Q1 2023 Palo Alto Networks Inc Earnings Call
<unk> adapted our operations to align with changing market conditions.
On the topline billings grew 27% year over year, while our peer grew 38%.
We have consistently maintained that cyber security the most innovative sector of the technology industry demonstrate progress on our transformation. We have shared how our new cloud delivered cloud enabled offerings are contributing to our business via our NDS era.
That context this quarter, our NDS they are hit a key milestone across the $2 billion, Mark and grew 67% year over year.
As the macroeconomic environment changes, we are accelerating our efforts to drive incremental operating leverage in our business given that we're the largest independent cyber security business, we can meaningfully improve our margins for the next phase of our company's lifecycle.
Our focus on profitability in the quarter drove operating income growth of 44% year over year with operating margins up 260 basis points during the same period.
We also generated over $1 billion and free cash flow in the quarter.
For the second quarter in a row, we generated net income on a GAAP basis as we focus on GAAP profitability for the fiscal year.
At the center of our strategy is the need to drive more consolidation to get customers to a better security posture towards that end, we continue to see large cross platform buys and guar millionaire customers at a steady clip.
Our customers have been on a journey with us initial deals that give them comfort with our products and help distinguish our abilities from our competition over time lead to customers seeing an opportunity to consolidate into one of our platforms as.
As they get comfortable with either start up as more cortex, we see them looking at further consolidation across multiple platforms from us. This strategy allows us has allowed us to continue to transition our deal sizes are satisfied customers and we expect this to continue.
Consistent with that approach we have had some marquee deals this quarter our U S. Federal government agency chose our cortex technology.
Transaction allows the total spend to go into nine figures with additional ears and customer option. The selection highlights unique capabilities and market leadership of our expense technology, but yours is a central of this transaction. We received a purchase order for the first three years of the deal for over $60 million in Q1 allows.
Allows us utility signed a seven figure deal for software firewalls.
Security subscription that Prisma cloud.
The customer has hundreds of appliance based firewalls and chose our software firewalls because of our consistent architecture and chose Prisma cloud as a standardized security across four public clouds.
A major European Media company signed an eight figure multi product deal, replacing several incumbent network security vendors and consolidating on Palo Alto networks, including a full line of cloud delivery delivered security subscriptions.
We closed a seven figure deal with a U S technology company spanning all three platforms. The customer did not have our physical firewalls in the environment, but valued our consistency of software firewall deployment across on premise and cloud are unique expense offering and the total cost of ownership benefits of consolidating on our platforms. You can see evidence of a broader success with large.
Customer commitments and our active customer count.
Or 230 <unk>.
Year over here in the first quarter.
Okay.
We continue to innovate across our platforms and get recognized by the market for our abilities. This quarter. So it was launched software composition analysis in Prisma cloud SaaS security posture management, and sassy and just this week.
Of course, our next generation Firewalls, Lastly, we announced general availability of <unk> and cortex.
External recognition of our innovation is important to us as many customers rely on this third party validation as a part of their evaluation process. This quarter, we received leadership recognition into new categories, adding cloud security posture management or C. S. P M and cloud native application protection platform are seen app to our list.
Let's take a deeper look at all three platforms.
We have continued to see solid growth in our network security business.
Innovations of the appliance firewall form factor, including our Gen four refresh and our investments in the virtual form factor have continued to drive our share against on a year over year basis gain of approximately two percentage points of market share in the appliance market and seven percentage points in the VM market.
Customers see an opportunity to drive standardization and make decisions to move away from competitors that have not kept up with our pace of innovation.
So see many customers extending the standardization to SAIC.
Many are in the relatively early stages of executing sassy given it involves changes to their security network architectures are principal sassy offering has gained industry recognition and you've seen an increasing number of wins within our installed base as well as with new customers.
To put this into perspective, our firewall customer base of over 15 times larger than our SASSA customer base with our core sellers now enabled and executing and driving SaaS into the installed base. So as he continues to represent our largest pipeline.
Consolidation of network security capabilities of our customers is driving it that subscription and towards installed base across all five of form factors. Okay.
Constant innovation and capability expansion and network security has been a hallmark of our platform since we entered the market over 15 years ago.
While we have highlighted the number of new subscriptions. We offer they are also re imagined our existing capabilities on advanced Euro filtering and threat prevention versions leverage deep learning to block adhesive zero. The unknown attacks in real time yesterday, we introduced the advanced version of wildfire to stop more zero day cloud the attacks as part of our panelists.
Kevin I don't know earlier, the new subscriptions provides significant additional value to our install base and have already seen promising adoption.
Moving on to Prisma cloud.
This rollout cloud continues to be the industry's leading <unk> platform built from best in class acquisition and organic innovation.
Acquired bridge through 18 months ago to ship shift left and introduced our cloud core security module with Infrastructure's code scanning, believing this relieves our SCA or software composition analysis solution in Q1.
The integration of FCA with the Prisma cloud platform enables developers and security teams to prioritize normal abilities that impact the application lifecycle proactively.
Seen hundreds of Prisma cloud customers use our IAC and SCA capabilities as part of our cloud core security module.
We continue to see pretty much our customers increase their credit consumption as they expand their hyperscale of footprints and adopt more of our nine modules such as cloud code.
Half of our Prisma cloud customers are using two or more modules and nearly 20% are using four or more modules in Q1, our credit consumption grew 55% year over ear.
Building further upon our success shifting left with IAC security NFC adoption, we're doubling down on investing in software supply chain security today, we announced our intent to acquire cyber security, which is key to this strategy side. It brings the ability to visualize customers application development and deployment environment analyze the tools identifier.
And how to remediate them this ability to secure the software supply chain is backed up by Ciders, leading CIC. These security research team.
The integration of <unk> capabilities into Prisma cloud after the closing of the acquisition, we will further our leadership in cloud security, helping enterprises secure applications from the cloud.
Yeah.
Across cortex, we are focused on driving momentum in a number of areas. The first key is ensuring we are winning customers with a best of breed product capability. In Q1, we saw strong cortex large deal performance. We had success not only with xdr XOR and expense on a standalone basis, but a number of notable examples of multi product deals.
This included a multimillion dollar transaction to the European construction company, which replace their existing Sim and saw with Xdr Pro an X or other government customer adopted xdr pro an XOR and a seven figure deal as it formalized a new source for multiple agencies. These are in addition to the federal customer we already talked about.
Continue to innovate across cortex during Q1, delivering a new managed detection and response service built on our xdr capability and enriched by our unit 42 World class threat intelligence.
I'm most excited about the general availability of <unk>, our breakthrough autonomous security operations platform.
Our launch events or Exxon were oversubscribed, and we see a lot of residents with our product and its future roadmap as customers re imagine the waterless stock management.
Just a few months ago, we had launched a design partner program. Most recently, we've had two multimillion dollar commitments from Exxon design partners as they expanded into production deployments at this point the majority of our design customers have transitioned to paying customers.
We are carefully managing how we onboard future <unk> customers, because we want to ensure fast customer and time to value. Our interest list is north of 50 customers, who would like us to deploy Exxon were qualifying them and carefully onboarding them. So that we can scale and scale the business appropriately and give them value.
In summary, I feel our teams did a good job in a seasonally tough quarter, where also the macroeconomic climate is fast changing I'm sure. All of you are trying to figure out what all of this means for us over the next few quarters.
As we all know the fed is working to tame inflation impacting growth.
While cyber security somewhat resilient, we do see some marginal signs of impact.
Cybersecurity deals are getting more scrutiny, suggesting deeper and longer reviews of transformational projects newco.
New conversations that include payment term the discounts are causing deal cycles to elongate on a positive front, while some deals have been sized down are broken into phases.
We are experiencing few deal cancellations we.
We do expect this behavior to become the norm over the next year.
The impact is not uniform across all sectors, but those feeling the impact of interest rate increases are more likely to scrutinize their budgets and those prospering and the high interest rate environment technology CPG in some parts of retail are feeling an impact while utilities oil and gas defense and public sector verticals continue to be on of course.
On course of their plants.
Coming off Q4, Q1 tends to be a seasonally more challenging quarter, but we were able to obtain some of these early trends by doubling down on execution FY.
FY 'twenty three will require continued excellent execution to overcome some of these macro impacts.
Towards that end, we have already taken concrete action, we are frontloaded hiring of our field teams to increase coverage across our customer base.
We have also expanded our level of activity around both new accounts and existing customers to ensure faster time to value with our products.
As we discussed last quarter, we have seen some customers delay hardware refresh plans, while they will ultimately need to refresh somewhat choosing differ and reassess at a later date.
I continue to believe that hardware will have a long term industry growth rate in the 5% to 8% range and who might trend to lower end of the range. However, coupled with an easing supply chain and I expect that near term will continue to report a low double digit growth rate for product revenue.
Too many vendors leads to complexity and increases risk given the increased scrutiny and return requirements. The silver lining for Palo Alto networks is that we are having more conversations around consolidating platforms than we've ever had before we think customers are less likely to purchase newer security products. Instead, they will continue to consolidate towards.
Like for like capabilities from fewer vendors cyber security is critical to ITT transformation and hyper scaler adoption, we believe that whilst there may be short term bumps to the pace of investment by some of the customers. These projects will continue for the medium and long term we.
We see cyber security spending ASEAN resilient, but not immune to customers adjusting for the current environment.
Having said that I continue to believe that we can overcome these macroeconomic impacts with strong and focused execution, which is what we plan to do.
It was just six to nine months ago that we're talking about the challenges we faced in the competition for talent are now finding it easier to recruit and hire top talent. We're also seeing lower attrition rates, which necessitates fewer overall, new hires we will closely monitor our hiring as well as are all spending to further sharpen our focus on efficiency.
As you proceed through the year and focused internally, how we respond to the external landscape sharp execution from our teams will be paramount.
Before I turn the call over to Deepak I want to provide some perspectives on how we're thinking about the forecast.
We are adjusting the high end of our guidance ranges for revenue and billings for the year for the upside you saw in Q1.
Within our revenue, we do expect slightly higher product revenue growth in the range of 10 plus percent as we were able to ship. Some orders that had previously been held back by the more challenging supply chain situation I mentioned earlier.
We're also reflecting the strength you saw in <unk> during Q1 with higher Ngls are our guidance.
The range for the year. This reflects not only the performance of our quarter of our cortex, Prisma cloud sassy and sulfur and firewalls, but also the success we have seen an advanced cloud delivered subscriptions that I noted.
On a positive note, they're focusing more and more on execution and how our teams focus on driving incremental operating leverage towards that end, we were able to take steps to accelerate the profitability. The previously outlined at our analyst day, which is reflected in our Q1 operating margin and EPS performance. We will remain focused here and as a result are raising our operating margin guidance for the year by 50 basis points.
This as well as highest higher interest income is driving the increase to our EPS and cash flow guidance as Deepak will cover.
Over the last few years on a compounded basis, our EPS and adjusted free cash flow have gone below our revenue growth rate as we've made significant investments, we're not targeting EPS and adjusted free cash flow to both grow north of 30% at our guidance midpoint, which is ahead of our revenue growth.
We are confident in our strategy and wouldn't trade our position with any other cyber security company. We believe our broad portfolio focus. It is an advantage as we focus on emerging areas, where customers are allocating new budget dollars. While also capturing an increased portion of the customer's waterside security budget as they look to consolidate spending we will continue to invest for the long term with a commitment to fund innovation.
We also pursue near term opportunities to drive efficiencies in our business with that I will turn the call over to Deepak.
Yeah.
<unk> cash and good afternoon, everyone.
Q1 revenue of $1.56 billion grew 25% and was above the high end of our guidance range product grew 12% in total services grew by 30%.
By geography, we saw growth across all theaters with EMEA up 32%, the Americas growing 24% and Jay Pat growing 26%.
Our next generation security capabilities are increasingly driving our results.
<unk> grew 67% and at $2, one $1 billion exceeded $2 billion for the first time.
We continue to see strength driven by our broad portfolio within next generation security. This includes cortex, Prisma cloud Prisma sassy software firewalls and the advanced versions of cloud delivered subscriptions, we remain optimistic about the prospects of this broad and diverse portfolio.
We delivered total billings of $1 $75 billion up 27%, which was above the high end of our guidance range total deferred revenue in Q1 was $7 2 billion, an increase of 39% remaining performance obligation or IPO was $8 3 billion, increasing 38% with.
P O representing about half of our IPO similar to previous quarters.
Right.
Moving beyond the top line metrics I already highlighted non-GAAP gross margin of 74, 3% was down 10 basis points year over year with some incremental supply chain related expenses being incurred to components and chip.
Operating margin was 26% an increase of 260 basis points year over year over year.
This strength in operating margin was the result of lower expenses as a percentage of revenue across all three expense lines.
R&D sales and marketing and G&A.
We are already focused on aligning our investment plans to the areas of highest per ton and thus as we proceed through this environment. It is sharpening of these efforts.
non-GAAP net income for the first quarter grew 56% to $266 million or 83 cents per diluted share.
non-GAAP effective tax rate was 22% GAAP net income was $20 million or seven cents per basic share and six cents per diluted share.
Now turning to the balance sheet and cash flow statement.
Balance sheet is strong closing Q1, with the highest cash an investable balance ever with cash equivalents and investments of $5 $9 billion.
We have ample flexibility to rebate repay debt coming June invest in the business through tuck in acquisitions and return capital to share holders. We're in the enviable position to be able to do all of these at the same time.
Q1 cash flow from operations was $1 two $4 billion, we generated more than $1 billion in free cash flow for the first time in our history with total free cash flow of $1 $2 billion this quarter.
This puts us well on track to hit our annual guidance, which we are raising today.
This cash flow performance was largely driven by strong collections in the quarter that we expected based on the strength of our business in Q4.
During Q1, we did not repurchase any of our shares as a reminder, our share repurchase program is opportunistic and we're committed to this method of returning cash to shareholders over the medium term.
As <unk> discussed on the M&A front, we entered into a definitive agreement to purchase scientists security for approximately $195 million in cash excluding the value of replacement equity awards subject to adjustments.
This deal to close in the fiscal second quarter, we expect the financial impact of the transaction to be immaterial to our fiscal 'twenty three guidance.
Stock based compensation that ticked up slightly as a percentage of revenue quarter over quarter as expected with the issuance of a portion of our fiscal year 'twenty between grants on a year over year basis, we continue to manage our <unk>.
SPC down as a percent of revenue in line with our long term clients.
As we've had a number of questions about the impact of foreign exchange volatility on our business I wanted to remind investors that we price our products in dollars around the world and therefore, not exposed to the direct translation impact.
Revenue that you may be hearing about from other companies.
Now moving onto our guidance for Q2.
And for the year.
For the second fiscal quarter of 2023, we expect billings to be in the range of $1 94 to $1 99 billion and.
An increase of 21% to 24%.
We expect revenue to be in the range of $1 63 to $1 $66 billion, an increase of 24% to 26%, we expect non-GAAP EPS to be in the range of 76 to 78 and.
An increase of 31% to 35%.
For the fiscal year, we expect billings to be in the range of $8 95 to $9 1 billion, an increase of 20% to 22%, we expect <unk> to be in the range of $2 six 5% to $2 7 billion, an increase of 40% to 43%, we expect revenue to be in the range of $6.
Eight five to $6 $91 billion, an increase of 25% to 26%.
<unk> product revenue growth in the range of 10% up slightly as my cash outlined in his remarks, we expect fiscal 'twenty three operating margins to be in the range of $19, 520% up 50 basis points versus the range, we outlined coming into the year.
We expect non-GAAP EPS to be in the range of 337% to $3 $4, an increase of 34% to 37%. We expect adjusted free cash flow margin to be 34, 5% to 35.
5% and we continue to expect to be GAAP profitable for fiscal year 2023.
Additionally, please consider the following modeling points.
We expect our non-GAAP tax rate to remain at 22% for Q2 and fiscal 'twenty three subject to the outcome of future tax legislation.
Q2, 'twenty three we expect net interest and other income of $18 million to $20 million.
We expect Q2 2003 diluted shares outstanding of 320 to 226 million shares we expect fiscal year 'twenty three diluted shares outstanding of $325 million to $331 million.
Q2 capital expenditures of $40 million to $45 million and we expect fiscal year capital expenditures of 190 $200 million.
Okay.
As an additional modeling support based on our prior seasonality, we expect the quarter over quarter revenue and billings growth. The Q3 dollars 23 to be in line with last year.
Also we expect operating income in Q3 to be roughly flat with our Q2 levels.
To wrap up we are confident in our strategy I wouldn't trade our position with any other cyber security company.
We're focused on sharp execution and sales intensity to stay ahead of the changing macroeconomic environment at the same time, we're focused on taking steps to accelerate our profitability I think I did with.
With that I will turn the call back over to clay for the Q&A portion of the call.
Oh.
Great. Thank you.
To allow for broad participation alright gas at each person only ask one question.
Our first question of the incomes from socket clear of Barclays with Hamzah Bolivar West fault socket you may ask your question.
Okay, Great Hey, everyone. Thanks for taking my questions here and a nice set of results.
Maybe maybe for you you.
You mentioned some early customer behavior changes I was wondering if you could just expand on that a little bit and how that manifested in the business. It doesn't seem like there was much of an impact in the NGL business in fact that accelerated growth year over year I'm wondering if you could just expand on where that that customer behavior changed and how you've incorporated that into the full year.
Good.
It looks like it as I mentioned.
We are seeing customers spend more time trying to understand what they're spending money on there's more questions. The cfos are getting involved so larger deals are getting more scrutiny.
We noticed that early in the quarter. So we accelerated our efforts in trying to get those deals in front of those CFO is much faster and earlier in the quarter as opposed to waiting towards the end in certain cases customers came back and said I'd like this now I'd like to hold off on this and by next quarter that just means you have to go far more pipeline much faster.
Much harder to make sure we can make up for those deals with other deals in our pipeline at any point in time, our pipeline as you would expect is larger than what we expect to deliver in that quarter. So we have deals in the pipeline and we just have to work with our customers to solidify them and what we have done is because of that behavior, we have increased scrutiny.
Internally, we've increased our efforts with our sales teams to get ahead of this and we're just increasing the activity of execution be frontloaded. Our hires we hired 550 direct sales reps as quickly as we could in the quarter. Because we think this environment is going to continue and the only way to fight this to get more coverage out in the field can more coverage and more focused and getting deals done.
Get them across the line there is not a demand problem right. All of that is happening is that people are pushing out some of that just means you just need to get more active with our customer base to make sure we get more business into our pipeline, which is what we're doing.
Makes sense. Thanks.
Next question from Asa firewall or Morgan Stanley with brand if I'll go ahead.
Hey, guys. Good evening. Thank you for taking my question.
And I know a lot of great clarity in the prepared remarks, the cash I wanted to talk a little bit about.
Supply chain security and cider.
I think a few months ago, there was an executive order.
From the buyer and administration around securing software supply chain I know, it's early days and the acquisition the ink is not even dry yet but.
What do you feel about sort of the pipeline the opportunity Palo Alto networks being now the largest cyber security vendor for the U S Federal government.
What are you what are you seeing there and is there is there interest already from that front. Yeah. Let me, let me comment and then I'm going to let our birthday boy lethal I'd speak to this because we've got to give them more to do it as Bert said he came to work.
As you know.
Prisma cloud continues to go from strength to strength, we see very large deals in the hopper and our pipeline and we're beginning to see more and more seriousness on cloud security for our customers I highlighted a customer which has four public cloud deployed they can do that take unsecured with four different native cloud CSP platform secured.
So we are seeing more interest we're seeing more engagement as I've always maintained I don't believe all of the cloud security products have been created and you as you start to see the customers move. So we saw the shift left movement. We went ahead that bridge grew its fully integrated we've seen in a significant percent of our customers begin to use that as we're talking to them. We're realizing.
They have some legacy some new app stack vendors in place, which they are deploying and they're really trying to use that to take care of supply chain security. Some of that is older architectures older ways of doing things.
But we decided we want to do it differently if I answer the question Lee when Everything's lately.
After the restaurant question.
Thank you Nick.
Good question Hamzah, So let me know.
Let me make one thing very clear, it's not just a U S federal government's challenge.
Anyone who is developing and deploying applications into public cloud, which today is basically everybody has a supply chain risk that they are dealing with that supply chain risk could come in the form of.
Software in the form of open source software that there.
Building into their applications, which which brings a certain type of supply chain risk and the second type is through all of the tools and applications that they need to use in order to actually build an application.
And we've seen that this can easily be hundreds of different third party tools that they incorporate into their development process that have access to their source code.
That is the second form of supply chain risk and sometimes referred to as CIC D pipeline risk and that is a.
A key component of what cider will add to the broader capabilities, we have with personal cloud.
Alright, thank you.
Sorry, you're on mute.
That is not going to be on mute okay brands.
Deutsche Bank with Andy to follow go ahead Brad.
Great. Thank you so much for taking my question and congrats on a strong execution and cash I wanted to circle back on your comments about the easing supply chain and expectations for hardware growth to be above long term trend. This year I believe you said low double digit just making sure. The uptick is solely your view on supply and just relatedly when we look at <unk>.
Gross margin it still seems to be under pressure can you help us just reconcile how much of this is mix versus Cogs and any other factors to appreciate.
What do you expect the hardware gross margin. Thank you first of all Brad remind me to send you a painting for your office it looks a bit sparse but.
That notwithstanding red like I've always maintained the underlying hardware growth in the industry is about 5% to 8% and I'm not deviated we've seen in a changed behavior, where people have tried to order ahead because of supply chain constraints that you see in pricing impacts to drive some of the growth, but I think the underlying growth continues to be the same what has happened in the last I'd say four to six.
Months slowly and steadily we are seeing easing of some some elements of the supply chain. There are some components of become easier to get as you've seen some semiconductor companies are talking about cutting supply are cutting production and memory and then you know.
And in DRAM. So you are beginning to see easing in various some certain amount of confidence which is.
Following us to ship product faster at the same time some.
I'd say real and perhaps some artificial supply chain constraints are being maintained in the industry I expect them to ease overtime. It should also ease up somewhat pressure on gross margin.
The gross margin impact is purely as having great expedite fees for certain parts is really not an underlying component cost issue. So we think those will ease over the next really.
It really depends on suppliers I think the supply chain easing is happening as we speak and we should be out of it in the six to nine months timeframe at the far end 12, it all depends on when the suppliers stop extracting more from us to try and get us those parts.
Taking my question.
Great next to Danny Lewinsky Wells Fargo with children's loan Oh go ahead.
Alright, Thank you congrats on a great quarter.
You know one of the key metrics that stood out to US I guess, what was the Nextgen air our growth, particularly your net new <unk>.
I think you mentioned you saw strength.
Sure.
I was just wondering if you could put a finer point on that and maybe let us know the margins.
Nextgen security and umbrella.
Included in that net IRR this quarter. Thanks.
So got it.
So I would say look we feel very good about all the elements of our <unk> Lake just to repeat we've got SaaS, we've got cortex without cloud and we have some of the new clavell of it services. The majority of the growth continues to be the SaaS and cloud cortex like side of the house. So I think all of that is good there are portions of deals we don't comment on deals.
Specifically.
But you know if they have the appropriate products and we contribute in the appropriate them out they are in them.
Yes, sorry, I think yes to your direct question, yes, the expanse dealers in the net new IRR that you've seen.
Thanks.
Next up is Phil Winslow of credit Suisse with the T mobile wanting to follow up go ahead Phil.
Great. Thanks for taking my question and congrats on another.
In quarter, one and focusing on Prisma sacks, Saturday Prisma access you gave some interesting stats there in terms of penetration into your existing firewall based but also.
Wins in the cloud therefore with customers that are not current on premise firewall customers of yours.
You look at the momentum Youre seeing are you getting better at penetrating that existing base.
And are customers starting to understand the value of on premise off premise, one policy or yards or are you seeing more momentum even in I'll call. It displacing competing vendors in the cloud.
So Phil first of all thanks for the compliment actually called Great question, a socket asked and I think.
I've maintained that.
I have seen again more activity this past quarter and C level executives from our customers engaging on consolidation plays are getting cloud transformation play is going and what is interesting in not only our customers are beginning to see increased engagement with GSI is a global a global system integrators with system integrators are being brought in.
To try and keep costs down and create a transformation so.
We now have the name any one of them, but I would say more engagement of gains across the board with ESI community as well as our direct customers in terms of your question are we seeing engagement from existing customers or net new customers is both in there.
Our existing customers are stepping up and they are on a path to do their transformations, whether they're adopting the cloud.
So the big.
Hi, it's Phil we used to be a firewall company these to sell firewalls.
Got a dirty secret for your CIO and <unk> doing buy firewalls network architects do and they live in one corner of the enterprise CIO is in C stores do transformation projects they'll do a cloud transformations they'll do network transformations. They lose soft transformations that we honest now we never had a portfolio until about two and a half years, we've actually had those conversations so at the beginning of <unk>.
But as we are really building a new muscle as a company, where we are able to engage with CIO in C stores, you've got Amit flying in one direction helmet from Euro flying in the other direction, we got BJ Jenkins flying that's our direction and we let layout as well once in a while so across all of these people were having a lot more engagement across customers and these are long term plays but you know the good news is we show you that a few.
As always land in the quarters, we get large eight figure deals in a quarter is a consequence of these large transformation conversations with take between three to 10 months to germinate into real Big deal. So I think the activity is still high as Ive said on the margin there scrutiny because people us anyway, because it's a big deal can we parse it out and adapted to our budget, but we're not seeing a.
A reduction in conversation or activity.
Awesome keep up the great work thanks will.
Alright mixes between molony from Citigroup with Mike Church next go ahead Stephen.
Thank you and good afternoon, and thank you for taking my questions and happy birthday. Lee My guess to you is I won't be asking your question and cash <unk> for you.
Is that a commentary on makena concessions and flexibility in light of a more challenged macro I wanted to get a better sense of how pervasive. These conversations have been for you in the installed base.
And maybe more directly what are some of the impacts at the bucket, maybe you're seeing for any deferred revenue mix standpoint, and how we should think about invoicing duration in billings duration. When we think about our cash flow trajectory in the context comments. So Fatima, let me give you context I want to make sure.
Unclear.
So far these are on the margin.
Okay. This is not more and not mainstream we do expect the activity to get more in that direction. Because you can see the fed continuing to be on this mission to go game growth and we expect that's going to cause more customers to pay attention, but let's not and as I said in my remarks. There are some industries are making money hand over.
First Dr to oil and gas you know they've never made so much money. So the public sector continued to spend with all the geopolitical issues that are out there so our financials, they're making more money believe it or not they're fine. So yeah. There are certain segments of the market where these conversations are happening it's not across the board. We don't expect I think 50% market is not feeling any.
Pain with the interest rate increases so take that aside we take the rest of it some of their budgets in place have transformation plans in place. So on the margin yes. Those conversations will increase as you know in anticipation of this we built <unk>, we have a very good motion around providing financing we're sitting at $5 $9 billion of cash. So we are able to finance our cup.
Are they so need to be able to facilitate their transformation projects. So.
The conversation happens between us or our third party vendors. They are able to make this happen and Deepak you've got a comment on the deferred billing and deferred revenue.
I think all I would say the team that I think Nick has explained that accurately and I would just say everything's included in our guidance like in terms of what we think.
And on the flip side is as we've said you know.
We have $5 $9 billion in cash our entire interest income last year was $19 million 19 at $19 million I think our Q1 interest income was twice that so.
So there is the flip side of that.
I appreciate that thank you.
Okay next is Michael <unk> of Keybanc, and followed by Jonathan Ho Michael. Please proceed.
Thanks, everyone and congrats on solid quarter in a tough environment.
Last quarter, the cash I believe when you talked about your Billings Guide you also commented that you can achieve that billings guide.
With no reduction in product backlog is that maybe you could talk a little bit if you could about backlog in any way to the extent you can in terms of what happens with it this quarter Uptown Flodden, whether you still assume backlog product backlog.
Flat into the end of the year in order to make the numbers that you've got.
Michael we don't comment on backlog.
As I have said and as Deepak has said because of supply chain constraints, having eased a bit we have been able to ship.
To our customers much faster, which has a positive impact on attach services that we're able to ship them, but remember our billings grew at 27%.
And.
As we've said in the past backlog in the overall scheme of things is not as substantial as you might think.
Okay. So no change to that comment from last quarter about holding backlog to make the billings number.
No we don't hold backlog to make billings numbers, we try and ship our products to our customers as soon as we can to ensure that they get their product as quickly as they would like.
And we report the quarter based on what we've been able to ship great. Thanks, and congrats thank you alright.
Alright, Great next to Jonathan Ho William Blair with Roger I'll go ahead John .
Great Let me Echo my congratulations as well on a happier.
You can talk a little bit about the X Siam traction that youre seeing immediate help us understand what this means from an upsell potential standpoint, when customers start to move in this direction. Thank you.
Yes, Jonathan it's a great question, because I'll tell you what I wasn't I was positively surprised by the <unk>.
The reaction of our customers wanting to engage in a next time conversation both directly as well as many of the system integration partners, who are there. So clearly there seems to be a pent up desire to re imagine their sock people are relying on old data ingestion platform people relying on old.
Alert based optimization of prioritization things and they all understand that it's physically in humanly impossible to intercept cyber threats by doing it manually.
And that seems to be a common realization yet none of them actually had a solution relative presented to them for a long period of time. So what we thought we were doing design partners. We signed up eight nine design partners guess, what in three months all of them says, we don't want to be designed partner, we'd like to start using the product on a commercial basis. So we accelerated our general availability of the product because we had to.
It was available for those nine customers in all of them turned to customers now and our sales teams are trying who are aggressively trying to go out there and pitch it and we will actually have to maintain a waitlist to make sure. We wont, we wont need implementation resources to be able to because this is a this is the lift you're ripping out of data ingestion leg, you're ripping out their existing Sim yet they have to keep running their sauce in a way.
That we can transform that so we're working with GSI is we are working with third party partners for them to build the capabilities. So you can get this done with a variety of customers I've said this before I still maintain that.
Four years ago, when we embarked on the journey, we decided we're going to build our cloud security business, we're going to build a cortex business are going to build a.
Sassy business.
<unk> said all three businesses are on track to be $1 billion business says I think <unk> has a similar potential in a similar timeframe to be our fourth business that's going to be in the same same.
Category.
Excellent. Thank you.
Okay great.
This is Roger Boyd of UBS agenda, Fuji Oh go ahead Roger.
Well, thanks for taking the question and congrats on the nice results and the cash you had talked last quarter about extending prisma access person SaaS you to the entire sales force and really becoming a SaaS fee for sales organization and I'm just wondering relative to your expectations. Any comments you can provide on what you're seeing from a sales productivity efficiency standpoint.
Well.
We set that and we are.
In the midst of that transition.
We have trained all of our salespeople to become sassy first we have hired a bunch of people from SaaS competitors to meet some of these areas for us. So we continue that's field force transformation at the same time.
As I said, we've hired 550 direct salespeople in the first quarter, because we want to increase the cover it at the same time, we've been able to do that without having to create a specialist sales force on top of that so you can see.
We also said in our prepared remarks, we are accelerating our path to profitable to more profitability. Because we believe we are going to get those efficiencies, we anticipated by making a SaaS. He first field force, but also there is some other things to drive more and more efficiency across the organization not just in sales. So we feel pretty comfortable that not only will we get not only will we.
Sales productivity, but we also believe we will get overall productivity in the organization. So we can accelerate our operating margin aspirations ahead of our two year plan, we'd shared about near than a quarter ago.
Very good thanks a lot.
Great next John <unk> from Guggenheim with Joshua Tilton of volatile hedge.
Thanks Clay.
So really strong Ngls are a R quarter guys.
My question is more on the product line, we had heard in just in our checks into the quarter.
Any product refresh that might be happening, perhaps is getting extended.
Perhaps it sounds like maybe because of the macro backdrop. Some of the stuff you talked about the cash I guess first of all is this accurate and if so should we be thinking about perhaps a little like in this quarter, a little bit lower product growth than we saw over the last several quarters, but a decent product growth Nevertheless for perhaps a longer period of time.
<unk>.
I'm trying to I'm trying to interpret your question, Okay. So I'm talking about that.
Of what.
I think as a product refresh and I'm.
I'm going to let Lee answer that.
Promise you, we'll get more than one question [laughter] gladly.
Sure.
One of the things I've said in the past and talking about product refresh.
As it pertains to the new models that we release as these refreshes typically play out over a fairly long period of time.
And so I.
I would suggest but not looking at as a singular quarter. When you think about the trend in how this evolves.
Most of our customers are large enterprise customers they.
They make long term decisions these decisions take place.
For 123, plus years of time and so these these hardware refreshes play out over cycles like that as opposed to on specific quarters.
But actually effected affected your results. The last time you did it in 2017 for about two years and it looks like you're about a year into it and I was just wondering if perhaps it could last longer than two years. This time that's really.
This time, we've seen a lot of extraneous factors, which are muddied the outcome for the industry with the supply chain crisis of the pandemic with the Poland because of supply chain now with the fed increasing interest rates I'll tell you one of the easiest decisions for our customers to make is to sweat their assets a little longer because it's not like this.
Firewalls suddenly go up at the end of life. They just they can be extended so ill say listen I'd much rather put the money on my cloud transformation and sweat the asset a little longer. So if you add all of the Miss that's why that's why we went with zelle cyber security transformation of the company. We wanted to take away the impact of any one product line.
Perfect. Thank you very much that's really helpful.
Next is Joshua Tilton Wolfe research with Adam Borg Oh go ahead Josh.
Hey, it's Patrick in for Josh.
Okay.
Second quarter's sequential based ads have been mid 90% range.
But the guide for next quarter implies a 12, 12%.
So how do we interpret that as just a little more aggressive than usual.
I'm, sorry, I I think probably the way that I would I wouldn't interpret too much and if at the end of the day we have.
Pipeline, we have large deals it really depends on when deals come in they can have a significant impact on your billings and so we're just trying to be as transparent as we can in terms of the information that we have on hand, theres not theres nothing magical naptime.
I think the guide.
Super. Thanks next is Adam Borg with Stifel, rather, which followed go ahead Ed.
Thanks, so much for taking the question I really appreciate it maybe just on a topic, we haven't touched on Ot cyber security.
That's an area that we're just picking up more of our Texas seeing some more focus and love to think about the cash how youre thinking about the opportunity in Ana Paula. Please thanks.
We've been we've been very focused on making sure that we make Iot capability available as part of our integrated portfolio. So you don't have to with yet one more sensor and get one more cyber security vendor surprisingly.
The Ot stuff, you're talking about literally talk about Canada.
But.
Ot environments have long been sick.
Secured by keeping them disconnected from everything else and.
You know theres Ot environments that are still running windows 95 Windows N T for those who've been around for awhile.
And that obviously has significant risk and so the way to two to control that is simply segmented and wallet off from the rest of the world, but what's been happening over the last couple of years is.
Ot networks are increasingly.
Being digitized.
Specific parts of them are happened to be connected to the cloud, which also means the ot and Iot are starting to.
Merge together, a little bit more and so as that happens there's a greater.
Greater interest in thinking about what the next generation of security for an Ot environment looks like and so this is where our ability to to come in with a next gen firewall infrastructure that can provide the segmentation, where it's needed but layer on top of that the Iot Ot.
Our security capabilities designed to secure that transformation is starting to pay dividends I still think this is early days and transformation.
But there definitely is a strong interest in our in these types of organizations and as the cash mentioned earlier. Many of these are oil and gas utilities and others that actually are are seeing some of the benefits of some of the recent macro environments and so.
That's also part of an opportunity to to leverage and make investments now.
Okay that would be helpful. Thanks again.
Right next to Rob Owens with Piper Sandler with Matt Hedberg.
Rob.
Thanks, Clay and thanks for taking my question could you drill down a little bit in terms of fed and what you saw in period, obviously, calling out a.
A couple of large deals, but if I rewind. The thought process was the fed was going to get more linear and less budget flush are typical to the September quarter. So are you seeing those trends play out or was this more of a budget flush type of quarter and wasn't in line with your expectations. Thanks.
It wasn't a budget flush quarter, we've been working the deal, which we announced for a very long time as you can imagine.
Those size deals don't happen overnight, but it just happened to converge at the right time for us from a from a timing perspective, but.
We are finally, beginning to see the fed activity get stronger because we're at that point in time with this administration, where they've gotten their stuff together across the various agencies and they've actually started executing against the strategy. So we think yes. The fed spend will continue to stay strong in and we continue to get linear.
Stein passes as we get through the.
The rest of this administration's term, it's always dicey in the first year or first year and a half because it's a whole new set of characters specially if you change of administration, where they're still trying to figure out what they wanted to endorse and what they don't want to so I think things are more stable and things are going to continue to stay strong in that space.
Thanks for the color.
Next is Matt Hedberg from RBC with Great Paul ill go ahead, Matt.
Thanks, Clay Hey, Congrats from me as well in the quarter.
A few part question for you obviously you price in U S dollars, but I'm wondering in international markets. Obviously, there's been a huge currency movement I know historically partners would absorb a lot of that price movement, just sort of curious how that's happening and nobody's customer conversation, where the dollar has appreciated pretty materially.
Yes, I think look there's always going to be the isolated instances, where where it comes up in discussions but for the most part our sales reps will we'll try to manage that through different tools that they have available.
To them and then and then that's pretty much it.
That's a fair question. In addition to what Deepak said Theyre, having customers will come back and said like the currency has moved a lot our prices gone up in the last two weeks and what can we do about it in that case it becomes a conversation in some cases, we've had to adjust prices, but at the same time.
Hmm.
It looks like you said some of them get absorbed by the channel something of them get absorbed by the customer suddenly get absorbed by us.
Okay.
Alright, and last question for the Union will be from Gray Powell of ETE GE go ahead great.
Okay, great. Thanks for thanks for taking the questions and congratulations on the strong results.
So yes, the Etfs are really really stood out.
To me.
Can you just sort of can you remind us on the economics of selling chassis to that of the traditional firewall is there is there any sort of like.
One year trade off or just like how should we think about that playing out.
Safi.
Becomes a bigger piece of the mix.
I think it's kind of interesting to all of our SaaS deals.
I think like for like are much larger than our firewalls deals even with the same customer.
They can range from two to three X and sometimes even up to five <unk>, depending on the comprehensiveness of the requirement and the customers' desire to deploy it. So you have lots of lots of eight figure deals out there that are being competed for in the SaaS space and I think there's two and a half vendors fighting for those deals.
We were not a player.
Now two and a half years ago in that space now where almost every one of the large deals out there head to head so either the deal gets one our laws, but we're in every one of them and they are typically large size. It so.
And the economics are better and the security posture is better for the customer because imagine if I sell 500 firewalls. It takes customers see this amount of time to go deploy them and every time I gave a software upgrade the customers to go drive a truck and upgrade all those firewalls, because they want a sandbox the upgrade which leaves them exposed from a security perspective, and Safi I can I actually we actually do the upgrades and we can.
Get the entire customer base upgraded in the span of two weeks in some cases, we just announced panelists 11 Dot O and I, we still have a lot of customers have not have not upgraded to 10 doctors right. So this does improve the security posture improves the total cost of ownership.
And that shows up in a larger deal size, because we're shifting costs from the customer too.
Having it be software managed by us and our partners. So like the economics of SaaS here, a phenomenal from a deal size perspective, as well as from Manta, they're pretty consistent from a margin perspective.
So I think they're still as I've said in the past is an $8 billion to $10 billion asset market out there and that's that.
That space is growing in.
Double digits.
As an opportunity.
Okay got it thank you very much.
Alright, and with that we'll conclude the Q&A portion of our call and I'll turn it back over to the cash for his closing remarks.
Thank you clay and thank you everyone again for joining US we look forward to seeing many of you at upcoming Investor events. I also want to thank our customers partners and employees around the world for helping US deliver these great results in such a tough environment, but that have a great day.