PANW - Earnings call transcript Q3 2018 | Palo Alto Networks, Inc.

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Operator

Good day, everyone, and welcome to the Palo Alto Networks Fiscal Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference to Amber Ossman, Director of Investor Relations. Please go ahead, ma'am.

Amber Ossman

Good morning, and thank you for joining us on today's conference call to discuss Palo Alto Networks fiscal third quarter 2018 financial results. broadcast the the website Investors being be and at is on accessed section call live web over can investors.paloaltonetworks.com. This of our Chairman newly Kathy on Chief President; Officer; and me today's Palo are Executive our McLaughlin, With Alto Officer. Arora, Networks call Mark Anderson, Executive Chief our Bonanno, our Officer; Nikesh Chief appointed Financial Mark and announcing XX, This morning, ended the April XXXX. fiscal for we issued our a third results press release quarter

online on release, the If for it our fiscal you points call, the modeling you XXXX. copy to forward-looking like regarding the like course make guidance including statements, full conference during year website. would can our fiscal remind a of this management that fourth would will and and financial statements We access you of quarter

results representing which the and as differ you these update cause we opportunity call. not and this operating no and of actual them statements products statements These shift products by of and forward-looking Our to These the our and uncertainties, benefits timing in in market which control, our trends anticipated metrics, today, materially from apply number involve on results, rely obligation to should our these and statements. some are views a and could demand certain of as beyond for and those position financial mixed subscription new of subscriptions; forward-looking risks and seasonality. competitive undertake and future, statements offerings; after

and note basis X-K. financial with on have Form that we non-GAAP been on posted a minutes SEC on refer a filed to are the Form our XX, expressed on website could the actual and XXXX, quarterly use XX-Q charges. For cause results and to of description filed certain Also, ago call on to this our differ, certain a adjusted exclude our please on more detailed that release factors measures SEC with few earnings February report please

on the non-GAAP these you located financial investors.paloaltonetworks.com. Conference will provided supplemental be our under San we XXXX on of reconciliations formal Mark. in to Bank turn that in our For we the Stock information Chicago. I will Wednesday, periods, Global financial Francisco; in section be Wednesday, our completed June inform Blair have of Quarterly financial We And like will X, with And Growth the XX, once over measures in Technology GAAP XXXX William to that, Results. website and measures Relations posting historical America the June website to we that call Conference we've Investors Investor found them of to also be would finally, participating in at the remarks, can

Mark McLaughlin

thank this XXXX and quarter everyone, morning results. for our fiscal Amber, you, you, for third joining Thank us

succeed our in fast-growing President brings proud supporting and to to on who's congratulations. Nikesh, X global of a months strong ideally that for be abilities our company mission Nikesh share next Vice of for Board of all found operating leading very years. the Nikesh, team Google with security SoftBank In and of of the plan I'll transition, Before Chairman with Nikesh, of the by will at quarters His large several CEO getting to journey as company as succession the scale results the start run at after the who team past our his to incredible organizations. as accomplished has leader the of well rapid experience I'm suited footing quarter, this Business I'll time, and team, take here the the the immensely Chief Board company welcoming as Directors positioned I've having on week. the the of Chairman gains rapid the like the over nearly leg demonstrated I'd as future. a the in Directors for on is had company the experience with of Welcome privilege to we team me been working with and age. platform. over life of well and Nikesh its in very digital to the the market coming rates protecting as Officer with of and the working assist and way remain the and the

Nikesh Arora

had all Day I is the of to and get privilege job, This growth the The I that can see is over months. me excited the my very Palo clear cloud the was we're more still enterprises. so it fortunate It Mark. spend, of last to stages impressions. people. Google the the Thanks, the and company, board, for about about in me team, for about the the Alto enough in early and at I the revolution the there. I time getting more company and X space, participate few know I've early on the are talk the and minus pleasure to scaling

we I have similar very opportunity think here. very, a

I of think is one cybersecurity most there. exciting out spaces the

be here company, exciting for is truly me, able Nir, built. firsthand you, unique. have even what to and This is to see me, For more the team

growth Your capability customer quality have years. over seven you of the is offering, of centricity, execution well the that as as last the testament your built the

have and Networks the work become collecting with great company's the space. the the of honored team Palo Alto that right excited build great a couldn't part security towards and common a Networks you I more people, Palo of work Alto as leader to to cement be in leadership position the of evident motivating to team members with mission companies are those and are by the me, the on people. the to done and me For it's values, set built them good continue that

Mark McLaughlin

quarter. that, were basis, delivered again. share XX.X% to up third with Welcome On I'm Nikesh. XX% quarter. turn earnings the non-GAAP $XXX and grew $X.XX. strong to very million. million. margin we Billings $XXX.X per on QX operating again, Thanks of delivered we XX% a was pleased the to With results let's our year-over-year revenue Non-GAAP

We landscape significant for and lose threat their due and platform trust global resulting rapidly consequences our demand that evolving seeing are to security the businesses the of customers. to strong ever-accelerating operating the

our market advantage to of The had another continue now quarter As serve the new around increasingly at world. show, at rapidly, growing and of share XX,XXX capture additions leverage is pleased and scale. ecosystem platform we evident. approximately are our customers high We results our competitive large is rates to very and strong customer

customer continue wallet our rapidly share addition we customers. existing robust In to new to acquisition, also increase in

in in of in this the purchase which a Our a top of lifetime a increase spent million over QX, of XX% fiscal all value quarter, XXXX. made QX minimum $XX.X XX $XX.X customers, million

and existing delivered over new PA-XXXX endpoints new in the PAN-OS their Phantom, Some in XX include over and and and cloud. on competitive expansion GlobalProtect secure tens purchases consumption, a of previewed of is displacements X,XXX Zscaler EMEA's against to months, competitive past Framework Proofpoint to become largest education cloud network, proposition to in PA-XXXX our of most and of service which at introduction for solutions; system us examples interest X.X allows including operating which the functionality deployment as service, startups a a just for standard we our the defense Cisco showcased with changes against Customers of cloud-delivered record Linux to become superior the price delighted a role cloud opening prospect workstations the model elements X,XXX the innovation stores recent around thousands a in more appliances X.X, platform our manufacturers and a Splunk Traps evolution, These as in Application and hardware to partners addition to U.S.-based the momentum release security, vendor and can and security ease allows a of annual pleased well marries drive customers. ServiceNow, Ignite and and our Check to like the the SSL in the retailer. on in our of to host of decryption value become in performance, Ignite, security March, Traps entire new as compelling cloud-based center consumption leading, of plays utilize Symantec standard serve our major to endpoint Check sensors the helping acquired, which the highly our also the HR customers sales At a of as the the at the health applications. crowd ruggedized brings and and management We secure have which Framework. in customer The our User the hospitality than they driving offer is applications. addition is now pleased the the increased network, fundamentally very endpoints, large PA-XXX, platform reach customer continued engagement provider quarter entertainment recently and as securing Endpoint Framework security in innovative high. to wins security public leader Anaheim. critical Application of well the foundational Customer competitive leading a operating Point win in announce security and Application for capacity, Application care were enforcement and for capabilities, the base and the Framework. as capabilities, we both while largest in statewide of security series, new which Point The of management. the Microsoft, and data providers; easier system the to as In U.S. use benefits of were collection global for performance log U.S. companies, new points both day-to-day including replacement over level cloud support, Advanced with Cisco well such Also, industry Conference on And we customers were platform and cases XX in to offering. a is wins and higher as strong now of Protection third version customers beating one one

identified with specifically and security vendor. of validation rating. protection and as favorable vendors a independent and In leading the of see recommended threats Traps exploits, Labs' report blended Traps evaluation rating effectiveness and report We looking evaluated April exploits momentum continue false to having against and a Traps most zero strong Endpoint cost receiving garnered market with evasions Traps Protection overall Advanced positives, of total are when endpoint NSS the XX offerings, as XXX% different a Their malware, of variety ownership. evasions. at weighing blocked

detect to visualization detection We will across our thread in data also leading stop collection traditional greater feed Logging to level capabilities running endpoint and Traps. response and approach beyond into Secdo of acquisition the and also to brings entire in applications platform. Framework Service, April. EDR precision announced Secdo Application goes Secdo's cyberattacks the our unique methods giving

monitoring storage our we applications With and and superior and have are do security, of to applications For reporting reporting. compliance our for can protect that how cloud platforms understand combination now security. of and must detailed an security, offerings. we're security the achieve deployments, which used in Evident, produce shown through cloud and through cloud we posture in VM-Series, infrastructure better inline, a deployments. we being Traps validation you public overall cloud provide protection Aperture continuous the quarter cloud in all and API-based Evident.io, cloud leader environments, host now compliance And acquire excited public Customers and deployed all

other to with to enhance in customer interest the from also We've monitoring Evident, in consistent of will the both good applications leverage Application traction very be We of already data able the Framework. terms pipeline. effectiveness collected seen and Evident's

drive transformation most and our needs helping security security customers solve are through transformation. digital We their pressing

excited turn through operating mission place position and security team trust and to competitive day. market who to their the I'll And our our call and of we're into again are XXXX, life age thank our for total to platform. that, want our every driving of we in growing in addressable end the our work digital and Kathy? hard As security, us with advantages the in significant partners I once head Kathy. protecting leading about of market fiscal and we the the for growing ongoing dedication their over customers the our way our

Kathy Bonanno

Thank you, Nikesh. Mark, and welcome,

a million to look to of and are $XXX.X XXXX, In with By SaaS-based prior existing year-over-year third $XXX.X Americas, QX revenue total periods customers the to are in million. the as to once like earnings $XXX.X the breadth to revenue for fiscal in with I'd In year. grew XX% revenue million total, the market-leading subscription all for XX% XX% billing, support our geography, XX%. compared margin of $XXX.X otherwise. figures revenue the revenue top strong adopting rates security accounted pleased stated to deliver offerings platform. combination And and Before except year. we across positioned of of in XX%. increased well to the Support results. are with revenue grew EMEA QX million, the drove share 'XX, XX% of robust and growth non-GAAP share our delivered prior revenue line we XX% increased APAC. we product In XX% finish grew increased $XXX.X We QX again per revenue. and year-over-year XX% million revenue I'm full growth subscription start, in a and that total of QX remainder new expansion financial and operating growth both year growth. operating and of quarter, compared I unless note

$XX.X QX a of million XXX or Total an of increased year-over-year is point of Non-GAAP $X.XX GAAP increasing for M&A. net $XXX.X expense of billings in share. basis an includes million $XXX driven XX.X%, third the total million XX.X% for $X.X QX a and XXX estimates We share. operating million by acquisitions diluted which to XX third or of sales was XX.X%, the The XX% basis with million to in loss a and the former to was employees. Gross were Turning company's declined at basic to million expenses end revenue XX% marketing. material at of ongoing includes points last diluted primarily or to expenses. acquisition-related third and $XX.X On improvement and the related quarter. $XX.X XX%. XX%. quarter, net basis loss compared $X for in margin quarter updated points due X,XXX leverage margin per billings not year-over-year grew billion, year. This headquarters were of increase basis income announced the decline ended approximately revenue billings, Operating $XX.X the to was recently quarter and of associated $X.XX per million QX a deferred revenue, increase operating sublease

cash flows cash consideration sheet operations the numbers was XX% April into million, cash ongoing operating year include from QX billion, for the at DSO a We $XXX.X with takes flow expenditures equivalents finished and operating $X.X XX days expenses. cash cash period. $XX.X was and million million. XX%. quarter. margin Free $XXX balance XX.X%. of to Turning for cash which approximately and $XX.X a from million account the of items. to outflow $XXX.X of of These up of were during million of M&A flow approximately investments XX in acquisitions decline increased related and acquisition-related quarter prior costs Capital cash days,

forward-looking modeling and guidance earlier. Amber this guidance Please type information the to now referred to Turning points. remember, of includes that

to be revenue of to $XXX $XXX in plan investment, expect million we approximately million of XX million, an in XXXX, increase fourth of to $XX $XXX quarter million, the XX% to invest to million, EPS XX% We the $X.XX year-over-year; be year-over-year; XX% to year-over-year. this range an million related million XX per With to $XXX $X.XX XX% QX of to to $XX shares. acquisitions. XX% non-GAAP share in fiscal increase $X.XX million the million an we our to to XX% or to revenue of $XXX recent range $X.XX $XXX using to to increase be to of expect to of range million between be billings the the in For range product

to growth $X.XX be of to revenue of of $XXX in be of the year-over-year; to to we million, full range in to million. $X.XXX EPS revenue the growth growth billion, using acquisition-related $X.XXX to XX% the which $X.XX XX% expenditures in million to the our XX% range billion, product billion investments be year approximately capital between And $XXX XX% XXXX, to XX% fiscal approximately non-GAAP expect billings includes in of range be $X.XXX of fourth expect to $X.XXX the range to For billion and the XX representing we representing million representing in million XX year-over-year; $XXX be to shares, quarter. continue to year-over-year;

conclude, provide like points. additional I Before I'd to modeling some

the EPS our assumes be of end the of at lower gross includes Our acquisitions that non-GAAP range. guidance margin and will impact recent we our

margins we with associated includes Our QX full non-GAAP effective flow expected expect free $XX tax cash our year in to be rate XX% tax rate million be to will XX%, XX%. be year which XX%, of And non-GAAP cash the and approximately expenditures acquisitions. range approximately of effective is to fiscal

we cash for of to expect XX%. acquisitions, questions. free open like XXXX margin the year XX% to the for With full Excluding Operator, poll please between that, questions. fiscal I'd flow call

Operator

Morgan Instructions] will with Weiss first Keith from come [Operator question Our Stanley.

Keith Weiss

to messaging playing that how operating durable separation? a creating you think of to their seem what's sort a sustain of be to real on quarter. the even little core pleasure is something and and I a see you sort performance separation you basis, security across Palo seeing replacement not got onboard. you peers is you like in in talk of on high-level going-forward who Mark, in you thank guys. a your and and struggling really haven't a platform Excellent, Alto is guys quarter. it's peers, while. so, product go. Very what Nikesh, that of in to the about question does and from more welcome a type in around the growth been any into really solid guess, board nice markets. working between the XX% seen something But with of you But bit sorry it's we kind terms that us your seem Can it to degree we're growth

Mark McLaughlin

I kind very really Well, it's security for can the Platform operating company, understand platform well. see, us for and concept the resonating the to the strong. very growth Sure. as is growth outside of product thanks well, important I Thanks, appreciate words. is company And as Keith, is very whole that. strong. you the inside think

get prospects As third with, It's that. less problem and about we've the a how environments. their with about customers we get with significant, three in talked significant answer do almost the resonate before the to with Framework the lot. across really that speak evolutions, automation a now, board being complexity you the one speak do more right like with Application unanimously the They you we it an how

of working the getting and Framework, to entire purchases hardware, underlying as as across Networks say do third every we're the with the platform in But to I most positions every of see make essence, well they for need the the realize you driving Evident the would on system it single endpoint will which that positions lot it basis, enforcement confident. all the we're concept here in stand-alone the that one Now of become operating the of standardize cloud. can very is from be we well the the the that head very on And they, day and order of of Alto at release well win points, doing me, a think – in them call and all across. the new customers, things seems that on to I'll at Application I centers best consistency from sure spends the which releases, team of Palo value in or that a very data time course, and head to we a is of that those week aspects. positions the evolution Traps, in all the And acquisition, to the achieve network, increasingly that, who important version and the the

Keith Weiss

the it. if as has Mark, Board, security the sneak company. is got could leading could board much a position although if leader nontraditional you Chairman great Got how follow-up. a into a Maybe very having new as in what still us – Vice Nikesh, not be give And leader, a pick. I background sort of a in up of how one some comfort definitely visibility security-focused your a as security the traditional

Mark McLaughlin

this. the about over was And will let thanks me the and we several been security for had the the the be hurry us we folks professionals board That do When quarters with it's as I the the the thinking, or saying change we want to we I would at be the like. last at and look sure. the Well, focus, in time, the continue about company, find I planning in basically question. right X,XXX-plus – seven There's it. have to of future what the right Lee course, no company. said past right starting about time. team. talking amazing so for was clear that, person if make years succession to for They're so. best with the in security and Yes, we at would does look our world, Nir run a company other

and We which some Mark and Anderson who fantastic. very to committed in folks best company, René the operating the of is executives are have

security know and a perspective. we something So is from DNA genetically

do support that we laid a very of think required is security SaaS. that the lot out. today. to it's heading about from the that massive datasets to that platform it look that those, to direction the as I with It’s operating direction So with cloud, like a It’s to infrastructure in forcing security to five company. we’re with and I just got in the company's years clear say garner analytics, in more going would where start

large-scale with lot that informed accomplished not people those have in also There’s There’s that of kind be which for somebody the kind characteristics. a the succession those who’s experience. pick great, who somebody a ideally leader, business of of a great that lot has culturally really of who world. platforms not have fit a planning, experience our and So platforms should

across with laid make We’re I him had fortunate out. to months all alignment find just few that Nikesh last to we variables the and those sure spend

process, that So Keith. thought really the was

Operator

Fargo. will Winslow question Wells from come Phil with next Our

Phil Winslow

move-up Vice Hey thanks your at question. congrats my to back known have for you taking Mark, again VeriSign. I for Chairman. since my guys,

been executive, impressive a super only real not gentleman. You but a

on your role. So been new fun, and it’s congrats

Mark McLaughlin

you, try a to to Thank Phil. I’ll Yes. continue gentleman. be

Phil Winslow

it out pricing there, well. you’d wins environment what right. think from you a across lot the been sort displacements sort a All Any the on several of Obviously, just you about off competitive the competitive question Pulled the When noted quarter. just and Yes, portfolio. that of that, across there? there’s you conversation perspective, particularly a about sort of seen highlight of platform? out have just changes

Mark McLaughlin

Yes, sure.

Let probably first, the with think sense well. and me always of competition good massive in been pricing. perspective is commentary very competitive The a that market. time take has competitive of I spends seeing it’s a Mark He the have we’re change as no field in What some the a amount from in pricing customers.

improved match increasingly of operating as interestingly, desperation I the able Nobody the we being cases. value in discipline-wise being that. And done having to out a very think that sequentially our card by security improve nice lot go a first, third, in what perhaps platform sell job and quarter-over-quarter they And – of have doing price can as the and to is business seen year-over-year. unique. again in discounting very we’ve

that any you sell all platform. we of value face have do strong the comments? the competitive continue in of pressure, pricing So the to Mark

Mark Anderson

Mark it’s Anderson Phil, Yes. Hey here.

with hardware are every X kit, the making we’ve competitors when them on being with we’ve innovation help replaced, the features that’s we of Alto price announcements, is very something months brought product performance-wise, – talk think distill platforms paying think platforms to proposition. got I last customer decision that of we’ve that form think, that I get the what into So hundreds sense for the Palo factors XX there. importantly, the of think they’re into for compelling Alto for Framework, customers most we’re or nature consumable times a Networks into I a for when the taking proof charging third X offers Networks of evolution, a stuff. the compelling to future But where security our kind value the Palo And us Application think security takes I their able I consideration desperate I that very

Phil Winslow

the where the just for here. stand of Got And what sort we, could so of, I milestone there? sort follow-up in toward outside of next if App on you my Wondering a actually grade success guess, looking you sort far for should it. in, question And give of Framework the from a point development. us

Mark McLaughlin

great Yes. Phil. question, It’s a

it Framework that the So me is course of start apps can about Application let things. over on an last announced with third the have The real is sure a easily ago, of One a today. and Framework create the first, a where progress We making parties is. very of number year year lot made framework. it the into from App perspective,

a Conference collected a fantastic last over and as And of previewing who applications, the just the companies liked stage XX there of there far were customers Logging there The just Ignite and saw there. the so week, had them that really, their very of but applications, be was successful and their release, we had allows second was which User right thing launch development really to the X,XXX Service, which number applications all folks sense give to We data highlighted on between we demo also in workflow the floor. well. was only We that. not the

also in August. Application We the could Framework be that announced production-ready

top platform so driving a the than successful success Framework, across with actually in driven traction. the future, real you about say, customers, which Application in of is definitions you’re able have when the that in think of say good of of a would very lots said there’s think we’ll that the the So onetime applications let’s be lot towards, before, and soon, do that framework. somebody use the it how me this itself. value people would platform asked be more And platform I to I

time, from the that the applications value lot customers on running framework. expect would a top of of we So over get will

Operator

We’ll with go Hedberg next to Matt Markets. RBC Capital

Matt Hedberg

on Hey the you questions. start role, the been Nikesh, businesses to the certainly that see working was well. company. my impressive. to for you, But It’s you congrats your it’s Nikesh. certainly my ability congratulations as taking Obviously, two. Mark, I’ll bring guys, mentioned over years. great offer to with I’ll excited scale thanks you Maybe minus Day to Google what with And at

You those to mentioned some with? any Alto Palo insights cloud due you think environment? some in are positioned a is I’m And well came diligence, you public there in how are away you your similarities when did what of curious thrive similarities.

Nikesh Arora

Matt, you, the you thank Thank congratulations. and asking for your for question

subject to so As two, anything I change. Day minus said, I say is it’s

there no that cloud So in I see think question to digital the we revolution, Networks’ we’re few think of company line and mind the life on that with sort transition. Palo every cloud And to make I anybody’s in early it out is still in the are, keeping decades, will in having and that there’s going mission I almost safe our early think next transition. impressions Alto – preserving

is one Networks people Framework to sort people to lot learning. go bring being the best-of-breed have going huge of of we apply migrating of or just empowering help datasets to brings keep to notion about are where machine sort that can to transition, we Mark amounts are with the sort who to customer transitioning this and AI, this a of data, powerful. and talked of participate of created, to As be a of going solution And Palo end lot an Alto to we Application a extremely extremely that have track

to impression product being early that be take team those on areas that company path able going to along with fundamentally exciting. sort the I think of working is the that’s that my is

Matt Hedberg

That’s And as a follow-up. then great. maybe

bit a seeing you some your to competitors hear you. you be the Could – sense that things competitive more called Mark, continue And a about there little remarks, GlobalProtect Thank win good talk a I guess, pricing Are helpful. there? there. in on GlobalProtect. prepared landscape even some just out nice about legacy We And would it for there? you’re better

Mark McLaughlin

well, right? case, form hardware, of customers do So as is Yes, operating you’ve And have factor it’s do mean, we ensure have the can with sure. cloud big And what cases, part appropriate in know, course. you service hardware. the hardware for us GlobalProtect over I some we GlobalProtect our and – seen use time, platform, that the security as small Matt, platform appropriate we – all of use

agents We have endpoint. on the

applications. full-on next-gen pricing machines price-wise. That’s reduce security API want the and important We reacting competitive branch just it From for to at we traditionally SaaS customers cloud GlobalProtect And that. very hooks you would in what with have the network the at MPLS and cloud costs, where and well. call ability users as firewall are have service, point virtual offices, capabilities a for cloud, perspective, for places mobile you to well have the we’re your

consistent success be the really As on with platform, early good seen being as because in everything we helps head-to-head we’ve across service. think cloud our we can with of also it And are GlobalProtect we a platform basis. value well, the it’s best and

Operator

Our next Jaffray. question Nowinski from will with Piper come Andrew

Andrew Nowinski

been All real with right, thanks. working Congratulation, it’s Nikesh, And on Mark, over years. appointment. your pleasure a you the

the for market in cloud you maybe color always There’s seeing bad trends – us you’re the Just virtual a larger move deals? Can view side maybe the demand been Virtual the to on how on and a just firewall that any they’re some give the question security. is somewhat driving on on firewalls.

Mark McLaughlin

mentioned the And is the a of little as the to the in much inevitable. Nikesh Yes, good actually spend small. how When really cloud and move It’s is you look earlier, it’s today, of it question. sure. pretty amount cloud a at IT

this. as factor very think We’d form that else into think, well. And is to see additive people existing we’re which the protection going along that, platform so in and the to far. going we for And is That’s at offerings not to future case innings our I be the back our business business, portion the part continue inline that the right the the the expect only continue we as protecting way, been, right cloud. And So VM-Series in – most everything that’s to the because in buying seen use the VM-Series, would we’ve well is but to grow for of well. very again that business in fantastic. to early expect we customers of going case, the

Andrew Nowinski

XXXX just had February A cycle. given lot in the cycle a that’s year? us said, and growth driving new Series it’s of it. you give a the in as then on out to know – an the appliances with of refresh maybe product just could market, the where this the And got automation, last you new much contributing we’re the I regard refresh and XXXX But were Thanks. specifically at Okay, of think lot quarter. wondering revenue how platform you update from just you

Mark McLaughlin

question. Great Yes.

you base the the serving size the customer nicely quarter-over-quarter, see the customers to As cohorts so XX,XXX over time. over of from about we’re today, growing grow very time continues keep can

becomes expect capability As get these past, very continue fall we’ve also And drivers to large a if the as the come side as operating that cycle customer business, our years reasons cohorts really if in and the into think, by giving hardware, we’d system, said not sets already only refresh but I contributor three would future. new latter or in in us the an of increasingly The the in the to customers hardware not into important. and refresh to are the business, categories. they’re they’re the bigger

first the with goes value driver. you that’s I who think expansion opportunity can biggest many the up are the lifetime is most the customers where The creation prevalent see we today very – and think significantly, so

We also It’s customer very high. have net new acquisitions.

well continue be refresh, will us. you to certainly a very then quarter, As to to over from helps. is the as continue can think grow performing see for is case the going And again time. that that’s which the We and third contributor

Andrew Nowinski

Great. Thanks Mark.

Mark McLaughlin

Andrew. Thanks,

Operator

William Ho with We’ll next Jonathan go Blair. to

Jonathan Ho

with the with Application congratulations wanted maybe of well. seeing you’re as think as about that start my just you opportunity up of revenue that a to maybe have the some and out Framework how some I customers me well. new signed the Let commonalities echo from and that

Mark McLaughlin

through should with question. the of deliver the these is that in don’t to as is there collectors over applications described of be, a the how working I it the Application very themselves, flip we’ll push-pull with developers, footprint platform, push cloud with Framework aspects, – as to a growing over on and our it monetize since we we this foundational over already but time, And right. vendors that And positions. inevitably going right as think, the a someday, see of ecosystem do to focus perhaps healthy the transpires Yes. enforcement not then the us, we with security Jonathan, Framework. the the of see what which also data be view aspect their would Application value We pull, now. I ability top really would The We and started their network, great plan have just of that how customers also including of main think is of And this. complexity a reduce we time. in of evident and is only all less purchases for right? very resonate simplicity all the driving which capabilities fantastic much

nicely So that’s us. that’s the for and it’s on those in the all cloud, very on the endpoint, growing are network,

Jonathan Ho

you’re the you’re with here little relative Secdo to bit and acquisition? that acquisition, And what capabilities what adding addressing and new Traps challenges maybe X.X you then talk a it. Got can about

Mark McLaughlin

Sure, yes.

about think two there’s think ways I that, Jonathan. to

Traps. brings capability the an one The That’s first to that capabilities Secdo customers, one. is most important evident and probably definitely, EDR to

to have and way ability Secdo with unique very that We EDR some visualizations. is important. is thread-level that capabilities believe the our unique that does So very

back to what – early come fiscal Traps sorry, that’s with early we’re into You’ll going calendar calendar that see capability. do XXXX, I’m XXXX in that the and

the taking to EDR capabilities cloud because but platform, that data endpoints, entire we EDR don’t XDR, somebody know simply be also just not Secdo and well. the unmatched just and get applying were perspective from everywhere an there, but the size going you in best or platform, capability can This the all the about talked have concept We it think that’s we as on endpoints. the In across the security that, we you I and at meaning of deployments a if of across so addition to capability Ignite call had locations. also so not entire network

Jonathan Ho

Thank you.

Mark McLaughlin

Thanks, Jonathan.

Operator

Goldman has Sachs Gabriela next Borges question. with our

Gabriela Borges

for Maybe the maybe morning to in time XX%-plus-type and growth Good as congratulations for we subsequently the saw questions and back team. Anderson and was product bit a followed little by a The of Mark thanks and that well. taking Kathy XXXX, slowdown. were last

through thinking year. Kathy. into question going how the follow-up at comps So next about tougher And a a you’re managing is level for high

investing prepared just investments acquisitions, you’re little remarks Just on the on in. you. the in in the incremental a Thank more that what you discussed

Kathy Bonanno

very Thanks lot as strong resonating very for customers, we’re our is mentioned. product platform, customers, quarter, this is about pull of obviously, The mentioned, the a from interest platform the Yes, and growth excited side, as number. Mark question. both push experiencing the with Mark operating and security

a happy year. really products. lot share been think with So after that year and performance of We we we’ve we’re the of that opportunity, have share into market year still after growing

there’s opportunity and still that us for come. to years grow, can So be sustainable a of we think growth to for lot

we’re that’s now. obviously integrating of that working In coming of integration newly market. of so we’re case investments Secdo And that the our into making, incremental we’re terms platform, in off the acquired technology on the

sure we For have of making marketing are just both Evident for go-to-market a alike, overall plan and those sure right have we services. offerings great product messages, working that we and for the Secdo that making operational and on those integration operationalizing, plan

Mark Anderson

it's Anderson. Gabriela, here. Mark

think things. So I couple a of

Our customers with on team transformation field sales customers, quite opportunities going is both their as own digital journey. ones with business, disciplined in really that new especially after expansion well propositions are for as existing embarking

to a important with, gives the mentioned earlier. subject future of proof security them show to with but it like how I a it's to I really their expert matter think us approach, being again, the access consultative able regards type Framework, journey. opportunity in that we investments provide Application And to

large, by there. and out is cycles is architecture in our just telling by provide customers unrivaled security cloud us also, either customers hardware But security the think everywhere are doing, go. in endpoint, consistent just to differentiated and are our the think perimeters competitors I I at really that on-prem from what that come to and an providing approach

Gabriela Borges

Thank you. color. helpful That’s

Operator

Capital. Barclays to next with Kalia go Saket We'll

Saket Kalia

opportunities. are how Maybe might your here model? And you, pricing question. be you Mark, what from Framework on consumption taking the parts us for of that to to you're Hi, the give going available you both starting congrats work generally here initially in different for broad on Maybe several thanks on of other believe accepting I new August. brushes Jonathan's questions, related to can and any seeing customers Application

Mark McLaughlin

applications Application be meant Saket, yes, that's April, will – that perspective relationship means said pricing April, or clarify notes just best – August, to application say In that. I'm between provider is people good relationship The correct Framework From question. very the available a that perspective, themselves. is be the me framework. provider probably we I third-party a sorry, from the I'm will the production-ready today, I thing come when And the what through with right application to customer give XX August. sorry. that the is pricing the through

I we're From like our not position lot the pull to right is right market though, one that's have Palo that. do now data to So feature, like customers collect time, perhaps compelling beginning, Networks. but the a factor a lot. is the try seeing meaning on the because be to form that when of after intent you to have an what innovation more of deploy definitely of aspect, idea in factor will said, form like in And we'll it standardize of over business, the the will Alto now value, to able monetize nature the being actually which we're look don't to that. of have we think a lot to get in What they driving on perspective

endpoints on of the standardizing so are driver as that's the a Palo they think Networks, and well, increasing, the and our cloud Alto network business. I

I drivers the we're into see driver going think last that to driver that's for I but been of think continue and as a year. the well, lots other There's think it's that's a happening, future. I

Saket Kalia

for Maybe you, helpful. Kathy. That's follow-up my for

of you quarter basis? give You to any EPS in either might the impact quarter. broad brushes and Secdo that maybe Can revenue impact Evident any from or billings or the fourth annual in having the it here perspective us the talked on we're an have on

Kathy Bonanno

Yes.

revenue On the impact was the billings immaterial. and quarter,

and our for certainly capabilities products great We the both those a see the go-to-market hoping revenue demand lot Going forward, our offering. opportunity of EDR them. have to obviously, plans we to on plans, billings working addition and cloud, given from and of performance both we're and our well that going a service with security, endpoint good are we're as of be

Saket Kalia

helpful. very That’s Thank you.

Operator

Our from next ISI. question comes with Ken Evercore Talanian

Ken Talanian

some provide Nikesh, thanks for security Hi, within consolidation you potential the it's question. your for early, I of realized but the and taking for the initial sector? general on could thoughts M&A thoughts

Nikesh Arora

Thank for you, Kenneth question. the

the the some about I extent, you the to you to the need we'll not. opportunity over we I a product priorities until that the which going I and on offering to the part think it's like lot have sure that's make I a Mark inappropriate we understand fully maintain. with that but company, we Palo execute Networks, guys more table M&A to lot and where quarters, And set do continue for me that and conversation make have and substantive got to hopefully, of early I entire pace our used rhythm have Alto on sure thoughts see time if do to in of need a future stake because or on gotten then the to understanding I'm of spend what has anything

Ken Talanian

are follow-up, use Or a solutions as circle there office the just interest around GlobalProtect case of guess, cloud. in to I seeing hardware? Is instead applications? you broader primary And branch Great. using the back

Mark McLaughlin

Yes.

cases, branch, mobile users use is second as also on, a one seeing early is primarily, few well. again, We’re

both think are So those drivers. I of

to the We in to expect be future. drivers continue those

Ken Talanian

Great. Thanks very much.

Operator

We’ll Citi. go next with Pritchard Walter to

Walter Pritchard

question One, as what has I questions could year Mark, just on year QX. moving you’re think few then the seasonality thanks. And us think not we congrats had with you successor subscription has QX, about On well – just year. business here around how going side. wondering as mostly. your I’m the fill shape follow-up evolved. tell least one you shoes a a as about guidance at of the about providing And to But for been – finding bit looks Kathy. next next know into the a on Hi, that for into on

Kathy Bonanno

Walter. have seeing are into Yes, definitely and QXs with Thanks, we a Sure. that we being to And patterns terms growth seasonality I strongest would the QX. quarters continues normal expect our and business, sequential become our case, to and that seasonality in in be factor of continue bigger pretty sequentially seen QXs.

Walter Pritchard

attaching for think side, wondering, And you One, to on model to easy us the pretty Great. there. then subscription I appliances. the – pieces have with I’m two is

how some the looks out some a attach maybe there. you growth have side side, you is some the and you the for in just seeing nonattached? help time. products new unattached then three-year like, And You’re relative splitting products, attached Can continuation, had of subscription on a rates it understand and between acquired, us number

Kathy Bonanno

on year-over-year. run Sure. The $XXX was nonattached a fast, business about we Analyst rate, mentioned Day million at at growing very XX% growing

while remains smaller obviously relatively but of a so a business, XX% close of business. getting of our And small it’s overall it rest portion about our of newer portion than growing faster our and still – to about because the business the business, much

in And large just growing faster. of much so of terms numbers, law

and offerings as subscription Framework more nonattached, and that adding the more you’ll obviously that well. We’re are in see Application

The become also business rest very of fast. grow nonattached and our of continue the part bigger continue that will expect a is very business do well. we to growing so will And to business the

rate As XX% our was services you this saw, billings over growth quarter.

continues rate fast. small business significant business, the grow relatively because the a to to degree because business, doesn’t influence nonattached of rest very it’s And attached the point. portion, – at a it’s overall the so And growth this

Mark McLaughlin

could If the given growing run we’ve million, of quickly. point. one $XXX out the at end just other about Yes. very make QX, said I billings at contribution rate Kathy

see, that grow which think And that that against continuing thing well. I is up probably rate, is interesting very run continues And time. As a the well. with billings that large is over you approaching of base very it’s XX% the to can go about base as good, to

for it, – that’s very growing level a services security SaaS well fast business growing right? the So if network as business grow very particularly simply takes it’s itself, business in of security to contribution large time with being a you well. So think large the against associated about the and nonattached because the matched

Walter Pritchard

you. Thank Great.

Operator

Our comes with from next question Shaul Oppenheimer. Eyal

Shaul Eyal

XX% a seeing guys, dynamics onboard. not welcome into and you different Europe goodbye quarter, Mark, the than for congrats Talk strong for equation. to the morning up One us another literally, how in Mark, one strong Mark, this you’re outlook. Nikesh. bit in year-over-year. onboard about Thank there the little in on context the maybe saying have on that Europe, we Good Nikesh, still so quarter you. was GDPR play U.S., here.

Mark McLaughlin

Yes, sure.

capabilities take how hand for a from in came or over I’ll – driving He has I’ll cybersecurity. state-of-the-art ago. state-of-the-art lot the big particularly beginning. term it to little a there using is over avoiding a is back picture, GDPR, what that you interest a of while So do we just GDPR folks use Mark. this requirement liability capabilities,

the we that, which to of Mark, is customers, right to for And definition which probably positive that, a there's course, questions we capabilities. that which for very the platform, is provide, regulators. But you do you think a for lot plus Of that uniquely thing would are us, just? everything it here. do fits can state-of-the-art how raises

Mark Anderson

Yes.

I think Mark. nailed it, you

each EU, things Palo thought working there, what like the the fact with over us, the that the of heightens think, well for two as decades. the I highlight would Alto never have threat for in been than been share to that EU doing have they've awareness of different also to do GDPR as to government and intelligence, bilateral something last I countries sharing And think legislation agreements. leaders individual like like just threat Networks more open do I customers highlight

because quarters, lot So five of in our has invited really think little ramped group relevance countries, last the and I the of seen a or that performance. more. the Europe, a maybe you've We in to more conservative get in do four

Shaul Eyal

million doing software $XXX heavily a cyber security they Nikesh, XX about, a than ago. just down less years, to of big different knows seems be eyeing in months you're from think, DNA. Google recent SoftBank, I what It might afar, appears I in the the security be who security check reason that from invested road. requires bit for think coming

to Google, so I if being think done I you second, share – is think, company, us opportunity They lot with software before much, great your security your be that arena, security plunge by the phrased the Mark And a as the a the thoughts so also could observed the how you on end. Amazon, it tech point. haven't into could big Microsoft.

world is Alto. becoming So maybe the with just the second you Palo for crazy –

Just us security. share big how maybe with tech the behemoths view

Nikesh Arora

to Amazon and history fair think back realized to I was Enterprise now the it's the team, consumer And you I in with see say when first that, Google the that. enterprise. is realized first the privilege Google's And at working was of it for as a in of which part, slowly the to I big time, that, innovation, cloud a Google. realized the came of way had Microsoft's making the

the the charging to enterprises. into all with cloud trying ahead they're address opportunity So

they we trust to have great. other, people different all be provide have that's the can important an comprehensively all, amounts to how it offering across proprietary and offerings have. arbiter think look massive to around offerings, cloud solutions between they're for Having I the it security degree, independent take of at the these end that or given see somebody there's customer can and you some multiple need where who to said that, a they solution one these data that can team to

opportunity that's So big think out there. I the

customer. created, that need we're understand our cloud, set to going and these towards sure solution be given and of Given the to the their aspirations going vis-à-vis all are we huge amounts the make them end provide to we that aspirations datasets

that's the opportunity is. think where I

Shaul Eyal

Thanks.

Operator

come Our James. will next from with question Turits Michael Raymond

Michael Turits

fact of areas and Nikesh, identity. in thank in not you guys you're have expanding I I'll welcome. just some and the very the much. last everything so to come security still in Kathy. about of follow-up general, On let's then the M&A, a are there's that strategically products done Mark, How terms DLT, or large that you say thinking those Mark, M&A back for have Hey many quarter so? thanks very much in, question in you email, for maybe given years.

Mark McLaughlin

on at way. the very all CIO to for sure that in CISO Michael. or unique question, a in various very to Great we statement massive a they highly attack, second, example. terms an table aside if unknown for something the have you or threats of and security, threats When large Yes. meaning outcome the for denial you for we've we eight put can a focused outcomes, ideally is you known you're and That of least look service particularly choose or other to solve might think bring that's the stop been the enterprise, you solve like solving and and those lives think that if technologies broadly customers there in stop XX for The for technical how of we And And be – they're define about that competitive to important. those at all alongside very, those, outcomes. not over we're limit damage, our depending years them. when we in making them quickly whatever withstand ensuring right? customers, a that outcomes very detect And outcomes, outcome

holistic mentioned; well, something vendors customers But Now back-end and important. integrator for systems appreciate well, on And we've for of we for you that's done really from outcomes that identity customer those that. solving in partnerships the as example, those doesn't why make the sure something Proofpoint, to to outcomes security who messaging picture space with you mentioned blend have just just strong can and over bringing as time the the using lot these are so space, a best very the that is outcomes that the themselves be capabilities that. they the table solving very

Michael Turits

framework the again, the Great, cash [and thanks How for on those Kathy, acquisitions been for – And particularly], detailing impact have do very acquisitions flow, thanks. then expenses in this and these acquisitions quarter. XXX to that we those strong talked You've with acquisitions? impact basis investment. next How points. year? track Are those to expansion on margin do even XXX the about in

Kathleen Bonanno

Yes.

that about have invest we've between is points. of we guidance points The organic basis to margin operating talked that plan $X.XX We acquisitions, organic given to fiscal expansion full XXX QX the XXX basis $XX to $XX expansion recent of million, per and we share our operating outside to towards $X.XX are margin working equates that that the to on for year. million

Michael Turits

next though? Okay. No early thoughts year, on

Mark McLaughlin

Yes, it's pretty early.

Kathleen Bonanno

working and to been Yes. obviously. and committed very We're framework, to remain profitability important But obviously that have company. on we our the still planning, growth

Operator

KeyBanc Capital question from Our final come Owens will Rob with Markets.

Rob Owens

you're more go, come, hardware a we one And quarters question, function acceleration we five cycles one's taking – to revenue meaningful of or ASPs point? actually the are we're win this competitors under we've be [indiscernible] to showing hardware going the Anderson rates do possibly do Thanks is up? two, whether Well, in Thanks. deceleration. you Mark think reflected regard where about ticking could mentioned my you of that products not Or seen wire. and think and for the customer at that think you've there? Or those were at With guys which your talk come this your I begs guess, coming? success and and how point? those numbers cycles are, seen your and are Can question. acquisition suppose, And number then

Mark McLaughlin

cycle in reverse, Maybe I'll do racing take [ph]. and you them can the

Mark Anderson

Yes.

Mark McLaughlin

[ph]. Everybody here is saying Mark

Mark Anderson

hard X I snapshot little that outperform Networks I Palo saying in, everybody time, of patterns market. think is a of what was buying the it's the cycle think regardless back down What if long Alto to continues nail of here. they're Rob, a to the that take X in XX, cycle over what of Mark one, period on So XX years, time, years you in or you cycles see

years the a including that can and You matter well. XX through as fact see in as all the last last of quarters very four recently

confident taking competitive we'll the make always we to is market think, to that most offering that. able we job, be sure and in Our And share. market, we'll do we're have very the be

Mark McLaughlin

double-digit low Rob, billion market about double-digit market. Just $XX share got prosecute big picture, we total a addressable we've share in market or low

think -- customer security, from if want to customer look And existing the opportunities, big or that change hit to going of customers years. significant X in we're saw new the to going customer thought they're just for I leader. a the both sizes of expansion, X last make to customer for in terms So starting they're to growth we if veins cohorts the

our and So both to us into the I I grow tremendous that's the us confidence what think guide. opportunities give gives think embedded business, that's

Rob Owens

Then the long competitive win rate lines.

Mark Anderson

earlier, I to or win look to acquisitions they're together trying our trying bad stitched think for like years think against we've it developed digital primarily with either monster this point Frankenstein's sometimes small they're that said that's Competitive sell competitors some sell dozen I because products over feel an like in rates, the I that technology I tuck-ins last platform automation drive organically, the And age. architecture. needed the really

Mark McLaughlin

Yes. And rates we've consistently win competitors high, all Rob, [ph]. against seen be very

Rob Owens

Thanks Great. guys cheers, Mark. and

Mark McLaughlin

that. appreciate I much. very you Thank

our last that I Okay, was question. think

our of here, like all working to privilege thank with I want Alto you. close I'd everybody our Palo So for customers off, and the Networks, to the employees of partners

lot me, been We time of it's this care. thank forward upcoming look you future. Take a For seeing call. for to I for a to morning really the want experience. the in amazing everybody their

Operator

participation. you conclude does today's your conference. for That Thank all

You may now disconnect.

Palo Alto Networks (PANW) 5 Jun 182018 Q3 Earnings call transcript