day, and welcome to the Palo Alto Networks Second Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kelsey Q2. Please go ahead.
Great. Thanks. Good afternoon, and thank you for joining us on today's conference call to discuss Palo Alto Networks' Fiscal Second Quarter of 2015 Financial Results. This call is being broadcast live over the web and can be accessed on the Investors section of our website at quarters.paloaltonetwork.com. With me on today's call are Mark McLaughlin, our Chairman, President and Chief Executive 2nd quarter and Stefan Tomlinson, our Chief Financial Officer.
This afternoon, we issued a press release announcing our results for the fiscal Q2 ended January 31, 2015.
If you
would like a copy of the release, you can access it online on our website. I would like to remind you that during the course of this conference call, quarter. Management will make forward looking statements, including statements regarding our revenue and earnings per share guidance for our fiscal third quarter and Non GAAP Operating Margin for Q4 of fiscal 2015 and Q4 of fiscal 2016 as well as our expectations regarding profitability, cash flow and competitive position. These forward looking statements involve a number of risks and uncertainties, some of which are beyond our control, 2019, which could cause actual results to differ materially from those anticipated by these statements. These forward looking statements apply as of today, and you should 2nd quarter.
We do 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, 2Q. Please refer to our quarterly report on Form 10 Q filed with the SEC on November 25, 2014, and our earnings release posted a few minutes ago on our Web 2019. 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. Quarter.
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 2019 of our website located at investors. Paloaltonetworks.com. Before I turn the call over to Mark, we'd like to inform you that we expect Q3 fiscal year 2015 earnings conference call will be held after the market closes on Wednesday, May 27. 2. In addition, we would like to invite institutional investors and sell side analysts to join an investor track at Palo Alto Networks Ignite Conference at the Metropolitan in Las Vegas.
Our program will start with lunch at noon on Monday, March 30. Formal presentations will kick off at 1 p. M. Pacific Time. While the event will be webcast, guests who attend in person are invited to stay for the conference, which will run through Wednesday, April 1.
2nd Quarter. To register, please email me at kturkottpaloaltanetworks.com or call me at 408-753-3872. 2nd quarter. And with that, I'll turn it over to Mark.
Thanks, Kelsey, and thank you, everyone, for joining us this afternoon. I'm pleased to report that we delivered very strong results in our 2nd quarter up 54% year over year and billings were $283,000,000 up 51% year over year. We also continued to show the leverage in our operating model with non GAAP operating margin expanding to 12.4 percent as well as Q2 non GAAP EPS of $0.19 Our results continue to demonstrate our belief That our next generation enterprise security platform is highly differentiated and is the right approach to security at the right time in history and that our business model is unique 2nd quarter and allowing us to deliver industry leading revenue growth rates at scale, while doing so with consistently increasing leverage. At the highest levels, it's more and more evident That the world has changed and that cybersecurity is now critical to the fabric of all things related to technology, business and national security. 2nd quarter.
This means that cybersecurity has attained a status as a fundamental imperative for every company and organization in the world and that this paradigm shift is not abating, but likely to 2nd quarter. Continue for many years. It is also becoming increasingly obvious that legacy technology solutions are incapable of protecting businesses in the age of Sophisticated and Aggressive Cyberattacks. What is needed is a true enterprise class integrated and automated platform capable of not only detection, but prevention as well. 2nd Quarter.
Palo Alto Networks is delivering this platform and as a result we are able to capture more market share more quickly than other companies 2nd quarter. We've been able to do so in the past. Our customers' consistent feedback is that they are more secure when using our platform than they were with their previous legacy architecture and as a side benefit, They're spending less on our integrated platform than they used to by cobbling together disparate and point products. In addition to having the right platform at the right time in history, quarter. We have also been working very diligently to ensure that we can execute well against a large and growing addressable market opportunity.
This requires continuing to Develop our world class sales and distribution capabilities, including doing some unique things like hosting our partner representatives in our sales and technical training, 2nd quarter, as well as ensuring that all the other functions required to support the company's continued fast growth are scaling well. I'm exceptionally proud of the quarter. As you can see from our results, the market is voting in favor of our philosophy, approach and platform and we are beating and displacing the competition at very healthy rates and quickly becoming the industry standard. In Q2, we added well over 1500 new customers, bringing our total customer count 22,500, a more than 40% increase year over year. And our global and major account focus continues to pay off with us now serving 81 of the Fortune 2019 and 16 of the Global 2000.
Examples of new customer wins this quarter include a checkpoint in Cisco replacement at 1 of the United States' largest energy providers that purchased high end data center appliances in combination with subscription services including Wildfire, a global financial institution in Europe where we replaced Check Point in Cisco and sold PA-seventy50s for the data center and working with our partner 2nd quarter. Also included Palo Alto Networks' position for NSX and one of the world's largest insurance companies where with our partner Dimension Data we replaced the incumbent Cisco in Global firewall refresh and won a very competitive bake off for an APT solution with Wildfire. On the expand side of the business, we know that satisfied customers 2 repeat purchases and we've placed a great deal of emphasis on customer service and support. Our customer satisfaction scores are among the highest in the industry and we continue to invest in 2nd quarter. Structure and talent required to ensure that our customers are getting the most out of their technology investment.
As a result, we see significant expansion and a lifetime value of our customers. For example, to make our top 25 customer list in Q2, a customer had to have spent 2nd quarter, a minimum of $7,400,000 in lifetime value, a more than 60% increase over the $4,600,000 required in Q2 of our last 2nd quarter. These customers typically make purchases quarter after quarter as they add new products and subscriptions. In fact, all of our top 25 customers placed a repeat order with us in Q2. Additionally, we continue to widen the innovation gap with new products and subscription
2nd quarter acquisitions, which address our customers'
greatest security needs and are driving a market share shift in our favor. In the high end data center market, our 120 gig 50 chassis continues to resonate with enterprise customers across all verticals. This quarter, we closed multiple 7 figure PA-seven thousand and fifty deals to 2nd quarter 2nd quarter. We have a very compelling and highly differentiated data center security solution. In the mid range data center market,
quarter 2018. The PA-three thousand and
sixty, which we launched in Q2, did very well, further expanding our footprint in that segment of the market. Wildfire had yet another strong quarter as well. Quarter. We now have over 5,000 customers paying for Wildfire, up from approximately 4,000 last quarter. Wildfire is being purchased across all verticals with organizations including an international digital based e commerce business and a large North American based public utility company making purchases in the quarter.
2nd quarter. Both are examples of businesses that bought Wildfire for its ability to turn unknown threats into known threats in a matter of minutes and the benefits of Automated Threat Intelligence Sharing over the entire customer base. Q2 was our 1st full quarter in the market with Traps, our advanced endpoint protection solution integrated wildfire. Traps opens an incremental $4,000,000,000 endpoint market, which is yet untapped for us. Similar to what we saw in the firewall market about a decade ago, 2.
We believe that legacy endpoint solutions have not kept pace with the threat landscape, leaving customers vulnerable to attack and the market ripe for disruption. 2. In Q2, we added dozens of new Traps customers and closed our first seven figure transactions with a large healthcare organization. While it is early, we are pleased with our progress and excited about the future in this market. It's a very exciting time in general Palo Alto Networks.
I consistently tell our team that our platform is solving very hard problems for customers and as a result, we believe that we have the potential to capture historic market $1,500,000 share in a very large addressable market and that we've only just begun. We believe that our innovation engine, proven and scalable go to market capabilities and focused and scalable quarter support capabilities that allowed us to drive outsized growth while expanding profitability and generating significant cash flow with our model. Before 2. I'd like to reiterate Kelsey's invitation to join us for Ignite 2015 Conference and Investor Track starting on Monday, March 30, 2nd Quarter two Conference Call in Las Vegas. I hope to see all of you there.
With that, I'll wrap
it up and turn the
call over to Stefan. Stefan?
2Q. 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 that are GAAP, 2nd quarter. All financial figures are non GAAP unless stated otherwise. In Q2, we continue to execute well against our land, span and retain sales strategy and are pleased with both the rate of new customer additions as well as expansion in our current customers.
2nd quarter. Growth in sales of products, subscriptions and support drove double digit sequential growth resulting in record billings, revenue and deferred revenue. Additionally, with approximately 47% of total revenue coming from recurring services, our hybrid SaaS revenue model and ramping economies of $1,000,000,000 continuing to drive leverage in the business, resulting in strong non GAAP operating margin and free cash flow this quarter. Quarter. I'm very pleased with the results in the first half of fiscal twenty fifteen.
We believe we can continue to capitalize on macro tailwinds and security spend, 2nd quarter 2020. The technological advantage of our next generation platform and the untapped spend in our large customer base to drive growth and continue to take market share as we head into the back half of our fiscal year and beyond. Now let me turn to the numbers. Q2 total revenue grew 54% over the prior year and 2018% sequentially to reach a new record of $217,700,000 The geographic mix of revenue for Q2 was 27% Americas, 21% EMEA and 12% APAC. Compared to the prior year, the Americas grew 62%, EMEA grew 35% and APAC grew 51%.
As in previous quarters, we saw broad strength across a wide range 2 verticals and we did not have any end customer concentration. The 3 components of our hybrid SaaS model, product, 2nd quarter. All grew very well in Q2. Q2 product revenue of $115,600,000 increased 43% over the prior year and 14% sequentially. We saw healthy growth in our mid range PA-three thousand series, high end PA5000 series and PA-seven thousand and fifty.
In particular, the PA-seven thousand and fifty continue to show and is a catalyst to capture more market opportunity in the data center market. Our recurring services revenue of $102,000,000 increased 9% over the prior year and 12% sequentially and accounted for a 47% share of total revenue. Looking at the 2 components of recurring services revenue, 2nd quarter. The first component is our SaaS based subscription revenue of $50,100,000 which increased 74% over the prior year and 15% sequentially. Support 2nd quarter revenue, the 2nd component of recurring services was $52,000,000 an increase of 65% over the prior year and 10% sequentially.
Billings in Q2 were $282,800,000 an increase of 51% year over year and 18% sequentially. 2nd quarter. Growth in subscription attach rates and high renewal rates are driving recurring services billings, which positively impact deferred revenue. Total deferred revenue in Q2 was 5 $35,800,000 an increase of 65% year over year and 14% sequentially. Short term deferred revenue increased to 324.5 2018, an increase of 60% year over year and 13% sequentially.
Total gross margin for Q2 was 77.8%, an increase of 2.50 basis points compared to last year and 100 basis points sequentially. Quarter. Product gross margin was 77.1 percent, an increase of 160 basis points year over year and 200 basis points sequentially. The sequential increase was due in part to favorable product mix. We expect there will be fluctuations in product gross margin primarily due to mix.
2nd quarter. Services gross margin for Q2 was 78.7 percent, an increase of 3.50 basis points year over year and 10 basis points sequentially, due in part to ongoing growth in the contribution from high margin subscription services. For the quarter, research and development expense was 12.2 percent of revenue, increasing approximately $3,600,000 sequentially to $26,500,000 This was primarily due to headcount growth and project related expenditures. $1,000,000 Sales and marketing expense for Q2 was 45.8 percent of revenue, increasing approximately $9,600,000 sequentially to $99,600,000 quarter. This is primarily due to an increase in headcount and sales commissions related to first half sales performance.
General and 2. This was driven in part by headcount growth in outside services. Total headcount at the end of the quarter was 2,083, up from 1900 at the end of Q1 fiscal 2015. In total, Q2 operating expenses were 142,500,000 2nd Quarter 60 5.4 percent of revenue. Operating margin grew 3 40 basis points year over year to 12.4% and increased sequentially 180 basis points.
Net income for the quarter was 16,900,000 2018 or $0.19 per diluted share using 86,600,000 shares compared with net income of $7,800,000 or $0.10 per diluted share and Q2 2014. On a GAAP basis for the 2nd quarter, net loss was $43,000,000 or 0 point 5 2nd quarter share. This compares with Q2 2014 GAAP net loss of $39,900,000 or $0.55 per basic and diluted share. We finished January with cash, cash equivalents and investments of $1,100,000,000 Our cash flow from operations, 2nd Quarter. Free cash flow and free cash flow margin for Q2 were $76,800,000 $70,700,000 and 32.5 percent respectively.
2nd quarter. Included in our cash flow results is an approximately $12,800,000 payment to Israel made in conjunction with transferring the intellectual property rights acquired from Cybera out of Israel. Capital expenditures in the quarter totaled 6,100,000 quarter. Consistent with the strength we saw in the quarter, linearity in Q2 tracked better than the prior year period. Our accounts receivable balance was $135,300,000 this quarter, up from $116,200,000 in Q1.
DSOs $20,000,000 spending environment and our ability to execute against that opportunity. In Q3 2015, we expect revenue to be in the range of $219,000,000 to 2.20 $3,000,000 which represents 45% to 48% growth year over year. We expect non GAAP EPS 2nd quarter to be in the range of $0.19 to $0.20 per share using $87,000,000 to 89,000,000 shares. Before To conclude, I'd like to highlight a few considerations for modeling purposes. Due to 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.
2nd Quarter 21st endpoint protection offering. We're on track to hit this investment goal. We expect CapEx for fiscal year 2015 to be in the range of $45,000,000 to $50,000,000 for the year. 2nd quarter. And as we've said previously, we continue to expect to exit Q4 fiscal 2015 with a low teens non GAAP operating margin and Q4 fiscal 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.
2. And we'll take our first question from Matt Niknam with Goldman Sachs.
Hey, guys. Thank you for taking the question and congrats on the quarter. A question on margin. So the margin guidance, Stefan, as you alluded to exit rate this year, fiscal year exiting in the low teens. You're already just under 13% this quarter.
Is it fair to assume margins remain fairly flattish in the next two quarters? And maybe if you can help us think through
fiscal year and 22% to 25% exiting Q4 of 2016. And I do think it's fair to say that we're going to continue to balance top line growth with investing in the business. And the incremental dollars that are being spent are primarily in our innovation engine, which is R and D and product management as well as our field marketing organization and field sales operations. With a low percentage market share 2nd quarter and a very large market. We're very much focused on taking as much share as possible, but doing it profitably.
So you look at operating margins and free cash flow margins, We're able to drive very healthy top line growth and increased profitability.
And we'll take our next question from Keith Weiss with Morgan Stanley.
Hi. This is Melissa Gorham calling in for Keith. Thanks for taking my question. Q2. Just a question on Traps.
Mark, you mentioned dozens of Traps deals in the quarter. I'm just wondering if you can maybe provide some color on the early customer feedback there. And of those deals that you saw, are they taking spend from existing endpoint solutions? Or is this just net new opportunities?
Yes, good question Melissa. Yes, so the feedback has been very positive. It's kind of it's interesting and I think also 2. It drives a lot of optimism for us in this business. When we're talking to customers about this and saying this is what Traps does, it actually does real time exploit prevention.
That's 2nd quarter. Such a disruptive concept that sometimes you have to explain it to them twice and then show it, right, the demo. But when they see it, the reaction is Wow. That's pretty disruptive technology and a big step forward. And the second part of your question, we are 2nd quarter.
In some of these deals, some folks are buying it to run side by side with their existing vendors. 2nd quarter. In some of these cases, including that 7 figure deal that I discussed on the prepared script, we took that from a legacy vendor in a competitive win.
Okay, great. And then just one quick one for Stephan. One of the things that many of us picked up in the quarter was perhaps longer lead times in terms of Inventory. Was that an issue in the quarter? And if so, is what have you done to maybe remediate that potential 2nd quarter.
Yes. Due to high order volume, we extended our standard shipping lead time from 2 weeks to up to 4 weeks. The reality was we're able to ship most of all the orders that came in within a 2 week lead time, but it was really due to high order volume. So there's no supply chain issue and we were able to satisfy all the demand.
And we'll take our next question from Raimo Lenschow with Barclays.
Hey, congrats on a great quarter. Two quick questions from me. First, it's maybe just me, but I'm hearing a lot more Competitive replacements for Checkpoint. Can you talk a little bit about the environment that you're seeing there? It seems like slowly changing for you guys.
And then the second one is, obviously, we all hear about increased security spending. How do you see that in your conversations with the clients in terms Kind of ad hoc I need to react to an emergency versus kind of more longer term planning which you guys should see. Thank you. Yes. Good question, Trava.
Mark, so
on the Check Point one, we've been displacing Check Point for a very long time at good rates. So when you look at this quarter, well over 1500 new customers for the quarter, last quarter 2,000, right now. It's very, very hard to post those kind of numbers from new logos if you're not having everybody in the market be 2. To the Palo Alto cause and Checkpoint donates quite a bit to us. And that is increasing over time.
I think as We become the industry standard here. I think that's what's really happening as we continue to take this many customers and build a lot more relevance in the market, a lot more awareness in the market on a global basis. And on your spend question, spending seems very healthy right now 2nd Quarter. From a security perspective, really no reason to believe that that's going to change anytime in the future and particularly if you've got of the enterprise class platform that solves a lot of the customer's hardest problems. We think we're the big beneficiary of that.
And our next question comes from Philip Winslow with Credit Suisse.
Hi, guys. Thanks guys and congrats on a great quarter. Just wanted to follow-up on some of your 2nd quarter. On wildfire, obviously, you guys are having continued success there. I wonder if you could give us just some more details on sort of win rates versus 2nd quarter.
So, how you're who you're seeing out there, how you're comparing with them? And then also from just an attach perspective, not just with Wildfire, but your other subscription Maybe give us a sense, I know you only give us metric once a year, but it's a sense of sort of how those attach rates are trending as well as renewal rates? Thanks.
Yes, sure, Phil. Let me take those in reverse. So attach rate for all our servicers are doing well. They're all increasing. So that's The trend has been continuing for quite some time, including wildfire, which is growing at very fast pace.
And if you come to Ignite, you'll get some more detail around those things. 2. On wildfire itself, everybody in the market today from a network security perspective has some sort of APT offering in this space today. But from who we see in the market, we primarily see FireEye in the market and we continue to win new business where they don't exist. We continue to win business Where people put us side by side and ultimately choose our platform over a standalone product approach.
And our next question comes from Karl Keirstead with Deutsche
Bank. Yes, thanks. My question is
for Stefan. I just wanted to go back to your guidance around seasonality during the quarter. I I think you said that you should see the strongest growth in 2Q and 4Q. If you could just clarify, I know it's super preliminary, but Are you suggesting that the July 4th quarter might see a growth rate higher than what Palo Alto put up in Q1 and would likely put up in 3Q?
That's a good question, Carl. We guide 1 quarter out, but directionally you can think about the 4th quarter being typically very strong like most companies fiscal year end. We can't really get into the details around what our 4th quarter projected is going to be relative to last year's Q4. But the way that the organization is set up, we're positioned for growth 2nd quarter. And in the way the sales cycles work, at the end of the fiscal year, lots of people are in sales accelerator.
So you would typically see an increase in sales productivity and deal closure, etcetera. So, that's about all I can get into in terms of
quarter. And
our next question comes from Andrew Nowinski with Piper Jaffray.
Great. Thanks. Congrats on the nice quarter. I just want another follow-up question on Wildfire. It's clearly gaining traction.
You added about 1,000 customers this quarter And then 1500 total customers. I was wondering if you could give us any color on the mix of new customers that were deploying Wildfire versus existing customers that deployed it.
Yes, Drew. Yes, we're doing very well in both regards. So with well over 1500 new customers in the quarter. We're seeing very nice win rates for new logos as they come in the door. And having Wildfire as the most advanced Because we're able to talk about something that's very important for all companies, which is advanced persistent threats and malwares.
So it's good to have that as a lead for somebody who's not yet using Palo Alto Networks. 2nd quarter. With the existing customer base, we see very good adoption there as well because if you're already using portions of the platform, our story is and What customers are experiencing is the more of the platform you use, the better you are from a protection prevention perspective. And wildfire is a very 2nd quarter. Strong aspect of that.
So we see a lot of demand from our existing customer base as well saying, I want to add that portion of 2. Into the platform we're already on. So both cylinders are falling very well.
Our next question comes from Walter Pritchard with Citi.
Hi, thanks. Stefan, two questions for you. One, we've heard some of your competitors in the last 3 to 6 months talk about upticking their level of spending and bringing down their profitability goals. You're obviously sticking with your Ability goals as you stated them today. How do you think about sort of the market dynamic there?
And to some degree, you're all in the same And if they spend more, you may need to spend more. Do you feel like you're adequately covered? Is there anything that could happen in the market that could cause you to similarly uptick your spending more so than you're guiding to today.
So on that front, what I picked up around the competitive space is a lot of folks are Spending more on sales and marketing, in order to try to get into the enterprise, where you have historically Companies who have been focused on the SMB or telco trying to get into high end enterprise that they're building out their sales forces. We believe that it starts with a differentiated product. So we have the best platform out there. And when we start with that product and that platform, we've been building to scale under Mark Anderson's leadership, the worldwide field operations that we already had, call it, 45% of revenues for sales and marketing. And over time, we're going to be getting leverage over that, but there's not Some big reinvestment plan that we need to make in order to get incremental growth.
And additionally, If you think about the productivity of the sales force, we're going to have more ramped salespeople than ramping salespeople very soon. And 2nd quarter. And that increases the overall capacity that we're bringing into the model. So we don't envision 2018. Any derailment from our track right now.
Our next question comes from Brent Till with UBS.
Good afternoon. Mark on Traps, you mentioned you added a couple dozen customers. I'm curious what you saw in those deals with the rest of the portfolio from Palo Alto? And And perhaps when you look at some of the new versus existing, if you could just maybe give us a little more color on what you're seeing in that early adoption? I had a quick follow-up for Stefan.
Yes. We're seeing a lot of interest in the existing customer base, not surprisingly. So the question I answered a little while ago, I said the power 2. The platform is that the more the platform you use, the better security you get and usually at a better total cost of ownership. Traps with its integration of Wildfire is a very compelling part of that 2Q.
So our existing customer base, particularly those people who are using wildfire already, are very enticed by what that brings 2nd quarter. So we're getting very positive feedback from the existing customer base. Also, even though This is in the future for us as far as putting up the numbers against it. The ability to talk 2nd quarter. Customers who don't own any Palo Alto Networks yet at all and just talking about Traps is another entry point for us as well.
And of course, we're telling that
2nd quarter. Sorry to our as
yet signed on customers that you should just look at Traps if you have an endpoint need and then that can drive the adoption of more of our platform later
Okay. And Stefan, you mentioned strength in the 7,050. I'm just curious if you could maybe add a little more color what you're seeing in the data center market?
2. Well, we're seeing more invitations to play in the data center market and we see that in a couple of different ways. The first is just organically we're with the 7,050 we're getting brought in, but also with our partnership with VMware, we had a great use case where There was a NSX VM for NSX deal that was out there. We ended up selling not only 2, the VM series for that engagement, but we also sold the 7,050 to protect the north south traffic for that data center. And that's just 2019.
One example of a number that we're working on where the 7,050 is increasing our overall wallet share for the overall data center
market. And our next question comes from Matt Hedberg with RBC Capital Markets.
Yeah. Thanks distribution channel versus some of your initial expectations. And then I had a quick follow-up for Stefan after that.
Yes, great question, Matt. So about a year ago, WestCon had is about a little over 30 countries. And today, we are a little more than double that number. So in that last 12 months timeframe, we've increased that by 100%. We've also which is important because with that relationship, the number of resellers that were under that umbrella has gone up as well.
So just our distribution, I mean, the reseller capability below the distribution has grown a lot in the last 12 months. We're very pleased with that.
That's great.
And then maybe a quick one for Stefan. I know you guys price in U. S. Dollars, but I'm curious, are you seeing any evidence of the strengthening dollar and demand overseas?
Yes. Since we price in U. S. Dollars, we don't really see any material shift for the revenue. Quarter.
Where we do see a little bit of a benefit is as the dollar strengthens, we pay our foreign locations, salaries, benefits and expenses in local currency. So that does have a modest benefit. But outside of that the real top line risk isn't there Because we do price in USD.
And our next question comes from Daniel Ives with FBR Capital.
Yes. Thanks. Mark, could you just talk about just deals getting fast tracked and maybe even more at the Board level in terms of what you've seen on the cyber security, especially in terms of some of the high level threats we've seen over the last 3 to 6 months.
Yes, Dan, I think that we're seeing is that there's certainly a large and growing amount of attention at the Board level, the highest levels in companies and Boards 2nd quarter. What we're actually seeing below that though is good spending, as you can see in the market in general, in order to try to solve those things. But as far as that's working out at the buyers, we're seeing more thoughtful and strategic purchases, meaning that we're finding folks who are 2nd quarter. Stepping back and saying we want to think about something that is going to be very valuable for us for 3 to 5 years, not just the latest threat that just came out last week. We tend to do very well in that kind of environment because we come in with 2nd quarter.
We get to show them an architectural standard for security that covers all of their enterprise at every point of the kill chain and how that can provide a very strong dose of prevention and that is resonating extremely well in the market.
Okay. In terms of from the White House, some of that you're at and obviously you're really involved with what you see on the government 2Q. Do you think 2015 is going to see an inflection point on the federal side in terms of spending on cybersecurity? Or Do you think we're still not there and there still needs to be some bureaucracy and red tape that needs to get cut through? Thanks.
I think generally the government recognizes like all organizations that need to be at the forefront of cybersecurity. It's not so much inflection point 2nd quarter. In terms of acceptance of what has to happen from a technology perspective, I think it has a lot to do with budgets. So if you recall, The fiscal 'fifteen budget for the government was a very tough one. It's kind of going into fiscal 'fifteen.
We're coming off of a lot of belt tightening just generally in the government. 2018. So I would expect that the fiscal 2016 budget is actually just going to be a better budget. It's going to be more money in the budget in fiscal 2016 than there was in 2015. That's a good thing for providers.
And if you're a provider like us who's got a really good solutions for the government who needs to be at the very front of this. We think that bodes well.
Our next question comes from Greg Moskowitz with Cowen and Company.
Thank you very much and I'll add my congratulations 2nd quarter. Question for Mark. Mark, some security vendors hold the view that or are taking the view anyway that any APT solution that is effectively part of the firewall has some detection and prevention limitations just really because so much of the network traffic is Being generated by mobile and other sources. I just wanted to get perspective on that if I could.
Well, our view is that
What you're trying to accomplish
at the
end of the day or should be trying to accomplish is not only great detection, but a very, very strong level of prevention and that's got to be across the entire enterprise, right? So in order to do that, you need to be able to see the traffic everywhere, whether it's mobile or data 2nd quarter. It doesn't really matter, right? And if you can't see all that traffic, meaning you're not in line, then you're going to have a very, very difficult time doing anything from a security Whether it's APT or anything else. So that's the view that's driven the importance of being in the I call it the architecturally textually favored position of being the firewall in the 1st place because the firewall is generally the only security device that's going to see all the traffic in or out of the network.
Now if it's off of mobile device 2nd quarter. And you VPNed into your traffic flow, then you're going to supply those network security policies to that traffic regardless 2nd quarter. So what device is coming off is which is exactly what we recommended folks do and that's what GlobalProtect does for example. So I would completely agree with the statement 2nd quarter. That you have to see all the traffic in order to secure it and that you're going to be unable to do that unless you're in the firewall position.
Perfect.
Thanks.
Our next question comes from Michael Turits with Raymond James.
Hey, guys. A quick question on There was a question earlier about 2014 versus 2015 in terms of whether the spend is sustainable. Mark, any shift at all In terms of security spending in terms of priorities that you see from 2015 versus 2014?
Yes. I think that as we what we've seen folks at the highest levels being paying more attention to is what I mentioned earlier, which is, I'll call it, what is the security architecture, right? 2nd quarter. And more and more were the ones being invited in that conversation to say, how should I think about this big picture across the board top to bottom right from an enterprise perspective 2. As opposed to thinking about the point products where it's time to refresh this product to refresh this product.
And as the platform provider for prevention in that, that's great for us because we have the ultimate answer for that for folks today in the market and it's resonating very well.
And then, yes, obviously, it's very strong overall, but Europe was a little slower than last quarter. Anything going on there? Or I haven't checked if it was a tough comp or not. Have you noticed?
No. Europe, we like Europe. It's good You may recall last quarter we grew a little over 60% year over year in Europe and then we grew 16% sequentially That said, we like those numbers.
Great. Thanks very much.
Thanks, Mike.
Next we'll go to Gur Talpaz with Stifel.
Great. Thanks. So there's been a lot of noise within the endpoint market. Can you talk about what you're seeing out there competitively? And you think customers are starting to understand the inherent advantages of an integrated offering with Wildfire versus, let's say, a standalone offering?
Thank you.
2nd Quarter. Yes, a couple of angles on that. The first is that I agree with you, there's a lot of noise in the market on the endpoint side. The reason 2. That is becoming evident that the endpoints are very important from a solution perspective in order to secure an enterprise, right, because it's The Wild West and the endpoints.
And the first thing we see for sure is customers recognizing that the legacy AV technologies are incapable of doing that, right? So the second thing is the rush of lots of other players in the market say, we're going to fix that for you. Fixing it actually requires doing prevention, right? That's At the end of the day, that's what you have to do in order to have a good fix there. And we think that our approach with Traps and the customer feedback we're getting, as I mentioned a little earlier, is they agree with It actually does prevention at the endpoint and because of that it's very compelling.
2nd Quarter. And next we'll go to Jonathan Ho with William Blair.
Hey, guys. I just wanted to understand a little bit better. Are you starting to see much revenue come from the installed base in terms of refreshes from 4 or 5 years ago, the initial 2 customers. And how should we think about that trend for the course of 2015 and going into 2016?
Yes, Jonathan. So what we look at is we definitely see a refresh Going on in our earlier cohorts, the first really measurable ones for us are 2,009, 2010 by numbers. So we're seeing refreshes occurring there. To put that in perspective, the combined customer base for 2,009, 2010 is less than 2,000 customers. We've got over 22 1,000 customers now.
So if we continue to see refreshes into those larger cohorts, which we would expect to, that's a tailwind.
Got it. Excellent. And then as you start to think about the NSX and VMware relationship, can you maybe Talk a little bit about how significant this could be from a selling perspective and just sort of the initial reception that you're seeing. I know you talked about the wins, but 2nd quarter. Why customers would choose the solution and what potentially the alternatives are, if any?
Yes. We think of it in 2 regards. The first is that you definitely want to have relevance in the sense of there's a changing environment in the data It's not just north south, it's got to be east west. So the first thing is, can you adequately represent yourself in that conversation back to the strategic architectures and say I have you covered not only north south but east west as well. We definitely have north south covered and we are uniquely integrated and Working closely with VMware on the East West and when we show that to customers and how tight that integration is and it provides the same level of protections in north south.
They're very, very impressed with that. And we can see that playing out through the numbers NSX is selling very well as you may have seen from VMware's results. 2nd quarter. And as a result of that, we're getting pulled into lots and lots and lots of conversations with customers that's resulting in deals. And we We have well over 300 POCs going right now as an example with VMware customers.
Our next question comes from Aaron Schwartz with Macquarie.
Good afternoon. Thank you. On the metric you give for the top 25 customers. That increased quite a bit and I'm sure a number of things are driving that. But was there anything in particular that stood out?
Aaron, we're seeing our relevance continue to grow in the market and particularly with larger companies that they're 2 Making Larger Purchases With Us. So these are our largest customers, right? And then they continue to make larger purchases. And also we're seeing some customers On their first purchase, jumped right onto the top 25 list. Right.
So it's the mix of those two things that's driving that number up into the right.
Okay. And secondly, if I could, on the attach, you talked about that directionally moving higher as well. Can you just comment on the duration of what you're seeing now. Has that changed at all relative to 1 or 2 years ago? Thanks.
Yes, relative to 1 or 2 years ago for durations. Dave, they're basically in the same zip code relatively. They're up modestly, but There's no been there hasn't been any real like sea change in terms of duration.
Great. Thank you.
Our next question is from Jeff Kvaal with Northland Capital Markets.
Yes, hello.
Hi, Jeff.
Can you guys hear me okay?
Good. Yes.
Good. Thank you.
Perhaps I got buzz on
my mind perhaps, Q2. I was wanting to ask you how you were doing in the service provider market. I know that you've been pushing into that realm of this. And then secondly, I think you opened the call a little bit, Mark, talking about 2. I've seen a better runway I think for the security market over the period in a few years than you might have or 2 ago.
I'm wondering if you could delve into those comments in a little bit more detail.
Yes, sure thing. Yes, Jeff, good question. Let me take those in quarter. So what I was saying on the prepared remarks in the security market is that the I see a paradigm shift, which is security becoming what I'm calling fabric to all technology decisions that are being made by organizations, government and companies. And that's the result of all 2.
These attacks we're seeing and the incredibly evident fact that the legacy technology can't withstand that, right? So I think that paradigm shift that the securities fabric and will remain that way for quite some time is the point I was trying to make is that's not going to abate over time. I think that's going to continue to grow over time. And on your first question, the service provider market, we like that market a lot. We do very well in that market.
As I've said before, We view that market a couple of 3 different ways from an opportunity perspective. The area where we're doing very well right now is selling to service providers who are using our technology in their own networks. The 7,050 as an example has been a great boon for us there because those are big networks, slot the throughput of the data center usage and we're seeing very strong demand for provider industry for that.
Our next question comes from Gray Powell with Wells Fargo Securities.
Great. Thanks for taking the questions. Just a couple. So obviously you have a lot going on with wildfire and Traps in terms of newer products. How do you feel about the level 2nd quarter.
Internal innovation or R and D. And then do you see any technology sets that could supplement your current offerings?
Hey, great. One thing we never forget is that we're doing well in the market and Palo Alto has been as successful as we have 2. Because we've been very innovative and very disruptive. So we start everything with that. And as a result of that, we put a lot of time, effort, people, 2nd quarter.
And I think our track record is pretty good on that. We have a number of things, if you just think back in the last 12 months, that we've done traps around the PA-three thousand and sixty improvements to wildfire. And we're going to continue to innovate as we go forward as we always have done every single year. 2nd quarter. If you come to Ignite, we'll talk to you a little bit about that as well.
So I feel very good about the level of innovation, our track record on delivering that and the pace at which we
Got it. Thank you very much.
Thank you.
Our last question today comes from Scott Zeller with Needham and Company.
Thanks. I just wanted to ask if Stephane has any color he could share for the deferred seasonality, If there's an update on that please.
Well, deferred seasonality would most likely trend towards what the revenue seasonality is. So Q2 and Q4, you would see if
those are The quarters in
which we would see the most pronounced strength. Then the subsequent quarter, you would basically see Deferred, it will go up as well. I would give you that as color commentary. I can also say that both long term and short term deferred revenue have also been growing just very well. And so we see a nice balance between customers who are signing up for a 1 year deal,
2nd quarter. We are seeing
proportionally more customers signing up for multiyear deals as well. And some of those multiyear deals 2nd quarter.
Thank you.
Great. Well, thanks everybody for being on the call this afternoon. We appreciate it. We had a great first half of our fiscal 'fifteen and we're very excited about the second half of the year and beyond. As I said earlier, I I think we're in the right place at the right time in the market with the market leading protection prevention platform.
I want to once again thank the Palo Alto Networks team for all their hard work and support for customers and partners as we continue our march to become the global leader in enterprise security. Thank you very much.
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