Good day, everyone. Welcome to the Palo Alto Networks Fiscal Second Quarter 2020 Earnings Conference. Today's call is being recorded. This time, I'd like to turn things over to Mr. David Niederman, Vice President of Investor Relations.
Please go ahead, sir.
Good afternoon. Thank you for joining us on today's conference call to discuss Palo Alto Networks fiscal second quarter 2020 financial results. This call is being broadcast live over the web and can be accessed on the Investors section of our website at investors. Palovelotonetworks.com. With me on today's call are Nikesh Rawara, our Chairman and Chief Executive Officer Kathy Banano, our Chief Financial Officer and Lee Klarich, our Chief Product Officer.
Afternoon, we issued a press release announcing our results for the fiscal second quarter ended January 31 2020. If you would like a copy of the release, you can access it online on our website We would like to remind you that during the course of this conference call, management will make forward looking statements, including statements regarding our financial guidance and modeling points for the fiscal third quarter Both fiscal year 2020 in our next three years, our competitive position, our proposed accelerated share repurchase, and the demand and market opportunity for our products subscriptions, benefits, and timing of new products, and subscription offerings, and trends, and certain financial results and operating metrics. These forward looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. These forward looking statements applies of today. You should not rely on them as representing our views in the future, and we undertake no obligation to update these statements after this call.
For more detailed description of factors that could cause actual results to differ, please refer to our quarterly report on Form 10 Q filed with the SEC on November 26, 2019, our earnings release posted a few minutes ago on our website and filed with the SEC on Form 8 K. Also, please note that certain GAAP financial measures we use on this call are expressed on a non GAAP basis and have been adjusted to exclude certain charges. For historical periods, we have provided reconciliations of these non GAAP financial measures to GAAP financial measures in the supplemental financial information that can be found in the Investors section of our website located at investors. Palatinetworks.com. And finally, once we have completed our formal remarks, we will be posting them to our Investor Relations website under the Quarterly Results section.
We'd also like to inform you that we will be attending the Morgan Stanley TMT Conference in San Francisco on March 5th. And with that, I'll turn the call over to Nikesh.
Thank you, David. Good afternoon, and thank you, everyone, for joining our call. I was talking to our President, Amit Singh earlier today. He just finished a 2 day review of our sales teams around the world. He was excited.
More than I've ever seen him excited since he started volunteering over. He was excited that we are more strategic conversations than ever around the world and a strategy around cloud security, securing the sock, adding capability to our firewall is resonating with customers. They're launching more integrated capabilities than ever before and our customers are responding well to our efforts. And in terms of all that enthusiasm, our billings are up 17% year over year, including strong performance from our next generation security offering which had impacted our sales team's focus on product versus next generation security. We have course corrected that and balanced their focus.
We knew that the problem will take some time to correct as we discussed last quarter. In all fairness, we were expecting improvement this quarter, which hasn't arrived. Our performance didn't improve partly because the sales incentive change is going to take longer than expected and partly because we were too optimistic about some of the deals closing in the quarter. Upon deep inspection, I feel that the softness will be a little bit more time. So what are we going to do about this and what gives comfort that performance will improve.
1st, we're following up with the success of our Prisma and Cortex people and have created new speed books for firewalls to drive entrepreneurial energy in the the leadership for this speedboat is now in place. Yvara Andy Elder, who joined us from Libervant and Alan Grosswall, who joined us from Cisco, who will be leading this speaker. Secondly, we recently launched SD WAN across our entire power to stay. And with combined with Prisma Access, we believe a great savvy solution. We're still in early stages, but we have closed some deals and are seeing heightened interest from our customers and positive feedback on the vision and simplicity of our SD WAN.
Solution. Along with our technology partners, we have the capability to bring a full branch architecture solution and feel good about our ability to compete. Finally, we're seeing signs and early indicators that we track across our business, where we are likely to see some product growth resume in the fiscal fourth quarter. So let me revisit that in terms of what it means to our outlook going forward in product and its impact of all of the networks. We expect product growth to improve in the second half of fiscal twenty twenty and turn positive in fiscal Q4.
However, product will still be below our internal expectations. We expect that product will return to market growth next year in fiscal 2021. We have put cost containment measures into place to match our investment trajectory with our profitability expectations. And Cathy will give you more details around this versus our EPS forecast. Global product growth will of course impact our firewall as a platform metric, and I expect double digit growth this year.
Management team and I have revisited our 3 year guidance that we gave at Analyst Day, we're only 2 quarters in to that guidance upon deep inspection, we still feel confident our long term outlook for fiscal 2022. Now that we've talked about the product issue and the impact of financials, let's talk about what's working. I met Lee and I have seen over 100 customers this quarter. Our strategy is resonating. Organizations everywhere are undergoing a profound digital transformation.
Fundamentally reshaping the way they operate, innovate and connect with the people they serve. These transformations are helping drive the need for Prisma and Corpus. I'd like to share a few key wins in the quarter. In fiscal Q2, a number of customer wins illustrate the power of our comprehensive approach to security, including A large US retailer who expanded the follow-up on Networks footprint this quarter with an 8 figure deal spanning each across 3 pillars, including Prisma Cloud, Visma Access and SaaS, Cortex and our next generation Firewall. This is one of our largest deals in recent times and a true cross platform buyer of Prisma Court and firewall.
The multinational travel management company expanded the next generation firewalls at Prisma Access following a purchase of Demisto last fiscal quarter. Is a very example of how one of our next generation security services opens the door with a major account for future firewall purchases. I also love this example because the client was pursuing the goal of building a network that will support a significant number of remote employees and also transition away from MPLL. Our solutions not only provide significant flexibility and increased visibility, we also our customers also drive substantial savings compared to prior architecture. We are here with a large German automotive company versus Prisma Cloud compute, formally known as Twistlock.
Prisma will be a critical period of the customers move to and cloud force architecture and shift less security models. These wins are excellent examples of our success in articulating our Vision security and being able to demonstrate our value proposition to customers. As a final indication of our momentum, in the first half of fiscal twenty we closed 2 of our top 20 largest deals in the company's history. Additionally, Prisma Cloud had another record setting quarter and closed an 8 figure. Yes, 8 figure deal with the U.
S. Retail I highlighted earlier, the largest deal in the history of Prisma Cloud. During the quarter, we also continued to drive innovation across our products. Let's travel at Firewall. In December, we launched SD WAC for our next generation Firewall.
Customers are currently testing this offering and feedback is positive as we appreciate our vision and the simplicity of the solution. We will continue our new follow-up subscriptions in 2020, including IoT labels here. Earlier today, we announced Cortex Xor and extended security orchestration automation response platform that natively integrates threat intelligence management. Corton 6 stores a significant evolution of the Demisto platform and we believe it will redefine the SOAR category by making threat intelligence much more actionable at scale. In Prisma Cloud, we have launched the first version of our integrated product where SaaS customers of Prisma Cloud who are using it for workload security and seamlessly leverage the capacity capability to deploy container secure.
In short periods since launch, we have seen 10% of our customers take up both modules. This is exciting because we are hard at work to develop integrating deploy 4 modules over the course of this year, including the integration of Alpharetta. Turning to our marketing efforts, if you will be attending RSA, you will likely notice the refresh look and feel of the new Palo Alto Networks branding. Additionally, we have launched a stand alone brand for our firewall business Strata. Over the past several months, we have launched and built 2 of the premier brands inside the security Prisma and Corte.
When we took a step back and reviewed our position, it became clear that the firewall needed their own plan. All three brands well up to the Palo Alto Networks, which also supports the new updated logo. On the people front, we're continuing to prioritize our culture and workplace environment. Highly focused on making Palo Alto Networks a place where everyone feels inspired to do their best work. We're extremely pleased to run a perfect score on the human rights campaign foundations 2020 corporate quality index and also the designation of a best place to work for lgbtq quality.
We are very, very proud of this achievement. Finally, I will highlight our proposed accelerated share repurchase transaction or ASR that we announced earlier today in our earnings press release. Proposed ASR on the amount of $1,000,000,000 is expected to occur in our fiscal third quarter and represents the capital allocation strategy that we believe it has value to shareholders while still allowing us sufficient flexibility to achieve our goal. The proposed ASR is in addition to the $1,000,000,000 repurchase authorization that we announced in February 2019. As of today, approximately $800,000,000 remain available for future share purchases under the February authorization.
In closing, we continue to charge new territory and cybersecurity with our 3 platform strategies taking shape. Have a lot of work to do, but it's heartening to see our customers partnering with us in a more strategic manner. We are the largest cybersecurity company providing industry leading growth. One transforming our business to protect our customers as they go through this transition. The new data center will be the cloud and we will be there for our customers at Prisma.
New frontier in the AI is AI and ML and Cortex will solve our customer's needs there with security automation. Last but not, definitely not the least, firewall technology will continue to protect our customers and their data centers or in the cloud, and we will be there beside them in Strata. With that, I'll turn the call over to Cathy.
Thank you, Nikesh. Before I start, I'd like to note that except for revenue and billing figures, all financial figures are non GAAP and growth rates are compared to We believe our overall business remains healthy despite our Q2 product revenue performance. In the second quarter, We continue to add new customers at a healthy clip and sales of our next gen security offerings continue to be strong. In Q2, total revenue grew 15 percent to $816,700,000. Looking at growth by geography, the Americas grew 15%, EMEA grew 12% and APAC grew 20%.
Q2 product revenue of $246,500,000 declined 9% compared to the prior year. Q2 SaaS based subscription revenue of $342,600,000 increased 37%. Support revenue of $227,600,000 increased 20%. In total, Subscription and support revenue of $570,200,000 increased 30% and accounted for a 70% share of total revenue. Turning to billings, Q2 total billings of $998,900,000 net of acquired deferred revenue increased 17%.
The dollar weighted contract duration for new subscription and support billings in the quarter remained at approximately 3 years, up by approximately 1 month year over year. For the first half of fiscal 2020, Billings of $1,900,000,000 increased 18% year over year. Product billings were 479 $800,000, down 7% and accounted for 25% of total billings. Subscription billings were $868,900,000, up 34%. Support billings, were $547,600,000, up 22%.
Total deferred revenue at the end of Q2 was 3.2 to adding over 2500 new customers in the quarter, we continue to increase our wallet share with existing customers. Our top 25 customers, 24 of which made a purchase this quarter, spent a minimum of $46,200,000 in lifetime value through the end of Q2 2020. This is a 30% increase over the $35,600,000 in the comparable prior year period. Q2 gross margin was 76.4%, which was up 10 basis points compared to last year. Q2 operating margin was 17.9% a decline of 6.70 basis points year over year and includes a headwind of approximately $9,000,000 of net expense associated with our recent acquisitions.
On a GAAP basis for the 2nd quarter, net loss increased to $73,700,000 or $0.75 per basic and diluted share. Non GAAP net income for the 2nd quarter declined 18 percent to $120,300,000 or $1.19 per diluted share. Our non GAAP effective tax rate for Q2 was 22%. Turning to cash flows and balance sheet items. We finished January with cash, cash equivalents, and investments of $3,500,000,000.
Q2 cash flow from operations of $306,900,000 increased by 11% year over year. Free cash flow was $257,800,000, up 2% at a margin of 31.6%. Adjusted free cash flow in the quarter was $275,600,000, representing a margin of 33.7 percent excluding cash charges associated with our headquarters in Santa Clara. Capital expenditures in the quarter were $49,100,000, of which $17,800,000 was associated with our headquarters in Santa Clara. DSO was 57 days, an increase of 7 days from the prior year period.
Turning now to guidance and fiscal 2020, but will remain below our initial expectations. As such, we are modifying our guidance for the full fiscal year. Please note that our guidance does not reflect any potential disruptions in our global supply chain that could result from the coronavirus, which we are carefully monitoring. For the 3rd fiscal quarter of 2020, we expect revenue to be in the range of 835 to $850,000,000, an increase of 15% to 17% year over year. We expect billings to be in the range of $980,000,000 to $1,000,000,000, an increase of 19% to 22% year over year.
We expect 2320 non GAAP EPS to be in the range of $96 to 98¢ using approximately 99 and a half to 101,500,000 shares. For the full fiscal year, we expect revenue to be in the range of 3.350 to $3,390,000,000, representing year over year growth of 16 to 17%. Billings to be in the range of $4,075,000,000 to $4,125,000,000, representing growth of 17% to 18% year over year. Nextgen Security billings to be in the range of $810,000,000 to $820,000,000 representing year over year growth of 79% to 82%. We expect fiscal 2020 non GAAP EPS to be in the range of $4.55 to $4.65 using approximately 99 to 101,000,000 shares.
Finally, turning to free cash flow. For the full year, we expect an adjusted free cash flow margin of approximately 28%. Before I conclude, I'd like to provide some additional modeling points We expect our Q3 and fiscal 2020 non GAAP effective tax rate to remain at 22%. CapEx in Q3 will be approximately $85,000,000 to $90,000,000 with approximately $50,000,000 related to real estate purchased to accommodate future expansion of our headquarters in Santa Clara. As a result, we are increasing our expected full year CapEx to approximately $220,000,000 to $230,000,000 with approximately 100,000,000 free cash flow in Q3 and fiscal 2020 will exclude costs associated with the expansion of our headquarters including the real estate purchase I just described, as well as a $50,000,000 cash payment for litigation related settlements.
With that, I'd like to open the
We'll hear first today from Keith Weiss with Morgan Stanley.
Hi, this is Hamza Fodderwala in for Keith Weiss. Thank you for taking my questions. Just a couple of ones from me. First, on the product revenue side, Nikesh, is there anything else that you're seeing in terms of any unforeseen challenges within, the firewall business, has there been any change to the competitive landscape at all? You mentioned, you know, launching SD WAN, obviously, there's another vendor that's had some pretty strong traction there.
So any more color would be really helpful.
As we highlighted in the prior quarter, we, made changes to our sales incentive last year to drive, Prisma and Cortex because honestly trying to there's very few examples when I came to enterprise security of companies building a second and third product line to route the 1st product line. And we spent a lot of effort as a team trying to figure out how can we build where the opportunities were. We aligned it on cloud, we aligned it on automation and machine learning, and you made some significant bets both in terms of acquisitions and resource resources in driving Prisma and CortEx. That changed that changed and trying to get sales people to learn, appreciate, understand, and sell these things, cause them to pivot hard because they're going to make a lot of money. Cortex and they did.
What they did was because they were focused on this, there's only finite resources. They didn't go in knock on enough doors to create firewall demand. And as you know, there's a cycle from demand to closure, which has its own notion, takes its own time. And we discovered that much later in the year. While we're delighted with the success of Prisma and Cortex in Q4, we realized that we had been systematically eroding the opportunity to have a large pipeline going into Q1.
Is why you saw a Q1 results. We were optimistic that we would be able to accelerate that effort and try and get deals closed sooner. But, unfortunately, it was hard to fight the tape. There is a cycle. There is a motion.
And our customers are used to it, and that's what is in front of us. Hence, we have had to realize our product efforts. In terms of what's going on in the market, yes, as do you want as a trend as you see it? There are other people out there, who are doing well with SD WAN. There are SD WAN Companies out there doing well SD WAN.
We have SD WAN partners. Every time we go sell Prisma Access, as part of a SAP solution, either we now use our own SD WAN or customers choose other SD WAN partners. Definitely SD WAN is a friend. And We think as people go to cloud, as network architectures change, MPLS starts to get pulled off off and the internet becomes on your network, we will see people, leverage more SD WAN capabilities. So it is an area of focus.
It continues to remain area of focus and and we're excited about the progress we've made since December in terms of getting customers interested in our solution. And other than that, honestly, I think this is an execution issue at our end. I don't see that the market is changing. So we've got to take our medicine and we're going to go ahead and go execute.
I just asked one follow-up question on the next gen side. On core tax, it seems like there's been some really strong traction there. I was curious to know, the announcement that you made earlier today on that product how do you expect that to translate to, further pipeline into the second half of this year? And what are some of the early trends that you're seeing there? And that's it for me.
Yes. So as you know, on Cortex, we have 2 products. In the larger category of security automation, applying AI and machine learning, we have product of Cortex 50R, which the simplest form competes in the XDR category, which is the next generation of EDR category, where some of the newer endpoint vendors have migrated to. And there we keep adding more data sources into our ingestion capability. So XDR is doing well.
Our primary customers have come primarily from Palo Alto customers who had our firewalls and some of your customers who want our endpoint capabilities from the XDR perspective. And that business is doing well. What we announced this morning was a Cortex Xor, which is the next evolution of what was Demisto. In the past, we sold Demisto to our customers. And the constant feedback, regardless, it'll be amazing.
It's tracked in terms of management will be part of this capability we would have to go stitch it on top of our capabilities automate and and add playbooks on. So the digital team has rallied and merged technical management. In the capability of what was Demisto and hence we've defined the Xor. Silicon Valley Industry analysts, they've been calling for this, they've been calling for this trend, So we are 1st in launching that capability. Purely from a mechanical perspective, every customer who is a customer of Demisto should want an upgrade to this capability additionally, it should open up a larger market for us with Demisto, which is exciting to our market, which is, we think, roughly the same size as the sewer market.
So, we're excited about it.
Thank you.
Thank you for asking a Corvix question. I was thinking that question wouldn't come towards until the end of the call.
We'll hear next from Walter Pritchard with Citi.
Hi, thanks. Nikesh, question for you just on the if we're thinking about this not from sales incentive perspective and what behavior you're driving, but just from a customer demand perspective, how do you think about I guess you know, we all understand, I think, that firewall demand is not what it was 2, 3 years ago, but, you know, certainly, I think we hear in the industry that customers spend on firewall is you know, flatter, maybe slightly up. And I'm wondering as it relates to your customer base with, with firewall revenue down two quarters here now, are customers Did they did they buy last year and they're holding off their purchases or they're holding their purchases in the future? I'm just wondering how we think about it from the buyer perspective. I think we well understand everything you've done, from the sales incentives side, from the sort of supply side?
Yes, thanks, Walter. I think it's a good question. From a buyer perspective, every customer is on a different life cycle in terms of both where their infrastructure is today and where they're trying to go tomorrow, whether they're adding more data centers or going to the cloud or trying to replace their sort of traffic coming back home and trying to build some sort of a hybrid cloud plus data center infrastructure. So Yeah. The trend as as I highlighted, in the last answer is that we are seeing SD WAN being asked for.
We are seeing buyers looking for SD WAN solutions with security. In some cases, that involves a VOXX solution, in some cases, involves a software solution. In our case, we have the opportunity now with SD WAN from December to deliver both. We can give you a box that gives you SD WAN capability. We can give you personal access.
That allows you to deploy SP runs into the cloud. So from that perspective, there's definitely activity on the network. So re architecting the network and trying to get more, sort of, evolution underway. Customers who have large data centers are to their own refresh cycle. So we're not seeing anything big that would give us a reason to believe that things are shifting.
On the margin, are are the solutions given by cloud versus boxes where it caused some difference probably, but nothing we see at this point in time.
Great. And then Cathy, just on the long term goals, I know you're not revisiting those here, but as we think about the 3 year CAGR you talked about, I mean, can you help us understand maybe what level of, firewall or product sales you were anticipating in there and sort of Analone, any color you can provide us around sensitivity of that overall growth number given the performance you've seen here on the product side near term?
Yes, Walter. Thanks for that question. We did, obviously not guide explicitly on product, but I think for the most part, the analysts were projecting, less growth than we have seen historically on the product line, which was appropriate and reflected in our guidance. And so, obviously, that's changed a little bit and we've had to adjust our guidance this quarter, but we still feel we still feel really great about the longer term view, especially given the performance of our Gen security. And we definitely think, as Nikesh mentioned, that we believe that what we have is an execution issue and that we know how to compete in firewall sales and that we'll be able to correct the situation and improve that growth as well.
Okay. Thanks for taking the questions.
And from JPMorgan, we'll move next to Sterling Auty.
Hi guys. This is Matt on for Sterling. Thanks for taking my question. If we're looking at product revenue, assuming that product revenue is just flat from here on out. How long do you guys think it would take to get the next gen security to parity with that revenue run rate?
Thanks.
I'm going to let Kathy answer the parity question, but I will tell you from our product revenue forecast. We've looked at the pipeline and looked at the early indicators. We think that Q3 is going to continue to be tough, but we should be able to get to positive growth by Q4. And our teams are hard at work to make sure that we divert these trends and that next year we're back to that market or above market growth in the firewall space. In terms of how long it takes for parity for NGS, I think that's a math problem.
If you look at our forecast, we're giving you for NGS and look at our our firewall forecast, you should be able to deny that answer. But I'm gonna let Kathy answer that question in case.
And I really don't have much more to add. That was a great answer.
Great, great. Thanks for that. And then just one follow-up. Geographically, it looks like there are some issues in the year. Are there any macro impacts or any thing that you guys can point to, geographically?
No, again, I think on a geographic basis, there's no trend thing is you know that Europe and Asia generally have lagged the cloud trend globally, but they're slowly getting on board same company in Europe also talk about hybrid cloud solutions, talk about thinking about changing network architectures. They generally lagged some of the U. S. Companies in that context we're seeing traction in different parts of the world of varying degrees. So no, I think the market's market's only going to get bigger on an international basis.
And as Kathy said, you know, we're all watching the coronavirus thingy, you all look to the market today. I think whatever impact happens because that will happen across the industry, will not be specific to any one company, but we have some we might have less exposure compared to others, but I think that will be more of a global impact around that trend.
Great. Thanks guys. I appreciate the color.
We'll move next to Karl Keirstead with Deutsche Bank.
Thanks, Kathy. I just wanted to make sure just given the attention on the product revenue side that I understand the outlook for the second half where you said the product revenue growth should improve. So just to be clear, the year over year decline you anticipate in 3Q would, would, there'd still be a decline, but, less than negative 9. So a better than negative 9, I should say. And then in fourth quarter, you think the year over year growth rate for product could move positive.
Is that correct? I just want to be clear that you anticipate negative 9 as being the floor, let's say?
Yes, that's correct, Carl.
Okay, got it. And then maybe maybe
Not just on me too.
Okay. Thank you.
Okay. Great. And just so I'm clear, the $50,000,000 litigation related settlement was related to what, Kathy?
The details of the settlements are confidential. So we won't be describing a lot in our queue or on this call, but, it was related to an, an IP settlement, which is pretty common in the industry.
Got it. Okay. Terrific. Thank you.
From Raymond James, we'll move to Michael Turits.
Hey, guys. Good evening. So two two competitive questions and and then one on on the incentive. So Can you be more specific, Nikesh, about whether or not you're actually losing because you you don't have any SD WAN It's just coming into play for you now. And what's going on in the in the market against Zscaler specifically for was called cloud delivered network security competitively.
All right. Well, let me start with the SD WAN question and I can try and give you some color on the network transformation architecture market. I generally prefer not to talk about other companies because I don't understand their businesses as much as I understand ours. But on the SD WAN front, all we are seeing, customers require to talk about SD WAN. And remember, customers have a choice of taking best to breed SD WAN in the market which are independent players.
Or taking that as part of an integrated firewall solution. And we've seen customers opt for either depending on the complexity of their needs for SD WAN. You're going to deploy it to run across 10,000 sites, 8 1000 sites, you go get a specialist SD WAN vendor because he has a whole bunch of stuff that he want to deploy configure and set up, which is a much more complex product that is available in the market. Sometimes customers wanna do a simpler architecture and just have the capability in their firewall. And we're seeing a market for that too, and that is the market we will be able to address with our evolution of our firewall capability and our we end up with my access capabilities with the SD LAN that we'd want.
So yes, we are seeing that need come in. Honestly, I've not seen many large deals in the market. Where we've seen a competitive situation where the customer says I cannot solve this problem through the power of the firewall. I'm gonna go elsewhere. But clearly, other people are doing well.
That may be some of her market segment issue. I haven't seen that much in the large enterprise space. In terms of, what it does to the network transformation market, remember, Let's say when I came to Palo Networks, we had a product called GPCS, which we deployed a lot of resource against, and we worked really hard over the last 18 months. Lee and his team did a great job in launching Prisma Access and delivering it. We got this product in the market almost only for three quarters.
And in that 3 quarter time frame, we have made some teaching those that are very large customers that deploy very large deals. I highlighted some of the deals earlier, in my prepared remarks. And that was a large field, my access company with that deal. So a market where people weren't seeing us They probably had more share in a market where they see us when we get deals. Other people get less of that buy.
And, you know, it's one of our strongest pipelines in that space. We have a lot of expectations from that space. So, kind of expect us to continue to be aggressive in the Southeast space because we believe they have one of the most comprehensive solutions. Was that a third part of your question?
Yeah. That that was that was helpful, Nikesh. My my follow-up was did you make any additional, incremental changes to the incentive structures as you saw that things were taking longer at this quarter?
Look, we have a very capable, responsible, intelligent sales team out there. And they understood the math when we did the math in the last year in terms of taking the multiples we gave them to go sell Prisma and cordix as they did as we requested them to do. We have balanced those. We have a lot of scrutiny. We have a lot of inspection going on in the firewall space and our teams are responding.
It's just honestly, it it takes takes time. Firewall cycle has a has a time element to it. And call it, missed judgment in the last quarter when we looked at the deals of the pipeline, we were being too optimistic that we could close a lot more of them in this quarter than we have been able to. The deals haven't gone away. They're just take time.
And we're just trying to make sure that we're no longer setting unrealistic expectations of closing deals in our pipeline and giving a reasonable forecast book to you and setting right the right expectations of lurking.
We'll move next to Brent Thill with Jefferies.
Hi. This is Howard on for Brent. Thanks for taking the question. Nikesh, in your prepared remarks, you mentioned, you know, you had gathered feedback from about 100 key customers. Could you share some any additional details around I guess, customer requests for either more product functionality or or flexibility or even on the pricing side.
So, for example, is there any demand for a a such encryption pricing model for on prem firewalls?
Yes. Thank you for the question. Look, I'll tell you a funny story. When I did the my tour when I started Palo Network. I got a lot of curiosity meetings because people wanted to know who's this new guy who come into cybersecurity and who wanna talk to me.
And I went there and talked to them about firewalls, and I told them about all of our subscriptions. The money never polite and listened to me nicely and nodded their heads. But they've been buying firewalls for 15 years. And, you know, it might have been new and exciting for me. They've been buying for a long time, and the CIOs and CISOs were interested, but this wasn't top of mind.
What has changed in the last 18 months is that we talk about cloud transformations and how the cloud transformation has to be secured with Prisma Access and Prisma Cloud. We talk about their SOC and how their SOC is getting too much data and then it makes sense of that data to be able to be more secure. So now we're having real conversations where they want to talk about this transformation And slowly and steadily it's emerging that we are one of the few companies which have those products and are committing to developing them further with our customers anybody else in the market. And I would challenge the industry to show us who else is out there talking about these topics with our customers. So the conversations are really, really good.
That are actually meaningful. We are seeing a lot of conversation in our network transformation. We are seeing a lot of conversational customers want to be in multiple clouds. 1 year ago, it was they were going to a single cloud. A year later, they found they have instances of different cloud infrastructures being used by different parts of the organization.
So want a multi cloud security solution. So the conversations are changing in terms of what people are talking about. In terms of what they want, I don't think you're going to see ratable on prem firewalls anytime soon because there are many players in this space and customers have a have a notion in a way of buying these things and capitalizing them. So, you know, if somebody wants it, I'm sure we can construct a financial a solution for them that allows them to buy battery, but honestly, we're not seeing demand for financial creativity to buy our firewalls. I think there is going to be some conversation in the future about how these architectures, over time need to be fungible that if I'm going to have a data and a cloud install, how do I make sure I can move things fungibly between them and our teams are working hard to trying to understand that need and see if we need to make any full rates in that direction.
Okay. Thanks, Pekash. That's really great color. I I had a related follow-up for for Cathy. It's it seems like subscription billings were very strong and that's, you know, driven a lot by, by the cortex, XDR.
And so if we were to if product billings had performed in line with your expectations, because the overall billings number was
actually towards the high end of your guidance.
And despite
the the revenue, the full year red guide, guide down, the billings is actually, you know, it's you guys only guided it down 20,000,000 dollars, $30,000,000. So if we at least some product was was in line with expectations, would total billings have actually, you know, could we could we have seen a billings raise?
Well, I think that's a very good question. And I'm going to let Kathy respond in a second, but I think this is a point I tried to highlight in my beginning of the remarks that our teams are really excited. We're delivering the billing numbers we have on tap. We're just delivering them in the wrong box as per your expectations. We're delivering them on Cortex and Prisma more aggressively than we expected, and we're seeing a product mix.
So we're making a hold which is interesting because the short term financial impact changes our revenue and EPS in the very short term, but this is phenomenal news for the long term. We have 4th revenue is rising, the better than it has in the past. So I will let Kathy add more color to that.
Yeah. We've, you know, obviously, been really thrilled with the strong subscription performance, not just NGS, but also our attached subscriptions are growing nicely. And, you know, we've introduced some new subscriptions, DNS, and, S UN, which is just very new. And in addition, we've introduced a platinum support product as well. So all of those are helping contribute to strong subscription growth, which we feel really terrific about, obviously.
So, look, we left our NGS, long full year guidance the same. We didn't we didn't move that this time. But we are feeling really terrific about all of those numbers. And, you know, the the product The product decline is certainly the driver of all of the change to our revenue and billings guidance.
Okay. Thanks a lot.
Moving on to Nehal Chokshi with Maxim Group.
Yeah. Thank you. I'd like to ask about the accelerate share repurchase timing and also, well, it's been the thinking on why have you only already purchased 200,000,000 points so far?
Yes, thanks for the question. Look, the we have a 10b5-1 plan filed, which allow which buy stock back out of $1,000,000,000 authorization at certain levels. And when we looked at the strength of our billings, we looked at the trajectory as a company in our comfort as management team. And we looked at the product thing. We anticipated that, you would not take kindly to our product execution issue.
We think this is a very good company in the long term. So which will the best thing we can do for our shareholders is to return capital by buying back shares, because it seems they're very, very attractive at these levels.
And it will take place in in Q3. In Q3.
And if you look at 3 and a half,000,000,000 of cash on our balance sheet, so already outlined our M and A strategy, which says we're going to be doing, tuck ins to our product strategy as opposed to try and go do any big M and A So from that perspective, we felt, you know, given that we generate close to $1,000,000,000 of free cash flow every year, that gives us enough financial flexibility to be able to do this at this point in time.
Great. Thank you.
We'll hear next from shaul Eyal with Hiner.
Thank you for taking my question. This is Yi in for Shao. Just two quick questions. First one is for Nikesh. I think you talked about in the prepared remarks that there's certain key indicators that tracking, you know, you're expecting positive fee on the firewall side.
Nikesh, can you help us? We're having
a hard time hearing you. Sorry. Can you speak up? We're having a hard time hearing you.
Sorry. Sorry. Thank you for taking my question. This is you in for Sharu. Nikesh, I think on the prepared remarks, you talked about there are some key indicators.
That's tracking, positively on the firewall side. Can you elaborate on what are the some of the metrics you're looking at?
Yes, look, as in any good sales organization, you have to look at your deals, you have to look at pipeline, you have to look at your conversion capabilities, you have to look at the stages of deals that progress. You have to look at how many customers are evaluating your firewalls versus how many customers are up for refresh. So we track all those metrics and we're seeing seeing positive, indications of those metrics that our pipeline is is robust. And you know, as I said, we were optimistic in this quarter that we would have been able to close a lot more sooner than normal, but I think they're gonna take them all the time. We are seeing those indicators trend up, which gives us confidence about our Q3 and Q4, revival expectations from our product business.
Albeit not as much as we had expected earlier, but we still believe that, as somebody earlier asked, it's minus 9% of the trough. Yes. We believe there's a trough And we believe by Q4, we'll have we'll be in positive territory and hopefully revise back to market market plus growth next year.
Thank you for that, Nikesh. And then a quick one for Kathy. On the geographics right now, I think you mentioned that EMEA and APAC lagged for the quarter. Any chance you could give us the growth rate, for, you know, the individual individual regions, US, India, as well as APAC, and, and maybe comment a little bit on the distribution pipeline, going forward.
Yeah. I'm I'm sorry. I'm really struggling to hear you, but I think you asked for our revenue growth by geography. Is that correct?
Yes. That's correct. Kathy, whether it be on the, the the the traditional degree breakdown, US, EMEA, as well as APAC. You know, if we could get some color on the year, we'll do a growth rate and maybe comment a little bit on the distribution channels going forward.
Yeah. So our our growth by theater, was 15% in the Americas. EMEA's growth was 12% and APAC was 20%. Thanks. Thank you.
And from Guggenheim Partners, we'll move next to Taz Kajalji.
Hey, guys. Thanks for taking my question. I had
a question on your guidance revision. So, Cathy, if I did my math right here, you're guiding down revenues by about 90,000,000 for the year, but your billings have been guided down by only 35. So what's the offset, given that you're guiding down programs, I think, by the 90,000,000. And you're not even raising your your next gen billings guide. So what is the offset for, billings versus the decline in product revenues?
Yeah. You know, as I mentioned in the response to the last question, we are seeing strong subscription growth. Not just in our NGS subscriptions, but also in our attached subscriptions. Including some of the newer subscriptions that we've launched, which are contributing.
And will launch.
And will launch, yeah, in the future.
Got it. And then one one second second question. Just to clarify, you mentioned that product revenues would be positive in 4Q. Right? Because if I do the math on your full year revenue guide and then, assume typical seasonality on your on your supported subscription revenues, it still leads to negative, product growth for, obviously, QT and also Q4.
So can you just clarify? Q4 should be we expect people to be positive from growth?
Yes. We are expecting positive growth in Q4. Positive product year over year revenue growth.
And Keith Bachman with Bank of Montreal has our next question.
Hi. Thank you very much. I'm gonna have two questions. I'm gonna ask you currently. The first is, Palo Alto has had trouble, establishing and then hitting targets.
And so while on a subscription side, things have gone quite well,
the performance
products has been very different. So you're guiding to a a less of decline, if you will, in Q3 and then product growth in Q4. But what's the process that you think, that you've either approved upon or have more information because candidly hasn't been very, effective at hitting targets. So what's different now that gives you confidence in terms of a processes or a higher discount rate, so to speak, on, the targets that you established. And then the corollary question is, I know you're saying this is more internal than external, but if you look at the growth rate between 4 to net product growth that are double digits revenue growth and you're down 9%.
So it's a 20% spread on your on your product. Growth rates. It's just hard to believe that there's not competitive, activities there. There are laws that are causing meaningful share loss. So I just Wanted to the corollary question is what gives you the confidence that you're not actually losing share and this is more internal and external?
And that's it for me. Thank you.
All right. Well, thank you for your question. Yes. Look, I think I'll repeat some of what I've said. Last year when we did our forecast, we will be delighted with some of our next generation security growth and we expect our growth to continue.
And majority of that happened, but in Q4, we saw a product slowdown a bit and we saw next generation security take up because our teams have been focusing on generating a lot of commissions for themselves. And we look to the number in absolute. And as the prior analyst indicated, in absolute, we are delivering the billings. We are still delivering industry leading growth in cybersecurity. There's no other company of our scale and size, delivering the numbers that we are.
So I know you're very focused on the product piece and So are we? Let's focus on that. You talked about the competitive activity. I think it's unfair to look at spreads, but these numbers are different. FortNet has a different revenue than we do.
And absolutely, yes, there's still a spread. They operate in different segments. We operate in different segments. They've been seeing strength in SD WAN, they've been seeing strength in the low end market where the computer price. We've looked at the entire market.
We inspect every deal. You know, every deal where we're competing with other people or not. So part of our competitor data is based on customer by customer understanding who we're competing with and if you're not. Yeah. 22 things.
1 is right. Giving yeah.
Just just to jump in, though,
but in terms of the forecast, within you, miss, the last two product forecast, have you put a higher a bit more conservative than you think as we look out the next two quarters?
Gabby, do you want to say something about it?
Yes. I just want to be clear that we haven't guided to product revenue. And I think if you go back and look at our history of usually when we've missed. Usually, we don't find very many quarters where we miss. And probably we do pretty well compared to most companies, would be my guess.
Alright. Okay. I will see you before. Thank you.
We'll hear now from Patrick Colville with Arete Research.
Hi there. Thank you for taking my question. I just want to talk about SD WAN because that was the big launch back in December last year. And, just wondering if you could share any anecdotes on, you know, SD WAN kind of early feedback And I guess, you know, not to flog with dead horse and his product stuff, but, is that a contributing factor? Is it all, you know, just any color there would be great.
Look, as I mentioned, there is a lot of interest out of the market from SD WAN perspective. Because, remember, there's a very large installed base with MPLS. And as people are going down the cloud journey, they are looking at the facts. So why do I need to bring all my traffic back home to my data center? Why can't I just send it from my branches, my remote offices, my other data center straight to the cloud?
And that is causing the SD WAN conversation to happen. Is pretty standard now that people will, you know, replace that MPLS solution with internet access with SD WAN, but then they need security. So with that as a background, since Lee is here on the call, and I feel like he has to earn his keys as well. By Lee, can you talk more about the SD RAM market?
Sure, Nikesh. Happy to earn my keep. So, Patrick, as you mentioned, SD WAN was released in December, so it's still very early days. But we are seeing a lot of interest, a lot of very positive reaction from customers. We have dozens of customers already that are deployed We in the in the quarter, we had a multimillion dollar SD WAN deployment, which gives us, a lot of excitement to see the larger deals coming through as well.
And I would say even perhaps more exciting is that while these initial gills and deployments are more of the do it yourself kind of variety, which is how the SD WAN market has operated in the past. We're hearing from our customers is that they really like our ability to combine this with prison access in a more of the Sassy kind of variety solution where we're providing the network and the networking and the security from the cloud and lighter weight, branch deployments to connect to that cloud. That's the that's the promise it's asking. We're getting a lot of very good feedback from customers about that is the future of how these architectures, these network transformation should happen.
Great. And can I talk about internal segmentation could I do a bit of work speaking to CISOs? And one of the trends that I've been picking up of late is that ransomware is it's become an increasingly prevalent threat. And one of the ways to combat it has been increasing use of internal segmentation. So I was wondering if, you know, you've seen that as well, you know, and what kind of boxes people are buying to segment their networks internally?
Yeah. So I actually separated those 2 things. Ransomware is a generally resolvable problem. And we have a number of ways of presenting ransomware from, getting into a customer's enterprise to begin with.
Segmentation can be a a backstop to
that, but Shanee segmentation is a much broader initiative to focus more on building 0 trust architectures designed around, increasingly mobile workforce, increasing over devices, locations of devices, include increasing, cloud deployments, public cloud, and and fast deployments where customers as they have their enterprise architectures transformed, they're looking to move to an increasingly 0, 0 trust architecture, which then leads down the path of needing to do better segmentation to have the right enforcement points in the right part of the network. We're very well suited for this because in that architecture is not just about location device. It's about being able to build context oriented policy everywhere. And consistently, and we are unique and have been unique for many years in ability to meet that requirement.
Great. Thank you very much.
And for Mizuho, we'll hear from Greg Moskowitz.
Okay. Thank you very much and good afternoon. So, Nikesh, you mentioned earlier that product revenue would return to market growth in fiscal 2021. But as I think we all know, for many years, Palo Alto has been growing significantly above market rates. And and I realize that you're thinking out from the go to market issues, but Can you shed some light on how you're thinking about your firewall market share over a medium to longer term basis?
And then also what do you think the firewall market growth rate will look like over that period of time?
Oh, I thought I had you by saying we're going to market growth or better because I didn't want to predict the firewall market but that's a very good question. Thank you. But the reason we're not expecting to grow faster than market from a share perspective because we believe we will be taking share. We will be taking share in the software form factor. Every solution that can solve that is solved by a box by some of our competitors.
We solved by a VM. We solved by a container VM. We solved by a Prisma access delivered by the cloud solution. All these things do not qualify as product revenue in the way we report these. All these things ends up in next generation security.
So, you know, this is the this is the fallacy. This is the trap we fall into in terms of how you recognize sales versus software sales and the transition companies like ours have to go through. So yes, we definitely expect to be taking market share from everybody else. We'll be taking it. We'll be recommending software solutions to our customers with SD WAN with VMs for the cloud, with container VMs or containers.
But they're not going to follow the product talks. Do I believe I can sustain product growth at market levels? Yes. Which means I have a lot more share in the market on my boxes and I will take share with software form factors because most transitions are being discussed in software form factors and not as straightforward replace the box A, box B.
Okay. That's helpful. Thanks Nikesh. And then just a follow-up for, for Cathy, can you comment just on how discounting rates were this quarter? And related to that, Was there any pushback at all from customers or from the channel on the recent appliance price increases?
Thank you.
Sorry. What were the rates you asked me about? Alright. Sorry. You asked me about discount rates?
Correct. And just if there was any pushback from customers on the recent appliance price increases?
Yeah. You know, We did see a small uptick in our discount rates this quarter. We feel like on the balance with the price, the price increase that we took on product, we were still, at least on par, maybe a little bit better off with the price increase.
Our final question today will be from Gray Powell with BTIG.
Oh, great. Thanks for thanks for working me in. Yes, I just I just had a quick one. So how should we think about the growth rate of attached subscriptions given what's going on on the product side? And then what do you see
as the key levers to drive that component of
the business going forward? Thanks.
Yeah. Well, you know, our attached prescriptions have obviously performed really well in the most recent quarter, along with the GS subscription growth as I've already talked about. The, you know, the reality is we've sold, you know, a number of enterprise agreements which, customers buy our subscriptions in advance, and then they tend to buy more products as time goes on. That's sort of part of the agreement that we strike with them. And so we are expecting, subscription growth to continue to be strong with the new subscriptions that we're adding and with continued strong attach rates.
And then as we return product growth, to higher levels. Obviously, that will help with the general attached subscriptions as well.
Got it. I guess what
I was trying to get at would be with the new subscriptions coming online, should attach subscription be faster than maintenance?
Yes. Definitely. Yeah. And we've seen that historically. Yeah.
For sure.
Okay. Cool. Thank you.
Yeah. You bet.
Anything further, Mister Powell?
Oh, I'm sorry. I'm I'm good.
Thank you. Great. And everyone, I'll turn the conference back to you all for closing remarks.
Thank you. Good morning, Rose. I wanna thank everybody again for joining us. We look forward to seeing many of you at RSA in our upcoming investor conferences, but I also would like to thank our customers, our partners, most importantly, our employees around the world who worked hard to deliver the quarter. Thank you, everyone.
Have a great evening.
Again, that does conclude today's conference. Thank you all for joining us.