Palo Alto Networks (PANW -1.41%)
Q2 2023 Earnings Name
Feb 21, 2023, 4:30 p.m. ET

Contents:

• Ready Remarks
• Questions and Solutions
• Name Individuals

Ready Remarks:

Clay Bilby

Good day, everybody, and welcome to Palo Alto Networks’ fiscal second quarter 2023 earnings convention name. I’m Clay Bilby, head of Palo Alto Networks Investor Relations. Please word that this name is being recorded as we speak, Tuesday, February twenty first, 2023, at 1:30 p.m. Pacific Time.

With me on as we speak’s name are Nikesh Arora, our chairman and chief government officer; and Dipak Golechha, our chief monetary officer. Our chief product officer, Lee Klarich, will be a part of us within the Q&A session following the ready remarks. You will discover the press launch and data to complement as we speak’s dialogue on our web site at traders.paloaltonetworks.com. Whereas there, please click on on the hyperlink for occasions and displays the place you’ll find the investor presentation and supplemental data.

Through the course of as we speak’s name, we’ll make forward-looking statements and projections relating to the corporate’s enterprise operations and monetary efficiency. These statements made as we speak are topic to dangers and uncertainties. We assume no obligation to replace them. Please evaluate the press launch and our current SEC filings to see these dangers and uncertainties.

We may even discuss with non-GAAP monetary measures. These measures shouldn’t be thought-about an alternative to monetary measures ready in accordance with GAAP. Essentially the most straight comparable GAAP monetary metrics and reconciliations are within the press launch and the appendix of the investor presentation. All outcomes and comparisons are on a fiscal year-over-year foundation until particularly famous in any other case.

We might additionally like to notice that administration is scheduled to take part within the Morgan Stanley TMT Convention and JMP Securities Know-how Convention in March. I’ll now flip the decision over to Nikesh.

Nikesh Arora — Chairman and Chief Govt Officer

Thanks, Clay. Good afternoon, and thanks, everybody, for becoming a member of us as we speak for our earnings name. I am happy to report that we had one other robust quarter with the stability of top-line progress, important growth in non-GAAP working margin, and powerful free money circulation. Billings and income every grew 26% 12 months over 12 months.

Our RPO grew 39% as we proceed to signal giant multiyear offers with our clients. We additionally delivered an acceleration in our working leverage in Q2 as we centered on driving worthwhile progress. Our non-GAAP working revenue grew 55% 12 months over 12 months, supported by a non-GAAP working margin, which exceeded 22% for the quarter, up over 440 foundation factors 12 months over 12 months. This translated to a different quarter of profitability on a GAAP foundation.

We’ve now been GAAP worthwhile on a cumulative foundation over the past 4 quarters. As well as, our robust free money circulation technology this quarter additionally places us on observe to outperform prior steerage. I do know lots of you’re questioning in regards to the macro setting, so I wish to begin with an replace there. There’s clearly a harder macro rising on the market because the Fed continues on its campaign to tame inflation.

The altering macro is clearly making enterprise leaders extra cautious. A few of our clients are seeing indicators of a slight slowdown whereas others are much less impacted. I, nevertheless, really feel that we’re not finished but. And whereas not anticipating shocks, I do suppose we’ll see extra cautious exercise over the subsequent few quarters.

Clearly, warning is considerable, driving extra scrutiny, making clients demand extra worth from their companions. We have seen some tasks get delayed or descoped, none canceled, whereas most proceed on observe. We have at all times maintained that we anticipate cybersecurity to be resilient, and we proceed to see proof of that. On the massive deal entrance, this conduct is certainly widespread.

For us, this has meant we have to get forward of this and work carefully with our CIO and CSO companions. Not simply that. It is creating extra conversations round fee phrases, reductions, and scope of cope with buying groups, one thing we have been working with our clients on as nicely. I am delighted that based mostly on our subject groups getting forward of this downside, earlier this quarter, we didn’t see any main offers slip from the quarter.

Our deal cadence high quality was per the identical quarter final 12 months. On an equally constructive word, this setting drives the necessity for consolidation, not simply to generate clear safety outcomes, but in addition to scale back the safety vendor sprawl that has been prevalent in our clients’ infrastructure and the necessity for a long-term safety technique based mostly on complete value of possession and worth. We really feel lucky that with our portfolio, we’re finest positioned to ship this to our clients. Inside our personal enterprise, two issues have occurred.

One, we now have turn out to be extra centered on effectivity from early this 12 months. For instance, our headcount progress this 12 months is more likely to be decrease than any of the final three years. On the identical time, we don’t anticipate slowing down the tempo of our improvement or enterprise outcomes. Dipak and his workforce have been rigorously inspecting our value constructions throughout our portfolio to make sure we’re set as much as ship constant gross margins in all areas.

This has been one of many main drivers of our improved working margin, and we hope to proceed to enhance as we scale. Secondly, as anticipated, provide chain challenges and product have abated considerably versus six months in the past. Whereas that is evident in our product gross margins and our general profitability, there are some lingering impacts, which we anticipate to additional abate via the tip of this 12 months. Let’s additionally take a second to debate {hardware} progress.

Over the past 12 months, numerous components have impacted {hardware} progress, together with provide constraints, uneven demand, given provide chain impacts, and backlog. Moreover, we now have observed our clients proceed to be extra centered on their cloud, community, and safety operations and transformations and are keen to sweat their {hardware} belongings longer. Underlying all this, we nonetheless imagine that the trade {hardware} progress fee is within the low to mid-single digits. As all these extraneous components mitigated over the subsequent few months, we’ll see the long-term progress gravitate again to these ranges.

So, what does this imply for the second half of this 12 months and past? Considerably counter to the market, we’re elevating steerage each on top-line metrics, metrics, and profitability. In fact, this requires the present demand to maintain, and for us to keep up a continued concentrate on execution. We’ve a singular alternative on this setting to strengthen our place out there. Therefore, we’re investing with a watch towards disciplined progress and positioning ourselves to the associate of selection for purchasers trying to consolidate.

You will hear extra about this from Dipak, however we’re elevating billings and next-generation safety our steerage on the again power in our software-based and cloud-delivered capabilities. In our {hardware} pipeline, we’re seeing particular transactions which might be on observe for This autumn, which has brought about us to shift some forecasted income from Q3 to This autumn whereas sustaining our annual steerage. With all I’ve stated about effectivity in higher operations and the impression, we’re now guiding to 21.5% to 22% working margin for fiscal 12 months 2023. Moreover, we’re additionally growing our money circulation steerage.

Consolidation continues to be a key theme with our clients. In fact, clients will not be keen to compromise on high quality and cybersecurity. Given our market management in 13 classes, we’re lucky to be engaged in lots of such conversations. These conversations are driving enterprise, and many purchasers are on a long-term transformation path to this.

The variety of offers we closed over $1 million grew practically 20% 12 months over 12 months, and the worth of those transactions grew practically 60%. Equally, the variety of greater-than-$5-million offers grew 84% and various greater-than-$10-million offers grew over 140%. We noticed deal values in these cohorts develop considerably. This continued momentum is essential to us having the ability to drive platform consolidation.

Repeatedly, we see early millennial clients turn out to be an onboarding ramp to assist us drive extra cybersecurity worth to our clients. Nearly all of our $10 million offers contain a number of platforms on an underlying transformation that’s driving vendor consolidation. Let’s check out a few of the methods we’re driving consolidation. First, with Zero Belief transformations, we’re serving to clients standardize their equipment and software program firewalls with a broad line of safety subscriptions.

A life sciences buyer signed an eight-figure deal to standardize their operations utilizing our next-generation firewalls, VMs, and safety subscriptions. In different circumstances, we’re serving to clients undertake SASE and software program firewalls and consolidate their safety stack throughout our constant set of choices, pushed by hybrid work and securing SaaS apps. A monetary service agency not too long ago signed an eight-figure cope with us as a result of they wished to remodel their community and cut back each operational challenges and value of possession. They selected us over pure-play SASE opponents due to the breadth of our providing in our complete Zero Belief community.

Secondly, trial cloud transformations. We’re utilizing our Prisma Cloud and Prisma Entry capabilities to assist clients undertake hyperscale cloud and Software program as a Service. One other monetary companies agency with a mandate to run over 90% of the apps within the cloud signed a excessive eight-figure deal to standardize in each Prisma Entry and Prisma Cloud. Lastly, in such transformations, we’re utilizing our Cortex platform with XRM to assist clients rework their safety operations middle and retool round high-fidelity knowledge sources, AI, and automation.

A retail firm began a relationship with us round Unit 42 incident response with an Expanse trial and small XDR deployment. They expanded the connection with a excessive seven-figure deal to standardize on XDR and XSOAR. These strategic buyer relationships and transformations wouldn’t have been doable with out us constructing a brand new safety trade paradigm, a paradigm round fixed innovation. Our success is pushed by investments in innovation and is more and more clear to us that there’s a flywheel at play right here.

This begins with R&D funding, the place we now have the biggest funds of all devoted cybersecurity corporations roughly $1 billion in non-GAAP spending on a trailing four-quarter foundation. That is two to 5 instances as a lot as our pure-play friends. Our scale additionally permits us to unfold this funds throughout a bigger income base and the shared wants of our three platforms. R&D investments then translate right into a file variety of product releases.

Our first half main launch is No. 35, up 59% from the primary half of final 12 months. A few of the key releases within the first half included our flagship PAN-OS 11.0 Nova, our third superior subscription, Superior Wildfire, our new AI-based SOC platform XSIAM and new modules and updates in Prisma Cloud. This fixed innovation is inflicting trade analysts to take discover.

We not too long ago obtained recognition for management within the cloud-native software safety platform class, or CNAPP, bringing our complete variety of lively management recognitions to 13, which compares to 9 a 12 months in the past. All these management positions have helped us develop our NGS ARR at 63%. We nonetheless imagine there’s a giant untapped TAM for a lot of of those companies given the strong adoption of superior software program companies that we now have launched, that are all cloud-delivered and us being within the early a part of the SASE cloud life cycle, we really feel assured in our future potential to drive NGS ARR. Let’s take a deeper take a look at a few of the highlights.

I will begin with my private favourite, our community safety enterprise. We launched our first SASE functionality, Prisma Entry, on the finish of fiscal 12 months 2019. Within the first 12 months, we booked lower than $100 million in enterprise. Over the past six quarters, we booked about $1 billion, with our largest deal final quarter being a TCV deal for $40 million for SASE.

We now have over 4,000 clients and are rising ARR roughly 50%. In Q2, we noticed a wholesome variety of giant aggressive wins in SASE, and SASE has one among our strongest pipelines trying 12 months out. Past the top-line traction, we’re additionally seeing enhancing economics within the enterprise. Two years in the past, we confirmed you ways the five-year income from a SASE buyer compares to an equipment buyer.

At the moment, SASE was about two instances greater. Since then, we have added extra worth to SASE. We launched autonomous digital expertise administration in FY ’22, adopted by AIOps and SaaS safety posture administration this 12 months. AI has the facility to remodel SASE.

Our built-in safety companies are actually all powered by AI to detect and stop even zero-day assaults. And we’ll quickly be introducing extra AI-driven functionality to remodel the consumer expertise and utilizing the platform. We now anticipate our five-year income from a SASE buyer to be greater than two and a half instances that of an equipment buyer. We have additionally seen some enhancements in our SASE gross margins over this era as we now have scaled to turn out to be extra environment friendly.

For those who go to the opposite facet of our community safety portfolio, our software program firewall enterprise goes robust. This contains the broadest deployment choices for purchasers, together with VM-Collection and CM collection, which may run of their knowledge facilities or be bought within the cloud marketplaces, and the first-to-market built-in cloud next-generation firewall choices for hyperscale clouds. We’ve the very best market share of any firm on this market. We imagine it is greater than thrice of our any closest competitor.

The present macro setting is inflicting extra clients to observe their capex funds. This shift, together with the truth that clients are reworking the information facilities shifting to the cloud, is main extra of them to undertake software program firewalls. In Q2, the variety of offers over $1 million for our software program firewall was practically doubled, and 6 of our prime eight offers in Q2 included software program firewalls in our providing. Transferring on to our cloud safety enterprise.

We proceed to make regular progress with Prisma Cloud. Platform enhancements are vital to our progress. We launched the brand new API danger profiling functionality to boost our net software safety module. This functionality helps safety groups assess their API stack floor, assault floor shortly based mostly on greater than 200 danger components, together with misconfigurations, publicity to delicate knowledge, and entry privileges.

This helps groups prioritize essentially the most important danger and take preventive measures to deal with them. We additionally proceed to shift left and concentrate on securing workloads as they’re developed, fixing our clients’ software safety channels. To that finish, we closed the acquisition of Cider, and have introduced their workforce below widespread management with our cloud code safety workforce to assist convey Cider’s CICD safety functionality to our platform. After releasing cloud core safety a 12 months in the past, over 15% of our buyer base has adopted these capabilities.

Our cloud core safety clients in Q2 grew 30% over Q1. Our new secret administration module launched in December scans code repos utilized by builders for hard-coded secrets and techniques like passwords and API keys to ensure this data just isn’t uncovered and used as a vector of assault. We proceed to see these new capabilities and enhancements drive a rise in buyer module adoption. For instance, our clients with two or extra modules grew over 40%, and clients with 4 or extra modules greater than doubled.

Credit score consumption of Prisma Cloud elevated 48% 12 months over 12 months. This progress is being pushed by new buyer additions, clients growing their cloud footprints, and clients consuming extra modules. Whereas there was dialogue on moderation and cloud consumption out there, we imagine the comparatively early stage of cloud safety adoption has and can proceed to shelter us from this headwind. Earlier than I transfer on to Cortex and discuss persevering with indicators of optimism I see in that class, I really feel compelled to take a detour towards AI.

Clearly, AI has been on everybody’s thoughts given the continued dialog within the tech trade. Most of you understand the story of arrival with the Palo Alto Networks. I talked about fragmentation and the necessity for an answer there, which we now have talked rather a lot about. I additionally talked about automation and AI.

We counted, I used the phrase AI extra time than my first six months in Palo Alto Networks than platform or consolidation. The challenges you all know is that AI has been a knowledge downside and continues to be so. Not like shopper the place we are able to discuss Sonnets and ChatGPT’s inventive capabilities and the revolution that’s going to drive in search or promoting, its potential to summarize knowledge and proceed to amuse and inform us, the calls for from AI and enterprise are much more exacting and so are the returns. An enterprise AI must be clear.

It has to have complete knowledge. And in safety, particularly it must be real-time. So, not solely do it’s essential have one of the best knowledge to create nice safety outcomes, you additionally should be positioned in line to dam threats. Let me make a case why with petabytes of information from trillions of occasions, billions of periods, a whole bunch of tens of millions of URLs, and tens of tens of millions of flies flowing — information, not flies — flowing via our product throughout cloud, community, and endpoints each day, we’re finest positioned to ship safety outcomes utilizing AI machine studying.

Palo Alto Community’s next-generation firewalls broke via the firewall trade within the early days due to our potential to then ship next-generation safety. These companies had been pushed by expansive knowledge assortment capabilities, EAL, or enhanced software logs. We’ve since utilized that functionality throughout our whole community safety stack. We estimate that this community safe knowledge is slightly below half the dear safety knowledge that’s wanted for any AI-driven consequence.

We’ve over 60,000 clients the place we may also help them use this knowledge. As we conceived with Cortex, we constructed XDR to make sure we collected one of the best endpoint knowledge throughout the trade. We acquired and deployed the biggest safety automation footprint at XSOAR, however we’re not stopping there. We then acquired and built-in Expanse, which checked out vulnerability knowledge from a unique and distinctive perspective.

These fashioned the basic constructing blocks for XSIAM. With our management place in automation, analytics, and assault floor administration, once more, we’re driving an AI-based SoC transformation. With our 4,500 Cortex clients, we’re in a position to convey what we imagine is the subsequent largest set of safety knowledge that’s helpful for AI. We utilized the identical thought and rigor as we constructed Prisma Cloud, integrating knowledge from all hyperscalers, integrating shift-left knowledge from builders.

Slowly and steadily, the Prisma Cloud integration is being constructed on a stronger basis of safety knowledge. Cloud is turning into an more and more vital contributor to AI, and our 2,000 clients will profit from it. We’ve delivered distinctive AI-based outcomes, together with blocking unknown but malicious web sites, command and management area, and information at scale. Additionally, we now have proven in our personal safety operations middle that we are able to cut back the imply time to detection to seconds and the meantime to reply to minutes.

These are all outcomes that can not be achieved with out the information we now have and the AI/machine studying experience we apply. Let’s have a look into how we imagine this has made us extra excited and inspired us round XSIAM. In Q2, as a part of the Cortex and XSIAM platform, we launched vital new capabilities, together with SaaS-enabled XSOAR, delivering a cloud-based interface and Expanse lively assault floor administration permitting our clients to remediate points found utilizing XSIAM. We launched XSIAM and GA on the finish of Q1.

So, far, we have closed roughly $30 million in enterprise and have a rising pipeline of consumers that need to rework safety operations of the brand new platform. I feel XSIAM goes to pave the best way for us to drive AI-driven safety transformation outcomes. We are going to proceed to work arduous with our early clients to drive evolution and success in XSIAM. I am extraordinarily constructive, maybe, and cautiously optimistic about XSIAM.

Its early relevance, product-market match, and with the concurrent dialogue on AI, it makes me hopeful that this could possibly be the quickest ramp of any safety product. We see our first milestone to attending to $100 million in bookings quicker than Cortex SASE or Prisma Cloud in our portfolio. Earlier than I flip the ground to Dipak, I wish to put all this collectively and discuss the place we’re centered as we enter the second half of our fiscal 12 months and past. We see a transparent street map forward of us.

We intend to place our head down and execute. Proper now, we’re within the course of of remodeling our enterprise to software-based and cloud-delivery choices. Our income, which is more and more pushed by our next-generation safety capabilities, is turning into extra recurring in nature, and we now have a possibility to personal a higher share of our clients’ cybersecurity funds. This could permit us to maintain excessive income progress for longer.

Over the past couple of years, we set in movement a plan to broaden our working margin, together with driving scale in our faster-growing companies. Over the past six months, we have listened to traders who’ve inspired us to concentrate on worthwhile progress and speed up incremental leverage in our enterprise, and we made good progress in Q2. We’re now well-positioned for the second half of the 12 months. We’re appreciably elevating our margin goal for FY ’23 up 200 foundation factors from our prior steerage and 250 foundation factors from our preliminary FY ’23 steerage.

We imagine we are able to proceed to construct on this into fiscal 12 months 2024 and past, placing us three years forward of our profitability targets we provided at our final Analyst Day in September 2021. As Dipak will describe, we imagine the mixture of sustaining greater top-line progress and concentrate on effectivity units up nicely to construct on this base of upper profitability and develop EPS forward of income. I wish to emphasize that attaining GAAP profitability is a vital milestone for our firm. In help of this, we’re actively centered on managing our stock-based compensation to proceed bringing this down as a % of our income.

With that, I will flip the ground over to Dipak to take you thru our particulars of our outcomes and steerage, after which we’ll take questions.

Dipak Golechha — Chief Monetary Officer

Thanks, Nikesh, and good afternoon, everybody. For Q2, income of $1.66 billion grew 26%. Product income grew 15%, whereas complete service income grew 29%, with subscription income rising 32% and help income rising 25%. Transferring on to geographies.

We noticed income progress throughout all theaters with the Americas rising 22%, EMEA up 35% and JPAC rising 32%. The power of our next-generation safety capabilities continues to drive our outcomes with NGS ARR of $2.3 billion, rising 63%. Power was broad-based throughout all three of our platforms: community safety, cloud safety, and safety operations. We delivered complete billings of $2.03 billion, up 26% and above the excessive finish of our steerage vary.

Complete deferred income in Q2 was $7.6 billion, a rise of 39%. Remaining efficiency obligation, or RPO, was $8.8 billion, growing 39%, with present RPO representing about half of our RPO just like current quarters. Our non-GAAP earnings per share was considerably forward of our steerage, and this metric, in addition to our trailing 12 months adjusted free money circulation, accelerated. Non-GAAP EPS of $1.05 grew 81% 12 months over 12 months, whereas trailing 12-month adjusted free money circulation of $2.7 billion grew 76% 12 months over 12 months.

Transferring on to the remainder of the monetary highlights. Non-GAAP gross margin of 75.5% was up 150 foundation factors 12 months over 12 months, pushed primarily by a rise in our software program combine. On a quarter-over-quarter foundation, we noticed much less stress from incremental prices associated to the provision chain. We have made important progress in driving leverage.

That is one thing that we articulated at our Analyst Day in September 2021 and kicked off in fiscal 12 months ’22. And we now have accelerated this in fiscal 12 months ’23 with a concentrate on worthwhile progress as evidenced by our Q2 efficiency. Our working margin of twenty-two.8% elevated 440 foundation factors 12 months over 12 months. This outcome was pushed by enhancing gross margins and a slower degree of headcount additions.

We anticipate to see ongoing enhancements in our operational effectivity. And because of this, we’re elevating our fiscal 12 months ’23 working margin steerage. Non-GAAP internet revenue for the second quarter grew 79% to $332 million or $1.05 per diluted share. Our non-GAAP efficient tax fee was 22%.

Delivering fiscal 12 months GAAP profitability is one other milestone in our stability of driving progress and profitability. For the quarter, GAAP internet revenue was $84 million or $0.28 per primary share and $0.25 per diluted share. This was our third consecutive quarter of GAAP profitability. And as Nikesh famous, we now have now been worthwhile on a cumulative foundation for the final 4 quarters.

We imagine we now meet the factors for inclusion within the S&P 500. Turning now to the stability sheet and money circulation assertion. We ended Q2 with money equivalents and investments of $6.2 billion. Our common period — our new contracts elevated barely 12 months over 12 months, pushed by offers with strategic clients.

It stays at roughly three years, the place it has been traditionally. Q2 money circulation from operations was $695 million, with complete adjusted free money circulation of $685 million this quarter. Our robust free money circulation in Q2 was pushed by elevated working profitability, greater curiosity revenue, and enchancment in billings linearity as a result of enhancing provide chain situations. Throughout Q2, we repurchased roughly 1.8 million shares on the open market at a mean value of roughly $139 per share for a complete consideration of $250 million.

As a reminder, our share repurchase program is opportunistic, and we’re dedicated to this methodology of returning money to shareholders over the medium time period. Inventory-based compensation ticked up 20 foundation factors as a % of income sequentially associated to the issuance of our annual grants and the impression from the Cider acquisition. On a year-over-year foundation, stock-based compensation was down 350 foundation factors as a % of income. Earlier than I get to steerage, I wished to cowl my ideas on working margin.

We’ve continued to drive enhancements within the profitability for our fastest-growing companies as they’ve gained scale. Additionally, over the past six months, we now have developed and executed on detailed plans to speed up our working leverage. This contains elevating the bar across the return on funding we anticipate, in addition to remaining prudent in our hiring. We have additionally spent numerous time taking a look at our peer group and learning benchmark knowledge.

As we glance towards the second half of the 12 months and into fiscal 12 months ’24, we imagine we are able to proceed to execute in opposition to our plans and drive greater working margins. We anticipate that it will translate into us rising our EPS quicker than our income progress charges. Now, shifting on to steerage. We’re providing steerage for Q3 and likewise This autumn to make this express after which providing up to date annual steerage.

You will see we’re sustaining our annual income steerage and giving express steerage for Q3 to This autumn based mostly on what we see in our pipeline for product income. For the third quarter of 2023, we anticipate billings to be within the vary of $2.20 billion to $2.25 billion, a rise of twenty-two% to 25%. We anticipate income to be within the vary of $1.695 billion to $1.725 billion, a rise of twenty-two% to 24%. We anticipate non-GAAP EPS to be within the vary of $0.90 to $0.94, a rise of fifty% to 57%.

For the fourth quarter of the 12 months, we anticipate billings to be within the vary of $3.12 billion to $3.17 billion, a rise of 16% to 18%. We anticipate income to be within the vary of $1.937 billion to $1.967 billion, a rise of 25% to 27%. We anticipate non-GAAP EPS to be within the vary of $1.18 to $1.22 per share, a rise of 48% to 53%. For the fiscal 12 months, we anticipate billings to be within the vary of $9.1 billion to $9.2 billion, a rise of twenty-two% to 23% and we anticipate NGS ARR to be within the vary of $2.75 billion to $2.8 billion, a rise of 45% to 48%.

We anticipate income to be within the vary of $6.85 billion to $6.91 billion, a rise of 25% to 26%. We proceed to anticipate product income progress within the vary of 10% for the complete fiscal 12 months. For fiscal 12 months ’23, we’re anticipating our working margins to be within the vary of 21.5% to 22%. And we anticipate our non-GAAP EPS to be within the vary of $3.97 to $4.03, a rise of 57% to 60%.

We anticipate our adjusted free money circulation margin to be between 36.5% to 37.5%, and we anticipate to be GAAP worthwhile every quarter and for the fiscal 12 months 2023. Moreover, please think about the next modeling factors. We anticipate our non-GAAP tax fee to stay at 22% for Q3 and monetary 12 months ’23, topic to the result of future tax laws. For Q3 and This autumn, we anticipate internet curiosity revenue — internet curiosity and different revenue of $45 million to $49 million.

We anticipate Q3 diluted shares excellent of 321 million to 327 million shares. We anticipate This autumn diluted shares excellent of 326 million to 332 million. We anticipate fiscal 12 months ’23 diluted shares excellent of 320 million to 326 million. We anticipate Q3 capital expenditures of $35 million to $40 million, with full-year capital expenditures of $165 million to $170 million.

With that, I’ll flip the decision again over to Clay for the Q&Part of the decision.

Clay Bilby

Nice. Thanks, Dipak. To permit for broad participation, I might ask that every particular person ask just one query. The primary query can be from Brian Essex of JPMorgan, with Hamza Fodderwala to observe.

Brian, it’s possible you’ll ask your query.

Brian Essex — JPMorgan Chase and Firm — Analyst

Nice. Thanks, Clay, and congrats to everybody on some implausible outcomes. Actually, actually robust right here. Thanks for taking the query.

Possibly Nikesh for you, I simply have a query on SASE. Possibly for those who might dig in somewhat bit to the aggressive dynamics there. Does it actually assist to — I assume, how a lot does it assist the platform to have full end-to-end SASE? I see numerous personal distributors constructing out full and finish SASE platforms. Or is that this extra of a transformational push or perhaps there’s somewhat little bit of each? Thanks.

Nikesh Arora — Chairman and Chief Govt Officer

Hey, thanks for the query. Look, the SASE market, I feel historically was a market which was centered on Web entry. Prospects use that as a proxy-based approach to onboard Web entry and was effective. I feel the pandemic actually flipped the swap.

Coupled with the entire cloud transformations which might be occurring, our clients, particularly bigger clients, wish to create a primary — first-class citizen of any consumer who’s not sitting within the workplace or within the campus, and so they wish to get to Zero Belief. So, I feel the confluence of Zero Belief, the confluence of the cloud transformation, the confluence to use a full safety stack opened the door for full SASE deployment to community transformations, couple that with the truth that individuals are making an attempt to get away from giant wide- network-type community architectures, SD-WAN sort community. So, I feel, our confidence on all of this stuff created an actual spurt within the SASE market. We’ve 60-plus thousand clients who use our firewalls.

Now we’re displaying them a path emigrate from a firewall-based, campus-based, knowledge center-based structure to a Zero Belief structure, which spans {hardware}, software program and any form of distant entry and campus options. So, I feel that is what’s driving that for us. And whereas your guys — you are impatient. Your brains transfer quicker than our potential to execute generally.

It is solely been three years. And I feel I might problem anyone out out there. And all people learn the identical Gartner Magic Quadrant on SASE. I wish to see what number of distributors can declare that the final six quarters, they bought $1 billion SASE, and who simply did a $40 million deal in SASE final quarter.

So, I feel that is our execution, our potential to work with present clients, our continuously listening to clients evolving our product is permitting us to get right here. It is a aggressive market, however I feel we’re down to 2, two and a half distributors on this market who we see at each buyer now.

Clay Bilby

All proper. Our subsequent query from Hamza Fodderwala with Morgan Stanley, with Fatima to observe. Go forward, Hamza.

Hamza Fodderwala — Morgan Stanley — Analyst

Hey, good afternoon. Thanks for taking my query. Possibly for Nikesh and Lee Klarich. Simply curious across the early buyer conversations round AI as clients look to automate their safety operations.

And to what extent is that aiding the dialog towards consolidation for Palo Alto Networks?

Nikesh Arora — Chairman and Chief Govt Officer

That is an awesome query, Hamza. And I have been form of on and off when it comes to mood my enthusiasm for this area. And I used to be on my approach to India to talk at a convocation, I skilled ChatGPT for the primary time. And I circled and rewrote my convocation speech saying, that is one of the best factor that occurred to safety, enterprise, and to shopper as a result of I feel it is form of an inflection level, which is huge.

Now, clearly, that is a dialog. I might say three months in the past, clients weren’t asking us about AI, and now all of them wish to know, are you deploying AI in your safety merchandise? That is nice. And that is why we spent a while on the earnings name making an attempt to elaborate how we have been utilizing this for a very long time. The conversations are round how do I begin making extra sense of my knowledge.

I feel the final iteration of utilizing knowledge within the safety trade has been extra about, I might say, offline or reactive knowledge evaluation for essentially the most half. And that is the primary time the purchasers need real-time, proactive, block-the-threat outcomes, which is form of our candy spot, if I’ll say so. And that dialog is starting to start out. I will inform you, on XSIAM, there isn’t any deal lower than $1 million.

I have never seen a safety product that we launched within the trade which begins off at a minimal value of $1 million, proper? We have finished $30 million of enterprise within the final 12 to 16 weeks, the place our clients — our groups are nonetheless getting educated. We’re nonetheless getting traction. We nonetheless have, we predict, 70%, 80% of the product builders nonetheless engaged on the remainder of it as we get suggestions from clients. And I am cautiously optimistic.

And I feel you will notice this pave the best way for deployment of AI. That is our first outcome-based product. That is the primary time we are able to stroll in and say, hear, I can cut back your imply time to reply, a imply time to detect. In any other case, I might say, use this, that is actually good, it’ll prevent, however he will not discover out till one thing occurs.

Within the case of XSIAM, I say, I can show effectivity, I can show decrease value of possession for you. So, very hopeful. Do not get forward of your self. It may take some time.

I actually instructed you we would be completely happy if I get $100 million quicker than any of the product. And hopefully, this turns into one other leg of progress for Palo Alto to provide us extra sustained prime line over the long run.

Clay Bilby

All proper. Our subsequent query from Fatima Boolani of Citigroup, with Brad Zelnick to observe. Go forward.

Fatima Boolani — Citi — Analyst

Good afternoon. Thanks for taking my questions. Nikesh, this one’s for you. You had been fairly express that you’re having lifelike conversations with clients about fee phrases and extensions and monetary circumstances as most organizations focus perhaps extra on money circulation preservation than that they had up to now.

So, perhaps to particularly ask, it is not very obvious in your numbers that you simply’re having these forms of conversations. So, A, how are you managing to bypass numerous that? And the way is Palo Alto Monetary Providers as a financing car perhaps serving to you drive numerous these conversations that is not obvious to us?

Nikesh Arora — Chairman and Chief Govt Officer

Good.

Fatima Boolani — Citi — Analyst

Good.

Nikesh Arora — Chairman and Chief Govt Officer

It means we’re doing job of managing our money circulation margins and ensuring our clients are completely happy. And this very not often do I get to make each shareholders and clients completely happy on the identical time. So, it is a kind of moments. Look, on a extra severe word, sure, you are proper.

We’re having these conversations. And I might say Dipak and his workforce doing an outstanding job in ensuring that our gross sales groups are supportive when the shopper is speaking about fee phrases, annual billing plans, or particularly utilizing PANFS. So, I’ll cross over to Dipak and clarify how he is strolling the tightrope and ensuring that we’re doing this successfully with our clients. I’ll say, we’re blessed as a result of, as Dipak highlighted, we now have $6.2 billion of money on our stability sheet.

So, we now have the capability to have the ability to do that for our clients. However Dipak?

Dipak Golechha — Chief Monetary Officer

Yeah. No, I feel I might simply say that it has been very selective and really purposeful trying on the precise buyer interplay. We’ve a complete workforce which might be very skilled at this. We introduced lots of people in with exterior expertise.

And it truly is a case-by-case piece right here, however that is how you retain it like very selective and strategic. And that is the one time we actually use it.

Clay Bilby

All proper. Nice. Our subsequent query from Brad Zelnick of Deutsche Financial institution, adopted by Tal Liani. Go forward, Brad.

Brad Zelnick — Deutsche Financial institution — Analyst

Nice. Thanks very a lot, and congrats, Nikesh and workforce. Nice, nice job. Nikesh, Palo Alto Networks is way over a {hardware} firm.

And that is —

Nikesh Arora — Chairman and Chief Govt Officer

Oh, my God, Brad. You are reminding me of the assembly we had 4 and a half years in the past in my workplace. Go on.

Brad Zelnick — Deutsche Financial institution — Analyst

I am so glad that I left that impression on you, Nikesh. I am nonetheless ready for the paintings, by the best way. You possibly can see behind right here. It is nonetheless — despite the fact that I am in entrance of the constructing, it’s kind of sparse.

However good to see you. So, way over a {hardware} firm as we speak that is on full show, however you have down-ticked in your trade {hardware} progress expectations from what you stated final quarter. I imagine final quarter, you stated 5% to eight%. Now you are saying low to mid-single digit.

I do not know if it is immaterial distinction, however I observed the distinction. If something, what’s modified in any respect in your market view? How ought to we anticipate your {hardware} enterprise to carry out versus market? And what would you say, Nikesh, to a skeptic that is maybe skeptical that numerous the success you see in the whole lot else in next-gen is driving alongside on — and alternatives created when a salesman exhibits up and is promoting {hardware}? I assume how a lot of that movement is going on away from {hardware} that we must always admire? Thanks.

Nikesh Arora — Chairman and Chief Govt Officer

So, Brad, I feel it is vital to know that we now have a really giant put in base. We’ve 62,000 clients who deploy Palo Alto firewalls. And let’s simply say, in my 4 and a half years at Palo Alto, I do not know any buyer has decommissioned us but. So, I feel that the answer of the {hardware} just isn’t being deployed or not getting used just isn’t true.

So, there may be {hardware} enhancements for our clients. Though anyone will not be shopping for {hardware}, numerous our subscription progress, our ELA progress, is pushed by the truth that folks have {hardware}, which they’re extending the software program capabilities on and shopping for extra software program capabilities from us. So, it is not simply {that a} salesperson exhibits up solely to promote {hardware}, they really present as much as deploy extra safety capabilities on the software program entrance. And couple that within the case of SASE, for those who take a look at our giant pipeline, it is clearly pushed by a buyer of Palo Alto, who’s a firewall buyer, or a possible SASE buyer who’s saying, hear, I do know your safety companies, I do know your Zero Belief insurance policies, I would like to have the ability to broaden into it and deploy a full end-to-end SASE answer or a Zero Belief answer for you.

So, I assume I am making an attempt to say is that our success in software program just isn’t hardware-dependent. All I am highlighting is that I imagine that the market was very confused final 12 months with provide chain. You could not get chips. There have been orders being made.

Prospects are getting jittery, saying, I’ve capacities, I’d want extra {hardware}. So, a complete bunch of conflation of results that occurred {hardware}. I’ve continuously maintained that {hardware} grows. The trade grows at low to mid-single digits.

You observed that maybe a slight downtick in my expectations, and that is in all probability truthful. You are perceptive. However I do not suppose it modifications the general consequence for us as an organization. I do fear about people who find themselves purely hardware-focused who haven’t got the flexibility to place an answer which incorporates software program.

I will provide you with an instance. A big retailer involves us and say, I might prefer to deploy a SASE answer throughout my whole retail base. I might prefer to improve. I wish to do AR, VR for my retailer.

I wish to go get extra bandwidth in there. Technically, there are a number of methods to unravel the issue. What you do is promote firewalls and say, hey, put a much bigger firewall in your retailer. And I can ship SASE as a result of I’ve safety functionality.

I can say, put an SD-WAN field in there, go deploy numerous bandwidth in there, and do a software-based SASE implementation. A, it’ll be a lot simpler to interchange software program in there, improve software program. I handle that for you. B, it is safer as a result of you could have essentially the most newest upgraded software program out there straight away.

Three, it is scalable. You possibly can enhance your bandwidth requirement and safety necessities over time. And D, for me, it is nice as a result of it is two and a half instances extra worthwhile for me to have you ever deploy SASE than put a field which I might need to maintain sending a truck yearly to try to form of improve this supply.

Brad Zelnick — Deutsche Financial institution — Analyst

Makes good sense to me. Sustain the nice work. Thanks.

Nikesh Arora — Chairman and Chief Govt Officer

Thanks, Brad.

Clay Bilby

Nice. Subsequent query from Tal Liani of BofA, adopted by Keith Bachman. Go forward, Tal.

Tal Liani — Financial institution of America Merrill Lynch — Analyst

I wished to ask you in regards to the distinction between income progress billing and deferred income. You elevated the steerage for deferred and billings which might be very, very robust. We see much less of a rise in income. What are the dynamics going ahead?

Nikesh Arora — Chairman and Chief Govt Officer

I’ll let Dipak reply, however I’ll advocate you to attempt Dali. And also you may be capable to create a parallel poster award, and we’ll have to determine who did which one.

Dipak Golechha — Chief Monetary Officer

Yeah. Look, Tal, I feel on the finish of the day, like we’re an enterprise firm. And as you see in our steerage, like we now have a big This autumn steerage with numerous clients sweating belongings, as Nikesh talked about in our — in his script. I feel we’re simply making an attempt to replicate that in our newest forecast, which is what drives the steerage.

And so, in case you have folks sweating belongings, we do not know precisely what’s going to fall through which quarter, and that is what drives the income.

Nikesh Arora — Chairman and Chief Govt Officer

Yeah. Effectively, I feel simply to just be sure you do not — we do not combine the forest from the timber. We’re seeing higher progress throughout our enterprise on a TCV foundation throughout our clients. That is driving the billings progress, which clearly then falls into income, each short-term and long-term and deferred.

I feel what you are seeing is the upper mixture of software program in our expectations going ahead, which makes it extra ratable over time. It provides us extra creditability. Therefore, the income appears per expectations, and also you see the software program half, which is sitting in deferred develop quicker.

Dipak Golechha — Chief Monetary Officer

Definitely, on SASE, that’s the most —

Tal Liani — Financial institution of America Merrill Lynch — Analyst

That is smart.

Clay Bilby

All proper. Nice. Thanks. Our subsequent query from Keith Bachman of BMO, adopted by Patrick Colville.

Go forward, Keith.

Keith Bachman — BMO Capital Markets — Analyst

Many thanks. Good afternoon. Good night. I wished to ask you, Nikesh, about Cortex, if I might, extra broadly, and I will break it in two components.

The Cortex journey, the outcomes have been stable, not simply this quarter, however for some time frame now. And, A, on the aggressive entrance, we have been listening to numerous dialogue from a few of the main distributors that pricing has turn out to be rather more materials in profitable share of the Crowdstrikes or what have you ever. It does not seem that that is the case in any respect in your outcomes from the expansion charges and the profitability. So, I simply wish to hear somewhat bit about pricing.

After which extra broadly on simply the aggressive dynamics in your outcomes, and also you talked about $100 million form of run fee on XSIAM, how has the portfolio helped shaping this consequence as you look out over the horizon over the subsequent variety of quarters in Cortex?

Nikesh Arora — Chairman and Chief Govt Officer

So, Keith, that is an awesome query. And I am hesitating alone analogy, so I used to be going to provide you as a result of I do not suppose we must always print that. It is clear — I do not wish to put a phrase in opposition to our Cortex enterprise. At the start, look, I’ve at all times maintained that the chance within the safety market arises when there’s an inflection level.

And I feel the endpoint trade went via an inflection level just a few years in the past after we noticed the emergence of EDR and XDR gamers. And also you noticed that, I might say, maybe the normalization of pure endpoint antivirus-type gamers out there. And what’s occurred is for those who take a look at the evolution, we have gone from just a few endpoint gamers to many, and also you’re starting to see convergence once more down to 2 or three folks. And I might say that we’re one of many three rising XDR distributors the place clients are selecting us.

We’ve top-of-the-line POC outcomes throughout the complete market vis-a-vis different gamers. So, I might say as we speak, for those who’re on the lookout for an XDR consequence, there’s probably two or three distributors at all times within the fray are starting to see ourselves to. That was not the case three years in the past. That was not the case two years in the past.

So, we’re pleased with our place, I feel, one. Two, XDR is a pipeline enterprise as a result of it is fairly constant. To your level about pricing, the deal sizes are fairly constant, and so they’re form of in a spread, and you bought to have numerous offers to your pipeline and get some conversion going from them. Cloud and SASE may be huge.

I promote a $40 million cloud deal, $40 million SASE deal. I haven’t got $40 million XDR offers. They’re all in the identical swim lane, and you’ll substitute one for the opposite. And we see constant progress.

Now, the place I feel our secret sauce is kicking in and may kick in is XSIAM solely works with XDR. And what’s attention-grabbing is we have seen very early, we have had 15 clients of XSIAM within the final 12 weeks, and so they’re all north of $1 million. Very early, we’re seeing clients saying, I might like XSIAM. And we’re saying, hear, you possibly can solely get XSIAM if you are going to purchase XDR.

So, we’re starting to see there is a pull due to an outcome-based oriented XSIAM. Once more, as I stated to Hamza, do not get forward of your skis. This can be a shift we’re making an attempt to engender within the trade, however we predict that the best way to drive XDR for us in the long run goes to be by creating one of the best safety consequence within the SoC for the shopper. However they understand I would like good knowledge.

The one means I get good knowledge is to Palo Alto, XDR, which permits us to go create the safety outcomes in XSIAM. So, that is our method. Till then, we’re simply going to maintain our head down, grind on the pipeline, ensure that we are able to win the offers. However for us, we’re headed for the larger value as a result of I can do numerous XSIAM enterprise the place I can XDR seed it into my clients.

So, XDR pricing is much less contentious for me. It is extra attention-grabbing for me to get the precise buyer in XDR. So, you observed there is a sure a part of the market we play in. We do not play within the low to mid-end of the market in XDR.

We do not have 500 buyer — 500 consumer clients. We prefer to get the ten,000, 15,000, the upper finish of the XDR clients as a result of we predict that may be a excessive switch into XSIAM sooner or later. And we have been doing that constantly for the previous few years making an attempt to construct that base. So, as when the XSIAM is prepared, we are able to begin encouraging our clients to evolve from XDR to XSIAM.

Clay Bilby

Subsequent is Patrick Colville of Scotiabank, adopted by Matt Hedberg. Go forward, Pat.

Patrick Colville — Scotiabank — Analyst

Hello, guys. Thanks for taking my query. And it is good to be again. So, I wish to ask about margin.

So, I imply, actually spectacular to see what you guys printed within the margin. I imply, trying on the numbers for fiscal second quarter. To me, the 2 most vital levers had been the product gross margin and the gross sales and advertising form of prices that had been moderated. I assume as we take into consideration the rest of the 12 months, how ought to we mannequin out these two levers? So, ought to we proceed to anticipate much less incremental stress from provide chain prices on the product GMs? And the way far can this S&M effectivity go?

Nikesh Arora — Chairman and Chief Govt Officer

Effectively, I feel, Patrick, to begin with, is Dipak made your life simpler by providing you with an working margin steerage for the 12 months. So, you do not have to fret in regards to the element components. So, you possibly can simply take a look at the full and have a beautiful time. Prevent some modeling at Palo Alto.

So, that however, I feel between Dipak and I, we have each stated that — I contemplated placing this in our earnings script. I had a gathering with an investor. Dipak and I had a gathering for hours about six to seven months in the past. They usually took us via the brute power of profitability and margins and margin growth and long-term EPS for Palo Alto.

And the opposite day, Dipak and I checked out one another and say, you understand what, progress is vital, however progress — worthwhile progress is much more vital. And I might say there is a collection of packages that Dipak has been operating over the past six months, which embody taking a look at gross margin throughout all of our merchandise, taking a look at our spend throughout classes, taking a look at headcount. So, this can be a sustained program we now have in place. We will reasonable our means via it to be sure that we do not impression our potential to generate the correct amount of progress and correct amount of worthwhile progress.

However I feel the factor I will depart you with is that we have given the steerage for the complete 12 months for working margin, how it’ll evolve. We predict it is an excellent place in comparison with the place we had been anticipating to be proper now. And I feel we have additionally given you hope that we do not imagine that is the tip. We imagine we are able to maintain enhancing from right here.

So, for now, that is all we will say.

Patrick Colville — Scotiabank — Analyst

All proper. Thanks a lot.

Clay Bilby

All proper. Subsequent, we have Matt Hedberg of RBC adopted by Jonathan Ho. Go forward, Matt.

Matt Hedberg — RBC Capital Markets — Analyst

Cool. Thanks, guys. Congrats from me as nicely. Nikesh, I’ve to return to SASE.

I imply, the 50% progress in ARR off of a giant base is spectacular. And also you guys took a unique method this 12 months when it comes to integrating your core firewall and your SASE gross sales power. Are you able to discuss in regards to the strides in these conversations into the opposite form of 50,000 firewall clients that are not SASE clients? How does that dialogue go? And if — simply because it looks like such a wedding that makes a lot sense from a cross-sell perspective?

Nikesh Arora — Chairman and Chief Govt Officer

Sure. Matt, look, I feel a contented firewall buyer is a buyer who at the least has feeling about Palo Alto. And I feel in the event that they’ve deployed our safety companies, they’re even higher as a result of they know the way these safety capabilities work. And now we’re working via every of those clients making an attempt to work with them on their Zero Belief technique.

SASE is usually a protracted lead time, lengthy dialog as a result of it is not simply safety. I feel the half which generally will get misplaced on this — in a few of the analysts, is that SASE is definitely — you take — say, the firewall, I provide you with a firewall, you run the firewalls in your community, it is all good. You run your rising product. In SASE, I run your community.

I take the visitors out of your laptop computer onto me, onto GCP, and route the visitors for you. So, now I am a part of your mission-critical capabilities. Meaning my community must be robust, my latency must be low, my availability must be excessive. That is not a conventional query safety CoIP corporations have been requested.

They are not used to operating networks. That is why I simply fall off my chair after I maintain listening to, there are seven different distributors constructing SASE options. I am like, sure, good luck, discover ways to run a community. So, there isn’t any coincidence that we determined that we weren’t going to run the community.

We will write AWS and GCP on the community for us as a result of that is what they do rather well. They usually have cloud functionality with low latency. So, we have constructed our SASE stack, which runs now concurrently on GCP and AWS permitting us to provide you availability, which is greater than these two individually. So, we predict the long run.

That is the precise reply, proper? Now, clearly, we’re not 11 years previous in SASE. We’re three and a half years previous in SASE. So, there are some issues which we get stumped on as a result of there are options and functionality we have to maintain constructing as a result of there are edge circumstances which had been delivered to the forefront. That is the place Lee and his workforce are doing an outstanding job, persevering with to maintain us on the prime of the form of pyramid of that subject.

We’re engaged on some actually thrilling capabilities within the upcoming future. We’ll inform you within the subsequent upcoming quarters. However we really feel superb about our SASE pipeline, our on-ramp. They’re lumpy.

They’re giant offers. However there may be product-market match, and we’re seeing success.

Clay Bilby

All proper. Our subsequent query from Jonathan Ho of William Blair, adopted by Saket Kalia. Go forward, Jonathan.

Jonathan Ho — William Blair and Firm — Analyst

Congratulations. Simply wished to perhaps begin out, you have seen some great giant deal success this quarter. By way of the platform consolidation discussions with clients, what are you seeing? And is there proof of consumers perhaps standardizing on Palo Alto throughout a number of areas? What might drive that form of development over time? Thanks.

Nikesh Arora — Chairman and Chief Govt Officer

So, William, the explanation we showcased the millionaire clients, the $5 million offers and the $10 million deal slide, is there is a journey. By the best way, I’ll ship you a Palo Alto shirt, so you possibly can at the least put on that on this assembly. You possibly can put on that different one different instances. However anyway, so sure, we confirmed you a slide of $1 million and $5 million and $10 million as a result of clients undergo a journey.

And it is very not often you stroll right into a contemporary buyer, and we satisfied them to go spend tens of tens of millions of {dollars} to this and consolidate. So, it is normally an evolutionary course of the place we have turn out to be the firewall vendor of selection. They go along with us on SASE. They’re engaged on cloud.

They see the concurrence of cloud and SASE. They’ve XDR. They wish to get to XSIAM. So, slowly and steadily, we’re displaying them the advantages of consolidation.

I will inform you, us being leaders in 13 classes helps as a result of the primary time you used the phrase consolidation, the primary response of the CIO or CISO is, wait a minute, I would like one of the best stuff. I simply don’t desire it as a result of you could have it. Then we are saying, wait a minute, our stuff is one of the best stuff, in addition to it really works collectively. So, it is a journey.

It isn’t one thing that may be a panacea that each buyer is available in and walks in, however our groups are actually centered towards making an attempt to evolve our clients down that path or throughout that journey, proper? And that is why we are able to exit and do a deal. I feel our largest deal this quarter is north of $75 million.

Clay Bilby

All proper. Our subsequent query from Saket Kalia of Barclays, adopted by Joe Gallo. Go forward, Saket.

Saket Kalia — Barclays — Analyst

OK. Nice. Hey, guys. Thanks for becoming me in.

Numbers converse for themselves, Nikesh. Possibly a query for you. Loads of pleasure round XSIAM. Some attention-grabbing wins you referred to as out as nicely in your AI part.

However perhaps a strategic query for you. As you suppose forward, perhaps the subsequent couple of years for XSIAM, how do you suppose that that can have began to disrupt the SIM market, both from a tech or a pricing perspective? And perhaps simply to flip that on its head somewhat bit, is it doable that instruments like XSIAM perhaps assist broaden the SIM market?

Nikesh Arora — Chairman and Chief Govt Officer

So, I feel, Saket, the SIM market does not have a pricing downside. It has a price downside. I spent some huge cash. I do not get sufficient worth.

And for those who ask a few of the clients on the market, how do they use the SIM, SIM is used submit breach or submit occasion to determine what occurred. A SIM just isn’t doing on-the-fly real-time blocking. So, when SolarWinds occurs, Log4j occurs, you possibly can go to your SIM and take a look at the place it occurred and determine and hint it again and try to block the outlet. What it will not do for you is cease it mid-flight.

And that is a paradigm shift so far as safety is anxious. The one means you are able to do that and cease it mid-flight is analyzing knowledge because it’s being created. So, to us, the explanation we name XSIAM not SIM is this is our phrases. We watch the information in circulation.

We watch it coming from the endpoint. We cross-correlate mid-flight with firewall knowledge. We go and triage it. We automate a few of the alert, a few of the noise away.

And we’re taking a look at like actual incidents between triage already, which aren’t being put in some giant knowledge lake, after which operating question language in opposition to to see how do I remedy the issue. They’re already doing it within the again finish. Now, in fact, with the supply of latest LLMs which might be on the market, which you all I am positive have been speaking about and coping with of their free time, they do much more helpful issues than write poetry in your spouse. They’ll really analyze knowledge to inform you what’s anomalous and what’s off sample.

And for those who can determine that out, then what do it’s a must to do? You need to go forward and remediate it. How do you remediate it? You bought to be a firewall to remediate a community. You have to be an endpoint to remediate the endpoint. You bought to be Prisma Cloud, remediate it within the cloud.

So, I feel what XSIAM goes to do goes to convey real-time functionality within the SOC, or real-time functionality in safety. It is early days. Once more, I’ll say — maintain repeating, in a repetition to not fall the prayer, do not get forward of itself, however that is the place we’re heading. And for those who can image chat ChatGPT 10 years from now, image AI and safety 10 years from now.

You’ll not have people making an attempt to investigate as a result of it might be too arduous for people to investigate petabytes of information. Already, the information in a company is an excessive amount of for a safety analyst to investigate.

Clay Bilby

All proper. Nice. Subsequent query from Joe Gallo of Jefferies, adopted by Ben Bollin of Cleveland. Go forward, Joe.

Joe Gallo — Jefferies — Analyst

Hey, guys. Thanks for the query. Are you able to simply touch upon the execution in cloud safety regardless of the backdrop of hyperscaler progress moderation? After which perhaps extra importantly, the place clients are within the journey to cloud safety consolidation? It nonetheless feels just like the Wild West of numerous disparate merchandise in that class. When does that market merge, which I might think about advantages to? Thanks.

Nikesh Arora — Chairman and Chief Govt Officer

Thanks, Joe. So, two fast solutions. One, we’re nonetheless the biggest participant with north of two,000 clients in cloud safety. I do not know for those who explicitly referred to as it out, however our largest cloud safety was $40 million this previous quarter.

I do not know some other vendor within the cloud safety area who’s doing half of that in 1 / 4 in a single deal. So, sure, there are a lot of small gamers on the market, however we have seen a little bit of churn out there the place some small gamers have form of been acquired and gone. Does that imply we’ll be the one participant? No, there will be different gamers within the medium time period, however we really feel snug that there are people who find themselves consolidating. It feels just like the Wild West as a result of clients are nonetheless not totally within the full cloud safety platform mould.

So, they’ve not totally embraced the necessity to have all this stuff related, however I feel it is a matter of time and a matter of demonstration that it’ll occur. By way of your query round the place we’re, and we talked about that within the ready remarks round hyperscalers. Bear in mind, the cloud safety market is just a few billion {dollars}. The hyperscalable market a whole bunch of billions of {dollars}.

Now the distinction is whenever you decide to a hyperscaler, you commit that you will transfer, you are going to transition, you spend some huge cash. And numerous that stuff sits in deferred income as a result of they aren’t totally deployed, or clients have not totally consumed. Cloud safety applies to stuff that you simply eat, proper? Like if you have not consumed it, otherwise you aren’t able to eat it, they don’t seem to be going to be shopping for cloud safety. So, I feel we now have somewhat little bit of a niche when it comes to when folks decide to once they deploy it, to once they take cloud safety.

I simply suppose that stuff can decelerate for some time, nevertheless it’s nonetheless received — there’s numerous headroom for us to get from the place we’re. Even when we received to all the purchasers who’re in deployment or are deployed, I feel we must always see a gradual continued progress for Prisma Cloud. So, the market demand, to me, just isn’t the place the problem is. The problem for us or the chance is to go persuade as many purchasers as we are able to that this can be a platform play.

You need to consolidate throughout a number of modules. You need to have stuff discuss to one another on a continuing foundation, in any other case, you find yourself in the identical state of affairs as you had been in enterprise safety a few years in the past.

Clay Bilby

Our final query as we speak is from Ben Bollin of Cleveland Analysis. Go forward, Ben.

Ben Bollin — Cleveland Analysis Firm — Analyst

Good afternoon, everybody. Thanks for taking the query. Nikesh, you have talked about some GSI alternatives up to now. I am occupied with the way you see that channel creating.

What sort of tail you see there? And the way significant your platform is turning into for these companions? Thanks.

Nikesh Arora — Chairman and Chief Govt Officer

Thanks, Ben. I used to say that a couple of 12 months in the past that I’ve had extra CIO conversations in 1 / 4 than I did in a few years. I might now say that about GSIs. I might say within the final six months, I’ve had extra GSI conversations than I had within the first 5 years of Palo Alto or 4 and a half years of Palo Alto, proper? And the reason being GSIs are occupied with transformation.

They’re occupied with the place they’ll go right into a buyer and deploy a significantly better safety consequence for them. We weren’t related as a firewall firm with SASE, with cloud safety, with now XSIAM, they see an actual alternative to go in and do some transformation for his or her clients. And transformation for them means income to them and means a stable product within the again. I might say most GSIs are nonetheless early ish of their journey to construct a full cybersecurity competency throughout the board.

And there, they’d slightly cope with lesser distributors than extra. So, us being leaders in sure classes, performs into our power and our potential to associate with them. I feel you — we’re already, with out particularly calling out offers, there are a lot of offers the place we’re partnered with GSIs, the place they’re the entrance and we work with them to be as half of a bigger transformation mission, and we’re seeing increasingly more of that.

Clay Bilby

With that, we conclude the Q&A portion of our name as we speak. I will flip it again over to Nikesh for his ultimate remarks.

Nikesh Arora — Chairman and Chief Govt Officer

Look, to begin with, I wish to thank all of you for becoming a member of our name. I additionally wish to thank our workers who work actually arduous towards delivering these outcomes. I’ve to say six months in the past, after we’ve began to see warning indicators, we pivoted arduous. We made positive that our groups received forward of it, and so they have delivered.

So, I wish to thank all of them for his or her contribution. As I stated, this can be a difficult macro setting on the market. And the one means we will get via this as Palo Networks is to maintain our head down and execute. And that is what we intend to do.

As soon as once more, thanks, guys, and see you subsequent quarter.

Length: 0 minutes

Name individuals:

Clay Bilby

Nikesh Arora — Chairman and Chief Govt Officer

Dipak Golechha — Chief Monetary Officer

Brian Essex — JPMorgan Chase and Firm — Analyst

Hamza Fodderwala — Morgan Stanley — Analyst

Fatima Boolani — Citi — Analyst

Brad Zelnick — Deutsche Financial institution — Analyst

Tal Liani — Financial institution of America Merrill Lynch — Analyst

Keith Bachman — BMO Capital Markets — Analyst

Patrick Colville — Scotiabank — Analyst

Matt Hedberg — RBC Capital Markets — Analyst

Jonathan Ho — William Blair and Firm — Analyst

Saket Kalia — Barclays — Analyst

Joe Gallo — Jefferies — Analyst

Ben Bollin — Cleveland Analysis Firm — Analyst

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