Q1 2024 Palo Alto Networks Inc Earnings Call
Richard Senior Vice President of Investor Relations and corporate development. Please note that this call is being recorded today Wednesday November 15th 2023 at 130 PM Pacific time.
With me on today's call to discuss first quarter results are the cash Aurora, our chairman and Chief Executive Officer, and Deepak Lecher, Our Chief Financial Officer. Following our prepared remarks, Lee Klarich, our chief product officer will join us for the question and answer portion.
You can find the press release and other information to supplement today's discussion on our website at investors <unk> Palo Alto networks Dot com, while there. Please click on the link for events and presentations defined the Q1 2024 earnings presentation and supplemental information.
During the course of today's call, we will make forward looking statements and projections regarding the company's business operations and financial performance. These.
These statements made today are subject to a number of risks and uncertainties that could cause our actual results to differ from these forward looking statements.
Please review our press release and recent SEC filings for a description of these risks and uncertainties, we assume no obligation to update any forward looking statements made in the presentations today.
We will also refer to non-GAAP financial measures. These measures should not be considered a substitute for financial measures prepared in accordance with GAAP. The most directly comparable GAAP financial metrics and reconciliations are in the press release and the appendix of the Investor presentation.
And unless specifically noted otherwise all results in comparisons are on a fiscal year over year basis.
We also note that management is participating in the UBS Conference November 29.
I'll now turn the call over to the cash.
Thank you Walter and good afternoon, everyone and thank you for joining us today for our earnings call.
Q1 was the first quarter of our three year plan, we presented in August if.
If I were to summarize the quarter I would say the following.
We continue to execute amazingly well.
It is a volatile environment on the geopolitical front, we've been contending with what's happening in Israel in Ukraine.
On the hardware of our product front as Youll see there has been a normalization in the industry, it's something we've been indicating for awhile.
Backlog is we can ship supply chain issues are behind us and broad growth is normalizing in the industry. We continue to six <unk>.
Almost strength as we've indicated in prior quarters in their category.
On the macroeconomic front business practices continue to adapt and adjust to a new normal with higher interest rates for longer.
Internally on the product side, we've had one of the strongest start to our fiscal year. In addition to various recognitions, we've delivered strong innovation across all three platforms.
Lost in AI enabled cloud manager and network security to continuing our consolidation and collateralized Asian efforts toward Zero Trust and sassy, we announced our intent to deliver enterprise browsers, the tableau acquisition, which will solve one of the critical issues that are what access which did not address today about any SaaS vendor then.
We released the industry's first integrated UI for code to cloud Prisma cloud and announced the acquisition of the VIX security to double down on data security for regenerative AI and Prisma cloud last but not the least and cortex, we launched <unk> dot O with bring your own AI.
Hi.
The go to market side Q1 is seasonally a slower start as we kick off the new year, but the team delivered superior revenue and profitability.
Had our highest cash collection quarter in our history.
We continue to see steady execution.
Excuse me in our firewall cloud and endpoint businesses. The SaaS fee, we continue to position ourselves in larger and more strategic deals and <unk>.
It's early days continues to garner tremendous interest, giving us more comfort around our long term intentions. So in summary, a strong start in Q1 towards our three year journey early days, but confidence inspiring.
And the details.
Our Q1 revenue grew 20% of our billings grew 16%.
While our peer growth of 20, 26% exceeded both of these and was driven by our next generation security capabilities.
I would like you to pay particular attention to RPM versus billings Deepak will talk about the difference at <unk>.
And explain why the street might be confused with our future billings guidance.
Our Q1, non-GAAP operating margins expanded by 760 basis points, driving 1.38, and non-GAAP earnings per share and regenerative record one 5 billion adjusted free cash flow in Q1.
If you look at what's going on from an overall cyber security perspective.
We have never seen as much adversarial and consistent activity at scale as we have seen in the first quarter.
Unfortunately, you don't expect this to abate anytime soon.
As a consequence of this increased activity and in recognition of our customers' commitment to us. This week, we announced a unit 42 rapid incident response retainer at no cost to all of our strategic customers.
Aimed at providing additional support during this escalating threat landscape.
Ransomware attacks are increasing in frequency and severity the ransom amounts being paid are also increasing.
Bad actors are being damaged in a much shorter amount of time as an example in a recent engagement of our year to 42 team you saw an instance, where bad actors extracted two four terabytes of data and just 14 hour.
There is also some evidence that the adversaries are beginning to live generative AI as a tool to make attacks more sophisticated not just that based on what we're seeing in unit at 42. Most attacks are not happening on the back of vulnerabilities and widely used software and apr's such as widely exploit it move it file transfer software.
Unfortunately, these bad actors remain elusive with no apparent significant increase in convictions and high profile attacks was therefore not surprisingly this malicious activity continues.
At the same time U S publicly listed companies and the board are confronted with new SEC disclosure requirements around prompt public reporting on material cyber security incident, and the enhanced oversight responsibility that comes with it.
This result is a continued focus across organizations on understanding security posture cyber security risks and how to mitigate this risk effectively.
This increasingly involves not only the C. So, but the entire organization legal finance and the CEO and the full board of directors.
The space of malicious activity at the board level focus on cyber security risk is fueling a strong demand environment customers have often have multiple strategic priorities in cyber security and our broad portfolio enables us to align with these priorities.
In Q1, the cost of money remains a constant discussion and customers significant focus on this topic is becoming the new normal.
The way it manifests itself in our businesses that theres always a payment and duration discussion in final lease negotiations.
Our strong balance sheet, we can use a mix of strategies to navigate the environment. This includes annual billing plans financing through a manifest and partner financing.
<unk> does not this does not impact our business demand or the impact to annual revenue annual metrics. It does create variability on total billings more than before depending on financing used or the duration of contracts.
I am not concerned about the demand for cyber security this quarter and upcoming quarters, none of my concerned about our ability to execute.
This variability is a pure consequence, all the payment conversation that we're having with our customers and this was validated by the fact that we continue to see strong IPO and low churn, suggesting this is a cosmetic impact to our business.
We continue to see strong interest across our next generation security portfolio, and we're making progress on our platform migration journey.
Slight a few deals to talk about the diversity of opportunity across platform buys as well as the geographical distribution of our deals for example, the federal government agencies signed a $25 million expansion transaction, including adding cortex, xdr, and prisma access and highly competitive situations and expanding the network security footprint. This customer is in.
Ill spent over $100 million over its lifetime across oxy.
A large global SaaS provider signed an $18 million Prisma cloud transaction to consume modules across the portfolio. The customer is already a customer for our network security and cortex platforms, a large educational organization expanded its relationship with us in the first quarter of $15 million transaction, adding <unk> Prisma cloud.
And an expansion of its network security footprint.
And lastly, a nation state signed a $28 million deal that is a first of its kind standardizing on both SaaS and X I am. This is a long sales cycle and represents our systematic approach to platform Ization.
The story of these deals have been playing out across our large customers as of Q1, 56% of the global two thousands has transacted with us across startup prisma and cortex.
This continued focus on customer Ciber transformation has fueled the 53% growth in Ngls are are we report this quarter as we broke through the $3 billion milestone and.
Another exciting news as of Q1 recurring revenue across Palo Alto is 82% of our total revenue from 77% a year ago.
Let's turn onto updates from our three platforms that are the engine driving our success first and then for security we continue to drive innovation across our portfolio and see momentum as customers drive towards Zero Trust architecture.
This month, we unveiled Pan OS $11, one our cost months startup cloud manager.
A unifying the management of all of our three form factors and all security services in a single pane of glass and also leveraging AI to analyze security policies reduced this configuration that predict and prevent disruptions.
Customers, who have invested in our platform by deploying all three form factors continued to grow rapidly up 34%.
Top 100 network security customers, 60% of purchased all three form factors up from 50% a year ago on average this platform customers spend more than 15 times over the rest of our network security customer spend.
The story is similar and sassy, having just seen our innovations gained multiple industry recognition of SaaS fee in the second half of our fiscal year. We have continued to invest to build on our leadership position.
We're seeing strong momentum and sassy.
There are good are approximately 60% in Q1, we.
We also saw a 35% of our $5 million or greater network security transaction includes sassy up from less than 10% a year ago.
Today. It was the first day of our event called sassy convert where we unveiled several enhancements.
We have enabled SaaS, either access applications with performance faster than the Internet.
We added visibility and control or interconnect SaaS applications and enables safe access to Jenny I tools to ensure data isn't and urgently need lastly, we added remote browser isolation technology for an extra layer of security.
M&A has always been an important part of our strategy last week, we announced our intent to acquire talent cyber security.
See an opportunity to expand the addressable market for sassy and solve an important customer problem.
As many as 36% of workers classify themselves as independent workers, who often use unmanaged devices for work. In addition employees increasingly use personal devices for accessing business applications.
To enable access to these devices security teams have an impossible tradeoff, they're forced to either ignore security entirely in favor of flexibility and user experience or to adopt cumbersome technologies like VDI.
Talent is a pioneer in the emerging enterprise browser category and when combined with Christmas ASE. After closing, we will enable users to securely access business applications from any device, including mobile devices and non corporate devices with a seamless user experience.
We intend to include this capacity capability because my access after closing and customers will be able to extend the same best in class security don't manage devices moving.
Moving onto Prisma cloud.
We continue to see a strong endorsement of our integrated platform strategy.
Traction is evident in the strong growth of our multi module customers. We are seeing particular success here with modules release of last two and a half years.
There has been a consistent pattern of seeing 100, plus customers for new modules. The first full quarter of launch and rapid growth after that as the benefits of these new modules are broadly understood.
This enthusiastic adoption has driven our strong conviction and adding key new modules, including some through acquisitions.
Our ISC scanning capability, which came through the bridge crew acquisitions and see ICD security, which came through a cider are two such examples.
This new module traction is helping to accelerate prisma cloud new business <unk> in the last quarters.
In Q1, we also unveiled a major new Prisma cloud release, Darwin Darvin further differentiates our unique position across code cloud infrastructure and cloud runtime Darvin enables a view across all elements of cloud applications, including cloud services infrastructure assets compute workloads API endpoints data and code jarvik at all.
So help customers understand risks with deep contacts and overly active attack attempts in near real time.
Our full coverage from QUADRA cloud enables fixes to be applied immediately versus the ones months, most vulnerability stake to be passed.
Okay.
About two weeks ago, we announced our intention to acquire <unk> security, which will bring an award winning data security posture management capability Prisma cloud.
With almost 70% of organizations, having data stored in the public cloud.
We're all of new cloud data services and the adoption of generative AI, we see an increased need to identify sensitive data effectively manage user access and implement robust security measures to prevent unauthorized internal and external access to data stored in the cloud.
After the close of our proposed acquisition <unk> capabilities will be integrated into Prisma cloud platform right near real time data protection from code to cloud.
Moving onto cortex, we.
We continue to invest across our product portfolio and expand our customer count as we see continued adoption of xdr XOR expense in <unk> and.
Q1, we have several industry recognition of our innovation cortex.
Cortex Xdr was the only product in the industry to achieve 100% protection of detection and the round five Mitra evaluation. Additionally, XOR expanse and <unk> are all named leaders by third parties this quarter.
Through our cortex active customer count by 25% to over 5000 customers of traction overall in cortex as essential as it allows us to sell our transformational offering excellent.
<unk> has had a very fast start since we released the product just over a year ago.
After a strong FY2023.
Science first suite of release, which included over 200 million in bookings, we followed up with a strong Q1.
You saw our first expansion purchase of excimer, an eight figure deal in Q1, our largest <unk> customer to date was deployed with over 200000 endpoints.
We're seeing exciting transform customer security operations and significantly improve their security outcomes. This includes Sydney significant reductions in the meantime to detect and resolve security incidents on.
On the back of potential customers hearing about early signs of success our pipeline for <unk> is over $1 billion.
Of which $500 million created just in this last quarter.
As I began my remarks Q1 was the first quarter of us delivering on the three year plan, we presented in August.
Driving profitable growth investing in innovation next generation security and the industry's largest dedicated security go to market organization at the same time, leveraging the scale of Palo Alto networks.
Man for cybersecurity is strong given the backdrop of attacks and the ever increasing focus on scrutiny around cyber risk.
<unk> continues to be Paramount given the macro conditions and we will continue to be adapted and responded to changes in the environment.
Manage for long term growth operating margin and free cash flow and ensure we continue to transform the business and build revenue predictably Youll Susi this through our pure and most importantly, our current RVO.
Our long term forecast thesis remains intact, whilst we expect short term variability in billings. We don't expect this to have a meaningful impact on our ability to deliver our three year targets with that I will turn it over to Deepak.
Thank you and our cash and good afternoon, everyone I'll cover the specifics of our Q1 results additional details on the drivers behind the results and our Q2 and fiscal year 2020 call guidance.
The Q1 revenue was $1 eight $8 billion and grew 20%.
Revenue grew three 3% total service revenue grew 25% with subscription revenue of 988 million growing 29% and support revenue of $549 million growing 17%.
We saw consistent revenue contribution across all theaters Americas grew 20% EMEA was up 19% and Japan grew 23%.
The strength of our next generation capabilities continues to drive our results and GSA huh.
Yeah.
Exceeding $3 billion for the first time.
And growing 53%.
We saw strong contributions across the portfolio in Q1.
We delivered total billings of two point was there were $2 billion up 16% total deferred revenue in Q1 was $9 4 billion an increase of 32%.
Remaining performance obligation or our Apio was $10 4 billion, increasing 26% with current IPO just under half of our IPO.
As Nick has mentioned we sold the rising cost of money have an important inc.
Incremental impact on customer behavior in Q1.
We are responding to this in the ways, we have discussed previously, including using annual billing plan financing to panel Fabs and partner financing.
In Q1, this had a negative impact on our billings, although as you can see we saw strength in NGF era and revenue.
Our non-GAAP earnings per share was significantly ahead of our guidance growing 66%.
This was driven primarily by the significant increase in our non-GAAP operating margins, which expanded 760 basis points year over year.
We continue to benefit from the scale inherent in our business, especially as some of our next generation security offerings scale.
We again delivered strong cash flow in Q1 with trailing 12 month adjusted free cash flow of $3 billion, achieving trailing 12 month free cash flow margins of 41%.
Moving beyond the top line.
Gross margin for Q1 of 78% increased 370 basis points year over year.
We again saw year over year improvements in product margins with the normalization of the supply chain environment.
Service gross margin improved to 78% as our newer offerings continue to gain scale.
Our operating margin expanded by 760 basis points in Q1, as we saw higher gross margins and efficiencies across our three operating expense lines.
We are pleased with our operating efficiency progress against our medium term target. We continue to make significant investments to support our top line growth expectations, including investments in product and engineering building sales capability and supporting our ecosystems and our go to market organization.
Turning to the balance sheet and cash flow statement.
We ended Q1 with cash equivalents and investments of $6 9 billion.
Q1 cash flow from operations was $1 $56 billion with total adjusted free cash flow of $1 489 billion.
This quarter.
As is typical for Q1 this cash flow performance was primarily driven by strong collections in the prior quarter based on the strength of our control bookings.
So our collections in the quarter, but based on the strength of our Q4 bookings.
Over the last several weeks, we announced that we have entered into definitive agreements to acquire two companies on a.
<unk>, 31st we announced our intent to acquire <unk> security solutions for approximately $232 million in cash excluding the value of replacement equity awards.
On November six we announced our intent to acquire talent cyber security for approximately $435 million, excluding the value of replacement equity awards and inclusive of cash on our balance sheet at closing.
We expect both transactions will close in our second quarter fiscal year 2004.
During Q1, we repurchased approximately 300000 shares on the open market at an average price of approximately $227 a share for total consideration of $67 million as.
As a reminder, our share repurchase program is opportunistic and we're committed to returning cash to shareholders over the medium term.
Stock based compensation expense declined by 250 basis points as a percent of revenue year over year Asics.
As expected stock based compensation ticked up slightly as a percent of revenue quarter over quarter with the issuance of a portion of our fiscal year 'twenty foregrounds on.
On a year over year basis, we continue to manage our SBC down as a percent of revenue in line with our long term clients.
Before turning to guidance I want to frame some of the impacts that we're seeing on our billings as the cash noted we see strong demand in the market and continue to see customers make technical selection of offerings across our portfolio.
From here, we see more customers asking for deferred payments.
Either with annual billings financing can pan of FES or pursuing external financing.
Some customers are looking for additional discounts the upfront payments as they grapple with the cost of money.
Our strong financial position, which includes $7 billion in cash cash equivalents and investments combined with our many options in dealing with that.
Dynamic gives us significant flexibility.
<unk> 10 impact, how billings trends quarter to quarter, and we are reducing our billings guidance.
Accounts of this through the fiscal year 2024.
<unk> and <unk> have more of a direct impact on future revenue this quarter with duration towards the low end of the range. We've seen over the last several quarters, we saw strong trends in <unk>.
As we've seen low customer churn, we're confident that independent of specific billing terms in contract language. We can continue to grow <unk> at levels that support our forward revenue growth ambitions.
Now moving onto our guidance for Q2 in the year.
For the second quarter of 2024, we expect billings to be in the range of $2 33, 5% to $2 38 5 billion.
Increase of 15% to 18%.
We expect revenue to be in the range of one 955 to $1 985 billion in.
An increase of 18% to 20%.
We expect non-GAAP EPS to be in the range of.
129 to $1 $31.
A share an increase of 23% to 25%.
For the fiscal year 2024.
We expect billings to be in the range of $10 seven to $10 $8 billion, an increase of 16% to 17%, we expect <unk> to be in the range of $3 $95 billion to $4 billion, an increase of 34% to 35%. We expect revenue to be in the range of $8, one five to $8 $2 billion, an increase of 18.
19%.
We would expect our fiscal year 'twenty for operating margins to be in the range of 26.
Six 5% up 190 to 240 basis points versus fiscal year 2003.
We expect our non-GAAP EPS to be in the range of $5 40 to $5 53, an increase of 22 2005.
5%.
And we expect adjusted free cash flow margin to be 37% to 38%.
Additionally, please consider the following modelling points.
We expect our non-GAAP tax rate to remain at 22% for the second quarter and fiscal year 2024 subject to the outcome outcome of future tax legislation. We also expect cash taxes in the range of $230 million to $280 million.
For the second quarter, we expect net interest and other income was <unk> $55 million to $60 million, we expect second quarter diluted shares outstanding of 339% in the.
42 million shares.
Fiscal year 2020 core diluted shares outstanding of 338 to 343 million shares.
And we expect fiscal year 2020 for capital expenditures of $175 million to $185 million of $40 million to $45 million in Q2.
With that I'll pass it back to Walter for the Q&A portion of the call.
Well, thank you Deepak to provide us broader participation as possible. Please limit yourself to one question. Our first question will be from socket calia with Barclays followed up by Hamzah firewall up from Morgan Stanley go ahead socket.
Okay, Great Hey, guys. Thanks for taking my questions here.
Deepak maybe the question is for you.
<unk> the revised billings guide in this macro backdrop and to your point the higher cost of money.
I'm curious, how you've maybe thought about.
Factors like pipeline like close rates and very importantly, billings duration for the rest of the year as we just try to get comfortable with how much. The billings guide has maybe been de risked.
Yeah.
Okay. Thanks for the question I wanted to take this one.
Because it's more of a demand function.
<unk>.
Repetition doesn't support the prayers I will repeat that.
Billings difference is not a change in demand for us or not a function of our pipeline.
The billings changed as a consequence of negotiations with customers and the customer says he wanted me to pay you for three years upfront.
You got to give me a bigger discount you want to pay me lumpy two to three.
Three year deal.
Yes, we'll finance it benefits I could do that but I can say just pay me on an annual basis I'm. Okay.
Like my money every year.
If I go in that direction my billings changes.
It does not change anything in my pipeline and my close rates or in my demand function.
At some point.
So, we're just keeping giving ourselves flexibility because this quarter, we saw a lot more negotiations around those topics I just don't want to be held hostage to dose kindergarten negotiations, where we have to go finance deals to get the C D and their billings as a PCB metrics you see these important if I am concerned about churn I have very low churn across our product categories.
So I'm very happy to collect my money on an annualized basis, that's what's needed to make sure that I don't get pressure on financing I don't get pressure on having to give a larger discount.
Flexibility I do do a lot of PCB deal. So I do a lot of financing. This allows me that flexibility. So I want to make sure. If there is no change the demand function in the market. There is no change in our revenue forecast.
Got it very helpful. Thank you. Thanks.
Thanks Socket next up is going to be Hamzah firewall up on Morgan Stanley followed by Brian Essex from J P. Morgan Hamm. So go ahead.
Hey, good evening. Thank you for taking my question I, just want to start by offering my thoughts and condolences to all your employees in Israel.
Yes.
Yes.
Similar vein.
Good question.
16% billing growth is certainly not bad in the context of many of your peers growing single digits if at all.
I'm just curious because your guidance is still assuming that growth will sustain for the full year. So what's giving you that confidence given the cost of money given the hardware digestion that you can sustain that high teens billings growth given what youre seeing in the market.
So I'm sorry.
Mark you had mentioned the pipeline we have visibility through our pipeline. So we know there's business out there we have not seen customers walk away from deals in Q1, it's not like people don't want to do business.
We've been very consistent on hardware in our hardware expectations for the last 12 months, we are regaining our consistent expectations on hardware, we don't expect any lumpy movements up or down. We expect is going to go steadily in the zero to 5% range as we've always been talking about so I think from that perspective, I think to use sockets word we feel reason.
The derisked on what's out there in the future Q1 of the first quarter allows us we have lots of pipeline, we have visibility to I think I want to reiterate again, we are retaining flexibility can I go financing need of course, I can kind of go finance it through your deal to manifest a $7 million of casualty Cat, which act, but youll have in cosmetic impact or giving you better buildings.
But what I don't want to do is finance bad deals.
This allows me the flexibility of not having to finance them nothing changes I still give them a revenue for the year I still got my CRP O I still got my annual buildings I, just don't get either to a near three billing changes my total billings forecast with cosmetic it's mathematics, but.
It's interesting to see how the street interpreted.
Okay. Thank you thank.
Thank you Hamzah next up we have Brian Essex from J P. Morgan followed by Gabriela Borges from Goldman Sachs. Brian Go ahead. Please.
You're muted Brian.
Thanks, a lot.
Yes. Thank you for taking the question maybe.
Maybe wondering if I could dig in on M&A a little bit.
A pretty meaningful volume of M&A from a dollar spent perspective this quarter after not having done some for a while.
How would you describe the overall environment and how would you I guess message to investors the level of M&A that you might do over the next couple of years. So is this more of a one off.
Apple higher that you saw a great opportunity to pick up or might there be something meaningful in terms of.
The longer term.
<unk> even.
Dollars put through your sales pipeline as you.
Scale, the Soviet platform, our scale both of the multiyear platform.
So Brian Thanks for the question look.
We have not changed our point of view, we have always maintained that we're going to sustain M&A at a level close to $1 billion a year.
So we haven't done one for a while.
<unk>.
And if you see if you split the two we did a cloud security one we've been pretty consistent in that rough range in the $150 million to $250 million range in terms of adding cloud capability as we see the market evolve. So I think that's kind of consistent where we are we saw unique opportunity as I mentioned, 36% of workers are.
Workers, they don't get a SaaS, we have more access.
Solution, we saw more and more discussion in the market, where RBI will not.
<unk> every use case and managed devices, where not all your mobile homes don't have management for security last few hacks that happened to mobile devices. So from that perspective customers are asking what is my solution and now what we didn't want to do is to deploy yet another independent solution just disconnected from our overall size of the capability.
And like we do have always pay attention to the market. He forgot Talbot had the best Tech in this space and they were just about to go ways to go to a go to market.
Florida our exposure.
Some of the other companies.
And from that perspective, we saw an opportunity and we think it's a great fit actually makes us. The most comprehensive SaaS solution, we are going to integrate them deeply into our SaaS solution, where customers will be able to use enterprise browsers RBI are our prisma access clients. So.
I don't want call them, one off one off sounds it will ever happen again, but I think he is just happens to be the time, where we did too at the same time, although in two different platforms different teams integrating them. So it's not overhead to the organization.
But we're going to keep our cautious approach towards yeah.
And what we can digest.
Didn't expect anything that is.
All the regular pattern.
Instead of showing the last nine months.
All right helpful. Thank you great. Thank you. Brian next question is going to be from Gabriela Borges Goldman Sachs with Roger Boyd at UBS on deck go ahead Gabriele.
Good afternoon. Thank you I wanted to ask about the two dynamics that you're talking about in your business the firewall cycle.
The cost of money impacting Leds Josh.
How do you think about the potential that these two dynamics are actually connected meaning cognex is also having an impact on billings duration and how do you think about the risk that cost money dynamics got worse before they get better, thereby impacting our full year guidance.
Thank you.
So thank you Gabriel look the firewall business is actually is a.
There's the one chart business yourself piece of hardware and you get paid for it it's not a ratable business I'd throw out ability comes from our subscriptions and services.
It's usually there we have to look at it from an NGL perspective, our duration. This quarter was on the lower end of duration reduced went down because we took more annual billing deals or we took shorter duration contracts with our customers.
So from that perspective.
I think we feel comfortable given the visibility to our pipeline for the rest of the year that we've created.
<unk> for ourselves on delay.
I think we're going to keep having this debate where you keep calling it guiding down on billings and I want to keep calling it flexibility.
<unk> got dominant billings and keep telling you it doesn't change my numbers so.
Just agree that we're going to be saying that because I don't nothing has changed the prospects of volatile on three months ago.
Alright, Thanks for your question.
Maybe just to build on that.
Walter I'd say like just recognize that we're also maintaining our task guidance, which would be the other area.
They get concerned when our concern on that front.
Okay.
Great. Thanks Gabriel.
Next question is from Roger Boyd at UBS, followed by Brad Zelnick at Deutsche Bank Go ahead, Roger Great. Thanks for taking the question.
Just looking at the <unk> pipeline that that $1 billion is a pretty impressive mark.
Any color you can provide on the size of the length of those deals as we think about it from an IRR perspective, and I know you've talked about the three X are our up sell or expansion potential.
But just any any color on the size of those deals and how we should think about that kind of flowing into opportunities over the course of fiscal 'twenty four.
Yes.
I'm trying to make sure lease lease I guess to ask some questions.
I just want to show up next time.
Yeah.
[laughter] over.
Yes.
Obviously over the last few quarters can talk about X I am in the the.
The interest received from customers is.
Very strong and.
It's been the fastest sort of growth of a new product that we've ever seen.
It speaks to a couple of things one is just the.
The need in the market from customers to go through their stock transformation.
<unk> talked about the speed of attacks.
Increasing.
Relative to disclosure requirements and things like that.
Obviously, the number of attacks have been going up as well that's driving the the technology needed to have a different solution a better solution, one driven by AI and automation and Thats exactly how egg sandwich was built.
And that is what's fueling the interest the second part of this is.
With <unk>, we're able to replace several of the customers legacy point solutions in the stock. So we are consolidating multiple independent piece parts with a single xa on deployment.
And third with each deployment of Exane. This is this is a significant.
<unk> the customer is making in us.
Okay.
<unk>.
Three year investments.
Yes.
Because they are standardizing their stock.
Yes.
Long term memory with us.
It is not a short term decision, they're making so all of those factors are what are fueling the strong pipeline that we shared in the the early customer success, we're having with Exane.
Great. Thank you for the question next question from Brad Zelnick at Deutsche Bank, followed by <unk> at Citi Go ahead, Brian.
Great. Thanks, very much for taking the question I wanted to ask you about your new hardware lineup and the release of Pan OS 11, one.
Notice some of the newer features like quantum security and advanced.
Wildfire patient zero prevention I, just wanted to get your take on the extent to which the new platform can catalyze demand as customers try to look to take advantage of the innovation and maybe if you could.
US compare contrast versus prior product cycles.
Yes. Thank you.
I always get excited about the next Gen. Firewall released was of course very good Brendan.
[laughter].
Be.
But what we announced was a new high end <unk>.
So one that scales beyond a terabyte per second and so there is a.
Obviously this is for the largest highest performance networks out their service provider and in some cases large enterprise environments.
Inc. Ruggedized platforms platforms that go to plus 50 degrees Celsius minus 40 degrees Celsius, because theres there are harsh environments out there that also need to be protected right.
This is expanding the use cases.
So we can support with our hardware next Gen firewalls.
The other pieces you mentioned are also equally exciting from a software perspective.
Quantum is still likely a ways off but there's a lot of companies that are starting to prepare for that thinking about.
What happens in post quantum cryptography in the advent of potential Hodgkin Peters and what that will mean and so.
This is the start of a set of quantum security capabilities that we're watching for our customers. You mentioned advanced wildfire, we added a proxy capabilities. We added ATM capabilities. There's a lot of innovation in this industry. This generally.
Generally in that with the strides.
Customers to look to be on our latest gen four or newer hardware architectures.
Overtime.
<unk> hardware refreshes and upgrades and so all of that is good and helps helps our customers give us the most secure state.
Yes.
Well thank you great.
Thank you for that next question is for T mobile Ani at Citibank, followed by Joel Fishbein from tourists go ahead Fatima.
Good afternoon, and thank you for taking my questions and either for any Casher Deepak.
Some of your pipeline commentary I wanted to unpack as you think about that composition of Engie S. A whole or for the remainder of the year and bearing in mind. Some of your product hilarious are yeah, I'm not going to see maturity, but certainly they are more penetrated than others. So I wanted to get a sense of how you're thinking.
<unk> about.
<unk> bipolar is hey, your expectation.
Expectations for the year and to the extent anything there has changed and I recognized that you love all your product pillars equally but any distinct.
I was going to stop.
Given this very kind of because I remember prior answers.
Tried to give a I tried to give a preview of that in our prepared remarks, where I said that we continue to see steady educate execution and hardware endpoint and cloud so they're following.
Spectra trajectory, we see the pipeline I've said, the excitement and upside is coming out of SaaS, Okay Cyan and.
And we see that there are large.
Network transformation deals out there.
These things have anywhere from six months or 12 months closing cycles. So we would have to know what's in the pipe for the rest of the year Jeff's answer Tom sense of comfort. You also said, we grew that business, 60% in the first quarter on Saturday.
Only cannot habash enough about next time as you know so far so the $1 billion pipeline are hoping will close in that six to nine month, interestingly Exxon pipeline towards those faster than pipeline or deals close faster because the chassis is often very competitive there poc's involved feature comparison, putting us at one or two other companies in the case of.
It really competing with the incumbent.
Helpful. Thank you.
Thank you for Tina next question is from Joel Fishbein of tourists followed by Joe Gallo at Jefferies. Joel to go ahead with your question. Thanks.
Thanks for taking thanks for taking the question. This is for the cash.
Lee the cashew you called out.
The recent ransomware attacks and also the Sec's new requirements I'm curious number one is there is that helping to drive business and wood products essentially would that be driving Palo Alto and why you are sort of in a unique position to sort of address some of these these issues, yes. So it's interesting Joe.
Let me connect that to something we announced yesterday. So first of all as I said the activity is at an all time high.
Every day you read about ransomware attacks now the FCC regulation is actually not kicked in yet I think they kick in December but youre seeing some companies go out there and start to sort of self report and anticipation because they're all petrified.
When you get a deck, so I think youre going to see more and more disclosure and we'll be trying to parse did more activity or more disclosure. So it's a good question I think it's more activity that we've seen more and more activity our team does research.
We've had the maximum number of inbounds to our incident response team in the last months than we've had before them. So clearly anecdotally also has sort of come true that this is what's happening now typically the anatomy of an attack for us from our vantage point is that when we get engaged in incident response typically we go in and redeploy it protection.
Sort of suite, where we go in for Xdr everywhere.
From a bunch of analytics to make sure we understand what happened and where the sort of fee.
But actions may still be resident in a customer's infrastructure now typically we do that and believed they don't want us to leave with our stuff. They wanted to do a step back in case you guys come back so from that perspective, the incident becomes a lead unfortunately.
Because of the fact that it becomes a lead for us and that creates a whole bunch of product conversations around whether we're going to deploy endpoints, whether we need to upgrade their firewalls or they need to go down a cyber security transformation I'll tell you nine times out of 10 every one of those customers ends up in the cyber security transformation because they discover that they have a lot of stuff that this should have upgraded or.
Or changed in that process. So that's kind of what happens.
Those are the products, which typically end up as those customers.
And maybe I'll just add one point.
Nick has just described.
Multi extortion ransomware attacks being on the rise 37% increase the key to that is a lot of companies have sort of become used to call. It normal encryption only ransomware attacks.
Adjusted and backups, so that when that happens, we just back up from a clean backup and earn back and operational.
These multi extortion attack actually steal data and then extort.
The target and so this cant simply be dealt with as backups and this is driving a need for.
Better and greater investment in prevention of the attacks and not just the recovery side.
Connects the sophistication to the to the investment due to the strong thank.
Thank you.
Great. Great next question from Joe Gallo at Jefferies, followed by Gray Powell of BCG, Joe go ahead.
Hey, guys. Thanks for the question you've made several acquisitions further bolstering cloud congrats on that 12 module. The cash when do you think the platform message truly cements itself in that market as it currently feels like the wild West and then has the pricing environment has stabilized there at all.
Great questions, yes, the pricing has stabilized.
We saw tremendous pricing pressure and the last is clear with the emergence of few competitors, who are willing to do whatever it takes to try and dislodge our platforms our solutions.
It's fair to say that pricing is beginning to stabilize I think what's interesting is we're seeing customers come.
For the second time around.
And start looking to platform I think the first wave so far and there is still part of customers showed that Australia is still very module driven I wanted to see SPM solution I want to see NFS solution and I want to look at FCA. So you'll find that there are different people in the customers organization or responsible for different pieces of the cloud security.
And then they are trying to look for best of breed kind of like replicating what happened in enterprise security, but as soon as this chart, putting big deployments our scale of any kind they have to start having a platform.
<unk> told you in an $18 million deal for platform for a lot of SaaS company. We don't have every large gas companies, which upon our platform absolutely every large SaaS company media platform because they have a different tools that they're not able to stitch together. So I think it's going to be survey.
Or sort of recursive journey, where we'll show that will land and some customers some customers on other people will land, but their modules, but eventually each of those customers astragal rational conversation. So we're sort of focused on our platform story, we're focused on making sure we make our platform more and more robust I was at a CIO and before just this morning.
30 of them there and the first question was what is interesting you guys for Big data security posture management, how does that integration to the following five things we have running in the following five things and talk to each other.
Thanks, Alright. Thanks for the question Joe next question from Gray Powell at BCG, followed by dental and in Cleveland Research Greg Go ahead.
Okay, great. Thank you very much.
Yes, so maybe a broader question.
It's pretty clear that the firewall space are that there's headwinds across.
The firewall client states this year impacting everyone.
But youre still guiding Q2 billings to about 17% growth.
Your closest competitors guiding to minus five historically, you've been fairly correlated with them.
I know you can't speak to their business, but can you talk about what's different on your side why you are more insulated as it is it more of the Mds portfolio is it data center exposure is the share gains is there just anything you can kind of help us think through those dynamics.
Yes, all of them.
Sure.
I'm trying to I mean, I kind of in process, which competitor is talking about both okay.
Yes.
Look we are in multiple businesses and our firewall business as we said on the hardware business, we see that 2% to 5% is being where the market is and some of that we achieved.
The first one that we achieved through our own customers expanding some of your achieved through replacement of other People's firewalls.
The last I'd say 18 months, we've been very.
Diligent about making sure we normalize for the effects of backlog with supply chain and that guidance into that thinking and you see that in our numbers. So I don't think thats going to change much for us I can't comment on other people's billing variability.
We just saw the impact of billing variability for sure our numbers this quarter. So I'm sure they have their reasons within the variability.
In terms of SaaS as I've said, and where we compete with a different set of people not with the other people we saw 60% growth this quarter and we have visibility to the pipeline for the rest of the year, which gives us comfort that that is there is business to be had there. We told you what X line, which is again a category, which is more on the soft management.
Space is a different set of competitors.
It's a different set of competitors and then cloud security where competitors more startup. So I think the portfolio allows us to look at different growth rates in different pipelines across the spectrum as I said the demand function is not pointing down for cyber security across the board. The only thing that's changing is people, saying I'll do a two year one year deal a three year deal or a five year.
After a year later you finance it for LTE area. That's the only that's the only confusion youre seeing and I think if you do.
All of that in the market you figured out the underlying growth rates.
Strong or some people in certain categories.
Great. Thanks for the question. Okay. Thanks. Thank you follow up our next question comes from Ben Bollin, Cleveland Research, followed by <unk> Kidron from Oppenheimer go ahead Ben.
Good afternoon, everyone. Thanks for taking the question I wanted to piggyback great Great question, a little bit when you look at the underlying products revenue.
How much of that is physical appliance versus the software form factor and then.
A follow on would be interested in your thoughts on.
How the trajectory of branch firewall looks over time as customers adopt more BMS and SaaS fee to get that scale.
Thank you.
So let me let me take the first part of the question I mean product revenue and cash flows that zero to five is actually across hardware virtual firewalls and another software that's counted in product revenue, we talked about that last time then.
It's very customer specific in terms of what their actual needs.
So again, rather than trying to pass through each of them I think it's looking at the aggregate, we'll feel pretty comfortable in that zero to 5% rate questions.
So software is about 30, 35%.
Perfect.
Quarter Alright.
You can see that in our gross margins our gross margins continue to improve for product because software.
A higher gross margin product for us.
And then I think your second question was around what is what is the impact of this on the branch deployments.
Theres really primarily to the two models for the branch one is.
SD Wan only branch that tends to be for smaller branches, where all of the security or just about all security moves into chassis and Scott delivered in the second model is a next gen firewall typically with SD Wan Bilton rash, which is still often connected back to SaaS for global network connectivity et cetera.
So the shift to software and SaaS he doesn't.
Replace the need for the branch to have.
That local intelligence seem to be an extension of the customer's network and also an extension of the network security posture Zero Trust posture everywhere.
Thank you.
Next up <unk> <unk> from Oppenheimer, followed by Patrick Hogan from Scotiabank go ahead, hi, Thanks, Walter if I kind of just.
Not sure I got the answer from Ben's question quite right on hardware can you tell us exactly hardware and what percent of revenue that is and Cisco in conjunction to you right. Now reported also results and they've talked about they've significantly pulled down there next quarter guidance.
In the view that for the last two or three quarters, a lot of hardware was sold but not installed and so there'll be some digestion period in there. My question to you we use sell firewalls, how much visibility do you have into how much of that is actually goes and sits on the shelf versus actually gets deployed in the field.
And so you still have risk zero blind spot here, where you might not know exactly how your customers are handling hardware firewall hardware and.
Could that catch up somehow as our business as well.
Okay. So I don't I did not listen to the Cisco call because we are here.
Even if I had to time I wouldn't say so.
So I don't understand so very large hardware business remember auto is a small part of our business.
We only.
We only report in revenue, what we sell and shipped to the customer. So there is nothing if it's sitting on the shelf at a customer then.
It's still so from our perspective, yes.
I think it's been a little into it but do you have.
Special again installed enough yes.
So every firewall that is deployed has to be registered with us. So we have reasonably good visibility into firewalls that are sold are deployed at any point I would say, it's fair to say there are specific issues, where customers may have bought an extra firewalls without limit to deploy them, but there is no I'd say there's no.
Uncharacteristic or different activity, we've seen in the last three months that has been away from the normal. So if you don't have suddenly the last one a lot of customers don't want to borrowers I think.
Im going to try and guess, but there was this hold backlog situation in supply chain program, where people may have bought ahead, because we are expecting supply chain prices to continue now they got a bunch of stuff that order sitting around that they can deploy it in October where we don't have that situation. We never went down that path. We didn't hear a lot of backlog we ship.
We never went bust.
Six of shipping in a product. So we didn't I know that in the industry. Some people were up to one year in terms of shipping backlog, we a couple of weeks or back to $4 six weeks ago.
Really is not an impact for us from that perspective.
So I think that should give you some better sense of.
What the spread is we have reasonably decent.
Decent visibility into our pipeline.
Up or down on the margin, yes, but nothing as substantive as you might have seen from other people.
Thank you.
Thanks, and we'll take our last question from Patrick Colville at Scotiabank Patrick go ahead.
Alright, Thank you Walter for squeezing me in and sore throat. So some of it like Jason Statham.
So forgive me for being required.
Clients.
To me to standup metric was the non-GAAP operating margin, which was 28%.
Typically <unk>.
Like the low watermark for margin, but based on your guidance, it's actually predicted to be the high watermark.
So I guess I.
Presume tomlin, and degen going to be dilutive, but deepak are there any other puts and takes.
We should consider around operating margin.
I think I think you obviously talked about the <unk>, which is part of the rationale for the annual thing. We did have some expense expenses that we expected to incur in Q1.
I'll now come later in the year somewhere around the marketing areas as well, but I would say, it's just normal course of operating business.
Fundamentally I think I think taken as <unk> explains the majority of the rash I will just say on a year on year comparison.
We did have.
Hiring.
That had a different.
Level.
Hiring activity.
This year, it's a lot more.
Normalized in terms of how we're ramping so there's just a little bit of a factor calculation and there, but nothing really out of Danone.
Alright. Thank you Patrick for your question, Thanks, everybody for participating and with that I'll pass it over to any cash for his closing comments.
Well. Thank you very much again, everyone for taking the time to attend the earnings call. It.
I would be remiss, if I did use the opportunity to thank all of our employees.
Ross the world.
And the ones in Israel, especially given what's happening in that part of the world.
Also wanted to thank all of our partners and customers for trusting policy that works.
Sure.