Good day, ladies and gentlemen, and welcome to the 3rd Quarter 2014 Palo Alto Networks Incorporated Earnings Conference Call. My name is Denise, and I'll be the operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being quarter for replay purposes.
I would now turn the conference over to your host for today, Kelsey Turcotte. Please proceed.
Good afternoon, and thank you for joining us on today's conference call to discuss Palo Alto Networks' fiscal Q3 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. Good afternoon, Palo Alto Networks issued a press release announcing the results for its fiscal Q3 ended April 30, 2014, and its settlement of litigation with Juniper Networks.
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 4th quarter, target operating model gross margin range, accelerating growth for all of our subscription services, expectations, plans and strategies relating to our acquisition and integration of Cyvera demand and adoption of our products and services, including demand for both our higher end appliances and wildfire products as well as our subscription services 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 these 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. And we undertake no obligation to update these statements after this call.
For a more detailed description of these risks and uncertainties, Please refer to our quarterly report on Form 10 Q filed with the SEC on February 24, 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 and reconciliation of these non GAAP financial measures to GAAP Financial Measures 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 4th quarter and full year fiscal 2014 earnings conference call will be held after the market closes on Tuesday, September 9.
And with that, I'll turn the call over to Mark.
Thank you, Kelsey, and thank you, everyone, for joining us this afternoon. I'm pleased to report another strong quarter of growth. In Q3, revenue grew by 49% year over year to approximately $151,000,000 billings grew 46% year over year to approximately $194,000,000 and we delivered non GAAP EPS of $0.11 These results were driven by continued strong product demand, robust services growth and our rapid market share gains in the large and growing strategic enterprise security market. We also announced this that we have settled all existing litigation with Juniper. I'll provide some more details about that later in my remarks.
The enterprise security market has been changing rapidly in the last few years Due to a number of factors, the increasing number and sophistication of attacks has shown enterprises everywhere that cyber attacks are a global, growing and lasting phenomenon. This realization has led Enterprises to focus on the negative consequences of relying on legacy thinking, legacy technology and point products to try to secure their networks, And it is driving the demand for disruptive platform solutions that do not just detect and remediate, but those that can protect and prevent. We believe that the solution for this challenge is a highly integrated and automated platform that enables enterprises to safely use all applications on their networks And to quickly turn unknown threats into known threats, thereby protecting the enterprise from today's most sophisticated attacks. We built this platform, starting with our next generation firewall, then continued with our next generation threat intelligence cloud that allows us to quickly add high value services to the platform. And Now with the addition of Cybera, we will provide complete protection for the enterprise by extending prevention technology to the endpoint.
This next generation enterprise security Point Solutions and when combined provide a truly unique solution to address modern security requirements. And we saw multiple proof points of the value of our platform in the 3rd quarter. We reported record financial results. We achieved the highest rate of new customer acquisition in the company's history. We held highly successful Ignite user conference with close to 2,000 attendees, a 100 plus percent increase from last year.
We closed the acquisition of Savara. For the 3rd year in a row, Gartner positioned us in the leaders quadrant of the Magic Quadrant for Enterprise Network Firewalls. We added more than 600 paid Wildfire subscribers and now have over 2,000 paid subscribers. We were named Technology Partner of the Year by VMware for our integration with their NSX platform, And we saw very high interest in our new PA-seven thousand and fifty chassis as well as a large number of inbound requests for demonstrations of our Cyvera endpoint enterprise security platform is disrupted and solves very complex and important problems that customers face today. A few examples of what we did in the Q3 around this are a 7 figure deal to Secure the entire network of 1 of America's largest airports where wildfire was a key differentiator, a win at a premier sports network production to secure video traffic where we sold PA-seven thousand and fifty's into the data center and PA-five thousand's into every stadium and strategic wins for Firewall projects at a large electric utility in Japan as well as Asia's largest casino.
These are just a few examples of how we are serving our customers' needs. Our customer base grew to well over 17,000 in the 3rd quarter, including continued growing penetration rates into the Global 2,000. This high rate of new customer acquisition plus demonstrated repeat selling into the installed base is the basis for our land and expand growth model. On the expand side of the equation, in Q3, a top 25 customer had to have spent a minimum of $5,000,000 Lifetime value to make our top 25 list. And our lifetime value measured by the increase from their first purchase grew to 24 fastest growing areas for us both in landing new customers as well as expanding in the installed base is with Wildfire, our subscription service for detection and prevention of Sophisticated Cyber Techs.
On any given day, we typically analyze more than 280,000 unique files with wildfire Importantly, we then quickly deliver preventative signatures to protect against newly discovered malware through content updates every 30 minutes to paid wildfire subscribers. This not only provides very fast prevention from future attacks to the customer where the new attack originated, but it also provides proactive protection and prevention from future attacks entire paying customer base. No other company in the security market can provide this level of detection and prevention, and we'll soon provide additional and unique prevention capabilities The endpoint with the integration of the Cybera endpoint protection technology. Endpoints are currently the most exposed part of enterprise that threats and oftentimes the entry point onto the network for the most damaging and sophisticated attacks. Legacy endpoint security technology is very far behind the curve solving this problem and newer endpoint technologies focused primarily on detection and forensics.
However, customers want to be proactive rather than just reactive in And we see time and again they're hungry for prevention capabilities. That's why we spent more than a year looking at the endpoint security market and ultimately acquire Sivera due to its unique ability to prevent endpoint attacks at the critical exploit phase. We are moving quickly to integrate as our next generation firewall and cloud based subscription services are today in the network security market. In addition to customers wanting our prevention platform approach at the endpoint, we are also seeing Increasing demand in the data center, which is our fastest growing market segment. That's why we recently introduced the PA-seven thousand and fifty, our high end chassis, which is designed to serve the data center in service provider markets.
Early demand for the chassis is high, and we anticipate this being a strong contributor for our future growth. On the go to market front, we have been able to attract and develop career paths for some of the best sales talent in the industry, and we continue to optimize our distribution channels globally. Our customer satisfaction scores are well above industry average, and we know that satisfied customers buy more, which you can see from our lifetime value numbers. We will continue to refine territories and add to our major account team to constantly improve the focus that enterprise customers receive from their sales teams and our value added partners. Before I turn the call to Stefan, I want to provide some details around the settlement we reached with Juniper.
Under the terms of the agreement, the parties have dismissed All existing litigation against each other, have licensed the patents in dispute to each other for the life of the patents and have entered into a covenant not to sue each other patent infringement for 8 years. In addition, we will pay Juniper a onetime settlement amount of $175,000,000 As we said from the beginning of this case, we do not believe that we infringe on any Juniper patents, and we still believe this to be the case. However, over the course of the last two and a half years, we've spent a large amount of time, money and other resources on this litigation. While we are confident of our position in the case, we believe With that, I'll wrap it up and turn the call over to Stefan. Stefan?
Thank you, Mark. Before I get into the details of Q3 results and Q4 guidance, I'd like to note that except for revenue figures that are GAAP, all financial figures are non GAAP unless stated otherwise. A reconciliation between GAAP Non GAAP results can be found in our press release and on our Investor Relations website. Q3 results once again underscore the power of our land expand and retain strategy and our hybrid SaaS model. We added a record number of new customers in Q3 and continue to expand within our existing customer base, where we drive repeat purchasing through sales of our products and recurring services.
Every time we sell or renew a subscription service, it's equivalent to selling a new product, except that we've chosen a SaaS model Deliver and monetize it. In addition to better visibility into future revenue streams, growth in our subscription services has contributed to ongoing gross margin improvements. All of these factors were catalysts for record billings, revenue and deferred revenue in Q3. Q3 total revenue grew 49% over the prior year and 7% sequentially to another record of 150,700,000 mix of revenue was 66% Americas, 21% EMEA and 13% APAC. Compared to the prior year, the Americas grew 56%, EMEA grew 40% and APAC grew 32%.
We saw broad strength across a wide range of verticals and we did not have any end customer concentration. Product subscription and The 3 components of our hybrid SaaS model all grew well in the quarter. Product revenue of $84,100,000 increased 38% over the prior year and 4% sequentially. We saw a nice adoption across a number of our different appliance families in the quarter with particular strength in the contribution from our higher end appliances, including our newly introduced PA-seven thousand and fifty, which is providing greater expansion opportunity in the high end data center market. Our recurring services revenue of $66,600,000 increased 64% over the prior year and 11% sequentially and accounted for a 44% share of total revenue.
Looking at its two components, our SaaS based subscription revenue of $32,000,000 increased 71% over the prior year and 11% sequentially. On a year over year basis, we expect that subscription revenue will continue to grow at a faster pace than product revenue. Support and maintenance revenue of $34,600,000 increased 58% over the prior year and 10% sequentially. Compared to the prior year, billings in Q3 grew 46% to $193,900,000 Total deferred revenue increased 68 percent to $367,900,000 and short term deferred revenue increased 73% to $231,200,000 Total gross margin was 76.1%, an increase of 200 basis points compared to last year and 80 basis Point sequentially. Our target operating model gross margin range is 73% to 76% as we exit Q4 FY 2016.
Product gross margin was 76.3 percent, an increase of 200 basis points year over year and 80 basis points sequentially. The sequential increase was due in part to contribution from our higher end appliances and COGS reduction efforts. As a reminder, we expect there will be fluctuations in our product gross margin, primarily due to mix and the timing of new appliance shipments. Services gross margin was 75.9%, an increase of 2 20 basis points year over year For the quarter, Research and development expense was 12.4 percent of revenue, increasing approximately $800,000 sequentially to 18,600,000 Sales and marketing expense was 47.2 percent of revenue, increasing approximately $5,300,000 sequentially to $71,100,000 New headcount additions, commissions and expenses associated with both RSA and our annual Ignite user conference contributed to the increase. General and administrative expense was 7.4 percent of revenue, increasing approximately $1,400,000 sequentially to 11,300,000 As a reminder, this does not include our IP litigation expense with Juniper, which was $4,700,000 in Q3 'fourteen.
Total headcount at the end of the quarter was 1556, up from 13.75 at the end of Q2 'fourteen. This includes the addition of 47 members of the Sivera team. In total, operating expenses were 101,000,000 7% of revenue. Operating margin increased approximately 60 basis points year over year to 9.1% and increased sequentially 10 basis points. Our effective tax rate for Q3 was 38%.
Debt income for the quarter was approximately $8,700,000 or 0 point of $5,300,000 or $0.07 per diluted share in Q3 'thirteen. Turning to our GAAP results and the Juniper settlement. As Mark mentioned, we will pay Juniper a one time settlement amount that is valued at approximately $175,000,000 This consists of a cash payment of $75,000,000 stock issuance of $70,000,000 or approximately 1,100,000 shares of common stock and a warrant to purchase $30,000,000 or approximately 460,000 shares of common stock at a nominal exercise price. The warrant will be subject to mark to market accounting beginning in Q4 FY 2014 and continuing through no later than Q2 FY 2015. It will exclude this non cash expense from our future non GAAP results.
The accounting for the $175,000,000 value of the settlement is as follows: $113,700,000 is a one time expense reflected in our Q3 'fourteen GAAP results. In Q4 'fourteen, the remaining $61,300,000 is an intangible asset on the balance which will be amortized ratably over a 5 year period into product cost
of goods sold. Because this is
a non cash charge, we'll exclude expense from our future non GAAP financial results. On a GAAP basis, net loss was 139,100,000 dollars per basic and diluted share for the quarter, which includes the $113,700,000 expense
associated with the
settlement with Juniper. This compares with the Q3 'thirteen GAAP net loss of $7,300,000 or 0 point We finished April with cash, cash equivalents and investments of $471,900,000 This takes into account the $82,600,000 of cash consideration we to acquire Cybera, which closed during the fiscal Q3. Cash flow from operations, free cash flow and free cash flow margin expenditures in the quarter totaled $5,900,000 Q3 tracked to typical linearity was more back end loaded than Q2. Our accounts balance was $114,800,000 this quarter, up from $86,100,000 in Q2, which resulted in DSOs increasing to 60 days, up from 57 days in Q2. Let me now move to modeling assumptions and our guidance.
I'd like to highlight several assumptions. First, our strong performance has muted expected seasonality in the business. Going forward, we would expect Q1 and Q3 to reflect a more typical seasonality pattern. 2nd, as we stated previously, we're making the necessary investments in Cybera and we anticipate spending $3,500,000 in Q4 $14,000,000 $25,000,000 in FY 'fifteen. 3rd, from a cash planning standpoint, we expect full year capital to be in the range of $42,000,000 to $47,000,000 in FY 'fourteen.
And as a reminder, the cash payment of $75,000,000 to Juniper in Q4 'fourteen will impact both cash flow from operations and free cash flow. Finally, our guidance excludes expenses related to the Juniper IP litigation. Given our settlement with Juniper, after Q4 'fourteen, we no longer expect to incur IP litigation expenses related to this matter. Turning to guidance. In Q4 'fourteen, we expect revenue to be in the range of $158,000,000 to $162,000,000 which represents 41% to 44% growth year over year.
We expect non GAAP EPS to be approximately $0.10 to $0.11 per share using 81,000,000 to 83,000,000 shares. This includes shares issued in the acquisition of Cybera as well as the equity component of our settlement with Juniper. With that, I'll turn the call back over to the operator for Q and A.
Our first question comes from Raimo with Lynch Chiao, Barclays. Please proceed.
It's Saket here for Raimo. Thanks for taking my questions and congrats on getting the settlement behind you. Question for Mark. Now that the settlement is behind you, do you see any changes to your product roadmap maybe over the next 1 to 2 years?
Hey, Saket. Thanks for being on the call. No, our roadmap is fairly well set right now for the next 12 to 18 months. We're really focused on The 7,050, which we just launched, the next edition of Wildfire getting NSX out the door, which is already GA, but there'll be some improvements to that later on with VMware with the NSX And also probably some more device changes we'll make in the next 12 to 18 months as far as introducing some new parts of the family and devices. And then the big picture, obviously, is getting the Xivera integration done so that we have the Xivera as part of the platform That will be done by calendar year end.
So we like the roadmap that we have right now for the next 12 to 18 months.
Great. That's helpful. And then for my follow-up,
Sure. The subscription attach rate in the quarter was well over 35 percent, so good growth in attach rate. We had added over 600 paid wildfire subscribers. So the paid Base is over 2,000 subscribers now. And I think about that in a number of ways.
The paid subscribers against the total Base of our customers, which is well over 17,000 is more than 10%, right, of the customer base using the paid for portion of this technology today. And we think that will continue to grow over time or a different way to think about it is there's no reason to think that wildfire Can't grow to the size of our URL web filtering business or threat prevention business over time, and it looks like it's heading in that direction.
Next question please.
Our next question comes from Keith West with Morgan Stanley. Please proceed.
Yes. Thank you guys for taking the question and very nice quarter. I want to talk a little bit about wildfire. You guys mentioned wildfire being a key differentiator in getting into some large deals. Can you talk to us a little bit about Competitive environment around wildfire seems like a lot of vendors coming into this space with a advanced versus threat solution or a sandboxing solution.
How do you see that competitive environment It's putting out and where are you doing best in terms of against competitors?
Sure, Keith. Thanks for being on the call. Yes, so wildfire is Very important to us as a differentiator. And I think it's moving through phases. The first phase for us was as a door opener in order to be able to speak around Cybersecurity Advanced Persistent Threats at the highest levels in companies.
We got a lot of traction from that. It's into the selling phase now, meaning that Going very, very nicely. Tax rates are high. The reps really like to talk about it. The customers are very interested in it.
And I think it's where it's Settling out now is it's part of our platform. And just like the other components of the platform, it's the entire platform working Together, that's really unique and disruptive in the market, and that is what differentiates us from all the competition, not just All those components working very, very well together in one automated platform approach and soon to have Cyvera in that as well. But the highest level, the difference between us and everybody else in the market who's got a solution like this is the difference between detection and prevention. Everybody either has or say that has advanced detection capabilities for advanced persistent threats. We're unique in having the most advanced detection capabilities, but because we are the firewall, the ability to do prevention as well.
And That's absolutely critical for companies as they think about protection and prevention.
Got it. And then maybe A follow on on that. In terms of sort of partnerships around wildfire, it was some of the you guys talked about the detection Jim, but remediation is different part of the equation. Can you talk to us about sort of how your partnerships are evolving around there to sort of fill out that type of
Yes, sure. We're very open to for partnerships across the board because the way we think about the business, not just wildfire, What's right for the customer, right? And customers definitely want the ability to do detection, which we do. They definitely want the ability to do prevention, which we're unique in. And some stuff we'll get through, right?
So the idea that you'd want to have some forensics capabilities and remediation capabilities is true. There's nothing wrong with Over time, that should abate as prevention capabilities get better, but that's definitely a need in the market today. And we're very open to partnerships Across the board with folks who can do those sorts of things for customers. Even in some competitive examples, we have We're partnered with some of the endpoint technology providers and other folks in the market because that's what customers are asking for. We want to deliver the solution Looking for.
Great. Next question please.
Thanks. Our
next question comes from Kare Keirstead with Deutsche Bank. Please proceed.
Hi, thanks. One for Mark and maybe one for Stefan. Mark, First of all, congratulations on getting that IP litigation risk off the company and the stock. And actually, that's where I wanted You've disclosed in the press release the financial settlement, but I just wanted to ask you what it means more broadly for Palo Alto Networks. In terms of potentially getting management focused 100% on the business now, To the extent that you had a workaround team in place, I presume those resources are freed up.
Maybe it takes away An issue that your competitors are throwing at customers and bid situations. Can you give a perspective on maybe what some of the indirect benefits might be for getting this out of the way.
Yes. Sure, Carla. I think there's the very tangible benefits of we're not spending 1,000,000 of dollars a quarter in legal expenses On a go forward basis and from a management perspective, the burden of all this is primarily on myself, Stefan and our General Counsel, Jeff Drew, we did a fantastic job in all this, by the way, and not much beyond that. So we have had a lot of focus on litigation, but frankly, primarily from investors, and I understand why. It's an important thing, but that's where a lot of our time and attention was put from management And then from our legal team's perspective, obviously, they didn't spend a lot of time on this as well.
Below that or around that on the sales We have very, very few questions about the litigation from the minute it was filed up until today, even less so over time. And it doesn't appear to have impacted our selling whatsoever. If that happened, it's behind us now, but it doesn't look like it's the case. From an engineering perspective, The team's been very just heads down on the product road map, really not worrying about the litigation aspect of trying to do engineering work around it because the I'm sorry, and we don't think we infringe in the 1st place. So the team the engineering team hasn't really felt that since at all.
Okay, great color. And if I could follow-up Stephane, the maintenance support growth 58%, still tracking at a very healthy clip and well above what the product revenue growth is Growing or is. So I'm just curious, what are the factors propping up that support maintenance line? Is your renewal rate increasing? Perhaps a little color there.
Thank you.
Sure. So maintenance has been Proforma had a very high clip. It grew 10% sequentially, 50% year over year. It's a differentiated product that we have, and You can't really buy a platform and an appliance without buying maintenance services. And the value added engineering that we're putting into releases and fixes, etcetera.
Customers have to have maintenance. So the attach rate on maintenance Our
Next question please. Our next question comes from Phil Winslow with Credit Suisse. Please proceed.
Hi, thanks guys and congrats on a great quarter and the settlement as well. Just two quick questions. First on just the pricing environment out there. You guys had another strong gross margin quarter Coming ahead of our numbers in The Street. Just wondering if you could comment on just the price environment that you're seeing out there?
Then just one follow-up to that.
Yes, sure, Phil. The competition has been pretty aggressive on pricing for quite some time in response to our success. So It's not any news that they continue to price very, very aggressively. We've been able to hold the line on that for a long time now as we've reported every quarter, as you can see From the gross margin discounting, this is the premium security technology in the market today with the platform approach, and people And they're willing to pay for that. On the gross margin side, on the product side, we had a really nice lift from Our higher end appliances in the 70,050 and the 5000 and even the 3000 series, which have very nice gross margins.
So that's what you saw in this quarter.
And Just an add on point to that, we really look at our product portfolio as a platform. And when you have a hybrid SaaS model With high attach rates on subscription services and you look at the benefits of the total gross margin, we are seeing a tailwind around the benefit that we're getting from subscriptions. So we're holding the discounting line on product. We're selling more higher end appliances and the power of the subscription model is coming into play here.
Great. Thanks, guys. And then just a quick follow-up with SIBER. Just hoping to get to some early feedback from customers as you've been talking to them
It's really great. We have a lot of inbound requests from our existing customer base, particularly the large customers, I'm wanting to understand how the technology works. I think they've got a good sense of what our description was of it being very different. Now they want to touch it. They want to test it.
There's a lot of interest in doing POCs with them, and we're going to manage that very So the ability to support it and sell it in the field. So we have a plan around all that. You'll see a lot of activity in the fall around this product coming to market.
Great. Next question please.
Sure. And also to limit yourself to one question and one follow-up. Our
Mark, from a demand driver standpoint, just wondering if you have an updated view that you can share with us regarding magnitude or timing of a possible network refresh
Greg, it's hard to tell, right? Those are inexact things. Our best way to gauge that kind of thing, as it Turns out, I think, it's coming from our major accounts team. So we've put a tremendous amount of effort, as you've heard, in the major accounts in the last 18 months or so. And our uptick The G2000 accounts, we're adding a couple dozen or more every quarter, right?
So we're just we're we've got over 800 and some G2000 accounts now. We keep adding more every quarter, and we get visibility into those accounts on a long term road map perspective. And these are really big companies, long term road maps. So we're getting our own sense What they're thinking about doing and the level of interest in moving to next generation technology, I'd say it's very high generally, specifically the things we're doing on the virtualization side, almost 100% hit rate onto our openers and conversations Around that and then obviously cybersecurity is top of mind for everybody as well. It's again back to the platform approach.
We do all those things in the platform. So Instead of thinking about things as firewall refresh cycles, I think people are thinking about moving to the next generation of technology in the face of the really complex Things they have to face today, and I think we're a big beneficiary of that and are going to continue to do that in the future.
Okay, that's helpful. And then just a follow-up for Stefan. You mentioned that you have now over 2,000 paid users of Wildfire. Just wondering how many total Wildfire customers exist today encompassing both free and paid?
Hey, Greg, it's Mark. We have close to 4,000 total customers today. And like I said, we added over 600 paying customers quarter.
Great. Next question please.
Our next question comes from Rob Owens with Pacific Crest. Please proceed.
Great. Thank you very much. A couple of questions. You mentioned this was the highest rate of customer acquisition in the company's history. Just maybe a little bit more color there.
Securities obviously been in the spotlight. There's Speculation around what this refresh could look like. And coming off the quarter with the highest customer acquisition in history, maybe just some color around what forward pipe looks
Yes, sure. So well, well over 1,000 customers, that's like this is our 9th or 10th quarter, and I can't lose But over 1,000, but well over 1,000 in this quarter and like I said, the highest one we've had. Very importantly around that, Rob, as well as it's great to feed the funnel at the top under the land part of this, but the expand side is equally as interesting for us. So the number we share On the LTV of the top 25 just continues to go up into the right. This is the 2nd quarter or 3rd quarter.
I have to go back and look at the data, but Every top 25 customer purchased again in the quarter, right? So with the way we think about that is over 17,500 total customers today, All of which continue to do repeat purchasing patterns following the trends of those top 25. So just a lot of additional sales to be made to the existing base and then throwing in 1,000 plus new customers every quarter. It's just a great model.
And then as we approach Q4 here, and I know you've done for Q4, any high level thoughts around 2015 and maybe We should see product revenue at a minimum?
We're going to be updating folks On modeling assumptions for FY 'fifteen at the end of the Q4 call, but I can tell you that our goal is to continue to outpace the market in terms of growth rate and in the competitive landscape. We're definitely committed to continuing to prudently and consciously invest in parts The business that had a good ROI, and you can see the results that we've been posting. So our plan is to continue Grow at a very brisk pace in FY 2015. Including on the product side.
Great. Our next question comes from Jonathan Ho with William Blair. Please proceed.
Hey, guys. Congratulations on a strong quarter. Just wanted to get a sense As you've released this new VMware product, can you give us a sense of maybe what that opportunity looks like and What type of contribution you're looking for, maybe not for the fiscal year, but just sort of in the short run and how that would potentially scale over time?
Hey, Jonathan. Definitely a tailwind for us, I think, just from my own experience talking to prospects about this and existing customers and what I hear It is, like I said, close to 100% hit rate on when you have this conversation with folks that you are definitely invited back for the next meeting VMware customers today. VMware has put a lot of time and effort into the NSX platform itself, which certainly helps us since the so we're integrated into that platform. They have trained up specialized sales folks who are training their entire sales team on this as well. The product is now GA.
And As far as all of the field work that needs to be done with their folks, comp plans, all that kind of stuff, my understanding is that's all completed And they will be bringing that to market in an organized way in June. So I would expect just from the pipeline we're At interest level, this is going to be a good thing for us as it plays itself out through the end of this calendar year and into our into calendar 15. It's a fairly complex sale, right? This is virtualized data center stuff, so it's we do not have 30 day sales, these are longer We definitely have the benefit of having VMware really organized and rallied around this as well in addition to our own sales team. So I think good things are going to
Great. And just as a follow-up, in terms of your international distribution opportunity, clearly, the Americas region is showing some strength How do you guys think about sort of seeing similar growth materialize in terms of the international components over time?
Yes, the international markets are great markets for us. As you can see from our numbers, we're growing as a company at very, very High rates, I would say, at a pretty good scale rate. When you look at the Americas, which is the largest contributor to this from a revenue perspective and its growth rates, Fantastic. And then you look at the international side, which is less mature in the sense of when we came to market with that, the development of the teams and And all the things you do to grow markets, all growing at very nice rates as well. But I think On an absolute dollar basis, if you get outside the United States here and look at just how many dollars we bring in the quarter, say, in APAC, for example, versus what All the companies in that region spend on security technology.
It's just the tip of the iceberg. So we're committed to the international markets They're performing well for us, and we think they're going to be great contributors over the long haul for
us.
Next question, please.
Our next question comes from Eric Suppiger with JMP. Please proceed.
Congratulations on a good quarter. First off, just how much of a factor has the litigation been in June and February in terms of your sales execution? And how much do you think that will getting that settlement behind you will change your sales prospects going forward?
Yes, Eric. As I was saying a little earlier, it doesn't appear that we really had any impact from a selling perspective from the litigation. The number of times that I got to ask about it by somebody in the field to talk to customers, Stefan, or maybe 10, right, in two and a half years. So the bottoms up Feedback from the field is this has not been a significant issue from going to market. The numbers wouldn't suggest it is either.
So but if it were in a way that was not visible to us, that's now removed and that's a good thing for us.
Okay. And then Stefan, Can you give us a little sense for what we can expect from the cash from operations outlook for next quarter, but what we should think about for CapEx?
Yes. So what we ended up giving was guidance on CapEx, which for the full year, we're looking at $42,000,000 to 40 $18,000,000 of CapEx. So there will be some additional CapEx in Q4. As far as cash flow from operations or Free cash flow, we would expect to deliver healthy free cash flow, cash flow from operations, You're going to have to exclude the $75,000,000 payment to Juniper, kind of looking at pro form a cash flow So we expect to continue to drive healthy free cash flows. And part of the hybrid SaaS All that we have has been a differentiator for us from a business model standpoint.
Our free cash flow margins tend to be, call it, anywhere between 8% to 12% higher than our operating margins. And that's because how we license
and how we go to market. So
we think that free cash flow and cash flow from our office will continue to grow healthily. Okay.
Very good. Great.
Next question please.
Great. Our next question comes from Gray Powell with Wells Fargo. Please proceed.
Great. Thanks for taking the question. Can you talk about the integration of your Morta acquisition with Wildfire? I believe some of Moritz capabilities were going to be introduced into the next version of Wildfire. And can you just update us there on the timing and the additional functionality that Morita brings.
Yes. So the Morita acquisition for us was about getting 2 things. 1 was an extremely talented group of guys Who have a lot of expertise and have built technology about the second thing, which is really the subtle needs of lateral movement of APTs and malware through networks and which is becoming more and more important in the data center, right, as things kind of find their way in there. So they're moving quietly through the network into the data center. So when we use the terms detection and prevention, this would fall really into the detection side of if something was in your network, being able To see it was there so that you can then protect against it, right?
And that technology is well along in its path and integration into the whole platform, including Wildfire. And by the end of this calendar year, so we should see that in the next release of wildfire early next year. But we're excited about the technology we got there and it does a lot of great things around very sophisticated detection. Got it. Thank you very much.
Thanks, Greg.
Great. Next question, please.
Our next question comes from Walter sir Pritchard with Citigroup. Please proceed.
Hi. Stefan, wondering you talked about strong sales of the 7,050. Can you talk about if you had Supply constraints or any troubles fulfilling demand on that product during the quarter?
No. Thankfully, we didn't. We had very good product demand planning cycles that we
go through. We have
a stellar operations and product management team We're able to forecast, and we have very close customer intimacy. So we had a good handle on What the demand was coming into the quarter. So we were well situated to fulfill that demand.
Got it. And then just on the attach rates, you talked a bit about the wildfire attach rates. I'm wondering, looking at some of the more mature subscriptions like URL And IPS and GlobalProtect, are you at a point there where those have sort of steadied out and plateaued in terms of the attach you're seeing coming in On new purchases or are we still seeing those escalate as the quarters go on?
Interestingly enough, Filling up, each of the subscriptions that we had this quarter all grew sequentially, which was nice. As we've mentioned Before, threat prevention and filtering are already at a very high rate, so kind of the sequential growth rate will, by definition, be just a little bit less. But Yes. As you point out, it's really the power of the platform and the subscriptions are a big differentiator and we're selling an integrated appliance, Which is a big differentiator for us.
Great. Next question, please.
Our next question comes from Daniel Ives with FBR Capital Markets. Please proceed.
Yes, thanks. Look, obviously, You guys are doing a great job on larger deals. Maybe you could sort of talk about, maybe you've seen a difference strategically in terms of recent attacks like cards and eBay in terms of just going up to a C level, a Board level
in terms of fast track on some of these cybersecurity initiatives?
Hey, Dan. Yes, I think it's definitely the case because of these high profile, very well publicized Folks are seeing that the ability to have a conversation around cybersecurity, advanced persistent threats and then very importantly, the high differentiation The platform that can do protection and prevention doesn't hurt us at all. So these things are all play to our favor. Our sales guys, they definitely Understand how to take advantage of that and they've been doing that very successfully in the field.
Okay. Thanks.
Thanks, Dan.
Great. Next question, please. Our next question comes from Scott Zeller with Needham and Company. Please
Proceed. Thank you. Is there any color you
can offer us on the number of opportunities where customers are standardizing on Palo Alto as a platform.
Yes. Hey, Scott. I would say lots and lots of cases of standardization. The reason for the pause there for a second was that when companies standardize on Palo Alto, particularly large companies, that is the beginning Multiyear process of putting Palo Alto all throughout the enterprise, all throughout the network, and that takes time. That's Interesting.
That's one of the reasons you see on the LTV the top 25, our ability to come on the phone every quarter and say that number goes up, everybody is buying Every quarter, that those companies begin with an initial purchase for something and then ultimately or in a lot of cases say, we are going to make Call out the networks, the backbone of our enterprise network security, and then that manifests itself through all these repeat purchases. Only the customer knows what the big picture road map around those things look like. We get the visibility into that in our strategic planning with them and then what we see on a quarterly basis when they're making when they're putting in orders against what they've shared with us from those decisions. But I think when you just think about over 60% of our base today is using us as a firewall, over 75 Our initial sales are as a firewall. That's a great indicator of standardization when you become the firewall for an enterprise.
Thank you.
Thanks, Pat.
Great. Next question, please.
Our next question comes from Brent Thill with UBS. Please proceed.
Mark, you mentioned the data center is the fastest growing segment in the business. I'm curious if you could just give us a mile marker where you think you are and If you had some achievements you'd like to put on the board in that segment, how would you look at that over the next year?
I think it's early innings around that, Brent, for two reasons. The first is that for the data center itself, having the next generation capabilities bring to that has been very interesting for customers for some time and the ability in the north south traffic to now do that at Plus, just opens up tons of possibility for existing customers who are already using us and new customers Where they were looking for that throughput requirement. And then the greenfield opportunity in the data center is really in the virtualization space with our own VM Series with the NSX Technology for East West Protection. That's a use case that is fairly new for companies, really starting to understand they have They provide that same level of next generation security to their own traffic in their data center. That's not something that they had to do before ABTs became so Preflon, for example.
So it's the combination of those two things, which is very high throughput north south, east west greenfield opportunity, but being the only company that can do the next generation platform capabilities in both of those instances It's a tremendous opportunity for us. And like I said, I think it's early innings in all that for us.
Okay. And for Stephane, on the subscription attached, just more to Walter's question on, if you look through each The big buckets, is there a simple attach rate you
could give us on each
of those to just give us a sense of where each of those are at or you not going in that level of detail?
Yes. Historically, what we've done is, semiannually, we give the total metric, and we don't get into each Specific subscription. So as of Q2, we had an attach rate of about 1.9 across the as an average across the 4 subscriptions. And that metric has increased over the last several periods. And the reason why it's increasing is customers are continually looking for an integrated solution So they don't have to have a proliferation of devices behind the firewall.
So the elegance of the platform with the subscriptions Horizonte, a big differentiator.
Great. Next question?
Our next Question comes from shaul Eyal with Oppenheimer. Please proceed.
Thank you. Hi, good afternoon, guys. Congrats on a good quarter on the settlement. You had a very solid quarter in APAC. Have you been displacing anyone as some of your peers have been seeing some softness in that region?
Yes, Shaul. Just as a general matter, you should assume that regardless of where we are in the world, almost 100% of our sales are displacement sales. Generally, somebody is losing for us to win, and we do that at very high rates, and it doesn't matter around the geography. I mentioned just a few things we did in APAC in the last quarter, the largest casino in Asia, for example, luxury utility in Japan, both are displacements in those cases. But again, almost Everything we do is a displacement.
Fair enough. Stefan, are you looking any different on cash utilization in light of the settlement? Obviously, you've got plenty of cash even when embedding the settlement. Currency is probably about to get stronger near term. Any views you can share with us on that point?
We feel good with our cash position right now. And I think as a differentiator to our business model relative to some other folks out there, we've been able to generate over $80,000,000 of free cash flow fiscal year to date. We'll look to keep our options open, but we feel comfortable with our cash position and our ability to continue to generate
Great. We have time for one last question, please.
Our last question comes from Fred Grieve with Nomura.
Hey, guys. Congrats on the settlement. I hopped on a bit late, so apologize if this has already been asked. But could you give us some update on the Sysvera acquisition? I'm sort of curious whether this is having any impact on customer conversations or bringing more customers potentially to you.
Yes, Fred. Yes, it's been very positive for us. So as far as selling the product, we'll be doing that in a very organized approach in the fall of this year, meaning having it integrated into the platform, having the salespeople know how to sell it and then support personnel who can support that. Putting that aside for a second, so this is another instance of being able to have really strategic conversations enterprise security platform. So we have the firewall, we have the cloud and now we have the endpoint as well, and that's resonating very well.
As a result of that, the interest level, like I said Earlier in the call, it's very high. The requests for POCs are off the charts. So we've got more inbound interest Then we can handle at the moment. We want to make sure we do that in a very organized way. So when we bring this to market, it's pallet the network's quality.
We have no further questions. I would now turn the call back over to management for closing remarks. Please proceed.
Thanks, operator. Thanks, everyone, for being on the call this afternoon, and I want to say a special thank you to all the Palatin Networks team for all the hard work and support of our customers and partners as we continue to redefine the next generation of enterprise security, and we appreciate your interest in the company. Thanks.
This concludes today's conference. You may now disconnect. Have a great day.