Good day, and welcome to the Palo Alto Network Fiscal Quarter First Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I now like turn the conference over to Amber Austin, Director of Investor Relations. Please go ahead, ma'am.
Good afternoon, and thank you for joining us on today's conference call to discuss Paloosa Networks fiscal first quarter 2019 financial results. This call is being broadcast live over the web. Can be accessed on the Investors section of our website at investors. Palo Alto Networks dot com. With me on today's call, are Nikesh Alora, our Chairman and Chief Executive Officer Kathy Donano, our Chief Financial Officer.
Lee Klaritch, our Chief Product Officer, and Dave Pranich, our Executive Vice President, Worldwide Sales. This afternoon, we issued a press release announcing our results for the fiscal first quarter ended October 31, 2018. If you'd like a copy of the release, you can access it online on our website. We'd 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 plans for the fiscal second quarter 2019. Our competitive positions and the demand and market opportunity for our products and subscriptions, benefits, continued execution focus and timing of new products and subscription offerings.
Each 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 apply as of today and 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 a more detailed description of factors that could cause actual results to differ, please refer to our annual report on Form 10 K filed with the SEC on September 13, 2018, and our earnings release posted a few loans to go on our website and filed with the SEC on Form Eight K. Also, please note that certain financial measures used on this call are expressed on a non GAAP basis and have been adjusted to exclude certain charges.
For historical period, we've provided reconciliations of these non GAAP financial measures to GAAP financial measures and the supplemental financial information that can be found in the Investors section of our website located at investors. Powelloxnetworks.com. We'd also like to inform you that we'll be participating in the 2018 Wells Fargo Tech Summit in Park City, Utah on Tuesday, December 4th. And the Barclays, Barclays Global Technology, Media And Telecom Conference in San Francisco on Wednesday, December 5th. Lastly, once we have completed our formal remarks, we will be posting them to our Investor Relations website under Quarterly Results.
With that, I'll now turn the call over to Nikesh.
Thank you, Amber. Hello, everyone, and thank you for joining us this afternoon for our fiscal first quarter 2019 results. As you know, it's been a busy few months for me at Palo Alto Networks, and I am delighted to report that we had another outstanding quarter and once again, we have been able to grow our top line significantly faster than the market. I'm also happy to say that my cybersecurity education progressing nicely as I continue to meet more customers, partners and employees. During this quarter, we held our first ever European Ignite, our user event, in Amsterdam and our 2nd annual Federal Ignite in Edmonton, DC.
At these events for our customers and partners, We consistently heard from multinationals to governments, all the challenges that are associated with protecting data in a digital world. Mobility, the movement of data to the cloud, data analytics and machine learning are some of the trends that we believe are forcing companies to reevaluate the security posture in the more oriented manner, looking for high levels of integration and automation. In this way, we believe we are uniquely positioned to support our customers across all these 3 events: 1, securing their enterprise 2, enabling them on their journey to the cloud and 3, helping them with their desire to deploy advanced AI and ML across their enterprise. So let's discuss some current examples of how we're solving customer problems and what we have in store. Service providers a segment where we are traditionally not done as well as we would like.
We're about to change that. We're excited to announce a new product for our service provider partners an area we plan to focus on and invest in for future growth. Our service provider providers are facing a major mobile infrastructure transition from 4G to 5G. We want to be there with them to help them succeed. They're announcing a new super scale next generation firewall, the K2 series, that has been developed specifically for service providers for their high throughput needs, taking into account their price considerations and upcoming 5G and IoT transition.
We expect it will be available shortly in early 2019. In a segment where we've done well, the federal space WIfAR, our cloud delivered malware analysis service achieved FedRAMP ready status during fiscal Q1, This extends our ability to provide advanced threat prevention and analysis capabilities to U. S. Federal agencies. For our largest customers, we introduced Panorama interconnect.
The new Panorama plugin gives customers the ability to manage configurations of over 30,000 generation firewalls from a single panorama console, and they can push configuration changes to all managed devices from one single location. This continues our quest to simplify a large scale security management for our customers. And lastly in cloud security, we closed our RedLock acquisition this quarter, FredLock adds to our already extensive set of cloud security offerings, which include evident, aperture, global product cloud services and VM Series. By combining the Evident RedLock Technologies, we'll provide customers with cloud visibility and compliance, cloud security analytics and advanced threat detection in a single offering to be released very early next year. Video offerings will help security teams better understand their cloud deployments Vintech to respond faster to the most critical threat and achieve automated remediation.
I think there's a lot of discussion around our philosophy and my philosophy on M And A. So I'd like to use the subject We have a clear opportunity to be a leader in this space and believe we believe that we can significantly enhance the value of the asset we acquire. We invested a product focused team in technology that we believe we can integrate quickly and effectively into our infrastructure. I want to reiterate that as a shareholder and as an investor, my interests are aligned with yours to create long term shareholder value. So to give you some guidance, any activities in the area of M and A are going to be disciplined.
They're going to be guided by aspiration to 1, participate in a large market, 2, become number 1 or number 2 in that market, and 3, bringing the vast execution capabilities of Palo Alto Networks to any acquisition so that we can instantly enhance value. Looking forward, We will continue to stay strong in network security, adding capabilities to solve our customer problems. Additionally, we will lean forward the trends of cloud, machine learning and AI in a big way. These important technologies paired with our vision of simplifying security and providing a platform with consistent protection across an enterprise environment is resonating with customers. The Application Framework And XDR are the next step in our evolution towards this goal.
We're making good progress under the leadership of our founder in Israel. And while we're still in the early days, during Q1, seven partners launched applications of the framework, The technologies these partners bring to the framework include analytics, MSSP, identity, threat intelligence, security for industrial control systems, IoT and network taxes control. Before I move on, I'd like to add a little bit more color on my 1st 180 days. As we all know, execution has been a key variable in our success as a company, and we will continue to be so in the future. Fair loss earnings call, I mentioned launching speedboats with focused leadership accountable for results in our more nascent market opportunities.
Once we have a great execution machine, we want to make sure our speedboats give us the flexibility to operate and execute effectively in some of the new areas. Our first speedboat in cloud security has been launched and is off to a good start. We have product and sales leaders jointly driving our cloud performance and we expect this focus will allow us to execute as well in new areas as we have done historically. We'll likely launch additional speedboats in the future will keep you posted on our progress. We have an excellent go to market engine that is running well.
And with our new President, Amit Singh, We have a leader in place who brings extensive experience growing enterprise and cloud businesses is driving revenue and scale. Alec joined us on November 1st, as we're extremely busy in his 1st few weeks from the job. He's finished over 50 account reviews and has many customers already this quarter to both share our commitment to them and learn from our customers on how we can best partner with them. He's running hard and I'm excited that we found such a capable leader to fulfill this important role. He joins a great team and together, they will remain focused in executing against our significant market opportunity and momentum across the platform.
In our fiscal Q1, the team lived up to their reputation as we once again acquired new customers at a rapid rate and expanded our wallet share with existing customers. Our top 25 customers each spend a minimum of $33,600,000 in lifetime value, which is a 45% increase or the $23,200,000 they did in Q1 of fiscal 2018. Examples of customer wins and competitive displacements in fiscal Q1 that demonstrate the progress we're making across the network endpoint in cloud are be landed atop 3 airlines in the U. S. To secure their data centers We also replaced a competitor in the data center and sold all of our attached subscriptions at a U.
S.-based Investment Management company. Our cloud firewalls VM Series was selected as security standard, or on the world's largest networking telecom companies in the world. Our cloud monitoring and compliance offering evident was selected to secure the public cloud infrastructure on one of the largest banks based in Europe. Global Gold Product Card Service was selected security remote factories offered stores, one of the work leading manufacturers and marketers of quality skin care, makeup, fragrance and hair care products. No points are guessing what that is.
And our advanced endpoint protection offering draft was selected to protect 10,000 devices at a leading healthcare provider in Australia. To round out the news in the quarter, we were happy to be positioned as a leader for the 7th consecutive year in Gartner's 2018 Magic Quadrant. For enterprise network firewalls. This positioning reflects our commitment to staying ahead of the threat landscape and providing our customers the best protection against the ever evolving set of cyber FX. I personally remain extremely excited about the opportunity ahead of us and plan to keep my head down and continue to execute with our leadership team.
I'd like to thank our customers and our partners for their support. And of course, the team at Palo Alto Networks for their dedication to our mission. I really enjoyed becoming more established at Palo Alto Networks and learning about cybersecurity and working with this great team. I wake up every day excited to be part of the great company. With that, I'm going to turn the call over to Kathy.
Thank you, Nikesh. Before I start, I'd like to note that except for revenue and billings, all financial figures are non GAAP, and growth rates are compared are reflected under ASC 606 as we adopted the new standard as of August 1, 2018. As Nikesh indicated, we had a great start to our fiscal year. We continue to see healthy security spending and strong demand across our platform. In the first quarter, total revenue grew 31 percent to $656,000,000.
By geography, Q1 revenue grew 29% in the Americas, 35% in EMEA, and 35% in APAC. Q1 product revenue of $240,500,000 grew 30% compared to the prior year. Q1 SaaS based subscription revenue of $231,300,000 increased 37%. Support revenue of $184,200,000 increased 24%. In total, subscription and support revenue of $415,500,000 increased 31% year over year and accounted for 63 percent of total revenue.
Q1 total billings of $758,500,000 increased 27% year over year. The dollar weighted contract duration for new subscription and support billings in the quarter was approximately 3 years consistent with what we have seen in prior periods. Total deferred revenue at the end of Q1 was $2,400,000,000, an increase of 34%. Q1 gross margin was 76.7 percent, relatively flat to last year. Q1 operating expenses were or 55.9 percent of revenue, which represents a 140 basis point improvement year over year, Q1 operating margin was 20.8 percent, an increase of 150 basis points year over year.
We ended the 1st quarter with 5645 employees. Non GAAP net income for the 1st quarter grew 64% to $115,400,000 or $1.17 per diluted share. On a GAAP basis for the 1st quarter, net loss declined 39 percent to $38,300,000 or $0.41 per basic and diluted share. Turning to cash flow and balance sheet items. We finished October with cash cash equivalents and investments of $3,800,000,000.
Q1 cash flow from operations of $252,300,000 declined by 8%. Free cash flow for the quarter was $218,000,000. During the quarter, we redeemed 3.27 per cap accounting, $52,300,000 of the amount redeemed is categorized as cash flow from operations. Adjusting for this and other cash charges, free cash flow in the quarter was $275,400,000, up 27% at a margin of 42%. Capital expenditures during the quarter were $34,300,000.
CSO was 58 days, a decline of 12 days from the prior year period. Turning now to guidance and modeling points. For fiscal Q2 twenty nineteen, we expect revenue to be in the range of $675,000,000 to $685,000,000 on an ASC 606 basis, an increase of 24% to 26% year over year. We expect 2nd quarter non GAAP EPS to be in the range of $1.20 to $1.22 also under ASC 606, using approximately 99000000 to 101000000 shares. Before I conclude, I'd like to provide some additional modeling points.
Our non GAAP EPS guidance includes expense of $10,000,000 to $15,000,000 associated with our recent acquisitions. Also included is our expectation of a $0.01 to $0.02 impact associated with U. S. Tariffs on Chinese origin goods. As we continue to retire the 2019 convertible debt through maturity in July, we expect approximately $45,000,000 of the remaining $248,000,000 balance to be accounted for as cash flow from operations.
We expect our non GAAP effective will be approximately 25 to $30,000,000. With that, I'd like to open the call for questions.
Thank you questions will be taken and we're still and answer session. Looks like our first question will come from Ken Talilani with Evercore ISI.
Hi, thanks for taking the question. So first off, could you give us a sense for what if any changes do you have made to your go to market efforts on the firewall side? And I'm thinking of that inclusive of the channel.
Thanks, Ken. Thanks for your question. We haven't made any particularly major changes to our go to market on the firewall side. That I can think of or including the channel. I think the efforts continue to be the same.
Dave, do you have any Yes, Ken. It's really been business is normal on that front. The sales team is enthused and highly engaged. We've got the industry leading product We've got great traction and great markets in front of us to grab, and we feel great about that business.
Okay. And as a second question, could you give us an update on your traction with GlobalProtect cloud and how you would characterize your win rates there?
Hey Ken, on the GlobalProtect crowd cloud front, we think we have a unique opportunity as we see people trying to go ahead and automate and put security income of the new architecture for the remote branches and for the remote offices within EPCS's unique product, which does really well. We've had some good success with some very large players. We'll share more about the success in our next quarterly call. But now. Again, it's an interesting product.
It's unique in the way that allows existing customers to follow the networks to be able to extend their network security, which they already have in the data centers, all for their remote projects without having to change the management control system, etcetera. So really exciting. We're seeing a lot of traction and hopefully we'll tell you more about it next quarter. Great.
Thanks very much.
Thank you. Our next question will be from Matt Hedberg with RBC Capital Markets.
Hey guys, congrats on the quarter. Nikesh, in your prepared remarks, you talked about an increased on the service provider segment, which is great to hear. It sounds like there's a new product coming early next year. There's obviously a lot of drivers here. You mentioned a couple of them including 5G.
I guess I'm wondering Can you give us a little bit more detail on how this new product portfolio might accelerate the momentum there? And Is there anything else from a go to market perspective that needs to be also augmented?
Matt, thanks for your question. Let me give you a very high level point of view. And then I'll have Lee jump in and give you some more insight into why we believe this product meets the needs for the future for our service provider customers. It's it's a segment when I came here. I realized we haven't done as well as we'd like to do.
And, you know, there's there's structural reasons for it. There's reasons on the service provider side for it, but that's not enough of an answer. So we sat down, looked at what should be doing what we can do. And the product team really rallied hard the last 6 months to be able to put this together because we believe we already had the industry leading firewall from a security and networking perspective, we just needed to make sure we were emphasizing some of the features that the service providers need in the future. So from that perspective, I think the team has done a phenomenal job on getting us ready.
Now remember, the sales cycles will serve right along. So you're not going to be hearing us blow the top off from a sales perspective in 3 months, but this is a prerequisite for us to be to be strong in that sector. We have a very dedicated go to market team of the SP space as one of our few spaces where we have a dedicated team around the world. And they're very excited about this new product. Now let me jump in and talk about why this product is relevant for 5G IoT and a next generation perspective for the service providers.
Yes, thanks
Nikesh. When we looked at what's happening in the transition from 4G to 5G, there's some really significant changes that are taking place. The first is, is just the advent of, of IoT becoming really, high scale on mobile networks with the capabilities of 5G offers. 2nd is a lot of that is going to be high value IoT. It's going to be medical device use cases.
Going to be connected cars. It's going to be things that are really important. And the third is, more and more applications are moving into these mobile environments. And so when we think about that, can just imagine the the need for the best security all of a sudden becomes a critical driver for this change from 4G to 5G. And so, our timing of bringing out the new K2 series is aligned with this big shift in the SP, space for this move to 5G.
That's great. Maybe one other for Lee, on the product side, obviously, RedLock seems like a great acquisition, really complimentary everything you've done. Specifically, what I can tell from Evident IO. Maybe a bit more color there. I guess, it shares a sort of it's an API framework.
So
it looks like it's going
to be a nice integration, but maybe just a little bit more detail on how that sort of supplements what you guys have done center, including continue to build out that side of the business?
I think, Matt, that's a great question. I think as I walked around and talked to a lot of there was evidence that no pun intended that every one of our customers was undergoing some sort of journey towards the cloud. And different shapes of farms. Some people have a public cloud instance. Some people are analyzing it.
Some people are trying to decide. And many of them talk of a hybrid environment or a multi cloud environment because none of them is quite yet sure where they want to land in the long term. And as we put it on, understood that journey. We understood that they need a multi cloud security platform that allows them to carry the security posture. From their existing data center and their existing infrastructure into the cloud.
And as we look to that, we thought we had a product in the space called Evinib which was leading in its own way and its own category, but we looked at the market and said RedLock also, but nipping at our heels that will also So doing really well in adjacent parts of the same market. So a good offering would be the integration of the 2. And to the credit of our evident RedLock team, they will integrate in the next month and be able to have an integrated product in the market by the 1st week of January, which I think is phenomenal given the base of that market and given the opportunity in that market, we believe that fee is the only product of its kind in this space. But Lee, I'll let you talk more about it. Yes, absolutely.
So one of the things we've seen in when we talk to our customers and their journey to the cloud is 1, they're all going through this journey, but 2, they almost 100% don't fully understand everything that they have in the cloud already. And so the combination of Evident and RedLock really gives us, say, a great window into and our customers, a window into everything they have. So visibility, asset inventory. Based on that, it then gives the next step, which is how to provide security analytics for that. Ultimately, detect threats and respond to those threats.
And evident brought a certain aspect of that. Resog brought another component And as Nikesh said, we'll be integrating those 2 quite shortly into a single integrated offering.
Super helpful. Thanks guys.
Thank you. Our next question will be from Andrew Nowinski with Piper Jaffray.
Great. Thank you and congrats on a nice quarter. You announced the new service provider product today, and that's definitely a market that you should be in. And you've also refreshed your low end and mid range firewalls. So I'm wondering, when can we expect to refresh of the large enterprise 7000 series I'm going to let Dave answer that question.
We don't talk about product futures. On these calls and they'll make public announcements. The 7000 series is extremely competitive in the marketplace right now. It's doing great with our customers. We're very happy with the performance on that box.
Okay, fair enough. And then a question for Kathy, talking to your sales team or your channel partners, you feel like
the enterprise buying cycle is more,
perhaps more backend loaded this year than it was last year, as it relates to, the calendar year end enterprise budget flush?
Well, you know, our linearity has actually been pretty good the last couple of quarters. And so I wouldn't say that we're really seeing more backend loaded nature of the business necessarily.
So normal seasonality, you're expecting this quarter?
In Q2, we've guided, to what, you know, 24% to 26% year over year revenue growth seasonality there looks pretty in line with what we've seen historically.
Thank you. Our next question will be from Keith Weiss with Morgan Stanley.
Hi. This is Tom Zafatoala in for Keith Weiss. Thanks for my questions. I wanted to just dig into just the security demand environment more broadly heading into 2019. Seems like we've had pretty strong refresh activity in the previous quarter.
Where do you think we are in terms of the upcoming PR referral or middle innings? Just wanted to
get your thoughts on that.
Yes. In terms of refresh opportunity. We've talked about the fact that, it's an important variable for us. As our cohort size increases every year to stoke over our history, it becomes a bigger and bigger opportunity for us as time goes on. It's while it's an important variable, it's not the most important driver of our growth as you see, we continue to add customers at a very high cliff every quarter and are expansion opportunity within our existing customer base is quite significant.
So relative to the number in our customer cohort of 5 or 6 years ago, just the opportunity within our existing installed base the new customers that we're adding are really the primary driver of our growth.
Got it. And just a follow-up question on that. So it seems like the RedLock acquisition was a pretty good one for you. You've gotten some good feedback from the partner channels at least talk to, on that product. What other functionality gaps do you see from a cloud security standpoint that you still have to fill in.
Do you think it could be addressed organically, or are you looking at all options?
Yes. Look, public cloud security is obviously very important and we're putting a lot of, of our way behind that with VM series, which continues to do very well for inline security with Evident RedLock Combination, which we believe is the leading solution for API based security in public cloud, and with some of the enhancements of major traps over the last, many months to include support for Linux, which is obviously the pronged operating system. Behind applications who run the public cloud. And so that combination of inline security, API based security and host security, we believe is the right approach, and we feel very good about being in a position where we have leading solutions in all three of those.
Thank you. Our next question will be from Michael Turits with Raymond James.
Hi guys, this is Eric Keith on for Michael. Nikesh, you indicated several times that Palo Alto will be focused on utilizing security data. So does this mean that you want to enter the SIM market or and with the automation aspect, what we call now the SOAR market? How should we think about that?
We have some very exciting products. Coming up early next year in XDR, which allows you to do some degree of investigation, some degree of remediation. We are looking carefully at what it entails. Our application framework will allow for SINDS and SOURCE to run on top of it. So we believe that we will be able to provide a comprehensive solution to our end customers as long as we can deploy our firewalls and our endpoint agents more ubiquitously across our entire base.
Got it. So I mean, just to kind of piggyback on that. So without a major investment, whether organically or inorganically, can you develop like the intellectual capital and the culture around analytics and data science, if you decide to go that way, needed to kind of become a data focused company or?
We have a significant effort around analytics, with our product magnifier, which does a bunch of behavior analytics, which sits on all of the application framework. We have embedded ML people and almost every one of our product teams, albeit small, but our intention is to keep beefing that up because we believe machine learning is not just about taking a lot of data and trying to train it. Machine learning is about taking every product of yours, understanding the data that it gives, so you're understanding how you're use that data to be able to create a better product to start with and then leverage the ability of that product to improve the outcome for every customer. So we're embedding ML people across the board, across the company. We also have analytics apps on our platform.
And as we see the deployment of the application framework as we see the unit's behaviors of customers will decide which way which auto's needs we need to put more work behind.
That's helpful. Thank you.
Thank you. Our next question will be from Sterling Auty with JP Morgan.
Yes, thanks. Hi guys. Kathy, you mentioned, I think, $0.01 to $0.02 impact in terms of Chinese tariffs. Had some discussion with this question as to if we see something go further in terms of the trade war, is there any turn about supply of product coming out of China? And do you have alternative sourcing, if necessary?
Yeah. You know, it's, it's important for you for us to remind everyone that we do manufacture our products in the US. There are some components that we source that are only available in China. And, we are looking at a number of options in terms of being able to mitigate the impact of tariffs or ensure that we have dual source opportunities. And so our supply chain management is always, you know, very aggressive in terms of ensuring that we have a number of options available to us, and we're doing saying in the current environment.
Great. And then just one follow-up. Just strategically, how should we think about the the subscription the product subscription growth from here for subscriptions that are not attached to a physical appliance. So whether that's a a virtual firewall, etcetera, moving forward. How should we think of the growth dynamic there versus some of the physical product sales as you talked about service provider and other strategies?
Well, we've talked historically about the non attached business being at a $274,000,000 run rate as of q44 of 'eighteen, growing at 68% year over year. And so we are yeah, these are newer markets for us where they're we're seeing very nice growth in them. And Nikesh mentioned launching Speedboats that we believe will help us to execute very well in these newer markets where we think we have great products, particularly in the cloud based We've talked about the Evident RedLock combination, and so we're very excited about the opportunity there. But obviously, the, business of the firewall growth and the product growth and our cash subscription growth is extremely important as well, and we continue to focus there. And those those areas, they're also growing very nicely for us, which is why we continue to be able to grow at rates above the rate of the market.
Got it. Thank you.
Thank you. Our next question will be from Saket Kalia with Barclays.
Guys. Thanks for taking my questions here. First, maybe for you, Nikesh, you talked about some of the early partners on application framework.
Can you just zoom out a little bit?
And can we talk about how customers are using logging service and maybe some of the next couple milestones that you look forward to that can help drive the op framework opportunity?
Look, I think part of the out framework thesis has always been of trying to collect the data ones and use it many times across multiple applications because today every cyber security solution that the customer sees requires some degree of intrusive probes into their infrastructure, whether it's network at the endpoint or even their cloud security in some cases. So the notion is let's collect all the data once and then use it multiple items from multiple apps. Towards that end, for example, our Traps product is probably going to collect or collects close to 100 megabytes of data per user per month, which I think is probably 15 or 20 times higher than any other endpoint product in the market. So that's what allows the customers to be able to collect that data once and we can deploy multiple applications against it. That's how we're going to be able to deploy XDR for them.
And there's no reason why these customers need to have that data collection happens multiple times. There are some customers who are running 6 to 8 endpoints At the same time, but each endpoint is taking a sliver of data for the deployment life cycle of that endpoint is anywhere from 3 months to 12 months depending on the complexity of the customer locations of their employee base. So in that context, we're seeing good progress when we deploy log service with Traps or people use Traps management services in the cloud to be able to manage their endpoints without an enterprise. We're probably going to be able to leverage the same thing without an the mental, sort of end point deployment for the same customer with XDR, which is offered out of the service of Delta London service. Similarly that products like magnifier that use similar data to be able to deploy the sort of the, the application of top of data collection from firewall and feeding endpoint.
So we're seeing the evolution of the Application Framework as an integration point across multiple solutions we're starting with our own first. Wanna make sure that our stuff works. So there's proof in the pudding. And for me, the key milestones are, can we get multiple follow on the networks as to be useful? Without deploying multiple sensors into the customer's infrastructure and be able to turn them on extremely rapidly because the speed of employment is a key component in the future for cybersecurity.
So as long as we believe we're headed down that track, I'm excited. As long as we can see other partners coming down and say, oh, this is interesting. We like the fact that we have all this data don't have to go deploy multiple sensors across our customer base or your customer base. You can just sit on top of this data And as long as there's an economic model which allows them to utilize that data and this customer consent, we're fine letting them use it.
That makes a ton
of sense. Thanks for that.
Maybe for my follow-up for you, Cathy, just a quick housekeeping question, was there anything to note on the other income line this, I guess, this quarter and last, it feels just a little bit higher than what we've seen historically. Just wondering if you could talk about some drivers there.
Well, you know, there are probably a couple of drivers. Number 1, interest rates have been increasing. And then number 2, we have a higher cash balance given the, convert that we recently did.
Okay, got it. But no other sort of one time investment gains or anything like that? Sort of separated?
No. Nothing right now. Yes.
Got it. Thank you.
You're welcome.
Thank you. Our next question will be from Greg Moskowitz with Cowen and Company.
Okay. Thank you very much. First question is for Nikesh Or Lee. How did Trapp due this quarter. And can you perhaps provide an update on the integration of Secdu as part of your XDR approach?
Yep. Trust, trust continues to do well. We added a lot. We added a lot of new customers, of course, the, as Nikesh mentioned, the new trust manager service, which is cloud based service, the majority of these new customers are deploying using that service, which is great because that ties into logging service and application framework and set this up for some of the futures around things like XGR. And so on that topic, we continue to make good progress on the integration of SEK2.
The, as we've told it before, we believe that EDR is not sufficient. So the idea of doing detection response based off a single data source is not enough. We think that the endpoint data needs combined with network and cloud data as well. And so we are actively working on that. We haven't.
And some of the endpoint data, we're getting more We have network data. We have cloud data. And then in parallel to that, we're making good marks in the SDR application. We're on top of that and use that data. And we're on track for early calendar 2019 to have that available.
That's very helpful. Thanksfully. And then just for Cathy, as you noted, your operating margins were up about 150 basis points year over year. And so it seems that you're absorbing the incremental cost from Evident IO insect do quite well. And I know of course that you don't you're not providing fiscal 'nineteen guidance.
I'm just wondering though if there are any unusually high investments that you're targeting at this time over the balance of the year, whether it be the K2 launch or anything else?
Yes. We're providing guidance, obviously, 1 quarter at a time, as you mentioned. Ment in M and A, in Q2 in our modeling point. And aside from that, there's, there's really nothing nothing significant for us to report at this tenant.
Okay. Thank you very much.
Our next question will be from Jonathan Ho with William Blair.
Yes. Fantastic. So just wanted to start out with the reference that you made to the speed boats. Can you maybe give us a sense of what this entails and maybe contrast that with your traditional approach?
Yes, look, what happens when you have very low variance successful large teams selling a large amount of revenue and you start a new product initiative. Typically, some of those efforts get buried across a very large sort of team of functional organizations. So what we've done is we've taken all the people who are focused on some of our new product areas, put them on the same floor. We'll have to take them across functions and effectively traded 2 leaders, one of the product side, one go to market side, and they have carte blanche to move as fast as they'd like to move within certain guardrails. And this has really increased our agility and our speed, both in terms of deployment of product, but also decisions that they need to make a customer by customer basis and from a go to market perspective.
And the early results are promising on our cloud security space has really helped us. For example, Cloud Security team is run by Laura Budvar, who we bought on board as part of the RedLock acquisition. He's a CEO there. He's very excited. He's very motivated to keep driving the product strategy indeed Darvin, who's a member, an outstanding member of Palo Alto Networks, our go to market and business team, they're both partnering really well.
In brings the capability to be able to deploy that product across our very large sales force, which is globally distributed, but doesn't have to worry about that. And have to worry about continuing to build a market leading product and going in partnership with Dean and making sure that some of our best customers sign up for the product. So that's kind of like the model behind it. It's working really well so far for one of the product areas. We're working on carving out the next set of product areas.
So we are almost on to our second. We'll be able to carve out a team, which is going to focus on GPCS and aperture at our second speaker. I'm really excited about being able to do that. It should be driven by Adam on our product side and Renee our CMO. So, you know, just trying to create speed and agility on the speedboat front.
Got it. That's helpful. Just wanted to also follow-up on some of the newer developments with AWS and maybe your early thoughts in terms of what outposts some of the your impacts could have on the business?
The good thing is that what AWS and not just AWS GCP be Liam by another end or Azure. All of them are trying to encourage customers to think hard about the cloud and, you know, get out of this model. Let me control my my destiny by having my own data center to try to convince people that we all need to go to cloud. Now as people are going to the cloud, they're realizing that, yes, the cloud is a fantastic platform gives you low latency, allows the availability, allows you to scale globally very rapidly. But it's very hard to think about cybersecurity in that context.
And there's a whole set of conversations that come about Mahida Integrity, don't move my security posture from existing platforms to the future. And that's where we think none of these cloud transitions are going to happen in a meaningful way unless customers are able to think about and secure transition. So our job is to make sure that we partner with our enterprise customers today and help them to journey as they make the cloud journey and transition and there's a debate whether people are going to use AWS native security or GCP native security or is there room for something like us? And I said, yes, there is because there's no there's very few, no, it's never going to ask answer, but there's very few dedicated single cloud only customers out there. Most customers are either hybrid customers.
Most customers are multi cloud customers. In which case, you need an independent cloud security partner who can help you across this myriad of platforms because it's very hard for what needed cloud provider produce a multi cloud hybrid and public cloud environment security vendors. So we believe that in the huge space, we believe it's who's both us and AWS and GCP and as your partner in this journey because it's beneficial for them and beneficial for us. And honestly, like security, the 2% or 2.5% spend across a cloud transition, AB3. So they're not going to go to try and compete with us in the 3% to 4% spend.
I don't know if I've got some 2.5 to 4, but it depends on the customer. I like I'd like to be I'd like it to be more, but it depends customers. So we think there's going to be there's enough room for a partnership in this space.
Fantastic. Thank you.
Thank you. Our next question will be from Patrick Colville with Arete.
Thanks for taking the question. Can I ask about, you know, core next generation firewall? What continues to differentiate you guys? Because you guys are crushing it and, doing a great job. And just from your perspective, what continues to differentiate power also versus the competition, to produce these results?
Look, in my six months that I've spent talking to customers and traveling around the world trying to understand both, you know, why are customers buying us and what's differentiated in our product, I have to say at least the feedback I get from our customers is that there is a very clear differentiation around security. Yes. Paul of the Networks firewalls were built with security first in mind. And that's why you've heard us launch the service provider, Cadencies just now. Because they balance both the throughput need to safeguard it as well as the high security requirements 5G and IoT.
So we are a security first set of firewall. And that resonates with all of our customers in kind of the right time in the journey because early cloud migrations, early data center migrations were a lot about moving your data there. Now it's a lot about opening up the internet. So when people start opening up ingress and egresses to the internet in a large scale basis, you open the door for cyber security attacks, cyber attacks across our infrastructure. At that point in time, every CIO, every CECL is concerned about making sure that their environment is protected.
So security is becoming a more and more relevant topic on the agenda of CECL, CEO, CIOs, they turn on and say, do we have good security or not? And that's not a price sensitive conversation. It's a security sensitive conversation. And from that perspective, I think I can't take credit from this as a team here and the prior management did a phenomenal job in making sure We have people around the world. We have customers.
We have gone ahead and worked with these customers over here. Some of the deals coming in pushing out. These teams have been working on for 12 months, 18 months to 24 months. So this is a journey that we started a while ago. It is a security focused journey it is a product that is clearly differentiated in the marketplace.
And we both, given the more sensitivity around security, we will continue to take market share.
Got it, got it. And can I ask, in my follow-up, another high level question like that? So there's some investors, a skeptical that you know, a client's company can transition to be more of a software company over time because history and technology over the 30 years shows us that that, you know, can be quite difficult. You know, clearly, the numbers you guys are putting out in unattached subscriptions are very healthy with the growth momentum being very strong. So the indicators for now that this transition is happening very effectively.
But what gives you confidence that that can continue and that you guys can continue with pivoting away from product and more towards subs?
Look, I think once we look at it from an industry transition perspective, because some of us analyze the industry and look at it from afar, if you ask the customer. For them, it is a continuous spectrum. They see it as a continuous journey, and they want to be able to take their existing partner with them through the journey because Security is kind of a thing where your customers have to believe and trust in you that you were going to protect them. We have many instances many, many, many incidents have on a daily basis where the customers, we understand breaches that call us. We work with them.
We show them how to protect themselves. We show them how to improve their security posture. Who builds trust and reliability with over 50,000 customers around the world. And I think as we come out with new products, would a customer rather buy next generation product from a small start up of forty people, or would they rather have the capability of a team that has been working with them for 3 to 5 years? I think security posture.
We believe the ladder. Look, I'm sitting in the pit working with the team for the last 6 months, 12 hour days, working hard in every product, every part of the transition. I'm convinced we can make the transition. So as far as the skeptical investors, it's for us to know and for them to find out, but the time they find out, it'll be delayed. Good stuff.
Well, yeah, good job. Keep it up. Thanks very much. Thanks. Thank
you. Our next question will be from Gabriela Borges. With Goldman Sachs. I was hoping you could characterize for us the level of sophistication education that you're seeing around cloud security awareness from your customers. At this stage, how much of a push from Palo Alto where you really need to educate around the virtual firewall and Google Protect and AppoGen, some of the cloud products that you have versus customers may be reaching a consensus and realizing that in order to be secure in the cloud, they need more power outage products?
Thanks.
Thanks, Gabriela. That's a brilliant question because when I when we did the acquisition of RedLock and when I looked at what we have at Evident, I realized we have an awareness problem. Many of the existing customers in AWS, GCP or Azure don't know what they need. And part of the effort in the last even few weeks and going forward has been beginning in front of our customers demonstrate the product to them, and it's about them saying, oh my god. Yes.
I do need this. So you're right. There's not a flash realization across the across the space that we need to security because some of these things are moving from the DevOps team upwards into the enterprise. So there's a lot of awareness and education that is required and we are stepping up our efforts to do that education, to do the partnerships to create the awareness But we also believe we, like I said earlier, we are the only players right now with a product of sophistication. I mean, we intend not to lose the sophistication leadership of this product.
That's helpful. Thank you. And the follow-up is not specifically on the 7000 Series refresh, but I do want to ask how you're thinking about the cadence of appliance introductions at a higher level. If I think back to 2017, there are a number of product instructions on the appliance side. So just maybe some high level thoughts on how you think about those instructions going forward and how much more thought put into that, if at all?
Thanks.
Sorry. Can you clarify your question, appliance? What?
How are you thinking about the cadence of new appliance introductions at a high level?
Yes, yes, got it. Sorry. Thank you. Look, the our desire as we build our hardware roadmaps and overall strategies our large enterprise customers are sure shutter customers that in general, they do not want to see, hardware technology change too fast because that necessitates the need for them to then go through and do a whole bunch of work to swap out, you know, old hardware for new hardware and things like that. And on the flip side, of course, we want to stay very up to date on the latest and greatest technology in order to be able to provide the best products.
So we're always balanced in between those two aspects. And, there's no single answer to it. It's just always looking for where the the big technology inflections are on the hardware side. And then looking at how we can slot those into a development schedule that makes a lot of sense to both us and our customers. What you've seen us do over the last couple of years is obviously introduced a number of new hardware platforms that have been very well received.
And then where we need to, we'll continue that process of bringing to market new hardware technologies where we get a lot of bangs to the buck and really help our customers.
I appreciate the call. Thank you. Our next question will be from Eric Stifelgaard with JMP Securities.
Yes. Thanks for taking the question. Two questions. 1, Nikesh, how do you feel your channel is permanently prepared for moving into the cloud? What kind of evolution do you need to see from your channel partners?
And then secondly, on the service provider front, one of your competitors, does a lot of development with the hardware with ASICs. Is that something that you would sitter in order to achieve the performance that you need, to meet service provider requirements or 5G?
So, thanks for the question. I think, look, the channel, do you mind doing mute, Eric? Okay. Getting a lot of feedback. So there we go.
Perfect. Thank you. Eric, from a channel perspective, the channel is not one entity. Channel is a very large set of partners where we have people who are very cloud savvy and very cloud ready and there are people who are going through their own journey of transitioning to the cloud because they've been very hardware centric. So they come in different shapes and sizes.
We're very excited about the partners who are stepping up and creating the cloud education focus within their own teams. To be able to part the journey. There are some others who are called Dicks. I've learned called born in the cloud. So there are people who are focused exclusively in the SaaS space.
Working with us and other players in the gas space. So there is a transition going on in the channel as much as there is a transition going on in our customer base. And the channel is getting ready to be able to provide these capabilities to our customers. So we see a very, very sort of healthy partnership going forward with the channel they're going to end up providing a lot of services to our customers, getting a lot of education awareness. The question Gabriela asked about how do we create the awareness across 50 plus thousand customers of the public cloud company and get them to see our product can do it alone with our smaller team on that scale.
We're going to have to leverage a large distribution network, which is in place, which we service provider network. So I think that's kind of the answer for the first part of question. And as it relates to the ASIC and the throughput part, look, we believe in the Cadence series product, we are going to match the price performance of everybody else out there from a throughput perspective. And we believe we're going to be industry leading insecurity. In fact, the only ones in the industry who can deliver the security requirements for 5G IoT.
So we feel very comfortable with the new K2 product. As I said very early, the sales cycle in SBR long But as we've announced this today, we're going to be launching efforts toward our teams and our go to market teams to start approaching some of the largest service providers around the world, working with them to make sure they understand the capabilities of the effect of the next generation firewalls now. And make sure that they keep us in consideration as they go towards the old journey of going to 5G and IoT.
Thank you. Our next question will be from Catherine Trebnick with Dougherty.
Thanks for taking my question. A brilliant quarter. Did you provide the number of customers you added during the quarter? That's my first question. Hi.
Yeah. We didn't talk about it in the prepared remarks, but we added over 2500 customers this quarter. Alright. Thanks. And any particular service that, stood out in driving, your subscription services, was there one that was stronger than the other during the quarter.
And then any of that underperformed? Thanks. Yeah. No, we had nice performance across our subscription portfolio. And obviously, we're very happy with the growth we saw there.
So, no, none of them underperformed, like aperture, auto focus. I'm just trying to quantify. Yeah. No. We we we will break out, yeah, we break out more details from time to time, but we haven't provided details by product of of how each one for Alright.
Thanks. Keep up the good work. Thank you very much.
Thank you. I'd now like to turn the call back over to Nikesh for closing remarks.
Yes. Well, thank you, operator. Look, in closing, I'd like to thank all of you for your interest in Palo Alto Networks. I also would like to thank once again our customers, our partners, our employees for the tremendous amount of effort they put into making sure that we're able to deliver our results. I've been reading many of your notes, and I know that some of you are still anxious to understand me.
So, before I wish you a happy holiday, I wanted to send out this invite to all of you, who would like to come meet me. We're gonna, we'll try and schedule over the next 3 weeks for sell side analysts to come visit. If you reach out to Amber and our Investor Relations team, she can schedule it, that way, hopefully, next time around when I read your notes, you won't be as anxious about me I'm enough anxious enough to log myself. I don't need you to be more anxious about me. So with that, thank you again for your interest in Palo Alto Networks, and goodbye.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.