Good day, ladies and gentlemen, welcome to the fourth 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 listen-only mode. Later, we will conduct a question and answer session. If at any time during the call you require operator assistance, please press star followed by zero, and the operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Kelsey Turcotte. Please proceed.
Great. Thank you. Good afternoon and thank you for joining us on today's conference call to discuss Palo Alto Networks' fiscal fourth quarter and FY 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 Steffan Tomlinson, Chief Financial Officer. This afternoon, Palo Alto Networks issued a press release announcing the results for its fiscal fourth quarter and full year ended July 31st, 2014. 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 FY 1st 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 in our market share, expectations relating to our acquisition of Cyvera, demand for and adoption of our products and services, expected availability and efficacy of new products, and our competitive position. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future.
We undertake no obligation to update these statements after this call. For more detailed descriptions of these risks and uncertainties, please refer to our quarterly report on Form 10-Q filed with the SEC on June 3rd, 2014, and our earnings release posted a few minutes ago on our website. Also, please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in the supplemental financial information that can be found in the investors section of our website, located at investors.paloaltonetworks.com. Before I turn the call over to Mark, we would like to inform you that we expect our FY 1st quarter 2015 earnings conference call will be held after the market closes on Monday, November 24th.
In addition, we would like to invite you to participate in an investor webinar on Tuesday, September 30th at 1:30 P.M. Eastern, 10:30 A.M. Pacific, to discuss our next generation security platform and technology differentiation. Webcasting information can be found on our website at investors.paloaltonetworks.com. With that, I'll turn the call over to Mark.
Thanks, Kelsey, thanks everyone for joining us this afternoon. I'm happy to be here today to share with you our results for our fiscal fourth quarter and full fiscal year 2014. We continue to see a large amount of momentum in the business, Q4 was strong across the board. We delivered record billings and revenue, with revenue for the fourth quarter growing 18% sequentially and 59% year-over-year to $178 million, along with Q4 non-GAAP earnings per share of $0.11. It was a great end to a very good year for us, I'd like to thank the Palo Alto Networks team for their hard work and our customers and partners for their ongoing support.
Our results continue to demonstrate our ability to significantly outgrow both our competitors and the market, and we are more confident than ever that our platform architecture and strategy is unique, compelling, and far ahead of the competition. 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 customers by a wide margin, and we are now privileged to serve more than 19,000 global customers, up from 13,500 at the beginning of the fiscal year. This customer base is highly diversified across verticals and geographies and includes more than 850 of the Global 2000 and 75 of the Fortune 100. On this list are some of the largest high tech, financial services, government, manufacturing, and service provider organizations in the world who entrust their security to our unique platform and superior solutions.
New customer wins this quarter include a large U.S. retailer, 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 security provider, 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 pace of new customer acquisition, the size of commitments from our customers is growing, underscoring our momentum in the market and the power of our platform. To make our top 25 customer list in the fourth quarter, a customer had to have spent a minimum of $5.6 million in lifetime value, a good measure of the power of our land and expand model. This threshold is a more than 10% increase over last quarter and a more than 50% increase over last year.
If I expand this list to our top 100 customers, each has spent a minimum of $2.3 million on our solutions, up 20% sequentially and 75% year-over-year. Customers across our installed base continue to make larger and larger commitments to us as they remove legacy technologies and point products in favor of our next-generation security platform. On the product side, we generated significant traction with our newly introduced security offerings. Sales of our PA-7050 chassis significantly exceeded our internal forecast as our customers move to adopt Palo Alto Networks as the platform of choice in high-throughput environments like the data center.
We also see 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 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 north-south and east-west traffic protection. On the scripts and services side, we had another great quarter with WildFire, the market's only advanced persistent threat detection and prevention offering. In Q4, we added a record number of paid customers, bringing our total paid base to over 3,000. We achieved this footprint in just under two 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. We're not resting on our laurels. To further extend our technology leadership in the APT solution space, we recently reduced the average time from APT detection to prevention to approximately 15 minutes, down from approximately 28 minutes last quarter. 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 automated capabilities in our platform versus standalone point products. The newest addition to our platform is Traps, the advanced endpoint protection offering we acquired with Cyvera in the spring. We have ambitious and aggressive plan for Traps, and we're very happy to report that we're hitting all our milestones.
Integration of the two companies is going well, and we have completed proof of concepts with major customers who have very strong interest in the unique exploit prevention capabilities in the offering, especially with the added integration with WildFire. 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. Our sustainable growth is not only driven by unique and differentiated technology, but also by highly productive and meaningful distribution partnerships. I'd like to thank our global partners for their dedication and support in fiscal 2014, as they're key to our success. We will continue to focus on increasing 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. Our unique and differentiated offerings, combined with their global distribution capacity and logistics capabilities, will generate significant opportunities for both companies. 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 further enhance our ability to prevent future attacks. Finally, we took advantage of a market window to complete a convertible debt offering on very favorable terms. The net proceeds of just over $525 million add additional resources to our already strong balance sheet. In hindsight, this was a very productive quarter and year for us. Our market-leading, consistent growth is due to the superiority of our unique platform approach to security.
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 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 all parts of the network, all the time. We believe that our results demonstrate that the market is quickly adopting Palo Alto Networks as the leading enterprise security platform. With that, I'll wrap it up and turn the call over to Steffan.
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, all financial figures are non-GAAP unless stated otherwise. Let me start with an overview. The acceleration of customer acquisition, billings, revenue, and adjusted free cash flow underscore the power of our land, expand, and retain strategy. The enterprise security market is $16 billion, growing to over $19 billion in 2017. We are substantially outpacing the growth rates of both our competitors and our addressable market. We continue to balance investment and growth with profitability. Our hybrid SaaS model plays a key role in our success with increasing revenue visibility, 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 $178.2 million. For the fiscal year, we reported revenue of $598.2 million, 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, the Americas grew 74%, EMEA grew 54%, and APAC grew 7%. As in previous quarters, we saw broad strength across a wide range of verticals. We did not have any end customer concentration. Product, subscription, and support, the three components of our hybrid SaaS model, all grew very well in fiscal 2014, with particular strength in Q4. Q4 product revenue of $99.7 million increased 52% over the prior year and 19% sequentially.
We saw strong demand across our entire product family, with particular strength in the contribution from our highest-end appliances, including the PA-7050, which is providing greater opportunity in the data center market. When we ship a product, we typically bill and recognize all of the revenue at the time of shipment. Our recurring services revenue of $78.5 million increased 67% over the prior year and 18% sequentially. Accounted for a 44% share of total revenue. Recurring services are billed at the time of shipment, and revenue is recognized over the duration of the contract. Looking at the two components of recurring services, the first component is our SaaS-based subscription revenue of $37.6 million, which increased 74% over the prior year and 18% sequentially. We currently have four subscription services, each priced at 20% of the appliance list price per year.
In the fourth quarter, customers purchased on average 2.1 subscriptions per devices, compared to 1.9 in Q2 fiscal 2014 and 1.7 in Q4 fiscal 2013, as they continue to move to our integrated platform approach versus standalone offerings. Support and maintenance revenue, the second component of recurring services, was $40.9 million, an increase of 62% over the prior year and 18% sequentially. Support and maintenance is priced at approximately 16% of the appliance list price per year. Billings in Q4 were $232.9 million, an increase of 64% year-over-year and 20% sequentially. From an annual perspective, total billings for fiscal 2014 were $771.4 million and grew 51% year-over-year. Product billings were $340.2 million and grew 40%, accounting for 44% of total billings. Support billings were $216.7 million and grew 59%, accounting for 28% of total billings.
Subscription billings were $214.5 million and grew 65%, accounting for 28% of total billings. Growth in recurring services billings positively impacts deferred revenue. Total deferred revenue in Q4 was $422.6 million, an increase of 70% year-over-year and 15% sequentially. Short-term deferred revenue increased to $259.9 million, an increase of 69% year-over-year and 12% 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%-76% as we exit Q4 of fiscal 2016. Product gross margin was 75.7%, an increase of 50 basis points year-over-year and a decrease of 60 basis points sequentially. We expect there will be fluctuations in product gross margin, primarily due to product mix, which was the case this quarter.
Services gross margin for Q4 was 78%, an increase of 450 basis points year-over-year and 210 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% of revenue, increasing approximately $2.1 million sequentially to $20.8 million. This was primarily due to the addition of Cyvera. Sales and marketing expense for Q4 was 51.9% of revenue, increasing approximately $21.5 million sequentially to $92.6 million. 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. It is worth noting that we incur the full commission expense when the order is booked, but recognize revenue for the majority of an order ratably over the term of the contract, which does not match the expense with the revenue in the quarter.
General and administrative expense for Q4 was 5.1% of revenue, decreasing approximately $2.3 million sequentially to $9 million. As a reminder, non-GAAP G&A expense does not include the final IP litigation expense of approximately $2 million related to the settlement announced with Juniper earlier this quarter. Total headcount at the end of the quarter was 1,722, up from 1,556 at the end of Q3 fiscal 2014. In total, Q4 operating expenses were $122.3 million or 68.6% of revenue. 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 drove especially strong performance this quarter, which amplified the typical commission-related seasonality we anticipate at fiscal year-end. We expect to see sequential improvement in non-GAAP operating margin in Q1 fiscal 2015.
Our effective non-GAAP tax rate for Q4 and fiscal 2014 was 38%, and net income for the quarter was approximately $9.1 million or $0.11 per diluted share using 83 million shares, compared with net income of $5.5 million or $0.07 per diluted share in Q4 2013. For fiscal 2014, we reported net income of $31.8 million or $0.40 per diluted share, compared with net income of $18.2 million or $0.24 per diluted share in fiscal 2013. On a GAAP basis for the fourth quarter, net loss was $32.1 million or $0.41 per basic and diluted share. This compares with a Q4 2013 GAAP net loss of $15.8 million or $0.22 per basic and diluted share.
For the full fiscal year 2014, we reported GAAP net loss of $226.5 million or $3.05 per basic and diluted share, compared to GAAP net loss of $29.2 million or $0.43 per basic and diluted share in fiscal 2013. The increase in GAAP net loss was primarily driven by settlement expenses. We finished July with cash equivalents, and investments of $974.4 million. This includes the $527.7 million 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 million cash settlement payment related to Juniper, our adjusted cash flow from operations, free cash flow, and free cash flow margin for Q4 were $48.9 million, $44.1 million, and 24.8%, respectively. Capital expenditures in the quarter totaled $4.7 million.
For fiscal 2014, adjusted cash flow from operations and adjusted free cash flow were $163.4 million and $127.3 million, respectively. Capital expenditures for the year totaled $36.1 million. Consistent with the strength we saw in the quarter, linearity in Q4 tracked slightly better than both Q3 and the prior year period. Our accounts receivable balance was $135.5 million this quarter, up from $114.8 million in Q3. DSO has increased sequentially by three days to 63 and declined year-over-year by nine days. Turning to guidance. In Q1 2015, we expect revenue to be in the range of $178 million-$182 million, which represents 39%-42% growth year-over-year. We expect non-GAAP EPS to be approximately $0.12 per share, using 83 million-85 million shares. 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 over the longer term, fiscal Q2 and Q4 may show our strongest sequential growth in revenue. As we said previously, in fiscal year 2015, we expect to invest approximately $25 million, or approximately $0.18 to $0.19 per share in Traps, our advanced endpoint protection offering, which we acquired with Cyvera. Pricing for Traps will be on a per endpoint basis, and we expect billings and free cash flow to ramp in the back half of fiscal 2015, 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 million-$50 million for the year. We expect to exit fiscal 2015 with a low teens non-GAAP operating margin. We continue to expect to exit Q4 of fiscal 2016 at a 22%-25% non-GAAP operating margin. The effective tax rate for fiscal 2015 will be 38% on a non-GAAP basis. Our share count is expected to increase by approximately 1%-2% per quarter. With that, I'll turn the call back over to the operator for Q&A.
Ladies and gentlemen, if you have a question at this time, please press *1 on your phone. Again, for any questions, simply press *1. If your question has been answered or you would like to withdraw your question, please press *2. Please limit all questions to one question and one follow-up. Again, please press *1. Your first question comes from the line of Philip Winslow with Credit Suisse. Please proceed.
Hi, thanks guys, congrats on another just great quarter. You guys provided some commentary on gross margins. Obviously, gross margins were quite strong this quarter. I wonder if you can give us a sense of 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.
Phil, thanks for being on the call. As a general matter, what we're seeing from a pricing perspective is our ability to maintain premium pricings due to the premium nature of our offering. 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 across the line in the margin side. We have a nice increase in margins. Discounting for us has been very disciplined and consistent over time. 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.
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. 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. I wonder if you could just provide some more detail on just what the feedback you're getting from potential customers there. Thanks.
The feedback's been really strong. What we've seen in early previews of this, about six months ago, was an extremely high level of interest from folks across the board when we would talk about it and be able to show them POCs. We're in the market this quarter with the solution. We actually sold things in this quarter, including a very nice and large deal at one of the largest brands in the world, who was one of the first customers for the joint solution, which was fantastic. From a VMware perspective, my understanding is that within the next 45 days, this solution will be on their price list as a SKU as well. The entire VM sales force will have the ability to bring this to market as well. We saw this as very positive momentum for the technology specifically.
Just as a general matter, advanced security in the data center space, and it's great to be working with the leader there, VMware.
Next question, please.
Yes. Your next question comes from the line of Karl Keirstead 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-7050 appliance this quarter, can you talk about the ASP trends? Did you see a meaningful improvement in the ASPs in this quarter?
Yeah. 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 purchases come faster and consistently higher. Just a general matter, ASPs continue to uptick every quarter, which is nice.
Got it. Just one follow-up then. You had a strong beat this quarter on top line. Billings and revenues are really strong. 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 Q4 to Q1. Are you just being conservative here, or were there deals that you thought got pulled forward in this quarter?
First, our guidance methodology is always to give one quarter out guidance. Exiting Q4, 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 in Q1, we're looking at 39%-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 the stronger quarters for us from a seasonal standpoint. Most companies of our size actually see sequential declines in revenue from Q4 to Q1. With that as the backdrop, we feel good about the quarter. The pipeline is good. We have a lot of momentum and visibility heading into fiscal Q1.
Next question, please.
Your next question comes from the line of Keith Weiss with Morgan Stanley. Please proceed.
Thanks. 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 their overall business, particularly if you look at the billings growth going to, I think, 64% this quarter from sub 50% growth last quarter. Anything in particular driving that acceleration? Is it new products turning on? Is it a better acceptance within the marketplace? Anything that you could point us at to sort of explain how business is actually getting better as you guys get bigger?
Yeah. Thanks, Keith. Yeah, 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 is 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. I think that's what our reputation in the market is perceived at today and growing very quickly. 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 problems for enterprises, it's really driving some fantastic growth. We had a very nice year. We had a fantastic quarter.
As Steffan said, we've got a very nice pipeline going into Q1 as well. I think we've got a lot of momentum here.
Got it. Then as a follow-up on the flip side of the equation for Steffan. You reiterated sort of the target for operating margins exiting FY 2015 and exiting FY 2016. If I'm not mistaken, that's still not reflected in sell-side models, at least, or at least in the consensus expectations. There's some skepticism about that operating margin leverage. 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% ending in Q4, and our target exiting Q4 FY 2016 is to be 33%-36%. 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. Given the great performance in Q4, we'll have more ramped salespeople than exiting Q4 FY 2015 and Q4 FY 2016. That will be very helpful. From a partner standpoint, 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 we'll strike. 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. With these partnerships and the global distribution 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 in our operating margin structure is at or near our target model. We will have a very strong focus on sales and marketing leverage over these next eight quarters, and we feel like we're set up to do it. The final point I'll make is we always take an eye towards balancing growth with profitability.
The fact that we were able to re-accelerate top-line growth at these levels, and you look at the billings performance, we were able to take down a lot of business on the street in a profitable manner, and we'll continue to look to take share. We have 5% market share, 5%-7% market share in a $20 billion market, there's a lot of wood left to chop. Keith, one other point I'd make as well is, I think you've written about this a couple of times, but when you look at our install base and repeat purchasing patterns or our install base, repeat purchases come at a lower cost of sale for us. 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% of each of the Fortune 100 or Fortune 500 are customers. I know that your largest or I guess your second-largest competitor in Check Point has similar stats, although a bit higher. I'm wondering if, getting to this point with the 70%, could you sort of compare and contrast? You must coexist in a lot of accounts, and there's some accounts I'm sure where you've had success in displacing incumbents. Can you talk about sort of in those large accounts, how you coexist when you do coexist?
Yeah, 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, right? Everybody's got a legacy vendor, in a lot of cases, those are our Check Point. In almost every situation we come into, as we've said, we're displacement sale. 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 them. That's what you're seeing through all the LTV analysis, and the customer acquisition. It's not surprising to be in a network with somebody else. I think it's a very clear trend that we are taking people out of the network every quarter more and more.
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 7%, I think it was, year-over-year. Can you talk about just that territory? I know it's not that large from a revenue perspective, but what's going on there, and is there any change in terms of leadership or something that's driving that?
No, an APAC basis is a great market for us, and we think a fantastic growth opportunity. It's the last of the markets we entered from an entrance perspective a number of years ago. As far as coming up the curve on getting distribution capabilities, feet on the street, it's the least mature of our theaters. In the quarter, on the 7% growth, you have to look back to last quarter. We had a really great Q4 last year, so the compare was pretty tough there, but we really like that market.
Great. Next question, please.
Your next question comes from the line of Rob Owens with Pacific Crest. Please proceed.
Great. Thank you. I was wondering if you can touch a little bit on the acceleration that you saw in customer acquisition. Is this a function of the Juniper lawsuit finally being behind you? Are you guys coming to market now with a much broader product set with the 7050? Or is this a function of the replacement cycle and where we are there? Thanks.
Hey, Rob. Yeah, I don't think it had anything to do with the Juniper thing. I think that what's happening, and we saw it consistently every quarter. Our customer count grew every quarter very nicely, and by a wide margin in the fourth quarter. It was fantastic. I think what we're just seeing is the recognition of Palo Alto Networks, particularly on a global basis, as not only the technology leader here, but also with the ability to execute against that. When you think about 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 have 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. From a reputation perspective, customers talk to each other, what they're hearing is that Palo Alto actually solves very hard problems. The installations get done, the deployments work, the technology works, that the customers continue to buy more and more from us. That's a self-fulfilling thing for us, which we just continue to grow off of our really, really high customer satisfaction. We have rapidly positive fans, our customers, which is great to have that kind of fan base, and they do a lot of the selling for us.
Great. Can you talk a little bit about the revenue model in and around the NSX solution as we look at micro-segmentation? Are you moving to more of a subscription-based model for your traditional firewall?
Well, just for NSX, we have two models there. One is a perpetual license, and the other is a per-use license. We've given the customers the option to go either per server or for term or for perpetual. We'll see what happens as it plays out. Some of that will come down to whether they're more interested in CapEx models or OpEx models. Time will tell which of those might be more popular.
Great. Next question.
Your next question comes from the line of Brent Thill with UBS. Please proceed.
Mark, in EMEA, you've seen several quarters of sequential growth on a year-over-year basis. I know you mentioned back at the analyst day that you were making good progress in converting some of the distributors over that were on legacy solutions to your platform. I'm just curious if you could give us an update in what's happening there. Is that what's happening with this conversion that you're seeing in terms of the acceleration of growth? Had a quick follow-up for you.
Yeah. That's part of it, Brent. We have focused in the past, and we mentioned to you guys about distribution being very important from a capacity perspective. 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. What that's resulted in, I think, is from a distribution and partner perspective, is folks that may have had a 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 that. We're just too big to not be on everybody's line card at this point. That's what we're seeing. The announcement with Westcon we announced recently is a perfect example of that. It has 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. This is expansion outside of our core market with one of the best in the world. That's a perfect example of what is happening with distribution, which is the recognition and desire to want to work with Palo Alto and lead with Palo Alto, because that's what the customers clearly want.
Okay, just from a federal government perspective, who are obviously coming into an important close for their fiscal year, I'm curious if you could maybe just highlight what you're seeing there this year versus perhaps what you saw last year, if there's any contrast in the overall environment.
Yeah. The Fed market's 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 made in heaven, 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. We have experienced good growth in the Fed space, and we would expect with their year-end being in our first quarter, we'd see a nice quarter with the federal space as well. I think if you look historically, call it two years ago, a year ago, I think it seems to be settling out.
There was all kinds of anxiety from budgets and sequestration, all those sorts of things that has substantially subsided in that market over the last year, which is a benefit to everybody, but us as well.
Great. Next question.
Your next question comes from the line of Jonathan Ho with William Blair. Please proceed.
Good afternoon. Strong results. Congratulations. Just wanted to dig in a little bit into the spending environment. Clearly it looks like things are picking back up again. 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 looks like, and number 2, primarily where you're seeing that strength in terms of verticals.
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. 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. I think that's a net positive for everybody. From a vertical perspective, as a general matter, you usually see some verticals out ahead of other ones on being on the cutting edge of technology. I think we're beyond that at this point for cybersecurity.
As a general matter, meaning we're seeing Middle America, at least these are from our own results, Middle America, very large companies in the Fortune 500, that they are never the first to go to newer platforms, are quickly adopting Palo Alto Networks as a platform of choice. I think 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, is going to be persistent over time.
Got it. Then just regarding the Traps and Cyvera opportunity, can you guys maybe talk a little bit about sort of the initial customer reception? I think you mentioned a lot of interest there and the potential to integrate with WildFire, but can you maybe just talk to what is it that's differentiated and sort of the initial reception from customers based on that differentiation?
Yeah. 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, cybersecurity-wise right now. I think we've done a nice job on the network and with our cloud-based services from a detection and prevention perspective. Unless you have better protection at the endpoint, that's very porous and a lot of bad stuff gets in there. Most everything in the market today there is really focused on just detecting bad things. Then you go into sort of the, call it, the forensics remediation mode. What Cyvera has, and we have now and bringing to market, is something that is actually preventative in nature. It is true real-time exploit prevention. That's an extremely disruptive technology and concept.
I think it's disruptive as what we did with firewalls and next-generation firewall space, is what we're bringing to market in the endpoint space with this Traps technology. 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, into WildFire. Now you have all the fantastic benefits of WildFire from a malware detection prevention capability and all those thousands of customers that are on WildFire right now and growing at leaps and bounds every quarter, and we've connected that. We've connected the power of what's happening on the network, and now we have the same advanced disruptive capabilities on the endpoint. That's what customers are reacting to very positively in our POCs with them in the early looks that we've given them. It's very positive feedback, which is great.
Thanks. Next question.
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 Cyvera case here, how will it change your sales setup? Because if the large organization is probably a different buying center, do you need a specialized sales force for that? How does that going to work for you? I have a follow-up here.
Yeah, good question, Raimo. Traditionally, network and security or network and endpoint are different buyers, and that is the case today, and 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 a technology distinction between those two things. They're just saying, "Hey, we need to protect the enterprise," right? 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 is still different buying centers, and even though that may change over time, we want to be cognizant of that.
What we're doing from a sales force perspective is building an overlay team for our endpoints that are specialists, and they know how to sell to that buying center. All of our salespeople will be able to tell the story about the strategic solution. From a customer perspective of interest about endpoints, we have people coming in primarily on the SE side and plus some sales expertise. They know how to talk to that buyer. That'll be a joint call to go get that closed for hopefully the entire solution set that we sell.
Okay. Oh, yeah. The follow-up question I had is, if you look at WildFire and obviously gaining really good traction there, but if you look at the market, there's obviously some other big players in there that are having some momentum. What do you see in terms of the customer use cases? How are you getting deployed? Are you the starting point for guys and then they go up market for some extra stuff? How are you fitting in that kind of competitive environment there? Thank you.
We're seeing a couple things there, Raimo. The first is that as our very large and quickly growing installed base, what we're selling is a platform play, right? This is a strategic solution that can take care of all your cybersecurity needs across your entire enterprise, and WildFire is a very important part of that. If you're an existing Palo Alto Networks customer and you see the WildFire technology as highly integrated and automated into this platform, that is a good sale. 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, is that's a fantastic selling point for us for new customers.
If the top-of-mind issue for a prospect is 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 perspective." 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. In the process of that, they're often taking more of the platform. It's not that we're indifferent about how we get into an account, but we can serve any use case, and this is a very compelling use case for folks and a top-of-mind issue. It also works on the prospecting side for new customer acquisition.
Great. Next question.
Your next question comes from the line of Andy Nowinski with Piper Jaffray. Please proceed.
All right. Thanks a lot for taking the question today, and congrats on the great quarter. Just to 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 PA-7050 significantly exceeded your internal forecast. 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'll take several quarters to get up to scale in terms of volume. As volume scale, costs come down, gross margins go up. With the PA-7050, we've been shipping it for about a quarter and a half. We still are not yet at scale for the PA-7050. While it's great from a top-line revenue standpoint, it's not at scale yet from a gross margin standpoint. Over time, we should be getting more gross margin benefit out of the PA-7050. That's probably the biggest driver. When we refer to product mix, we had more PA-7050 sold, 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. We feel very good about the discipline around gross margin management and cost reduction efforts.
Got it. 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 vendors? Thanks.
Yeah, Andrew, it's Mark. Yeah, I don't see anything on the market front that's changing the game at all except us. We continue to innovate. I think every year we've brought out a number of really nice product innovations, new product lines like the 7050, 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. That, to me, doesn't appear to be working in the customer base, as you can see from customer acquisition and our growth rates.
Great. Next question, please.
Your next question comes from the line of Jeff Kvaal 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, that is, when 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 as strong in the low end. I'm wondering if you feel as though your own wins place yourself generally in the low end of that market, or is that generally across your customer base?
Hey, Jeff, it's Mark. It's across the customer base. We're seeing ever-increasing strength there. When I look at customers we've sold into from an installed base perspective, it's a very high percentage of those Fortune 100 and Global 2000 customers we mentioned earlier. When I look at new customer acquisition, some of the largest brands in the world are buying WildFire right out of the gate. We're closing lots of six-figure deals there, even bigger than that. I think that's a myth.
Okay, great. Secondly, Mark, you and Steffan, you both talked about the data center market as being a very strong one for the 7050. Can you bring us up to date on the service provider side? Is that an area where you're seeing some success?
Yeah. It's still early from a 7050 perspective in the service provider market, in the sense of those folks buying it for other purposes than for their own networks, right? As large enterprises, they're no different than other folks about wanting the most advanced security and high throughput environments. They're good customers for that technology. From a sell-through perspective, we've been able to, now that we have the offering, to sit down and start working roadmaps with them about new opportunities to work with them to sell through, where they're using that technology in order to provide services, say, to SMBs. That's a good opportunity for us in the future, but that's in the roadmap planning phases.
Great. Next question.
Your next question comes from the line of Gur Talpaz with Stifel. Please proceed.
Great. Thank you. With Cyvera, is this a replacement sale or can you actually operate in similar fashion to the core firewall market, where you can come in behind a previous AV solution, then sort of eventually displace them down the road?
Yeah, Gur, I think it's exactly like that, right? What we're seeing from a customer perspective is folks very willing to take a look at a complementary technology than what they have with an idea that perhaps it could be displacement down the road. Our initial selling motion is very much like we did in the early days in the firewall, which is we have something disruptive. We have something better. It's not a binary decision. You don't have to take somebody out for us to come in. We like that approach because when we get in and solve a really hard problem for the customer, we have a much better chance over time of growing inside there and displacing the legacy provider. We don't try to make the sale harder than it is by saying this is a binary thing.
Great. With WildFire, can you talk about how many total customers you have? With regard to the new paid customers, are these sort of unpaid customers being upsold to a paid subscription? Thank you.
Our total paid customers right now is over 3,000, we said, from a total base, which includes the free customers. Usually runs about 1,000 ahead of that or so. You can kind of tell from those numbers, we've been focused very much from a conversion perspective of taking free to paid and installing those to all new customers. I would say we'll continue to have the free offering because there's really no downside to that for us to get somebody to test the technology, and then convert to paid. We'll continue to have that free offering. I think, as you can tell from the momentum here, we're much more focused on the paid customers.
In an effort to try and get through everyone's questions, we'd ask that you limit yourself to one question now. That'd be great. Thanks.
Your next question comes from the lineup, Matthew Niknam with Goldman Sachs. Please proceed.
Hey, guys. Thanks for taking the question and congrats on the quarter. Obviously, customer growth remains really strong. 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.
Yeah. With over 19,000 end customers, 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. Mark had mentioned earlier on around the lifetime value metric. We feel like we're, call it, less than 10% penetrated across the entire install base of customers. As we continue to sell more appliances, subscriptions, and maintenance, that opportunity will only grow over time. The other thing is, with Cyvera coming into the mix, we'll have 19,000 customers in our install base to go after in order to cross-sell and upsell the opportunity there. We feel like we're in the very early innings of a nine-inning game around customer expansion opportunity.
Yeah. I'd say as well, Matthew, 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 billions of dollars in the install base right now without adding another customer that over time we can unlock.
Great. Next question.
Your next question comes from the line of Gregg Moskowitz with Cowen and Company. Please proceed.
Thank you. Mark, it's very clear that you're continuing to benefit from all the sales investments that were made last year. Just wondering if there are any notable changes that you would point to over the last six months or so with regard to sales cycles.
Sales cycles tend to be fairly consistent for us, in that some are really short, some are really long, right? We've said over the past that they generally average out about 90 days. That really hasn't changed for us, and I don't anticipate it to change either, because sometimes you have a customer who's in dire need of something right away, and a lot of our customers that we bring down, we might have worked with for two years to get them over the course of many tests and projects, and then they make a large purchase. Generally, 90 days is about the average.
Thank you.
Sure.
Your next question comes from the line of Michael Turits with Raymond James. Please proceed.
Hey, guys. Mark, obviously, a huge move having bought Cyvera to get you from network into endpoint. How are you feeling about 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. With that, we often show customers a triangle sort of picture of the network, the cloud-based services, and the endpoint. 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. If we saw things that could accelerate us on that, we would be interested buyers in those sorts of things. From an addressable market opportunity, it's massive, right? It's like $19 billion, $20 billion in single-digit percentage. We don't have to buy market share. We don't have to buy customers. We don't have to buy distribution capabilities. We're in a very good spot.
Great. Next question.
Your next question comes from the line of Catharine Trebnick with Dougherty & Company. Please proceed.
Thanks for taking my question. I hope you can hear me. I have a quick one on managed services, Mark. It seems like Forrester just did a study that said that there's an uptake in mid-size companies wanting to outsource due to the complexity and the number of threats. Then what would your product roadmap map to a managed service offering? Thanks.
There's a couple ways on that, Catharine. One, right now what's happening in a lot of situations is there are service providers who run things on an outsourced network basis. I mean, the simplest form of that is a managed service offering where a large telco, for example, is running a network on behalf of another company. Sometimes not even small companies, sometimes pretty large companies. We do very well there. All of 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. We're the security solution in there.
Great. We have time for one more question, please.
The final question comes from the line of Daniel Ives with FBR Capital Markets. Please proceed.
Great. Thanks, guys. This is Jim Warren for Dan Ives. Just wondering if you can talk a little bit about any changes that you might have seen in just customer sentiment over the last quarter now with the Juniper litigation behind you.
Yeah. Jim, this is Mark. We said in the past with the litigation that we hadn't seen in the market that people were not going to buy from Palo Alto Networks as a result of that litigation. I think our numbers historically have shown that. Customer acquisition, LTV, revenue growth, I think everything supports that statement. When you look today, there's really no evidence that we were wrong about that. I don't think that really had any impact at all.
Great. Thanks, everyone. Turn it over to Mark for a few ending thoughts.
Great. Thanks. Thanks for being on the call this afternoon, everybody. We had a really great quarter and a great year. 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 Alto Networks team for all their hard work and their support of our customers and partners as we continue our march to become the global leader in enterprise security. Thanks for your time.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.