Q2 2023 Palo Alto Networks Inc Earnings Presentation
Uneven demand given supply chain impacts in backlog.
Additionally, we have noticed as our customers continue to be more focused on their cloud network and security operations transformations and are willing to sweat their hardware assets longer.
Underlying all of this we still believe that the industry hardware rotate in the low to mid single digits as all these extraneous factors mitigate over the next few months, we will see the long term growth gravitated back to those levels.
So what does this mean for the second half of this year and beyond.
Somewhat counter to the market, we're raising guidance both on top line metrics metrics and profitability of course acquired the current demand is sustained and for us to maintain a continued focus on execution.
They have a unique opportunity in this environment to strengthen our position in the market, hence you're investing with an eye towards disciplined growth and positioning ourselves as a partner of choice for customers looking to consolidate.
You'll hear more about this from Deepak, but we're raising billings in next generation security our guidance on the back of the strength in our software based and cloud delivered capabilities.
Our hardware pipeline, we're seeing specific transactions that are on track for Q4, just caused us to shift some forecasted revenue from Q3 to Q4, while maintaining our annual guidance.
With all I've said about efficiency and better operations and the impact we're now guiding to 'twenty, 1.5% to 22% operating margin for fiscal year 2023. Additionally, we are also increasing our cash flow guidance.
Consolidation continues to be a key team with our customers of course customers are not willing to compromise on quality and cyber security given our market leadership in 13 categories. We're fortunate to be engaged in many such conversations those conversations are driving business and many customers on a long term transformation path with us.
The number of deals we closed over $1 million grew nearly 20% year over year and the value of these transactions grew nearly 60%.
Similarly, the number of greater than $5 million deals grew 84% and number of greater than $10 million deals grew over 140%.
The deal values in these cohorts grow significantly. This continued momentum is critical to us being able to drive platform consolidation time and again, we see early millionaire customers become an onboarding ramp to help us drive more cyber security value to our customers almost all of our $10 million deals involve multiple platforms are an underlying transformation that is driving vendor consolidation.
Let's take a look at some of the ways. We are driving consolidation first with zero Trust transformations, we're helping customers standardize their appliance and software firewalls with a broad line of security subscriptions, a life sciences customer sign an eight figure deal to standardize their operations using our next generation firewalls, Vm's security subscriptions and other cases, we're helping customers.
<unk> SaaS or software firewalls, and consolidate their security stack across a consistent set of offerings driven by hybrid work in security SaaS apps are financial service firm recently signed an eight figure deal with us because they wanted to transform their network and it is both operational challenges and cost of ownership. They chose us over pure place ASIC competitors because of the breadth of our offering and our.
Comprehensive Zero Trust network.
Secondly, with trials cloud transformations.
Using our Prisma cloud prisma access capabilities to help customers adopt hyperscale cloud and software as a service and other financial services firm with a mandate to run over 90% of the apps and the cloud signed a high eight figure deal a standardized and built prisma access and Prisma cloud last week and saw it transformations, we are using our cortex platform with <unk> to help customers transform their.
Our security operations Center, and retool around high Fidelity data sources, AI and automation.
Company started relationship with US around unit 42 incident response with an expense trial in small xdr deployment. They expanded their relationship at a high seven figure deal to standardize on <unk> XR.
These strategic customer relationships and transformations would not have been possible without us building, a new security industry pattern on the paradigm around constant innovation. Our success is driven by investments in innovation. It is increasingly clear to us that there is a flywheel at play here. This starts with R&D investment, where we have the largest budget of all dedicated cyber security.
<unk> approximately $1 billion in non-GAAP spending on a trailing four quarter basis. This is two to five times as much as our pure play peers are scale also allows us to spread this budget across a larger revenue base and the shared needs of our three platforms.
R&D investments then translate into a record number of product releases are first half major releases of <unk> 35, a 59% in the first half of last year.
The key really is in the first half included a flagship Pan OS $11 Nova.
Our third advanced subscription advanced wildfire.
Our new AI based sock platform X time, and new modules and updates in Prisma cloud.
This constant innovation is causing industry analysts to take notice recently received recognition for leadership in the cloud Native application protection platform category or C. Now, bringing our total number of active leadership recognitions to 13, which compares to nine a year ago.
All of these leadership positions have helped us grow our NDS are are at 63%. We still believe there's a large untapped tam for many of these services given the robust adoption of advanced software services that we've launched which are all cloud delivered <unk>.
And us being in the early part of the SaaS clouds in their lifecycle, we feel confident in our future and ability to drive N. G. S error, let's.
Let's take a deeper look at some of the highlights.
I'll start with my personal favorite our network security business, we launched our first sassy capability Prisma access at the end of fiscal year 2019, and the first year, we booked less than $100 million in business overall.
Over the last six quarters, we booked about $1 billion.
It was our largest deal last quarter being a PCB deal for $40 million for Safi.
We now have over 4000 customers in our growing out of approximately 50%.
In Q2, we saw a healthy number of large competitive wins and sassy and sassy has one of our strongest pipelines looking 12 months out.
Beyond the top line traction, but also seeing improving economics on the business two years ago. We showed you how the five year revenue from SaaS customer compares to an appliance customer at that time SaaS. He was about two times higher since then we've added additional value to sassy relaunched autonomous digital experience management in FY 'twenty, two followed by a offs in SaaS security posture.
Management this year.
AI has the power to transform SaaS, our integrated security services are now all powered by AI to detect and prevent even zero day attacks and will soon be introducing additional AI driven capability to transform the user experience in using the platform.
We now expect our five year revenue from SAIC customer be more than two five times that of an appliance customer. We've also seen some improvements in SaaS gross margins over this period as we have scaled to become more efficient.
If you go to the other side of a network security portfolio. Our software firewall business is going strong. This includes the broadest deployment options for customers, including VM series and C. N series, which can run in their data centers or the purchase of the cloud marketplaces and the first to market integrated cloud next generation firewall offerings for Hyperscale clouds, we have the highest market share of <unk>.
Company in this market, we believe it's more than three times of our any closest competitor.
The current macro environment is causing more customers to watch their capex budget. This shift along with the fact that customers are transforming the data centers moving to the cloud is the eating more of them to adopt software firewalls.
In Q2, the number of deals over $1 million for a software firewall has nearly doubled and six of our top eight deals in Q2 included software firewalls in there.
And our offering.
Moving onto our cloud security business, we continue to make steady progress with Prisma cloud.
Platform important enhancements are important to our growth.
We released the new API risk profiling capability to enhance our web application security module. This capability help security teams assessed at API stack surface attack surface quickly based on more than 200 risk factors, including Ms configurations exposure of sensitive data and access privileges.
Helps teens prioritize the most significant risk and take preventive measures to address them.
We also continue to shift left and focus on security and workloads as they are developed solving our customers' application security challenge to that end, we closed the acquisition of cider and have brought their team under common leadership as our cloud core security team to help bring cider see ICD security capability to our platform.
After leading cloud core secured a year ago over 15% of our customer base has adopted these capabilities our cloud core security customers in Q2 grew 30% over Q1.
Our new C code management module launch in December scans co repos used by developers for hardcoded secrets like passwords, and API keys to make sure. This information is not exposed and use as a vector of attack.
We continue to see these new capabilities and enhancements to drive an increase in customer module adoption for example, our customers with two or more modules grew over 40%.
And customers with four or more modules more than doubled.
Credit consumption of Prisma cloud increased 48% area. This growth is being driven by new customer additions customers, increasing their cloud footprints and customers consuming additional modules. While there has been discussion of moderation in cloud consumption in the market. We believe the relatively early stage of classic media adoption has and will continue to shelter us from this headwind.
Before I move on to cortex, and talk about continuing signs of optimism I see in that category I feel compelled to take a detour towards AI clearly AI has been on everyone's mind given the continued conversation in the tech industry.
Most of you know the story of my arrival at Palo Alto networks, I talked about fragmentation and the need for a solution there.
But you have talked a lot about.
I also talked about automation and AI.
We counted I used the word AI more times in my first six months of follow up networks than platform consolidation.
Challenge as you all know is that AI has been a data problem and continues to be so.
Unlike consumer however, we can talk about sonnets, and Chad Gpt's creative capabilities and the revolution that is going to drive in search of advertising its ability to summarize data and continue to abuse and inform us the demands from AI and enterprise are far more exacting and saw the returns.
In enterprise AI needs to be clean it has to have comprehensive data.
And in security, especially it needs to be real time.
So not only do you need to have the best data to create great security outcomes, you also need to be positioned in line to block threats.
Let me make a case why with Petabytes of data from trillions of events billions of sessions hundreds of millions of Urls and tens of millions of flies flowing files not flies flowing through our product across cloud network and endpoints daily we are best position to deliver security outcomes, using AI and machine learning.
Palo Alto networks next generation firewalls brought with the firewall industry in the early days because of our ability to then deliver next generation security.
These services were driven by expansive data collection capabilities E L or enhanced application a lot there since a <unk> capability across our entire network security stack. We estimate that this network secure data is just under half the valuable security data that is needed for any adjuvant outcome. There were 60000 customers, where we can help them use this data.
As you can see the cortex, we built xdr to ensure we collected the best endpoint data across the industry, we acquired and deployed the largest security automation footprint XOR, but we're not stopping there. We then acquired integrated expense, which looked at vulnerability data from a different and unique perspective.
These form the fundamental building blocks for Exxon.
Our leadership position in automation analytics and attack surface management again, we're driving in the Ibs sock transformation with over 4500 cortex customers, we're able to bring what we believe is the next largest set of physical scared security data that is useful for you.
If you applied the same rigor as we built charisma cloud integrating data from all hyperscale or integrating shift left data from developers slowly and steadily the prisma cloud integration is being built on a stronger foundation of security of the cloud is becoming increasingly important contributor to high 2000 customers will benefit from it.
We have delivered unique AI based outcomes, including blocking unknown, yet malicious websites command and control domains and followed at scale.
Also we have shown it on all the security operations Center that we can reduce the mean time to detection to seconds in the meantime to respond to minutes. These are all outcomes that cannot be achieved without the data we have and the machine learning expertise we apply.
Let's take.
A look into how we believe this has.
It made us more excited and encouraged us around X I am.
In Q2 as part of the cortex, and Exxon platform released important new capabilities, including SaaS enabled XOR delivering a cloud based interface and expense active attack surface management, allowing our customers to remediate issues discovering us discovered using our science.
We launched X sight and <unk> at the end of Q1, so far we've closed approximately $30 million in business I have a growing pipeline of customers that are looking to transform security operation of the new platform.
I think <unk> is going to pave the way for us to drive AI driven security transformation outcomes. We will continue to work hard with our early customers to drive evolution and success in science.
I'm extremely.
Positive.
And cautiously optimistic about X time, it's early relevance product market fit and with the concurrent discussion around the eye. It makes me hopeful that this could be the fastest ramp of any security product.
See our first milestone to get into $100 in bookings faster than cortex, SaaS year Prisma cloud in our portfolio.
Before I turn the Florida, Deepak I'll pull all this together and talk about where we are focused as we enter the second half of our fiscal year and beyond.
We see a clear roadmap ahead of us we intend to put our head down and execute right now we're in the process of transforming our business to software based and cloud deliver offerings, our revenue, which is increasingly driven by our next generation security capabilities is becoming more recurring in nature, and we have an opportunity to own a greater share of our customer's cyber security budget. This should allow us to sustain.
<unk> revenue growth for longer over the last couple of years, we set in motion a plan to expand our operating margins, including driving scale in our fastest growing businesses over the last six months, we've listened to investors, who have encouraged us to focus on profitable growth and accelerating incremental leverage in our business and we've made good progress in Q2, we're now well positioned for the second half of the year.
We are appreciably raising our margin target for FY 'twenty, three up 200 basis points from our prior guidance and 250 basis points from our initial FY2023 guidance. We believe we can continue to build on this into fiscal year 2024, and beyond putting US three years ahead of our profitability targets. We offered at our last analyst day in September 2021.
As Deepak will describe we believe the combination of sustaining higher top line growth and focus on efficiency sets up well to building this base of higher profitability and grow EPS ahead of revenue.
I wanted to emphasize that achieving GAAP profitability is an important milestone for our company in support of this we are actively focused on managing our stock based compensation to continue bringing <unk> down as a percent of our revenue with that I'll turn the floor or zip ought to take you through our details our results and guidance and then we'll take questions.
Thank you and our cash and good afternoon, everyone.
For Q2 revenue of $1 six $6 billion grew 26% product revenue grew 15%, while total service revenue grew 29% with subscription revenue growing 32% and support revenue growing 25%.
Moving onto geographies, we saw revenue growth across all theaters with the Americas growing 22% EMEA up 35% and Jay Pat growing 32%.
The strength of our next generation security capabilities continues to drive our results with <unk> of $2 3 billion growing 63%.
Strength was broad based across all three of our platforms network security cloud security and security operations.
We delivered total billings of $2.0 billion to $3 billion up 26% and above the high end of our guidance range total deferred revenue in Q2 was $7 $6 billion, an increase of 39%.
Remaining performance obligation or a P. O was $8 $8 billion, increasing 39% with current RPF, representing about half of our appeal similar to recent quarters.
Our non-GAAP earnings per share was significantly ahead of our guidance and this metric as well as our trailing 12 months adjusted free cash flow accelerated.
non-GAAP EPS of $1.05 grew 81% year over year, while trailing 12 months adjusted free cash flow of $2 $7 billion grew 76% year over year.
Moving on to the rest of the financial highlights non-GAAP gross margin of 75, 5% was up 150 basis points year over year, driven mainly by an increase in our software mix on a quarter over quarter basis, we sold less pressure from incremental costs related to the supply chain.
We've made significant progress in driving leverage this is something that we articulated at our analyst day in September 2021, and kicked off in fiscal year 'twenty, two and we have accelerated this in fiscal year 'twenty three with a focus on profitable growth as evidenced by our Q2 performance.
Our operating margin of 22, 8% increased 440 basis points year over year.
This result was driven by improving gross margins and a slower level of head count positions, we expect to see ongoing improvements in operational efficiency and as a result, we are raising our fiscal year 'twenty three operating margin guidance.
non-GAAP net income for the second quarter grew 17, 9% to $332 million or $1.05 per diluted share our non-GAAP effective tax rate was 22%.
Delivering fiscal year GAAP profitability is another milestone in our balance of driving growth and profitability.
For the quarter GAAP net income was $84 million or 28 cents per basic share and <unk> 25 cents per diluted share. This was our third consecutive quarter of GAAP profitability and as Nick noted, we have now being profitable on a cumulative basis for the last four quarters. We believe we now meet the criteria for inclusion in the S&P five.
Great.
Turning now to the balance sheet and cash flow statements.
We ended Q2 with cash equivalents and investments of $6 $2 billion.
Our average duration.
Our new contracts increased slightly year over year, driven by deals with strategic customers.
Means that approximately three years, where it has been historically.
Q2 cash flow from operations was $695 million with total adjusted free cash flow of $685 million. This quarter, a strong free cash flow in Q2 was driven by increased operating profitability higher interest income and improvement in billings linearity due to improving supply chain conditions.
During Q2, we repurchased approximately one 8 million shares in the open market at an average price of approximately $139 per share for total consideration of $250 million.
As a reminder, our share repurchase program is opportunistic and we are committed to this method of returning cash to shareholders over the medium term.
Stock based compensation ticked up 20 basis points as a percent of revenues sequentially related to the issuance of our annual grants and the impact from the <unk> acquisition on a year over year basis stock based compensation was down 350 basis points as a percentage of revenue.
Before I get to guidance I wanted to tell my thoughts on operating margin.
We've continued to drive improvements in the profitability for our fastest growing businesses as they gain scale.
So over the last six months, we have developed and executed on detailed plans to accelerate our operating leverage. This includes raising the bar around the return on investment we expect as well as remaining prudent in our hiring.
We've also spent a lot of time looking at our peer group and studying benchmark data.
As we look towards the second half of the year and into fiscal year 'twenty. Four we believe we can continue to execute against our plans and drive higher operating margins. We expect that this will translate into us growing our EPS faster than our revenue growth rates.
Now moving onto guidance.
We're offering guidance for Q3, and also Q4 to make this explicit and then offering updated annual guidance, you'll see we're maintaining our annual revenue guidance and give any explicit guidance for Q3 to Q4 based on what we see in our pipeline for product revenue.
For the third quarter of 2023, we expect billings to be in the range of $2 two zero to $2 billion to $5 billion, an increase of 22% to 25%.
We expect revenue to be in the range of one 695 to $1 $75 billion, an increase of 22% to 24%, we expect non-GAAP EPS to be in the range of 90 to 94.
An increase of 50% to 57%.
For the fourth quarter of the year, we expect billings to be in the range of $3. One two to $3, one $7 billion, an increase of 16% to 18%.
Expect revenue to be in the range of $1 93, 7% to $1 96, $7 billion, an increase of 25% to 27%, we expect non-GAAP EPS to be in the range of 1.18 to one point to $2 per share an increase of 48% to 53%.
For the fiscal year, we expect billings to be in the range of $9. One to $9 2 billion, an increase of 22% to 23%, we expect <unk> to be in the range of $2 75 to $2 8 billion, an increase of $48, 45% to 48%.
We expect revenue to be in the range of $6 eight five to $6 $91 billion, an increase of 25% to 26%.
We continue to expect product revenue growth in the range of 10% for the full fiscal year.
For fiscal year 'twenty, three we're expecting our operating margins to be in the range of 21.5% to 22%.
We expect our non-GAAP EPS to be in the range of $3 97 to 4.03, an increase of 57% to 60%.
We expect our adjusted free cash flow margin to be between 36.5 to 37, 5% and we expect to be GAAP profitable each.
Each quarter and for the fiscal year 2023.
Additionally, please consider the following modeling points, we expect our non-GAAP tax rate to remain at 22% Q3 and fiscal year 'twenty three subject to the outcome of future tax legislation.
Q3, and Q4, we expect net interest income net interest and other income of $45 million to $49 million. We expect Q3 diluted shares outstanding of 321 to 227 million shares. We expect Q4 diluted shares outstanding of $326 million to $332 million we.
We expect fiscal year 'twenty three diluted shares outstanding of 320 to 326.
<unk>.
We expect Q3 capital expenditures of $35 million to $40 million with full year capital expenditures of $165 million to $117 million.
With that I will turn the call back over to clay for the Q&A part of the call.
Great. Thank you Deepak to allow for broad participation I would ask that each person ask only one question. The first question will be from Brian Essex of Jpmorgan with Hamzah firewall or the bone spring you may ask your question.
Great. Thank you clay and congrats everyone on some fantastic results really really strong here. Thanks for taking the question.
Moving to cash for you just have a question on SaaS.
Maybe if you could dig in a little bit to the competitive dynamics. There does it really helped us I guess, how much does it help the platform to have full end to end SaaS fee.
I see a lot of private vendors building out full in SaaS platforms or is this more of a transformational push or maybe theres a little bit of both thank you.
Hey, Thanks for the question.
Look the SaaS market I think traditionally.
Was a marketed just focusing interacts us customers use that as a proxy based way to onboard internet access and it was fine I think the pandemic really flipped the switch coupled with the whole cloud transformations that are going on.
Customer, especially larger customers want to creative first.
First class citizen of any user who's not sitting in the office or in the campus and they want to get to zero Trust. So I think the confluence of zero trust the confluence of the cloud transformation and the confluence to apply full security stack open the door.
For full SaaS deployments and network transformations, coupled out with the fact that people are trying to get away from you know large wide area network type network network architectures to SD Wan type that Russia, because I think the confluence of all of these things.
Real spurt in the SaaS market is 60, plus thousand customers who's our firewalls.
Now, we're showing them a path to migrate from a firewall based campus based data center based architecture towards Zero Trust architecture, which spans hardware software and <unk>.
Any kind of remote access and campus solutions. So I think that's what's driving that that for us and you know.
Was your.
Your guys.
You are impatient your brains will faster than our ability to execute sometimes it's only been three years.
And I think I could challenge anybody out in the market anybody everybody is everybody read the same Gardner magic corner and sassy.
I want to see how many vendors can claim that the last six quarters, the solar $1 billion of SaaS.
And who just did a 40 million dollar deals 30 last quarter.
That's our execution our ability to work with existing customers are constantly listening to customers evolving our product is allowing us to get here.
It's a competitive market, but I think we're down to two two and a half vendors in this market.
What we see at every customer now.
Alright, our next question from Hamzah <unk> with Morgan Stanley with Accumulative I'll go ahead I'm sorry.
Hey, good afternoon. Thank you for taking my question, please turn to cash in.
Yes.
Just curious around the early customer conversations around AI as customers look to automate their security operations and to what extent is that eating the conversation towards consolidation for Palo Alto networks.
That's a great question Hamzah.
And I've been sort of on and off in terms of my how the temperament of the ASIC for this space and <unk>.
I was on my way to India of to speak of the convocation I experienced chat GPT for the first time and turnaround and rewrote my convocation speech, saying. This is the best thing that's happened to security enterprise and consumer because I think it's kind of an inflection point, which is big now.
Clearly that's a conversation.
Say three months ago customers are not asking was rei and now they all want to know are you deploying AI and your security products, that's great and that's why we spend some time on the earnings call trying to elaborate how we've been using for a long time.
The conversations are around how do I start, making more sense of my data I think the last iteration of using data and the security industry has been more about I'd say offline or reactive data analysis for the most part and this is the first time the customers want real time proactive blocked the threat.
Outcomes, which is sort of our sweet spot if I may say so.
And that conversation is beginning to start I'll tell you on X I am.
We had a no deal less than a million dollars I haven't seen a security product that we've launched.
And the industry what starts off at a minimum price of a million Bucks.
Right, we've done $30 million of business in.
The last 12 months to 16 weeks.
<unk> got our teams are still getting trained we're still getting traction. We still have we think 70, 80% product developers are working on the rest of it as we get feedback from customers, though and I'm cautiously optimistic and I think you will see this paved the way for.
For deployment of AI. This is our first outcomes based product. This is the first time you can walk in and say listen I can reduce your mean time to respond I mean time to detect otherwise I'd say use. This this is really good at is going to save you, but you won't find out until something happens in the case of X time, I say I can demonstrate efficiency I could demonstrate lower cost of ownership for years, So very <unk>.
Hopeful.
Don't don't get ahead of yourself, it's going to take a while I already told you that we'd be happy if I could $100 plus any of the product and hopefully this becomes another leg of growth for bio <unk> to give us more sustained top line over the long term.
Alright, our next question from Fatima <unk> of Citigroup with Brad Zelnick, followed with the T Mo.
Good afternoon, and thanks for taking my question just one for you.
Pretty explicit that you are having realistic conversations with customers about payment terms and extensions and financial circumstances.
Most organizations focus maybe more on cash flow preservation than they had in the past so.
Maybe just specifically ask it's not very apparent in your numbers that you are having those types of conversations.
How are you managing to circumvent a lot of that and how is Palo Alto financial services.
Financing vehicle may be helping you drive a lot of those conversations that's not apparent to us.
Good.
It means we're doing a good job of managing our cash flow margins and making sure our customers are happier and they're very rarely do I get to bake, both shareholders and customers happy at the same time. So it's one of those moments.
They've got a more serious note, yes, you're right we are having those conversations and I'd say Deepak and his team doing a phenomenal job in making sure that our sales teams are supportive and the customers talking about payment terms and we're building plans are.
Specifically using manifest so I'm going to on a parcel Deepak and explain how these walking a tightrope of making sure that our.
And we're doing this effective with our customers I will say, yes.
We're blessed because as Steve O'hara of $6 $2 billion of cash on our balance sheet. So we have the capacity to be able to do this for our customers, but deepak yes, no I think I would just say that it's being very selective and very purposeful looking at the actual customer interaction. We have a whole team that are very experienced at this we pulled a lot of people in.
External experience and it really is a case by case.
Piece here, but that's how you keep it like a very selective and strategic and that's the only time, we really either.
Alright, great. Our next question from Brad Zelnick of Deutsche Bank, followed by totally go ahead Brad.
Great. Thank you very much and congrats on the cash and change great great job, because Palo Alto networks as far more than a hardware company and that will I got a variety of reminding me of the meeting we had four and a half years ago in my office I'm, So glad that I left that impression on unit cash.
I'm still waiting for the hard work by the way you can see behind here, it's still even though I'm in front of the building it's a visit.
But it's good to see so far more than a hardware company today that is on full display, but you have down ticked on your industry hardware growth expectations from what you said last quarter I believe last quarter, you said, 5% to 8% now you're seeing a little bit just low to mid single digit I don't know if it's a material difference, but I noticed a difference if anything what's changed at all.
In your market view, how should we expect your hardware business to perform versus market and what would you say the cash to a skeptic, that's perhaps skeptical that a lot of the success you see and everything else and Nextgen is riding along on.
An opportunity is created when a sales person shows up and is selling hardware.
I guess, how much of that motion is happening away from hardware that we should appreciate thanks.
So Brad I think it's important to understand that.
We have a very large installed base, we have 62000 customers, who deploy volatile firewalls and let's just say in my four and a half years of volatile I don't know any customers decommission dose yet.
So I think that this this illusion of the hardware is not being deployed not being used is is not true. So theres hardware and we most of our customers, even though somebody may not be buying hardware a lot of our subscription growth. Our yearly growth is driven by the fact that people have hardware, which they're extending the software capabilities on and buying more software capabilities from us. So it's not just that a salesperson.
Was up only to sell hardware they actually sell show up to deploy more security capabilities on the software front and couple of that in the case of SaaS. If you look at our large pipeline is really driven by a customer of Palo Alto firewall customer or a potential as a customer who's saying listen I know your security services I know zero trust policies, I wouldn't be able to expand into it and deploy.
Full end to end SaaS solution or zero Trust solution for you. So.
I guess I'm trying to say is that our success in software is not hardware dependent all I'm highlighting is that I believe that the market was very confused last year with supply chain you couldn't get chips their orders being made customers are getting jittery, saying I have capacities I might need more hardware. So you get a whole bunch of conflation of effects that happened.
Hardware I've constantly maintain that hardware. It grows the industry grows at low to mid single digits.
You'll notice that perhaps.
Slight downtick in my expectations, and that's probably fair are you a perceptive, but I don't think it changes the overall outcome for us as a company I do worry about people who are purely hardware focus we don't have the ability to position a solution, which includes software give you. An example, a large retailer comes to us and say I'd like to deploy SaaS solutions across my entire re.
Tail base I'd like to upgrade I want to do a reorder for my store I want to go get more bandwidth them there.
Technically there are multiple ways to multiple ways to solve the problem. While you do sell firewalls to say, hey put a bigger firewall in the store and I can deliver sassy because I have security capability.
Say put an SD Wan box them Theyre go deploy a lot of bandwidth in there and do a software based SaaS implementation, a it's going to be much easier to rip replace software in their upgrade sulfur I take care of that for you be it.
<unk>.
More secure because you have the most latest upgraded software available right away three scalable you can improve your bandwidth requirement and security requirements overtime and then for me it's great because it's two five times more valuable for me to have you deploy SaaS, even put a box, which I would have to keep sending a truck every year to try and sort of upgrade the software.
Makes perfect sense to me keep up the good work. Thank you. Thanks, Matt.
Alright, Great next question from Tal Leone of Bofa, followed by Keith Bachman go ahead Don.
Now an expert on the art I wanted to show you made.
Made it.
Yeah.
Sure.
Tal.
I wanted to ask you about the difference between revenue growth and.
Revenue guidance for the meeting.
Feeling very very strong we.
We see less of an increasing revenue what are the dynamics.
I will let deepak answer, but I will recommend you try it daily and you might be able to create a barrel.
Poster hard and we'll have to figure out who did rich one yeah, that's how I think.
At the end of the day like we are an enterprise company and as you see in our guidance like we we have a large Q4 guidance with a lot of costs and the sweating assets is in cash as I mentioned in his script I think we're just trying to reflect that in our latest forecast, which is what drives. The this is what drives the guidance and so.
You have people sweating assets, we don't know exactly what will fall in which quarter and that's what drives the revenue.
Just to make sure that you don't we don't we don't mix the forest from the trees, we are seeing.
<unk> growth across our business on a TCE basis across our customers that's driving the billings growth, which obviously then falls into.
Revenue, both short term and long term and deferred I think what youre seeing is the higher mix of software and our expectations going forward.
Which makes it more ratable over time, which gives us more predictability, hence the revenue looks.
Consistent with expectations and you see the software part, which is sitting in deferred grow faster.
Certainly on SaaS fee that is the most that makes sense yeah.
Alright, great. Thanks, Our next question from Keith Bachman with BMO, followed by Patrick Hulu go ahead Keith.
Many thanks good afternoon, good evening I wanted to ask you.
Cash about cortex, if I could more broadly and I'll break it in two parts. The cortex journey. The results have been solid not just this quarter, but for some period of time now.
Hum.
On the competitive front.
We've been hearing a lot of.
Discussion from some of the leading vendors that pricings become much more material.
In winning share because the crowd strikes or what have you. It doesn't appear that that's the case at all in your results from the growth rates in the profitability.
So I just wanted to hear a little bit about pricing and then more broadly on b.
Just the competitive dynamics on.
Your results and you mentioned 100 million kind of run rate on X I am how is the portfolio help shaping.
This outcome as you look out over the horizon over the next number of quarters and cortex. So Keith that's a great question and I'm hesitating on my own analogy child is going to give you because I don't think we should print that it's clean.
It's just I don't want to put award against our cortex business first and foremost.
I've always maintained that the opportunity in a security market arises when there's an inflection point.
And I think the endpoint industry went through an inflection point a few years ago. When we saw the emergence of Edr xdr players.
And you saw that I'd say, perhaps the the normalization of pure endpoint anti virus type players in the market and what's happened is if you look at the evolution. We've gone from a few endpoint players to many and you're beginning to see convergence again down to two or three people and I'd I'd.
Say that we are one of the three.
Growing xdr vendors, where customers are choosing us we have one of the best.
Outcomes across the entire market vis vis other players so I'd say, if the Dave Youre looking for FTR outcome. There is possibly two or three vendors are always in the fray or beginning to see ourselves that that was not the case three years ago that was not the case two years ago. So we're happy with our positioning want too.
Xdr is a is the pipeline business because it's a pretty consistent to your point about pricing. The deal sizes are pretty consistent and they're sort of in a range and you've got to have a lot of deals to to your pipeline and get some conversion going from them cloud and SaaS. He can be big I still $40 million cloud deal $40 million asset deal I don't know $40 million xdr deals they're all in the same swim lane and you can substitute one for the other.
And we see consistent growth now where I think our secret sauce is kicking in and it should kick in is.
X time only works with xdr.
And what's interesting is we've seen very early as we've had.
And the 15 customers for Exxon in the last 12 weeks and they are all north of a million dollars very early we're seeing customers, saying I'd like Exxon, where he said listen you can only get X times, you're going to buy xdr. So we're beginning to see Theres a bull because of an outcome based oriented X I am again as I said to Hamzah don't get ahead of your kids. This is a a shift we're trying to engender in the industry, but we think that the way to drive X.
Dr for us in the long term is going to be by creating the best security outcome into software the customer would realize I need good data at the only way I get good data as to Palo Alto Xdr, which allows us to go create the security outcomes and XR. So that's our approach until then we're just going to keep our head down grind out.
The pipeline make sure we can win the deals but for us where we're headed for the bigger prize because you know I can I can do a lot of exciting business I can xdr seeded into my customers. So xdr pricing is less contentious for me. It's more interesting for me to get the right customer and xdr. So you'll notice there's a certain part of the market. We play in we don't play in the low to mid end of the March.
Next they are you don't have 500 customer fiber user customers, we like to get the 10015 thousand and the higher end of the xdr customers. Because we think that is a high transfer instructs time in the future. We've been doing that consistently for the last few years trying to build that base Hasnt been next time is ready we can start encouraging our customers to evolve from XD Arctic science.
Next is Patrick cultural Scotiabank, followed by Matt Hedberg go ahead Pat.
Hey, guys. Thank you for taking my question.
It's good to be back.
Someone asked about margin so I.
I mean really impressive to see what you guys printed in the margin I mean looking at the numbers for fiscal second quarter to meet its two most important levers where the product gross margin.
And the sales and marketing.
Kind of costs that were moderated.
Yes, as we think about the remainder of the year.
How should we like.
Model out there's two levels. So should we continue to expect less incremental pressure.
Hum.
From supply chain costs on the product Gms and how far can this S in them.
<unk> go.
Well I think Patrick first of all as Deepak major life easier by giving you an operating margin guidance for the year. So you don't have to worry about the competent parts. So you can just take a look at the total and have a wonderful time and save you some modeling and fall out or so.
That notwithstanding I think between Deepak and IV both said.
That I contemplated putting this on our.
Earnings script.
I had a meeting with an investor day back in I had a meeting for hours.
Six to seven months ago, and they took us through the brute force of profitability and margins and margin expansion, our long term EPS for Palo Alto and Thursday, Deepa can I looked at each other and say you know what growth is important but drove profitable growth is even more important and I'd say, there's a series of programs that <unk> has been running over the last six months, which include looking at.
Gross margin across all of our products looking at our spend across categories looking at head count. So this is a sustained programs we have in place.
Going to moderate our way through it to make sure that we don't impact our ability to generate the right amount of growth in the right amount of profitable growth, but I think the.
The thing I'll leave you with this that you have given the guidance for the full year for operating margin, how it's going to evolve I think it's a very good place compared to where we were expecting to be right. Now I think we've also given you hope that we don't believe this is the end we believe we can keep improving from here. So for now that's all I can say.
Alright, thank you so much.
Alright next you've got Matt Hedberg of RBC, followed by Jonathan who will go ahead Matt.
Cool Thanks, guys. Congrats from me as well on the cash.
I have to go back to SaaS I mean, the 50% growth in the IRR off from a large base. It's impressive and you guys took a different approaches here in terms of integrating your core firewall in your SaaS. Your sales force can you talk about the strides in those conversations into the other sort of 50000 firewall customers that aren't SaaS customers.
How does that discussion go in.
Just because it feels like such a marriage that makes so much sense from a cross sell perspective, yeah, Matt look I think.
A happy firewall customer is.
As a customer who at least has a good feeling about Palo Alto.
If they have deployed our security services, even better because they know how the security capabilities work and now we're working through each of these customers are trying to work with them on their zero Trust strategy SaaS is generally a long lead time long conversation because it's not just security I think the part which sometimes gets lost in this and some of the Alice is that fair.
<unk> actually youre, taking C. The firewall they give you a firewall you run the firewall senior network. It's all good you run your growing product and says Hey, I run your network.
I take the traffic from your laptop onto me onto GCB and route the traffic for you. So now and part of your mission critical capabilities that means my network has to be strong my latency has to be low availability has to be high that's not a traditional question security climate companies had been asked they're not used to running network. That's why I just I followed by <unk>.
Chair when I keep hearing there are seven other vendors buildings ASIC solution and they get good luck learn how to run a network.
It is no coincidence that we decided that we were knocking around the neck, we're gonna let AWS in GCB on the network for us because that's what they do really well.
And they have cloud capability with low latency. So we've built our SaaS stack, which runs now concurrently on D C b and AWS, allowing us to give you availability, which is higher than those two individually.
So we think the long term that's the right answer.
Right now clearly, we're not 11 years old and sassy were three and half years old and fast. So there are some things, which will get stumped, we get stumped on because there are features that gave them you're going to keep building because there are edge cases, which were brought to the forefront. So that's where lee and his team are doing a phenomenal job continuing to keep us at the top of the top of the sort of paramount on that topic.
We're working on some really exciting capabilities.
In the upcoming future or inform you and in the next upcoming quarters, but we feel very good about our SaaS pipeline are on ramp they're lumpy the large deals but.
There is product market fit and we're seeing success.
Alright, our next question from Jonathan Ho of William Blair, followed by cyclical you'd go ahead Jonathan.
Congratulations just wanted to maybe start out you've seen some tremendous large deal success this quarter.
In terms of the platform consolidation discussions with customers what are you seeing.
Is there evidence of customers may be standardizing on Palo alto across multiple areas what can drive that.
Sort of trend over time, thank you.
So William.
The reason, we showcase the millionaire customers, a 5 million dollar deals in the $10 million deal slide.
Is there is a journey.
By the way I'm going to send you a palo Alto shirts. So you can at least where that in this meeting you can where the other one other times, but anyway. So yes, we showed it as like $1 million and $5 million and $10 million because customers go through a journey and it's very rarely you walk into a fresh customer and we convinced them to go spend tens of millions of dollars doesn't consolidate so it's usually an evolution.
Larry a process, where we have become the firewall vendor of choice to go with us and SaaS. They are working on cloud this either concurrence of cloud and SaaS fee. They have xdr. They want to go to X science, so slowly and steadily.
We are showing them the benefits of consolidation and I'll tell you us being leaders in 13 categories helps because the first time you used the word consolidation. The first reaction of the Cio's. He says wait a minute.
Want the best stuff I, just don't want it because you have it and said wait a minute our stuff is the best App as well as.
It works together so it's a journey it is not something that is the panacea that every customer comes in and Watson, but our teams are now focused towards trying to evolve our customers down that path or across that journey right and Thats why we can go out and do a deal.
I think our largest deals this quarter was north of $75 million.
Alright, our next question from Socgen clearer Barclays followed by Joe Joe Go ahead, sorry.
Okay, Great Hey, guys. Thanks for thanks for fitting me in.
Numbers speak for themselves and the cash maybe maybe a question for you a lot of excitement around X I am some interesting wins, you called out as well in your AI section.
Maybe a strategic question for you.
As you think ahead, maybe the next couple of years for <unk>. How do you think that that will have started to disrupt the sim market either from a check or pricing perspective, and maybe just to flip that on its head a little bit is it possible that tools like X I am maybe help expand the Sim market.
Yeah.
So.
I think socket the Sim market doesn't have.
A pricing problem it has a value growth.
I spent a lot of money I don't get enough value.
And.
If you ask some of the customers out there how do they use the same seamless used post breach or post event to figure out what happened.
A simple not doing on the fly of real time blocking so when solar winds happens dog for Jay happens. If you go to a Sim and looked at what had happened and figured out and trace it back and try and block the hole or it won't do for you is stop at mid flight.
And that's a paradigm shift as far as security is concerned the only way you can do that and stop in mid flight.
<unk> data as has been created.
So to US recently called a sign not assume is here's our works we watched the data inflow. We watch are coming from the endpoint, we cross correlate mid flight with firewall data go and triage. It we automate some of the alert of some of the noise away, but we're looking at.
Real incidence of in triage already which are not being put in some large data Lake and then earning query language against disease, how do I solve the problem, they're already doing it in the backend.
Now of course with the availability of new Ela levels that are out there, which you all I'm sure have been talking about and dealing with them every time, they do a lot more useful things and write poetry for your wife.
You can actually analyze data to tell you what is anomalous and what is off background.
And if we can figure that out then what do you have to do here to go ahead and Remediated how did immediate it you've got to be a firewall to remediate the network you've got to be an endpoint remediated. The endpoint you got to be Prisma cloud remitted in the cloud. So I think what <unk> is going to do is going to bring real time capability in the sock or real time capability insecurity is early days again.
Gonna say keep repeating in a repetition and hospitals don't get ahead of itself, but this is where we're heading.
And if you can picture.
GPT 10 years from now picture AI and security 10 years from now.
You will not have humans trying to analyze because we do hard for humans to analysts petabytes of data.
Already the data in an organization is to too much for our security analysts to analyze.
Alright, Great next question from Joe <unk> of Jefferies, followed by been born of Cleveland Go ahead Joe.
Hey, guys. Thanks for the question can you just comment on the execution in cloud security. Despite the backdrop of Hyperscale are growth moderation and then maybe more importantly.
Where customers are in that journey to cloud security consolidation it still feels like the wild west of a lot of disparate products in that category when does that market emerge, which I'd imagine benefits.
Thanks, Joe.
Two quick answers one we're still the largest player with north of 2000 customers in cloud security.
No if you specifically called it out, but our largest cloud security deal it was $40 million this past quarter.
I don't know any other vendor in the cloud security space who's being half of that in a quarter and one deal. So yes. There are many small players out there, but we've seen and we've seen a bit of churn in the market or some small players are kind of being acquired and gone now does that mean, we will be only paranal there'll be other players in the medium term, but we feel comfortable that there are people who are consolidating it feels.
Like the wild west because customers are still not fully in the full cloud security platform mode. So they are not fully embraced the need to have all these things connected but I think it's a matter of time and a matter of demonstration that there is going to happen in terms of your question around where we are and we talked about that in the prepared remarks around hyperscale as a member of the club secured.
Market is a few billion dollars the hyperscale market hundreds of billions of dollars now the difference is.
When you commit to a hyper scaler you commit that you're going to move you're going to transition. We've spent a lot of money a lot of that stuff sits in.
Deferred revenue because they are not fully deployed our customers haven't fully consumed.
Cloud security and applies to stuff that you consume right.
I'm consumed it are you on ready to consume it they are not going to be buying card security. So I think we have a little bit of a gap in terms of when people commit to when they deploy to win the day cloud security I, just think that you know that stuff.
Can slow down for a while but it's still got a there's a lot of headroom for us to get from where we are even if we got to all the customers who are in deployment or are deployed I think we should see a steady continued growth for prisma cloud. So the market demand to me is not where the challenges the challenge for us or the opportunity is to go convince as many customers as we can that this is a plan.
Firstly, you have to consolidate across multiple modules etcetera stuff talk to each other on a constant basis, otherwise you end up in the same situation that you weren't in enterprise security many years ago.
Okay.
Our last question today is from Venmo and Cleveland Research go ahead Ben.
Good afternoon, everyone. Thank you for taking the question.
The cash you've talked about.
From GSI opportunities in the past I'm interested in how you see that channel is developing what type of tail you see there and how meaningful that your platform is becoming for those partners. Thanks.
Thanks Pat.
I used to say that about a year ago that I've had more CIO conversations in a quarter than I did in many years.
Now I'll say that about GSI I'd.
I'd say in the last six months I've had more GSI conversations that I had in the first five years of follow up for nonferrous part right and the reason is <unk> are interested in transformations, they're interested in where they can go into a customer and deploy and much better security outcomes for them we.
We were not relevant as a firewall company with SaaS fee with cloud security with now X I am they see a real opportunity to go in and do some transformation for their customers and transformation for them that means revenue to them.
And means a solid product in the back.
Say, most GSI, they're still early ish in their journey to build a full cyber security competency across the board in there they would rather deal with lesser vendors and more so us being leaders in certain categories plays into our strength and our ability to partner with them and I think use.
We are already at without specifically, calling out deals. There are many deals where we are partnered with GSI is where they are the front and we work with them to be as part of a larger transformation project, we're seeing more and more of that.
Yeah.
With that we conclude the Q&A portion of our call today I'll turn it back over to <unk> for his final remarks.
But.
First of all I want to thank all of you for joining our call I also want to thank our employees, who worked really hard towards delivering these results I have to say six months ago. When we started to see warning signs we pivoted hard we made sure that our teams got ahead of it.
And they have delivered so I want to thank all of them for their contribution.
As I've said this is a this is a.
Challenging macro environment out there and the only way we're going to get through this with Palo Alto networks is to keep our head down and execute and that's what we intend to do once again. Thank you guys and see you next quarter.