Good day everyone, and welcome to the Palo Alto Networks fourth quarter 2015 earnings conference call. As a reminder, today's conference is being recorded. At this time, I'd like to turn the call over to Kelsey Turcotte. Please go ahead, ma'am.
Great. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss Palo Alto Networks' fiscal fourth quarter and fiscal year 2015 financial results. This call is being broadcast live over the web and can be accessed on the investors section of our website at investors.paloaltonetworks.com. With me on today's call are Mark McLaughlin, our Chairman, President, and Chief Executive Officer, and Steffan Tomlinson, our Chief Financial Officer. This afternoon, we issued a press release announcing our results for the fiscal fourth quarter and full year ended July 31st, 2015. If you'd like a copy of the release, you can access it online on our website.
We'd like to remind you that during the course of this conference call, management will make forward-looking statements, including statements regarding our financial outlook for the fiscal first quarter of 2016, our business strategy, demand for our products and services, certain financial results and operating metrics, our market size, our growth rate, our operating leverage, product and service development, and the timing and impact of these releases, expected benefits of partnerships, client satisfaction and competitive position. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future, and we undertake no obligation to update these statements after this call.
For 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 May 28th, 2015, and our earnings release posted a few minutes ago on our site. 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. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in the supplemental financial information that can be found in the investors section of our website located at investors.paloaltonetworks.com. For planning purposes, we expect our first quarter fiscal year 2016 earnings conference call to be held after the market closes on Monday, November 23rd. We'd also like to inform you that we will be presenting at the Deutsche Bank Technology Conference in Las Vegas on Thursday, September 17th.
Finally, at the conclusion of today's conference call, we will be posting our prepared remarks to our investor relations website under quarterly results. With that, I'll turn the call over to Mark.
Thank you, Kelsey. Thank you everyone for joining us this afternoon. I'm happy to be here with you to share our results for our fiscal fourth quarter and full year fiscal 2015. 2015 was another great year for the company, one in which we continued to distance ourselves from the competition. In the year, we grew our customer base more than 35% to over 26,000 customers, and are now privileged to serve almost half of the Global 2000. The number of WildFire customers increased approximately 140% year over year to over 7,000 customers. We grew both revenue and billings more than 55% year over year. We significantly expanded our non-GAAP operating margin. We generated free cash flow of more than $300 million.
We expanded key technology partnerships and distribution relationships around the world. We continued to strengthen our platform with new offerings, including Traps, WildFire enhancements, and data center appliances. We were able to grow at these rates and deliver these results because we've established ourselves as the leader in next-generation security. Cybersecurity is an increasingly complex and long-term issue that threatens the fabric of our day-to-day digital lifestyle. To meet this challenge, enterprises, governments, and service providers are having to re-architect their systems and networks off of legacy platforms and onto next-generation technology. This has led to an increase in investment levels in security that we do not expect to change anytime soon. Customers recognize that security is not a problem that can be solved by cobbling together disparate point products or legacy solutions, but that an entirely new approach is needed.
There's a growing global market recognition that our prevention first mindset with the market's only true natively integrated and automated next-generation security platform delivers demonstrably better protection and prevention at a very attractive total cost of ownership. Our singular focus on innovation continues to strengthen this platform with highly disruptive offerings, each of which provides market-leading prevention capabilities, and when natively integrated in the platform, increases the overall capabilities of the platform. As a result, we are rapidly replacing the existing security solutions and winning new opportunities in organizations around the world. We are taking market share with growth rates that significantly outpace the market and the competition. We can see this once again in our Q4 results. Revenue of $284 million grew 59% year over year, while billings of $394 million grew 69% year over year.
Our non-GAAP operating margin was 14%, and we reported non-GAAP earnings per share of $0.28. We added a record 2,000-plus new customers in the quarter, including a North American brokerage and banking company where we replaced Cisco in a seven-figure data center deal, a utility provider of natural gas and electricity, where we beat both Check Point and Cisco for their advanced network protection project, a diversified managed healthcare company in North America, which purchased Palo Alto Networks for NSX in a seven-figure transaction, an Asian government security agency, where we replaced Cisco in their security infrastructure, and one of the largest airlines in the world located in the U.S., where we replaced Check Point in an outbound internet project. Equally important as new customer acquisition is the expansion of customer lifetime value.
To make our top 25 customer lifetime value list in Q4, a customer had to have spent a minimum of $9.2 million in lifetime value, a more than 60% increase over the $5.6 million required in Q4 of last fiscal year, and up from $8.2 million in Q3. This lifetime value expansion is being driven by a number of factors. One example is the continued rapid adoption of WildFire, where we saw attach rates grow to well over 50% in Q4. While we're very pleased with these results, we continue to believe there's a lot of runway ahead of us with WildFire, which appeals not only to existing customers, but attracts a significant number of new ones as well.
In the fourth quarter, we also saw continued strong adoption of Traps, our advanced endpoint capability, which we introduced in the first quarter of FY 2015, and we are now serving close to 150 customers. Wins included a large Japanese multinational telecommunications and internet corporation and a large U.S. regional supermarket chain. Given the vulnerability of endpoints and the deficiency of current legacy solutions, that market is ripe for disruption, and we believe our prevention-oriented approach offers customers the most scalable and effective solution. Feedback from our customers is that our platform advantage continues to resonate and differentiate us from the competition, and we look to widen that gap in FY 2016 with the introduction of capabilities that will further enhance our platform. By the end of this month, we expect to bring two new services to the market.
The first service, AutoFocus, gives security practitioners highly relevant access to the threat intelligence and context we gather from our large and ever-increasing customer base. This helps them focus on stopping the truly unique and targeted attacks. We have been running an AutoFocus community access program for several months now and are very pleased with the level of participation and feedback we've received. The second service, Aperture, is based on the technology we acquired with CirroSecure in fiscal Q4. Aperture expands our ability to safely enable applications by providing visibility and control for sanctioned SaaS applications such as Box, Google Drive, or salesforce.com that are highly collaborative, but often contain an organization's most sensitive data. We also recently announced availability of our newest high-end chassis, the PA-7080.
At 200 gigs a second, the PA-7080 is now our fastest throughput chassis, designed to help organizations secure high-speed internal networks, data centers, and large internet-facing connections without compromising their need for true next-generation security capabilities. Early interest has been strong. In addition to the enterprise customer, we expect the PA-7080 will help us further penetrate the service provider market. In early August, we announced an exclusive agreement with Tanium to integrate Tanium's technology with WildFire to enhance both network and endpoint security. On the distribution front, we are very pleased with the continued progress we are making with our channel partners on a global basis. The largest and most respected channel partners are making significant investments with Palo Alto Networks, providing great leverage for us, high rates of revenue growth for them, and value add for our joint customers.
For example, in fiscal 2015, CDW grew their business with us more than 85%, while Dimension Data and close to 500 other channel partners all doubled their business, giving us the capacity needed to support our growth. It is clear to the partner community that Palo Alto Networks is leading the market and very quickly taking market share from all legacy endpoint providers. As a result, in fiscal 2015, well over 12,000 of our partner security professionals invested in education, training, and building capabilities around our platform, which should allow us to continue to grow together into the future. Q4 was a fantastic end to a record-setting year for us, one in which we delivered unprecedented growth at scale while delivering consistent and meaningful non-GAAP operating margin expansion and cash flow.
I'd like to thank the Palo Alto Networks employees for their hard work and our customers and partners for their ongoing partnership and support. We completed our global sales kickoff a few weeks ago. I can tell you that there's a lot of energy and excitement around what we hope to accomplish in fiscal 2016. With that, I'll turn the call over to Steffan.
Thank you, Mark. Thank you 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. Q4 was a strong finish to fiscal 2015, a year in which we delivered industry-leading sales growth, expanding operating margins, and increased free cash flow generation. During the fourth quarter, our land and expand sales strategy resulted in a record number of new customer additions and expansion in existing customers that once again drove growth across the entire portfolio of products, services, and support. We delivered record revenue, deferred revenue, billings, non-GAAP operating income, and free cash flow. As we look to FY 2016, we feel good about our ability to continue to grow the top line and drive incremental leverage in the business.
Now let me turn to the numbers. Q4 total revenue grew 59% over the prior year and 21% sequentially to reach a new record of $283.9 million. For the fiscal year, we reported revenue of $928.1 million, a 55% increase over the prior year. The geographic mix of revenue for Q4 was 71% Americas, 18% EMEA, and 11% APAC. Compared to the prior year, the Americas grew 68%, EMEA grew 32%, and APAC grew 61%. We saw broad strength across a wide range of verticals and did not have any end customer concentration. The three components of our hybrid SaaS model, product, subscription services, and support, all grew well in fiscal 2015, with particular strength in Q4. Q4 product revenue of $154 million increased 54% over the prior year and 27% sequentially. On a year-over-year basis, we saw healthy growth across our product portfolio.
In particular, the PA-7050 chassis continues to help accelerate growth in the high-end data center market. Recurring services revenue of $129.8 million increased 65% over the prior year and 15% sequentially, and accounted for a 46% share of total revenue. Looking at the two components of recurring services revenue, the first component is our SaaS-based subscription revenue of $64.1 million, which increased 70% over the prior year and 17% sequentially. Excluding Traps, which does not ship as an attached to our appliances, in the fourth quarter, customers purchased on average 2.2 subscriptions per device, compared to 2.1 in Q4 FY 2014. Support and maintenance revenue, the second component of recurring services, was $65.8 million, an increase of 61% over the prior year and 14% sequentially. Billings in Q4 were $393.6 million, an increase of 69% over the prior year and 30% sequentially.
Total billings for fiscal 2015 were $1.2 billion and grew 58% year-over-year. Product billings were $496.7 million and grew 46%, accounting for 41% of total billings. Support billings were $342 million and grew 58%, accounting for 28% of total billings. Subscription billings were $380.4 million and grew 77%, accounting for 31% of total billings. Total deferred revenue grew to $713.7 million in Q4, an increase of 69% year-over-year and 18% sequentially, underscoring the power of our hybrid SaaS model and increasing visibility into future revenue streams. Total gross margin for Q4 was 78.3%, an increase of 160 basis points compared to last year and an increase of 80 basis points sequentially. Product gross margin was 77.8%, an increase of 210 basis points year-over-year and 140 basis points sequentially. Fluctuations in product gross margin are due in part to product mix and the introduction of new products.
Services gross margins continues to benefit in part from ongoing growth of our high-margin subscription services. Total headcount at the end of the quarter was 2,637, up from 2,317 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 10.6% of revenue, increasing approximately $2.6 million sequentially to $30 million. The increase was primarily due to headcount. Sales and marketing expense for Q4 was 48.2% of revenue, increasing approximately $29.8 million sequentially to $136.8 million. The increase was primarily due to headcount and end-of-year commissions expense. General and administrative expense for Q4 was 5.4% of revenue, increasing approximately $1 million sequentially to $15.4 million.
The increase was primarily due to headcount additions. In total, Q4 operating expenses were $182.3 million, or 64.2% of revenue. We achieved our near-term milestone of exiting Q4 fiscal 2015 in the low teens for non-GAAP operating margin, with Q4 non-GAAP operating margin of 14.1%, representing growth of 600 basis points year-over-year and 20 basis points sequentially. Net income for the quarter was $25 million, or $0.28 per diluted share using 90.1 million shares, compared with net income of $9.1 million or $0.11 per diluted share in Q4 2014. For the full year fiscal 2015, we reported net income of $75.2 million or $0.86 per diluted share, compared with net income of $31.8 million or $0.40 per diluted share in fiscal 2014. Our effective non-GAAP tax rate for Q4 in fiscal 2015 was 38%.
On a GAAP basis for the fourth quarter, net loss was $46 million or $0.55 per basic and diluted share. This compares with a Q4 2014 GAAP net loss of $32.1 million or $0.41 per basic and diluted share. For the full fiscal year 2015, we reported a GAAP net loss of $165 million or $2.02 per basic and diluted share, compared to a GAAP net loss of $226.5 million or $3.05 per basic and diluted share in fiscal 2014. We finished July with cash equivalents, and investments of $1.3 billion. Cash flow from operations, free cash flow, and free cash flow margin for Q4 were $111.3 million, $99.4 million, and 35%, respectively. Capital expenditures in the quarter totaled $12 million. The accounts receivable balance was $212.4 million this quarter, up from $150.5 million in Q3.
DSO increased sequentially by three days and decreased year-over-year by five days to 58 days. Turning to guidance. In Q1 fiscal 2016, we expect revenue to be in the range of $280 million-$284 million, which represents 46%-48% growth year-over-year. We expect non-GAAP EPS to be in the range of $0.31-$0.32 per share, using 91 million-92 million 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 to expect to exit Q4 fiscal 2016 at a 22%-25% non-GAAP operating margin, which was the target range and date we set at the time of our IPO in 2012.
To achieve this objective, we currently expect sequential non-GAAP operating margin expansion, with the majority of the acceleration into the back half of fiscal 2016. The effective non-GAAP tax rate for fiscal 2016 will be 38%. With the completion of our fiscal 2016 plan, we now expect CapEx to be in the range of $85 million-$90 million for the year, 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% for fiscal year 2016. Finally, our share count is expected to increase by approximately 1%-2% per quarter. With that, I'll turn the call back over to the operator for Q&A.
Thank you. If you'd like to ask a question at this time, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please be sure that your mute function is turned off to allow that signal to reach our equipment. Again, that is star one to ask a question at this time, and we'll pause just a moment to assemble our queue. We'll go first to Andy Nowinski with Piper Jaffray.
Okay, congratulations on the great quarter. Just wanted to ask about the product growth, it's clearly probably the best we've seen in a couple of years here for you, I was wondering if you could dissect that a little bit and give us some color on whether big deals may have influenced that product growth versus some of the market share gains you appear to be capturing. Then specifically on the market share side, I'd be curious as to where you're seeing the most gains from, whether it's from a vendor or a specific market segment. Thanks.
Yeah, and it's Mark. They're very related questions, and the answer is, on the second part, is we're seeing gains everywhere competitively. From the legacy firewall vendors as well as a lot of the point guys who, over time, are being subsumed into our platform from a services perspective. We're seeing gains pretty much everywhere we compete and also now including on the endpoint side as well. That plays into the product growth. On the product growth side, yeah, it's very healthy numbers, as you can see. We're experiencing both of the things that you just mentioned. One is we are seeing larger deals. We're getting into the Global 2000 at accelerating rates. We're seeing larger deals with larger customers. Our existing customer base has continued to buy more over time as well, as you can see from the lifetime value.
It's winning larger deals with larger customers upfront and then just a continuation of something we've been seeing for quite some time, which is customers continue to just buy more from us.
The other angle on that, Andrew, is we're getting deeper into the data center. We're selling our PA-7050 chassis and our PA-5000 Series, we're seeing larger deal sizes as we get further into the data center. That should continue as we get more traction with our PA-7080, which we just announced.
That's great. Keep up the good work, guys.
Thank you.
Thank you.
We'll go next to Philip Winslow with Credit Suisse.
Hey, thanks, guys. Congrats on what was just an awesome quarter ending a pretty huge year. I just wanted to double-click on the subscription side. Steffan, you mentioned that you're up to 2.2 subscriptions per box. As you think about the guidance going forward, how do you expect that to trend? Obviously you're introducing some, call it non-box attached subscriptions. You already have Traps. You've talked about AutoFocus. Maybe some more color on just how Traps is doing and how we should at least think about AutoFocus beginning to contribute once it's launched.
Hey, Phil. Yeah, thanks. A couple of thoughts on that. First, on the subscription side, you can see the attach rates continue to grow year-over-year. There's a lot of value in the subscription services that used to be point solutions. As we subsume them into the platform, which we have over time, customers are finding a lot of value from that approach. We like that a lot, of course. You can see our subscription services business, if we look at the fourth quarter, is approaching $480 million of billings run rate, growing at over 75%. You can just see very strong growth in the attach of the subscription service.
In addition to that, as you correctly note, as we go forward, we have a number of new services, Traps one of them, Aperture, AutoFocus, both coming out here in the next few weeks' time, that are services. They'll be billed as such from a sales and a revenue and deferred revenue perspective, but they won't have the concept of attach. Some of the attach rates commentary we've made in the past may be a little less meaningful as we go forward where we bring more services to market that don't have those attach rates. On Traps itself, we're very happy with Traps where it is right now. There's such a strong demand in the market for endpoint security.
100% or close to 100% of the sales calls I go on, customers are talking about the need for something dramatically different to happen at the endpoint, and we think we have the answer for that. We've seen a heck of a lot of interest in that. We think we've got a really great technology there that very importantly is part of the platform. At the end of the day, we're selling the platform, and that's what people find value in.
Got it. Just one quick follow-up for Steffan. You guys had another quarter of improving product gross margin. I know a lot of this has to do with mix sometimes and when products introduce, maybe give us some more color on what happened this quarter, this year too, and how you're thinking about that going forward.
Well, mix definitely plays a factor. As we sell higher margin boxes, that plays to the favorability. Mix is only one part of the story. We also focus on COGS reduction, we have, we think, the best supply chain team on the planet, they are going out and trying to drive costs down.
We are looking at a favorable product mix environment, also reducing COGS. We have great manufacturing partners as well. We have both of those dynamics going on, which is helping with product gross margins.
Great. Next question.
We'll go next to Rob Owens with Pacific Crest.
Great, thanks for taking my question. First off, I want to talk about the renewal cycle and your own renewal cycle as you look at preexisting customers over the last three and four years. Is that beginning to influence and drive some of this product growth we saw? Then second, in around Traps, Mark, appreciate the color around the platform play, but maybe you can give us just a little more with regard to the technology. Are you actually getting technology wins? Is it driving new customer acquisition? Lastly, on the Traps front, what are you guys seeing in terms of relative price per endpoint? Thanks.
Yeah. Hey, Rob. On the renewal cycle, I take that to mean you mean like a refresh cycle on our own.
Yes. A refresh of your own install base.
Yeah. Okay. No, no problem. That's what I thought you meant there. We said before, we have a great customer base, and we continue to add at that. We added over 2,000 customers in this last quarter alone. That's the gift that keeps giving on a long-term basis when you think about renewals and refresh cycles. We talked before about seeing refresh cycles in our 2009 and 2010 cohorts. I would start to throw in the 2011 cohort as well as these things get to the four-to-five-year natural refresh cycles. If you combined 2009, 2010, and 2011 together, it's a little over 4,000 customers out of 26,000. A glass is not even tiny bit full yet from a refresh cycle perspective on a very large and growing customer base. We like that a lot. On Traps, the question of technology wins or what's working there.
There are two things really that are going on. The first is, on a pure play technology or a head-to-head basis, I'd say, Traps is the only technology in the market that actually does exploit prevention. When you combine that with WildFire to get real-time known malware prevention and real-time unknown malware detection and very quick turnaround on prevention, that's a very serious technology difference. Just on a standalone basis, best of breed against anything in the market. Customers understand that that's real prevention as opposed to the other things that are in our market today. When you have that in the platform, connected to the platform through WildFire and you have the power of WildFire plus the 7,000-plus WildFire customers, where all that information is now being shared on a very fast basis to, in essence, automatically reprogram networks and endpoints. It's extraordinarily compelling.
On the price side from Traps, as we said before, we're selling Traps on a per endpoint, per month basis, billed annually over one, two, or three-year contracts.
Yeah. On the price side, I guess the question is, are you seeing it at a premium relative to where traditional AV vendors were? Plus, are you seeing TAM expansion? Thanks.
Yeah, no problem. On the TAM expansion side, we naturally pick up TAM expansion because we've worked in the endpoint security business before. It's a $4-plus billion market that we didn't address before. Now we have the opportunity to do that. When we brought Traps to market, we intentionally priced it in line with traditional endpoint security technologies because we didn't have to really break any glass there or tread new directions. We priced it at anywhere from $2 to $5 per endpoint per month on these multi-year contract, one, two, or three-year contracts. Nothing dramatically different than what people were paying already.
Great. Next question.
We'll go next to Jason Nolan with Robert Baird.
Okay, great. Thanks. I wanted to ask Steffan about the Q4 FY 2016 target of 22%-25% op margins. Like you said, that was set back at the IPO, and your growth rate has accelerated this last year. Is that still the right target? How do you get comfortable with backing off on growth or doing what you need to do to get there?
When we set the target model back at the time of the IPO, we had a philosophy that we want to be balancing growth and profitability. Over the last, call it three years, we have been delivering growth and profitability, and we find that as an operating principle that we try to stay true to. 22%-25% is what we reiterated exiting Q4 of FY 2016. We believe we can deliver industry-leading growth and expanding profitability over that time period. We give that range for a reason. It gives us latitude to, if we want to be at the lower end of the range, we can invest more in the business. If we want to be at the higher end of the range, we would let more fall to the bottom line.
With, call it, single-digit market share and close to a $20 billion TAM, we are laser-focused on growing both top line and profitability.
Okay. Thanks for that. A quick follow-up. At VMworld last week, Palo came up a lot. Maybe, Mark, if you can touch on the relationship with VMware and anything on the software-only product alongside NSX from VMware.
Thanks. I was up there a little while at VMworld, which was very well attended. I had the chance to talk to a number of customers about NSX and what we're doing with VMware, which is very significant, we think, in that there's a lot of movement to virtualized data centers. Security is becoming a paramount concern. One of the major use cases that VMware continually talks about because people care about it, is micro-segmentation, which is, in essence, a security use case. Palo Alto Networks for NSX is the answer for the east-west traffic protection in that regard. We like that relationship a lot. It's opened a lot of doors for us. We're winning deals. You just talked about a seven-figure deal we won in the fourth quarter. Around NSX. We like the traction there a lot.
On the software side, we had completely virtualized everything that we've done before, years ago with our VM-Series. The NSX relationship, what we've done with AWS as well is to expand or extend that into the private and public cloud environments, so you can have complete software-based solutions in any of those cloud environments, which is pretty significant and is getting a lot of attention in the market.
We'll go next to Sterling Auty with JP Morgan.
Thanks. Hi, guys. Mark, in your prepared remarks, you talked about the reseller and the reseller channels. Do they still have enough capacity with the group that you have to grow and hit all the targets that you have for FY 2016? Or how much channel expansion would you need to deliver your goals this year?
Yeah, it's a great question, Sterling. A 2 years ago, we were thinking about this a lot, which was, there's a great opportunity in this market. With our platform approach, we believe that we could capture historic market share. We still continue to believe that. Vendors, you get into the practicalities or pragmatics of lots of stuff, one of which is capacity for distribution, right? We were intentionally thoughtful about trying to establish deeper and deeper relationships, not only with the channel partners we have today, but folks who have global reach and a lot of capacity. We spent a lot of time and effort organizing around that principle as a company from a leadership and talent perspective, and then going work in these relationships, which were now bearing fruit and we're here talking about right now.
We think with the partner community we have today and some of the relationships we're continuing to drive, that we've got a lot of capacity to grow and outsize market rates for quite some time, which is our intent.
Got you. One follow-up. Steffan, you mentioned kind of the sales and marketing expenses in the quarter. You mentioned both hiring and the commission. Can you give a little bit more detail how much of the sales and marketing percent of revenue was more due to the overage in bookings and the commissions that you generated? The reason why I ask, just so we can get an understanding, why should we see the margin expansion be more back-end loaded in FY 2016?
Sure. We're not going to quantify the exact percentage, but it's in the, call it, few percentage points that had an impact for sales commission expense that were related to end-of-year accelerators and that sort of thing. As we mature as a business, and we have our sales force that proportionally has more ramped salespeople than ramping salespeople, we achieve that in FY 2015. We're going to see even more salespeople who are fully ramped, and that means they're going to be doing more productivity per person, which helps drive leverage. We also have our reseller and channel infrastructure becoming more productive, and that will be an element that will help drive operating leverage in sales and marketing.
Lastly, if you think about our land and expand strategy, the expansion value of our accounts come at a much lower cost of sales because the initial customer acquisition has already been spent. When you look at the proportion of our business coming from our install base relative to new business, at our last Analyst Day, I believe it was about two-thirds coming from the existing business, and that's a trend that we've seen to be consistent. As those dynamics play out, we should be getting more leverage in sales and marketing over time, and that's part of how we're getting leverage to get to the 22%-25% exiting Q4 FY 2016.
Great. Next question? We'll go next to Matt Hedberg with RBC Capital Markets.
Thanks for taking my questions, guys. Mark, it sounds like your carrier grade box is doing well. I know you highlighted the PA-7080 has had strong early interest. Can you talk about the performance of your boxes versus other high throughput boxes and how you guys hold up under increased traffic?
That's a great question, Matt. There's a very different architecture at play here and one that's been very compelling for our customers, right? Let's use the PA-7080, for example, 200 gigs a second. That is very high performance just in and of itself, but way more importantly, it's very high performance with the next-generation security that's unique to Palo Alto Networks, right? What we're not doing is we're not trading off performance for quote, "turning on additional feature sets" because we have an architecture with a single-pass engine.
At 200 gigs, we're able to do that with all of the security capabilities that all of our customers have come to know and love and not have them in a position where to say, you have to have higher and higher performance capabilities from a box perspective to get lower and lower rates of outcome as you turn on security features. This is a true architectural difference here that's very compelling and I think pretty well understood by our customer base when it comes to, most importantly, security, and then the total cost of ownership.
That's great. Maybe a quick follow-up on Traps. The 150 customers is a nice data point. I'm wondering who the most likely buyer is of Traps. It would seem that WildFire would make a lot of sense given its deep integration. Is that the right way to think about the next steps for customer additions?
We've seen adoption in a couple, three different buckets, all of which are fantastic. You're exactly right. The one that would seem to make the most sense would be people who are using WildFire already because the integration into the platform is through WildFire. If you have a customer with the Palo Alto platform running and they're using WildFire, the idea that you have endpoint prevention and also that's populating and receiving from WildFire, which then means you get 7,000-plus other networks working for you as well, is a great value proposition. Interestingly, we've also seen a number of customers who have purchased nothing yet from Palo Alto Networks except Traps. It's the very first purchase that they're making, which is fantastic. It's another door opener for us that then we think can lead to downstream further sales to those folks.
We'll go next to Keith Weiss with Morgan Stanley.
Excellent. A very nice quarter, guys, and thank you for taking the question. As we look into FY 2016, you guys do have a lot more products in the product portfolio, both in terms of expanding out the core firewall or next-generation firewall portfolio, but also going into newer sort of solutions. Traps, I'm sure the distribution is expanding, but also with the new services. Any change in the distribution model or sort of the sales structure to account for the bigger product portfolio, or does everything just go into everybody's tool bag on a go-forward basis?
It's a good question, Keith. What we've done historically, and it's worked out well for us, is when we're bringing something new to market, depending on what that is, and I'll use WildFire as an example of that, of building a small overlay team that become experts in what that capability set is, and then having them learn the technology and see what the customer objections are for that, make sure we understand all the kinks in the technology, and then rolling it out to the entire sales force, depending on what that looks like. We did that for WildFire. We did that and are currently doing that for Traps. We have an overlay sales team we built up over fiscal 2015. At our sales kickoff a few weeks ago, we did a lot of training for the entire sales force for Traps.
We quoted everybody on Traps for fiscal 2016, now that we have worked out all the how do you sell this thing with that overlay sales team. Those are two areas where we've done that. For Aperture and AutoFocus, those will not have overlay sales teams. Those are great technologies. They're fairly self-explanatory in the sense of how it adds value to the platform. We're confident our salespeople will get that.
Excellent. Maybe if I could sneak in one last one, just on federal business. From what we're hearing from our checks, it sounds like federal spending around security is definitely ramping up again, going into the federal fiscal year-end. I know Q1 is not typically sort of one of your seasonally strong quarters. How are you guys feeling about that federal business heading into their federal fiscal year-end?
I always feel good about that. Given what the federal government has to do for a living, some of the challenges that are very evident that they're facing, you can read about in the papers, what our technology does, we always felt like that was some vertical where we can provide a lot of value. Last year was very tough. I mean, the last government fiscal year was very tough, as everybody knew, we heard many times sort of walking the hallways as I do out in the Pentagon and places like that the next fiscal year for the Fed government would be better than the last one when they're working on their budgets. That appears to be what's happening, that's fantastic for everybody, for us in particular, given what our technology does and the problems we can solve for that customer base.
We'll go next to Michael Turits with Raymond James.
Hey, guys. Different kind of question about refresh. Historically, you've gotten a lot of opportunity in terms of displacing, let's call it legacy vendors, telco oriented, like Cisco and Juniper. Is there any slowing of that opportunity? Are you still replacing those guys at the same kind of rates, do you see plenty of roadmap for that or runway for that?
Yeah, Michael. Yeah, we are. We haven't seen any changes there except perhaps acceleration, as you can kind of see from the numbers here, as everybody continues to donate to the cause. Customers see that with their legacy technologies and their point products. What we are seeing is a recognition by the customer base that if you're really trying to get prevention done, it's very important that, one, you can see all the traffic, which is why we went in the firewall space against the legacy stateful inspection firewall vendors. In addition to that, when you have that architecturally favored position, you should be able to do a lot of prevention with that, which is subsuming a lot of point technologies into our platform. That's what we're benefiting from.
No slowing or shortening of the opportunity there?
Shortening of the sales pipe, you mean?
I'm sorry. Wrong word, no lessening of the opportunity that you see for displacing legacy vendors.
We continue displacement at very high rates.
We'll go next to Brent Thill with UBS.
Thanks. Steffan, on the billings number, obviously one of the best numbers you've had in the last couple of years. Was there any change in the billing duration that you saw in Q4, or most of the billing terms pretty similar to what you've seen historically?
Billing terms were very similar, and there was really no change in contract duration.
Okay. For Mark, you highlighted the move into the data centers is one of the bigger opportunities. Is there a way to frame where you're at, whether it's a baseball analogy or another approach in terms of how you're thinking about the penetration that you see right now?
Yeah, I think it's early. The data center use case for us is growing very rapidly. It's approaching 40% of the business from a sales perspective. We like that a lot. Those are larger devices, lots of subscription services that go in there, so that's a great move for us. When we look at some of the big picture items like the Global 2000, we're very fortunate right now to serve just about half of that. Glass half empty situation there. We got another 1,000 to go we haven't sold a dime to yet. Those are very large companies. All of them have big data centers. Just as a general matter, there's a lot going on in the data center space in general, and security is a prime driver as people think about what they're going to do with data centers in the future.
I think we've got a lot of wood to chop there.
We'll go next to Karl Keirstead with Deutsche Bank.
Thanks for taking the question. One for Steffan and one for Mark. Steffan, the October revenue guide was, I think, well above the street, but implies sequentially flat revenues, which I don't think we've seen from Palo Alto in quite some time. My guess is it's simply a function of the incredible outperformance in the July quarter, which makes for a pretty tough comparison. I just wanted to ask you if there's anything else for us to keep in mind? Then the follow-up for Mark. Mark, the world in August felt like a slightly rockier place. My guess is, given your numbers and guide and the fact that you're in the security sweet spot, it had no effect on Palo Alto. I just wanted to ask you whether you saw any trickle down from what looked like a tough macro into your business. Thank you.
Hey, Karl. You hit the nail right on the head. Given the 21% sequential growth in Q4, we just saw a very strong finish to the year. When you look at our guide, while it does imply a flat quarter-on-quarter, we're looking at 46%-48% year-over-year growth. There's nothing else going on there other than just extremely tough sequential compare.
Got it.
Karl, I think a big picture for us on the macro, I mean, yeah, August was very choppy, at least from the market perspective. Not so sure about all the real macro drivers behind that. If you take this week, it feels better than last week, right? I wouldn't put too much into looking in the short-term things like that. One of the things I'm very confident of, though, is that security is here to stay. It's a very important thing for all companies. As I've said before, I think it's becoming a fabric item in every IT decision that's being made, and I don't think that's going to change over time. As a result of that, we've seen security spending going up. I don't think that's going to change anytime soon.
Got it. Thank you both for the color.
Thanks, Karl.
Thank you.
We'll go next to Fred Grieb with Nomura.
Hey, guys. Two questions from me. First, on Traps, are you seeing any customers completely replace their AV or maybe move to free AV when they purchase Traps? Is Traps largely being deployed as an additional solution, kind of additional to existing AV?
Hey, Fred. It's early here. Using the baseball analogy, it's maybe the top of the first inning. What's going to happen in the next generation of endpoint security. In our customer base that we've sold to, we've seen both things occur. We've seen more of a complement, meaning somebody's running legacy AV, and they're using Traps or another endpoint technology as a complement to test it out and see what the difference is. Most of those we talked to say that they're hopeful that it's a very different technology and that it can replace AV over time, because that would be simpler for them. Less complex networks and endpoints is a good thing for the customers. Some customers have just jumped all the way down there and said, "Look, this does real prevention.
Because of that, I no longer need the AV technology." They're just in different mindsets right now about how fast they want to get to that end state.
Got it. Then, I guess on that next-gen endpoint side, who, if anyone, are you seeing in competitive deals where customers are looking to purchase Traps?
It's a very crowded market out there right now. We've got the legacy vendors that, by definition, are in every deal. There's some legacy vendor there. We're very familiar with that dynamic when we think about the firewall space and how to compete and win there. Then there's a lot of smaller players out there who are trying to make a company on their endpoint technology. In those situations, one of the things that we find to be very valuable for Palo Alto Networks is not only does our endpoint capability actually do prevention, but it's part of a larger platform. Particularly if you're an existing customer already at Palo Alto Networks and you get the value proposition of the platform, having an endpoint capability that does prevention and being tied seamlessly into that platform is a huge differentiator.
We'll go next to
Great. Next question
Gregg Moskowitz with Cowen and Company.
Okay. Thank you very much, and good afternoon. Mark, as part of the strength that you showed in Q4, are there any verticals that you would call out as having done significantly better relative to your expectations?
No, there's not, Gregg. One of the things we've loved about this business and it really goes to prove the true platform aspects of what we're doing here, is it's extraordinarily horizontal in nature. I think last time we talked about this,[unsure] , was that we had said that no vertical is more than 12%, 13% of the business, and that continues to be the case. This is a high degree of utility for all verticals and on a global basis. To me, that gives me great comfort. Everybody's out talking about platforms. A true measure of a platform is does it have a lot of value very horizontally? I think that we've proven that's the case here.
Okay, that's great. Just one for Steffan. Your fiscal 2016 CapEx guidance is significantly greater than 2015, although your CapEx last year did come in roughly $10 million below the midpoint of your guidance. Was some of the expected spend deferred until fiscal 2016? Really just kind of wondering if you could provide some color around that and if we should think about the fiscal 2016 CapEx as a new normal for Palo Alto, or if you think it's a bit inflated for that reason. Thanks.
Sure, Gregg. When you look at what happened with CapEx in fiscal year 2015, there's a little bit of a timing and lumpiness to it. Some of the FY 2015 CapEx ended up, just from a timing standpoint, being delayed relative to projects we're doing. That's hitting in FY 2016. That's part of the increase. As we run the business, we will have capital expenditures that are running at different rates given the projects that we're working on. Currently, business and infrastructure business, you look at the subscription services growth rates, the WildFire traction we've had. We're processing over 3 million unique files per day, and the amount of traffic there is going there to build the infrastructure to support that. We can't necessarily call a new normal on CapEx, but when you look at CapEx and free cash flow
What we're saying is free cash flow for FY 2016 should be greater than 30%, and that's about as far out as we comment.
We'll go next to Ryan Hutchinson with Guggenheim.
Great. Thanks. Questions on sales force productivity. I think last quarter you talked about it exceeding 50%. Where does it stand at the end of the fourth quarter? Then as you think about headcount additions and productivity levels 12 months out, just any comment would be helpful there. Then any material changes to the comp plan at the beginning of the year that we should be mindful of. Thanks.
Hey, Ryan. Take those in reverse. No material changes to the comp plan. We continue to have an aggressive comp plan. People make good money at Palo Alto Networks, and you can see that they're doing well with all that they're selling. From the headcount perspective, we are adding a lot of sales heads. Just from an absolute number perspective, I think that's obviously because the opportunity is in front of us. We continue to take down big numbers. We'll do that with a balanced approach. We definitely want to get as much opportunity as we can and deliver on the bottom line as well. Very confident in the ability to balance the profitability and growth of the company.
The first question was percentage of folks who are fully ramped. We don't give that specific percentage. We usually hold off till an analyst day to give that. We're north of 50% and it's improving directionally, which is part of the margin expansion story of the company.
Okay, great. Thanks.
We'll take our final question from Jonathan Ho with William Blair.
Hey, guys. Just wanted to echo my congratulations. Just wanted to start out with the Tanium partnership. What does this bring to the table in terms of the incident response side, and can this potentially help accelerate the Traps adoption?
Hey, Jonathan. Yeah, great question. Yeah, we're happy to have announced that partnership. As with all of our strategic technology partnerships, we built something first and announced it second, right? What did we do is we integrated the Tanium capability set into WildFire. The reason we did that was that when we see an indicator of compromise in WildFire, the Tanium technology has the ability to query all the endpoints on an enterprise and see if it's out there. An easy way to think about that is, we're the security company saying we know what to look for right from a security perspective, and those guys have a fantastic capability to find things very quickly and demonstrate it at scale.
Bringing those two things together allows us to deliver to the customers the detection capabilities, prevention capabilities, and very fast isolation to find it capabilities, then moving into remediation beyond that. To deliver on the roadmap that we laid out for endpoints, of which Traps is extraordinarily important around detection and prevention, then to get to isolation and remediation as well.
Got it. Then, European growth seems to always lag the U.S. and other regions. I guess, just want to understand maybe the dynamics there and what sorts of investments you're making towards that region in 2016. Thanks.
Yeah. EMEA has been a tough market for a while on a relative basis, primarily just because of all the macro issues over there and FX fluctuations . We like the growth that we've seen in the 30-some percent in the fourth quarter over 40% on a year-over-year basis. It's a fast-growing market, despite the fact that it's got some challenges that we are not seeing in North America or Asia Pacific, as an example. We think on a long-term basis for all markets and what those opportunities are, and one of the primary ways we think about it, that is our market share. Market share, just as a general matter on a global basis, is still relatively low compared to some of the larger competitors, and it's even lower when you look at some of the non-North American regions.
We think those are fantastic opportunities for us to capture a lot of market share, which we intend we would do over time, so we're investing accordingly.
Great. That brings things to a close. Mark, you want to finish up?
Yeah. Thank you for being on the call, everybody, today. We appreciate it. FY 2015 was a great year. I once again want to thank the entire Palo Alto Networks team for all their hard work and support of our customers and partners. As we look ahead, we're more convinced than ever of our ability to continue to take market share and distance ourselves from the competition. We look forward to updating you on the next call.
This does conclude today's conference, everyone. We thank you for your participation. You may now disconnect.