Good day, everyone, and welcome to the Palo Alto Networks 4th Quarter 2015 Earnings Conference Call. As a reminder, Today's conference is being recorded. And 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 conference call to discuss Palo Alto Networks' fiscal 4th quarter and fiscal year 2015 financial results. This call is being broadcast live over the web and Officer and Stefan Tomlinson, our Chief Financial Officer. This afternoon, we issued a press release announcing our results For the fiscal Q4 and full year ended July 31, 2015. If you would 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 Q1 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, Excessive 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 As of today, and you should not rely on them as representing our views in the future, and we undertake no obligation to update these statements after this call. For a more detailed description of factors 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 Q1 fiscal year 2016 earnings conference call to be held after the market In Las Vegas on Thursday, September 17. And finally, at the conclusion of today's conference call, we will be posting our prepared remarks to our Investor Relations Web site under Quarterly Results. And with that, I'll turn the call over to Mark.
Thank you, Kelsey, and thank you, everyone, for joining us this afternoon. I'm happy to be here with you to share our results for our fiscal Q4 and full year fiscal 2015. 2015 was another great year for the company, 1 in which we continue to distance ourselves from the competition. In the year, we grew our customer base more than 35% over 26,000 customers and Our privilege to serve almost half of the Global 2,000. The number of wildfire customers increased approximately 140% year over year to over 7,000 customers.
We generated free cash flow of more than $300,000,000 We expanded key technology partnerships and distribution relationships around the world and we continue to strengthen 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 To meet this challenge, enterprises, governments and service providers are having to re architect their systems and networks off of legacy platforms On to 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 is 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. And our singular focus on innovation Increases the overall capabilities of the platform.
As a result, we are rapidly replacing existing security solutions and winning new opportunities in And 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 $284,000,000 grew 59% year over year, while billings of $394,000,000 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, Cisco for their Advanced Network Protection Project, a diversified managed healthcare company in North America, which purchased Palo Alto Networks for NSX in a 7 figure transaction, An Asian government security agency will replace Cisco in their security infrastructure and one of the largest airlines in the world located in United States where we replaced Checkpoint in an outbound 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 $9,200,000 in lifetime value, A more than 60% increase over the $5,600,000 required in Q4 of last fiscal year and up from $8,200,000 in Q3.
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 capability, which we introduced in the Q1 of fiscal 2015 and we were 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 The second service, Aperture, is based on the technology we acquired with CiroSecure 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 that are highly collaborative, but often contained in organizations most sensitive data. We also recently announced availability Our newest high end chassis, the PA-seven thousand and eighty. At 200 gigs a second, the PA-seven thousand and eighty is now our fastest throughput chassis Our early interest has been strong and in addition to the enterprise customer, we expect the PA-seven thousand and eighty will help us further penetrate the service provider market.
And 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 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 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 Palatin Network's employees for their hard work
Thank you, Mark, and 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, a year in which we delivered industry leading sales growth, expanding operating margins and increased free cash flow generation. During the Q4, our land and expand sales strategy resulted in a record number of new customer additions and expansion in existing customers that once again 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 59% over the prior year and 21% sequentially to reach a new record of 283,900,000 For the fiscal year, we reported revenue of $928,100,000 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 The 3 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 $154,000,000 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-seven thousand and fifty chassis continues to help accelerate growth in the 5% over the prior year and 15% sequentially and accounted for a 46% share of total revenue. Looking at the 2 components of recurring services revenue, the first component is our SaaS based subscription revenue of $64,100,000 Which increased 70% over the prior year and 17% sequentially. Excluding Traps, which does not ship as an attached to our appliances, In the Q4, customers purchased on average 2.2 subscriptions per device compared to 2.1 in Q4 fiscal 2014. Support and maintenance revenue, the 2nd component of recurring services was $65,800,000 an increase of 61% over the prior year and 14% sequentially. Billings in Q4 were $393,600,000 An increase of 69% over the prior year and 30% sequentially.
Total billings for fiscal 2015 were 1,200,000,000 Grew 58% year over year. Product billings were $496,700,000 and grew 46%, Accounting for 41% of total billings. Support billings were $342,000,000 and grew 58%, accounting for 28% of total billings And subscription billings were $380,400,000 and grew 77%, accounting for 31% of total billings. Total deferred revenue grew to $713,700,000 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 And the introduction of new products. Services gross margin for Q4 was 78.8%, An increase of 80 basis points year over year and 20 basis points sequentially. Services gross margins continues to benefit in part from ongoing growth of our high margin Total headcount at the end of the quarter was 2,637, up from 2 1,317 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 percent of revenue, increasing approximately $2,600,000 sequentially to 30,000,000 The increase was primarily due to headcount.
Sales and marketing expense for Q4 was 48.2 percent of revenue, increasing approximately 29,800,000 sequentially to $136,800,000 The increase was primarily due to headcount and end of year commissions expense. General and administrative expense for Q4 was 5.4 percent of revenue, increasing approximately $1,000,000 sequentially to The increase was primarily due to headcount additions. In total, Q4 operating expenses were $182,300,000 or 64.2 percent 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 $25,000,000 or $0.28 per diluted share Using 90,100,000 shares, compared with net income of $9,100,000 or $0.11 per diluted share in Q4 'fourteen.
For the full year fiscal 'fifteen, we reported net income of $75,200,000 or $0.86 per diluted share, Compared with net income of $31,800,000 or $0.40 per diluted share in fiscal 2014, Our effective non GAAP tax rate for Q4 and fiscal 2015 was 38%. On a GAAP basis for the 4th quarter, net loss was 46,000,000 For the full fiscal year 'fifteen, we reported a GAAP net loss of 165,000,000 Cash flow from operations, free cash flow and free cash flow margin for Q4 were $111,300,000 99,400,000 35%, respectively. Capital expenditures in the quarter totaled $12,000,000 The accounts receivable balance We expect revenue to be in the range of $280,000,000 to $284,000,000 which represents 46% to 48% growth year over year. We expect non GAAP EPS to be in the range of $0.31 to $0.32 per share using $91,000,000 to 92,000,000 shares. And 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, We believe that fiscal Q2 and Q4 will show our strongest sequential revenue growth. We continue to expect to exit said 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 1,000,000 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.
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 with Piper Jaffray.
Okay. Congratulations on a great Just wanted to ask about the product growth and it's clearly probably the best we've seen in a couple of years here for you. And 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? And 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.
Anne, it's Mark. They're very related questions. And the answer is on the second part is we're seeing gains everywhere So 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, so we're seeing gains pretty much everywhere we compete and also now including on the endpoint side as well. And that plays into the product growth. So on the product growth side, yes, it's very healthy numbers as you can see.
And we're experiencing both of the things You just mentioned one is we are seeing larger deals. We're getting into the Global 2,000 at accelerating rates. So we're seeing larger deals with larger customers. And our existing customer bases continue to buy more over time as well as you can see from the lifetime value. So it's winning larger deals with larger customers And then just a continuation of something we've been seeing for quite some time, which is customers continue to supply more from us.
The other angle on that, Andrew, is we're We're getting deeper into the data center. So we're selling our 7,050 chassis and our 5000 series and we're seeing larger deal sizes as we get further into the data center. And that should continue as we get more traction with our seventy-eighty, which we just announced.
And we'll go next to Philip Winslow with Credit Suisse.
Stephanie, you mentioned you're up to 2.2 subscriptions per box. Just as you kind of think about the guidance going forward, how do you expect that the trend? And then 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
Hey, Phil. Yes, thanks. So a couple of thoughts on that. First on the subscription side, you can see the attach rates We're finding a lot of value from that approach. So we like that a lot of course.
You can see our subscription services business, if we look at the 4th quarters approaching Like $480,000,000 of billings run rate, so growing at over 75%. So, you can just see Very strong growth in the attach of the subscription service. Then in addition to that, as you correctly note, as we go forward, we have a number of new services Traps, one of them, Aputure, Autofocus, So some of the attach rates commentary made in the past maybe a little less meaningful as we go forward with the Services to market that don't have those attach rates. And on the 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, a answer for that, so 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. So at the end of the day, we're selling the platform and that's what people find value in.
Got it. And then just one quick follow-up for Stefan. 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 are introduced, but maybe give us some more color on what happened this quarter, sort of this And then how you're sort of thinking about that going forward?
Well, mix definitely plays a factor and as we sell higher margin boxes That plays to the favorability. But mix is only one part of the story. We also focus on COGS reduction and we have, we think, the best supply on the planet and they are going out and trying to drive costs down. So we are looking at a favorable product mix environment, but also reducing COGS We have great manufacturing partners as well. So we have both of those dynamics going on, which is helping with product gross margins.
We'll go next to Rob Owens with Pacific Crest.
First off, I want to talk about the renewal cycle and your own renewal cycle as you look at preexisting customers over the last 3 4 years. And is that beginning To influence and drive some of this product growth we saw. And then second in and around Traps, Mark, I 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?
And lastly, on the Traps front, what are you guys seeing in Yes, a refresh of your own installed base.
Okay. No, no problem. That's what I thought you meant there. As we said before, from a we have a great customer base and we We added over 2,000 customers in this last quarter alone. So that's the gift that keeps giving on a long term basis when you think about Renewals and refresh cycles.
So we talked before about seeing refresh cycles in our 2,009 2010 cohorts. I would start to throw in at the 20 cohort as well as these things get to the 4 to 5 year natural refresh cycles. And if you combine 2009, 2010 and 2011 Together, it's like a little over 4,000 customers out of 26,000, right. So, glass is not even tiny, but full yet, right. From a refresh cycle perspective on a On Traps, the question of technology wins or what's working there, there are 2 things really that are going on.
The first is, On a pure play technology or head to head basis, I'd say, Traps is the only technology in the market that actually does exploit prevention, Right. And then when you combine that with wildfire, to get real time known malware prevention and real time unknown malware detection and very quick turnaround on That's a very serious technology difference and 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 the market today, then 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, very, very fast basis In essence, automatically reprogram networks and endpoints. It's extraordinarily compelling. And on the price side from Traps, we said before, we're selling Traps on a per endpoint Per month basis billed annually over 1, 2 or 3 year contracts.
Yes. On the price side, I guess the
So on the TAM expansion side, we naturally pick up TAM expansion because we weren't in the endpoint security business before. So it's $4 plus 1,000,000,000 market that we And what 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. So we priced it Anywhere from $2 to $5 per endpoint per month, on these multiyear contract, 1, 2 or 3 year contracts. So nothing dramatically different than
Great. Next question.
We'll go next to Jason Nolan with Robert Baird.
Okay, great. Thanks. I wanted to ask Stefan about Q4 2016 target of 22% to 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? Or 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. And over the last, Call it 3 years we have been delivering growth and profitability and we find that as an operating principle that we try to stay true to. So, 22% to 25% is what we reiterated exiting Q4 fiscal 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. But with, call it, single digit market share and close to a $20,000,000,000 TAM, We are laser focused on growing both top line and profitability.
Okay. Thanks for that. And then a quick follow-up. At VMworld last week, Paolo came up a lot. Maybe, Mark, if you can touch on the relationship with VMware?
And then Anything on the software only side software only product alongside NSX from VMware?
Yes, thanks. Yes, I was up there a little while at VMworld, which is very well attended. I had the chance to talk to a number of customers And about NSX and what we're doing with VMware, which is very significant, we think. And that there's a lot of movement to virtualized data centers, security is becoming Paramount concern and one of the major use cases that the VMware continually talks about because people care about it is segmentation, which is in essence a security use case and Palo Alto Networks for NSX is the answer for the East West traffic protection in that regard. So we Like that relationship a lot.
It's opened a lot of doors for us. We're winning deals. You just talked about a 7 figure deal we won last in the Q4 around NSX. So we like the traction there a lot. And then on the software side, we had completely virtualized everything that we've done before years ago with our VM series.
And then the NSX relationship, what we've done with AWS To expand that into the private and public cloud environment, so you can have complete software based solutions in any of those cloud environments, which is
And we'll go next to Sterling Auty with JPMorgan.
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 fiscal 2016 or how much channel expansion would you need to deliver your goals this year?
Yes, it's a great question, Sterling. So a couple of years ago, we were thinking about this a lot, which was there's a great opportunity in this With our platform approach, we believe that we could capture historic market share. We still continue to believe that. And vendors, you get into the practicalities or pragmatics Lots of stuff, one of which is capacity for distribution, right? So we were intentionally thoughtful about trying to establish deeper and deeper Not only with the channel partners we have today, but folks who have global reach and a lot of capacity.
So we spent a lot of time and effort organizing around that principle as company with us from a leadership and talent perspective and then going work in these relationships, which we're now bearing fruit, we're talking about right now. So 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 at outsized market rates For quite some time, which is our intent.
Got you. And one follow-up, Stephane, 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. And just 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 fiscal 2016?
Sure. We're not going to quantify the exact percentage, but you can it's in the call a 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 proportionately has more ramped salespeople than ramping salespeople. We achieved that in fiscal 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.
That will help drive operating leverage in sales and marketing. And 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. And when you look at the proportion of our business coming from our installed base relative to new business, At our last Analyst Day, I believe it was about 2 thirds coming from the existing business. And that's the trend that we've So as that 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% to 25% exiting Q4 FY 2016.
Great. Next question.
And we'll go next to Matt Hedberg with RBC Capital Markets.
Yes. Thanks for taking my questions, guys. Mark, it sounds like your carrier grade box is doing well. I know you highlighted the PA-seven thousand and eighty as that strong early interest. Can you talk about Your next question comes from the line of David.
Please standby. We're about to begin. Your next question comes from the
line of David. Yes, that's a great question, Matt. Yes, there's a very different architecture play here and one that's been Very compelling for our customers, right? So the let's use the PA-seven thousand and eighty for example, 200 gigs a second. That is very high performance just in and of itself.
Way more importantly, it's very high performance with the next generation security that's unique to Palo Alto Networks, right. So what we're not doing is we're not trading off Performance for turning on additional feature sets because we have an architecture with the single pass engine. So at 200 gigs, 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 Most importantly, security and then the total cost of ownership.
That's great. And then maybe a quick follow-up on Traps. 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.
I'm wondering if we should sort of is that the right way to think about the next steps for
Yes, we've seen pretty good adoption in a couple of 3 different buckets, all of which are fantastic. And you're exactly right, the one that would seem to make Wildfire, the idea that you have endpoint prevention and also that's populating and receiving from a 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 Palatin Networks except Traps. 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 a downstream further sales for those folks.
And we'll go next to Keith Weiss with Morgan Stanley.
Very nice quarter guys and thank you for taking the question. As we look FY 'sixteen, you guys do have a lot more products in the product portfolio, both in terms of sort of expanding out the core firewall or an extension firewall But also, going into newer sort of solutions, Traps is I'm sure the distribution is expanding, but also with the new services. Any change in the distribution model or sort of the model or sort of the sales structure to account for the bigger product portfolio or does it everything just go into everybody's tool bag on a go forward basis?
Yes, it's a good question, Keith. So 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 Building a small overlay team that become experts and 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. So we did that for wildfire. We did that and are currently doing that for Traps. We have an overlay sales and we build 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 'sixteen now that we have worked out all the how do you sell this thing with that overlay sales So those are 2 areas where we've done that. For aperture and auto focus, those will not have overlay sale themes. 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.
And 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 The federal fiscal year end, I know Q1 is not typically a sort of 1 year seasonally strong quarters, but how are you guys feeling about that federal business heading into their federal fiscal year end?
I 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 on Papers and what our technology does, we always felt like that was some vertical we can provide a lot of value. Last year was very tough. I mean, the last government fiscal year was very As everybody knew and we heard many times sort of walk in 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 and that's fantastic For everybody, but for us in particular, given what our technology does and the problems we can solve for the customer base.
And 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 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 and just see plenty of roadmap for that or runway for that?
Yes, we are. So 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. And 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 other traffic, which is why we went in the firewall space against a legacy Stateful inspection Firewall vendors. And in addition to that, when you have that architecturally favored position, you should be able to do a lot of prevention with Which is subsuming a lot of point technologies into our platform.
So that's what we're benefiting from.
So no slowing of the or shortening of the opportunity there?
Shortening of the sales like they mean?
No, I'm sorry, wrong word, but no lessening of the opportunity that you see for displacing legacy vendors?
And we'll go next to Brent Thill with UBS.
Thanks. Stefan, on the billings number, obviously, one of the best numbers you've had in the last couple of years. Was there Change in the billing duration that you saw in Q4 or most of the billing terms pretty similar to what
Billing terms were very similar and there was really no change in contract duration.
Okay. And 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?
Yes, I think it's early. The data center use case for us is Very rapidly, it's approaching 40% of the business from a sales perspective. And 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. But when we look at the some of the big picture items like the Global 2,000, we're very fortunate right Just about half of that, so glass half empty situation there.
We got another 1,000 to go, we haven't sold a dime Those are very large companies. All of them have big data centers. And 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.
And we'll go next to Karl Keirstead with Deutsche Bank.
Thanks for taking the question. One for Stefan and one for Mark. Stefan, 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. But I just wanted to ask you if there's anything else for us to keep in mind. And then the follow-up for Mark.
Mark, the world in August felt like Slightly rockier place. My guess is, given your numbers and guide and the fact that you're in the security sweet spot, it
Thank you. Hi, Carl. 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.
And when you look at our guide, while it does imply a flat Quarter on quarter, we're looking at 46% to 48% year over year growth. So there's nothing else going on there other than just extremely tough Sequential compare.
Got it.
And then Carl, I think a big picture for us on the macro. I mean, yes, August was very choppy, right, from at least from the market Perspective, not so sure about all the real macro drivers behind that. If you take this week, Feels better than last week, Craig. So 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 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
Got it. Thank you both for the color.
Thanks, Rob. Thank you.
And we'll go next to Fred Grieve 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, Frank. We've seen both. And it's early here. You think the baseball analogy, right, maybe the top of the first thing, right? And what's going to happen Next generation of endpoint security, but in our customer base that we've sold through, we've seen both things occur.
We've seen more of a complement, Meaning somebody is running legacy AV and they're using traps or another endpoint technology as a compliment 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 AP over time because that would be simpler for them, right? So Less complex networks and endpoints is a good thing for the customers. Some customers just jumped all the way down there and said, look, this does real prevention because of that, I no longer need The AV technology. So they're just in a different mindsets right now about how fast they want to get to that end state.
Got it. And 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 they're by definition or 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 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
And we'll go next to Greg Moskowitz
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, it's not, Greg. One of the things we love about this business And it really shows 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 Sam, it will stay. We had said that no verticals more than 12%, 13% of the business and that continues to be the case. So this is a high degree of utility for All verticals and on a global basis.
So to me that gives me great comfort. Everybody's got to talk about platforms. A true measure of a platform is, does it have a lot of value Very horizontally, and I think that we've proven that's the case here.
Okay, that's great. And then just one for Stefan, your fiscal 2016 CapEx guidance is significantly greater than $15,000,000 although your CapEx last year did come in roughly $10,000,000 below the midpoint of your guidance. With some of the expected Ben 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 16 CapEx as a new normal for Palo Alto or if you think it's a bit inflated for that reason? Thanks.
Sure, Greg. When you look at what happened with CapEx in fiscal year 'fifteen, there's A little bit of a timing and lumpiness to it. So some of the FY 'fifteen CapEx ended up just from a timing standpoint Being delayed relative to projects we're doing, so that's hitting FY 'sixteen. So 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, so currently business and infrastructure business, you look at the subscription services growth rates, the wildfire Traction we've had, we're processing over 3,000,000 unique files per day.
And the amount of traffic there is going there To build the infrastructure to support that. So 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.
And we'll go next to Ryan Hutchinson with Guggenheim.
Great, thanks. Questions on sales force productivity. I think last quarter you
To have an aggressive comp plan and people make good money at Palo Alto Networks and you can see that you're doing well with all that they're selling. From the headcount perspective, we are adding a lot of sales heads. It's just from an absolute number perspective. That's I think that's obviously because the opportunity is in We continue to take down big numbers. We'll do that with a balanced approach, but we definitely want to get as much opportunity as we can and Deliver on the bottom line as well.
So very confident in the ability to balance the profitability and growth of the company.
And 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, but we're north of 50% and it's improving directionally, which is part of the Margin expansion story of the company.
Okay, great. Thanks.
And 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, John. You got a great question. So, yes, we're happy to have announced that partnership and as with all of our strategic technology partnerships, we built something first and announced it second, right? So what did We do is we integrated the Tanium capability set into wildfire. And 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.
So an easy way to about that. We're a 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 Demonstrate at scale. So bringing those two things together allows us to deliver to the customers the detection capabilities, prevention And very fast, isolation to find it capabilities and then, moving into remediation beyond that, right, to deliver on the roadmap that we laid out Four endpoints of which Traps is extraordinarily important around detection and prevention and then to get to isolation remediation as well.
And then European growth seems to always lag the U. S. And other regions. I guess just want to understand maybe the dynamics there and
basis primarily just because of all the macro issues over there and effects fluctuations, right. So we like the growth that we've seen in the 30 some percent in the Q4 over 40% on a year over year basis. So it's a fast growing market, despite the fact that it's got some challenges that we We're 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 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. So we think those are fantastic opportunities for us to capture a lot of market share, which we intend we
Great. That brings things to a close. Mark, you want to finish that?
Yes. Thank you for being on the call everybody today. We appreciate it. Fiscal 'fifteen was a great year and I once again want to thank The entire Palo Alto Networks team for all the 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.
Look forward to updating you on the next call.
And this does conclude today's conference. Everyone, we thank you for your participation. You may now disconnect.