Good day, everyone, and welcome to the Palo Alto Networks Fiscal First Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kelsey Turncotte, Vice President of Investor Relations. Please go ahead.
Great. Thank you all very much. Good afternoon and thank you for joining us on today's conference call to discuss Palo Alto Networks' fiscal Q1 2016 This call is being broadcast live over the web and can be accessed on the Investors section of our website at investors. Paloaltonetworks Our Chief Financial Officer. This afternoon, we issued a press release announcing our results for the fiscal Q1 ended October 31, 2015.
If you would like a copy of the release, You can access it online at our website. We'd like to remind you that during the course of this conference call, management will Forward looking statements, including statements regarding our financial outlook for the fiscal Q2 of 2016, the spending environment and Market opportunity for our products and services demand for our products and services from both new and existing customers certain financial results and operating metrics our growth rate 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 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 GAAP financial measures and the supplemental financial information that can be found in the Investors section of our website located at investors.
Paloaltonetworks.com. For planning purposes, we expect our Q2 fiscal year 2016 earnings conference call to be held after the market Conference on December 2, the Raymond James Technology Investors Conference on December 7, the Barclays Technology, Media and Telecommunications Conference on December 9th and the 18th Annual Needham Growth Conference on January 13th. And finally, At the conclusion of today's conference call, we will be posting our prepared remarks to our Investor Relations website under Quarterly Results. And with that, I'll turn I'll turn the call over to Mark.
Thank you, Kelsey, and thank you everyone for joining us this afternoon. I'm pleased to report that we had a great start to fiscal 2016. In In the Q1, revenue grew 55% year over year to a record $297,000,000 while billings grew 61% year over year to 3 Expanded to 16.7 percent and non GAAP earnings per share of $0.35 more than doubled year over year. We continue to post industry leading growth rates and scale for a number of reasons. First, security remains a strategic consideration embedded in virtually every IT for both fundamental and new requirements like cloud and mobility.
As a result, the demand environment remains very healthy. And as we look ahead, we expect this to continue to be 2nd, legacy products continue to give way to true next generation technology. It is increasingly evident to organizations globally That retrofitted legacy technology is not the same as Perficel's next generation security capabilities. And third, point solutions prevention as opposed to the alternative of legacy products or point solutions, which cannot provide prevention and add more complexity and cost. As a result of these factors, Palo Alto Networks has established itself as a leader in next generation security.
This is increasingly evident in our size, continued rapid market And global brand recognition as customers respond well to our vision and technology. We are very proud to now be serving over 28,000 customers across the globe who are choosing Palo Alto Networks as their strategic security partner for the future, and we're not resting here. We know that our success is Due to our intense focus on solving the hardest security problems for the most demanding customers. With this in mind, we are always improving our prevention platform and capabilities, further distancing Ourselves from the competition. Some example of these efforts include our continued momentum in the APT prevention space As evidenced by the fact that we added the 2nd highest number of new wildfire customers in the company's history during Q1, we now can count well over to 8,000 wildfire customers, Including over half of the Fortune 100.
The introduction in August of PA-seven thousand and eighty, our 200 gig chassis. We are very pleased with early customer reception and the PA-seven thousand and eighty was the cornerstone of several large Q1 deals. The September launch of Aperture, our new service that is designed To safely enable the use of sanctioned SaaS applications and Autofocus, our threat intelligence service that is designed to provide real time correlation and We also continue to execute well in the endpoint security market with Traps. Customers such as a U. S.-based media conglomerate and a European Specialist in Financial Services adopted Traps in Q1 because of our unique endpoint prevention capabilities.
Customers and prospects appreciate the power that comes Our platform approach with protection at all stages of the attack lifecycle from the network to the endpoint. We believe no other competitor can match these capabilities and we feel very good about our position in the quickly evolving endpoint space. And we are leading the way in providing next generation security for customers regardless Whether the deployment model is on prem, in private, public or hybrid cloud environments, our pioneering work with the virtualization capabilities of VM Series has led to good growth and we now have over 1,000 customers utilizing our VM Series offering and strong demand for our cloud offerings with partners such as VMware for and AWS for public cloud deployments. Reflecting the strong demand environment, we continue to see customer engagements increasing in number, scope and size. For example, in Q1, we conducted over 140 executive meetings at our briefing center in Santa Clara, the highest number ever for the company.
And again, we added well over 1,000 new customers, including one of the world's largest software companies based in EMEA, where we beat Check Point, among others for the Global Security Business, a high profile U. S. Government agency that adopted Traps for next generation endpoint deployment in a very competitive bake off and where we also sold Autofocus, one of the largest biopharmaceutical companies in the world, where we replaced Checkpoint And beat Cisco in a 7 figure data center deal and a large U. S.-based financial services company where we beat Cisco in a 7 figure global perimeter deal. Our technology differentiation and best in class customer satisfaction is also reflected in the continued expansion of our customer lifetime value.
To make our top 25 compared to $6,100,000 in the prior year period. Also as an indication of the rapid expansion inside our customer base, all of these top 25 customers made a purchase the quarter as they continue to invest in our next generation security platform. It takes a lot to win, expand and serve Customers in such a rapid growth trajectory at this scale and we've always been and continue to be intensely focused on effectively scaling our business. This includes our people, where we continue to attract the best talent in the industry to work at Palo Alto Networks. In Q1, we added more than 3.50 team Our partners where we continue to expand our global coverage model with some of the largest and most respected channel partners who provide our customers The best sales experience and value added services.
These relationships are very important to us and we see our partners as an extension of our sales team and a reflection of our culture and values. Our go to market capabilities where we continue to execute against the large market opportunity in front of us with the world's best Man generation, sales and marketing professionals and our customer support teams who continually delight our customers with the best service and support in the industry. We are serious about our mission as a company to prevent cyber attacks in order to maintain our way of life in the digital age. We are grateful for the trust our customers place in us and the opportunity And we are cognizant that our success is based on having the best people and technology in the world. Looking ahead, we feel very good about the state of the business.
The spending environment remains robust. The market opportunity is significant and growing. Our pipeline heading into Q2 is healthy, and we are confident in our ability to continue to execute against the opportunity and widen the gap between us and the competition. And with that, I'll turn the call over to Stefan.
Thank you, Mark, and thank you all for joining us on our call today. Before I get into the details of our results and guidance, I'd like to Note that except for revenue figures which are GAAP, all financial figures are non GAAP unless stated otherwise. Q1 was a very good start to fiscal 2016 With both revenue and profitability increasing nicely, revenue growth accelerated year over year and significantly outpaced the growth rate of the Competition reflecting broad receptivity to our next generation security platform and momentum in our scalable go to market structure. There are a number of growth drivers including robust new customer acquisition, expansion in existing customers and strong demand across the entire portfolio Products, subscriptions and support. These growth drivers resulted in record revenue and deferred revenue and strong non GAAP operating margin expansion and free cash flow generation.
I'm pleased with our execution and remain confident in our ability to continue to take market share. Now let me turn to the numbers. Q1 total revenue grew 55% over the prior year to reach a new record of 297,200,000 The geographic mix of revenue for Q1 was 71% Americas, 18% EMEA and 11% APAC. Compared to the prior year, the Americas grew EMEA grew 40% and APAC grew 46%. We saw broad strength across a wide range of verticals The 3 components of our hybrid SaaS model product, subscriptions and support All grew well in Q1.
Q1 product revenue of $147,700,000 increased 46% over the prior year. Growth was across our product portfolio, in particular the PA-seven thousand and fifty and PA-seven thousand and eighty chassis continue to help accelerate growth in the high end data center market. Recurring services revenue of $149,500,000 increased 65% over the prior And accounted for a 50% share of total revenue. Looking at the 2 components of recurring services revenue, The first component is our SaaS based subscription revenue of $73,600,000 which increased 69% over the prior year. Important maintenance revenue, the 2nd component of recurring services was $75,900,000 an increase of 61% over the prior Billings in Q1 were $388,000,000 an increase of 61% year over year.
Total deferred revenue grew to $804,500,000 in Q1, an increase of 71% year over year and 13% sequentially, underscoring the power of our hybrid SaaS model and increasing visibility into future revenue streams. Total gross margin for Q1 was at the high end of our target range of 75% to 78% at 77.9%, an increase of 110 basis points compared to last And a decrease of 40 basis points sequentially. Product gross margin was 76.7%, an increase of 160 basis points year over year and a decrease of 110 basis points sequentially. The sequential decline was due in part to product mix. Over time, we expect there will be fluctuations in product gross margin.
Services gross margin for Q1 was 79%, an increase 40 basis points year over year and 20 basis points sequentially. Services gross margin continues to benefit in part from ongoing growth of our high margin subscription Total headcount at the end of the quarter was 2,998, up from 2,637 at the end of the prior quarter. We continue to add talent across the business as we scale to support our growth. For the quarter, research and development expense was 11.4% of revenue, Increasing approximately $3,900,000 sequentially to $34,000,000 The increase was primarily due to headcount. Sales and marketing expense for Q1 was 43 8 percent of revenue, decreasing approximately $6,700,000 sequentially to $130,100,000 This was primarily due to The decrease in sales commissions related to our strong fiscal year 2015 year end performance.
General and administrative expense for Q1 was 6% of revenue increasing approximately $2,400,000 sequentially to $17,700,000 The increase was driven in part by consulting and outside services related to projects in the G and A organization as well as headcount additions. In total, Q1 operating expenses were 181 point or 61.2 percent of revenue. Q1 non GAAP operating margin was 16.7% representing growth of 6 10 basis points year over year and 2 60 basis points sequentially. Net income for the quarter was $31,600,000 or $0.25 per diluted share using 90,700,000 shares compared with net income of $12,800,000 or $0.15 per diluted share in Q1 2015. Our effective non GAAP tax rate for Q1 was 38%.
On a GAAP basis for the Q1, net loss was 38,700,000 Operations, free cash flow and free cash flow margin for Q1 were $146,700,000 $127,200,000 and 42.8 percent respectively. Capital expenditures in the quarter totaled $19,500,000 The accounts receivable balance was $196,400,000 in Down from $212,400,000 in Q4. DSOs increased sequentially by 4 days and year over year by 3 days to 62 days. Turning to guidance. In Q2 fiscal 2016, we expect revenue to be in the range of $314,000,000 to $318,000,000 which represents 44% to 46% growth year over year.
We expect non GAAP EPS to be in the range of $0.38 to 0 point 39 dollars per share using 91 92,000,000 shares. Before I conclude, I'd like to highlight a number of considerations for modeling purposes. Due to continued strong growth, seasonality has been difficult to forecast, but we believe that fiscal Q2 and Q4 will show our strongest sequential revenue growth. We continue We do expect to exit Q4 fiscal 2016 at a 22% to 25% non GAAP operating margin, which was The effective non GAAP tax rate for fiscal 2016 will be 38%. We continue to expect CapEx for fiscal 2016 to be in the range of $85,000,000 to $90,000,000 which includes investments in infrastructure, Cloud services and facilities to support the growth of our business.
We expect free cash flow margin to be greater than 30% throughout fiscal 2016. And finally, our share count is expected to increase by approximately 1% to 2% per quarter. With that, I'll turn the call back over to the operator for Q and A. Thank
And we'll go first to Andrew Nowinski of Piper Jaffray.
Great. Congrats on another great quarter, guys. Maybe just real quick, your billings growth remains strong and continues to outpace revenue growth. So based on some of the customer discussions you've had so far, I'm wondering if you can give us any color with regard to what your customer security budgets are looking Like in 2016 and whether the growth will be more dependent on market share gains or whether you can see a benefit from the an improving spending environment? And I have a follow-up too.
Thanks.
Stephanie, it's Mark. I think we're seeing a mix of those things. What we've seen for quite some time is that when given an opportunity to get in front of the customer in the 1st place regardless of the insertion point Demonstrating the ability to come in and displace an incumbent and then expand with that over time. So that's a big driver of And then in addition to that with security being so important globally as a consideration for companies, there's also new spend opportunities
And then geographically your mix from EMEA and APAC remained Largely unchanged, but the and the growth remains below that of the Americas. Do you have to increase hiring in those regions to drive growth? Or will that come more from the channel and distributors?
What we're seeing is with North America as the most mature market where we started in the company just continued amazing growth in an area where we still have so much untapped Potential for the company, the U. S. Being the largest economy in the world, a lot of focus on cybersecurity. So it's great to see that the biggest market continue to grow at those rates. And We're posting very nice growth rates in EMEA and APAC as well as you can see from the results.
And those are both areas where we continue to invest as well not only from a brand
And we'll go next to Saket Kalia of Barclays Capital.
Hi, guys. Thanks for taking my questions here. First, maybe for Stefan. Stefan, can you talk a little bit about linearity in the quarter? I'd imagine August Was slow seasonally, but do you have any qualitative color on maybe how September October maybe compared to some of your prior years?
Linearity was basically consistent with prior fiscal Q1s. It was maybe modestly A little bit more back end loaded mainly because August is a slow month. We also have our sales kickoff meeting that happens and we're coming off what was a phenomenal And we wanted to get everything set up. So September October were very strong and we had a very nice conclusion to the quarter.
Got it. Got it. And for my follow-up for Mark. Mark, a couple of nice deals involving Traps. Can you just give us an update if you sort of start the year?
If you can comment on sort of growth or size, but more importantly, where are customers In that decision process about sort of shifting to that next gen endpoint platform.
Yes, I think the well, first of all, the big market opportunity is $5,000,000,000 market and I would not I don't think it's a better statement to say. I think that's up for grabs substantially there. There's a lot of Activity in the space. What we're hearing more and more from customers is recognition of 2 things. First is legacy endpoint technology just is not doing the job for them.
It's pretty obvious. And The second thing is, is they're not looking for yet one more point solution or one more thing to put on an endpoint. They Very much like in the platform story and it resonates very well with them. So we're hearing customers say is we like the fact that Traps actually does prevention not just yet another And that it's natively integrated into the platform, so it connects my network and the endpoints together. So that's a
powerful story.
Got it. Thanks very much.
Thanks, Saket.
And we'll go next to Michael Turits of Raymond James.
Hey, guys. Good afternoon. Two questions. First, it's been sort of a mixed quarter amongst a lot of the security companies that reported. So and you guys put up a very consistent Strong quarter.
Is there any kind of change in the nature of spending in security that you're seeing?
No, that's a I think something that we believe for quite some time and I think it will definitely play out in the future and whether a quarter shows progression that I would never call something on 1 quarter. We're pretty convicted that a few things are happening. One is that legacy technology is definitely given away to next generation technology. The second is that point solutions are given away To platforms, right? And then the third is that the primary focus being, I'll call it, downstream response So if you put those three things together, if you were able to ring the bell on all three of those in the way the Palo Alto can do, I think we will continue to distance ourselves from the competition.
Other players can ring 1, 2 of those bells, but nobody else is ringing 3 I think that's why we continue to outpace everybody.
And then on legacy displacement, it sounded like things seem strong, but some of the other players, including Cisco seemed to be cleaning up their act a bit and Fortinet has obviously been strong over a multi quarter period. So is there any change in competitive landscape especially around legacy displacement?
We haven't seen that generally. So what we A couple of things. One, I've heard, of course, Cisco saying that they are now serious about security. I've heard A few times in the last few years. But yes, we only really take our cue from what our customers tell us.
And what our customers are telling us is that you can't retrofit legacy technology by buying companies and popping them on top of each other and come out with the next generation platform capability and that just sounds like more cost and complexity. So we We continue to beat Cisco handily quarter after quarter. We've done this last quarter. And I would note some other players who a while back have touted The problem is not technology. It's black sales and marketing costs have invested heavily in that and it doesn't really look like their growth rates are supporting that statement.
It looks more like a technology
And we'll go next to
Greg Moskowitz of Cowen and Company.
Okay. Thank you. Congratulations on a good quarter. I thought it was really impressive that all of your top 25 Customers made a purchase this quarter. And I know it may be a little difficult to generalize, Mark, but what do these customers buy this quarter?
Were they Primarily maintenance renewals, were they healthy additional appliance purchases, were they strong subscription upsells on existing deployments, any color there would be appreciated.
Sure, Greg. That's a great question. And the answer, not surprisingly, is all of the above. So we have lots of customers who just continue to expand with us in different portions of Their network environment, lots of customers continue to add subscription services that they didn't start with in the beginning. And some of course are doing maintenance renewals as well.
So it's really a mix of all of those things. But as we mentioned before, the expansion part of our business is The majority of our business is growing very, very nicely. You can see our customers and large customers just continue to buy more and more from us over time.
Okay, great. And then just as a follow-up, if you can comment Mark on the quarterly performance in federal that would be great.
Yes, good question. So Fed was a Fed is a great market for us. We had a very
And we'll go next to Brent Thill of UBS.
Thanks. Mark, just on wildfire, you mentioned You had a great quarter there. And I'm just curious what you're seeing with some of the point solutions. And are you seeing an increasing rate of customers turning off and deciding to be part of the Palo Alto
We're talking about the clear desire for folks to have a high degree of prevention orientation and have that to be native in one platform. So you have to when we look at our platform and the capabilities of every aspect of the platform, we'll stack them up all day long to any best The brief provider on our capabilities in wildfire in that case performs very, very well. And then in addition to that, which is unmatched, it isn't it's part of the platform. So the platform is more powerful because of every piece that's part of it and each of the pieces are more powerful because they're in the platform. And that's the reason why customers are coming to this, so And on top of that we network the whole thing which means we can rapidly share what we find from one perspective with thousands and thousands of other customers which increases the probability that the next time an unknown threat comes across somebody's network we saw it somewhere else and we just stop it right So it's really the combination of those things that's driving wildfire.
And for Stefan, this is the 3rd quarter in a row of accelerating deferred revenue, One of the highest growth rates you've seen, can you just help us understand what you're seeing there in the buildup of that Doctor?
What we're seeing
is kind of the resonance of our platform really taking hold. We're seeing increasing subscription attach rates. Over time, we are seeing high renewal rates for both support and subscriptions. And the fact that we Truly a platform play plays to our strength and that's playing out in the deferred revenue line. As you mentioned, total deferred revenue grew 71% year over year.
That was one of the highest growth rates that we've had in about 8 or 9 quarters. So, it's just it's a further kind of affirmation of the
And we'll go next to Catharine Trebnick of Dougherty.
Thank you for taking my question. I have a question on your virtual edition. You talked about 1,000 customers. There are several private companies out there, VArmour, etcetera. And can you just quickly say what your advantages are in that sector and how well you're doing it?
Maybe more details on that. Thank you.
Yes, sure, Catherine. Yes, there's a few very, very important differences. The first The virtualized series we have is the virtualization of everything we offer, right? So you have to start with next generation So other competitors in the market have virtualized stateful inspection firewalls, which means they are equivalent to a stateful inspection firewall. We have virtualized our entire next generation enterprise security platform.
So that's the primary Difference between us and all comers in that case, whether it be some large existing legacy providers or any new ones.
Okay. And that's where you're really seeing the accelerated movement with Amazon and then the NSX with VMware, Correct?
Yes. What we're seeing there, Catherine, that's a great question, is that as things move around like the network becomes more amorphous in nature, Locations move off network, users move off the network, cloud computing, all the things that are big macro trends. What we're seeing there is that it's very important to have virtualized Capabilities because you need to move those virtualized capabilities around very quickly and have very good degree of automation amongst them, right. So it's the combination of that that is really enticing our customers to use us and we noted how fast the VM Series is growing and that's just one indicator of how forward
And we'll go next to Shaul Eyal of Oppenheimer.
Thank you. Hi, guys. Congrats on strong results and outlook. Mark, so you mentioned 1 140 executive meetings during the quarter. Are these Board people joining meetings?
Are you seeing the level of And these, call it the seniority of those participants are hitting the level higher?
Yes. The engagement level for us has It's been high and continues to be high into the company. And I should have been more specific what I meant there is these are what we call executive briefings. We have an executive briefing And when we bring somebody in for an executive briefing, it's usually folks are coming in for a minimum of 4 hours, perhaps 8 hours. So they spend an entire day with us with a big portion of their senior technology executive team, sometimes executives outside the technology And we get an opportunity here what their needs are, what their strategy is.
We'll do a deep dive on our roadmap, bring in our technical experts and these are The feedback on this from customers is really great. They very much find it to be a useful amount of their time and they also get the I just wanted to note that because with 104 of these in the last quarter that is the biggest number we've ever done and we're literally bursting. It seems we had to knock down a couple of walls about 3 And
one for So good news, tax rate at 38% is not and probably cannot be going any higher, but And I know I keep giving you a hard time on this one, but how do we bring it down to be slightly more in line with some of your technology related peers?
Well, the 38% is a non GAAP effective tax rate. If you look at the actual GAAP tax rate Our cash tax rate, it's in the low single digits or it's even negative. So the non GAAP tax rate It's a placeholder that we've put out there for modeling purposes. We do believe that non GAAP tax rate will come down over time, most likely to the high 20s or low 30s. And I'll just leave it at that.
And we'll go next to Philip Winslow of Credit Suisse.
Hey, guys. This is Michael Baricich on for Phil. Congrats on the great quarter. Question about the attach rate of subscriptions. Can you give us some color on where it was?
And are there any changes in attach that you'd note this quarter?
Yes, Michael. Yes, attach rates are good and increasing. We talked about that at the end of the Q4. I think we said the attach rates at that point across the board We're at 2.2, and that the tax rates, we'd expect those to go up. They are we'll give more detail
The other thing is, it's not just about the attach rates of the 4 subscription services, but we have Traps, Autofocus and Aperture are 3 subscription services that are coming in into play. And that is also providing incremental business opportunity from us, which is starting to show up in deferred revenue and billings. Great. That actually leads into my follow-up. Could you give us an update on the customer feedback on autofocus so far?
Yes, it's great. Michael, this is Mark. We had 100 and 100 and 100 of customers in the beta before we rolled that out and a lot of them are looking for purchasing decisions. We sold the AutoFocus in Q1 to a number of those customers. And so far the feedback is they say this is very Impressive.
This is taking a lot of data and making it very relevant for me on a very fast basis, so I can make decisions with
And we'll go next to Jason Noland of Robert Baird.
Thank you. And I'll add my congratulations. I wanted to ask first on the potential for a refresh that was mentioned last quarter. There were 4,000 new customers from FO9 to F11. Have you started to see the refresh in early F16?
Yes. Hey, Jason, it's Mark, yes, we have seen our own customer base refreshing as well. And as you noted, the couple of cohorts we discussed before actually which is a bit less than 2,000 customers against the 28,000 customer base. Of course, we're very pleased to see customers refresh that Technology, I would expect that to continue over the time as more of the pace matures. But the biggest driver of the business is the expansion inside of those customers not just the refreshes.
So they're all expanding or pretty much all expanding at very healthy rates. And then on top of that When these bigger numbers and cohorts kick in from a refresh perspective, that should be a tailwind for us.
Okay. That makes sense. Stefan, I wanted to Ask a follow-up on the gross margin. You're already at the top of the range. I assume with mix shift, would that potentially go above the range in F-sixteen?
Or is this an
We feel good about the 75% to 78% gross margin range for the rest of this fiscal year. And That's something that we've that line item in our target model was actually up increased at our last Analyst Day, reflecting Again, the power of the model with our subscriptions business, being close to, call it, software type gross margins, that provides a Backstop to that range of 75% to 78%. So, for the rest of the fiscal year, we feel good about that. And then At some point, we will update our target model and we'll look at all of the line items in that model, including gross margin.
And we'll
go next to Gray Powell of Wells Fargo.
Great. Thanks for taking the question. Just one from my end. So as your operating margin scale from 14% in Q4 last year into your target range of 22% to 25 How should we think about your ability to maintain heightened billings growth? And then how does productivity of new salespeople factor into your thinking there?
Yes. So I'll take the second part first, which is the productivity of our sales force is one of the We have now much more than 50% of our coater caring salespeople Being fully ramped versus ramping, and we continue to see that trend going forward. So that plays a key role in the overall Both productivity and capacity of our overall sales organization. And we have done I think a decent job of managing growth and profitability. We continually balance that on a quarter by quarter basis.
And you saw that we Again reiterated, our 22% to 25% non GAAP operating margin In Q4 fiscal 2016, we don't give guidance more than 1 quarter out relative to billings or revenue. But we feel like we can we are optimally set up to continue to take a lot of market share by doing it in a profitable manner. And what we've also said is, this is a growth and It's not a growth or profitability story. So we continue to manage that dynamic, and we're doing what's in the best interest of our business.
Understood. That's very helpful. Thank you.
And we'll go next to Walter Pritchard of
Thanks. Mark, can you talk about the seventy-eighty opportunity and where you're what sort of business are you winning that you weren't able to Before or is that a continuation of what you have with the 7,050?
Walter, yes, I'd put it more in continuation buckets. So what we're seeing General is throughput requirements just continue to rise for companies in general with more applications that are heavier throughput hogs. The second thing we're seeing is a lot of work in data centers as people are moving to next generation data centers as well. And then the third area we see progress is in the service provider market. It's a combination of all three of those things that have us selling well with the, I'll call it, the 7000 series, which now includes the 780 as well.
Okay. And then Stefan, on the endpoint side, is there a thought to at some point breaking that business out if it gets large enough or I I would love to hear just we're trying to track it to some degree and understanding it's small at this point.
What we're thinking about right now is giving visibility in terms of number of customers and we plan on doing that on a semiannual basis. When the Endpoint business gets very large, we'll consider breaking it out. But right now, it's part of the overall platform, which is why, At least in the call it near to medium term, we'll continue to give color commentary on it, but not break it out specifically in terms of revenue.
And we'll go next
to Joel Fishbein of BTIG.
Good afternoon, guys. Just a follow-up on Aperture, Space that's been consolidating here, I guess Gartner calls it the CASB space, I hate that name, but love to I know it's very, very early, but It could be a big opportunity. Could you just go into some detail about it and what you're thinking there?
Hey, Joel, it's Mark. Yes, so let me For background, let me tell you what the market is, right? So, as data users and things move around as the traditional concept in network gets more and more One of the areas that's important is where is your data and what applications are being used. So if you're using an application That's not on your network and the user is connecting to it not through the network, then the ability to apply Network security processes to it and policies to it is limited just because there's no visibility in it. So that's the problem, right?
So what Aperture does It uses API Hooks to stand in the shoes of the credentialed user in a major third party sanctioned SaaS applications that has some really great technology that's looking for Anomalies based on users and data and the ability to identify and quickly fix it. So that's what it does, right? Naturally, we think that is part of a ProVenture platform. It doesn't it's important, but it doesn't deserve to be outside of the platform and I I don't think customers want to be buying yet more devices and complexity to put in their network to solve that use case. And that's what they've very clearly told us and that's
So do you think that there won't be so called a broker anymore in the middle that You'll be one of the people that will be providing that as a service?
Yes. I think that somebody have to well, What we're talking about is in the sense of somebody has to broker your data for you. What we're just trying to do is make sure that you can control the data in the 1st place. You don't need to add another third party I'm in the process to do that. That just adds complexity.
And we'll go next to Michael Kim of Imperial Capital.
Hi, good afternoon guys. Can you talk a little bit about the opportunity with managed security service providers and the early progress with new partners like Trustwave? How you see that developing and where that's giving you an opportunity to leverage into new segments of the market?
Sure, Michael. Yes. So there is, as you know some customers will choose to out portions of the security operations into managed security service providers, definitely seeing a growth in that business. And almost all the large MSS providers know how to work with and manage Palo Alto capabilities. Where there's a distinguishing Fact that it's really good for us MSS providers is what the Palo Alto Networks platform spits off for lack In a better term, it's way, way different and superior than just reading logs off of firewalls.
So when they're working with Palo Alto Networks platform, they have a great capability and to do something of high value for customers as opposed to low value just reading logs. And another aspect of that we think is Interesting is to take auto focus as a tool and have those MSS providers use auto focus and provide even more valuable intelligence to other customers as a result of that. So we I think there's some interest in there. And as you noted, we were working with some of the providers there to be forward leaning Great.
And then switching gears, can you talk a little about how the partnership with Tanium is progressing? And was that a contributor to wildfire customers in the customer in the
The partnership is going very well. So just for background for everybody quickly what we did with Tanium was back in September, we did work for quite some time with them and then in September Compromise that Wildfire is finding can be automatically sent to Tanium and it can look for it in a highly automated way as well as opposed to you So it's a very symbiotic relationship. The feedback that we've heard so it's a technology relationship, so let me start with that. It's not askew, right? But the feedback we've heard from our field, from their field and customers That makes a lot of sense, particularly when they're thinking about endpoints and they're saying, hey, I'd like to prevent things, I want to detect things that I couldn't prevent, I want to isolate them and I want to remediate them in a highly automated way, if I was unable to prevent them.
So that technical combination is pretty powerful. And we'll go next to
And we'll go next to Sterling Auty of JPMorgan.
Thanks. Hi, guys. So given it's the Q1 and you had sales kick off, can you highlight for us any tweaks or changes that you made in your go to market, whether it be Distributors and what each one is focused on or addition or subtraction or any changes to The reseller program.
Hey, Sterling, it's Mark. Yes, so a few things that came out of I'll call hopefully the seamless growth of the business through rapid growth phases and we're always paying attention to that clearly as on the go to market distribution side. So Mark Anderson He Formed a new theater for service providers as well. So we've got a lot of focus on that. We continue to work very well with our large distributor partners and reseller partners.
I think we We mentioned on the last call that we had over 500 of them in attendance for sales kickoff treating them just like our own sales team from a training And those relationships continue to grow very nicely over time.
And then just as a follow-up, you talked about the relationship with Tanium, but it does seem to be a bit of a morphing in terms How enterprises are thinking about the endpoint security strategy, is there any pieces of the technology puzzle on the endpoint that you feel at the moment that you don't I have that you would have to go through some sort of build versus buy analysis?
Yes, Sterling. I think most importantly what You would do at the endpoint if you could is you'd prevent an attack. So that is by far the highest value order bit and The things that we're solving for constantly and that's what we're doing with Traps. That's why we bought Zavera in the 1st place. That's why we did the integration to Wildfire and that's why we're making a lot of leaps and strides on our capabilities along those lines.
There are downstream things from that that are, if you couldn't prevent, you would like to be able to do like things I mentioned, but we're very, very focused
And we'll go next to Rob Owens of Pacific Crest Securities.
Great and thank you. I'm curious around the strength in short term deferred. Is much of that unshipped product or is that all subscription related? Just trying to get a sense of The first quarter's philosophy.
It's a mix of both products and subscription and support. And by definition, if you have a 1 year subscription and maintenance contract that goes into short term. If it's a multiyear, But if you look at the demand that we're seeing across the board, I would tell you that The vast majority of all of our deferred is subscriptions and support and there's very little product because we are a book and
Great. And Stephan, I appreciate the guidance 1 quarter at a time. Now that over half your business is coming from subscription related items, why not give
Yes. We constantly look at different models for guidance. But given our business and the growth rates, We feel comfortable giving 1 quarter out. We always leave the door open for looking at alternative models, but This approach has served us well and we feel like it's a good indicator of what the environment looks like. The other thing I'll tell you is we also give modeling points on our earnings calls, which gives some more color commentary around the overall health
And we'll go next to
Keith Weiss of Morgan Stanley. Mr. Weiss, your line is open. Please go ahead. Mr.
Weiss, please pick up your handset or to press your mute function, we're unable to hear you. And we'll go next to Scott Zeller of Needham.
Hi, thanks. I wanted to ask about the velocity of deals. Can you tell us if you're Seeing any change in sales cycles or if you're seeing a need for more sign offs at all in deals?
Did you say sign offs?
Sign off, yes.
Okay. So deal velocity is good. So we've said for actually quite some time that the From a start to finish on average things take about 90 days. Some of those be much, much longer. You know, we get some big organizations, government organizations And some can be shorter, about 90 days and that really hasn't changed for us.
From a sign off perspective, the only thing we've seen sign off Wise which is a good thing and slow deals down occasionally is, deals are getting bigger. So the bigger they get, the higher they go in the organization in order to get signed off. And we're fine with that because we definitely don't mind having visibility at the CFO, CEO level
And since you don't comment on ASPs, is there anything you can give us Regarding your comment, Mark, around deals getting bigger, any color if you're not willing to offer an ASP?
Yes, sure. What we absent around ASPs is that they tend to be in the mid five figure range. They continue to be there. They continue to over time. So it's been a pretty consistent trend for us year over year.
And the reason we don't put a lot of focus into ASP from a reporting perspective is We're more interested in the lifetime value of customers. And that's because usually we're coming in, we're taking somebody out of the from a placement perspective and a customer is going to give us a shot to do something. The first shot on that may Relatively minor shot, but over time we continue to grow and grow and grow into the account. And that's why the ASPs would be not as indicative of
And we'll go next to Tal Liani of Bank of America Merrill Lynch.
Hi, guys. I want to go back to the question on the PA-seven Katie, what is so the market the high end market has kind of different dynamics and we see Juniper back in the market with new high end solution and there are some companies are kind of established in the space Cisco and Juniper and Checkpoint. What do you bring to this market that is different than what's available today now? And can you elaborate maybe on the How are they different at this side of the market versus the general side of the market?
Hey, Coll, it's Mark. Yes, I'd say from a different It's basically doing what we've been doing for 10 years, which is the difference between legacy technology and the next generation. And we pioneered that and we're the only ones 2 are doing that, not using stateful inspection technology. From a throughput perspective, what we've seen with the 7,000 series like I said is an increasing demand from customers as They go to next generation data centers, application usage increases for a throughput perspective, is they want that next generation They want it at very high speed as well, which is fantastic an opportunity for us. But at the end of the day, what we've been doing is the same thing we've been doing for a decade now.
And that's clearly working in the market. We haven't seen any resurgence of anybody frankly in the market. You can see that from our results
And we'll go next to Keith Weiss of Morgan Stanley.
Hi, guys. Sorry about the technical difficulties. So thanks for taking the question and a very nice quarter. I wanted to go a little bit more broadly into sort of the idea of the Next Generation Security Platform and really talk about sort of the distribution side of that. You talked Little bit about the executive briefings and going higher in terms of what your sales guys are doing to engage at a higher level, more strategic level with your customers.
How do you get your partner channel on board with that as well? How do you get those guys up the ramp to be able to be helping you guys sell a more strategic sale into the customers? Because
Keith, it's Mark Anderson here. That's a good question. So, you may have read, last Here, we made the decision to involve all of our partners, give them the ability to participate in our internal Sales training. So whether it's having 4:4548 of them at our sales kickoff meeting in August, whether it's having a couple of 100 engineers come to Tech summits or every month having 10 to 15 sales engineers and account managers participate in our monthly new hire. They're learning the exact same curriculum as our field sales people because they're an extension of our field sales team.
The objective there clearly is to get And to do more of the lifting farther down the field than we've seen in the past. And we think so far, just internal expectations So the other thing is we're now I think a lot more relevant to these bigger model partners. So large cloud companies, large telcos, large systems integrators, more and more want to work with us and build out services to sell to their So it's a big focus for us. We're really ramping up the worldwide channels team and feel very strongly But it's only going to get better.
And we'll go next to Karl Keirstead of Deutsche Bank.
Thanks and congratulations on a great quarter. This question is for Stefan. Stefan, the difference between your non GAAP operating margins of 17% And your free cash flow margins of 43% actually widened out in Q1. I'm wondering if you can remind us of the factors that are Likely to cause this gap to narrow throughout the fiscal year as your guidance suggests? Thank you.
The factors that will Contributed to Narrow over time is, we will become a cash taxpayer, over Call it over time and right now we have very limited cash taxes that we're paying. So that's probably the primary thing. What we've given as a guide We've talked about our target operating model of 22% to 25%, which again we Believe that we'll get to exiting Q4 of fiscal 2016. And what we've said is we think that our free cash flow margin Track 5 to 8 points above the top end of that range. That is a guidepost and we'll I'll also tell you that, in this quarter we had exceptional free cash flow margins at north of 42%.
Part of that over performance was driven in part by a really exceptionally strong quarter in Q4 where we had billings and revenue growth that were all time highs and
And that concludes today's question and answer session. At this time, I will turn the call back to Mark McLaughlin for any additional or closing remarks.
Great. Thanks, operator, and thanks everybody for joining Good afternoon. We're really excited about the future and I'd like to thank our customers, partners and the entire Palo Alto Networks team for their hard work and support in Q1. Looking forward to seeing many of you in December and we hope everyone has a great Thanksgiving. Thank you.
And this does conclude today's conference. We thank you for your participation. You may now disconnect.