Good day and welcome to the Palo Alto Networks announces intent to acquire CloudGenx Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. David Neederman, Vice President of Investor Relations. Please go ahead.
Good afternoon. As you've seen this morning, we announced the proposed acquisition of Clogenix, joining us today to discuss the transaction are Nikesh Arora, Chairman and CEO of Palo Alto Networks and Lee Klaritch, Chief Product Officer. Please note that we will not be commenting on our fiscal third quarter or fiscal 2020 guidance during today's call. We'd like to remind you that during the course of this conference call, management will make forward looking statements, including statements regarding our competitive positions and the demand and market opportunity for our products and subscriptions including our beliefs about the anticipated benefits of the post acquisition of CloudGenx, the anticipated timing of close and our phased integration approach, our continued execution and focus on providing new products to our customers, and the overall impact from the COVID 19 crisis on our business. All statements other than historical facts, including the statements regarding the expected benefits of the proposed transaction are forward looking statements.
These statements are based on management's current expectations, assumptions, estimates, and beliefs. While we believe these expectations, assumptions, estimates, and beliefs are reasonable, such forward looking statements are only predictions and are subject to a number of risks and uncertainties, which are beyond our control and which could cause actual results to differ materially from those anticipated by these statements. These forward looking statements applies as of today, and you should not rely on them as representing our views in the future. With that, I'll turn the call over to Nikesh.
Thank you, David. Welcome everyone. Thank you for joining the call and making the time in such short notice. We're excited to announce the proposed acquisition of CloudGenx and explain how this complements our strategy. Before we get to taugenics, I would like to take a few minutes to address the COVID 19 situation.
1st and foremost, we have prioritized the health and safety of our employees. In addition to travel guidance of public health authorities, We had restricted international domestic travel for our teams. As of March 16th, we made working from home mandatory to all employees. With limited exceptions and optimized virtual meetings help and do so. In this unique time, we also have shown a commitment to helping our employees.
Yesterday, we committed to a no layoff policy associated with the uncertainty caused by COVID-nineteen. We have slowdown hiring to ensure that we manage the pace of our hires in line with the expectations of the economy. We've also established a fund to assist our employees that may be in need. Our RV workers who may not be working during this period and also the communities we're in. The fund will be supported by donations from management, our board of directors, our employees and me.
From a technology perspective, We're fully leveraging our remote secure working capabilities to Prisma Access for our employees, to enable them to securely connect with the applications need, loaded in the cloud and our data centers or offices. Additionally, we have transitioned our security operation center to the mode model in which all our analysts are working from home. Our partnership with Google allows us to scale our products in a linear fashion has ensured that we've had no issues in meeting the high demand we're seeing for remote secure access. Let me talk about the business impacts of COVID-nineteen. From a sales perspective, we have seen a few dynamics 1, the working from home phenomena has prompted many organizations to purchase incremental firewalls to accommodate the new traffic from employees no longer working from their corporate offices.
We are well positioned to help customers to fully protect our attached firewall subscription that allows organizations to secure remote workforces. We are also seeing an increase in conversations regarding Prisma Access from customers who are contemplating a new paradigm in terms of remote working. As organizers and around the globe are mandating their workers where possible to work remotely. We launched a free trial product in Prisma Access, We have seen over 1000 trials initiated by customers in the last few weeks itself. In a little over a month, we have seen a significant increase in Prisma Access and global direct pipeline, and I have already seen wind in that time frame.
The majority of this pipeline is from our installed base and speaks to its strength. With all that said, we're facing a situation without precedent, while we are working as hard as we can to continue to serve our existing customers, there may be impact status today, we cannot yet determine. On the margin, we expect that some of our customers will see a disproportionate economic impact a likely credit constrained, and we're already trying to be working with them to adapt that payment terms to ensure continued sales. Booking supply, we're monitoring the situation extremely closely. As a reminder, we manufacture all of our appliances here at California.
We do have a small number of components that are single source in China that are used in our low end firewalls. We have worked by supply chain to ensure that we're able to do with the current expected demand for the quarter. And most of our deals, we do not expect any supply chain interruptions. Now turning to cloudgenics. Delighted to further our staffing capability to propose acquisition of CELGenius.
We've spoken quite a big recent month about how the digital transformation is accelerating the adoption of cloud and advanced applications. Most organizations now have a digital transformation strategy to fuel user mobility. The recent study showed that 42.5 percent of the global workforce will be mobile by 2022. Although during this COVID 19 crisis, this number is clearly much higher. We expect that once the pandemic slows, you need to see a permanent change in our organized additional sync development workforces.
Cloud adoption is another macro level trend to a digital transformation. For most small organizations, I use a cloud in some shape or form whether that's SaaS, I, AWS, or PWS Fast. As applications move from corporate data centers to cloud and users need secure access from anywhere, whether it's headquarters and more pressure on the road, organizations, fades, challenges and tradition network and security architectures that will be costly and effective. With the acquisition of CloudGenx, we intend to maintain a dual SD WAN strategy. And Lee will talk about that in a minute.
We believe with the inclusion of CloudGenx, Tresma Access, which is already the industry's most comprehensive SAPI platform, will be enhanced to deliver a global cloud network of cloud delivery security for our users. You propose acquisition, we will integrate our Genex cloud managed SD WAN products to accelerate details on onboarding or remote branch of the retail stores into Prisma Access. This combination will extend the breadth of our solution, our platform, and address best of breed network as well as security transformation requirements. This will accelerate the shift from SD WAN to Sassy. As you've likely read in the press release, the agreed upon purchase drives is $420,000,000, the co founders, Kumar Amachandran, Manir Amaswani, and Mekent Ramanat under the Greek John Paulo Networks.
I'm gonna turn the call over to Lee let him share his thoughts on how cloud generates fits with our product strategy. Lee?
Thank you, Nikesh. As you can imagine, I'm excited by the opportunity to accelerate our Sassy strategy with the proposed acquisition of CloudGenx, but first a little context. Driven by digital transformation, we're seeing a significant increase in customers embarking on network transformation projects with SD WAN as a core enabling technology. The most the way most SD WAN architectures work, the customer deploys an SD WAN device in every branch office but they also need to deploy SDN devices in regional data centers around the world and effectively build and operate their own global network. As you can imagine, this can be very challenging, and we think there's a better way.
This is why we build Prisma Access. Where both the network and security are cloud delivered and offered as a service. Prisma Access provides customers world class security as a service on a premium global network through our partnership with Google. Sassy platform by integrating the cloudgenics AI based SD WAN product with Prisma Access, providing a seamless end to end solution to our customers. This is referred to as a thin branch solution as the device in the branch is intelligent yet lightweight with most of the complex processing happening in our cloud.
We expect the 1st integration milestone within 3 months of closing with deeper integration through the back half of the year. Importantly, for our customers, especially as work from home has become the new norm, Prisma Access also provides scalable, secure access for remote users. This means 1 cloud delivered security solution for branch offices, mobile users, and partners for secure global connectivity to all applications. Please note, we do believe in giving our customers choice, and so we will continue to enhance both the existing CloudGenx SD WAN product as well as our own next gen firewall based SD WAN product. This ensures we meet the range of requirements from our customers and provide a great on ramp to our full Sassy solution.
With that, let's open it
We will take our first question from Brian Essex with Goldman Sachs.
Hi, good afternoon, and thank you for taking the question. Congratulations on, first of all, on the transaction. It's a really interesting technology. Maybe maybe Lee, if, I have a question for you, from what I understand, CloudGenx is kind of a hybrid hardware software model. How do you anticipate, integrating that with your platform?
And then maybe part B of this, help us understand that they're a little bit differentiated with the application routing technology as opposed to packet routing technology, how does that also marry with your platform and where do you have the best synergy with those 2 aspects.
Yes, thanks for the question, Brian. To the first part, the one of the things we really liked about CloudGenx is the cloud based approach they took from a management telemetry, visibility, council they provide their customers. It's it's really, unique and and something that the customers value highly. The on the branch side, they have so it's a hardware option as well as a software virtual appliance option, and they give customers the choice between those we think that in the branch, we really like the solution they have. What we will do is from integration perspective is, design that such that it connects customers directly up to Prism Access.
So our global network and and security as a service And then we will start to integrate the the management consoles to give customers that unified experience over time.
Got it. Super helpful. Maybe one quick follow-up for Nikesh. I understand you guys have been partners for a while. From a sales perspective, how familiar is a sales force with CloudGenx?
And, is this something where you might be able to get a great amount synergy through the sales force right away?
Yes, Brian. Look, we have already been pivoting our sales force to learn more and more about Prisma Access a lot of remote security and SD WAN with the launch of our SD WAN capabilities of firewalls. Additionally, CloudGenx has a dedicated SD WAN team, obviously. And, we have a few customers where we have partnered together already, where customers are using the CloudGenx SD WAN product because my access with it. We anticipate being able to cross sell SD WANGRAP as My Access customers and, upsell as My Access to cloudgenics as SD WAN customers.
So we think there's a huge opportunity of putting sales teams together and leveraging both the SD WAN and Prisma Access secure capability As I said in my prepared remarks, we are seeing a bump up in the conversations around the most secure working from home. That usually translates into an SD WAN conversation in the medium term. I think as it becomes a new norm, given the pandemic we're in, I think we're going to see more and more projects in the next few years. We'll go talk about MPLS replacement backhauling some of the traffic straight to the cloud. And now all of it back to this and write in a similar trend, you think having a dual pronged solution is great because you know, for customers, which are taking on large scale network transformation projects, they do want a dedicated cloud based SD WAN solution, which we think cost.
Great, very helpful. Thank you very much.
We'll take our next question from Keith Weiss with Morgan Stanley.
Excellent. Thank you guys for taking the question. Nikesh, I guess the question for you, in terms of the timing, why now, from a kind of market perspective? Is this the right time for, doing biogenics and inks specific kind of forced the issue to be making this acquisition now. And then second part of the question, any detail you could give us on the financials ethroGenics or any projected impacts to the Palo Alto Networks Financial model on a going forward basis?
Thank you. Thank you for the question. Look, that's a great question. And we had been in conversation and being evaluable the SD WAN market even prior to when COVID 19 came about. And we've looked at every player in the market.
We've looked at where the maximum benefit for us would be from an integration perspective. And as you heard, Lee has outlined a very clear integration path. And honestly, the more we dug into the company, the better we liked it, the more we looked at it, the more we felt that the next set of developments should be together as opposed to separate. And the only question was, is this the right time or not? And if I take a long term view to this sooner, it's better than later because you want teams to coalesce.
You want the product to be aligned and integrated. And the team on Prisma Access has just come off a big release where is stable. It's working on GCP. We're turning on tens of thousands. It's not hundreds of thousands of customers.
And rather than then launch off a next development path, trying to make Ziva on stronger. We figured this was the right time to do it. And similarly, CloudGenx was going towards next transition of how do we go integrate LTE and 5G to the box So you figured if you do, if you start working now, we're better off getting it done. Our board made sure we looked at our capacity of the company to seek and reintegrate the nature. We look to that capacity from a cash perspective.
We have lots and lots of cash on our balance sheet. We think we can write out any economic scenario, in the next few years. So from those perspectives, we thought, you know, there's nothing stopping us and to be honest, I've seen the Palo Alto team really step up in the last few weeks and really focus hard on getting it done. We've gotten this done remotely by doing diligence remotely for the last 30 days, and it's worked out. So, I am better sooner than later if you're gonna deliver an integrated product.
We think this is the time in the market where this market will shake out winners and losers more so than the prime market. Got it.
And then on any financial impacts?
Yes, I'm going to, we're going to hold that till the earnings call, keeps because, as you can imagine, we still have to go to regulatory approval to get the deal closed, and we'd rather have the certainty to close behind us. When we share financial impacts with you.
Next question comes from Matumya Boolani with UBS.
Good afternoon. Thank you for taking the questions. Lynn, maybe to start with you. So, of course, you've been working on an organically developed SD WAN solution and maybe tying some of the earlier points together. Can you help, parse through sort of what is incremental the homegrown SD WAN capabilities and how the new capabilities from CloudGenics are going to be, deployed, whether that's through an attached or an unattached subscription?
And then I have a follow-up for Nikesh.
Yes, thanks for the question. We've seen and I described a little bit in the market is there's a lot of the SD WAN market today is, more of a sort of a do it yourself model where, SD WAN products are sold to customers and the customers deploy them. They build their own the hubs and regional data centers, they connect them together. They basically build their own network and the and they're there will continue to be a market for that, but we we really see the market shifting toward a Sassy model where that global network footprint and cloud delivered security is delivered as as a service, for the customer. And so in that model, what, the the cloud genx approach really fits nicely in that their SD WAN device, whether hardware or virtual is designed to be very lightweight, yet intelligent, deployed into the branch office.
It's already optimized for connecting into a a global, cloud footprint like Prisma Access. They then provide the cloud based telemetry, monitoring capabilities, the application performance routing. So it really completes the approach that we're taking with Prism Access in in an optimized way. Now we will, again, as I said before, we will continue to enhance the stand alone products. We we think there are a set of customers out there for various reasons that, will continue to to go down that path.
And so you'll see us, enhance both the CloudGenx as well as the the our NextGen firewall based products, but we see that more as a in the future becoming the on ramp to Prisma Access and Sassy solution.
That's super helpful. And the cash for you, you know, in in our conversations at RSA, there were some considerations around potentially slowing down the M and A effort. So, Can you give us, a sense of or some indication of how investors can feel confident that, you know, ongoing transaction activity like this won't dilute or divert your focus away from, the the efforts on rehabilitating the core firewall business and the network security business. And that's it for me. Thank you.
Thank you, Fatima. Like from a revival of the firewall business, That's a sales execution issue we highlighted in Q1 and Q2. And you said we believe that we would improve that capability in Q3 and going forward in Q4. And we still behind our statement that we believe our revival will improve our Q3 and Q4. Of course, not this can be any COVID impacts that are hard to determine the further out that you look.
From an opportunity perspective, you know, we, as I've said, our Prisma cloud team is, is heads up in all the integrations they have to do and they're focused on getting them to deliver the integrations. And, so is our Cortex team. And we looked when we looked at the firewall, and the most secure access opportunity, to be honest, as we delivered the SD WAN, you clearly see more activity in the SD WAN space in the last 6 to 9 months, both competitively as well as from the established players. And we are beginning to see a convergence of security and SD WAN. And we felt it was imperative for us to have a solution sooner than later And we have an organic solution as leaders tried, which satisfies a certain number of use cases.
If you want to have a fully integrated onboarded remote secure work, SD WAN use case, and this is the right answer for us. So I do still stand by the fact that we're not interested in going and spending money in an uncoordinated and disciplined fashion, but this was an important acquisition from a product road map perspective and something we'd like to get done. I probably will have more ability to share. We think about it financially, at our earnings call, and hopefully that'll give you some more comfort.
Appreciate that feedback. Thanks so much.
Comes from Saket Akhila with Barclays Capital.
First, maybe for you, Lee, can you certainly see the strategic overlap between CloudGenx and Prisma Access as well as the dual SD WAN strategy you talked about. But could you just maybe talk about longer term, how perhaps cloud genics could add to the SD LAN capability on your core firewall appliances.
Yes, good question.
The integration with Prism Access, certainly we think it's an obvious one and one that will significantly benefit our customers and and and where we see the market moving. You know, we we are taking a look at where we can leverage either technology and or simple know how from cloudgenics into our next gen firewalls. They've you know, one thing I've learned. They've they've been working on this for, to pass close to 7 years. Obviously, they've they've built up a tremendous amount of knowledge and an experience to that process and and there's no question.
We'll we'll tap into that as we integrate the teams and, and leverage the knowledge and learning, in both directions.
Got it. Maybe it's my follow-up for you, Nikesh. Listen, obviously, still a lot to play for this quarter and not looking for a comment on numbers to your point earlier, but you spent a lot of time with customers. And I'm curious any preliminary things that you're hearing from them, just on their view of security spending through this crisis, you talked about more infrastructure from work from home and other tidbits, but anything else that you're hearing from customers as they sort of maybe adjust it to this crisis?
I know, Saket, it feels like it's been a long time, but let me remind you it's only been about two and a half weeks. Since people have gone into this mode. And to be honest, most customers were thought unaware, as I'm sure, and everybody was busy making business continuity plans as well as making sure they can scale remote worker capability in a secure fashion. So yes, we've seen that that spike in terms of people's interest on the margin in terms of making sure there are more work use cases are working. I honestly believe that cost, and as I mentioned in our prepared remarks, clearly, there are some sectors of the economy which have been badly hit already in the 2 now peaks.
And those people we're actively working with to make sure that you can work with them on credit terms. Beyond those two impacts, I think it'll still take a few weeks before customers, we adjust their plans and rethink their clients if they have to. But for now, we haven't seen any major changes which has not been suggested or not. It's just I don't think they've had enough time to take stock, and everybody's trying to see how this thing unfolds whether it's gonna be a quick one or a slightly longer, very long one.
Makes sense. Thanks guys.
We'll take our next question from Walter Pritchard with Citi.
Hi. Thanks. Question EBIT for Lee and Nikesh. Just around service provider relationships, how are you thinking about this product either being, friendly for, you know, channel partners like telcos and and others that provide, you know, network is, do you do you think it'll put you more in competition there or do you think you can, you can help leverage those relationships with managed services and so forth?
Yes, it's a good question. Let me give you a quick overview on the blea. That's something to add. Look, as you might have an interesting market, a lot of the deals that, CloudGenx has done have happened through network influencers and people who support large network transformations. Sometimes they come from the security side.
Sometimes they come to network side. And, we're both ways. We also have started building an SP practice. We hired a few people who are working with SPs directly. But, Lee, do you want to add to that from the the possibility of SP as a channel?
Yeah. I mean, obviously, we we've used SPs as being, viable in a a very interesting channel. One thing I'd add is with with Prisma Access, we already have a number of relationships around the world with service providers. Using that as the footprint for providing both network and security as a service. And so, I could see this cloud genics playing nicely as an extension of that.
Okay, great. Thank you.
We'll take our next question from Brent Thill with Jefferies.
Hi, good afternoon. I was curious if you could just expand on the pricing model and how you see that evolving going forward?
Lee, do you wanna take that one?
Sure. The So they just just answer the first part. So the pricing model they have is is largely based on it's a subscription model. And priced by the the size of the branch office essentially. Which means the the entire thing, including including hardware is is part of the subscription.
That's that's the current model. As we as we look forward As I mentioned, the, the primary strategic focus will be on integrating CloudGenx with with Prisma Access And Prism Access obviously is also designed as a subscription model. And so, while we haven't finalized all the plans, we'll be going through refining integration planning, during the close process, I would anticipate that you would see us the the pricing models, fit seamlessly together.
And just a quick follow-up for Nikesh on Prisma Access, you mentioned a pickup in demand. There's a few financial companies. We've seen that already in that we spoke to. And just when you think about how quickly customers are coming back to kind of get get renewed on this. Can you just walk through what that uptick looks like?
And any other color that you have just to further cement that comment would be helpful.
Well, I only indicated that, look, we've had people call us out for more viable capacity to make sure that GlobalProtect works for them. We currently have approximately over 25,000,000 remote users we're supporting across multiple customers. Over 10,000 customers. So some of them have called for increased capacity. Some of them have done quick POCs, literally 48 hour POCs have gone live.
And again, these are anecdotal. These are not a large base we're talking about. You've had customers who literally, school districts or universities who wanted a more secure access instantly. So we are seeing a pickup in demand. And our view is that it takes 21 more days to form a habit.
We think the work becomes more normal. In corporations, it grows from 5% to 20% and that becomes the need for every organization to ramp up their capacity in a more stable, scalable way over time. So we think every one of the leads we're seeing, we're traveling this to us. Hopefully, we should be able to convert over the medium term. So company.
Thanks for the color.
We'll take our next question from Sterling Auty with JP Morgan. Thanks.
Hi guys. I'm curious in the situation where a customer still wants to bring traffic back from the branch to the core data center. If they're using cloudgenics, would that actually require a separate cloud genx box at the data center, or will you be able to integrate that into the existing firewall platform, or would that perhaps require, a customer to upgrade their Palo Alto firewall to support?
Lead you off with that? Yeah, absolutely. So there's there's 2 there's 2 ways in which we can can address that. So for, we can directly address that today with Clogenix, both in the branch office as well as deployed, deploying a Clogenix device in the, in the data center. We anticipate that it won't take too long before we would be able to have the data center device be an NextGen firewall, simply running updated software.
So that's that's one way in which we could address it. The the other option that we would anticipate seeing a lot of customers do is actually connect CloudGenics up to the Prisma Access service. And from there, determine only the traffic didn't actually used to go to the data centers, route it back to the data center, any traffic that's for SaaS application and cloud application or internet is secured and then forwarded to the appropriate destination. So it it basically does all of security in the cloud. And only forward the traffic to the data center that actually has to go there.
But we'll be able to support both, deployment options for customers.
Got you. And then one quick administrative follow-up. How many employees at CloudGenx and, at this time?
Approximately 200. Great, thank you.
That concludes today's question and answer session. Mr. Oort, I'd like to the conference back to you for any additional or closing remarks.
I just want to thank everybody for taking the time and joining us today. As I've said, we're extremely excited to bring our enhanced Sassy solution to help our customers. I appreciate all your questions. I hope all of you are staying safe and healthy. I look forward to speaking with you all again.
Thank you again. Bye bye.
That concludes today's presentation. Thank you for your participation. You may now disconnect.