Good day, and welcome to the Palo Alto Networks Fiscal Fourth Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Kelsey Turcotte, Vice President of Investor Relations. Please go ahead.
Great. Thank you very much. Good afternoon, and thank you for joining us on today's conference call to discuss Palo Alto Networks' fiscal Q4 and full year 2017 financial results. This call is being broadcast live over the web over to you and can be accessed on the Investors section of our website at investors. Paloaltonetwork.com.
With me on today's call are Mark McLaughlin, our Chairman and Chief over to Stephen Tomlinson, our Chief Financial Officer and Mark Anderson, our President. This afternoon, we issued a press release announcing our results for the fiscal Q4 and full year ended July 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 the fiscal Q1 and full year fiscal 2018 our competitive position and the demand and market to our products and subscriptions, benefits and timing of new products and subscription offerings, organizational changes, our ability to drive outside 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, over to you, 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 quarterly report on Form 10 Q filed with the SEC on June 1, 2017, and our earnings release posted a few minutes ago on our website and on the SEC's website. Also, 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 over to the Investors section of our website located at investors. Paloaltonetworks.com.
We would also like to remind you that we will be hosting Investor Day 2017 with on-site registration starting at 8 am Eastern Standard Time on Wednesday, September 27, in New York City. For more information or registration details, please visit our Investor Relations website or email over to Jane Zee at sxiepaloaltonetworks.com. And finally, once we have completed our formal remarks, over 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 Q4 and full year 2017 results. I'm pleased to report that we ended the year with a strong 4th quarter. On a year over year basis, Q4 revenue was $509,000,000 up 27%, billings were $671,000,000 up 17%, to the operator. Non GAAP earnings per share was $0.92 up 39% and free cash flow was $190,000,000 For the fiscal year 2017, to the operator. Revenue was $1,800,000,000 up 28% year over year.
Billings were $2,300,000,000 up 20% year over year. Non GAAP earnings per share was $2.71 up 43% year over year and free cash flow was $705,000,000 I want to thank our customers, to our team and our global partners for these results, their hard work and their ongoing support. In the quarter, we saw a solid demand environment in all theaters to strong customer interest in all the capabilities of our next generation security platform. We also saw continued solid gains from the go to market work we started in
to our fiscal Q3.
Customer acquisition in the 4th quarter was very strong with approximately 3,000 new customers added. We are now privileged to serve more than 42,000 to 500 customers worldwide. This was by far the strongest quarter for new customer adds in our history, including the addition of a record number of G2000 customers, which now total over 12.50. We also added approximately 2,000 new wildfire customers in the quarter, Bringing our total number of wildfire customers to over 19,000, an increase of approximately 50% year over year. In addition to record new customer additions, We continue to rapidly increase our wallet share of existing customers.
In the quarter, all of our top 25 lifetime value customers again made purchases increase over the $14,000,000 in Q4 of fiscal 'sixteen. This represents a multiple of almost 100 times their initial purchase, which is up from approximately 50 times the initial purchase of our top 25 in the prior year period. Specific examples of customer wins and competitive displacement In the quarter, included an 8 figure Cisco replacement at 1 of the world's largest pharmaceutical companies that included both attached to non GAAP subscriptions, a 7 figure checkpoint replacement at 1 of Australia's largest banks to protect the remote offices, a McAfee replacement on 40,000 endpoints at 1 of the largest energy companies in the United States, a 7 figure Cisco replacement and competitive win against Check Point to a large U. S. Loan corporation for data center segmentation and a competitive win at a very large global service provider in a cloud data center deal.
Over to our Q and A session. Our ability to extend prevention capabilities consistently wherever data is deployed or computed is essential in an increasingly dynamic compute environment. And as a result, our platform adoption is increasing across the board. Along with market leading growth for our hardware and SaaS security services, our non attached subscriptions, Including Traps, VM Series, Aperture and Autofocus all performed well in the Q4. More than 3,400 customers are now using our VM Series and cloud deployments And we have sold millions of endpoints to over 1400 Traps customers.
At the beginning of August, Traps received a maximum performance score of 100 detection of real world attacks on testing done by AV TEST, a third party organization with extensive experience testing endpoint security software. In addition, we were positioned in the leaders quadrant of the July 2017 Gartner Magic Quadrant for Enterprise Network Firewalls for the 6th time in a row. Over to you. For over a decade, we have been driving major evolutions in security that deliver increasingly high rates of consistent prevention, Regardless of where data may be and marrying innovation with the consumption model that overcomes the legacy siloed, expensive and people intensive models that have reached a breaking point. These evolutions build on each other and fiscal 2017 was a very big year for the introduction of new products and capabilities that are driving increased disruption in the market.
Over to you. In the Q3, we released our new hardware, high performance virtualized firewalls and feature rich 8.0 operating system. Feedback in these releases has been very positive, which is evident in our Q4 results. These new products and capabilities were quickly followed in May with the release of Traps to 4.0, which added several key security capabilities and extended operating system support to include macOS. And at our user conference in June, we announced 2 new services, the GlobalProtect cloud service and the Palo Alto Networks logging service.
Our new GlobalProtect cloud service will deliver all the prevention capabilities of our platform, including application visibility and control, to threat prevention, URL filtering and wildfire to secure remote networks and mobile users. Our new logging service to the cloud based offering that is the basis for better security analytics that provides scalable storage capacity and processing power to help organizations store, Given our critical mass and deployments of architectural enforcement points globally, we made the game changing announcement at our user conference in June of the next evolution of the industry and our platforms, the Palo Alto Networks application framework. This open and Full SaaS framework leverages the existing Palo Alto network security infrastructure already deployed across tens of thousands of global customers, which is growing by 1,000 each quarter. To security needs by being able to rapidly consume and deploy innovative security applications built by Palo Alto Networks, 3rd party developers, to MSSPs and their own teams. This brings customers and security innovators a new level of agility and speed by reducing the complexity of Creating, deploying and integrating security innovations by leveraging already deployed infrastructure.
More than 30 secondurity industry vendors I've already engaged with Palo Alto Networks to develop applications for the new application framework, which we are planning to have generally available in early calendar 2018. There's been a lot of excitement and positive feedback around our fiscal 'seventeen announcements, which we had the privilege of sharing live with customers in June at Ignite, And then again, just last week at our sales kickoff, where we trained almost 3,500 team members and partners on the skills they need to sell the platform. Over to the call. The energy level is very high as we come off a strong finish to the year. As we look forward to fiscal 'eighteen, I'm excited about driving further disruption in the market and or opportunity to continue to quickly acquire market share.
I'll turn the call over to Stefan to review the financials and provide guidance in a minute. Over to you. But before doing so, we'll bring you up to speed on a few organizational announcements we made this afternoon. First, I'd like to congratulate Lee Klarich on promotion to Chief Product Officer, expanding its responsibility to now include engineering as well as product management. Lee, who has been with Palo Alto Networks since 2,006, Has been a long time member of our senior executive team and has played a key role in leading the team that has delivered our market leading security platform.
I'd also like to welcome Sreedhar to our Board of Directors. Sreedhar, who is currently Senior Vice President, Ads and Commerce at Google, brings deep technical engineering experience and extensive cloud, analytics and infrastructure expertise to the Board and we're very happy to have him. And finally, Stefan has informed me and the Board that he intends to retire from his role as CFO. To the company is initiating a search for his replacement and Stefan will remain as CFO until the search is completed. Stefan, you've been a great CFO and friend as well as a great business leader.
Over to you. You've put a world class team that has enabled our market leading growth to position us well for the future. While you'll be with us until we find your replacement, I did want to take this opportunity to thank you for all that you've done for the team. We're all very deeply appreciative. And with that, I'll turn the call over to you, Stefan.
Thanks, Mark, and thank you for the kind words. It's a privilege to work with you and the team here at Palo Alto Networks. I'm very proud of what we've been able to accomplish in leading the market in such a short period of time. Over 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 Compared to prior year periods unless stated otherwise.
In the Q4, we continue to see positive indicators of the changes we started to make in to Q3 'seventeen in the go to market portion of the business as sales productivity improved sequentially. It was by far the largest new customer acquisition quarter in the company's history over to you as we continue to significantly outgrow the market, delivering record revenue, billings and deferred revenue, while also generating record operating income, to earnings per share and free cash flow. In Q4, total revenue grew 27% to $509,100,000 For the fiscal year, over to the operator. We reported total revenue of $1,800,000,000 a 28% increase year over year. Looking at the geographic growth of Q4 revenue, The Americas grew 27%, EMEA grew 28% and APAC grew 27%.
Q4 product revenue of $212,300,000 grew 11% compared to the prior year and was greater than we expected. Sales of the new hardware, Which we launched in fiscal Q3 'seventeen, contributed to the strong results this quarter. Q4 SaaS based subscription revenue of $155,700,000 increased 46%. Support revenue of $141,100,000 increased 37%. In total, subscription and support revenue of $296,800,000 increased 42%, accounted for a 58% share of total revenue, There is now approximately a $1,200,000,000 run rate business.
Q4 billings of 670,800,000 Increased 17%. The dollar weighted contract duration for new subscriptions and support billings in the quarter was just under 3 years, essentially flat compared to the end of the second quarter and up slightly year over year as customers commit to our platform as their long term security architecture. Over to fiscal 2017, total billings were 2,300,000,000 up 20% year over year. Product billings for 711,100,000, up 6% and accounted for 31% of total billings. Support billings were 715,300,000, up 23%.
Subscription billings were $867,000,000 up 32%. Support and subscription billings accounted for 69 of total billings in fiscal 2017 compared to 65% in fiscal 2016. This mix shift towards subscription and Support is a multiyear trend that we expect to continue given increasing customer adoption of our 8 subscriptions, new subscription services to be introduced in FY 2018 and high renewal rates. Total deferred revenue at the end of Q4 was $1,800,000,000 and increased 43%. Over to Q4 gross margin was 77.3%, a decrease of 210 basis points compared to
to our fiscal Q3.
In Q4, discounting decreased sequentially and year over year. Q4 operating expenses were $273,000,000 or 53.6 percent of revenue, while operating margin was 23.7%. Over to the operator. For the full fiscal year 2017, operating margin was 20.1%, an increase of 280 basis points year over year Compared to FY 'sixteen operating margin of 17.3% as reported. Included in the 280 basis Point increase is approximately 100 basis points of organic operating margin expansion.
We ended the year with 4,562 employees, to an increase of 767 year over year. Net income for the Q4 grew 42% year over year to 85,500,000 or $0.92 per diluted share. For fiscal 2017, net income grew 47% year over year to 253,400,000 over to $2.71 per diluted share. On a GAAP basis for the 4th quarter, net loss increased 22% year over year to 38 point 2,000,000 or $0.42 per basic and diluted share. For fiscal 2017, GAAP net loss increased 12% year over year to $216,600,000 or $2.39 per basic and diluted share.
Both Q4 and fiscal 'seventeen GAAP results include an impairment loss of $20,900,000 on property and equipment related to the relocation of our corporate headquarters. Additionally, we expect to recognize a loss of approximately $15,400,000 in our Q1 fiscal 2018 GAAP results over to you as we vacate our former headquarters facilities. Turning to cash flows and balance sheet items. We finished July with cash, cash equivalents and investments of $2,200,000,000 During the Q4, we repurchased approximately 900,000 shares of common stock at an average price of $134.60 per share, leaving a balance of approximately $580,000,000 available for ongoing repurchases through December 2018. Q4 cash flow from operations of $239,500,000 increased 28%.
Over to you. Capital expenditures in the quarter were 49,200,000 including 25,500,000 of CapEx related to our new headquarters. Over to you. Free cash flow was 190,300,000, up 11% at a margin of 37.4%. Over to the operator.
Excluding CapEx related to our new headquarters, free cash flow was $215,800,000 up 25.8 percent at a margin of 42.4%. DSO was 70 days at the low end of our target range of 70 to 80 days. Over to you. Turning now to guidance and modeling points. This guidance takes into account the type of forward looking information that Kelsey referred to earlier.
Over to fiscal Q1 2018, we expect revenue to be in the range of $482,000,000 to 492,000,000 an increase of 21% to 24%. Product revenue to be in the range of 170,000,000 to 173,000,000, an increase of 4% to 6%, billings to be in the range of 580,000,000 to 600,000,000 an increase of 12% to 16%, over to you. And we expect non GAAP EPS to be in the range of $0.67 to $0.69 using $93,500,000 to 95,500,000 shares. We expect CapEx for Q1 fiscal 2018 to be approximately $30,000,000 including approximately 10,000,000 to dollar final expenditure related to our new headquarters. For the full fiscal year 2018, we expect revenue to be in the range of to $2,125,000,000 to $2,165,000,000 an increase of 21% to 23%.
Product revenue to be in the range of $7.35,000,000 to $750,000,000 an increase of 4% to 6% billings to be in the range of $2,640,000,000 to $2,700,000,000 an increase of 15% to 18%, over to you. And we expect non GAAP EPS to be in the range of $3.24 to $3.34 using 96,000,000 to 98,000,000 shares. Before I conclude, I'd like to provide some additional modeling points. For the full year, we expect seasonality for revenue to be in line with historical trends as reflected in FY 2018 consensus heading into this afternoon's call. To at least 65% of total revenue.
Our non GAAP EPS guide to include approximately 150 basis points of organic operating margin expansion, Excluding continued investments in LightCyber in the first half of fiscal 'eighteen, CapEx to be approximately 100,000,000 conference. And finally, free cash flow margin to be in the range of 37% to 39%. With that, I'll turn the call back over to the operator for questions.
And we'll go first to Ken Talanian from Evercore ISI.
Hi, thanks Thanks for taking the question.
So first off, I was wondering where
are you in refreshing the group of customers who are likely to conference to renew hardware within the next year or so. With the new hardware, and then what assumptions are you factoring into your fiscal 2018 guidance around that?
Yes. Hey, Ken, it's Mark. Happy to take that question. So from a refresh perspective, as you know, the cohorts for our customers continue to increase each year, so that gets better and better for us as the years go on. And we've been doing well on the refresh so far.
We're doing a lot of work to make sure that we capture refresh into the future. In our fiscal 'eighteen numbers, we have a number of drivers associated with product growth. Refresh is one of them. It's not the primary driver for growth, but But it's one of them in there. Okay.
And then along those lines, are you seeing any changes to the level of attach For your attached subscriptions or acceleration in the unattached?
Yes, we have the last time we had talked about attached, which was a metric that we were We're not going to provide any longer because we're more focused on the penetration rates. The last time we talked about it a couple of quarters ago, we said it was 2.6 and since that time it's been rising, continues to rise.
Conference. Thank you. We'll go next to Michael Tourette from Raymond James.
Hey, guys. And 1st, congrats on the quarter, Stephane. Thanks for all your hard work over the years and best of luck in all. Thanks. Glad you're sticking with it through the transition.
Two questions. 1, first of all, the guidance is all very strong. One is billings. Billings growth is still lagging by about 5 points. Any thoughts on what's happening there in terms of duration or why we're still seeing that lag?
And then I have a product question.
Yes, sure. So on the billing side, Michael, as you know, as we Came off of the first half of fiscal 'seventeen. We are working through some issues and those are improving for us. We saw productivity increasing through the second half. So naturally, we were lower on the billings growth than we originally planned in fiscal 'seventeen, so it created a lag to revenue.
As you see from the guidance, we'd expect that light to continue, but it's compressing through the back half of fiscal 'eighteen as we benefit from the ongoing work there.
And we're not seeing any change in duration for FY 'eighteen.
And then I wonder if you could talk a little bit more about Global Tech Cloud Service initial reaction on that. We've been very positively impressed by it in terms of its importance to the market and I'm wondering what else you can tell us
Yes, sure. That's very happy to talk about that. The GlobalProtect cloud service, as I mentioned in the prepared remarks, is The new service that we'll be launching in September, so very shortly. And this is a way for our customers in remote locations and branch offices to use all of our capabilities with a cloud offering, if they choose to do so. So, some customers like to in those kind of locations use Small hardware, in essence run it themselves.
Obviously, we've been doing that for quite some time for them. Others like to have third parties manage that. We've been doing that for quite some time with our MSSB to partners and I will give them an additional way to do that as well through a complete cloud based solution. The interest on this This is great from when we rolled out of Ignite and talk with our customers about it.
Thank you. And we'll go next to Walter Pritchard from Citi.
Hi, Stefan, same, been great working with you. Just wanted to ask you about the Free cash flow margin, sort of the high end of the range you've talked about. I think you talked about 30% to 40% and you're 37% to 38%. Your revenue guidance at the low end of the range you've talked about corresponding to that cash flow range. Any help you on to that cash flow range.
Any help you give us understanding what's enabling you to drive that better cash flow on revenue that's At the lower end of that range.
Well, there are a couple of moving parts that go into free cash flow, but we are starting to see slight increases in productivity. So billings growth will help with free cash flow. And then there's also just the overall improving operating margin that we're trying to drive as well. We've signaled that we're looking at Increasing operating margin by 150 basis points of organic operating margin expansion. So that should be helpful as well.
So those are two dynamics. We're solidly within our growth and profitability framework. And then the last thing is Our taxes continue to be very de minimis. Cash taxes for FY 'seventeen were roughly $9,000,000 and we don't see a very big uptake in FY 'eighteen as well. Those are the moving parts.
Great. Thank you.
Yes. Thank you. We'll go next to Philip Winslow from Wells Fargo.
Thanks guys for taking my question. In your comments, you highlighted obviously strong expansion and then in the Q and A you conference. I really wanted to touch on the new customer acquisition because if I look at what you did in the second half versus the first half, you clearly saw an improvement there. Yes, just to the team here. I just wanted to wondering if you could just drill down on that.
Have we started to see the positive impact of the changes that you made Mid fiscal year in terms of new customer acquisition. When you look at new customer acquisition, maybe you've got a comment too, not just on count, but deal size and any sort of color you over to you.
Thanks. Yes, J. Farrell. Yes, so customer acquisition as you saw very, very strong in the Q4. Happy to see that.
I think there's a number of drivers inside of there. The first and most important is I just think that the customer base continues to really gravitate towards Palo Alto Networks and the platform and what we can do with that with Things that we're talking about doing in the future as well are really resonating with customers who are really can't handle all the complexity and cost of the old way of doing things. So there's clearly a move towards platforms and we consider ourselves a leader there. The second thing is more tactical in nature or operational, I'll call them, Which you touched on is, the work that we've been doing in the go to market organization has paid off dividends in the early in the second half and through the Q4 and we would expect that continue to take dividends into next year as well. I think some of that's showing itself through in customer acquisition rates as well.
And then as far as 1st, themselves, they are we're very enterprise focused company. The ASPs for Customers is continue to be in the mid five digits for us that goes up and down with various quarters. And we certainly pay attention to that, but we pay more attention to the lifetime value and wallet expansion. And as you heard us talk about lifetime value continues to grow very nicely across the customer base, including to wallet expansion as well. So that's all going well.
And then probably one more thing that's worth noting in the Q4 itself is we've seen continued The team is doing a continued great job internationally as well. So our brand presence and recognition in international markets continues to grow over time and quickly and We saw solid performance in every theater in the world and that also contributed to strong customer adoption.
Great. Thanks guys and congrats again. Also, Stefan, just wanted to pass along my congratulations to you as well. It's been a great run.
Thank you. I totally appreciate it.
Over to you.
Thank you. We'll go next to Pierre Ferragu from Bernstein.
Hi. Thank you for taking my question. Stephane, maybe I hope it's not too difficult a question, but could you give us Some perspective on what your thinking process has been and how you came to this decision To tell the Board you would retire from the role. And then if I think over. About Palo Alto going forward in the next few years, from where you stand today, what do you think is going to be like the most important challenge And the company is going to face.
Thank you.
Pierre, I appreciate the question. Over the past five and a half years, I've been fortunate to be part of team that's helped grow and scaled to be a market leader and the company is in really good shape. We've had a lot we have a lot of management bench strength And I'm focused on an early transition to whomever my successor is. And when I think about just the overall opportunity for Palo Alto Networks with leading technology, great go to market organization and the vision and leadership that the company has. I think the future is very bright, but I'll turn that part over to Mark.
Yes. Thanks, Aaron. The second part of your question, I'd say the most important challenge for us in the future is one that's been with us for quite some time, which is to make sure that we can scale well. I think from an innovation technology perspective, the team has done a very nice job. We get very high marks from the industry, from the customers, from third party recognition.
We just launched a whole slew of new services. The application framework, which we just announced, we truly believe is very, very disruptive and it's going Thank you and tire industry as well again. We're going to do it again, is our plan. But through all that, where we're a large company growing very quickly, we have to execute well
all the time. And I would make I believe that
would be the Thank you all all the time and I believe that would be the single biggest challenge for us is just make sure we get it right again and again and again. And Yes, we've been more right than wrong, but we've had our fair missteps in.
Thank you.
Thank you. We'll go next to Rob Owens from KeyBanc.
Great and thank you for taking my question. You mentioned in your prepared remarks less discounting in the period. I was Curious if this is a function of the environment or a function of the new solutions that you have. If you could elaborate, that'd be great. Thanks.
Well, I think it's A mix of both things, Rob. So what I mean by that is that Palo Alto has been very well known for bringing the highest levels of into the enterprise space for a long time. And as a result of that, I think we're the premium provider in terms of innovation And we're not the chief providers in the market from a price perspective. So our customers You'll pay for value and we believe we're delivering very high value and as we keep delivering more and more capabilities and value to that, they're continuing to pay at the prices we're looking for and they're getting a lot for that. So in addition to that, from the Price performance throughput on things in the hardware category, those change over time as customers need better and better performance with conference better price per performance to do things like SSL decrypt and use cases that are growing in nature.
And we've been able to continue to deliver on that for customers as well, so that they can have all the performance they need in an Except for price. I think it's a mix of a combination of things
there. Great. And then on the DSO front, massive improvement on a year over year basis. And I guess One of your best results this year, was this a more linear quarter than you have seen that really speaks to you guys kind of getting back to a normal cadence of sales? Thanks.
Yes, that's a great question, Rob. So we've been operating in a range of 70 to 80 days. We were at the lower end of the range this quarter. There are a number of puts and takes to DSO. We have seen improved linearity.
That's one in particular. Conference We've also seen just good business traction as well and good collection cycles. And so a number of things that go into it, but Being at the low end of the range is a good thing and but we have a range for a reason because we do see some ebbs and flows to DSO.
Over to you. Great. Thank you very much.
Thank you.
Thank you. We'll go next to Jonathan Ho from William Blair.
Hi, good afternoon and wanted to echo my congratulations. Can you maybe starting off give us
Yes, sure. Jonathan, it's Mark. And just so you know, we're very barely able to hear you, but I think I got the question in from using the baseball analogy of from the go to market work we've been doing, call to the bottom of the 5th. As we mentioned before, we took a 4 phased approach to this. We were going to design what we're going to do.
We're going to communicate it to folks. We were going to implement it and then we have to put it in run time. We finished the first three phases. We're in the run time phase. We have the folks in the chairs for the most part that we need and establish the relationships appropriately with the customers.
And this is the human element portion of it now where we have that Yes, those relationships bake over time. We're exactly where we expected to be at this time, so very happy with the progress and we think we're seeing the fruits of that as you See from the Q4 results.
Got it. And then just in terms of the application framework, can you give us a little bit more detail in terms of how you think that Can maybe further differentiate Palo Alto and what that could maybe mean for win rates going forward?
Sure. Well, let me start off on this one. In the Hundreds of customers that I've spoken to about this over the course of this past 6 months at Ignite, EBCs, the reaction has been very, very positive. And the reason for that is It is pretty obvious that the consumption model and security is fundamentally broken. What I mean by that is most customers We'll complain and rightfully so that they have way too many vendors.
How do you add the next one with less people to do it, less money to do it and the complexity to do that. And what we're doing with the application framework is to continue to change not only what the definition of security is, which is very high rates of prevention, in this case, using Increasingly better and better analytics on massive sets of data, but also to be able to consume innovation in a different model. So there's no single security company They can innovate everything that's going to be needed. Customers know it, we know it. So the application framework is leveraging all of the infrastructure that we've already deployed and we're increasing that by 1,000 every quarter from a customer perspective into a big data lake, which is already running at Petabytes and petabytes of data for a long time, applying analytics on top of that, which we've been doing for a long time with wildfire And Mymeld and White Cyber Now and then open that up through an open API at the top, so that not only the Palatoo network into the framework.
We expect it to be a lot more over time. So it's a route to market for other vendors, including ourselves, where The customer gets to use that capability simply by turning it on without having to deploy something additional into the network or their endpoint or the cloud, Which is a very traditional model. So that's why we think it's very compelling and customers seem to agree with that.
Thank you. We'll over next to John DiFucci from Jefferies.
Thank you. Mark, you said that ASPs For new deals, we're in the mid-five digits, but it sort of bounces around a little bit. By my math, and I try to Figure it out. It was lower than it used to be, let's say, a year ago. I know we're getting over the last year with a lot of things happening.
Does it have anything to do with the greater ratable portion of revenue from new deals, More ratable subscription and maintenance than product or is there something else going on there?
John, it's a good question. And I think that when we are adding as many customers as we add every quarter, You see a whole slew of use cases for why people are coming to Palo Alto Networks. As a general matter, we kind of average it all out by the definition ASP, as a general manager, you have to shut all out. We are displacing our competitors at very high rates and lots of times the way that that happens They want to use us for something and then they go from there and they expand. So usually, when we're going to get to come into an engagement somewhere, we're going One of the first things that we do is like put us in a lab environment or a DevOps environment or some environment to get started and test it.
And that, of course, goes into the to ASP for what they're doing. But then what happens almost all the time is they buy a lot more from us and spread out very rapidly, which is why we tend Pay a lot more attention to the lifetime value expansion and the wallet expansion of the customers as well. So it's not really about ratable Subscription services. It's really about how do you start off with Palo Alto Networks and then what happens after the initial purchase.
Got it. Okay. Thanks. And if I could, on the refresh, and maybe this one maybe for Mark Anderson. Since your new products that just came out last quarter imply improvements, are you seeing what sometimes is called a Sort of a trade down, which we've seen with other companies in history.
When they come out with new products and when customers start to refresh, they may actually buy Lower level product because they don't need the same maybe they don't need to spend as much as they did previously. Are you seeing any of that at this
conference Anytime we bring out a new product family that offers dramatic price performance, we see Really three things. We see customers continuing to need more bandwidth because they're moving a lot more applications around, maybe back and forth to public cloud, And then they'll trade up. We'll see some customers that will trade down because the price performance and the port density meets their needs on the trade down. But I think more importantly, and this has really become a big factor already as quickly as Q4, We're getting deals that we would not have otherwise won with the price performance of the in particular, over to you. So for customers that want real fast capabilities and our next generation visibility to applications and user behavior, there's Nothing like it out there and that's been a big help.
Thank you. We'll go next to Sarah Hindlian from Macquarie.
Hi, Steve. Thank you so much for taking my questions conference. And congrats on the quarter. I wonder if you could talk about the overall spread environment a little bit more, where you're seeing dollars rotate within your products, on what sort of driving the better attach rates there on the subscription side would be of great interest to us as well? Thanks.
Sure. Hey, Sarah. Yes. So on the threat environment, I think is you can the threat environment never stands out, let's start with that and you can see it all the time in newspapers and the various attacks. What we see from that from customers is the increasing recognition that the position you want to be in as a Customer is the ability to get every possible shot you can to prevent an attack, and be able to do that very consistently Everywhere possible.
So that would mean whether it's in your network or in the cloud or endpoints and to be really interjected into the attack lifecycle everywhere. So you Increase the probability analysis that you're going to prevent that attack successfully. That is the definition of platforms and security, which is the ability to get to high degrees of prevention in a highly automated way with less and less human involvement with tons of leverage from other companies, all in the same kind of network effect, if you will, And to get it consistently wherever data resides, and that's what we're delivering for folks. So earlier, somebody asked a separate question, which I said, The recognition of the need for platforms in this kind of environment where the adversary is increasingly automated really is starting to underline the need for less and less complex and manually dependent systems that have been delivered through legacy platforms and point solutions. And that's fundamentally what's happening with Palo Alto Networks and what's been driving our growth.
That's very helpful. Thank you. Sorry for the bad reception. In. And on products attached, can you dive into that a little bit, maybe a little bit more color, in particular around Traps, if you could?
Sorry, I missed half of that.
My second part of the question was about Traps. So first was Attach. Okay.
Yes, as I said earlier on
the A metric that we're not sure is all that helpful from for what's happening from LifeSens value and wallet expansion in the customers. So we're Looking penetration rates, which continue to grow up over time, attach rates have increased as I said earlier on the call and continue to increase. We expect that to continue as customers adopt all of our services. And on Traps, very happy with how Traps is performing for us. It's getting to be to a good sized business for us.
We have, as you heard, over 1400 customers now and millions of endpoints, and that's growing really well. And not only does Our sales force agree with that. They're very excited about selling Traps. We can see it working very well for customers, but so is the partner community as well, where an increasingly large number of partners are becoming to our specialized partners, getting all the training that's needed in order to bring those marks.
Fantastic. Thank you.
Thank you.
You. We'll go next to Gur Talpaz from Stifel.
Great. Thanks for taking my question. And Stefan, thank you for all the help over the years. So I wanted to ask about interest level and uptake in your standalone subscriptions, Namely the VM series following the refresh earlier this year. Given the added capacity going all the way up to 16 gigs per second with the 700 series And as well as new features you've added to PANDOS 8.
Have you seen any change in the demand pattern for products like 300, 500 or 700 over the past few months?
Gary, what we've seen is really good demand in both cases. So customers have lots of And we're trying to address all of their use cases. Obviously, some of them and a big growing part of that is cloud based And where they're using our VM Series is in cloud environments, which is whether it's hybrid or private or public, we can service all of those with the VM Series. And with the increasing amount of bandwidth required through because of cloud and SaaS adoption, things along those lines, we have been and will continue to deliver faster and Faster throughput in the VM Series as well. At the same time, with the hardware that we have and we're going to continue to have hardware is an important part of the business.
We're Biggest hardware security provider in the world today by a long shot, we think. Some customers are doing both, right? They have hardware and we also have virtualized capabilities in the cloud. They need the consistent protection between both of those. And so lots of customers are using Our favorite Anim series, and we would expect that to continue into the future.
That's helpful. And maybe one more fault, if I might. On Traps, Within Endpoint, there's been a lot of talk about Endpoint conversions primarily through the incorporation of EDR. Do you feel like that's somewhere you need To go or is this somewhere is that a feature you think that can be addressed through the application delivery framework and some of the third parties that are building on top of your framework? Thank you.
Over to
you both. So as we if we went to the very basics of when we launched Traps in the 1st place, to some of the really simple or simple way to think about things, what do you need from an next generation endpoint security solution. You would want The ability to do prevention if you could, detection if you can, you would want EDR capabilities and you'd want the ability to do some automated forensics As fast as possible, right. So, I'm oversimplifying things along those lines. And what you've seen us do with our roadmap with Traps is continually march down that to a list of things and also partner in cases where we don't have those capabilities in the market.
So I think it will be a mix of those. And on the application framework itself, the other endpoint vendors as well writing applications into the framework and I think other security vendors will do that even perhaps hopefully some of our competition will at some point, because ultimately what's best for the customer Is the delivery of the best capabilities against the largest set of data, right? And we think we are we have the largest set of data today and we're going to continue to have that because of the very, very fast rate of deployment of talented networks globally as you can see from the customer additions and lifetime value expansion.
Thank you. We'll go next to Sterling Auty from JPMorgan.
Yes, thanks. Hi, guys. Let me start, Stephan, congratulations Palo Alto and could we see you as the C level executive in another company going forward?
I'm currently retiring from Palo Alto Networks Sure. An early transition and be here through my until my successor is named.
Understood. And again, congratulations. And then one follow-up, really impressive results out of EMEA. We saw struggles Checkpoint and CyberArk in the quarter and there's been lots of questions about GDPR and other things. Mark or Mark, Any commentary to what you saw in the quarter, perhaps the linearity or to discussions and demand specifically to the theater.
Yes, Sterling, it's Mark A. Here. Yes, we did have a very good quarter in EMEA. I think a big Part of it is the continued kind of elevation of our brand and the combination of the marketing and the sales coverage that we have has Really help drive awareness to how we're different and it gets us appointments. And with especially with GDPR coming in May of next year, There's sort of a forced awareness that we're not running around chasing ambulances, but we're certainly being asked questions as subject matter experts and we're turning showing ourselves to be much more relevant and much more of a thought leader than maybe some of our competitors.
And I And just secondly, the team there, the performance across all regions in EMEA, without exception, was very good and very consistent. So all the way from the Middle East back to Western Europe and the UK and down to South Africa was just very solid. So I think It's a combination of a good team, elevated brand and just heightened awareness of the fact that legacy point products,
We'll go next to Greg to Kowitz with Cowen and Company.
Okay. Thanks very much and Stefan congrats and best of luck. Mark, I wanted to follow-up on the application framework Because it does present a fairly radical change to security architecture as we know it. Can you talk about over what time period you see this playing out As well as what you think this might mean for your financial model both over the medium term and the long term?
That's a great question, Greg. As well, we like to be the disruptors in the Teresa, we're going to keep doing that. And as I said, I think the model for security today for some time Has been increasingly broken consumption wise, right. And we did a huge amount of work around that. I'll call it the first evolution That we drove with the X-ray and firewall where we proved that you could subsume a lot of capabilities that used to be provided as point solutions as hardware into SaaS Applications delivered off of hardware and that's been a big part of our business.
We did the second evolution about 3 years ago by proving We still have a lot of ways to go on this, of course, with proving that the consistency of having the same kind of security, not only in the network, but also in endpoints in cloud is absolutely critical and will Growing criticality over time and very few vendors are going to be end up being able to make those claims if they can do that high rates of prevention exactly the same way, everywhere where the data may be. And then the 3rd major change or evolution is how do you consume all these things In the future, where data and data, data will become more and more important, right? So that's sort of the setup. I think the specific question to know about the model and the businesses. We would expect that this would be transformative to the industry over time.
It's going to take time of course to do that. The application framework, as we said, will be available in calendar 'eighteen from us. And we would expect that over time, it would grow nicely and as routes to market become open to Security innovators that would not be able to go build businesses and reach scale and get the data importantly themselves that they could that we have because we have it in massive And just a couple other thoughts around that. It's a very virtuous cycle, if you will, And the more capabilities, analytics you can do and data that you have with your own things Things that you bring to market like Palo Alto Networks has done in the past and will continue to do in the future or that third parties can tap into through that application framework Makes the whole thing more valuable and will pull through the sensors, if you will, the endpoints and the hardware and the virtual capabilities, because that's actually how you consume, right. And then the more of those that are deployed and we deployed a lot of them, we deploy a big amount and drive more data, Which makes the data lake more attractive to people to write applications into, right.
So I think you kind of get it from, if you will, from the bottoms up and the tops down, these things
to reminder, we ask that you please limit yourself to one question to allow everyone an opportunity to ask questions. And we'll go next to Fatima Boolani from UBS.
Good afternoon. Thank you for taking my questions. Mark, Emma, a question for you around the lifetime value metric. Over to you. Yes.
That metric continues to be resilient for you and continues to slope upward. And maybe going back to the basics. Can you help us understand sort of what's going in that metric and maybe what the most sensitive drivers are that are in there that We're underestimating and that continued to outperform for Eatsworth for that number to breach the $20,000,000 mark.
Yes, sure. Well, maybe the simplest answer would be everything goes into lifetime value. So if you purchase something from Palo Alto Networks, it could be hardware, it could be virtual, it could be Maintenance and support could be subscription services is going to count inside the lifetime value metric, which is one of the reasons why we talk about The multiple of your initial purchase, somebody earlier asked about ASPs. And so if you look at the multiples of initial purchase, it's really that Everything continues to grow over time. As far as the other part of the question about what might be Less evident, if you will, inside of that.
I'll turn it over to Steph and see if you have any thoughts on that one.
Yes. I think as our platform Resonates with customers and they're looking to adopt all of our subscription services, all of the new hardware. We have this dynamic where the expansion value of an opportunity once we acquire the customer towards the initial purchase. So our customers continue to come to us and say they want less security vendors in the space. They're looking for a consolidated platform and the fact that we have great innovation engine going on at the company, we're coming out with subscription services And products that customers want to buy, that's playing right into the wheelhouse of where the industry is moving.
So it's platforms are winning over time. We believe we have the best platform and those are like the key drivers.
And there's to probably a dozen different places in a large enterprise that we can sell our use cases to. So we're constantly looking You'll pull more arrows from our quiver and which we've certainly done with amazing innovation over time. And we can do that in multiple places within the enterprise. So the right account coverage. We're looking to continue to expand at all times.
We'll go next to Eric up in your from JMP.
Yes. Stefan, good luck with retirement. Great working with you. My question has As you look into 2018, how do you see the expansion into cloud services progressing? Did you see what kind of adoption did you see in Q4?
And how do you plan to position the company for that in 2018.
Sure. Hey, Eric, it's Mark. Well, we saw a very strong adoption in cloud and in over to you. Well, there's a number of things inside of there. One is the VM Series, you've got lots of strong customer adoption.
That's a good sized business for us as well that keeps growing at very rapid rates. We also saw good adoption from Aperture, which is our CASB offering. We'll Throw that into CloudCore category as well, because I think customers, they view that. And then the third thing of the The services we just announced on the logging service and the GlobalProtect as a cloud service as well will also add into the ability to serve use cases into the cloud for customers. So we'd expect a bit of adoption over time from that as well.
Very good.
Thank you. And we'll take our final question from Carl Curtis from Deutsche Bank.
Thanks. Maybe given last, I'll squeeze in 2. One is, Mark, on on the federal government side. We've heard from Juniper and most recently Ciena this morning about some weakness, but I'm just curious what you're seeing there. And then if I could squeeze in a second, it seems like Palo Alto is replacing John as the Head of U.
S. Sales. And I'm wondering if you could put that in context. And is that sort of the last big piece on the sales leadership front as you close on your reorg. Thanks so much.
Sure, Karl. I'll take this is Mark Ham. I'll take the Fed question and give Mark Anderson the John Scruggios question.
Over to you. On the Fed
side, just as a big picture item, we're a very well diversified company from a revenue perspective, no vertical in any quarters representing 12% to 14% of revenue, so which is good because verticals go up and down obviously in sentiment and spending patterns. Fed's been a very good business for us for a long time. We'd expect that to be the case in the future, but I believe that there's a lot of uncertainty in the Fed space right now, Giving budget anxiety. So just pick up the paper, you can read about whether we're going to have a budget or continuing resolution. And I think that that is Year over for spending, which ends in September, as you know.
So we've taken all that into account from a guide perspective. And we hope there'll be more clarity in that space in the to not too distant future, but we're watching like everybody else. I'll turn the other question over to Mark.
Yes, sure. So, Karl, with regards to Billy, He was with us for over 4.5 years, and gosh, what an incredible job he did building the business. He came to us over a year ago and said that Mostly for family health reasons. You wanted to shut it down at some point and just in a move of incredible characters that What would be the best time for Palo Alto Networks? And so as we went through our transition challenges in the second quarter, John was there leading the changes and really driving that and finished up with a really good strong Q4 and just hats off to him.
I've to know him for 25 years, and he's a good friend and a tremendous guy, and he deserves to take a rest, which I know he's going to do. So with that much time, we were able to do a good, I think, a good discrete search and You spent a lot of time with Patrick Blair. Patrick comes with incredible credentials. He's a good guy, great culture fit. And He's inheriting a team that's just got incredibly strong bench strength and a lot of tenure in the senior leaders of that team.
And we're excited about what Patrick brings to the mix. Patrick's got scale, managing 1,000 and 1,000,000,000, which is important for us as we look to our future. And he had an incredibly warm welcome at our SKL last week, and I think people are excited to have him on board because he got a great reputation here in the Valley.
Over to Mark. I know we gave you a lot of modeling information today. By practice, we post our script to the website as soon as we hang up this afternoon. So please do go look for that information because there's a lot of to a calendar that I think you'll find helpful both for Q1 and for the full year. And with that, I'll turn it over to Mark.
Yes. Thanks, Kelsey, and thanks again, everybody, for joining us call today. And as Kelsey mentioned in the opening remarks, our Investor Day will be September 27 in New York. We hope to see everybody there. Appreciate your time on the call.
Bye bye.
That does conclude today's conference. Thank you for your participation.