Americas grew 33% EMEA was up 22% and Japan grew 23%.
<unk> finished the quarter at 143 billion supported.
Supported by broad strength across each of our platforms prisma.
Prisma access <unk> more than doubled year on year, and we continued to see especially strong growth from xdr in Prisma cloud.
This demonstrates that our portfolio approach to driving growth in our high growth markets is working and what gives us confidence to raise our guidance here, which I will talk more about shortly.
In the second quarter of 2022, we delivered total billings of $1 six 1 billion.
Up 32% and also above the high end of our guidance range.
Total deferred revenue in Q2 was $5 4 billion an increase of 31%.
As a reminder, billings as total revenue plus the change in total deferred revenue.
Net of acquired deferred revenue.
Our NGF billings grew 79% year over year going forward, we encourage investors to focus on our Ngls are metric as we view this measure as being more indicative of the underlying drivers of this business, we will not be updating NDS billings in the future.
Remaining performance obligation or <unk> was $6 3 billion, increasing 36% with current RVO growing largely in line with total Lafayette as.
As mentioned previously we believe our apio adds meaningful insight into our future revenue as it includes both prepaid and contractual commitments from customers the strength of our RPM growth gives us confidence in our future quarters.
Effectively provides us a head start from a revenue perspective.
Our product growth was 21% in Q2 and above what we've seen historically.
Collecting strong customer demand for our clients and software offerings.
Within our firewall as a platform business. We saw billings grew 26% in line with the growth we've seen over the last year as customers purchase hardware software and SaaS and form factors.
Within <unk>, our software mix increased five point, 40%.
Last quarter, we raised our fiscal year 'twenty two outlet for product revenue growth to mid teens, we're raising with outlet to high teens as we continue the balanced forces a very strong customer demand and supply chain constraints.
Turning to the details of our results product revenue was $308 million growing 21% subscription revenue of $618 million increased 34%.
Support revenue of $391 million increased 30% and in total subscription and support revenue of 101 billion increased 32% and accounted for 77% of our total revenue.
non-GAAP gross margin of 74% was down 130 basis points in part due to the ongoing costs associated with the supply chain.
Our production teams have done an outstanding job in fulfilling the growing demand and keeping the priority focused on enabling shipments to customers. We will continue that path moving forward.
non-GAAP operating margin of 18, 4% was again up sequentially and down year over year as expected with higher product and support cost impacting the year over year trends.
non-GAAP net income for the second quarter grew 20% to $185 million or $1 $74 per diluted share.
Our non-GAAP effective tax rate was 22% a GAAP net loss was $94 million or 95 per basic and diluted share.
Turning now to the balance sheet and cash flow statement.
We finished January with cash equivalents and investments of $4 2 billion.
Sales outstanding was 60 days unchanged from a year ago.
Cash flow from operations was $483 million, we generated adjusted free cash flow of $441 million a margin of 33, 5%.
In Q2, we again balanced multiple financial priorities with strength in both top line underlying non-GAAP profitability and in cash conversion. We believe it is important to hold ourselves to this discipline, even when growth is robust in order to drive a best in class financial model as we scale into a larger company.
We continue to execute on our capital allocation priorities outlined in our September analyst day. During Q2, we purchased approximately 1 million shares on the open market at an average price of approximately $534 per share for total consideration of $550 million.
We continue to expect a large part of our cash flow to be used for share repurchase we.
We have approximately $415 million remaining on our authorization for future share repurchases expiring in December 31 2022.
On the M&A front, we did not close any acquisitions in Q2.
As we noticed at analyst day, we continue to focus on managing down our stock based compensation as a percentage of revenue.
This quarter, we reduced SBC by about two points year over year as we apply our overall discipline to this process whilst balancing the current market for cyber security talent, we look forward to continuing this trend.
Similarly, we talked about an aspiration for achieving the rule of 60, combining revenue growth and adjusted free cash flow margin.
You will see that with the revised mid point of our fiscal year guidance, we're now expecting to achieve this once aspirational goal.
Lastly, moving to guidance and modeling points.
Cash highlighted we continue to see very balanced demand. This includes demand from our appliance form factors that outstrips, our ability to fulfill them in the short term as well as strengthen our next generation security portfolio.
Our Q3 guidance takes into account the strong demand picture as well as the best information, we have today on supply chain and all the factors.
Turning to our guidance for the third quarter of fiscal 'twenty, two we expect billings to be in the range of $1 five nine for $1 six 1 billion, an increase of 24% to 5%.
We expect revenue to be in the range of one 345 to $1 $365 billion, an increase of 25% to 27%.
non-GAAP EPS is expected to be in the range of $1 65 to $1 68 based on a weighted average diluted count of approximately 106 to 108 million shares.
For fiscal year 2022, we expect billings to be in the range of $6 eight to $6 $85 billion, an increase of 25% to 26%.
We expect revenues to be in the range of five point.
45% to five $475 billion.
An increase of 27% to 29%.
We expect <unk> to be $1 75 to $1 $775 billion, an increase of 46% to 50%.
We expect product revenue to grow in the high teens as the seasonality weighted to Q4 as we have seen in prior years.
We continue to expect operating margins to be in the range of 18, 5% to 19%.
non-GAAP EPS is expected to be in the range of 723% to seven $3 based on a weighted average diluted count of approximately 106 to 108 million shares.
The free cash flow margin is expected to be in the range of 32% to 33%.
Additionally, please consider the following additional modeling points, we expect our non-GAAP tax rate to remain at 22% for Q3, 2002 and 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.
For Q3, we expect capital expenditures of $40 million to $45 million for.
For fiscal year 'twenty, two we expect capital expenditures of $185 million to $195 million, which includes $39 million outlaid in Q2 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. Thank you.
Great. Thank you Deepak and to allow for broad participation I would ask that each person ask only one question.
The first question is coming from sockets Collier.
Barclays.
Liana <unk> of Bofa to follow.
Okay, great. Thanks Clay.
Team the cash maybe I'll start off with.
Product question since it's hot off the press this morning.
I was wondering if you could talk a little bit about the X I am product a little bit again brand new given the announcement today, but maybe the question is how do you envision that disrupting the Sim market and how can you maybe leverage your existing portfolio to cross sell into the customer base.
Well. Thank you so okay. Thanks for the question.
But what.
When I came to pause and outsource our meantime respond at Ballston networks was measured in tens of days.
And for someone who did not work in the security industry I found it a little flabbergasting because if it takes tens of days to figure out that he had been breached and all youre doing is closing the door after somebody has gone.
So we challenged our team internally is there can you take that and turn that into seconds or minutes, because that's the only way we're going to have a chance to be able to protect not just ourselves, but our customers in the future that required us internally revamp from having north of I would say 15 to 20 other security vendors, even in our infrastructure down to less than.
Ken.
Because there are some areas as you know we don't we don't play in cyber security.
That coupled with automation with data analytics, we're down at balls networks under one minute.
As a mean time to resolution, which is how we can resolve log for Jay within our company or solar wins within our company I think that's the capability that customers need.
You did a phenomenal job and in his video where he says look you take a car and you add adaptive control at Park Lane assist you had all those features to an old car as an OLED new carpet without harvest between around 20 years.
That doesn't make it autonomous vehicle head start from scratch you have to build the software to build a analyzing data.
And that's kind of the right analogy to think about the future of protecting our customers will have to depend on being able to analyze data on the fly immediate on the fly and not wait for humans to analyze it and come back and their latest thing now I know what happened towards the end that and we have <unk>.
<unk> <unk> is an early release working with.
The handful of design partners to work with them to go to place to security infrastructure in line with what we've done at volatile that allow us to learn and to build with them, but we expect this product will be <unk> later in the year.
Im really excited the way it leverages our portfolio is.
We can do it quickly if you're using Palo alto or volatile appliances volatile firewall is powered endpoints Apollo because my cloud is an easy thing to do for US. We also integrate other security vendors, but obviously the quality of data becomes suspect as it keeps going down to more and more legacy security technologies.
Great great. Thanks.
And our next question comes from Tal Leone with Bank of America with Brian Essex next tolerated. Please proceed.
I Hope you can hear me.
Our balance sheet, Glenn I'm limited to one question. So I'll just ask the question to someone else will ask probably I'll ask the balance sheet question. There is a <unk>.
Long term convertible note that was rolled into short term liabilities. The magnitude is big it's $1 6 billion.
Can you explain this also.
Im looking at your SBC, it's getting to $290 million this quarter, almost it's a big number and if I go back youre not profitable if I take into account the SBC and that has been the historical trend. So can you first explain the SBC.
And the outlook well, we know how what's what's going to be.
With this account.
When are you going to turn our profitability on a GAAP basis, what's the plan for the company. Thanks, Let me start at the second I'll hand over to Deepak to answer your question on the balance sheet and add to my answer.
But when I came in we bought a bunch of companies that we bought them was.
<unk>.
Uninvested the founders from their equity and their companies and reinvested them a volatile stock over a period of four years that was the only way we could secure the talent of all these founders from the companies. We bought so a significant part of our SBC is the embedded M&A cost of retaining founders as you've noticed we have not done any significant M&A the last two or three a quarter.
As that begins to roll off you will see a step change down in our SPC.
When all of those acquisitions, we can roll up obviously the earliest ones will start rolling off in about another six months and then over the next year or so you don't know how if youll see a significant rollout. So that should show you that in addition to that as <unk> highlighted we are working hard to make sure that the normal SBC continues to be.
The managed down and of course as you know as a percent of revenue of revenue keeps going up that also acts as a benefit towards that direction. So we will talk more about what our forecast to achieve GAAP profitability.
As we lap Q4 this year, because we have more visibility on the M&A stuff, but I'll, let deepak after that and as well talk about the balance sheet item. Yeah. I think the only thing that I would add is like what we found.
And the company is when we really focus on something we find opportunities you've seen that on pretty much every metric that we focus on this.
This now becomes another metric that we're focusing on I just want to say that we're going to balance that with the need to retain our talent just as you saw from the welcome home video we want to make sure that we get the best talents as well, but that's really on the SBC on your balance sheet question Tao like a couple of different points.
2023, and 2025 notes eligible for early conversion from February 1st.
To April 32022, due to the share price exceeding the price thresholds those.
<unk> continues to be classified on the balance sheet as current liabilities in Q2 unchanged from Q1 and Q4. The 2023 notes were classified as current liability and the 2025 notes were a long term liability. So it's just the question is how they are classified on the balance sheet based on all the trigger events on the on the notes, but hopefully it.
That answers your question.
Yeah.
Alright, great. Thank you and the next question comes from Brian Essex with Goldman Sachs with Hangzhou Firewall are up next Brian . Please proceed.
Great. Thank you.
Good afternoon, and thank you for taking the question.
So just wanted to touch on on the hardware side of the business see the innovation with the updated panel asked in Gen four hardware refresh.
I guess first part of the question would be have you adjusted sales incentives to drive better hardware adoption and maybe part of that question is how do you think about.
<unk>.
The I guess, the ability or the incentives to leverage the product side of the business to drive consolidation of share on your platform going forward.
Great question, Brian So two parts one as you probably heard from everyone in the industry, who is on the hardware business.
Demand is outstripping supply.
I suspect it partly has to do with supply partly has to do with volumes going up with the pandemic.
Inflation expectations so.
We don't have to do a lot on sales incentives dive in more hardware.
We have customers, who would like the hardware delivered sooner than later, so we are seeing demand.
As a as I said, our ability to supply despite the 21% growth.
Still no matter I'll strip that 21% number which is why you'll see our RPM continuing to rise so.
That's your answer to the first part in terms of the ability for us to leverage hardware and and I've highlighted metric. We shared last time that 25% of our customers and SaaS are net new to Palo Alto last quarter.
We haven't declared that number this quarter, but that gives you a sense and typically those conversations Brian our hay, while love Your security platform I Love Your security, both so I'd like to deploy it but my firewall is still around and they have to see is more to go.
In that case, we end up with a SaaS deal with the expectation that over time when that customer consolidates their firewall it gets.
To be a Palo Alto end to end zero trust execution, because the only way to do zero Trust right is to make sure your hardware your cloud and your remote users at all or consistent in terms of security policies.
We see an opportunity to take hardware and further consolidated in some cases customers going from two hardware vendors to one in some cases customers doing replacement of some other hardware vendor with Paulo networks, because now they're already deployed SaaS in their models. So we see all of that.
<unk>.
And one of the beautiful features some of the subscription that I laid out whether it's autonomous monitoring or AI ops or DNS security or.
Euro filtering et cetera, we can make that happen consistently for our customers across both platforms. So in that perspective, they only see the benefits of deploying that on a consistent basis.
Great. Thank you and our next question comes from Hamzah <unk> of Morgan Stanley with Phil Winslow to follow.
Hey, guys. Thanks for taking my question.
So the <unk> grew really nicely in <unk> and you raised the full year guide on that too.
You normally don't do midway through the year.
A prisoner to ASE prisma cloud doing really well as usual teams.
But there appears to be an inflection.
On cortex can you talk about some of the strategic initiatives that are driving that in the last couple of quarters in particular, and then maybe just for Deepak.
Can you help us understand maybe the gap between Ngls billings in <unk> growth going forward as some of the lower duration stuff becomes a higher percentage of the mix.
Thanks Hamzah. Thanks for the question look I think.
This was an all out.
The quarter strength across every end use category, whether it's cloud SaaS cortex.
There is an inflection point both in cortex as honest Prisma cloud.
More and more conversations around where customers are coming to the point of saying, yes, I cannot do this with the cloud native tools, whether they've got multiple cloud providers I'm dealing with or I cannot do it this way the next startup from.
Two guys, who started it and that can cover one sliver I need something that's more comprehensive because honestly if I was going to replace our security capability with a startup give really AWS azure DCP already have that capability. It's not like they are lacking a capability from a security perspective, but just to give an example.
If you're deployed.
Security using one cloud provider, whether it's AWS <unk> azure you'd have to integrate 10 of their modules to get one prisma cloud.
You have to do the integration work yourself. So we've already done that not just within their tools also across all public cloud providers. So that's why the consolidation of security capabilities and Prisma cloud makes us we're seeing that inflection you see the number of customers is closing in on 2000 customers.
Of the Fortune 100, so we're not dealing with small enterprises trying to replace some features from csp's, revealing with people who are now in complex production environment type scenarios and there was a disappointing because much of that so we've seen that inflection there and youre seeing that with 56% growth in got it consumption youre, saying not only are we benefiting from people adopting multiple module.
Also benefiting from the fact that their native.
Sort of production workloads are going up.
And I apologize I will tell you our concern.
Public cloud is always outstripped our forecast because of the success, we're seeing in our MBS portfolio. So that's one part of the codex I'd say.
Again remember two years ago, we didn't have any of these products are all networks for busy selling firewalls. So I think part of it is the sales force getting behind it understanding it and.
On most technical desks out there xdr fare better than most of the names you would know in the SCR space. So we have real technical differentiation advantage in the market.
From that perspective, we are able to go out to our basis I look I know we didn't have the product three years ago. It's time for you to renew its time for you to deploy xdr why didn't try follow up that was.
So using both of those and then I'll leave you an absolutely okay.
So I don't make me feel like Youre going to outstrip any questions [laughter].
Actuals come here with a balance sheet question.
Thanks, Hamzah you want me to answer the I guess, the billings versus they are all its a good question that comes up quite often I think.
Fundamentally the way I look at it is you're comparing apples and oranges, a little bit here <unk>.
Your annual recurring revenue.
Your your billings is looking at whatever the duration is for what's out there.
And so if you have like one deal that happened to be a long duration right you will get more billings in IRR within that quarter.
Previous times, we've had that so I think the last quarter R&D billings grew less than the IRR, which is why.
I'm, probably more in the camp of let's just focus on <unk>.
The source of truth and the one that we will focus on but that's all that's happening.
Variable quarter to quarter based on some of the larger deals that in the cash mentioned.
Alright, great and up next is Phil Winslow of credit Suisse with Brent still to follow. Please proceed great. Thanks for taking my question and congrats on a great quarter I just wanted to focus in on Prisma cloud in the cash maybe inception that question in my head with your fleet.
But you mentioned the increased attached to production environments.
Well, it's just being early in terms of consolidation of functions at Palo Alto, but what are you hearing from customers in terms of just adoption are we at that inflection point and then also how are the competitive dynamics are changing here.
I'm going to hand over to leave it as I said it doesn't answer the question when it comes to the next earnings call. So.
Before I give it to him I will say one thing that we've deployed in adoption team on Prisma cloud in the last six months, which is seeing phenomenal outcomes and also.
I want to say I wanted to take it the right way.
Competitively.
The auction is customers I'm not ready to go to a production quality high end fully integrated cloud security platform I'm fine with my DIY, plus my cloud native tools, but we.
We don't run into a POC or compete with somebody else because usually we either lose against ourselves because the customer would rather stay where they are now in the case of xdr or SaaS, we have competitive environment. Its not like we don't compete but in the case of cloud is usually based on the customer needs, but I'm going to let Lee talk about what customers see from cloud what typically does it take.
Yeah I think.
Thanks Nicole.
There's a couple of I think key trends that we're seeing one and following onto a weighting of cash was saying.
There were a number of companies probably early adopters of cloud built a lot of their own tooling used a lot of open source.
And it's interesting a couple of years ago, when we talked to them.
I'd say no no no. We've got this covered we felt thrown tools were happy to maintain them.
And many of them are now coming back to us and saying actually it turns out. This is this is more work than we thought it was.
It's surprising just how many distinct API as exists in each of the different cloud products that you have to integrate with pull data from and understand just using that as one example of many right.
One trend that we're seeing is the challenge of doing it yourself the second is.
I think the understanding of what actually needs to be accomplished.
And.
Again early on we saw it was I would just need compliance in the cloud and now we're seeing customers fully understand the needs across all different five pillars that we have and the importance of each of those and our ability to deliver on those.
And lastly, I'd say we.
We've actually gotten fairly good and we continue to work on this building in products.
Adoption capability. So we're not just dependent on people costs.
Customer success and adoption folks talk to our customers about adoption of new modules for building that into the product natively, suggesting to the customer what they need in order to be most secure and we're seeing that drive a lot of adoption.
You saw that the note the metrics on the bridge for integration and just how quickly we've gotten to 70 customers adopting that in product in just a couple of weeks since it was released into production. So.
Love to see this trend, obviously theres a lot more adoption, we're going to see in the future, but I do think that we're seeing that inflection point.
Great. Thank you.
Alright. Your next question comes from Brent Thill of Jefferies with Rob Owens, followed rich. Please proceed.
No cash just on the demand environment and everyone's curious to hear your view on the strength of the pipeline relative to a year ago and many of your question that this is there have been a pull forward or not.
Address what youre seeing in the pipeline and ultimately.
Why this has not been a pull forward of demand in your perspective.
I think Brian it would be a pull forward demand that you saw.
Everyone posting numbers of this at this rate you are seeing some other players in the industry, who are low single digit and firewalls. So we must be taking demand away from somebody else.
It was us taking a fortinet taking it clearly we're taking some demand away from somebody else.
Like some of it is pent up demand where people did not have anybody to go into the offer the go deploy a firewall because nobody was going to the office people are coming back slowly and suddenly there are people who go into place as part of that part of it as a refresh as you know we are we have now refreshed more than 65% of our portfolio. That's still only three months and so we're still seeing.
Demand for Gen four products being created volatile an hour. So I think couple of that and I think to some degree there's a little bit of a fear that they won't get the firewall. The time so people are ordering.
But I think we will sell for as I said, we're going to see this into fiscal year 2023 at least and we'll keep you posted.
Alright, great and our next question comes from Rob Owens with Piper Sandler with Gregg Moscowitz All Rob. Please ask your question. Thank you very much with the success that you guys are currently seeing in cloud can you talk about the channel model in terms of how you go to markets and longer term the potential economic implications if there.
Ernie Thanks.
Yeah look I think it's fair to say in the large enterprise customers the model Hasnt changed.
Well from a channel perspective on the margin.
We will depreciate almost all cybersecurity products are slowly and steadily being listed on public cloud marketplaces, So all of us, including Palo Alto, we're seeing some customers.
By on those marketplaces in some cases, it makes sense and we've got a embedded native firewalls in GCB and you can deploy it by accessing it through the marketplace. If you will in some cases people using unused credits on public cloud marketplaces to be able to buy security because that's a feature that public cloud marketplaces are offered I think that's on the margin, but I'll tell you what's more interest.
Our people, we're seeing channel partners get very savvy and start building adoption teams and sales teams just specific to cloud is specific to our portfolio because they see the market shifting in that direction. There is a bit of a <unk>.
Arms race amongst themselves the channel, whereas the more qualified people are likely to get more customers to buy from them because.
And it's not always the person who used for firewalls.
Thanks.
Our next question is from Gregg Moskowitz Mizuho Securities with Adam Borg default Greg. Please proceed.
Okay. Thank you and congrats on a terrific quarter and the cash last quarter you size the pull forward at about 10% of product.
<unk>.
How do you think about the net impact for the Q2, and then maybe if there's sort of a little bit of a follow on to <unk> question is there any evidence of double ordering either a partner or a customer level.
So Greg on.
On the first part.
I think it's there's a net wash theres a pull through but there is a lack of ability to fulfill.
So whilst I might be seeing a pull through youre not seeing in my product revenue because <unk>.
Within the range of what I have not been able to ship because of the exceeded demand. So in my numbers Youre seeing a balance you're seeing.
I know you probably if you had visibility as seen in the booking but you wouldn't see in the revenue because I haven't been able to ship not.
Not I've been ability.
And that's the answer to the first question and in terms of I know, there's this question's been asked at least for the last two quarters about double ordering and shadow ordering we don't work that way.
When you order versus your peers.
And I haven't seen a refund being asked for in the firewall or canceled order yet for the last two quarters. So I will start around numbers and thats that may be true at the lower end, where people have distribution channels, where.
Channel, where preorder and hold onto it.
So you may see that there where the end customer is not customer on record in the beginning where do you start.
Distribution stocking that goes on we don't do any distributions talking we basically have end customers on every purchase order and we haven't seen any canceled order or a refund.
Just to build on that like our sales cycle six to nine months and all of our purchase orders are noncancelable.
Just to put a.
Final point on it.
Uncomfortable.
Helpful. Thank you guys.
Alright. The next question coming from Adam Borg with Stifel, followed by Patrick total Adam. Please proceed.
Great. Thanks, so much for taking the question, maybe just to drill down on cortex for minutes, just given the traction there and maybe you can talk a little bit more about attach service management. It just seems like that's the areas of interesting important just given the breach environment. So I was hoping you could talk more about traction there and the opportunities going forward. Thanks.
Yeah.
Yes.
Okay would we acquired expanse will but over a year ago.
We've talked about why we thought this is so important and number one is.
The proactive.
Proactive side of it the finding an issue.
So you can fix it before an attacker finds it and attackers have increasingly automated tools and so it becomes even more important.
For example, if you look at log for J B shortly after.
For Jay information became available what we saw was.
Attackers building automated scripts to basically try to find.
Carnival Apache servers, right and so that's the kind of.
Challenge that a lot of customers are up against and and expanse makes it very easy for customers to proactively refined that fix it et cetera.
<unk> is in a reactive state.
Where something has become known publicly expense helps our customers find where they have exposure in order to address those issues first and so both of these are examples of why expanses becomes so important to our customer basin and were.
We've seen our customer base really understand that better over the last couple of quarters.
And really embrace this as a sort of a must have product in their security operations.
Great. Thanks, so much.
And our last question for today will come from Patrick Ho Ho of Deutsche Bank, Patrick You May ask your question.
Thank you for squeezing me in I guess congrats on that.
Excellent.
The numbers, so clean I think I'm going to ask a philosophical question. If I may just going be about M&A.
<unk>.
Roughly 30% cheaper than when we last spoke three months ago.
The start of your tenure in the cash.
Quite acquisitive.
Is the moderation in valuations for <unk>.
Private companies public companies as well does that mean that your philosophy.
Philosophy around M&A might have changed versus the messaging you gave us six months ago.
So theres no change Patrick I don't think the valuations of private markets have quite <unk>.
Normalized like the public markets have first and foremost I think the private markets are still enjoying the lack of liquidity as the no reason to mark to market. The validation. So that's just more of a philosophical answer not.
Not correlated with my M&A point right.
I would like it to have an purely because some of those companies are trying to come attract Alan for policy that works. So that's I'd like them to get Mark to market. So people realize these things can go down but that having been said theres been no change look as I said the reason we're acquisitive in the beginning there were many areas of cyber security were which were up and coming and going to be important and we were not in there.
And we were behind the eight ball or pick an analogy we were late to the party we hadn't done the work needed to be ready for that market take cloud security right about six or seven companies about security each of them had been in existence for three to four years. So that's 40 years of development that we were able to benefit from in a market we need to be first.
With Prisma cloud is abundantly clear why we did that.
So we didn't have automation workflows and platforms. We did that it would take SaaS. If you didn't have an endpoint monitoring we didn't have SD Wan that's stuff that takes four to seven years to build we didn't have the time to go build it otherwise the market we would not be in the market today, we compete zee scalar, let's go and SaaS and we compete with Goldstrike Center one in STR, we would not.
The player so that made sense today, if you look forward I do.
Don't see many areas of cyber security, where we don't have a leading product or a leading products not on development. If you look at all of those innovation cycle, I'd say, great and firewalls continues to innovate.
Three years acquiring getting up to snuff to a place where now we can compete in multiple categories and now with <unk>, we are delivering industry leading innovation.
I Couldnt buy anything for Exxon, because I looked at everything in the same space and I said wait a minute why do we need to look at something which is 10 years old I don't need customers I have customers antibody technology. So from that perspective nothing has changed.
<unk>.
I don't think Designee company out there that.
Is valued at a place where we see them. So by God, we could this could be accretive, but you could take this because I think the cost of integration and cyber security.
Is going to make you from a leading player to a mediocre player because he spent too much time emerging sales forces and customers trying to run two competing technologies. So that's not our playbook. Our playbook is to go find cool technology that you can absorb make part of our go to market motion and to use those founders and we've done that and we've left the door open saying if you were to buy companies that would be more on the product category.
Which would be more in line with these smaller to midsize acquisitions. They made anything else so that philosophy hasn't changed.
Alright, great. Thank you with that we will close the call I'll turn it over to Nick <unk> for his final remarks.
Well once again, thank you everybody for joining us and as the place that we apologize for the delay.
We look forward to seeing many of you at upcoming Investor events and some of you on calls after this I just once again want to thank our customers our partners and most importantly, our employees around the world for helping us deliver good quarter have a great day.