Good day, and welcome to the Palo Alto Networks Third Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would
fiscal Q3 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 Stefan Tomlinson, our Chief Financial Officer. This afternoon, we issued a press release announcing our results for the fiscal Q3 ended April 30, 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 revenue and earnings per share guidance for Q4 of fiscal 2015 And non GAAP operating margin for Q4 of fiscal 2015 and Q4 of fiscal 2016 as well as our expectations regarding our growth, gross margin, seasonality, future investments, CapEx, leverage, profitability, cash flow, integration with recently acquired SierraSecure, New product and service releases 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 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 these risks and uncertainties, please refer to our quarterly Form Report on Form 10 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 information that can be found in the Investors section of our website located at investors.
Poweropternetworks.com. Before I turn the call over to Mark, we would like to inform you that we expect our Q4 fiscal year 2015 earnings conference call the call over to Mark.
Thank you, Kelsey, and thank you everyone for joining us this afternoon. I'm pleased to report that we had a great Q3 across all metrics with revenue of 2 We also continue to increase the leverage in our operating model with our non GAAP operating margin expanding to 13.9% In Q3 non GAAP earnings per share of $0.23 Security continues to be a top priority on a global basis and security spending remains strong. Our results demonstrate our market leadership with growth that significantly outpaced the market. We are achieving these results quarter after Quarter because our customers and prospects are reacting favorably to our philosophy, strategy and platform. First, our philosophy is one of breach prevention.
We believe that the cybersecurity battle is a mass battle where it's critical to alter the equation such as the odds of launching a successful attack are significantly which dramatically increases the cost for the attacker. 2nd, to implement that philosophy, our strategies have a high degree of breach prevention capabilities at every step in the And third, our platform is unique in the market and it provides natively integrated and highly automated breach prevention capabilities They can demonstrably show the benefits of our approach. We know that we have the right platform at the right time in history as customers continue to turn to us to solve problems at legacy technologies, Point products and strategies based primarily on threat detection and remediation cannot. We saw this play out yet again in our Q3 results. During the quarter, we added well over 1500 new customers, bringing our total number of customers to over 24,000.
We also saw significant expansion in the lifetime value of For example, to make our top 25 customer list in Q3, a customer had to have spent a minimum of 8 point $2,000,000 in lifetime value, a more than 60% increase over the $5,000,000 required in Q3 of last fiscal year. As we mentioned at Analyst Day, we believe the potential upside lifetime value on our current installed base, assuming spending patterns consistent with their early customer cohorts, It's more than $5,000,000,000 and growing every quarter. In addition, Wildfire continued its rapid growth. We now have over 6,000 paying customers, up from approximately 5,000 Last quarter and an increase of approximately 200% compared to the Q3 of fiscal 'fourteen. And on the endpoint, we saw continued momentum in the field with Traps wins that U.
S. Based oil and natural gas exploration and production company as well as an electric utility holding company in the Southeast. There's a great deal of excitement around Traps given the increase in Enterprise network firewalls for the 4th unit row. We also see the power of the platform in the field with large new customer wins that included 1 of the world's largest multimedia and creative More than 400 stores and 20,000 employees, a large North American financial services provider where we replaced Check Point and are implementing PA A-7050s and Palo Alto Networks for VMware NSX in the data center, including Wildfire WF 500 in all subscriptions And a major win with 1 of the United States' largest local government authorities will repeat Cisco for an all encompassing security rearchitecture project. All of these wins are validation to our platform approach works and customer feedback is very positive.
Our customer satisfaction scores are industry leading and our net promoter scores Best in class. We had a huge turnout and great interaction with more than 3,000 customers and partners who attended Ignite, our annual user Then right on the heels of Ignite, we attended RSA where traffic at the booth was overflowing. As a result of these events and the Our pipeline continues to strengthen because customers and prospects recognize that the platform delivers multiple benefits. It's flexible, allowing customers to utilize any part or all of the platform depending on the current budget, projects and requirements. It's networked, which means customers quickly get the positive impact of leverage and insight from across our customer base.
This is important because no one customer alone can change the cost curve on the And it's extensible, meaning that we are constantly improving our capabilities at each part of the platform as evidenced by the introduction of the PA-three thousand and sixty In PA-seven thousand and fifty for the data center, continued enhancements to wildfire, the addition of Traps and the ongoing cycle of new innovation. For example, at Ignite, we announced AutoFocus, our cyber threat intelligence service and to date more than 7.50 customers requested participation in the community access program for this new service, which will be generally available in the fall. And today, we announced the acquisition of Cirrus Secure, Which is the foundation for a new service to be launched in the fall to provide the most advanced security capabilities in the market for SaaS applications. Our sales efforts continue to Very well, driven in part by focused execution with partners like Westcon, the largest global security distributor. In fact, in Westcon's last reported quarter, We became the number one security vendor by revenue surpassing Check Point and other legacy security players.
At the same time, our relationship with VMware continues to expand nicely. During the Q3, we closed several 6 figure Palatin NetworkSprintSX deals and very pleased with our growing pipeline. All that we've been able to accomplish is further proof We continue to differentiate ourselves from the competition with the only true breach prevention platform in the market. As a result, we are rapidly gaining market share Given our current scale and growth rates, we believe we're in the path to being the leading enterprise security provider. I'd like to end my remarks by thanking our employees and partners for their hard work and dedication.
And with that, I'll turn the call over to Stefan. Stefan?
Thank you, Mark, and thank you for joining us on our call today. Before I get into the details of our results and guidance, like to note that except for revenue figures that are GAAP, all financial figures are non GAAP unless stated otherwise. I'm very pleased with our Q3 execution as we continue to capitalize on a robust security spending environment with our highly differentiated strategy. Our breach prevention approach delivered by the only true end to end platform in the market gives us a competitive advantage you can see our results. New customer acquisition and expansion in existing customers drove substantial growth across all components of our business, Once again resulting in record revenue, deferred revenue and billings.
At the same time, we continue to deliver the operating margin leverage inherent in our quickly ramping hybrid SaaS model with sequential and year over year expansion of non GAAP operating margin, non GAAP EPS and cash flow from operations. As we head into the last quarter of fiscal year 2015, we remain focused on executing against the market opportunity in front of us. Now let me turn to the numbers. Q3 total revenue grew 55% over the prior year and 8% sequentially To reach a new record of $234,200,000 The geographic mix of revenue for Q3 was 67% Americas, 20% EMEA and 13% APAC. Compared to the prior year, the Americas grew 60%, EMEA grew 42% and APAC grew 55%.
As in previous quarters, we saw broad strength across a wide range of verticals and we did not have any end customer concentration. As I mentioned, three components of our hybrid SaaS model product, subscription services and support all grew well in Q3. Q3 product revenue of $121,500,000 increased 44% over the prior year and 5% sequentially. We saw healthy growth across our product portfolio on a year over year basis with the data center products growing nicely as we continue to capture share in that important part of the market. Our recurring services revenue of $112,600,000 increased 69% over the prior year and 10% sequentially and accounted for a 48% share of total revenue.
Looking at the 2 components of recurring services revenue. The first component Is our SaaS based subscription revenue of $54,800,000 which increased 71% over the prior year and 9% sequentially. Support and maintenance revenue, the second component of recurring services, was $57,800,000 an increase of 67% over the prior year and 11% sequentially. Billings in Q3 were $302,200,000 an increase of 56% year over year and 7% sequentially. Growth in subscription attach rates and high renewal rates are driving recurring services billings, which positively impacts deferred revenue.
Total deferred revenue in Q3 was $603,900,000 an increase of 64% year over year and 13% sequentially. Short term deferred revenue increased to $365,400,000 an increase of 58% year over year and 13% sequentially. Total gross margin for Q3 was 77.5%, an increase of 140 basis points compared to last year And a decrease of 30 basis points sequentially. Product gross margin was 76.4%, an increase of 10 basis points year over year a decrease of 70 basis points sequentially. The sequential decrease was due in part to product mix.
Services gross margin for Q3 was 78 In part from ongoing growth of our high margin subscription services. For the quarter, research and development expense was 11.7 percent of revenue, Increasing approximately $1,000,000 sequentially to $27,400,000 This was primarily due to headcount growth and project related expenditures. Sales and marketing expense for Q3 was 45.7 percent of revenue, increasing approximately $7,400,000 sequentially The $107,000,000 This was primarily due to expenses related to our Ignite user conference and RSA as well as headcount growth. General and administrative expense for Q3 was 6.2 percent of revenue, decreasing approximately $2,000,000 sequentially to $14,400,000 This was driven in part by a decrease in outside services. Total headcount at the end of the quarter was 2,317, up from 2,083 at the end of Q2 fiscal 2015.
In total, Q3 operating expenses were 148,900,000 63.6 percent of revenue. Operating margin grew 480 basis points year over year to 13.9% and increased sequentially 150 basis points. Net income for the quarter was $20,500,000 or $0.23 per diluted share using 88,000,000 shares, Compared with net income of $8,700,000 or $0.11 per diluted share in Q3 2014.
On
14 GAAP net loss of $146,600,000 or $1.96 per basic and diluted share. We finished April with cash, cash equivalents and investments of $1,200,000,000 Our cash flow from operations, Free cash flow and free cash flow margin for Q3 were $87,200,000 $77,400,000 and 33.1 percent respectively. Capital expenditures in the quarter totaled $9,800,000 Consistent with the strength we saw in the quarter, Linearity in Q3 tracked better than the prior year period. Our accounts receivable balance was $150,500,000 this Up from $135,300,000 in Q2. DSOs increased sequentially by 3 days and decreased year over year by 5 days to 55 days.
Turning to guidance. As we enter Q4, we feel good about the security spending environment and our ability to execute against that opportunity. In Q4 2015, we expect revenue to be in the range of $252,000,000 to $256,000,000 which represents 41% to to 90,500,000 shares. Before I conclude, I'd like to highlight a few considerations for modeling purposes. Due to continued strong growth, seasonality has been difficult to forecast, but we believe that over the longer term fiscal Q2 and Q4 may show our strongest revenue growth.
We expect CapEx for the fiscal year 2015 to be in the range of $40,000,000 to $45,000,000 for the year. Total consideration for Sierra Secure, which closed in the 4th quarter, was $18,000,000 of which approximately $16,000,000 was cash. And as we said previously, we continue to expect to exit Q4 fiscal 2015 with a low teens non GAAP operating margin And to exit Q4 2016 at a 22% to 25% non GAAP operating margin. With that, I'll turn the call back over to the operator for Q and A. Thank
We'll take our first question from Philip Winslow with Credit Suisse.
Thanks guys. Congrats on another great quarter. I mean, obviously, you still have good product sales. But if I look at the services line and your revenue just obviously the attach rate of additional subscriptions keeps trending positively here. Wonder if you could provide us some more color just sort of what you're seeing if there are any sort of is Is there any particular subscription that's driving this?
And if so, what is that? Or if it's not kind of just the mix that you're Thanks.
We see a broad strength across our threat prevention, filtering and wildfire. Those continue to Very well. Over the past year or so, we've seen a modest uptick in GlobalProtect. So the power of the platform That we're delivering to customers is really resonating. So there's not one in particular that is shining more than the rest.
But over the last year we have seen an uptick in wildfire in particular.
Got it. And then just one quick follow-up. You guys mentioned The VM Series product and the relationship with VMware there. I wonder if you could provide just some more color sort of is there any particular vertical that Seeing this adoption in or is it more widespread? And sort of what is the pipeline you think look for that going forward?
Yes, hey,
Phil, it's Mark. Yes, we're seeing broad interest across the board. It's not vertically specific. We're definitely seeing as customers Or paying attention to virtualization a big way, moving to the cloud, those sort of concepts are giving us a fantastic opportunity to enter conversations For something that's brand new, right, conceptually brand new for them and where they want to take the future of their networks. And it's a great entry point And having such a powerful partner like VMware, who is almost always in this conversation with them really helps us a lot.
So we like what we've seen so far a selling perspective and every quarter the pipeline is getting stronger. So we like that a lot.
Awesome. Congrats again guys.
Thanks, Phil.
We'll take our next question from Fred Grieve with Nomura.
Hey, thanks guys. 2 for me. 1, could you give us an update on the demand you're seeing in the service provider segment, particularly for the 7050? And is this actually becoming a meaningful growth driver for you?
Yes, Fred. It's Mark. Generally, service provider is a good vertical for us and it's growing very well for us. Partly that's because of the seventy-fifty. Generally, they're seeing the service providers want to secure their own networks.
70-fifty certainly helps in that. And we are seeing them Want to be more and more partner with us as systems integrators for other enterprises. All of our technology helps in that. But Specific to the service providers' customers, that's been strong and growing very nicely for us and they really like the seventy-fifty.
Great. Thanks. And just as a follow-up, moving to Traps, can you tell us where the budget for Traps is coming from? Specifically, is this new budget that's being created Specifically for Traps or is it actually cannibalizing existing endpoint budget?
I think it's a mix of both with what we've seen in the market so far, and what I mean by both is that, as customers more and more come to the recognition and realization that The legacy AV technology is really not helping them much in today's advanced threat environment. They're starting a lot of them are starting to say, let me see what's in So they create some budget to go test, right? And they're bringing folks in. Traps is definitely on that list for them to run those tests. When they make a buying Which is I've made my mind up.
What we've seen so far, at least in the customer base we've sold to, is either repurposing the AV budget and going with free AV and repurposing it Palo Alto or repurposing a portion of the AV budget. They're just going to give less to the AV guys than they used to and taking That savings remainder we're putting in into the NextGen, which is more and more us.
Next question?
We'll take our next question from Karl Keirstead with Deutsche Bank.
Thank you. Question for Stefan. You mentioned again on this call that Typically 2Q and 4Q should have the strongest growth, but it feels based on your guide that this year the Q3 just reported And you also mentioned earlier that the 3Q linearity was better than prior periods. So It feels like 3Q was a stronger quarter than you guys were expecting. So I just wanted to ask you if there was 1 or 2 areas Where you saw particular growth and if there was any deal pull forward from the Q4, the July quarter?
Thank you.
Well, first on the seasonality part, what we've always said is more of a prospective statement than anything else. Because we've been able to blow through typical seasonality patterns, it's just been hard to call where seasonality Really will land. As we get bigger, we continue to think Q2 and Q4 will be seasonally stronger. As it relates to this fiscal Q3, we saw great strength across all geos. Grow very nicely off of a very large base.
EMEA grew 42% year over year. APAC grew 55%. So geographically, we saw Broad contribution.
When we
look at product lines, our family of appliances and our chassis, they all sold very well. So it's really broad strength and it goes back to the power of the platform. We're going into customers and we have the versatility to sell to any enterprise security need, Both now on the endpoint and on the network and we're seeing that play out. Yes.
And just Fred, it's Mark. I don't think we saw any pull in from a deal perspective Q4 to Q3. Pipeline is strong for the Q4.
Got it. Good to hear. Congrats on the quarter.
Thanks, Karl. Thank you.
We'll take our next question from Keith Weisz with Morgan Stanley.
Excellent. Thank you guys and very nice quarter again. I wanted to delve a little bit To the recent acquisition Cirrus Secure. And maybe you could sort of help us understand why this direction in terms of sort of The adjacent technologies where you could have gone into, what made this one most interesting to you guys? And what was it about this technology in particular, because it does look like it was a technology buy for you guys.
What's differentiated? What about this technology in particular, made you go out and buy
Sure. Well, Keith, as you know very well, part of what we're trying to do from a prevention perspective is to make sure that we can always Safely enable the use of applications. That's been a guiding principle for us in the very beginning is to make applications that people want to So there of course are lots of things going on in technology land out there around security, but with that as a guiding principle, we're really interested In this area because there's such an increasing use of SaaS applications, for a very long time, our platform has done a Fantastic job of securing SaaS applications that come across the network, meaning from a threat perspective. What's interesting about this and the reason we really like is the unique approach they've taken to go a step further in sanctions, meaning applications that companies want to use, right? Sanction SaaS applications And this technology gives us and it is a technology purchase plus people purchase as well.
These are guys who are in the market that have a handful of customers that we validate The technology, it gives us a deep level of visibility into the applications themselves from a data and user perspective, so we can see actually Happening with the data. What is the data? Who's using it? And from that, we can tell very, very quickly if it's being used for or misused, So it's another strong safe enablement play for SaaS applications which is a really fast growing trend as you know for So that's why we really liked it and these guys have something really interesting.
Got it. If I can ask one follow-up on the distribution side We've been talking for a while about the ramp up of some of these distribution deals. You guys mentioned Westcon On the conference call, where are we in that kind of cycle of ramping them up? How much further is there to go in terms of getting on new distribution capacity, particularly Some of these larger agreements
that you guys recently signed. Yes. We're very optimistic about the ability to continue to do that. We've highlighted at WestCon a few times. The reason for that They're the largest security distributor out there.
And as you can kind of tell from the results we talked about before, including now being their number one That's ramping very nicely. That's not the only thing we're doing. We work with other distribution partners as well who we've been working with for quite some time
and are aggressively partnering with them in order
to continue to ramp We partner with them in order to continue to ramp with them as well on a global basis. So there's a lot going on here in And it's important for our future to be able to get the capacity. As you can tell, people really want to buy our technology, right? So we want to make sure that we have the capacity to fulfill that on a global basis. And we'll take our To fulfill that on a global basis.
We'll take our next question from Michael Turits with Raymond James.
Michael Turits, thanks a lot. Hey, guys. A question on the discussion around the firewall spending cycle if it exists. Obviously, firewall spending, network security spending has been strong in the last couple of years. Is there any sense that that has in any way peaked last year?
Or does there any shift In terms of priority of spend this year to other areas besides network security?
Yeah. You know what we're seeing Mike is a really good question. I mean across the board security spending It remains very strong, which is fantastic. I mean, and the reason it's great, obviously, for all security companies, but us in particular, is what the Trending as we're seeing. So traditionally, you'd see people refreshing into from a firewall perspective or other technology And that would be the opportunity to talk to somebody.
And those refresh cycles continue to happen all the time, which is really good for us since We've got the platform. The customer can be inserted or onboarded at any point in that platform for whatever they feel like the most Pressing use case may be. It might be the firewall, it might be IPS, it might be advanced persistent threats, it might be the endpoint. It doesn't matter in a sense that we can deliver the solution They needed time and grow from that. So we see cycles of buying being very strong as a general matter and Specifically, we're pleased with the ability to be differentiated to come in at any point whatever those buying cycles are.
Okay. And just a follow-up to that if I can sort of similar question about Cycles. Let someone ask last quarter if you were beginning to see a refresh of your own base. And do you have any further visibility into that at this point?
Yes. We watch that closely, of course. And what we said earlier on that is we are seeing our own customers starting to refresh in the earlier cohorts. And that's not surprising given 4 to 5 year refresh cycles. And we also like the fact that when we're seeing those folks come back to us that we've been able to, in A lot of cases sell them larger devices because their needs have grown, more subscription services because they realize the power of their subscription services and we've brought more to market as well.
One of the most interesting data points for me on that when I think about it is if you look at the 'nine, 'ten, 'twenty 10 cohort combined, it's Like 2,000 customers and we have over 24,000 now. So if that pattern holds from our own refresh in our customer base, There's a lot of buying in there in the future.
We'll take our next question from Matthew Niknam with Goldman Sachs.
Hey, guys. Thank you for taking the question. Just a couple on Cirrus Secure. Any color you can share on how you plan on pricing This is your secure technology, once that's rolled out later this year. And then maybe if you can talk to any sort of incremental Spending, whether it's sales and marketing, R and D tied to rolling out that subscription, want to get a sense of any sort of margin impacts we can expect in upcoming quarters.
Thanks.
Yes. So for from a pricing perspective, we'll get more data around this We get closer to the fall, Rob. But generally, we're anticipating we'd price it on an application user basis and we'll get more specific about that when we Bring that to market and Stefan can answer the margins.
Yes. So with the technology acquisition and a small team of people coming over, we Plan to absorb this from an R and D standpoint. And from a sales and marketing standpoint, we're not going to be adding an overlay sales team. This will be sold by Our normal teams here. So the impact will be modest and we reiterated our low teens operating margin exiting Q4 And also the 22% to 25% non GAAP operating margins exiting Q4 of next year.
So we feel good about the ability to execute without any dilution. That's great. Thanks.
Thank you.
We'll take our next question from Shaul Eyal with Oppenheimer.
Thank you. Hi. Good afternoon, guys. Congrats on another set of strong results. Two quick questions on my end.
Thank you guys for the color on the VMware partner Jay, on the Westcon, but any color you can share with us on the Splunk relations at this point?
Yes. We love Splunk. They're very good partners for us and I think they feel the same way about us. I think you can see from Splunk results as they continue down the path Security becomes an increasingly large use case. For them, not surprising given what they do with the data.
And what we have found and I think based on their from our joint customers consistently tell both of us is when you put Palatinetworks data off of our platform through Through a Splunk platform, you get very actionable intelligence used for security purposes and customers like that a lot. So We continue to work with them not only in the technology side but also in the go to market side as well.
Got it. We've heard that over the course of the past few Quarter's Board of Directors have started to get involved in the security decision process spending process. Mark, what can you tell us on that front? Are you meeting With the boards, are you being called into those urgent board meetings? Yes.
I think boards are Becoming more involved, it's a total top of mind issue right now and it's growing in nature. I do get the opportunity to speak with Board members Boards, I would tell you, as I said before, it's not that they're the urgent meetings, meaning it's not the panic meeting. It's more and more folks Being very thoughtful saying, hey, we got to think about this over a multiyear basis, not what we read in the paper yesterday. So how do we come up with A solution that is, takes care of us on a longer period of time is the best possible way. And the way we speak to that is through a security reference About what the next generation reference architecture should look like from a security perspective.
And obviously, Palo Alto has a lot to bring to bear on that. And we Certainly talk through that with them, but it's more at the level of saying, here's what's happening in the world, you have to have a prevention philosophy first and foremost. Does mean you shouldn't do other things, but it means if you're not doing prevention first and foremost, you're thinking that way, then you're going to be behind the curve in a way you can never recover from. And then here's what a reference architecture would look like that has that mindset. And then obviously, Nopalat has got an important part of that and we get the chance talk about that too.
We'll take our next question from Jason Nolan with Robert Baird.
Okay, great. Thank you. I wanted
to ask about auto You mentioned 750 customer requests. Do you have a feel for the size of the market and what's the Trajectory of adoption would be? Yes. So what we mentioned there, Jason, was that when we if we back up for a minute Analyst Day, we said we would do a community access program, the first thing, because that would give us a chance to put the technology in the market, let customers play with it, Fantastic feedback, which we're now getting. When we announced that and said anybody who'd be interested in being part of the community access program, We had over 750 of our existing customers show up for that WebEx to raise their hand and say, I want to be in that, which is fantastic.
I think it's a sign of strong interest in the technology and then also a sign of hopefully a strong pipeline for folks who may want to purchase the technology When we bring it to market. As far as what the market looks like for that, there is an increasingly high demand for Intelligence and analytics and security. I've not yet met a customer that has told me if I just had some more data, I would be better off. All of them tell That what I need is to make sense of what I have, frankly, whether it comes from Palantir or anybody else, right? And what Autofocus does is it takes The data off of literally billions of pieces of information that we have across our very fast growing customer base and it burns the haystack And it just leaves the needles and it shows which of the needles are sitting on top of each other and which are separate, right?
And that is very actionable intelligence that people are finding to be very So we anticipate that there'll be a good degree of interest to this and we look forward to getting into the market in the fall. Okay. That makes sense. And then, Stefan, Any color you can provide on over underperformance by vertical? I think you'd said at the Analyst Day that high-tech is the largest vertical at
We saw a very broad distribution again across all verticals. High-tech continued to FormWell, Financial Services, Public Sector, those are our top 3. But when I say top 3, the largest one lifetime to date is Call it 14% individually. So we saw a very nice broad strength across all verticals, which again goes to the point that Every vertical needs a platform solution and we're in the business of helping every industry and every customer.
We have a question from Gregg Moskowitz with Cowen and Company.
Okay. Thank you and congratulations on
a very strong quarter as well. Stefan, I think last You extended your product lead times from 2 weeks to 4 weeks. Just wondering where that stands today and what do you expect going forward?
Our product lead times are again call it standard 2 weeks. We worked through some of the issues that we had and we never had any customer satisfaction issues. So we were good on that
front. Perfect. And then on wildfire Mark, are the paid users primarily coming from mining the installed base just looking over the past 90 days? Or are you seeing Hi, are new customers attached as well?
We're seeing great attach on new sales as well as the existing customer base. I think the There is no longer relevant between the 2. We brought that to market. We gave it for free for a while on the installed base just to get people to use it. And that The free aspect is no longer relevant whatsoever.
We're over 6,000 paid customers and growing very rapidly.
We'll take our next question from Rob Owens with Pacific Securities.
Hi, guys. This is Ben on for Rob. Thanks for taking my questions. I wanted to start with The traction that you're seeing in the data centers, maybe you could provide a little bit of color as far as where you're seeing the most traction? And are you And what's the split between Internet facing data centers versus the internal enterprise data center type market?
Well, we're seeing broad strength across the board in data centers. I think just fundamentally because there's so much increase in the application usage bandwidth and what Folks are doing so. It's a very positive trend across the board. But as between the 2, you mentioned we're seeing a lot of the use case
Okay, great. And then on the Traps endpoint solution, is there any functionality that we Completely replace the existing endpoint products that
are out there. Or do
you believe that where it sits right now is Provides
all the functionality that is needed. That's a great question, Ben. A couple of things. At the very highest levels, the way we've viewed the road map from an End point perspective and when we decided to buy severa, we did it against this roadmap concept of saying a great end Point would have real prevention capabilities. It would have good detection capabilities.
It would also have the ability To do some level of, I'll call it, automated remediation, find that stuff and remediate it. And when it did those things, it would not break the native application experience and it would use as little So before we bought anything, that was our roadmap that we had in mind. If you think through that, The highest order of bit in there is prevention. Of all the things that I just mentioned, the most important one would be prevention. So that's why we focus very, very heavily on that.
And that's why we bought Xivera because it brings real prevention capabilities into the market and we'll fill out the rest of that roadmap Over time. Now your specific question though is, can use Traps and replace AV? I think that's what you're asking, right? And what we've seen customers do is to say they think of it a different way. They say, I'm interested in security, right?
So I need secure endpoints, right? And that road map I Gavee gives you secure endpoints and the most important part is prevention. So I think when they want to have security, they're saying give me It can be different or complementary frankly to my legacy AV, but I need security, not AV, Great. So we're seeing some customers like I mentioned before run them side by side. We're seeing some customers just say, I'm just going down the security angle.
I don't really need the AV Since it's not doing a lot for me anyway, it's really a mixed bag. It's a very dynamic market right now, meaning it's moving quickly and I think it's moving in the direction of security And that's where we're primarily focused.
Great. Thank you.
Thank you.
We'll take our next question from Matt Hedberg with RBC Sea Capital Markets.
Thanks for taking my questions guys. Congrats on the quarter. Mark, I had a follow-up to the prior question on Traps. You mentioned several wins in the quarter and some of the features that customers are looking at here. But can you talk about maybe just the pace of business coming out of Ignite?
And is there anything else you can help us with to help quantify the trajectory of that as we think to 2016?
Yes. We like so we like the market. It's a big addressable market opportunity. There's a hell of a Interest in it as well. We're selling well in there.
We continue to close dozens and dozens of deals every quarter. We've sold multiple 1,000,000 of dollars worth of To date and we would expect that we continue to have a good ramp as we go into 2016 and that 2016 will be good selling year
That's great. And then Stefan, your hybrid SaaS model certainly is resonating. Can you remind us about the amount of in quarter revenue you need to obtain in order to hit the midpoint of your
No, we don't get into that level of specificity. But what I can tell you is, you look at just the mix From a revenue standpoint, and if you look at product revenue this quarter, it was about 51.9%. So that product revenue number is typically the go get number that we need in order to hit Yes, the overall guidance. Of course, there's some subscription services That we can count on as revenue in the quarter, but most of that's ratable in nature. So, it's really focused on product revenue as the go get, that's the primary driver.
And we've been we've seen very nice traction with our appliances. You look at the year over year growth rates, They've been very healthy. And then we have increasing subscription attach rates. And you're really seeing the power of the overall model when you look at the revenue results.
We'll take our next question from Brent Thill with UBS.
Stefan, you mentioned the Q3 linearity Was a lot better than last year. Is that better sales execution just a sign of the overall demand environment being so good for your sector? Just curious if you could give a little more comment on what you saw in the quarter?
Yes. It's a combination of things. But as we have more quarters under our belt in sales execution, which is already very high, continues to excel. So that was a big boost when you do A year over year comparison. From a market standpoint, we see lots of great traction across all verticals.
So there's we've seen a healthy spending environment and that's also contributed. So those two factors really help with the linearity.
And just real quick on the long term deferred revenue, you continue to see acceleration over the last several quarters. Can you maybe just walk through what you're seeing in that line item that Is yielding that type of result?
Yes. So we see very good growth in both short term and long term deferred revenue. The dynamic that we're seeing in long term deferred revenue is we have lots of customers. In fact, some of our largest customers are looking to do multiyear deals with us and that's great and that's goodness because we are now designed into their fabric and We can participate knowing that we have a long term partner with those customers. The sales force is not There are not more incentive to sell long term deals.
They do have a little bit of skin in the game. They do Deals that are booked in into the business.
Thank you. And we'll take our next question from Gur Talpaz with Stifel.
Great. Thank you. So with CRO Secure, there are a lot of vendors out there trying to do cloudsas security. Can you maybe talk about the advantages CERO has versus players like Adelom or Skyhigh or Alaska that have been sort of well funded and picked up a lot of steam over the And maybe going one step further, the advantage the customer might have by deploying a unified solution with a firewall as opposed to a standalone solution?
Yes, Gary, great question. Well, a couple of thoughts there. So there are a lot of players in the market. Just one commonality I'd put at the very top of the list is Enabling SaaS applications is an aspect that should be part of the platform. So just as a general matter, this is I think another example of the market of things that We'll be part of platforms over time.
And as the leading platform provider, we absolutely To provide the capability so the customers are not forced to buy yet another point solution in the market. When you think about what those various Vendors are doing, there's a whole mix of approaches. One thing they do is they take they give visibility in the SaaS applications being used. Again and again and again when we talk to our customers, we hear them say, all they're doing is taking your log data from Palo Alto Networks and presenting it. Now they do that very nice manner, but that's one of the value props is take the log data and present it to us.
There's no reason we can't do that and we will do that. Another approach they've taken is doing reverse proxy technology, try to get in the traffic flow to see things. We are extremely experienced folks from a networking perspective, that is not a great approach. It just doesn't scale over time, breaks applications. And then a third aspect of this what we described and what CRO has really cracked the nut on.
And that is actually having the hooks into the applications themselves In order to see the data and the users of the data and having a really great analytics tool associated with that, so you can see What's happening in the application itself with the data and users? We like that approach a lot. It's about safe enablement. It's scalable. It doesn't break applications.
So it's got a lot going for it and that's what we really particularly liked about those guys. So combining that capability set with us providing our own level of A viewpoint off of our log data about SaaS applications is what you can expect us to do. Awesome.
Thank you very much. Great quarter.
Thank you.
We'll take our next question from Michael Kim with Imperial Capital.
Hi. Good afternoon, guys. Can you talk a little bit about customer adoption of Traps? Is it primarily new customers to wildfire including Traps or existing Wildfire customers adding Traps? And are you seeing it primarily in the Global 2000?
Or is it pretty much
The good news is it's across customer base. So there's not a pattern there in a good way, right? There's a lot of interest from customers, some smaller customers, customers, larger customers, it doesn't matter in the vertical. I think naturally those customers who are already using Palo Alto technology Tend to get the story faster because they have called the technology from a platform perspective and those who are using wildfire already have seen the value and benefit of wildfire And the combination of Traps and Wildfire is a very powerful thing. So they get it even faster than others.
But just as a general matter, we're seeing interest across the board.
Great. And then just briefly on auto focus, is your plan to continue to expand the program beyond 750 customers Before you go GA, or do you feel comfortable with this kind of level of initial interest to really get you to a comfortable level in GA?
Yes. That's a really good question. Actually, we would Have less than 750 people in the Community Access Program. So just to run a good program like that, that will be measured in the dozens, not 100. We just mentioned the fact that 750 people wanted to be in it.
This is an indication of interest, but just to have a really focused effort, get good feedback, it will be much smaller than that.
We'll take our next question from Jonathan Ho with William Blair.
Hey, guys. Just wanted to
get a sense of what you're seeing out there in terms of win rates and whether you're seeing maybe continued improvement or whether it's become fairly stable at this point?
Competitive win rates are very high. We continue to take share from all the legacy providers that are out there. When we get into a deal, which we're able to do more and more given just the brand recognition, the size of the team that Mark's running, Increased global coverage from a distribution and reseller perspective. We win a very, very high amount of the times and I think that's not obvious. It's showing through from the results.
Got it. And then as you broaden sort of the product base, are you seeing more sort of I guess tips of the spear or opportunities to get into accounts with now multiple touch points and has that helped to sort of bring the platform in from
Yes, there's 2 things that
are really helpful there. The first is that our sales team is very quickly Being educated and being out of conversations, I'll call it a higher strategic level of folks. So it's a platform level conversation. The customer is going to say, I have a need or I have a pain point, right? The sales force knows that before you jump in on that, the right conversation to have with them Is what is our philosophy and how do we bring that philosophy to bear with the platform, because it shows how not only we're going to solve that pain point We're just going to do it in the context of the platform.
We'll take our next question from Matt Williams with Evercore.
Hi, good afternoon. Thanks taking the question. Just curious if there's anything or any geo specifically in the international market that you guys are particularly focusing on? I know it's obviously a So just curious if there's specific sort of sub geos that you're more focused on than others or any commentary around would be great.
Just 2 just real general comments around it, Matt. One is, we'd like to go where the money is. That may be an obvious But not all of the sub geos inside of theaters are the same from a wallet and spend perspective. So we're I think we're educated about that. Like Australia is a great market, for example, in APAC.
The Middle East is a fast Growing markets, a lot of money there as well. And then we're also very focused on the Global 2,000. And when you actually write them down on a piece of paper, who are they and where are they headquartered, That's pretty telling about where they are more than 50% of them are in Asia, for example. So we're trying to be thoughtful And educated about where we put our resources and those are 2 of the just guides that I've given you about how we think about that outside the United States.
Great. That's helpful. Maybe just one quick perspective meaning are they more comfortable committing a higher dollar value than maybe they were a couple of quarters ago? Is that continuing trend up in terms of the larger and larger commitments right out of the bat?
Yes. Two aspects to that. 1, just as a general matter, I'll The ASP right across the board of all their customers continues to rise quarter after quarter. That's just a general deal comment regardless of size The customer and then in more and more customers again with our focus on larger accounts, we're definitely seeing folks Sign up to larger initial purchases and larger follow on orders as well if they're already using our technology. So the trends are very positive there.
We'll take our last question from Andrew Nowinski with Piper Jaffray.
Great. Thanks for squeezing me in. Just two quick questions. So number 1, will customers deploy 0 Secure as a subscription on your firewall, can it be deployed as a standalone product like Traps? And then will it integrate with Wildfire?
It can be standalone. So it's possible to do it that way. I think the real power would be using it in conjunction with the firewall. Because if you think of what I Earlier, we're already safely enabling applications across the network from a threat perspective. So that's there's real power in associating it with the With the firewall and yes it will be integrated with Traps.
That's a very good point that I didn't mention before very much like we did with I'm sorry with Wildfire. So one of the things we'll do right away is we'll take the technology over the next couple of months and integrate And wildfire has shown a very compelling value in being able to look at traffic. We'll definitely provide that capability set with the Syrah technology as well.
Great. And then I just trying to consolidate their security infrastructure and is the firewall the most logical place for that? And if so, do you think vendors a lot of firewalls are at a disadvantage The growth over the next 3 plus years?
What we see an inexorable trend toward is trying to do prevention and the best way to do it is a platform that is very integrated with highly automated outcomes. So that's what's happening in the market. And you can think about it as consolidation, but I think Customers think it's less about consolidation than they do is what's the outcome of the consolidation, which is a higher level of security because you have those integrated and automated outcomes. For that reason over time, I don't know how long, but over time, I think if you're providing point solutions in a traditional legacy model, You have a real problem there because these solutions should be at the firewall level because that's the device that sees all the traffic in the first And that's why we started there. And that's why we've consistently natively integrated these capability sets into the firewall because it has
That concludes today's question and answer session. Mark McLaughlin, at this time, I will turn the conference back to you for any additional or closing remarks.
Thanks everybody for being on the call this afternoon. As I said earlier, we are right in the right place to market at the right time in history with the market's leading breach prevention platform. And I Thank you, Steve. We want to thank all the Palo Alto Networks team for their hard work and their support of our customers and our partners as we continue our march to becoming the global leader in enterprise security. Thanks a lot for your interest We'll talk with you in September.
That concludes today's conference.