Please standby. We're about to begin. Good day, and welcome to the Palo Alto Networks Fiscal First Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms.
Kelsey Turcotte, Vice President of Investor Relations. Please go ahead, ma'am.
Thank you. Good afternoon and thank you for joining us on today's conference call to discuss Palo Alto Networks' fiscal first quarter 2018 financial results. This call is being broadcast live over the web and can be accessed on the Investors section of our website at investors. Paloelsonetworks.com. With me on today's call are Mark McLaughlin, our chairman and chief executive officer, Stefan Tomlinson, our Chief Financial Officer Mark Anderson, our President and Cathy Bonano, our newly appointed CFO.
This afternoon, we issued a press release announcing our for the fiscal first quarter ended October 31 2017. 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 this fiscal second quarter and full fiscal year 'eighteen, our competitive position and the demand and market opportunity for our products and subscriptions, benefits and timing of new products and subscription offerings. Our ability to drive outsized growth rates and trends in certain financial results, operating metrics, mix shift, and seasonality. 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 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 7 2017, and our earnings release posted a few minutes ago on our website and filed with the SEC on Form 8 K. Also, so, please note that certain 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. Paloaltonetworks.com.
We'd also like to inform you that we be participating in the Credit Suisse 21st Annual Technology Media And Telecom Conference in Scottsdale, Arizona on November 30th, the Raymond James 2017 Technology Investors Conference in New York on December 4th, the 2017 Wells Fargo Tech Summit in City Utah on December 6th, the Barclays Global Technology, Media And Telecom Conference in San Francisco on December 7th, on the Cowen Networking And Cybersecurity Summit in New York on December 13th. And finally, once we have completed our formal remarks, We believe posting them to our Investor Relations website under Quarterly Results. And with that, I'll turn the call over to Mark.
Thank you, Kelsey, and thank you, everyone, for joining us this afternoon for our fiscal first quarter 2018 results. Pleased to report that we delivered a strong start to the fiscal year. On a year over year basis, Q1 revenue was $505,000,000, up 27% Billings were $596,000,000 In the quarter, we saw a healthy demand environment in all theaters as well as strong customer interest in all the extended capabilities of our next generation security platform from network, endpoint and cloud. The go to market changes we made in midyear of fiscal 2017 which were designed to drive growth and leverage at scale are paying dividends for us in our channel as we start off our new fiscal year. In the quarter, we added over 2500 new customers and are now privileged to serve and customers.
Our top 25 customers each spend a minimum of $23,200,000 in lifetime value in Q1 which is a 53% increase over the $15,200,000 in Q1 of fiscal 2017. The rapid growth and adoption of our platform results from our relentless focus on innovation at our customers. Specific examples of customer wins and competitive displacements in the quarter included a 7 figure competitive win against Cisco and a virtualized data center deal with a US military organization. A Cisco displacement has a standard security vendor at 1 of the world's busiest airports based in EMEA. A checkpoint displacement at 1 of the world's largest technology companies to become its global security platform a checkpoint displacement in the data center of 1 of the world's leading payment processors facing United States and a Symantec displacement in an endpoint deal for 10,000 workstations at a U.
S. Federal agency that also included auto focus. There are 3 hallmarks to our platform that are increasingly well understood by customers and prospects. The first is our ability to provide increased prevention through automation and orchestration second is our ability to deliver these security outcomes consistently across on premise, endpoint, cloud and hybrid environments. And third is our demonstrated ability to continually push the boundaries to simplify consumption models at a time when organizations are struggling to balance security needs with limited operational manpower and budgets to accomplish these objectives, We continue to drive disruptive evolutions in the market that are designed to meet today's most challenging security requirements and that build on each other over time to establish significant competitive differentiation.
To that end, we introduced 2 new offerings in September. First, GlobalProtect cloud service, which delivers the power of the network's next generation security infrastructure for remote offices and mobile users as a cloud based service. This offering opens up new use cases for us, help widely distributed organizations, improve their security, and reduce complexity. Also in late September, we introduced the Palo Alto Networks logging service, our cloud based offering that stores context rich logs generated by our security platform. Managed seamlessly with our existing Panorama management product, the logging service is the foundation of our application framework, which is the next major evolution in security.
We expect our application framework to provide a new model for the delivery of security applications that it can imply advanced analytics to massive data sets and have automated workflow decisions enforced through already deployed capabilities in the network on the endpoint and in the cloud. We have received great feedback from the hundreds of customers briefed on the application framework, which we are on track to deliver in the first half of the calendar twenty eighteen. Initial reception to GlobalProtect cloud service and the logging service has been strong, and we are very pleased to have closed several deals in the first quarter. In addition to our new services, we further enhanced the capabilities of Traps, our advanced endpoint protection offering, with the introduction of version 4.1, Among the many new features, 4.1 added behavior based ransomware protection, enhanced kernel exploit prevention, and local analysis for macOS. And just a few weeks ago, Trapp scored a 100% protection rate and earned the approved award in the business security report published by AV Comparatives an independent organization that tests and assesses AV software.
This is yet another third party validation of our ability to replace traditional AV products. And in October, we expanded the capabilities of Aperture, our cloud access security broker offering. As part of the migration to the cloud, many organizations are adopting a multi cloud strategy that includes storing large amounts of data within cloud environments, in which requires advanced protections that complement basic native cloud offerings to achieve comprehensive and consistent security. Aperture now provides application protections for several AWS solutions, including Amazon 2, AWS Identity And Access Management and Amazon S3. We also enhanced our support for Office 365 to Google up applications to include cloud based email services and G Suite marketplace applications.
We continue to see very good traction with customers as they look to us to help them work through the requirements security in a hybrid world. Also, we were recently honored to be named the Fortune Magazine's list of top 50 companies changing the world, and to the Fortune Future 50 list. These acknowledgements further underscore our commitment to innovation and our dedication to improving security outcomes for our customers. I also want to welcome Kathy Banano as our next Chief Financial Officer. Kathy joined our team in 2014 and is currently Senior Vice President of Finance responsible for Financial Planning, Treasury, Enterprise Risk Management And Facilities, with more than 3 years of Palo Alto Networks, a decade in cybersecurity and 30 years business experience.
She has an intimate knowledge of our company, the industry and broad expertise across financial disciplines. As well as a proven track record of building world class organizations. Congratulations, Kathy. I look forward to continue to work with you.
Thanks, Mark. I'm excited about this role and my work with the team. I believe we have a truly unique opportunity to continue to disrupt the security market, take share at scale, and increase operating leverage. I will be at several of the upcoming investor conferences and look forward to meeting those of you I don't already know.
Congratulations again, Cathy, and look forward to taking the reinsaw from Stephanie's coming Wednesday. And before I conclude, I want to thank our customers and partners for their support and our team for their dedication to our mission, which is to protect our way of life and digital age. And with that, I'm going to turn the call over to Stephanie.
Thanks, Mark. I'd like to add my congratulations to Kathy as well. I've really enjoyed working with you and I know you'll be successful in your new role. Now let's turn to the numbers and guidance. I'd like to note that except for revenue and billings figures, all financial figures are non GAAP and growth rates are compared to the prior year periods unless stated otherwise.
In the first quarter, we delivered strong performance against our land and expand go to market model, In addition, the power of our hybrid SaaS model was evident in record deferred revenue that continues to be driven by our ongoing mix shift to subscription and support Year over year non GAAP operating margin expansion, which drove 35% growth in non GAAP EPS and very healthy free cash flow generation. As we look to the balance of the fiscal year, we're pleased with our improving execution and widening competitive positioning, which is further differentiated by our new offerings. In Q1, total revenue grew 27 percent to $505,500,000. Looking at the geographic growth of Q1 revenue, the Americas grew 25%, EMEA grew 35% and APAC grew 25%. Q1 product revenue of $186,500,000 grew 14% compared to the prior year.
Sales of the new hardware, which we launched in fiscal Q3 2017, continued to perform well as we land new customers and upsell them, into our existing customer base. Q1 SaaS based subscription revenue of $169,300,000 increased 40%. Support revenue of 149,700,000 increased 32 percent. In total, subscription and support revenue of 319,000,000 increased 36% and accounted for a 63% share of total revenue, which was a 420 basis point increase compared to last year. Q1 total billings of $596,500,000 increased 15%.
Total deferred revenue at the end of Q1 was $1,900,000,000, an increase of 37%. Q1 gross margin was 76.8% a decrease of 260 basis points compared to last year and within our target range of 75% to 78%. The decline was primarily attributable to the ongoing traction we're seeing Q1 operating expenses were $292,400,000 or 57.8 percent of revenue, which is a 360 base point improvement year over year, driven primarily by ongoing increasing leverage in sales and marketing. Operating margin was 19% an increase of 100 basis points. We ended the 1st quarter with 4707 employees.
Net income for the first quarter grew On a GAAP basis for the first quarter, net loss increased 12 percent to $64,000,000 or $0.70 per basic and diluted share. Turning to cash flows and balance sheet items. We finished October with cash, cash equivalents and investments of 2,300,000,000 During the first quarter, we repurchased approximately 861,000 shares of common stock at an average price of approximately $145 per share. Leaving a balance of approximately $455,000,000 available for ongoing repurchases through December 2018. Turning to cash flow.
Q1 cash flow from operations of $274,100,000 increased 35% and included the receipt of a $38,200,000 upfront cash reimbursement related to certain of the company's lease agreements. Capital expenditures in the quarter were $32,200,000, including $11,200,000 of CapEx related to our new headquarters. Free cash flow was $241,900,000, up 32% at a margin of 47.9%. On an adjusted basis, Excluding the upfront cash reimbursement and investment in our new headquarters, free cash flow was $214,900,000 up 16% and a margin of 42.5%. DSO was 70 days at the low end of the target range of 70 to 80 days.
Turning now to guidance and modeling points. This guidance takes into account the type of forward looking information that Kelsey referred to earlier. For fiscal Q2 2018, we expect revenue to be in the range of $518,000,000 to $528,000,000, an increase of 23% to 25% year over year. Product revenue to be in the range of $185,000,000 to 188,000,000 an increase of 10% to 11% year over year. Billings to be in the range of $640,000,000 to 6 55,000,000 an increase of 14% to 17% year over year.
Non GAAP EPS to be in the range of $0.78 to $0.80 using 94,000,000 to 96,000,000 shares. And we expect CapEx for Q2 fiscal 2018 to be approximately $30,000,000. For the full fiscal year 2018, We're raising our guidance and now expect revenue to be in the range of $2,145,000,000 to 2,185,000,000 an increase of 22 percent to 24 percent year over year. Product revenue to be in the range of $755,000,000 to 7 70,000,000 an increase of 6% to 9% year over year. Billings to be in the range of $2,650,000,000 to 2.71000000000 an increase of 16% to 18% year over year.
Non GAAP EPS to be in the range of $3.35 to $3.41 using 96,000,000 to 98,000,000 shares. And we continue to expect CapEx to be approximately $100,000,000. Before I conclude, I'd like to provide some additional modeling points for the fiscal year. We continue to expect fiscal Q2 and fiscal Q4 to have the strongest sequential total revenue growth. As reflected in consensus heading into this call, our non GAAP EPS continues to include approximately 150 basis points of organic operating margin expansion, excluding first half fiscal year 'eighteen investments associated with the lightsaber position.
And we continue to expect fiscal year free cash flow margin to be in the range of 37% to 39% as the nonrecurring cash reimbursement received in Q1 will be mostly offset by rent payments throughout the balance of this fiscal year. With that, I'll turn the call back over to Mark.
Thanks, Stefan. Before we head over to questions, I want to take the opportunity to thank you again for all your contributions from the network. Been an inspiring leader. You've got a great organization and you've been wonderful friends and a real pleasure to work with you. Thank you very much for that.
Thanks, Mark. I appreciate your kind words.
With that one, we had a question. So operator, would you please hold for questions?
And our first question will come from Philip Winslow of Wells Fargo.
Hey, thanks guys and congrats on a great quarter. Obviously, the product number was strong again this quarter and acceleration from the prior two quarters. Wondering if you can double click on just the sales practices that you all discussed following Q2 and just you feel in terms of just the go to market right now with the changes that you made mid last year? And then just one quick follow-up to that
Sure. Yes, Phil. So we saw a good strong environment, every theater. So we would like the help of the market out there. And then it's with being able to go capitalize on that with some of the changes we made last year, which have really taken effect.
I think we're seeing the dividends from that work we started mid last year. We feel good about where we are with that. Process. We're in the we call it the bake phase before relationship building phase, which seems to be going very well. And we'd expect that to keep paying dividends for us as we play out the year.
Got it. And then I was hoping if you
all could comment on just the pricing environment as well, just sort of any changes that you've seen there. As we exit sort of this calendar year versus maybe earlier in the year last year? Thanks, Jess.
Yes, it seems a good question. Yes, seems to say it's a very competitive market. We've seen the competition price aggressively for quite some time and what we've seen our us be able to do is continue to sell to the value of the platform. I think first get that more and more. Our team is trained to do that and we like the we like the results of that.
We've been able to continue to improve our product this down continuously sequentially. For example, as we like to see that as well. And it doesn't seem like that we have to succumb to all the pricing massinations that are going on with the competition here as the customers really adopt the entire platform.
And our next question will come from Pierre Ferragu of Bernstein.
Hi, everybody. Thanks for taking my question. So when I look at your guidance for next year, so you have 6% to 9% in product and see 16 to 18% in billing. So if I make the difference, you're growing your subscription billing 20% to 23% year on year, which is, firstly impressive and also way above your product growth. So my question would be How does that split between attached and non attached products?
How much of that is still driven by your expansion of your installed base of firewall and how much is really like a subscription that are not attached anymore. And then my second question would be If you keep growing like that, subscriptions much faster than products, next year, you're going to have less than a third of your billings coming from products. And 2, 3 years out, which will be like an 80% subscription and only 20% product business. Am I right thinking it that way?
Yes, Pierre. So, obviously, we don't guide beyond the year. Sorry to that, but I think just as a general matter, we've seen our business continue to move into services category over time, particularly in subscriptions services. For a few reasons, one is the platform is very powerful and us understand how their subscription services provide better security and reduce the complexity of their consumption models. And secondly, we continue to introduce these services introduced to in September, the global protect cloud service and logging service.
And we're happy with the performance already with those. So as we continue to bring new services to market, as well, we would see the business moving the subscription services direction as well. And then on top of that, the application framework, which will come into market next year as well, should also help move things in those directions. So that's what we would imagine would occur over a period of time that would keep moving in that direction. But we for the year, we've guided about a 65 percent split.
If you recall from Analyst Day is on revenue as to what would come from the side of the business.
Our next question will come from Rob Owens, KeyBanc Capital Markets.
Great. And thanks for taking my question. Maybe give us a little more color on the success you're seeing on the product side of things and what's coming from pre existing customers that are within your renewal base versus maybe an increase in competitive wins?
Yes, Bob. What we're doing well in both cases, you can see like net new customer acquisitions continue to be very strong. And obviously, we're selling product into a lot of those customers, the vast majority of those, as a matter of fact. So we continue to bring in new customer wins and also expansion business has been strong for us for a very long time. It is powering the majority of our business, by math, the size of the customer base So expansion business continues to do well.
I feel like we're doing really great in white space opportunities and also convincing our customers to continue to grow their lifetime value with us.
And I guess along those lines with the much of the upside in the quarter coming from product, the billings was at the high end, but you overachieved on product overachieved on total revenue. So if I looked at billings relative to revenue yield or I guess the inverse of product with the attach of subscriptions, Is that product mainly coming in from pre existing customers? So you don't give as much of a subscription uplift or do you have less attached or less duration to the attachment. You could help provide some color there. Thanks.
Yes, sure. So just a couple observations around that in the quarter. We are very happy with the product delivery, obviously, and total revenue delivery. And also on the billing side in the quarter, we saw a couple of things going on that ratio. 1 was as we continue to improve the product discounting, then that would put more into the product revenue buckets.
So the mix is a bit higher than we thought we would see in the quarter and also in some work service provider businesses, purchased some of those were a little more CapEx heavy than before as well. So that would put some more into the product bucket as well. So just really the mix is a little different than we expect to come into the quarter.
And our next question will come from Ken Talanian of Evercore ISI.
So another one on product. I was wondering if you could give us a sense for how much the VM series and Panorama contributed to product revenue in the quarter and how we should think about that for the remainder of the fiscal year?
Okay, it's Mark. Very, very little. The M Series is primarily almost almost all of it is heading into the subscription services line. That's how we recognize that. And it performs very well, by the way, but very little that goes into the product.
And the same is true with Panorama. Yes, same with Panorama.
Okay. And I guess, you delivered double digit year over year product revenue growth in quarter expecting the same next quarter. Is there anything that you see in the back half of the year that makes you a little bit cautious?
No. We like this is the way the quarter played out. So we over delivered our product, which is great. Our forecast looks good in the 2nd quarter. And based on that, we've we've increased the product revenue guide on a full year basis, but it's early in the year, so we don't see it play out a little bit more.
And our next question will come from Sterling Auty of JP Morgan.
First of all, Cathy, congratulations. They found a great job to finish off your tenure in such a strong note. But, just wanted to take it to the high level with the guide out of checkpoint out of Fortinet, there was all these concerns about what was happening in the firewall market. Obviously, you put up good results, but Mark, in your comments, you specifically pointed out good demand in all theaters. That's what I want to point to.
Can you give us additional color as to just the general spending environment for network security and more specifically firewalls. And there's still this big question on everybody's minds. How much is the move to the cloud going to hamper help or be a non event to the firewall vendors?
Yes. So maybe I think that it's 2 different levels, high level and I'll ask Mark to talk about the theaters for just a second, which were very strong. But, at the highest level, so we seen healthy demand in the market for security period. Right? I think what's happening is folks are definitely moving in the in the real platform direct and then we feel like we have the best one of those and it continues to get better and better over time.
And if you remember Sterling and Analyst Day, we talked about the 3 evolutions, all that build on each other and drive continued competitive advantage to that second one in there, which is we define as consistency of security outcomes across not only the network, but endpoints and also cloud environments, whether they're public or hybrid cloud environments is very important. And customers we think agree with that. So we're seeing a good adoption in our cloud offerings, the on series and aperture as well. But lots of folks are operating in hybrid environments. I expect them to continue to do that for some time.
So that drives strength in not only the cloud offerings, it drives strength. But the data center, what's happening in data centers from a hardware perspective, and we see lifts in all this. Maybe, Mark, you can talk about this theater.
Yes, you bet, Mark. So, hey, Sterling. I think with geographic color standpoint, we're really happy across the board. We saw a 25 percent in the Americas by far our biggest theater and 25% in Asia back in Japan and 35% in EMEA. So really good strong execution across the board.
I think in all theatres, we're getting a tremendous at Bags because we've got great geographic coverage in all the subregions and really good partner traction as well. So we're getting a lot more bats. We're winning the vast majority of those at bats because we have a much better solution. I think with regards to cloud, as we said, we're pretty clearly at Analyst Day. We really think that there's major tailwinds coming with cloud.
We we're hearing constantly from customers that they want as they move more and more off of prem. Over the long term, they're going to want consistent delivery of security. And, that's what we've been talking about for a long time, and then we think we're pretty unique in that.
And our next question will come from Matt Hedberg with RBC Capital Markets.
Hey guys, thanks for taking my questions. Kathy, I'll offer you my congrats relations as well. Mark, we continue to hear good things about GlobalProtect Cloud Services and you highlighted in your prepared remarks. Could you talk a little bit more about the competitive landscape there? What are some of the opportunities?
And then I have a quick follow-up.
Yes, sure. So I think the way to think about that Matt is and the way we certainly about it is we want to make sure that for our customers, when they want to consume the platform, that those consumption models are as broad as flexible as possible. So we have a long time to offer those capabilities, from an on prem perspective that people have mentioned themselves. We've had that with MSSP partners where it can be managed by a third party. And now with, global tech cloud servers, we give them the option of having that totally the cloud experience as well.
We continue to evolve all the offerings based on what the customer needs will be into the future. So if I step back in that a second and said, okay, what are we doing? And we're bringing the full on network security or the full on enterprise security platform in that form factor to the market, which means we're going to be able to provide and we are providing the security outcomes we've been driving for some time across all applications, consistently from endpoint to network and cloud as well, and in ways that are just not safe of, like, traffic that's leaving, but also coming into the network and and being able to bridge the mobile users. So a pretty distinct competitive advantage, I think, there and also, flexibility on a new model that customers reaction so far have been very positive.
That's great. And then maybe just a quick one. Could you comment on the relative rate of sales capacity adds in Q1 relative to your 15% billings growth. Was it less more about the same?
Nothing out of the more historically, so very consistent with what we've been doing for many years.
And our next question will come from Saket Kalia of Barclays.
Hey guys, thanks for taking my questions here and congrats Cathy in the promotion as well. Hey, Mark, maybe just to start with you, you know, just higher level, understanding it's still early days on application framework, I'm just curious how application framework is maybe changing customer conversations, if at all, at this juncture?
It's been really a dramatic, Saket, a positive way that when we're talking with customers and start off are always with the, a very high level to say, Palo Alto, for the last decade, has been fundamentally bringing higher and higher rates of prevention through automation and orchestration. In addition to doing that, we've also been massively simplifying the consumption model along the way so the customers can have better security with a much simpler consumption model that tries better ROI, less manpower, all the things that we believe it's important for a long time. And then the world completely agrees with that now, with the models, the way they are, they're really broken. They have to be fundamentally different. And then to show them the way for the 3rd evolution with the application framework to say, imagine a world that looks like this where you don't have to give up getting lots of innovation from the security market because security has to be highly innovative, but no one company can do that.
So here's a way to get even more automation, more orchestration, better prevention rates and do it with a vastly simplified consumption model as well. They really like that. I think what that's doing for us, right, right now is very much showing what the future is going to look like as the thought leader. We have lots of demonstrated capabilities in making those real. We have people writing applications, the application framework today.
And if we always gotta keep in mind that after that conversation, they're gonna buy something this afternoon. Right? Maybe it might be a firewall, it might be an endpoint solution. It might be a virtual machine in the cloud or something along those lines for a project. And what I think we're hearing them say is we've given us a very significant reason why we want to choose Palo Alto Networks as our operating platform for lack of a better term in all places in our architecture for our security capabilities.
And our next question will come from Gabriela Borges of Goldman Sachs.
Great. Good afternoon. Thanks for taking my question. Maybe a follow-up on the demand picture, but instead of geographically by vertical maybe if you could comment a little bit on federal carrier mid market. I think that was a comment earlier on some of the mix being to what's product because of CapEx service providers.
So if you could just talk a little bit more about the demand profile and the mix you're seeing across the vertical, that'd be really helpful.
Sure. Thanks. Yeah. So, first, let me start with where we're very well diversified across our verticals and which is great. We'd like to see that.
I mean, mostly it demonstrates that we're truly a platform because you see that horizontally played out across all verticals. And from a Fed perspective, the Fed year end, we saw some good wins there and continuing to see increasing signs of spending getting back to normal be fantastic. There's been a lot of ups and downs and anxiety in the Fed market due to lack of leadership positions being filled. We're in continuing resolution right now. So any can turn return to normalcy as a good thing there.
And also, you know, the fed space fits very well within our mission for what we do, which is sector. We have licensed the digital age and what the federal government is trying to do, they they find that to be very, in line with their mission. So they like that a lot which is great. On the service provider side, that's a good market for us. It continues to grow nicely.
We continue to put more investment in there from a technology perspective of of adding features and functionality to that. My comment earlier on the prepared remarks on service provider was that the product mix of the deal sets and the service providers is a bit heavier than we thought in the quarters that contributed some to the product. Mix in the quarter, which is what you'd like to see.
And we'll hear next from Michael Turits of Raymond James.
Hi guys. Two questions. First of all, I think there's a continuation of Rob Owens' question asking about the new versus existing. Can you give us some sense of where you are in that refresh cycle coming off of your big build, where growth was really strong back in the 2012, 2013 era, and where you might be, and if that's on track, then I have a follow-up question about billings.
Yes, sure. So from a refresh perspective, the refresh opportunity, as we said before, is large and continues to grow. And we had this many customers in the cohort grow over time. That's been going well for us. We had to refresh in the quarter.
We expect to continue that through the rest of the year. We also mentioned, Michael, you may remember Analyst Day that want us to cater, we wouldn't expect that to be the major driver of product growth in the year. We expect that to be the platform itself, our new customer, our new product introductions and increasing productivity from the sales team with reorg, but the refresh is definitely a positive for us and we're doing very well.
And our next question will come from Patrick Poldal of Arete Research.
Is there any way you could
tell us the, you know, or give us an indication of the product revenue blend from the new hardware launched in 2017?
The product revenue line, I'm sorry, Patrick. I'm not exactly sure I understand the question.
So of the product revenue you sold in the quarter, what can I get for you roughly was the kind of new hardware you launched early this year?
Yes, the new products that we launched had a very healthy contributing factor to the mix of products. We don't give out specific percentages, but the traction has been very strong. It's opened up new opportunities, to to sell the new customers as well as, you know, selling into our installed base from an expansion standpoint. So it was a very strong contributor. We just don't give out specific percentages.
And our next question will come from Andrew Nowinski of Piper Jaffray.
Great. Thanks. Congratulations, Cathy. So just a maybe a clarification here. Your product gross margin was a little bit lower than it has been historically, which I think you said was due to the new products, the new hardware.
But when do you expect to start to see the cost efficiencies from the new products whether they're no longer a headwind to your gross margin?
Yes, what we said earlier, when we have new product launches that we would have some headwinds on product gross margins as we to economies of scale and also that our providers, people who supply us with components can also take those components into broad base into the market. But we look at the size of the product launch we just did back in February, the biggest one we've done by a long shot. So we don't have actually a perfect analogy in that, but probably the closest one is the 5000 series we did a number of years ago. And that took about a year or so before we were able to get those economies of scale. We expect that to be the case here.
And just a follow on point. With that being the dynamic, we're still operating within our framework of, you know, 75% to 78% total gross margin. And we've incorporated that dynamic into that into that guidance range. So we feel good about that structure.
And our question will come from Gur Talpaz with Stifel.
Great. Thanks for taking my question. So a quick question on endpoint. Do you think about point now where large enterprises are more willing to buy endpoint or venture and networking security from the same vendor? And are you seeing more in the way of standardization project Thank you.
Congrats on the quarter.
Yes, there it's Mark. Yeah, I think that's the case. And we believe just as a big picture matter that that's definitely going to be the case the future, we lean very heavily into the endpoint market, as you know, weaknesses by manner necessity. And if you think about that second evolution, the way we define it as consistency from network endpoints that's going to be very important. Some capabilities from a security perspective are better done in the network and some are better done on endpoints and increasingly updated in the cloud, some will be in the cloud.
So we have to get all of those right and very importantly they all have to work together. We're seeing that customers want they want that consistency. I think they also want fewer vendors as a big picture matter as well. So being able to have a platform that has that consistency, that allows them to reduce the number of vendors and sprawl in the organization. That might be devices in a network.
It might be agents on an endpoint. There's a net positive for them.
And Greg Moskowitz of Cowen And Company has our next question.
Good quarter. Congrats, Cathy. Best of luck, Stefan. So I'd like to go back to new customer acquisition because this was an impressive quarter on that basis and especially so for Q1. Would you attribute this to the product refresh earlier in the year, or would you also say there's a more concerted go to market focus around reaching new accounts?
Thanks.
I think we have a number of things that are going on, Greg. We had a solid performance from all the theaters that you heard a little while ago across all the customer profiles. We've got our continued productivity improvements as well from the work we started last year. The new products for sure are getting a positive reception reception in the market. And then also with increasingly growing the offerings of our new services.
We have the ability to talk to customers about new opportunities and land. New customers with non attached services as well. So we have a whole bunch of stuff going on from, as far as the ability to test customers, new products definitely are contributing nicely inside of that.
Okay. Thanks.
Thanks, Greg.
And our next question will come from John D'Fucci of Jefferies.
Thank you. I have a follow-up question for Gar's question. It has to do with traps, because it looks like you're seeing some good traction. And by the way, this question I think is more for Mark Anderson. And that Symantec displacement is really interesting.
I assume your when your conversations with customers, they're first buying your your firewall and and everything that comes along with that, and then they consider traps. But I guess, is that accurate? And have you ever seen, I've seen when they look at traps, are they comparing traps on its own merits against Symantec Mark Mclaughlin just talked about having both has some advantages. But do they also consider it on its own merit against its own merits against the the competing product? And has it ever been or do you think it will ever be, the
lee the land like, hey, I want to buy traps and
then maybe I'll consider the firewall.
Yes, it's John. Thanks for the question. No, I think, just 1st of all, about a third of our customers for Traps are, are their first purchase is Traps, not traditional network security. So And we think on the merits of the solution with the focus that we have in the field that we, that we're winning because we're delivering better outcomes. And we're going after traditional antivirus budget because customers have associated very little value with the money that they're spending on traditional antivirus.
I think think down the road, we will it's really strategic space for us. And as Mark mentioned earlier, and we're going to continue to see success here.
Yes, I think one of the things John is, well, is, and this is important for our teams who are out there making these sales is the ability to be able to tell a customer to say, this second evolution where we defined it earlier, it's really important to have consistency of the security regardless where the date is and sometime it'll be on an endpoint, right? So we definitely want that consistency and also be able to say on a head to head basis, we're the best there, right? So you should choose us on a competitive bake off, which we know you're going to do, and we feel very good about that. And as you think about that bake off in addition to winning head to head, you also get the consistency aspect that allows you to grow into the future into even, more interesting things like the application framework over time. Right?
So more reasons why you want to deploy Papa Networks everywhere that's important as a data collection point and an enforcement point in your architecture, sometimes network, sometimes endpoint, sometimes in the cloud.
Yes, and it's really the trust and faith that we've earned from customers over the last decade where they know that we're going to provide a high quality product, and then we're going to support it in a way in a more focused way than anybody out there can from a from a product support standpoint.
Great. Thank you guys.
And our next question will come from Fatima Boolani of UBS.
Thank you for taking my question. Mark, a question for you around your dedicated efforts around building a public cloud practice and bringing your partners in there. Just at a high level, I'd love to hear what sort of conversations you are having with the customers around their public cloud challenges and how you are positioned to sort of help them cross the tasm and a quick follow-up for Stefan if I may.
Yes, you bet, Fatima. So I think We've got a really broad spectrum of customers. Some are leaning pretty aggressively into public cloud. They're putting preproduction dev ops new applications into the cloud, some are dipping their toes. And I think what we represent for them is an opportunity to provide a real consistent look and feel for the security that we can impose there.
This is going to take place over the next 5 to 10 years, where are you going to continue to see more and more migration as people become more and more comfortable for that? And I think that comfort is going to come from the, the kind of security that we can help deliver to them. So I think we're in a very good space there.
That's helpful. And Stefan, if
I look back to your billings performance, a couple of years ago where you maybe signed some longer term contracts as those come up for renewal in 'eighteen and even 'nineteen, What sort of trends are you seeing in the earlier crops of these longer term deals? Are they renewing at the same duration? That would be really helpful. Thank you.
Well, if you look back over the last several years, we've, you know, we've seen a modest gradual increase in duration and it seems to have leveled out at approximately 3 years. And so for the companies who are, who did a 3 year deal 3 years ago, there's really a mix of of of, of renewables business right now. We're seeing some re up, for or multi year term, we're seeing others renew annually. So there's really a mix there. But what we said at our Analyst Day and what we still is, you know, believe to be true is that for the rest of the fiscal year, we're we don't really see any changes in overall duration.
That should be roughly about 3 years.
And our next question will come from Walter Pritchard of Citi.
Thank you. I'm wondering just as I look at revenue per customer, you highlighted your large, I think it's $23,000,000 to be a top 25 customer. Can you talk about what's happening at the other end of your business? Are you with some of the lower end products that you released in the last 6 months? Are you dipping down into smaller customers at all?
And what is your strategy around? I know you're not a small office resident player, but Chris, kind of when do you look to potentially turn into that segment of the market, which is probably some revenue opportunity for you?
Hey, Walt, that's Mark. Our focus has been to continue to be, as you know, as an enterprise security market, mostly because we find focused matters is delivering the best solutions and being able to support them in a high quality manner. So that hasn't changed for us. And we look at the the customer acquisition and the mix of customers who are they very consistent with what has been for, for some time. So we haven't seen a change there as well either So I think what we are seeing from, some use cases and some of the larger customers is the ability to address seeing in new use cases around, like in retail environments.
And plus some of the services just wants to be able to do some more campus work, mobile, user work, things along those lines, and we'd expect that to continue to.
And then a question for Mark Anderson, just come out in the European theater. That looked especially strong. Was there anything specific? I mean, sometimes good execution is the answer, but I'm curious if there's anything specific you're seeing in certain countries or certain vertical might explain the strong performance in Europe?
Yes, that was really, really good performance across the board and every subregion within the Walter. I think just what we're seeing across the board in Europe is, they're typically 1 to 2 years behind the Americas in terms of their IT culture, if you will. And we're seeing just general awareness of the need for you know, migration away from legacy disconnected products to more of an architectural approach. I think it's coming at a time when bad things are happening around the world, focused on legislation with the GDPR. And frankly, the coverage that we have now in every major country in Europe that's getting us in front of customers and showing them how we can be a much better provider for them.
Great. Thank you. Sure.
And our next question will come from Keith Weiss of Morgan Stanley.
Hey, guys. Thanks for fitting me
in and a very nice quarter. I was wondering, just on sort of go to market strategy, it seems like the differentiation in kind of the sales, sort of what you what the base of kind of selling to the customer base is changing in a big way. This isn't an appliance sale anymore. It's not a box sale anymore. You guys are selling a platform.
Does this change sort of the partner strategy at all? I changed sort of kinds of partners you're going to market with, in terms of who could actually get across that value proposition?
That's a good question, Keith. Certainly, we're always on the lookout for, you know, for, you know, for, you know, for you know, new partners not looking to cast a white blanket, but really looking to, you know, improve the coverage that we have around the world. So just naturally, as we've grown, the kind of partners that we couldn't address, the large global ones, the large systems integrator 7 or 8 years ago, now we're at the scale where it's hard for them to avoid us, frankly. So we've actually worked really hard on that over the last 5 years. And as I think we've discussed in each of the Analyst Days, we're getting more and more attention there.
But I'd say nothing really dramatically different than the last Analyst Day other than just very much a focus on looking for large global distribution partners, large global, business integrators, service provider partners, and, you know, National National Brands. What we do want is we want a message that's consistent with what our field team is talking to customers about. That's this platform or architecture, delivery versus disconnected point products.
Got it. And then just one follow-up on the federal vertical in particular. Any color you could give us on sort of strength of federal in Q1? And given sort of current machinations and with budgeting and whatnot, expectations for potential to continue that strength into further into the fiscal year?
Yes, Keith. Mark, again, in the Fed space, like I said, we saw some good wins here in the quarter. I would say big picture instead. It's been a, it's been a mixed bag for a number of quarters as there's been some conservation, I think, in the federal space on some senior leadership positions. It's still going to fill And they're also just the budget.
They were still working on their continuing resolution right now that, don't think it's fixed until December timeframe. But the progression of seeing more normal spending and people understanding what their budgets will look like for the following year is a very important hopefully getting through the continuing resolution would be a positive marker on the table and get people back to more normal spending centers there.
Yes. And then just I would add, it's a really important space for us to be in. We've invested in the team over the last 3 years. And we've got great coverage across the intel civilian and DOD segments and I think we feel really good about the team. Sure.
Thanks, Keith.
And our next question will come from Carl Krista of Deutsche Bank.
For either, Mark, I wouldn't mind going back to the relative performance. It feels like in this quarter and the one you're guiding to, the gap between yourselves, and Checkpoint and Ford, and that seems to be widening. And I just want to ask if you can help us understand exactly where that Wedge seems to be opening up. Is it as simple as you've got a product cycle benefit that perhaps they don't now? Maybe you could help us there.
And then maybe as a follow-up to Stephan, Stefan, to build on a prior question, you raised the revenue guidance, but the billings guidance is, at least at the high end, essentially, the same. Is that simply because most of the Doctor comes from maintenance and subscription and those line items were a little bit more in line versus the outperformance on product. Thank you.
So I'll take the first part.
What I think we're seeing in the market and have been for a while is the importance of the platform, which I mentioned before. Where things work together in a highly automated orchestrated fashion. And there's really positive benefits in prevention outcomes plus the simplicity of the consumption models that result. Now, I think that's really continues to distinguish itself in the market because anybody can make statements, but at the end of the day, what really matters is the architecture on how it's actually built. And I think that what we've proven over time is we get a lot of credibility there because we're a company that primarily is working on developing and building those things ourselves.
So we can make those statements at scale to customers and say, no, we really think this actually works together, right? And we have a lot of different references you can talk to where other companies might be cobbling things together and trying to do do things that really don't work out at the end of the day. We're trying to get through an automated platform. So I think that's one level of it. The second thing on the architecture is the elegance of the architecture matters as well where from a simplicity perspective, having it, having it work in that automated orchestrated way.
And you're kind of mostly in charge of that platform. You build a lot of it yourself, matters from a stability perspective too. So we increasingly as other vendors add more like acquisitions into the mix, that that stuff doesn't really work well together. And not only does it not drive the security outcomes, but it drives increasing instability in networks as well. So we hear a lot of folks coming to Palo Alto Networks saying one of the primary reasons is not just technical.
It's also stability in my current provider can't run at these big scales any longer. They just keep adding more stuff and starting to break things well. So I think a whole bunch of stuff in the mix of that, but it all comes back to the architecture of the platform as the primary differentiator and as we drive these 3 evolutions and they build on each other, we think that increases the mode. And over time, we'll continue to allow us to distinguish ourselves.
Yes. And Carl, on the second part of your question, we as you mentioned, we did raise billings for the full year by $10,000,000. The mechanics are such that, you know, when you look at our deferred revenue balance, and what we're adding to it every quarter, very robust and healthy growth in both attached and unattached subscriptions and also maintenance but they're coming in line as expected. And, I think to the point that you raised, we are having more in period, more in period revenue than, than we had originally planned for, because product is so strong. And so we also raised product for the full year.
And the last point I'll leave you with is, if you think about current billings, current billings was strong. And that reflects, product revenue in the period versus the change in short term deferred.
And our next question will come from shaul Eyal of Oppenheimer.
Kath again, the recent promotion. Stefan, thank
you for everything. Actually, Stefan, before we
let you go,
just a quick housekeeping, number of customers relating to traps and wildfire. Historically, we have been providing that. Any, any view, any update along these lines?
Yes, on that front, we released those on a semiannual basis. And we saw very healthy growth in customer accounts, for both of those, you know, product lines.
Fair enough. Mark, you mentioned in your prepared remarks an expansion of your cloud product. I think you also mentioned including an updated email version targeting Office 365 landscape among other things. Just want to make sure, does that products full under your successful partnership with Proofpoint?
Yes, what I mentioned, Shao, is the for our aperture offering, which is our cloud access security broker offering. We continue to expand the applications APIs that it's worked with. And we've expanded it into cloud based email offerings like Gmail, for example, right? So that's what we've done. And so it's just think of them as we keep adding more application coverage to Aperture.
But there is integration with Proofpoint that would when we can make this discovery with Palo Alto Networks, the integration we do with Proofpoint can allow Proofpoint to actually do something about it. So it really is an add Proofpoint.
Got it. That is helpful. Thank you.
And our final question today will come from Jonathan Ho of William Blair.
Hi, congratulations. Just to make it quick, I'll leave with one question.
In your early data lake and application framework deal, Can you maybe give us a little bit of color in terms of what those deals look like and the potential for upsell and expansion over time?
Yes, sure. I'll take that. Mark is very involved with some of these. He can give me some more color. But, a big picture on the 3rd evolution, Jonathan.
Bringing the application framework to market. Maybe somewhat an obvious statement, but we we definitely are reinforcing it with customers. Is that if you're going to have capability sets that are really based on analytics and increasingly lots of interesting things and security will be driven on analytic capability, machine learning capability. The data set against which it runs is very important, not only in terms of its size, but also in the diversity of the kind of data in there. Right?
Like, for example, we don't need machine learning to tell you information's bad. It's the only data set you put in there with bad stuff. Right? You want to have very big datasets and you want the diversity of the datasets to have good, bad unknowns in there and grow a lot over time. So the logging service is a capability set that we get to go to customers and say, from a very cost effective point of view, you can log all the information coming off Palo Alto Networks capabilities, because you want those really large datasets for all the analytic capabilities, like light cyber, for example, and things will bring to the application framework to chew on this.
And the bigger they are, the better they are, and it doesn't have to be cost prohibitive to log all that information. So, you know, Mark was deeply involved in a couple of the sales this quarter. Maybe you want to add a little color?
I think for, to be able to leverage machine learning, like our adversaries, they're leveraging against our customers every day in an increasing scale and velocity. You need to be able to log not just bad and suspected bad, but also good to really let the machines crunch as Mark said. So I think what makes us attractive beyond price is the fact that we're able to take the data for logging service and add that to the trillions of artifacts that we have in our threat intelligence data centers around the world to really drive, the kind of automation that you need to to be able to reduce the attack surface.
I think that's the last question. Yes. Okay. Well, thanks, Doug. Before I close, I want to thank everybody again for joining us today.
And I wish you and your families a very safe Happy Thanksgiving. We look forward to seeing many of you in the coming weeks of summer investor conferences. Really appreciate your time. See you next time.
And ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.