Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Palo Alto Networks Financial Results Earnings Conference Call. My name is Shaquana and I will be your coordinator for today. At this time, all participants are in a listen only mode. We will facilitate a question and answer session towards the end of this conference. And a coordinator will be happy to assist you.
I would now like to turn the presentation over to your host for today's call, Ms. Kelsey Turcotte. Please proceed ma'am.
Good morning, and thank you for joining us on today's conference call to discuss Palo Alto Networks' fiscal Q2 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 Works website at investors. Paloaltonetworks.com. With me on today's call are Mark President, Palo Alto Networks' Chairman, President and Chief Executive Officer and Stefan Tomlinson, Chief Financial Officer. This morning, Palo Alto Networks issued a press release announcing the results for its fiscal Q2 ended January 31, 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 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 Q3, accelerating growth for all of our subscription services, product demand and adoption, strength of our sales pipeline, our litigation with Juniper 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, 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 December 5, 2013, 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 Investors section of our website located at investors. Paloaltonetworks.com. Before Before I turn the call over to the team, I would like to invite institutional investors and sell side analysts to join an investor track at Palo Alto Networks Ignite user conference at the Cosmopolitan in Las Vegas. Our program will run from noon on Monday, March 31 through 1 p.
M. On Tuesday, April 1. To register, please go to investors. Paloalto networks.com and click on the registration link. Any questions, please call us at 408 7,533,872.
And with that, I'd like to introduce Mark.
Thank you, Kelsey, and thank you everyone for joining us this morning. Given that it's start of the RSA conference. We want to ensure that everyone has time to make the events. We appreciate you joining us pre market this morning. On Page 34, we had a very good second quarter.
Strong customer demand for our integrated and automated enterprise security platform drove Q2 results that exceeded our guidance. Revenue grew by 46% year over year to $141,000,000 and billings grew 50% year over year to approximately $187,000,000 both driven by strong product demand, continued acceleration of our fast growing subscription services and expansion of our global direct and indirect distribution capabilities. Along with this strong top line growth, we delivered expanding operating margins and non GAAP EPS of $0.10 as we continue to demonstrate our ability to scale the business quickly and profitably. Security spending remains a top and growing priority for customers across organizations of all sizes and across all geographies. There is a growing understanding among security professionals, C suite executives and Boards.
The traditional security approaches limit their business agility and are not keeping up with the new waves of cyber threats. As a result, these legacy approaches and point products create unacceptable business and security risk. With this in mind, enterprise customers globally are adopting our enterprise security platform, resulting in continued market share gains against competition. We see this demonstrated in customer acquisition, where we now have over 16,000 customers, Continued growth in customer lifetime value and increasingly strong subscription service adoption as our customers take advantage of the power of our integrated and automated platform. Examples of wins for us in the last quarter include one of the world's largest oil and gas companies, where we checkpoint for a full data center security refresh in one of the largest cruise lines in the world where we replaced Cisco in the data center and have been selected as a sole provider for network security on their ships.
Our expanding product portfolio, innovative approach to delivering subscription services and focus on Global 2000 accounts continue to increase our lifetime customer value. In Q2, a top 25 customer had to rose to 21.3x. This compares to $4,100,000 19.6x last quarter. Mainstream enterprise customers are facilitating this growth by repeat purchases and larger deal sizes as we are being adopted as the go to technology in the battle for enterprise security. Not only are customers buying more devices, but they are also increasingly unlocking the power of our platform with subscription services that often take the place of a competitor's device.
Enterprises are doing this because of the highly integrated and automated capabilities inherent in our platform that deliver superior security while reducing their operational That's the winning formula for the future of enterprise security and is an accelerating growth for all of our subscription services. The power of this integrated and automated Platform is evident in the success we are seeing with Wildfire, which is our powerful subscription service for unique detection and prevention capability for increasingly sophisticated cyber threats. Over 1400 customers are now in the paid version of Wildfire, up from approximately 1,000 customers in Q1. And in Q2, we saw a significant lift in the wildfire attach rate for paid subscriptions to over 30% of device shift, up from 20% in Q1. Wildfire continues to act as a driver and differentiator for our enterprise security platform, attracting both new and existing customers.
Wildfire is also an example of the continued disruptive innovation that causes widening the gap between our platform and the competition. To extend that leadership and security, we acquired Morta Security in December, bringing us a highly experienced team of experts in cybersecurity as well as technologies that will enhance our platform. This past quarter, we continued to deliver on disruptive innovation with the release of the 6.0 version of our Palo Alto Networks operating system and enhanced wildfire functionality, including protection for many more file types, 0 day exploit detection and access to our global database of compromised domains and infrastructure. Also, 2 weeks ago, we announced the availability of the PA-seven thousand and fifty chassis and we continue the beta for our virtualized offering that tightly integrates with VMware's TennisX platform. We are very pleased with this partnership and honored that VMware presented with their Technology Partner of the Year award 2 weeks ago at their partner conference.
Early demand for the PA-seven thousand and fifty and for VM Series appears to be strong and we look forward to reporting on adoption throughout the rest of the year. In addition to the innovation engine, we are also scaling the capacity and productivity of our sales around the world, while expanding our partner footprint with large scale service providers, global systems integrators and direct manufacturing reps, all of whom are interested in helping customers displaced point products that are ill equipped to address the threat landscape today. The combination of our highly differentiated offerings, strong pipeline and Increasing global distribution capabilities sets us up well for the second half of our fiscal year and beyond, as we continue to demonstrate our leadership position in enterprise security. Lastly, I want to touch base on the Juniper litigation. As many of you know, the trial starts today.
We remain confident in our position in this case and are pleased with the judges' pretrial decisions. The Palo Alto Networks team looks forward to seeing many of you at our booth at the RSA Conference in San Francisco suite. And as Kelsey mentioned, we invite you to participate in a special investor track at our Ignite user conference in Las Vegas at at the end of March where you will see our technology firsthand and get a sense of the enthusiasm for our customers and partners. And with that, I'll wrap it up and turn the call over to Stefan.
Thank you, Mark. Before I get into the details of the Q2 results and Q3 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 and non GAAP results can be found in our press release and on our Investor Relations website. Growth in the quarter was driven by new customer acquisition and continued expansion within our existing customer base, where we continue to sell our suite of products and recurring services, including our subscription services. Structurally, our business model continues to benefit from higher attach rates of our SaaS based subscriptions.
Every time we sell or renew a subscription, it's equivalent to selling a product, except that we have chosen the SaaS model to deliver and monetize it. Increases in subscription revenue as a percentage of total revenue will improve our gross margins as well as increase visibility into future revenue streams. All of these factors, new customer acquisitions, success in our land and expand strategy and continuing momentum in our and services were catalysts for record billings, revenue, deferred revenue and free cash flow. Q2 total revenue grew 46% over the prior year and 10% sequentially to another record of 141,100,000 The geographic mix of revenue was 64% Americas, 24% EMEA and 12% APAC. Subscription and support, the 3 components of our hybrid SaaS model, all grew well in the quarter.
Product revenue of $80,800,000 increased 30 over the prior year and 7% sequentially. We saw nice adoption across a number of our different appliance families
in the
quarter. Our recurring services revenue of $60,200,000 increased 74% over the prior year and 14% sequentially and accounted for a 43% share of total revenue. Looking at its two components, our SaaS based subscription revenue of 28,800,000 increased 76% over the prior year and approximately 16% sequentially. Growth was driven by a higher attach rate for our subscription services, in particular Wildfire. 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 $31,400,000 increased 73% over the prior year and 13% sequentially. Compared to the prior year, billings in Q2 grew 50 percent to $186,700,000 Total deferred revenue increased 72 percent to 324 $6,000,000 and short term deferred revenue increased 72 percent to $202,300,000 Total gross margin was 75.3%, an increase of 30 basis points sequentially. Product gross margin was 75.5%, an increase of 210 basis points year over year and a decrease of 110 basis points sequentially. The sequential decline was due in part to product As a reminder, there will be fluctuations in our product gross margin, primarily due to product mix and the timing of new appliance Services gross margin was 75.2%, increasing 2 40 basis points sequentially, due in part to increased contribution from subscription services. Moving on to operating expenses.
Research and development expense was 12.6 percent of revenue, increasing approximately $1,300,000 sequentially to $17,800,000 Headcount additions and project related expenses supporting our development activities contributed to the increase. Sales and marketing expense was 46.6 percent of revenue, increasing approximately $5,500,000 sequentially to $65,800,000 New headcount additions, commissions and expenses and marketing contributed to the increase. General and administrative expense was 7.1 percent of revenue, increasing approximately 100,000 to $9,900,000 As a reminder, this does not include our IP litigation expense, which was $2,700,000 in Q2 'fourteen. Total headcount at the end of the quarter was 13.75, up from 12.64 at the end of Q1 'fourteen. In Approximately 180 basis points year over year to 9% and increased 150 basis points sequentially.
Our effective tax rate for Q2 was 38%. Net income for the quarter was approximately $7,800,000 or 0 point using 78,200,000 shares, compared with net income of $4,100,000 or 0 point 0 $5 per diluted share in Q2 team. On a GAAP basis, net loss was $39,900,000 for the quarter or $0.55 per basic and diluted share, compared to a Q2 'thirteen GAAP net loss of $2,600,000 or $0.04 per basic and diluted share. Our GAAP net loss As well as our cash flow from operations and free cash flow reflected $20,000,000 payment we made in the 2nd quarter to extend an existing mutual covenant not to with Fortinet for 6 more years. Turning to the balance sheet, we finished January with cash, cash equivalents and investments of $501,300,000 including the impact of our acquisition of Morta.
Cash flow from operations, Free cash flow margin were $41,400,000 $31,600,000 and 22.4 percent respectively. Capital expenditures in the quarter totaled $9,800,000 and were primarily related to facilities purchases. The accounts receivable balance was $86,100,000 down from the prior quarter balance of 91,400,000 Linearity in the quarter improved, which helped improve average days sales outstanding to 57 days, down from 63 days last quarter. Let me now move to our guidance. And as a reminder, guidance excludes IP litigation expenses.
In Q3 'fourteen, We expect revenue to be in the range of $143,000,000 to $147,000,000 which represents a 41% to 45% growth year over year. We expect non GAAP EPS to be approximately $0.10 to 0 point With that, I'll turn the call back over to the operator for Q and A.
Congrats on a great quarter. One of the things that really jumped out at me was your comments on wildfire. I wonder if you can find us just some more detail there? And then also maybe just an update of how you think it's Positioned out there versus the competition. Thanks.
Great. Thanks, Phil. Good morning. Yes, so we had a very nice quarter. Again, on the wildfires, you can See, we've added over 400 paying customers here.
So we've got about 1400 paying customers, over 3,000 total customers using wildfire. And I think what's Going on there is that customers are continuing existing customers and new logo customers are continuing to see the value of having a Very, very sophisticated detection and prevention, which is critically important capability in a platform that they already own with their existing customer The opportunity to have it very simply from a subscription service model if they're a new customer. And when you look at not only just the capabilities of Wildfire, but then also the total cost of ownership of that very advanced platform versus what's out there competitively. It's a big difference, right? So I think people are voting with their pocketbooks and saying, we'll go for very advanced, very sophisticated detection and prevention, critically important.
And in addition to that, we get it with the platform of your existing customer you already own and with the TCO that's a Big difference just like all of our subscription services are. So we're very happy with the adoption we're seeing.
Got it. And then just a follow on to that. Obviously, you're seeing better attach of just more subscriptions, call it, per appliance. But Call it per appliance, but wondering if you could give us some just comments on renewal rates that you're seeing just sort of across the subscriptions. Thanks.
Renewal rates continue to remain very high. They're in line with what we've disclosed in the past. On support in particular, it's close to 100%. For subscriptions, it's trending north of 85%. So we feel very comfortable about the recurring nature of our business model.
Great. Thanks guys and congrats again.
Thanks, Bill. Your
next question comes from the line of Gray Powell with Wells Fargo. Please proceed.
Good morning. Thanks for taking the questions. So maybe just kind of following up on the wildfire Same. Over the last few months, you've had a few developments on the APT side with the acquisition of Morta and the partnership with Bromium.
How do you
see your APT DTE capabilities expanding. And do you see the potential to more closely tie wildfire with an endpoint solution or offer incident response type services at some point. Yes, sure. Hey, Gary, it's Mark. Just on generally on wildfire, we continue to improve wildfire Pretty much every quarter to make it market leading.
So we put out a big release with our PN60 operating system Recently at the same time, some improvements to wildfire, which I mentioned in the script about covering more file types, Giving some access into corrupted domains, things that customers really wanted to see with that. So we think that doing that adds continued value and we're going to keep doing that. We bought a small company called Mortis Security in December. This is a team of really sophisticated folks who are from the NSA, U. US Air Force kind of backgrounds, who have been involved on playing offense cybersecurity.
And because of that Are developing some really interesting technologies that are taking are looking at like subtle lateral movement sort of things from a malware perspective. So we'll see that materialize in the next versions of wildfire in this obvious attempt by us to continue to You did keep that service as market leading around that. On your endpoint question, we've talked with lots of customers for a while and About is there value proposition of, I'll call, connecting the network to endpoints from a security perspective under the We've or a growing belief probably that endpoints are considered part of the network more and more just because of, if nothing else, mobility. And The feedback in that has been pretty positive. So to test that out in the market, we've done a number of integrations.
You mentioned Bromium, we've done Bit9, Symantec. So with some folks in the market where we connect wildfire into the endpoints and then see if that's providing value. The customers see that and that has been pretty positive. So We expect to do more of that kind of work in the future. And then your last question on incident responses, we just we're Not going to be in the incident response business.
I don't see us doing that. And the reason for that is we just philosophically believe that Instant response is kind of a necessity because the technology is not stopping things in the 1st place. You have to have this instant response human Very, very capital intensive human remediation effort. We think our job as the technology provider of detection and prevention is to Reduce the need for that over time. We think that's exactly what's going to happen as we continue to advance the platform.
Understood. Okay. That's very helpful. Congratulations. Thanks, Greg.
Your next question comes from the line of Rob Owens representing Pacific Crest Securities. Please proceed.
Yes. Good morning, guys. When you talk about the higher attach rate of subscription services, just wondering if you could give us some color In terms of which services are contributing the most to revenue at this point, I mean, obviously, you're seeing great growth with wildfire, but just curious on the others. Well, we have threat prevention and URL filtering, which both have been very nice sellers for us. And Our threat prevention is for IDS, IPS, URL filtering is for filtering obviously.
Those 2 continue to be Of course, this is for us. They are big competitive differentiators in the market. And then, of course, wildfire, which has really posted very significant growth sequentially and year over year. And then lastly, we have GlobalProtect, which with the advances that we're making, the innovation In our GlobalProtect solution, we're seeing an uptake from customers. So this quarter really marked a very strong quarter for us For us from a overall subscription attach rate, all 4 subscriptions increased in the quarter sequentially, with Wildfire, albeit growing off a smaller base grew the fastest.
So we're very pleased with that. And as we've talked about before, every time we sell a subscription service. It's the equivalent of selling a product, but we've decided to monetize it in a SaaS way. Okay, great. And then you mentioned new customer acquisition helping Drive results.
Just wondering any change in terms of who you're displacing or the rate at which you're displacing them? Thanks.
Yes, Rob. No, We continue to do well against all comers competitively. At the highest level, our main competition of the enterprise firewall vendors, it's Checkpoint, Juniper and Cisco and our win rates continue to be very healthy against anybody regardless who the competition is.
Your next question comes from the line of Keith Weiss representing Morgan Stanley. Please proceed.
Excellent. Thank you guys and thank you for taking the question. I wanted to dig into the announcement you guys made with VMware and also getting the Partner of the Year award with VMware, because we've been hearing a lot more about you guys going to And hearing a lot more evidence of garnering success in there. So maybe you could sort of mark to market for us what you guys have been doing thus far with VMware, where this new integration, where you think that's going to be able to take you guys? Yes, Ricky.
Yes, we're excited about this. So as we described in the past, The highest level what's going on is data centers right are changing fairly rapidly both from a throughput And also virtualization, right. So if you think about just data centers use case for next generation security, you've got north south traffic going in there and As throughput rate continue to grow, that's one of the primary reasons we introduced the 7050 and a big use case for that. On East West, which is a use case that's becoming more and more important to folks because as malware and malicious activity find its way into a network, it's trying to get into the data center because that's where Ground jewels are. And the idea of moving around inside the data center is more of a concern for folks than it used to be.
So you want to have the same kind of next generation security capabilities in the data center there, because that's becoming a highly, highly virtualized environment, all that Has to be virtualized. So working with VMware over the last year at the request, taking our virtualized technology, everything we have Physically, it's also been available for over a year in a virtual context. What we've done is we've integrated With their new platform NSX. And what that's going to mean is that as VMware customers adopt the NSX platform, If they would like to have the best and most advanced next generation security in a highly virtual In the data center, they're going to be able to purchase at the same time something called the Palo Alto Networks Edition for MXX, which is our virtualized capabilities, But really integrated at the orchestration layer, so that when you're say provisioning or deprovisioning virtual machines inside that data center, security is just going
to automatically follow us.
This is not This is not to throw the SDN word around, but sort of SDN is in nature about you don't have to do anything now that you used to have to do Your policy is just going to automatically follow along with those virtual machines. That's important mostly for security and then also for ease of use and that reduces The selling objection for VMware when they're trying to get people to adopt NSX, when they say, well, what about security? What about this new wave of Inside of data centers and virtualized environments, what are we going to do about that? This gives the answer to their customers to say we And then blasting and I'm going on for a minute is from an availability perspective, This pan addition for NSX is available in just a few weeks' time. From a go to market With VMware, their sales force and partner base will be able to and start to sell this in late spring or early summer.
So that's when we kind of expect to see adoption begin is when VMware's the power of their sales machine and partner community again falls in behind us. So Sorry for the long answer, but that's all. I love the long answer. If I could perhaps sneak one last one in, just on the new 7,050 appliance that you guys rolled out. Can you give us some early indications where you guys seeing the early adopters, the early demand there?
And how broadly do you think this could open up Data center opportunities for you. Does it get you into some incremental service provider business as well? Yes. So we think that demand there is Coming from what I just said, which is the data center use case just because of increasing throughput requirements. And we have evidence of that from our 5,060.
So our 5,060 Series is selling very well into that use case. And the assumption there from customers telling us was, well, if you like the fifty-sixty, you're going to love 7050, right, just because of a bigger end chassis. So we expect that that's going to be true and The data center requirements grow over time. That's a fantastic answer for customers to be In addition to that, it gives us the ability to have the conversation from a new customer set or use case for a customer set, which is in the service provider market where in the absence of having the 100 plus gig chassis using our technology for sell through into The SMB base was a short conversation just from the throughput requirement. So this gives us the ability to start to have that conversation Excellent.
Great quarter, guys.
Your next question comes from the line of Greg Dunham representing Goldman Sachs. Please proceed.
Yes. Thanks for taking my question. Mark, I guess first one for you. You mentioned last quarter at least When you looked at the pipeline and when you're talking to customers, you saw anecdotes of perhaps a little bit higher refresh in 2014 and 2015 than in previous years. Can you just give us an update on that?
And then a second one for Stephane. How should we expect the The 7,050 Series to impact product gross margins going forward? Thanks.
Yes, so I'll start off, Greg. Yes, on the refresh cycle comment, We've heard anecdotally that there's a possibility that there might be a larger refresh cycle coming than, say, in the last couple of years. Based on a few data points, one is conversations with our partner community. The second is with our major account focus, Our own guys who are now in more and more of the Fortune 100 Global 2000 accounts having longer term road map conversations and more visibility Sure. And so the commentary around that was that that might be possible.
I mean it happens every number of years and it might be possibly a time where we might see a a time where we might see a larger refresh cycle. It's anecdotal. I think that it's hard to say for sure one way or the other. The way we look at it is, if that is the case and we have seen the industry generally reporting decent numbers in the last quarter for even our competitors, It looks like they're doing better than they had in the past. So maybe another data point around that.
But if that is the case, with our outsized market share That's only beneficial for us if this were to in fact care.
Greg, on the Product gross margin question
as it relates to the seventy-fifty.
With our chassis in one line card That's very much in line with our standard product gross margins. As we add line cards to a chassis, the gross margin profile actually improves and gets above our standard product gross margin targets internally. So the more fully build out Each chassis we sell is, it will be a positive tailwind for product gross margins down the road.
Great. Thanks guys. Your next question comes from
the line of Jason Nolan representing Robert Baird. Please proceed.
Great. Thank you. Stefan, I wanted to ask about international plans for expansion in calendar 2014.
Certainly. Our international, it's growing off a smaller base, but we're posting very solid year over year growth rates in EMEA, APAC and the emerging markets. When we look at productivity and the opportunity that's there, the resources required, we're still Dividing territories there, we're adding major account folks. Mark Anderson has done a very nice job in terms of building out an international presence from where we were. So we're going to continue to invest in APAC and EMEA, because we're seeing very strong returns there.
And would you continue to push into emerging markets? There's been some challenges there more broadly. And I assume that's still an area of opportunity for you, but is that still full speed ahead or do you pause there?
No, it's Mark, Jason. No, we're going to be full speed ahead there. We've seen the emerging markets, even though it's a small base for us, outsized returns even greater than what we're seeing in the as you would expect, right, in the established markets. So we're not pausing And we would expect that we continue to do very well there. Thanks guys.
Thanks Jason.
Your next question comes from the line of Walter Pritchard representing Citi. Please proceed.
Hi, thanks. Back in July, you had product revenue decelerate back into the low 30s and you indicated that you I'm wondering, I know you'll give specific guidance around product revenue, but should we expect product revenue growth Pick back up or should we expect it to decelerate down into 2020? Walter, it's Mark. So on the product growth side, we've got a pretty good Product growth here is 7% sequentially, 30% plus close to 31% year over year. And we would expect to be able to continue product growth rates at these numbers north of these numbers.
So that was the expectation we set before and that's the plans we have. I think just at a big picture level on this too, The way we think about this is we're trying to get better the total revenue base of the company. There's a number of things that Stephan went through that are in the mix of that. And the ones that you On the subscription services side, it grows extremely well and that's because customers buy those generally in lieu of buying So we're very happy with the very strong product growth at close to 31% at the size and scale we have there. And then we're extremely happy with the subscription services revenue.
When you look at it, we're running close to $120,000,000 run rate SaaS business in this growing to close to 75% year over year. And that's because people are choosing those in lieu of other people's products. So it's a combination of those things. It's really the powerhouse here from a model perspective and it's delivering really well. You don't have to look at any frozen Billings deferred, all the things, wonderful things that are happening here, from the model to see how powerful that is.
But specifically in your question, We have strong product growth at a very high run rate right now and scale and we expect FTT. And then just Mark, one follow-up on the Some of your competitors and peers in the industry have more aggressively bundled subscription into product sales. I know you bundle support in. Have you guys played with potentially bundling in subscription and trying to obviously growth has been great, but trying to drive the growth potentially faster and more attached through those types package. The approach that we've taken, which was really based on market feedback early on was the first thing was to try So subscription services as services instead of just bundling it into the product that was obviously good a number of years ago from a model perspective.
And related to that was simplicity. So when you look at the competitors And feedback that we've heard years ago from the customer base was it's very complicated pricing models, pricing sheets that go And we just took a different approach called, it's 20% of the list price of the device and people reacted very well to that because it wanted simple The TCO then it's very, very obvious around that. We have 4 of those subscription services now. In In the future, if we were to add additional services and our intent would be that we would do that. We'll think about how we price all those when you start to head up the number of subscription Services at 20 percent of list price, it might change that later on.
But right now, the market is reacting very Great. Thanks. Thanks, Walt.
Your next question comes from the line of Brent Thill from UBS. Please proceed.
Good morning. Stephane, in Q1, I think you mentioned that it became a little less back end loaded with the DSO. This quarter DSO Dropped again. I think it's the lowest you've seen in the last 6 quarters. Can you just walk through the linearity and what you're seeing in the business?
It feels like there's a bigger tailwind from some of these high profile breaches that perhaps are offsetting maybe some of the historical seasonality. Can you
Certainly. On linearity in the quarter, remember our fiscal Q2 encompasses December, which has a calendar year end budget flush component of it. And we definitely participated in that. So we had a very good month 1 month 2 of the quarter, where a lot of the sales came in November December. So that definitely helped with linearity in the quarter and we came in with a tailwind as well.
So DSOs did come down sequentially. We were very And when you look at the construct of calendar year and budget flush, we really saw it across the board In nearly every vertical, which we are very pleased with, given the nature of the advanced persistent threat landscape out there And also just the struggles that many companies are going through trying to do a forklift upgrade of legacy technology to our platform, it's created a lot of disruption and a lot of opportunity for us. So those call it macro dynamics have played to our strength and that shows up in our billings and revenue and business momentum.
And just a quick follow-up for Mark. I know you mentioned the 7050 will give you a nicer tailwind with the service providers. But can you just give us a sense of where the current state of businesses with some of the service providers that you're engaging with, peri the seventy-fifty? Yes. So the way we look at service Brett, there's 3 opportunities.
One is the most simple, which is service providers are enterprises. So they are Likely customers for our own technology to protect their own networks and we've actually that's been our first penetration point with all the major service providers is just having to Our technology to protect their own networks and that's a good business for us and continues to grow. The second area we looked at is many of the large service providers run pretty good sized systems integrations business. And they are systems integrators for large enterprises and often Do outsourcing for networks. And in that case, having them resell our technology as part of those offerings is an area we can focus on.
And we've Done very well there with them as well. The 3rd area is service providers using our technology on a sell through basis from as a service sell through basis to offer security usually into lower end markets. That's an area where we haven't penetrated the service providers yet intentionally just Because of the technology requirements and some of the support requirements around that, we're very focused on the enterprise market as we continue Right now, because there is enormous growth in the enterprise. But the 7,050 is a throughput device that allows us to begin the conversation with the service provider If we wanted to go attack that 3rd opportunity with you, now that we have the chassis, can we do that? And the answer to that has been yes.
There are different requirements And we'll engage with those guys as we've started to on what those would look like and road map for around this. But that's how we think Service providers, it's not just a one trick pony. There's multiple ways to interact with them. Thank you. Thanks, Craig.
And your next question comes from the line of Jonathan Ho, representing William Blair. Please proceed.
Hey, guys. Just wanted to understand A little bit better
about sort of the EMEA region starting out. Are you seeing sort of improvements there or any impact to the macro environment and sort of your thoughts around the ability to continue improving the growth in that region? Yeah. Jonathan, it's Mark. Yes.
So EMEA, as you know, it's been challenging for us and for others for quite some time given all the macro environment over there, but it seems to be We're very happy with what we saw from a selling perspective revenue perspective and a selling perspective in EMEA. And For the first time for us, I'm not sure about other folks, but every sub region in EMEA that we organize around It's very well for first time in a long time, which is fantastic. We've been seeing some regions do much better and some regions do less better like Southern Europe. But even Southern Europe performed very well for us in this last quarter. So we like EMEA.
It's only about, as we 24%, 24% of our revenue base, so we have a lot of headroom to go over there. Got it. And can you talk a little bit about sort of where your revenue is coming from today relative to refresh existing customers versus competitive displacement and potentially at what point we start to see more of a lift from refreshing existing customers, which theoretically should be a bit easier? Yeah. We would expect that from a refresh perspective given what Stephan said about extremely low churn, high renewal rates for the company, We would do well in refresh cycles.
I think for us in refreshing, if you think about the history of the company and size or magnitude of the revenue base of the company And a refresh cycle generally being 3 to 5 years, call that 2010, 2011 is when the company is actually of any size from a revenue The refresh would matter one way or the other for us. So anything prior to that I think has been refreshed and it's small numbers It's after that when the numbers get bigger and we would expect that we would do extremely well from a refresh perspective with our existing customers because all our indications, Customer satisfaction reports, things we hear from the channel, things we hear from the customers are very, very high satisfaction rates with our technology. That's also obviously an But as a general matter, our growth has been and continues to come from displacing competitors When they're up for refresh. So refresh for us is a positive thing, whenever that's going to come upon us. Great.
Thank you.
And we have time for one further audio question. The question will come from the line of Scott Zeller representing Needham and Company. Please
Proceed. Thanks. Stefan, could you just give us some color around your expectations for seasonality of deferred income, please?
Well, seasonality in the business in general has been a little bit hard to call. We said that our fiscal Q2 and fiscal Q4 will set up to be the strongest from a seasonality standpoint. Q3 is effectively calendar Q1 for many companies because we have call it February, March, April And we've seen some seasonality in Q3 last year. Although we grew total revenue by 53 Year over year, we saw a sequential decline in product. So when you get to the seasonality of deferred revenues heading in We are guiding 41% to 40 41% to 45% year over year total revenue growth and deferred revenues And deferred revenues and billings will usually follow the same seasonality patterns that we've seen in the past.
So I would look to our prior
audio question that comes from the line of Karl Keirstein representing Deutsche Bank. Please proceed.
Great. Thanks for fitting me in. My question is to Mark. Mark, clearly this APT or anti malware focus is inside the firewall focus is probably Going to be the topic du jour here at RSA. And I just wanted to ask you a big picture question about how this changes Your the model this Palo Alto Networks sales force and M and A focus this year, does it tilt you Towards doing additional M and A besides the Morita deal you just did, do you need to pivot the sales force focus a little bit?
Any kind of model shifts as the customer focus on APT ramps as much as it has it seems in the last few months?
Yes, Carl. Well, big picture the answer would be So from an APT perspective as a threat that a kind of threat that has been highly discussed and vocalized in the last year or And I also expect this would be a big topic at RSA. It fits very well from us because what we're selling is a platform and the platform is able to address from a prevention a detection prevention standpoint APT. The reason for That and the interesting thing about the platform architecture and then hence the business model that flows from that is, of the aspects of our platform that That people have been using for quite some time to combat threats. We're all native to the platform.
We've chosen to monetize them from service perspective. But it's when they're operating together that that's the real that's the juice, that's the power. So we like the fact for The wildfire is selling very well from a subscription perspective. But it's wildfire as part of that overall platform with all the Technology in there that's really delivering the value from an APT detection and prevention standpoint for customers. So the reason I mentioned that Our sales force is very conversant on how to talk to the platform itself and what that can do from a security perspective.
And now if you want to talk about the newest thing called APT, here's how that fits into that security landscape and what platform I will do for you. So from a selling perspective, The team has been able to discuss any subscription service and the concept of the platform for quite some time and has been doing that From an M and A perspective, we've said for a while that we've got a very large addressable market here in Enterprise Network Security is these numbers you look at $13,000,000,000 growing at $15,000,000,000 in the next few years. And that the products we have today and the roadmap we have organically allows us to address the vast majority, if not only the entire total addressable market there. But if we saw opportunities where we could accelerate the product road By buying a small company along the way, we'd be interested and we demonstrated that with Morda, which brings us an acceleration of the roadmap on things related to wildfire. And then also if there was TAM expansion opportunities outside of that that were interesting over But we were very close in from what we do for a living.
We could be interested in that as well. So I think you're right. I think you'll hear a lot about We like that since we have a fantastic answer and solution for that. And it's a much bigger picture From a platform perspective and everybody else, we're hopeful that you're correct on that and it gives us a chance to get in front of even more potential customers.
Got it. Thanks for the color, Mark.
Thanks, Scott.
I would now like to turn the call back over to Mr. Mark McElson for closing remarks.
Okay. Thanks, operator, and thanks everybody for being on
the call this morning.
And I also want to thank Entire Palo Alto Networks team for all the hard work and their support and as well as our customers and partners as you help us continue to find the next generation of Enterprise Security. We appreciate your time this morning. Take care.
Thank you for your participation and today's conference. This concludes the presentation. You may now disconnect and have a great day.