Q4 2022 Palo Alto Networks Inc Earnings Call
Customers and also towards the Michigan are preventing successful cyber attacks. That's important that's what we stand for that ethos.
We do have good stuff and make it work and make it happen people Trust us.
People are at the center of our strategy. If we have the best people in the world, we can make great things happen.
But I'll go there.
Good day, everyone and welcome to Palo Alto networks fiscal fourth quarter of 2022 earnings Conference call I Am claims it will be ahead of Palo Alto networks Investor Relations. Please note that this call is being recorded today Monday August 22022 at 130 PM Pacific time.
With me on today's call are in a customer <unk>, our chairman and Chief Executive Officer, Lee Klarich, Our Chief product Officer, and Deepak <unk>, Our Chief Financial Officer, you can find the press release and information to supplement today's discussion on our website at investors <unk> Palo Alto networks Dot com, while there. Please click on the link for events and presentations, where you will find the investor presentation.
<unk> and supplemental information.
In the course of today's conference call, we will make forward looking statements and projections that involve risks and uncertainty that could cause actual results to differ materially from the forward looking statements made in this presentation.
These forward looking statements are based on our current beliefs and information available to management as of today risks uncertainties and other factors that could cause actual results to differ are identified in the safe Harbor statements provided in our earnings release and presentation and in our SEC filings Palo Alto networks assumes no obligation to update the information provided as a part of today's presentation.
We will also discuss non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP.
We have included the tables, which provide reconciliations between the non-GAAP and GAAP financial measures in the appendix to the presentation and in our earnings release, which we have filed with the SEC, which can also be found in the investors section of our website. Please also note that all comparisons are on a year over year basis, unless specifically noted otherwise we would like to note.
Management is scheduled to participate in the Citibank Global Technology Conference and Goldman Sachs Cornucopia and Technology Conference in September I will now turn the call over to the cash.
Yeah.
Okay.
Thank you Glenn and good afternoon, and thank you for joining us today for our earnings call.
As you can see from the video we were excited to celebrate the 10th anniversary of our IPO in early July our employees are engaged and excited as we continue confidently on our mission to be the cyber security partner of choice.
Moving to Q4 I'm pleased to report that we again saw very strong results starting with top line results that were well ahead of the guidance. We initially outlined for the fiscal year 'twenty two.
We delivered this growth while balancing our profitability commitments. We also made significant investments to continue to transform our company and take advantage of the large and rapidly growing market opportunity we see in cybersecurity.
On the topline billings growth of 44% was the highest we've reported in four years. We also grew our Apio ahead of our revenue growth rate the.
A key focus of our team has been rapidly positioning us as a constant cyber security innovator and one way to measure our progress is how our N D. S Air develops.
We are delighted to report this metric grew 60%, reaching one $9 billion exiting the year.
We are expecting it to reach $2 $6 billion in FY 'twenty three.
This was an independent startup it would be amongst the fastest growing cybersecurity businesses to achieve scale.
Within our core network security business firewall as a platform billings grew 26%.
When we started reporting this metric the intent was always to show that we continue to take share in the network security market at the same time transform the business to a software business today close to 50% of that comes from software form factors.
Operating income grew 52% in Q4, and our operating margin for the year finished at the high end of the guidance range with adjusted free cash flow margin coming in above the high end of the range we provided.
We achieved a major internal goal you've had on the profitability front delivering GAAP profitability. This quarter looking forward, we're guiding the full year GAAP profitability in fiscal 2023.
You've had many of you ask us about the macro environment and how is it impacting our business and the markets we serve.
And the last year, we arguably saw the most challenging supply chain conditions. The technology industry has ever seen we executed through this Walter and beer with modest impact to our gross margins be.
We expect conditions will eventually ease.
Our our planning, we're assuming a material improvement wont be seen prior to the end of fiscal year 'twenty three.
However, as a supply challenges fade, we expect this will start to have a favorable impact on our product gross margins.
There is a continuing debate on inflation, it's nature and duration, we saw some labor and other inflationary pressure in the second half of fiscal year.
We do not anticipate these pressures going away in the next fiscal year and we have plan for it to persist through fiscal year 'twenty three and hence it is included in our plan as reflected in our guidance.
With respect to the macro impact on demand.
We've just come out of Q4 with exceptional 44% billings growth.
In enterprise sales as most of you know SKU for magic.
We did however, see some marginal changes in macro environment in Q4, whilst early it is important to see how the overall macroeconomic conditions develop over the next year.
First we.
We saw more longer duration deals as customers increasingly have the confidence to make large long term commitments with us.
This is important to the transformation objectives, we set off a volatile networks. It confirms a validates our view that customers will consolidate if we give them constant best of breed products and ensure that they are integrated to deliver better security outcomes second we saw some isolated instances of customers extending the life of hardware potentially driven by macro forces.
We expect that on the margin. This could continue into FY 'twenty to me. It is counterbalanced by some customers refreshing their state and our continued share gains and the hardware form factor.
Third and transformational projects the vast majority of our customers continue on their investments here. Despite the expected short term macro impact.
Security spending is tied into our customers' desire to move to cloud drive more direct relationship with our customers modernize their it infrastructure as well as drive efficiencies, while adapting to a new way of working those efforts continue.
Coupled with a heightened awareness and need to do something on cyber security, we expect secular tailwind to persistent cyber security and we are best positioned to deliver against our customer needs.
Another trend I would like to highlight is the return to Palo Alto networks by employees, who had left for seemingly greener pastures.
On a six months period as part of our welcome home program. We are engaged with many former employees to date dozens of top performers have been rehired with many more in the funnel over 70% of people restart who have expressed a desire to come back to us and a significant number already have <unk>.
50% are turning from startups and the next largest percentage coming from peer companies. We're happy to welcome these employees back to part of ours.
As we embark on a new fiscal year my fifth at follow up and our CEO is worth reflecting where we came from.
Our transformation, Saudi has not been easy, but we are unwavering in our resolve to build the most comprehensive and relevant offerings for our customers taking away their complexity and delivering a better security outcome for them.
We see a path to being the largest cyber security company backed by constant innovation and excellent execution, becoming our customers' cyber security partner of choice, while leaving delivering increasing value to our shareholders.
Just four years ago, we were a different company.
We have reinvented the firewall market and capture the market share leadership position. There are glimmers of our next generation security strategy, but it made up just 8% of our billings.
Our software story networking security was early with some traction of our virtual firewalls and a fledgling precursor to SaaS eco global protect cloud services.
We made our first acquisition in cloud Native security and had early point product that will become part of cortex.
Let me step back and took stock in the industry. We had a key hypothesis, which we then tested proved to ourselves and have reproduce across the businesses today.
Has not previously been a cyber security company with a leadership position in multiple categories.
The customers believe that our cyber security platform could anchor their architecture.
We set out on this ambitious journey as you said, our prisma cloud and cortex as well as innovative significantly in our network security capabilities fast.
Forward to today, our transformation that's taken as far we are a recognized leader in 11 cyber security categories across our three platforms next generation security contributed more than 38% of our billings, helping to accelerate our growth network security. We now have the most comprehensive solution across three form factors that share common architecture and also offers.
Sweet of market, leading security subscriptions.
We have built assembled an integrated capability to nine modules that makeup prisma cloud, which is now the leader in cloud Native security Lastly, we have three anchor products and cortex with with our new <unk> product showing promise and led revolutionary and security operations is going to us hold us in good stead.
The proof that this transformation is working is and the momentum we're seeing and our customers.
Number of customers that spend over $1 million annually with us continues to grow with the millionaire count now in excess of 200 and the number of global 2000 customers that have purchased product in all three of our platforms is now 50%.
While we've had many large customer wins recently I want to highlight a team in three transactions. The first is a technology company that purchased products in all three of our platform and transaction over $75 million in value.
As a financial services company that Standardizes network security on our platform, including adding the Ns and deploying prisma cloud spending north of $40 million in.
Third as a professional services company that spent over $75 million across Drydock prisma and cortex.
One of the outcomes from our transformation of the past four years is a steady increase in our subscription and support mix, primarily driven by the growth of our next generation security business subscription and support now exceed 80% of our billings.
This has resulted in greater predictability in our revenues, we are seeing growing commitments from our customers represent a greater portion of next year's revenue as we enter fiscal year 'twenty three that number is 59% at the midpoint of our guidance, including revenue visibility gives us further confidence in our ability to invest and drive future growth. This number is over 70%.
For the revenue we expect in Q1.
All of this has occurred while our revenue growth has accelerated from FY 'twenty FY 'twenty two in part due to the accelerated growth in our next generation security offerings. While we are also taking share in traditional network security appliance form factors as reported by third parties.
Despite the success so far in our transformation, we still see significant potential ahead of us.
We estimate our large addressable market to be growing at a rate of 14% at 29% our fiscal year 'twenty two revenue growth more than doubled this market growth rate.
As we have transformed the business, we have seen our revenue growth reaccelerate.
Even with this significant growth over the last four years is still only represent approximately 6% of our Tam. We last presented at our analyst day in September 2021, 6% share of the market low for the market leader as compared to other categories and technology. So we see there is ample room to grow.
There are numerous trends that excite us around our ability to drive this growth and continue our share gains you may soon see a day, whether it would be a trillion dollars in public cloud consumed or observation. Thus far in this early market is that companies allocate to two 5% of the cloud budget of security, creating a significant prisma cloud opportunity.
So you have been in worldwide cyber security jobs that are unfulfilled or views that more training hiring alone will not effectively and efficiently counter the growing use of automation employed in attacks and the volume of alerts that is overwhelming the security Operation Center, we believe a new paradigm of security ops is needed that heavily leverages AI and automation.
Getting this opportunity with our cortex products and <unk> products, specifically lastly, hybrid work is here to stay there or more than 1 billion knowledge workers globally. We believe we have a strong position and sassy with our coverage of users and branch offices today, just cashing the surface with lots of opportunity.
We have a clear mission in front of us in each of our security platform to harness the opportunity that we have outlined.
And this is Q4 I figured rather than having me outline all the accomplishments from our product team I would invite Lee Klarich, who patiently listens and sits on our calls to give you a more detail update to help you understand how we will continue to build on our success, we had in FY 'twenty two.
Thank you the cash as Nick has highlighted across cyber security one of the biggest challenges is always been the overwhelming number of point products that customers must deploy integrate and operationalize to achieve the security they need.
In most cases this is never fully achieved leading to expensive yet suboptimal security outcomes.
We are bringing into approach one that delivers market leading capabilities tightly integrated and three platforms.
FY 'twenty two has been a significant year for us in network security, where we have furthered our position delivering a consistent security architecture across hardware software and SaaS.
We neared completion of our Gen four hardware rollout, which on some models delivers close to 10 X performance over Gen. Three <unk>.
As a result, we saw over 50% of Ngls.
New hardware sales in Q4 on Gen four.
Also in FY 'twenty, two we introduced the cloud NGF W across three of the major clouds, enabling our customers to adopt best in class network security in a cloud native service.
And Prisma SaaS she had three major launches in FY 'twenty two including the most recent zee TNA tutto launch firmly establishing our next gen approach to zero Trust.
Across our hardware software and Saturday form factors, we are able to deliver a consistent set of core security capabilities as ml powered cloud services in FY 'twenty. Two we saw the rapid adoption of advanced Euro filtering and we now see nearly all euro filtering sales on this advanced ml based service.
Advanced threat prevention, which was introduced in fiscal Q3 is also now off to a strong start.
And perhaps most importantly customers can manage all form factors and security subscriptions from a single management console to deliver consistent user experience and tremendous operational leverage.
While we believe the full platform where customers will end up we want to ensure our customers can start their adoption with any form factor and receive a truly best in class solution.
The number of $1 million lifetime values chassis customers that are also customers of our two other network security form factors and in FY 'twenty two at 210.
This is up eight fold since FY 19.
We have seven customers that have purchased all three of our form factors with $100 million in lifetime value and network security.
More broadly when we look at our network security customer base customers that have bought all three platforms from US spent 10 X more than those who are customers of only one form factor.
This showcases the true value of our network security platform.
In Q4, we introduced Z TNA, tutto, which redefined state of the art in Zero Trust network access to bring Uncompromised security and deliver zero Trust with zero exceptions.
We have seen significant momentum at our customer traction on chassis in FY 'twenty two on a number of fronts.
Our overall active SaaS customer base grew by 51% in Q4, and a $1 million SaaS deals also accelerated this year up 83% with over 51 million dollar deals in Q4 alone.
While many of these large deals are coming from our installed base as they see the value across her form factors. It is equally important that over 30% of our new SaaS customers in Q4 renew to Palo Alto networks.
This highlights the competitiveness of our SaaS solution and enables us to reach net new customers. Additionally, once we land with the new SaaS customer we are seeing customers look to standardize on our hardware and software appliances.
In the cloud we see that most customers are still relatively early in their journey. They are migrating workloads to the cloud and building new applications growing their footprints consuming more sophisticated services and adopting multiple clouds.
With this has come an expansion in their cloud security needs.
Our approach with Prisma cloud delivers a comprehensive platform with a growing set of capabilities to stay ahead of our customers' needs.
Increasingly cloud security needs to start at the moment developers write their first lines of code through to deploying and running this code and public cloud.
The acquisition of Bridge group brought us Infrastructure's code, a way of detecting and fixing security issues during development.
IAC became our ninth integrated module of Prisma cloud at the end of January .
And in the first six months of availability, we already have over 200 customers, making it our fastest growing new module.
We designed an incredibly easy way for our customers to activate any of the nine modules and have grown the number of customers that use more than three modules to over a third in those using four modules to nearly 20%.
This frictionless module adoption has helped to fuel our 55% growth in credits consumed on our platform. We are also closing in on 2000 customers for Prisma cloud.
It's great to see all the third party recognition like the SC Award as best Cloud workload protection solution that we announced today, but we're not done yet we see several opportunities for new modules and we'll continue to look at both organic development and external technology to drive continued expansion of the Prisma cloud platform.
We're earlier in our cortex platform journey executing well across our three core product categories of Xdr security orchestration and automation and attack surface management, we saw significant progress in FY 'twenty two as we drove sales of our key products and increased trashing, combining offerings and larger cross cortex transact.
<unk>.
Our customer count surpassed 4000, and we also signed 52 transactions greater than $1 million in Q4.
Combined with this customer success. We also continued the rapid innovation that we believe will be required to be a leader in security operations more holistically.
When we envisioned to future cyber security I don't see a path to success that is not heavily driven by AI and automation attack.
Attackers are two well funded and determined while customer networks clouds applications and users are too complex to manually defend the.
The only way to deliver meaningful security outcomes is by collecting rich useful data normalizing all data sources to a single source of truth, and then applying AI models to detect attacks and automate responses in real time.
We are now taking this to the next level.
Earlier this year, we announced X I am a fully integrated AI driven stock platform and kicked off a program with a limited number of design partners to ensure we had strong product market fit.
The results of this design partner program are incredibly encouraging proof.
Proving our assumptions about the value of good quality data powering AI based attack detection and native automation simplifying and speeding response.
I'm happy to say, our first paid customer was a seven figure purchase and most of the other design partners are likely to purchase in the coming months.
We are on track to launch the product into a broader set of our customers in the first half of fiscal 'twenty three.
We could not have accomplished all we have in the last several years and advancing our lead in network security standing up our cloud native security platform and progressing towards the autonomous sock without our investments in innovation over the last several years, our R&D spending has grown in order to enable our ambition to lead with a three.
Platforms, you see this in major product releases, which.
<unk> nearly 50 in FY 'twenty two.
As we move into FY 'twenty, three we are more committed than ever to leading in cyber security innovation. My team went through a rigorous process of prioritizing our most important investment areas across our three platforms.
With the continued investment in R&D I'm confident we're set up to deliver a great set of innovations in the coming year with focus on the most important areas for our success.
With that I'll pass it back to Nick Thanks Lee.
I wrap up and pass it to Deepak I want to provide you with a high level overview of how we're thinking about our financial targets in FY 'twenty three.
I highlighted the strong drivers at play, including technology sector forces as well as drivers within cyber security Lisa talked to you about all the innovation we have underway.
Continue to have confidence in our team's execution and the traction we're seeing across our platforms. We expect to continue to deliver strong results in line with the profile, we have talked about for the FERC for the last year since our analyst day.
For fiscal year 2023, let's think this includes billings growth of $20 to 21% revenue growth with increasing predictability that is in the mid twenties.
After achieving operating margin the high end of our guidance in fiscal year 'twenty, two we intend to deliver operating margin expansion of 50 basis points at the high end of our guidance with adjusted free cash flow margins of over 100 basis points of the high end of our guidance, while absorbing increased supply chain costs and inflationary impacts.
We achieved GAAP profitability in Q4 fiscal year 'twenty, two and we project. This will continue for fiscal year 'twenty three.
Lastly, today, we also announced a two for one stock split this was done to help ensure our shares are accessible to all employees and investors.
<unk> also demonstrates our belief in the future of the company and the momentum and confidence we have in our strategy with that I will pass on to Deepak to discuss our Q4 results in more detail as well as our Q1 of fiscal year 'twenty three guidance.
Dana cash and good afternoon, everyone.
Today, we again reported another strong quarter, which culminated in a strong fiscal year Palo Alto networks.
Q4 revenue of $155 billion grew 27% and was at the high end of our guidance range products grew 20% in total services grew by 30% by.
By geography, we saw strong growth across all theaters with EMEA up 33%, the Americas growing 26% and K Pac growing 24%.
Next generation security Ara grew 60% to $1 $89 billion with strength across the portfolio.
In the fourth quarter of 2022, we delivered total billings of $2 six $9 billion up 44%, which was above the high end of our guidance range total deferred revenue in Q4 was $6 99 billion an increase of 39%.
<unk> performance obligation or <unk> was $8 $2 billion in.
Increasing 40% with current <unk>, representing about half of our IPO similar to recent quarters.
With nearly all of our hardware products now refreshed as Lee had mentioned over 50% of our Q4 product orders were booked with generation for.
Customer reception has been positive with the majority of customers still in the early phases of their upgrade.
Our firewall as a platform billings grew 26%. We also continued to see an increasing software mix within our FY <unk> billings up two points to 48% in Q4.
Moving beyond the top line metrics I've already highlighted non-GAAP gross margin of 73, 2% was down 210 basis points year over year as we continued to incur additional expense the components in shipping.
We expect with headwinds persist for much of fiscal year 'twenty three.
Okay.
Last Q4, we guided for <unk>.
Fiscal 'twenty, two operating margin of 18, 5% to 19%.
We're pleased to have achieved the high end of our goal by delivering 19% operating margins in fiscal year, 'twenty, two while absorbing higher than expected supply chain costs.
non-GAAP net income for the fourth quarter grew 57% to $254 million or $2 39.
$2.39 per diluted share.
Our non-GAAP effective tax rate was 22% GAAP net income was $3 million or 0.03.
Basic and diluted share.
Turning now to the balance sheet and cash flow statement.
We finished Q4 with cash equivalents and investments of $4 six 9 billion.
Days sales outstanding was 98 days several days above where it would have landed within and without the impact of late quarter shipments.
Discounts continue to be in line with what we have seen over the last year.
Q4 cash flow from operations was $524 million, we generated adjusted free cash flow of $485 million, we achieved 33, 3% adjusted free cash flow margins for the year above the high end of our 32% to 33% guide for fiscal year 'twenty two.
During Q4, we repurchased approximately 755000 shares on the open market at an average price of approximately $483 per share for a total consideration of $365 million.
Additionally, our board of directors authorized an additional $915 million to share repurchase refreshing our authorization for future share repurchases back to $1 billion expiring December 31 2023.
On the M&A front, we closed one very small acquisition in Q4.
We reduced our stock based compensation as a percent of revenue by approximately 3% year over year and quarter to quarter.
SBC will remain a focus area in fiscal 'twenty three as we balance the use of SPC to attract and retain top cybersecurity talent with scale leverage we expect in this area.
Lastly, moving to guidance and modeling points.
It is worth noting that in fiscal 'twenty, two we have flexibility built into our plans that allowed us to execute through some real time developments during the year, such as supply chain and labor inflation.
If you use the same approach in building our fiscal year 'twenty three plan incorporating a degree of flexibility of outcomes.
It's also worth noting that we saw very strong Q4 business activity.
In some cases this was from customers taking advantage of ordering hardware and especially subscriptions ahead of a price increase that took effect on August 1st. We also saw some customers make large commitments in the fourth quarter that might have otherwise happened in fiscal year 'twenty three.
As you think about next year note that in the second half of fiscal 'twenty. Two we have very strong billings with some benefit from an increase in invoicing of multi year contracts for a few large customers.
In Q4 without this impact.
Billings would have been in the mid to high Thirty's.
Turning to our guidance for the fiscal quarter of 2023, we expect billings to be in the range of $1 six eight to $1 seven zero billion dollars, an increase of 22% to 23%.
We expect revenue to be in the range of $1 55 to $1 $5 $5 billion, an increase of 23% to 25%.
We expect non-GAAP EPS to be in the range of 2.0 $3 2.0 cents.
For the fiscal year 'twenty, three we expect billings to be in the range of $8 $95 billion to $9.05 billion, an increase of 20% to 21%, we expect <unk> to be in the range of $2 six or $2 $65 billion, an increase of 37% to 40%.
We expect revenue to be in the range of $6 eight 5% to 6.9 billion an increase of 25%.
We expect product revenue to be in the mid to high single digit percent range year over year.
We expect fiscal 'twenty three operating margins to be in the range of 19% to 19, 5%, which is 50 basis points ahead of the range. We provided on our fiscal full fiscal 'twenty, two and consistent with the growth targets. We presented to you our fiscal during our fiscal year 'twenty one analyst day.
We expect non-GAAP EPS to be in the range of $9 four zero to 950, we expect adjusted free cash flow margin to be 33, 5% to 30 33, 5% to 34, 5% and we expect to be GAAP profitable for fiscal year 2023.
Regarding our fiscal year 'twenty, four financial targets, which we outlined at our September 21 analyst day, we have strong confidence in achieving those objectives and we hope you take away from our call today some of the reasons behind this confidence.
Additionally, please consider the following modeling points.
We expect approximately 42% of our operating income to come in the first half of the fiscal year and approximately 58% in the second half we expect our non-GAAP tax rate to remain at 22% for Q1 and fiscal year 'twenty three subject to the outcome of future tax legislation.
The Q1 'twenty three we expect net interest and other income was six $6 million to $8 million.
Q1, 'twenty three diluted shares outstanding of 108 to 110 million shares we expect fiscal year 'twenty three diluted shares outstanding of 111 to 113 million shares.
We expect our Q1 capital expenditures of $35 million to $40 million and.
And we expect fiscal year, 'twenty, three capital expenditures of $190 million to $200 million.
And finally as Nick has noted we announced today a three for one split the Palo Alto networks common stock. The decision was driven by a desire to make our stock more accessible to our employees and the broader group of investors. It is also supported by our underlying confidence in our continued business momentum.
Shareholders of record at the close of business on September six 2022 will receive two additional shares after the close of business on September 13, 2022 for every outstanding share held on September six our stock will be in traded on trading on a split adjusted basis on September 14th 2022.
With that I will turn the call back over to clay for the Q&A portion of the call.
Great. Thank you Deepak to allow for broad participation I would ask that each person ask only one.
Question. The first question comes from Hamzah <unk> of Morgan Stanley was rivals follow Hamzah. Please ask your question.
Alright, Thanks, guys and thank you for taking my question and really nice set of results.
Deepak just a clarification question for you real quick.
Did you say that the billings growth in Q4 would've been mid to high 30% excluding the.
Estimated pull forward and then also for.
The cash you mentioned some early macro commentary about longer duration deals are you also seeing any changes in the sales cycle. As you guys do more seven to eight or nine deals in there is that reflected in the guidance at all.
Just to.
Keep the efficiency of time, yes, if I did say that if some of the is important.
Not just pull forwards we had some large long duration deals having normalized for them. They just want to make sure. We set expectations for next year that 44 was exceptional and some of that was because of some large longer duration deals I mean normalize for that then you'll end up in the mid to high 30. So this is more precautionary and our part as opposed to telling.
Telling you that we're not doing well.
On the front of.
Deal the life cycles have been elongated at the top end of the market for us as the deal sizes are growing this is not net new to US. This has been happening over the last two or three years. When I came the largest deal. We did was $28 million now we've done deals closer to $100. So obviously it takes a longer time to get 100 dollar deal in place and requires a lot more validation from our <unk>.
<unk> plc and getting engaged so that trend is consistent we have not seen any change in that driven by economic factors of that is your question yeah.
As I said the three we effects, we saw we shared a little bit of swelling of hardware assets to push them out a little longer and we've seen some people.
Look at transformation project, we see them not go away from core transformation, we've seen consolidation, particularly interesting.
Thank you Greg.
Next question from Rob Owens with Piper Sandler with Phil Winslow to call Rob takeaway great. Thanks for taking my question would love to drill down into the success you guys are seeing in Prisma cloud.
What are the biggest factors.
<unk> technical differentiation, that's driving your success right now.
Let me give you a sort of overarching picture and Lee has been kind enough to at least illustrated in our product capabilities, but like.
Very quickly we're noticing that if you go out and looked at it is hundreds of billions of dollars of cloud being sold by our cloud service providers are the top five around the world and what is becoming clear as most of the top end or large customers are in multiple clouds. There not just in one we ourselves are in DCP and AWS instances and deliberate of Azure. So we're seeing ourselves.
The cloud scenario, so one that multi cloud development is causing customers to look for a multi cloud solution and that's normally not driven by one cloud service providers typically somebody like us that's one part of it the other part is.
If the customer looking for point solutions, it's harder for us, but most customers are migrating away from point solutions looking for a more platform approach as Lee highlighted which bridge crew, which we acquired operates on the left side of the development lifecycle is the bills lifecycle Prisma cloud used to traditionally operate in the run cycle, where you put things into production by connecting.
Build and run it we've created the sort of even the extension to the urban life cycle. So we are seeing people, who are taking a serious view towards cyber security and the cloud come to Palo Alto networks and not chase. Some point solutions. If you look at the industry. There are no platform solutions available.
Industry groups have already validated that as the Aussie Awards, we heard about this morning. So Lee do you want add something technical differentiation you.
<unk> been well trained to cash alright.
I'll add one piece.
Turning to cash said in his prepared remarks.
Not only do we have a platform approach, but everything that we deliver from the platform is best in class and that combination is critically important.
For our customers to have the trust and confidence in using Prisma cloud.
Alright. Thanks.
Great. Thanks, Phil Winslow of credit Suisse with Adam to follow Joe go ahead.
Hey, congratulations on a great into this fiscal year now when we speak to your partners growing message back has been that increasing amount of the demand for Prisma access, which obviously had a great quarter is coming from enterprises that have been customers of other competing on premise firewall vendors. However, they do not offer a robust set of cloud services Palo Alto networks doesn't and lead to your point do your slides the number that jumped out.
It does today with more than 30% of new chassis logos in Q4 were new to Palo Alto networks. So the cash then maybe Lee if you could comment if you think forward here what is the opportunity not only monetize SaaS prisma access, but also to potentially transition that's largely on premise installed base of those competing firewall vendors to Palo Alto networks platform. What are you hearing from customers and why.
So Phil I think in the last year, I would say our ability to deliver deploy and sell sassy has grill.
And as you as you picked up in the number 30, because these customers are net new to politics and the way. It works is we go to them. They appreciate our firewalls, but the problem is there now have bought firewalls from somebody two years ago three years ago, five years ago, and there's still a lot of end of life on them. So they like us they like our solutions, but theyre not able to execute because somebody before then bought them or they bought them at a moment when.
They have a diluted so.
Now comes to the point, where we are able to convince them that our SaaS solutions right.
Our excitement for this 30% customers that overtime. They will then migrate their on prem hardware to volatile as well and we're noticing early days, but I'm noticing some of these customers who bought on southeast solution because they understand our security fabric then have deployed it and its a simple attach of putting hardware because of the security solutions have already been put into place. So.
We have taken share in the firewall market by by most third party estimates already 300 to 400 basis points everything borrowed the driver is us being able to deliver a more comprehensive zero Trust network security capability as Lee highlighted we have customers, who spend north of $100 million of lifetime value of network security with us which is hard to do.
Thanks, guys.
Great. Thanks, Adam Tindle, Raymond James with Brian This is Paul.
Okay. Thank you very much cash on the Ngls portfolio. Congrats on the success or just under $2 billion at this point and I thought I'd, maybe touch on the growth versus profitability algorithm for that piece of the business now that it's at this level of scale scale. If I look at the fiscal 'twenty three guidance. It implies that new <unk> is going to be just over 700 million.
<unk>, which is a big number but it's about the same dollar amount as you added in fiscal 'twenty. Two could you give maybe speak to kind of this crossroads the opportunity to invest more for <unk> and maybe a new step function level of new AOR growth versus is it a better opportunity now to harvest and improve profitability.
And certainly any metrics you can provide on where you are and where you can go on <unk> profitability would be great. Thank you.
I'm sorry, I'm confused are you, saying, 50% to 60% growth, it's time to harvest or trying to grow faster.
Sometimes I can never make you guys happy.
It is like three years ago, We said 1 billion you guys I've always said, that's a big number you won't get there we get you to $1 9 billion in four years and the second thing that's.
That's par for the course now just like start making more money.
Okay.
As Lee highlighted we are trying to balance our R&D spend with our growth aspirations I personally believe there's so much room in the cyber security market as we've demonstrated since like game.
Revenue growth was up 50% in terms of percentage growth. So you have to go in the 19% to 20% range and growing at 28, 29% and I think that's a good place at such large numbers, we're going at a good number we're going to keep balancing our investment yet showing you fiscal prudence could I go spend more money and let the operating margin languished lower yes, but I don't want to IV promise that.
We keep extracting operating margin to make sure were fiscally prudent and we're going to do that but at the same time, we use the opportunity of every dollar to make them more efficient and he's spending for growth.
We think our growth profile, obviously as you would expect has improved for most of our products that we were taking bets on about three or four years ago. I think it's also important to San <unk> is a leading indicator of revenue.
Revenue comes in after IRR and then your costs coming out on day, one so yes, our operating margins for these new areas are getting better in some cases getting to positive from negative, but I think we're still further way until you see the impact of the seven $800. We added this year as that flows into revenue. The next 700 folds in revenue hopefully will keep expanding operating margin.
Which is fueling our ability to give you that 50 basis point expansion over the years, but we're going to keep striking the balance.
Next is Brian Essex with Goldman Sachs was the team of <unk> go ahead, Brian .
Thank you for taking the question and I'll Echo my congratulations on the results as well great to see maybe.
Maybe any cash if you can help us reconcile what youre seeing on the product revenue side, particularly within the context of your guidance next year.
Particularly given what you said about consolidated sharing platform early stages refresh cycle, but it sounds like you got some great VM series transit.
Traction in the percentage of revenue total.
Total firewall as a platform businesses.
Accelerating.
What is what are the underlying assumptions behind that.
Mid to high single digit product revenue growth, where could you see upside and how are things different.
Underlying those expectations.
Third to what Youre seeing today.
Yeah, Brian as you know thank you for the question and thank you for your kind words.
We had the similar set of expectations last year going into this fiscal year.
And we benefited from some price increases as you know we also benefited from some pull through activities by customers because there were supply chain prices and people were trying to make sure. They are stocking stocking up we just want to be prudent we don't anticipate more price increases because our philosophy is we don't want to keep driving prices up because you know when you keep increasing prices on supply.
Chain settles down you have to cut prices and I don't want to be in that scenario or we're showing you a tremendous volatility in our product revenue. So that's kind of one factor is the price normalization. The second factor is potential pull in by customers because of supply chain constraints and ordering ahead. If you balanced that out we think the number is still in the low to high single digits, but again as I've told.
You from perhaps five years ago, we are focusing on firewall as a platform the more I drive SaaS either more drive virtual firewalls, the better off we are transitioning our business, there's going to be highlighted 70% of our revenue now is predictable going into next quarter, we highlighted that 80% of our software subscriptions coming from.
From software. So we are trying to make sure we keep transforming this business of software because we love our hardware business. It drives a lot of installed base of laser lots of refreshes in droves drives a lot of our advanced your advanced threat prevention capabilities now please don't take away that thats not our favorite child of ours, but at the same time, we are cautious and we're making sure we.
Balanced growth in our hardware business with a trust, we're putting into SaaS and cloud and cortex.
Very helpful. Thank you.
Great next from Fatima <unk> of Citigroup with sockets Leah next go ahead Stephen.
Thank you good afternoon, gentlemen, thanks for taking my questions.
Any cash for you.
If I calculate back of the envelope math.
You have roughly maybe 10% of your billings tied to a handful of transactions. So as I think about large deal dependency and 70 500 million dollar deals, becoming a norm at Palo Alto, how do you put your head together with <unk>.
Circling guardrails around the guidance as the business becomes a little bit more levered to some of these larger deals, especially given your scale.
Well, let me let me backup first of all we were careful we said mid to high <unk>. So it's not exactly 10% is somewhere between five and 8%. If you will if you think back of the math envelope.
But yes, 5% to 8%, but look part of it is we also until we have $200 million customers I think in cyber security that makes us the largest number of millionaire customers. You can expect there is a large amount of customers between that.
And.
The million dollar customers in 100, and then a minute. There's a lot of people have lots of numbers being 100. So you can expect we have people are pretty much at every number part of it is a balancing act in terms of what deals we prioritize what youll be focus on member honeymooned ordeal don't go away. They just take longer so we could get it done in Q1, we'll get them done in Q2 itself customer doesn't wake up one morning.
That deal have been discussing the last nine months of a honeymoon box.
There's not going to happen and typically it becomes a 60 minute audio are you still going to have in the following quarters. So our job is to have a lot more pipeline and our portfolio to make sure that we're able to bring enough of them in to be able to keep you Henry analysts.
Away from destroying our credibility or whatever the right phrases I regarding convinced yet for Tim or not I'm still waiting.
And mom that bullet train alright, good fantastic. Thank you.
Alright, great. Thanks, Our next question from a socket clear of Barclays with rental next go ahead sorry.
Okay, great. Thanks, Craig Hey.
Hey, everyone. Thanks, Thanks for taking my my question here Echo my congrats on a very strong quarter Deepak maybe maybe for you you.
You mentioned in your prepared remarks that you took the same approach with FY 'twenty three guide as you did with FY 'twenty, two which is obviously very strong. So maybe the question for you is as we all contemplate the impact of macro uncertainty for next year. How did you sort of think about that when when you were kind of thinking about that billings guide for next year, which again was very strong.
A higher base for 'twenty two.
Yeah, I don't think that's anything different than I'm going to tell you that hit the authority.
That's not already in our prepared remarks, I mean, I think it's really a question of just dissecting what are the impacts of the macro figuring out what supply chain related what's inflation related box demand related and then just making sure that we methodically work through it like that.
The cash and I and the leadership team has a lot of debates light during the course of the annual planning process and then we just try to make sure that we're thinking through scenarios and having enough flexibility for different scenarios, but.
Really nothing to add beyond the prepared remarks.
Got it thank you.
Alright, Great next is Brent Thill Jefferies with Andy Nowinski next go ahead Brad.
Yes, Joe under Brian I appreciate the question and congrats on the results maybe just a follow up to that last question appreciate the extra prudence and I noticed in your fiscal first quarter, but is there any reason why the growth rate would have.
I know theres some duration in <unk>, but just maybe talk about the billings guidance as it relates to <unk>.
So I think.
Again, ultimately we talked about how he got a normalize it for some large deals we deal to take a price increase on August 1st I think again, we're just trying to be prudent at the beginning of the fiscal year and make sure that we're not getting ahead of our skis I mean, the the 20% to 21% as the fiscal year Guide I think we've got a little bit higher in Q1.
Specifically, but I think I think.
Yeah, and so still ahead of consensus so I think we feel pretty good about the pipeline all the metrics that we look at is important to understand the overall market context, you've got companies, which are reducing guidance company that you are cutting EPS guidance. There are companies, which are warning of potential customer.
Deal lifecycle of being smaller so we were trying to make sure that we are prepared for both the upside and downside scenario I think it's fair for us to be prudent in that market.
Thanks, guys.
Hey, great. Thanks, We've got Andy Nowinski at Wells Fargo, and Joel Fishbein next go ahead Ed.
Yes.
Great.
First I just want to extend my congrats on a great quarter on the billings guidance, particularly in light of the much of our comp you have this year. So first question I wanted to ask about your win rates on Prisma SaaS, because none of our competitors have firewalls or other solutions to offer beyond their SaaS solutions. So I'm wondering if the rest of your portfolio might actually be your <unk>.
Our sustainable competitive advantage, that's driving that growth in new logos youre seeing with Christmas assay.
Part of the if you look at historically.
Until about three years ago, we didn't have a SaaS product that we could actually go head to head with the industry leader lets US right. What has happened in the last year and a half or two we've become a force to reckon with I'd say in the most the largest enterprise deal it's head to head with two vendors very rarely do we see a third it doesn't take a lot for guests with the second lender is.
And three.
Three years ago, we're not showing up to the party two years ago getting one or two deals out of 10 now we think we're in five to six out of 10 deals and our aspiration is next year to be internal 10 deals.
But hopefully if we can win half the deals that we're in will be growing at big numbers like we did this year. So we think we are coming of age in our SaaS business that we have a lot of respect for the other player in the market. We think we have a better solution technically we're seeing that when enterprise architecture come to play where customers want to integrate a zero trust strategy.
Atg across hardware software and.
Remote access.
Evan.
Solutions, we believe that we have a technical edge at the same time, we made the early decision to deploy that on the public cloud. We are actually are the only company that can deliver your SaaS solution on the public cloud redundancy. So DCP goes down we auto Hearts with Judy AWS enable does goes down with hospice due to these DCP. So we give you the highest level of SLA in this assay business.
In the marketplace.
That's great thanks for cash.
Alright next schedule is spine of tourists securities followed by Keith Bachman go ahead Joel.
Yeah.
Yeah.
Alright.
To give.
Give me one more shot here Joel to get sorry about that sorry about that thanks for taking my question I was on mute and cash just wanted to follow up on <unk>.
Fed spending in sled spending, particularly since Palo Alto is probably in the pole position.
Deal with the Zero Trust environment.
Governments.
Espousing a strategy around it I'd love to just get an update it seems like theres not rhetoric, but not a lot of spending.
As you'll appreciate what typically happens in the new administration comes into place. The first six months they spend the time getting to know each other.
Six months to write a lot of executive order and then we get into implementation. If we're lucky in here too. So yes, we have seen great signs of alignment in the market. We are seeing some good executive orders are aligned towards more awareness around cyber security as you know the FCC is also looking at how to make it a more relevant conversation and board. So all.
The signs are headed in the right direction.
The fiscal year close for fed comes into the next month and a half. So we should hopefully see some activity in Q1 around that and I think next year should be a better year for fed spending, especially around zero Trust and Safi and club.
Great. Thank you.
Alright next to Keith Bachman of BMO with Gregg Moscowitz follow up go ahead.
Yes.
Can you hear me Okay Yep.
Lee I wanted to bring you into the conversation for a second if I could.
Lots of good metrics around cortex, and I was just wondering how youre thinking about the growth potential in cortex, and particularly with <unk> coming in the first half.
Is that you think actually caused an acceleration in growth in cortex, and Deepak if I could just ask a clarification sneak one in here for the Billings guide are you assuming.
Duration neutral in FY 'twenty three.
Or any kind of assumptions around duration, and new and pricing that we should be thinking about in that 20 to 21 Billings guide when you compare this year to last year. Many thanks.
Yeah. Thanks, Thanks for the question Keith.
<unk>.
We saw it.
Another year of good traction with cortex across XT, Rx or an expense and I anticipate that we will continue to see.
That traction FY 'twenty three given the.
The product innovation that we've driven and will continue to drive across the three products and the value they provide.
When I think about <unk> I think of it as being a start of.
<unk>.
Fairly exciting journey, but it's going to be a multiyear journey I don't I don't see it as being just a quick hit it right.
More architectural transformation. It is truly what I believe customers need, but it will take a little bit longer for that to fully play out and I am.
Very encouraged by the design partner program, Iran, but there's we're going to see that play out over the course for next year and hopefully that sets the foundation for years to come.
Okay, Great and then just just one question on duration pricing no significant changes on duration and no.
Additional pricing beyond the ones that we've already announced the call August 1st we did have a price increase that was about 5% on our on our hardware.
Okay, great. Many thanks.
Thanks Keith.
Gregg Moskowitz Mizuho Securities sold by Matt Hedberg, Greg go ahead.
Alright, thanks clay so the cash at the beginning of your fiscal 'twenty. Two year, you spoke about a more incremental period of more moderate period. If you will as it relates to acquisitions, but earlier Lee did also mentioned several opportunities for new modules.
With valuation multiples, having generally command curious how youre thinking about M&A in fiscal 'twenty three.
So we outlined that we it's harder to do M&A now than it was three or four years ago, because we had such a wide.
Canada is a blank canvas in terms of various opportunities where we could go make acquisitions today, we have to we have to balance the idea of an acquisition to make sure that as is consistent with our product strategy is it an overlapping acquisition or is it a complementary acquisition, where we can integrate overtime. So that reduces the amount of the opportunity out there and I've always said, we're very focused.
On product area acquisitions as opposed to go to market acquisitions, because we have a as you can see from our IRR on Ngls $1.9 billion, we have the ability to go sell good stuff. If we get good stuff from our product burden here. So I think we will continue to stay on the lookout and scan the market.
We are not we're.
We're not.
In the mindset of acquiring large deals were in the mindset of looking for great product teams that we can complement really attach to our capabilities. So it keeps scanning the market and if something shows up.
We'll do it but again I don't think it has ever been a significant part of our effort in terms of our market cap and we did.
The first thing I have been in the older markets that was $225 million in those notes 50. So you can imagine it's a small scale relative to what the opportunity for the company and that's why we think about it we're not we're not chomping at the bit right now the market.
It's kind of like the public market has.
<unk> rationalized the private market's probably haven't yet it's a bit like real estate and our people remember the last the neighbor's house, what is sold out they kind of forget what their houses worked so until people realize the true value of the house is going to be a little longer before the acquisitions come into the security market again.
Thank you.
Okay, Great, Matt Hedberg RBC bolt by grateful.
Sure Hey, Thanks Kash.
Cash and team congrats on the results.
The success of your chassis portfolio is obviously impressive I'm wondering as you approach new fiscal year are there things that youre doing from a go to market perspective.
To even drive higher cross sell I believe you have about 54000 firewall customers and now just shy of 3600 SaaS customers just kind of curious how you think about maybe.
Driving even more cross sell what is obviously a bit on that.
Thank you for the question. It's a great question, it's something our management team has spent a lot of time thinking about.
And what we are doing going into this fiscal year is we used to have sassy sales specialists and what we've done is we have merged them into our core sales team and we've been running boot camps. The last six to eight weeks training everybody out in the field for SaaS. So we're converting our entire core field team our network security team into SaaS.
First team, which is the way only where we can get amplification across 2000 sellers and actually go make sure. There's a SaaS the opportunity to be uncovered to every customer. So we think sassy has come of age. We think etsy is the linchpin towards on network security strategy. We think there is this is gonna be a very very large market in the next five to 10 years everything we're one of two vendors in the market.
But who will be who will be invited to every opportunity and we hope to win our disproportionate share.
Best of luck. Thank you, Okay, alright, great last question for the day from Gray Powell with <unk>, Great go ahead alright.
Alright, Thank you very much and congratulations on the strong results.
So, yes, I guess I'll stick with the SaaS <unk> and I'd be really curious I mean, a lot of other companies that have reported earnings in the security space that they're talking about longer sales cycles.
Particularly for larger more complex deals.
How does that play into the Prisma SaaS portfolio, where are you seeing any are you seeing any macro impact there, particularly in terms of pipeline and then was that like a consideration.
The Ngls or our guidance.
But as I said.
First and foremost the large complex deals take longer to get done and SaaS. He does take longer because customers SaaS is just not buying a security and bolting. It on it's actually re architect and your network access.
Just how your laptop delving into your work if youre using Palo Altos Azure Cosmos assay. So it's kind of important because if your laptop doesn't get access to <unk> infrastructure in trouble. So it becomes a network play as much as a security plays with teams take a little longer to get it done. So I think that's kind of part of the process lessor. The macroeconomic concerns. If you will is really it's really doing the technology.
Formation and agreeing to do it as an organization that's what takes a little longer in terms of our guidance. There is a whole bunches of puts.
Puts and takes that are going in there are secular tailwind. We obviously have a sense of the pipeline going into next year.
The team asked we did some big deals I guess, what we didn't do some big deals right. You couldn't have done every deal. So there's a bunch of deals that are still waiting in the wings. Yes. There are larger and they are binary that if they all don't come in we will have to go hustle if they all come in we'll be in a great place, but our job as management is to balance all of these factors you've got to balance inflation supply chain.
<unk> cycles, various product investments, so I think across the balance if you look we think our guidance is prudent across all of these factors, where we've seen some of them might be better for us from the worst part of the margin. We think we can deliver the guidance as presented to you.
Alright, it sounds good thank you.
Great. Thanks, I will conclude our Q&A I'll turn it back over to Nick for his closing remarks, well first of all thank you everyone for your attention and your questions.
And for joining us.
Forward to seeing many of you after this and separate calls as well as upcoming conferences I also want to thank our customers partners and of course, most of all our employees, who make us the great place that we are with that profile out of nowhere.
Yeah.
Yeah.
Yeah.