Q1 2023 Palo Alto Networks Inc Earnings Call

In that context this quarter our engineers they are hit a key milestone it crossed 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 as they 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 Gore 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 they get comfortable with either start up is more of a 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 they've 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 U S utility signed a seven figure deal for soccer firewalls.

Security subscription that Prisma cloud.

The customer has hundreds of appliance based firewalls and chose our software firewall is because of our consistent architecture and chills Prisma cloud as a standardized security across four public clouds.

The 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.

It goes 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.

Let's take a deeper look at all three platforms.

We have continued to see solid growth in our network security business.

The renovations 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 gains 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, our customers see an opportunity to drive standardization and <unk>.

Decisions to move away from competitors that have not kept up with our pace of innovation.

We also 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.

Christmas assay 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 a stuffy customer base with our core sellers now enabled and executing and driving SaaS into the installed base chassis continues to represent our largest pipeline.

Consolidation of network security capabilities of our customers is driving it that subscription into our installed base across all firewall form factors.

Constant innovation and capability expansion of 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 day unknown attacks in real time yesterday, we introduced the advanced version of wildfire to stop more zero the cloud the attacks as part of our bandwidth.

Kevin I don't know earlier, the new subscriptions provides significant additional value to our install base and have already seen promising adoption.

Moving onto Prisma cloud.

This rollout cloud continues to be the industry's leading C&I platform built from best in class acquisition and organic innovation.

We acquired breached 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.

You've 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.

<unk> 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 the strategy side. It brings the ability to visualize customers application development and deployment environment analyze the tools identify risks and how to remediate them.

<unk> ability to secure the software supply chain is backed up by Ciders, leading see ICD security research team.

The integration of scientists 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.

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 example.

As a multi product deals. This included a multimillion dollar transaction to the European construction company will replace their existing Sim and saw with Xdr Pro an XOR. Another government customer adopted Xdr Pro next door in a seven figure deal as it formalized a new stock for multiple agencies. These are in addition to the federal customer we already talked about.

We 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 X I am our breakthrough autonomous security operations platform.

Our launch event for Exxon were oversubscribed, and we see a lot of resonance with our product and its future roadmap as customers re imagine the waterless stock management.

Just a few months ago, we had launched the 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 time to value. Our interest list is north of 50 customers, who would like us to deploy axon or qualifying them and carefully on boarding them. So that we can scale 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.

Cyber security 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 post spring 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 <unk>.

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 'twenty three will require continued excellent execution of our overcome some of these macro impacts.

Towards that end, we have already taken concrete action be a 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 he might trend to lower end of the range. However, coupled with an easing supply chain I expect that near term. We will continue to report a low double digit growth rate for product revenue.

Tony vendors leads to complexity and increased 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 the idea of 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 see cyber security spending is 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 months 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, we.

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 N GSA or during Q1 with higher Ngls are our guidance range.

The range for the year. This reflects not only the performance of our core tier of our cortex, Prisma cloud sassy and software 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 focus 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're 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 door to cyber 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 at 12% and 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 and our Ngls AOR 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 car.

<unk> <unk>, representing about half of our IPO similar to previous quarters.

[laughter].

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 shipping.

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 percent of revenue across all three expense lines are.

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 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 and 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 Nick has discussed on the M&A front, we entered into a definitive agreement to purchase cyber security for approximately $195 million in cash excluding the value of replacement equity awards subject to adjustments. We expect this deal to close in the fiscal second quarter, we expect the financial impact of the transaction to be immaterial.

<unk> to our fiscal 'twenty three guidance.

Stock based compensation 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 ground on a year over year basis, we continue to manage our.

<unk> down as a percent of revenue in line with our long term clients.

As we've had a number of questions about the impact that 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 to.

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, an increase of 21% to 24%.

We expect revenue to be in the range of $1 6 billion to $1 $66 billion.

An increase of 24% to 26%.

We expect non-GAAP EPS to be in the range of 76 to 78 cents, 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 Ngls are ought 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 the 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 $3 37 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.

<unk> to '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 two engines 26 million shares we expect fiscal year 'twenty three diluted shares outstanding of $325 million to $331 million, we expect Q2 capital expenditures of $40 million to $45 million and we expect.

Capital expenditures of 190 $200 million.

As an additional modeling support based on our prior seasonality, we expect the quarter over quarter revenue and billings growth for Q3, 'twenty three 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 environments. At the same time, we're focused on taking steps to accelerate our profitability I think I did.

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

Oh.

Great. Thank you Deepak.

For broad participation.

Ask that each person only ask one question.

Our first question of the incomes from socket clear of Barclays with homes available for socket you May ask your question.

Okay, Great Hey, everyone. Thanks for taking my questions here and a nice set of results the cash maybe maybe for 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.

Guide.

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 CF was much faster than 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 by next quarter that just means we have to go far more pipeline much faster and 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 the quarter. So we have deals in the pipeline. 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.

Eternally 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.

More coverage and more focus on 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 their purchases means we 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.

<unk> from Asa firewall or Morgan Stanley with brand to follow up go ahead.

Hey, guys. Good evening. Thank you for taking my question.

And I know a lot of.

Clarity in the prepared remarks, the cash I wanted to talk a little bit about.

Supply chain security and cider.

Think of 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 B 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 leaks ladder to speak to this because we've got to give them more to do it's his birthday came to work.

As you know.

Prisma cloud continues to go from strength to strength, we see very large deals in the hopper and a 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 you know native cloud CSP platform security.

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. The bridge crew is fully integrated we have 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 apps.

Check vendors in place, which they are deploying and they will be trying to use that to take care of supply chain security. Some of that is older architectures older ways of doing things.

What we decided we want to do it differently if I answer the question Lee whenever things differently.

After the restaurant question.

Thank you Nick.

Hum.

Good question Hamzah, So let me let.

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 to incorporate into the development process that have access to their source code.

That is the second form of supply chain risk and.

Sometimes referred to as see ICD 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.

So 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 the 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 is 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.

Yeah.

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, they've seen 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 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 allowing 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 over time, which would also ease up somewhat pressure on gross margin.

The gross margin impact is purely us having paid expedite fees for certain parts is really not an underlying component cost issue. So we think those will ease over the next.

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 the question.

Great next to Danny Lewinsky Wells Fargo with Phil Winslow Oh go ahead.

Alright, Thank you congrats on a great quarter.

You know one of the key metrics that stood out Josh I guess it was the Nextgen air our growth, particularly you're not.

<unk>.

I think you mentioned you saw strength.

Uh huh.

I was just wondering if you could put a finer point in time on that and maybe let us know the margins.

Your line is now next Gen security and whether that.

What's included in that net <unk> this quarter. Thanks.

Good.

So got it.

Yes, so I would say look we feel very good about all the elements of our <unk> Lake just to repeat we've got a SaaS 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, yes.

Sorry, I think yes to your direct question, yes, the expanse dealers in the net new IRR that he has seen.

Thanks.

Alright, great, except as Phil Winslow of credit Suisse with the team at <unk> to final go ahead Phil.

Great. Thanks for taking my question congrats on another phenomenal quarter wondering focusing on Prisma Saks's strategy Prisma access you gave some interesting stats there in terms of penetration into your existing firewall based also.

Wins in the cloud F or with customers that are not current on premise firewall customers of yours.

When you look at the momentum Youre seeing are you getting better at penetrating the existing base.

And are customers starting to understand the value of on premise off premise one policy or are you seeing more momentum even in I'll call. It displacing competing vendors in the cloud era.

So Phil first of all thanks for the compliment actually called Great question, a socket often 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 plays 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.

None of the name any one of them, but I'd 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 and there are existing customers, who 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 are sell firewalls and all.

I've 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 Who's in C stores do transformation projects they'll do 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 let's begin.

To happen is 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 a third direction and we let Lee out 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 of these always land in the quarter. So you get a 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 deals. So I think the activity is still high as Ive said on the margin. There is scrutiny because people are so anyway. This is a big deal can we parse it out and adapted to our budget, but we're not seeing.

A reduction in conversation or activity.

Awesome keep up the great work.

Alright next is for tumor molony from Citigroup with Mike Church next go ahead.

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.

Net cash and Deepak for you and.

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 per day said. These conversations have been for you in the installed base.

And maybe more directly what are some of the impact as deep as it may be 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.

Fatima, Let me give you context I want to make sure I'm clear.

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 handle.

<unk> got the oil and gas you know they've never made so much money. So the public sector continues to spend with all the geopolitical issues that are out there. So our financials been 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 it.

He painted 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 moat around providing financing we're sitting at $5 $9 billion of cash. So we are able to finance our <unk>.

So need to be able to facilitate their transformation projects. So.

The conversation happens.

Also our third party vendors Theyre able to go make this happen and Deepak you 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.

But on the flip side is as we've said you know we.

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 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.

Okay. Thanks, everybody 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 extent you can in terms of what happened was it this quarter up down flat, whether you still assume backlog product backlog I think is what you said 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.

<unk> talked to our customers much faster, which has a positive impact on attach services that we're able to ship them, but and remember our billings grew at 27%.

And as.

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.

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 right.

Great. Thanks, and congrats thank you alright.

Alright, Great next to Jonathan Ho of William Blair with Roger I'll go ahead John .

Great. Let me Echo my congratulations as well and have to be repaid.

You can talk a little bit about the X Siam traction that youre seeing and maybe help us understand what this means from an upsell potential standpoint, when customers start to move in this direction. Thank you.

John Thats, a great question, because I'll tell you what I wasn't I was positively surprised by the.

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 triple 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.

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 make sure. It's available for those nine customers on all of them turned to customer now in our sales teams 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.

We have a limit 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 sock in a way that we can transform that so we're working with GSI is we're 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, we embarked on the journey, we decided we're going to build the cloud security business, we're going to build a cortex business, we're going to build a.

Sassy business and I've 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.

Hey, Roger.

Awesome well thanks for taking my question and congrats on the nice results and the cash you had talked last quarter about extending prisma access for some 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 lead some of these areas for us. So we continue that 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 profit to more profitability. Because we believe we are going to get those efficiencies we anticipated.

By making SaaS. He first field force, but also doing 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 get 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 and 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 and the stuff you've talked about the cash I guess first of all is this accurate and if so should we be thinking about perhaps a little light.

In this quarter, a little bit lower product growth than we saw over the last several quarters, but it's a decent product growth Nevertheless for perhaps a longer period of time.

I'm trying to I'm trying to interpret your question.

So I'm talking about that.

Of what.

I think as a product refresh and they like.

Okay.

Lee answer it.

I promised that we'd get more than one question [laughter] go ahead Lee.

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 releases. These refreshes typically play out over a fairly long period of time.

And so I.

I would suggest like 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 you know over 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 good.

This time, we've seen a lot of extraneous factors, which have 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 these fire.

<unk> suddenly go up at the end of life. They just they can be extended so you know people, who 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 through this whole 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.

Okay next is Joshua Tilton Wolfe research with Adam Borg to follow go ahead Josh.

Hey, Patrick answer Josh.

Over the last several second quarters. The sequential these guys have been at 9% to 10% range.

The guide for next quarter implies at 12%.

So how do we interpret that as just a little more aggressive than usual.

I'm sorry.

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, there's not there's no magical map behind.

Guide.

Thanks, Susan Thanks next is Adam Borg with Stifel with Bravo, which follow go ahead Ed.

Thanks, so much for taking the question I really appreciate it maybe just on a topic, we haven't heard an 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 how youre thinking about the opportunity and what Paolo please. Thanks.

Yeah.

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.

<unk>.

P O T stuff, you're talking about literally talk about there.

But oh T 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 a while.

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.

OTT.

<unk> 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 bear.

Birth, 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 to 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 these types of organizations and as the cash mentioned earlier. Many of these are oil and gas utilities and others that actually 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, Oh go ahead 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 couple of large deals, but if I rewind. The thought process was the fed was going to get more linear and less budget flush 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. They just happened to converge at the right time for us from a from a timing perspective, but we.

We are finally, beginning to see the fed activity.

Get stronger because we're at that point in time with this administration or they've gotten their stuff together across the various agencies and that 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 first year and a half because there's a whole new set of character, especially if your change of administration or they're still trying to figure out what they want 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 volatile Oh 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, theres 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 to different tools that they have available.

To them and then and then that's pretty much it.

That's a fair question edition, what Deepak said, they're having customers will come back and said like the currency has moved a lot. Our price has 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's like you said some of them get absorbed by the channel. So I think it will 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 Greg.

Okay, great. Thanks for thanks for taking the questions and congratulations on the strong results.

So yes, the Ngls are really really stood out.

To me.

Can you just sort of can you remind us on the economics of selling SaaS fee for that.

All 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 the like for like by our much larger than our firewall deals even with the same customer.

And 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 we have lots of lots of eight figure deals out there that are being competed for and 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 or laws, but nowhere in every one of them and they're typically large sizes. 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 give 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 sassy 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 ban O S 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 partner so look the economics of SSE.

Phenomenal from a deal size perspective, as well as from when they are pretty consistent from a margin perspective.

So I think theres still as I've said in the past is an $8 billion to $10 billion IC market out there and that 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.