Good day, ladies and gentlemen, and welcome to the 4th Quarter and Full Year Fiscal 2014 Earnings Conference Call. My name is Jasmine, and I will be your operator for today. At this time, all participants are in a listen only mode. 2018. Later, we will conduct a question and answer session.
2nd Quarter and Full Year Fiscal 2nd Quarter and Quarter Fiscal. As a reminder, this conference is being recorded for replay purposes. And And I would now like to turn the conference over to your host for today, Ms. Kelsey Turcotte. Please proceed.
Great. Thank you. 2019. Good afternoon and thank you for joining us on today's conference call to discuss Palo Alto Networks' fiscal Q4 fiscal year 2014 financial results.
This call is
being broadcast live over the web and can be accessed on the Investors section of the Palo Alto Networks website at investors. Paloaltonetworks.com. With me on today's call are Mark McLaughlin, Palo Alto Networks' Chairman, President and Chief Executive Officer and Stefan Tomlinson, Chief Financial Officer. 2019. This afternoon, Palo Alto Networks issued a press release announcing the results for its fiscal Q4 and full year ended July 31, 2014.
2019. If you would like a copy of the release, you can access it online at the company's website. We would like to remind you that during the course of this conference call, Palo Alto Networks Management will make forward looking statements, including statements regarding our revenue and earnings per share guidance for our fiscal first quarter Target operating model gross margin range, expectations regarding revenue, costs and expenses, billings, free cash flow, capital expenditures, effective tax rate and our share count. Our ability to accelerate growth 2019. We are pleased to announce that
our expectations are in the Q4 and full year fiscal 2019. We are
pleased to announce that our expectations are in the Q4 and full year fiscal 2019. We are pleased to announce that our expectations are in the expected availability and efficacy of new products and our competitive position. These forward looking statements involve a number of risks and uncertainties, 2019. Some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. These forward looking statements apply as of today, 2019.
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. 2019. For a more detailed description of these risks and uncertainties, please refer to our quarterly report on Form 10 Q filed with the SEC 2019 on June 3, 2014, and our earnings release posted a few minutes ago on our website. Also, please note that 2017 financial measures we use on this call are expressed on a non GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations 2019.
We are pleased to report that we have received from the financial results of our financial results. We are pleased to report that we have received from the financial results of our website 2018, located at investors. Taloaltonetworks.com. Before I turn the call over to Mark, we would like to inform you that we expect 2019 earnings conference call will be held after the market closes on Monday, November 24. 2019.
In addition, we would like to invite you to participate in an investor webinar on Tuesday, September 30, at 1:30 20.7 Eastern 10:30 a. M. Pacific to discuss our next generation security platform and technology differentiation. $5,000,000 Webcasting information can be found on our website at investors. Paloaltonetwork.com.
And with that, I'll turn the call over to Mark.
2018. Thanks, Kelsey, and thanks, everyone, for joining us this afternoon. I'm happy to be here today to share with you our results for our fiscal 4th quarter and full fiscal year 2014. We continue to see a large amount of momentum in the business and Q4 was strong across the board. 2019.
We delivered record billings and revenue with revenue for the 4th quarter growing 18% sequentially and 59% year over year $178,000,000 along with Q4 non GAAP earnings per share of $0.11 It was a great end to a very good year for us, 2019. We are more confident than ever that our platform architecture and strategy is unique, compelling and far ahead of the competition. 2019. In addition to our strong financial performance, we also celebrated a number of milestones and highlights. In Q4, we added a record number of new 2019.
This customer base is highly diversified across verticals and geographies and includes more than 8 50 of the Global 2,075 of the Fortune 100. On this list are some of the largest high-tech, financial services, government, 2019. Manufacturing and service provider organizations in the world who entrust your security to our unique platform and superior solutions. New customer wins this quarter include a large U. S.
Retailer, 2,000,000,000,000 where we replaced Cisco to become their enterprise wide security platform, a Canadian government agency where we beat Check Point and replaced Juniper to become their agency wide 2019 and a substantial expansion of our footprint in one of Check Point's largest global customers in financial services. In addition to continued acceleration in the 2018. And if I expand this list to our top 100 customers, each has spent a minimum of $2,300,000 on our solutions, 2019. Up 20% sequentially and 75% year over year. Customers across our installed base continue to make 2019.
We continue to deliver legacy technologies and point products in favor of our next generation security platform. Nineteen. On the product side, we generated significant traction with our newly introduced security offerings. Sales of our PA-seven thousand and fifty chassis significantly eighteen. We also see a 2019.
We have a strong
pipeline for our Palo Alto Networks for NSX offering with our partner VMware, and we're happy to close a number of deals in the quarter around this solution, including a new opportunity 18 with one of the most highly recognized brands in the world. The data center is one of our fastest growing use cases as enterprises realize the need for the most advanced security at the highest levels of enterprise performance for both NorthSouth and East West traffic protection. On the subscription services side, 2018. We achieved this footprint in just under 2 years, making us one of the largest APT solution providers by customer count in the market. Wildfire attach rates on devices shipped grew to over 40% in the quarter, and we're not resting on our laurels.
To further extend our technology leadership in the APT solution space, 2019. We recently reduced the average time from APT detection to prevention to approximately 15 minutes, down from approximately 28 minutes last quarter. 2019. We will continue to aggressively compress this time frame to provide the best prevention capabilities to our customer base, which is clearly voting for the power of the highly integrated and 2019. The newest addition to our platform is Traps, the advanced endpoint protection offering we acquired with Sivera in 2020.
We have ambitious and aggressive plan for Traps, and we're very happy to report they were hitting all our milestones. Integration of the 2 companies is going well, and we have completed proof of concept 2018 with major customers who have very strong interest in the unique exploit prevention capabilities in the offering, especially with the added integration with Wildfire. 2019. We will make this new version of Traps generally available in the market by the end of September and look forward to updating you on our progress throughout our new fiscal year. 19.
Our sustainable growth is not only driven by unique and differentiated technology, but also by highly productive and meaningful distribution partnerships. Distribution and expanding routes to market with strategic partners like Westcon Group. In fact, in August, we announced that we will now be doing business with Westcon in over 40 countries. 2019. Our unique and differentiated offerings combined with their global distribution capacity and logistics capabilities will generate significant opportunities for both companies.
2019. We also recently announced the creation of Unit 42, our new threat intelligence team, which will provide actionable security related context to our customers and 2019 and further enhance our ability to prevent future attacks. And finally, we took advantage of a market window to complete a convertible debt offering on very favorable terms. 2019. Our market leading consistent growth is due to the superiority of our unique platform of growth and security.
2019. Unlike other providers in the security market, we have a true platform that is designed and built from the ground up. We provide tightly integrated and automated detection and prevention capabilities 2019 at enterprise class performance levels and have proven to be extremely flexible and extensible in the face of ever changing security needs. We do this for all users, on all devices, on And we believe that our results demonstrate that the market is quickly adopting Palo Alto Networks as the leading enterprise security platform. 2019.
With that, I'll wrap it up and turn the call over to 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, I 2019. I'd like to note that except for revenue figures that are GAAP, all financial figures are non GAAP unless stated otherwise. Now let me start with an overview. 2019.
The enterprise security market is $16,000,000,000 growing to over $19,000,000,000 in 2017 and we're substantially outpacing the growth rates of both our competitors eighteen and our addressable market. We continue to balance investment and growth with profitability and our hybrid SaaS model plays a key role in our success with increasing revenue visibility, $5,000,000 leverage and cash flow generation. Our results highlight the differentiation of our solutions and the power of our financial model. Turning to the numbers. Q4 total revenue grew 59% over the prior year and 18% sequentially to another record of $178,200,000 2019.
For the fiscal year, we reported revenue of $598,200,000 a 51% increase over the prior year. The geographic mix of revenue for Q4 was 68% Americas, 21% EMEA and 11% APAC. Compared to the prior year, 2nd quarter. Product, subscription and support, the three components of our hybrid SaaS model, 2019. All grew very well in fiscal 2014 with particular strength in Q4.
Q4 product revenue of $99,700,000 increased 52% over the 2019 percent sequentially. We saw strong demand across our entire product family with particular strength in the contribution from our highest end appliances, 2018, including the PA-seven thousand and fifty, which is providing greater opportunity in the data center market. When we ship a product, we typically bill and recognize 2019. Our recurring services revenue of $78,500,000 increased 67% over the prior year and 18% sequentially and accounted for a 44% share of total revenue. Recurring services are billed at the time of shipment and revenues recognized over the duration of the contract.
2018. Looking at the 2 components of recurring services, the first component is our SaaS based subscription revenue of 37,600,000 which increased 74% over the prior year and 18% sequentially. We currently have 4 subscription services, 2018. In the Q4, customers purchased on average 2.1 subscriptions per devices compared to 1.9 in Q2 fiscal 2014 and 1.7 in Q4 fiscal 2013, 2019 as they continue to move to our integrated platform approach versus standalone offerings. Support and maintenance revenue, 2019.
The second component of recurring services was $40,900,000 an increase of 62% over the prior year and 18% sequentially. 20. Support and maintenance is priced at approximately 16% of the appliance list price per year. Billings in Q4 were $232,900,000 2018. An increase of 64% year over year and 20% sequentially.
From an annual perspective, total billings for fiscal 2014 2017 $1,400,000 and grew 51% year over year. Product billings were $340,200,000 and grew 65%, accounting for 28% of total billings. Growth in recurring services billings positively impacts deferred revenue. Total deferred revenue in Q4 was $422,600,000 an increase of 70% year over year and 15% sequentially. Short term deferred revenue increased to $259,900,000 an increase of 69% year over year and 20% sequentially.
Total gross margin for Q4 was 76.7%, an increase of 220 basis points compared to last year and 60 basis points sequentially. Our target operating model gross margin range is 73% to 76% as we exit Q4 of fiscal 2016. Product gross margin was 75.7%, an increase of 50 basis points year over year 2019 and a decrease of 60 basis points sequentially. We expect there will be fluctuations in product gross margin, primarily due to product mix, 2019, which was the case this quarter. Services gross margin for Q4 was 78%, an increase of 4.50 basis points year over year 2 10 basis points sequentially due in part to ongoing growth in the contribution from subscription services.
For the quarter, research and development expense was 11.6 percent of revenue, increasing approximately $2,100,000 sequentially $20,800,000 This was primarily due to the addition of Cyvera. Sales and marketing expense for Q4 2019.9 percent of revenue, increasing approximately $21,500,000 sequentially to $92,600,000 The primary driver of sales and marketing expense was sales commissions and end of year accelerators attributable to very strong top line performance in Q4. Which does not match the expense with the revenue in the quarter. General and administrative expense for Q4 was 5.1 percent of revenue, 2018. Decreasing approximately $2,300,000 sequentially to $9,000,000 As a reminder, non GAAP G and A expense eighteen.
Does not include the final IP litigation expense of approximately $2,000,000 related to the settlement announced with Juniper earlier this quarter. Total headcount at the end of the quarter was 1722, up from 1556 at the end of Q3 fiscal 2014. In total, Q4 operating expenses were $122,300,000 or 68.6 percent of revenue. 2018. Operating margin grew 10 basis points year over year to 8.1% and decreased sequentially 100 basis points.
As I mentioned, momentum in the business sequential improvement in non GAAP operating margin in Q1 fiscal 2015. Our effective non GAAP tax rate for 2018. Q4 and fiscal 2014 was 38% and net income for the quarter was approximately $9,100,000 or $0.11 per diluted share using 83,000,000 shares compared with net income of $5,500,000 or $0.07 per diluted share in Q4, 2013. For fiscal 2014, we reported net income of $31,800,000 or $0.40 per diluted share compared with net income of $18,200,000 or $0.24 per diluted share in fiscal 2013. 2019.
On a GAAP basis for the Q4, net loss was $32,100,000 or $0.41 per basic and diluted share. This compares with a Q4, 2013 GAAP net loss of $15,800,000 or $0.22 per basic and diluted share. And for the full fiscal year 2014, we reported GAAP net loss of $226,500,000 or $3.05 per basic and diluted share, compared to GAAP net loss of $29,200,000 or $0.43 per basic and diluted share in fiscal 2013. Eighteen. The increase in GAAP net loss was primarily driven by settlement expenses.
We finished July with cash, cash equivalents and investments of $974,400,000 This includes the $527,700,000 of net proceeds from our offering of convertible senior notes due in 2019, which priced at a 0% interest rate in June. Excluding the $75,000,000 cash settlement payment related to Juniper. Our adjusted cash flow from operations, free cash flow and free cash flow margin for Q4 were $48,900,000 $44,100,000 and 24.8 percent respectively. Capital expenditures in the quarter totaled $4,700,000 For fiscal 2014, adjusted cash flow from operations 2018. Free cash flow were $163,400,000 $127,300,000 respectively.
Capital expenditures for the year totaled $36,100,000 And consistent with the strength we saw in the quarter, 2018, up from $114,800,000 in Q3. DSOs increased sequentially by 3 days to 63 and declined year over year by 9 days. Turning to guidance. In Q1 2015, we expect revenue to be in the range of $178,000,000 to $82,000,000 which represents 39% to 42% growth year over year. We expect non GAAP EPS to be approximately $0.12 per share 2018.
Before I conclude, I'd like to highlight a number of considerations for modeling purposes. While seasonality has been difficult to determine due to strong growth, we believe that the longer term over the longer term fiscal Q2 and Q4 may show our strongest sequential growth in revenue. And as we said previously, in fiscal year 2015, 2019. We expect to invest approximately $25,000,000 or approximately $0.18 to $0.19 per share in Traps, our advanced end cash flow to ramp in the back half of fiscal twenty fifteen and meaningful revenue contributions to begin in fiscal 2016, given the subscription nature of this offering. We expect CapEx for fiscal year 2015 to be in the range of $45,000,000 to $50,000,000 for the year, 2019.
And we expect to exit fiscal 2015 with a low teens non GAAP operating margin and we continue to expect to exit Q4 of fiscal 2016 at a 22% to 25% non GAAP operating margin. The effective tax rate for fiscal 20 15 will be 38% on a non GAAP basis, and our share count is expected to increase by approximately 1% to 2% per quarter. 18. With that, I'll turn the call back over to the operator for Q and A.
2018.
And your first question comes from the line of Phil Winslow with Credit Suisse. Please proceed.
Hi. Thanks guys and congrats on another just a great quarter. You guys provided some commentary on gross margins and obviously gross margins were quite strong this quarter. I wonder if you guys 2019. Just what you're seeing in the pricing environment out there just broadly speaking versus actually just sort of the mix and how that's impacting Your gross margins and how can you think about that going forward here?
Thanks.
Yes, Sal. Thanks for being on the call. As a general matter, what we're 2019. Our ability to maintain premium pricings due to the premium nature of our offering. 19.
We've seen a lot of pricing competition in the market as we continue to gain share from other folks, but it hasn't apparently affected our ability to hold the line on that. And I think you can see that 2019. So that's generally what we're seeing in the market today.
The other thing, Phil, is when you look at our increasing attach rate for subscriptions, The overall total gross margins are benefiting from the tailwind that we're getting from increased subscription attach rates. So the fact that wildfire increased sequentially and we have very high attach rates for threat and URL filtering. Those are all benefits for gross margin.
Great. And then also Just switching gears for a sec to the relationship with VMware. You guys have been talking about it for a couple of quarters, but it seemed like you started to see some traction in that with the VM Series. Wonder if you could just provide some more detail on just what the feedback you're getting from potential customers there? Thanks.
So we sold things in this quarter, including a very nice and large deal at one of the largest brands in the world Their price list is a SKU as well. So the entire VM sales force will have the ability to bring this to market as well. So we feel this is very positive momentum For the technology specifically and just as a general matter, advanced security in the data center space and it's great to be working with the leader there VMware.
Your next question comes from the line of Karl Guy Carstedt with Deutsche Bank. Please proceed.
Hi, it's actually Taz on behalf of Karl. Given that you said that you had strong performance in the PA-seventy-fifty 2019. Can you talk about the ASP trends? Did you see a meaningful improvement in the ASPs in this quarter?
Yes, as a general matter, Taz, from an ASP perspective, which we look at is from an initial sale, those have been going up every quarter very consistently On a modest basis, we spend a lot more time and attention on what the lifetime value of the customer looks like because from a buying pattern perspective, Customers tend to test us, they tend to find a place in the network. Their first purchase is to put us in a network somewhere and see that it actually works. And then the repeat 20 20 basis points, are come faster and consistently higher. But just a general matter ASPs continue to uptick every quarter, which is nice. Got it.
And then
just one follow-up. And if I you had a strong beat this quarter on top line, the links and revenues are really strong. But then when I look at the guide for next quarter. You're guiding almost flat revenues for Q1 versus Q4, which is quite a bit lower than your seasonal growth from Q1 to Q4 Q4 to Q1. You're just being conservative here or were there deals that you thought got to pull forward in this quarter?
First, our guidance methodology is always to give 1 quarter out guidance. And exiting Q4, 2019. We look at a number of things, including pipeline, and pipeline is very strong heading into Q1. When you look at the year over year growth rate 2019. In Q1, we're looking at 39% to 40% year over year growth, which is much higher than a lot of the models that were out there.
Additionally, you think about seasonality in our business and we feel like fiscal Q2 and fiscal Q4 will be 2019. The stronger quarters for us from a seasonal standpoint. And most companies of our size actually see sequential declines in revenue So with that as the backdrop, we feel good about the quarter. The pipeline is good, and we have a lot of momentum and visibility heading into
Q1. Next question please. And your next question comes from the line of Keith Weiss with Morgan Stanley. 2019.
I just want to thank you guys for taking the question and very nice quarter. It's somewhat unusual for a company of your scale to see this type of acceleration in 2019. Our overall business, particularly if you look at the billings growth going to 64% this quarter from 50% growth last quarter. Anything in particular driving that Is it new products turning on? Is it better acceptance within the marketplace?
Anything that you could point us at to sort of explain how business is actually 18. Yes. Thanks, Keith. Yes, so it's all the above. I think what we're seeing here just as a really big picture is, From a security perspective, it's very apparent that I think security spending is growing, that enterprises around the world are recognizing that cybersecurity It's a very lasting and important and probably permanent line item from a spend perspective.
They're seeking out the best possible solutions for that from the most advanced technology providers. And I think that's what our reputation in the market is perceived at today and growing very quickly. So when you think about that, you think about the size of the addressable market, to have the right technology at the right time in history to take care of all these 2019. It's really driving some fantastic growth. And we had a very nice year.
We had a fantastic quarter. And as Stefan said, we got a very nice pipeline going into Q1 as well. So I think we've got a lot of momentum here. Got it. And then as a follow-up on the Flip side of the equation for Stefan.
You reiterated sort of the target for operating margins exiting FY 2015 and exiting FY 2016. Nineteen. And if I'm not mistaken, that's still not reflected in sell side model at least or at least in the consensus expectation. So there's some skepticism about that nineteen. So maybe you could walk us through some of the key components of where we should be expecting that leverage and sort of how you guys push that extra margin out of the business?
Well, margin expansion is going to come primarily from sales and marketing as a percentage of revenue. When you compare where we are today versus what our target is, We are at 51.9 percent ending in Q4 and our target exiting Q4 FY 2016 is to be 33% to 36%. And how we bridge where we are today to where we will be in the future, it comes out of having more productive sales folks that are in the mix. And given the great performance in Q4 and we'll have more ramped salespeople than ramping, exiting Q4 FY 2015 and Q4 FY 2016 that will be very helpful. From a partner standpoint, 2017.
We have Westcon in the mix that will help with global distribution and we will look to get more leverage out of our partner infrastructure. The other Part of the equation is going to be contribution from other partners such as VMware and other partnerships like that that will strike. 20.5%. And when you think about a salesperson and what they can contribute to the company, it's all about adding more tools to the tool bag. And with these partnerships and the global capacity and the great sales and marketing leadership that we have in the company, we feel comfortable that we can get the leverage out of that line.
Every other line Very strong focus on sales and marketing leverage over these next 8 quarters and we feel like we're set up to do it. The final point I'll make 2019. We always take an eye towards balancing growth with profitability. And the fact that we're able to reaccelerate top line growth at these levels, nineteen. And you look at the billings performance, we are able to take down a lot of business on the street in a profitable manner, and we'll continue to look to take share.
And we have 2,000,000 to 7% market share in a $20,000,000,000 market. There's a lot of wood left
to chop. Keith, one other I want to make as well as I think you've written about this a couple of times, but is when you look at our installed base and the repeat purchasing patterns are installed base, what repeat purchases come at a lower cost of sale For us, so the power of that installed base and that LTV numbers we're looking at every quarter will also drive reduced cost of sale over time.
Great. Next question. Your next question comes from the line of Walter Pritchard with Citi. Please proceed.
Hey, thanks. Just had a question around, I think you talked on the call in your prepared remarks about 70% I'm wondering if getting to this point with the 70%, could you sort of compare You must coexist in a lot of accounts and there's some accounts I'm sure where you've had success in displacing in Can you talk about sort of in those large accounts, how you code this when you do code this? Yes, sure. That's a great question, Walter. I think what we've seen consistently and it's really Picking up as Palo Alto Networks is becoming, I think, the more recognized leader here from the most advanced security is that everybody started somewhere, 2019.
So we're coming into the network. We often coexist for a while in the network with whoever the legacy vendor is. And then over time, we gradually displace And that's what you're saying through all the LTV analysis and the customer acquisition. So it's not surprising to be in the network with somebody else. But I think it's a very clear trend that we are taking people out of the network every quarter more and more.
And then just one follow-up on I think you mentioned that Asia was I mean, great performance in U. S. Especially. I think you noted that Asia was up 2.7%, I think it was year over year. Can you talk about just that territory?
I know it's not that large for revenue perspective, but what's going on there? And is there any change 2019. In terms of leadership or something that's driving that? No. On APAC basis is a great market for us and we think It's the last of the markets we entered from an entrance perspective a number of years ago.
So as far as coming 2.5%. And in the quarter, on the 7%
Your next question comes from the line of Rob Owens with Pacific Crest. Please proceed.
Great. Thank you. I was wondering if you can A little bit on the acceleration that you saw in customer acquisition. And is this a function of the Juniper lawsuit funding being behind you? Are you guys coming to market now with a much broader $6,750 or is this a function of replacement cycle and where we are there?
Thanks.
Hey, Rob. I don't think it had anything to do with the Juniper thing. I think that what's 2019. And we saw it consistently every quarter. So our customer count grew every quarter very nicely and by a wide margin in the 4th quarter.
So it was I think what we're just seeing is the recognition of Palatin Networks, particularly on a global basis as not only the technology leader here, but also with the company's ability to execute against that. So when you think about our everything else that's going on in the company outside of technology from all The work that Mark and his team have done from a very mature, repeatable sales process, all the discipline we're bringing in the channels organization, the fact that we Major distributors who are now agreeing to distribute us on a global basis. We just can't be ignored anymore from that perspective. We have, I think, the highest customer satisfaction scores in the industry. All those things are very important.
And from a reputation perspective, Customers talk to each other and what they're hearing is that Palo Alto actually solves very hard problems. The installations get done, the deployments work, the technology works, and that
Great. And can you talk
a little bit about the revenue model in and around the NSX solution? And as we look at micro segmentation, are you moving more of a subscription based model for your traditional firewall?
Yes, Finit. Well, we have 2 we have well, just for NSX we have 2 models there. Perpetual license and the other is per use license. So we've given the customers the option to go either per server or for I'm sorry, for term or for perpetual. And we'll see what happens as it plays out.
Some of that will come down to whether they're more interested 20. But time will tell which of those will be might be more popular. 2019.
Great. Next question. And your next question comes from the line of Brent Thill with UBS. Please proceed.
Mark and EMEA, you've seen several quarters of sequential growth on a year over year basis. And I know you mentioned back at the Analyst Day that You're making good progress in converting some of the distributors over that were on legacy solutions to your platform. I'm just curious eighteen. If you could give us an update and what's happening there? Is that what's happening with this conversion that you're seeing in terms of the acceleration of growth?
And 2019. I had a quick follow-up for you. Yes, yes. That's part of it, Brent. So we have focused in the past, and we mentioned to you guys about distribution being When you think about the size of the company right now, we're actually a pretty large player and growing at excessive rates relative to any of the competition.
And what that's resulted in, I think, is from a distribution and partner perspective is folks that may have had concern about maybe they're going to rep Palo Alto Networks because they're going to upset one of their existing vendors. They just have to get past We're just too big to not be on everybody's flying card at these points, and that's what we're saying. And the announcement with Westcon we announced recently is a perfect example of that. We've increased our capabilities with them to over 40 countries. A lot of those are in Europe.
They've been a great partner in the U. S. Already. So this is expansion 2019. And then, what's happening with distribution, which is the recognition and desire to want to work with Palo Alto as and lead with Palo Alto because that's what the customers clearly want.
Okay. And just from a federal government perspective, we're obviously coming into an important close for their fiscal year. I'm curious if you could maybe just 2019. What you're seeing there this year versus perhaps what you saw last year, if there's any contrast in the overall environment? 2019.
Yes, the Fed market has always been a good one for us. It's a good vertical, I think, if you think about what those folks need and what we provide. From a solution perspective, it's a match 2018. And from a customer perspective, they buy at good rates from us. No vertical is more than 12% of our business, so we're not really dependent on any single vertical, but we have experienced good growth in the Fed space, and we would expect with their year end being in our Q1, we'd see A nice quarter with this federal space as well.
I think if you look historically, call it 2 years ago, a year ago,
2019.
And your next question comes from the line of Jonathan Ho with William Blair. Please proceed.
Good afternoon and strong results. Congratulations. Just wanted to dig in a little bit into the spending environment. I mean, clearly, it looks like things are I just want to get a sense from you guys. Number 1, around the magnitude of the if you can maybe quantify what the spending environment strength 2019.
And number 2, primarily where you're seeing that strength
in terms of verticals?
Yes. I think, Jonathan, on the spending environment side, what I've witnessed over the last couple of years is that security as a line item in the IT budget, I think, has increased just as a budget line item. 2019. And I think there's a growing realization that with that increase, it's going to stay there over time because security is very real, it's very lasting, it's Global in nature and everybody has to deal with that. And I think that's a net positive for everybody.
From a vertical perspective, as a general matter, you usually see some verticals out 2019. I think we're beyond that at this point for cybersecurity. As a general matter, meaning we're seeing Middle America, right, at least these are from our own results, Middle America, very large companies In the Fortune 500, they are never the first to go to newer platforms, are quickly adopting Palo Alto Networks as a platform of choice. I think eighteen. That's an example of what you're going to see across the board where the recognition of cybersecurity is very important and you have to spend on it.
It's going to be persistent over time.
Got it. And then just regarding the Traps and Cyvera opportunity, I mean, can you guys maybe talk
a little bit about sort
of the initial I think you mentioned a lot of interest there and the potential to integrate with Wildfire. But maybe just Talk to what is it that's differentiated and sort of the initial reception from customers based on that differentiation?
Yes. The thing that I think the customers are desiring and we hopefully will be delivering for them is that the endpoints are the Wild West 2019. So I think we've done a nice job on the network and with our cloud based services from a detection and prevention perspective. But unless you have Better protection, the endpoint. That's very porous and a lot of bad stuff is in there.
Most everything in the market today there is really focused on just detecting bad things, right? And then you go into sort of the forensics remediation mode. And what Cybera We have now and bringing to market is something that is actually preventative in nature. It is true real time exploit prevention. And that's an extremely disruptive technology and concept.
I think it's disruptive as what we did with firewalls, the next generation firewall 2019. This is what we're bringing to market with the in the endpoint space with this Traps technology. So you have this real time exploit prevention, and then we integrated it, and this is what we're bringing to market at the end of September, prevention capability and all those thousands of customers that are on wildfire right now and growing leaps and bounds every quarter, and we've connected that. 2019. We've connected the power of what's happening on the network, and now we have the same advanced disruptive capabilities on the endpoint.
And that's what customers are reacting very positively in our POCs with them and the early looks that we've given them sites. It's very, very positive feedback, which is great.
Quarter. Thanks. Next question. And your
next question comes from the line of Raimo Lenschow with Barclays. Please proceed.
Thanks for taking my question. If I can stay on the Xyvera case here, How does it how will it change your sales setup? Because if you look at like if the large organization is probably a different nineteen. How do we do you need a specialized sales force for that? How does that going to work for you?
And then I have a follow on. Yes,
good question, Raimo. 2019. So traditionally, network and security or network and endpoint are different buyers, and that is the case today, and I 2019. I expect that to continue for some time, although I think when you get to CIO, CISO, CTO level, more and more they're talking about securing the enterprise and not drawing 2019. We're just saying, hey, we need to protect the enterprise, right?
So when we come in with a solution that says, here's the network, cloud based services and endpoint, They're all highly integrated and highly automated and they work well together. That resonates extremely well at the C level. However, there are still different buying centers. And even though that may change over 5. We want to be cognizant of that.
So what we're doing from a sales force perspective is building an overlay team for endpoints that are specialists and they know how to 2020. So all of our sales people will be able to tell the story about the strategic solution. And from a customer perspective of interest about endpoints, we I have people coming in primarily on the SE side and plus some sales expertise. They know how to talk to that buyer. So that will be
Okay. And the follow-up question I had is, if you look at Wildfire and Obviously, having gaining really good traction there. But if you look at the market, there's obviously some other big players in there that's having some momentum. What do you see in terms of the customer use cases? How You're getting deployed?
Are you kind of the starting point for guys and then kind of they kind of go up market for some extra stuff? Or how are you fitting in that kind of
2.
Yes, we're seeing a couple of things everyone with the first is that our very large and quickly growing 2019. Our technology is highly integrated and automated in this platform. That is a good sale, like you want that technology and we're seeing that from the installed base. The other thing we're seeing, which is fantastic, and you saw by a wide margin this very high customer acquisition in the quarter, That's a fantastic selling point for us for new customers. So if the top of mind issue for a prospect Advanced Persistent Threats, we're able to come in the door with wildfire and say, this is the market's only detection and prevention capability.
I've got thousands of customers using it to prove it to you from a reference thousand. And when they take a look at wildfire as the entry point, they're often extremely interested in that, and that's what they want to buy. And in the process of that, they're often taking more of the platform. So we are it's not that we're indifferent about how we get into account, but we can serve any use case. And this is a very compelling use case for folks and a top of mind issue.
So it also works on the prospecting side for new customer acquisition.
Great. Next question. And your next question comes from the line of Andrew Nowinski with Piper Jaffray. Please proceed.
All right. Thanks a lot for taking the question today and congrats 2019. The great quarter. Maybe just a follow-up on the gross margin side. I think you said product gross margin was down this quarter due to product mix, though you noted the seventy-fifty 2019.
Given the significant revenue upside, can you just provide more clarity with regard to what products negatively impacted your product gross margins?
Sure, Andrew. We've been pretty clear with The Street around every time we introduce a new product, It will take several quarters to get up to scale in terms of volume. And as volume scale, COGS come down, gross margins go up. With the 7,050, we've been shipping it for about a quarter and a half. So we still aren't yet we still are not yet at scale for the seventy-fifty.
So while it's great from a top line revenue standpoint, It's not at scale yet from a gross margin standpoint. So over time, we should be getting more gross margin benefit out of the seventy-fifty. That's probably the biggest driver. So when we refer to product mix, we had more 7050 sold 2019. And that's great for top line revenue.
It had a slightly depressive impact on gross margins, but we're talking about 60 basis points sequentially. Year over year, we were up. Nineteen. So we feel very good about the discipline around gross margin management and COGS reduction efforts.
Got it. And then can you just talk about the competitive landscape and whether you're anticipating any changes going forward by way of perhaps new product refreshes coming from some of the legacy firewall Thanks.
Yes, Andrew, it's Mark. Yes, I don't see anything on 2019. New product lines like the 7,050, Wildfire enhancements, what we're doing with VMware, the Traps. I think we're pretty far ahead technically. And I haven't seen the competitors do anything Other than revise the traditional legacy technology they have, and that to me doesn't appear to be working in the customer base as you can kind of see 2,000,000 customer acquisition and our growth rates.
Great. Next question please. And your next question comes from the line of Jeff Pfau with Northland. Please proceed.
Yes. Thank you all for taking my question. I'd like to follow-up on Raimo's a little bit from my entry and that is We hear from some of the other APT players. They talk about how they would like to win in the high end. They do acknowledge that they are not
brands in the world are buying wildfire right out of the gate. We're closing lots of 6 figure deals there, even bigger than that. So, I think that's a myth.
Okay. Great. Then secondly, Mark, you and Stefan, you both talked about the data center market as being a very Wrong one for the seventy-fifty. Can you bring us up to date on the service provider side? Is that an area where you're seeing some success?
So they're good customers for that technology. So from a sell through perspective, we've been able to now that we have the offering to sit down and start working road about new opportunities to work with them to sell through, where they're using that technology in order to provide services, say, to SMBs. And that's a Good opportunity for us in the future, but that's in the roadmap planning phases.
Great. Next question. And your next question comes from the line of Gur GOPALPADS with Stifel. Please proceed.
Great. Thank you. With Sivvera, is this a replacement sale? Can you actually operate in similar fashion to the core firewall
2019. Our folks are very willing to take a look at a complementary technology that 20. I have with an idea that perhaps it could be displacement down the road. But our initial selling motion is very much like we did in the early days in the firewall, 20. We have something disruptive.
We have something better. You don't have to. It's not a binary decision. You don't have to take somebody out for us to come in. 2019.
And we like that approach because when we get in and solve a really hard problem for the customer, we have a much better chance of over time of growing inside there and displacing the legacy 2019. But we don't try to make the sale harder than it is by saying this is a binary thing.
Great. And with wildfire, can you talk about how many total customers you have? And then with regard to the new paid customers, are these sort of unpaid customers being upsold to a paid subscription? Thank you.
Yes. So from a total our total paid customers right now is over 3,000, we said, from a total base, which includes the free customers, usually runs about 2,000 ahead of that or so. We have been and you can kind of talk on those numbers, we've been focused very much from a conversion perspective of taking free to pay and And installing those 2 all new customers. So I would say this is we'll continue to have the free offering because there's really no downside to that for us to get somebody that has the technology And then convert to paid. So we'll continue to have that free offering.
But I think you can tell from the momentum here, we're much more focused on the paid customers.
So in an effort to try and get through everyone's questions, 2019. We'd ask that you limit yourself to one question now. It'd be great. Thanks.
And your next question comes from the line of Matthew Niknam with Goldman Sachs. Please proceed.
Hey, guys. Thanks for taking the question and congrats on the quarter. Obviously, customer 2019. I'm wondering if you can talk about how much of your revenue growth is coming from the existing base and maybe the opportunity for incremental upsell you currently see among your customer base. Thanks.
With over 19,000 end customers and we've been adding over 1,000 customers now for Well over 10 quarters. It's been a dynamic where once we land into a customer, it's all about the expansion value. And Mark had mentioned earlier on around the lifetime value metric. We feel like we're, call it, less than 10% penetrated across the entire installed base of customers. 2019.
The other thing is with Cyvera coming into the mix, We'll have 19,000 customers in our installed base to go after in order to cross sell and up sell the opportunity there. So we We feel like we're in the very early innings of a 9 inning game around customer expansion opportunity.
Yes. And I'd say as well, We mentioned this back at the Analyst Day. When you start to think about the power of the installed base and you look at the momentum around the LTV metrics, we anticipate there are multiple
and your next question comes from the line of Greg Moskowitz with Cowen and Company. Please proceed.
2019. Thank you. Mark, it's very clear that you're continuing to benefit from all of the sales investments that were made last year. Just wondering if there are any notable changes that you would point to over the last 6 Yes. Sales cycles tend to be fairly consistent for us, which Some are really short, some are really long, right?
And we've said over the past that they generally average out about 90 days. And that really hasn't I don't anticipate the change either because sometimes you have a customer who's in dire need of something right away 2019. And a lot of our customers that we bring down, we might have worked with for 2 years over the course of many tests and projects and then they
Hey, guys. Mark, obviously, the huge move having bought Segura to get you from network into endpoint. How are you feeling Strategic positioning and whether or not there are other meaningful market segments that you need to get into possibly through acquisition and whether or not there are attractive targets out there.
I've never felt better about our position in the market, Michael, particularly with the addition of Traps to bring the endpoint. And with that, we often 2020. I don't anticipate that becoming a rectangle. I think that we have all the coverage we need from an enterprise security perspective. With that said, we look at the product roadmap, it's very aggressive.
But from an addressable market opportunity, it's massive, right? It's like $19,000,000,000 $20,000,000,000 in single digit percentage. We don't have to buy market share. We don't have to buy 2nd
quarter. Your next question comes from the line of Catherine Trebnick with Dougherty and Company. Please proceed.
Thanks for taking my question. I hope you can hear 2019. I have a quick one on managed services, Mark. It seems like 451 just did a study that said that there is an uptake in midsized companies 2019. And then what would your product roadmap match to 2a net service offering.
Thanks.
Yes, there's a couple of ways on that, Catherine. I mean, right now what's happening in a lot of situations is there are Service providers who run things on an outsourced network basis. So I mean the simplest form of that is a managed service offering where like a large telco, for example, 2019. Is running a network on behalf of another company, sometimes not even small companies, sometimes pretty large companies, and we do very well there. So All those large systems integrators and service providers are very familiar with our technology and there's a lot of cases where they're running that technology on behalf of the customer.
Usually they're running probably the entire network of the customer on behalf of the customer and we're the security solution in there. 2018.
Great. We have time for one more question, please. And the
final question comes from the line of Daniel Ives with FBR Capital Markets. Please proceed.
Great. Thanks, guys. This is Jim Oren for Dan Ives. Just wondering if you can talk a little bit about any changes that you might have seen in
We said in the past with the litigation that there's really we hadn't seen in the market that people were not going to buy from Palo Alto Networks as a result of that litigation. And I think our numbers historically have shown that, the customer acquisition, the LTV, revenue growth, I think everything supports that 2018. And then when you look today, there's really no evidence that we were wrong about that. So I don't think that really had any impact
2019. Great. Thanks, everyone. I'll turn it over to Mark for a few ending thoughts.
Great. Thanks. And thanks for being on the call this afternoon, everybody. We had a really great quarter and a great 2019. We're energized by the opportunity as we move into our fiscal 2015 and beyond.
I want to take one more opportunity to thank the Palo Networks team for all their hard work