Good day, ladies and gentlemen, and welcome to the Q2 2013 Palo Alto Networks Inc. Earnings Call. My name is Lou and I will be your operator for today. At this time, all participants are in listen only mode. We will conduct a question and answer session towards the end of the conference.
As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Maria Riley, Investor Relations with The Blueshirt Group. Please proceed ma'am.
Good afternoon and thank you for joining us on today's conference call to discuss Palo Alto Networks' fiscal Q2 2013 Financial Results. This call is also being broadcast live over the web and can be accessed on the Investors section on 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. After the market Closed today, Palo Alto Networks issued a press release announcing the results for its fiscal Q2 ended January 31, If you would like a copy of the release, you can access it online at the company's website or you can call The Blueshirt Group at 415-217 7,720 2 and we will e mail you a copy.
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 continued revenue growth and overall momentum at the Palo Alto Networks Business trends in its business and operating results including its gross margin, operating margin and non GAAP effective tax rate and Palo Alto Networks revenue and non GAAP earnings per share for the 3rd fiscal quarter of 2013 ending April 30, 2013. These forward looking These forward looking statements apply as of today and you should not rely on them as representing our views in the future and we 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 10Q filed with the SEC on December 10, 2012 in 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 Margin. We have provided reconciliations of these non GAAP financial measures to GAAP Financial Measures in the Investors section I'd like to remind you that Palo Alto Networks is hosting its inaugural Analyst Day in New York City on March 21.
If you would like to Again, please contact me or Hadley Rotiqui at The Blueshirt Group or email, irpaloaltonetworks.com. In addition, a live audio webcast of the meeting will be accessible from the Investor Relations section of the company's website. Now I would like to introduce Mark McLaughlin, Chairman, President and Chief Executive Officer of Palo Alto Networks. Mark?
Thanks,
Maria, and thanks everyone for joining us. I'm delighted to be here today to share with you our achievements in our fiscal Q2 of 2013. We had A strong second quarter and our results continue to demonstrate Palo Alto Networks' recognition as the global leader in next generation enterprise Network Security. This leadership position is driven by our high value disruptive technology, which we believe provides the highest level of security available in the market today. As customers rapidly adopt our technology as their strategic enterprise network security platform, we continue to demonstrate the ability to drive growth far in excess any of the competition and with continued improving leverage.
In the Q2, we continued to see enterprise investments in security as a top mind issue, strong end of calendar year purchasing, improving customer sentiments in EMEA and continued adoption of our technology as the primary Firewalled by new and existing customers. As we've discussed in the past, our growth model is based on our ability to land in new customers as a Best in class provider for any enterprise network security use case, expand across that customer's network with additional devices and extend our value to the customer With subscription services that provide great performance and total cost of ownership advantages. And looking at the land component of our growth In the Q2, we added over 1,000 new customers in the quarter. This is the 5th consecutive quarter where we've added over 1,000 new customers. We now have Privilege of servicing over 11,000 total end customers around the globe, most of which are choosing us over the legacy incumbent firewall provider.
On the expand and extend side of our business, we continue to see strong increased buying and loyalty from our customers. Our business coming from services continues grow at impressive rates as our existing customers buy additional services and for longer terms. For example, in the Q2, our top 25 customers Follow on purchases averaged 11.4 times our initial purchase. This is up from 9.9 times last quarter. And to make the top 25 list in the 2nd quarter, a customer had to spend minimum $2,800,000 with us, which is up from $2,500,000 last quarter.
This is all translated into 2nd quarter results where we posted $96,500,000 in revenue, which is a 70% year over year increase And 12% sequential increase along with non GAAP EPS of $0.05 per diluted share, demonstrating our continued substantially outpaced the competition and with continued growing leverage in the business. Our results are driven by our ability to provide demonstrably and substantially better network security Some examples of this over the quarter include us replacing Checkpoint as a data center firewall in the distributed environment of 1 of Europe's largest broadcasters. We also replaced Checkpoint in the data center of 1 of the biggest insurance companies in the U. S. After starting our first deployment with them in December of 11 and replaced Juniper, one of the largest electronic component vendors in the world based here in California and Cisco, one of Australia's largest retirement funds.
And as We've discussed and demonstrated in the past, we continue to displace all the legacy firewall providers at a rapid pace of growing our market share. The reason why we're able to win so many new customers and And this differentiation continues to grow. Just a few days ago, I was pleased to see that Gartner once again recognized Palo Alto Networks as a leader in their latest Magic Quadrant enterprise network firewalls and they reiterated their belief that by year end 2014, the majority of new purchases will be Next generation firewalls. I'm also very pleased with the rollout of the 4 new products introduced in November at our Ignite user conference. Customer traction It's been significant across all these products, most notably for our PA 3000 series and Wildfire subscription service.
We now have more than 1200 customers using our wildfire service and are ahead of our internal forecast for the paid attach rates for the new service. In summary, we're pleased to report another strong quarter of growth, New customer acquisition and continued increasing operating leverage. Our solutions address the fundamental network security issues that are facing enterprises across And we entered the second half of our fiscal year with good momentum. I'd now like to turn the call over to Stephan for a detailed look at our financial results. Stephan?
Thank you, Mark, and thank you all for joining us today to cover our results for fiscal Q2 'thirteen. In Q2, total revenue grew to a record $96,500,000 an increase of 70.2% year over year and 12.3% sequentially. Looking at our 2 main components of revenue, in Q2 product revenue of $61,900,000 grew 60.3% year over year and 11.6 Percent sequentially, driven by sales of our series of appliances. Services revenue, which is comprised of both subscription and support, was $34,600,000 an increase of 91.5% year over year and 13.6% sequentially. Services revenue accounted for 35.8 percent of total revenue, an increase of 40 basis points sequentially.
And this is
in line with our Expectations and underscores the power of our hybrid revenue model as it provides enhanced visibility. The geographic mix of revenue was 63% Americas, 25% EMEA and 12% APAC with all theaters posting growth on a year over year and sequential basis. Total non GAAP gross margin in Q2 was 72.2%, in line with our target range of 70% to 73%. Non GAAP gross margin has decreased 70 basis points year over year and 40 basis points sequentially. Putting a finer point on gross margin, q2 non GAAP product gross margin was 73.4%, down 10 basis points year over year and 80 basis points sequentially.
The sequential decrease was primarily due to product mix and the impact of the launch of our new PA-three thousand series. As I mentioned in the last earnings call, product gross margins will fluctuate when we introduce new products as they have a higher initial cost of goods sold. As volumes increase For new products, we expect reductions in cost of goods sold, which will result in an improvement of gross margins over time. Our non GAAP services gross margin was 70.1 more subscription sales in the quarter and services gross margin will also fluctuate depending on the timing of the investment ramp of our services organization. Moving on to operating expenses, we continue to invest primarily in product development and our sales and go to market organization.
Q2 non GAAP R and D expense was $13,500,000 an increase of $1,900,000 from the prior quarter, primarily related to program spend and headcount As a percentage of revenue, non GAAP R and D expense was 14%, up 50 basis points sequentially. Q2 non GAAP sales and marketing expense was $41,900,000 an increase of $3,600,000 from the prior quarter. And as a percentage of revenue was 43.4%, a decrease of 120 basis points sequentially, demonstrating operating leverage. Q2 non GAAP G and A expense was $7,700,000 an increase of $500,000 from the prior quarter or 8% as were $63,100,000 an increase of $6,000,000 from the prior quarter or 65.4 percent of revenue, down 110 basis points sequentially. Q2 non GAAP operating margin was 6.8%, an increase of 70 basis points sequentially.
And the sequential improvement this quarter can steady manner, while noting there may be near term fluctuations. Our non GAAP effective tax rate for the quarter was 41.5%. This rate will continue to fluctuate throughout the fiscal year as it's dependent upon our global pre tax profit mix and potential discrete events such as the removal of our valuation allowance. Non GAAP net income for Q2 was approximately $3,900,000 or 0 point 0 $5 per diluted share using 77,500,000 shares. This compares to non GAAP net income of 2,900,000 This compares to non GAAP net income of $2,900,000 or 0 point 0 $4 per diluted share in fiscal Q1 And non GAAP net income of $2,500,000 or $0.04 per diluted share in fiscal Q2 'twelve.
On a GAAP basis, net loss was 2.6 $1,000,000 or $0.04 per basic and diluted share. Turning to the balance sheet, we finished January with cash, cash equivalents and investments of $368,300,000 In Q2, cash flow from operations was $34,500,000 free cash flow was 28,300,000 And free cash flow margin was 29.3%. Cash flows benefit from our hybrid revenue model in which we build for our services at Beginning of the engagement and we collect the cash shortly thereafter. We ended Q2 with $68,600,000 of accounts receivable, Up from the Q1 'thirteen balance of $56,400,000 Average DSOs were 58 days, up from 53 days last quarter, reflecting a slightly more back end linearity to the end of the quarter. Moving down the balance sheet, Total deferred revenue was $188,200,000 an increase of 92.2% year over year and 17.3% sequentially.
Short term deferred revenue of $117,400,000 increased 15.8% sequentially. The majority of our service engagements are on an annual basis, But we are continuing to see an uptick in multiyear deals. Billings were 124,300,000 an increase of 81.6% year over year and 12.4% sequentially. Let me now turn to our guidance for Q3 We expect revenue to be in the range of $100,000,000 to $104,000,000 which equates 2% to 58% year over year growth and we expect non GAAP EPS to be approximately $0.05 per share using 79,000,000 to 81,000,000 shares on a diluted We're continuing to invest in product development, sales and go to market as well as discrete projects in G and A, all of which is reflected in our guidance for Q3. With that, I'll turn the call over to the operator to open the Q and A session.
Thank you. And your first question comes from the line of Greg Dunham, Goldman Sachs.
Yes. Thanks for taking my question. I guess first off, can you talk about the impact of Mark Anderson's kind of emphasis on strategic accounts and the opportunity to improve Sales productivity from here. Thank you.
Yes. Sure, Greg. It's Mark. How are you doing? Yes, Mark has been focused on a number of things and I On a few of the other calls, one is on the strategic account side.
So not surprisingly, if the company continues to grow into the size we are and the size we intend to The large strategic major accounts are more and more important to the company. So we've been very focused on the global 2,000. We've got very good penetration there and continued increased Penetration and we continue to do really well in our large accounts on follow on purchases as well. Mark's putting a lot of discipline in place, talent In place you know how to sell into and service those large accounts. So we expect to continue to get gains from that over time.
And as you know it takes time in order to develop sales forces
I like that, but
so far very
pleased. One follow-up if you permit. The billings number was just a monster number. Were there any anomalies in there? Was that I mean is that mainly due to the wildfire release?
How should we think about that?
Yes. So I'll probably give Stefan for a little more detail. Just generally on the billing side, we did a we had a nice quarter as you can see. We had a nice increase in the services revenue side of it and the stall flowing through the billings and deferred.
That's right. When we look at the composition of billings, what we're seeing is a very nice uptick In our services line, both subscription and maintenance. And we were pleased with the number.
Thank you. And your next question comes from Joel Fishburne, Lazard.
Just a follow-up on that guys. The in terms of The take rates on the subscriptions, can you give us any more indication on the numbers that people are taking and what is Particularly driving the deferred revenue in terms of the subscription base?
Yes. So, hey, Joel, it's Mark. So as we said in the past, the attach rates on the services are good and high. We like they continue to be that way. And in addition to that, as We continue to launch more services, in particular, Wildfire, which came out back in November, and we like the attach rates we're seeing on that.
It's early days there, but they're higher than what we internally forecasted in Last, you've called 90 days of selling. So that's good. We think that's continued uplift for the company. I mean, at the end of the day, what's going on here is that when you Got a really disruptive device in the 1st place to the firewall and the ability to easily add very high value services for folks at a much lower cost. They would pay for other boxes.
It's a really compelling offering in the market. We keep seeing our customers take advantage That and increasing rates for longer term. So that's
Just as a follow-up to that, I mean, at RSA the big Aqua's malicious threat protection. Can you just talk about how Palo Alto is positioned in that market? And maybe that's the better question to ask relative to what's driving Subscription growth?
Yeah, sure. It's a great question. When I was up at RSA yesterday, there's definitely a big focus on APT malware, not surprising. And their security changes There's always something that's important to take care of. So as a general matter, I think what's going on there is that companies or enterprises are very Concerned about that.
And then the question is what do you do about it? And bringing a service like Qualify to market is really important It's all because it is the only one out there that can detect and prevent malware. But more importantly or big picture I think is what's Happening architecturally is that enterprises want the ability to have devices services that are that can provide the best security And do so rapidly without having to make big capital expenditures for the best of 3 point solutions to the next box, Right. So what we've done is we've said in a lot of cases, majority of cases where already your firewall were deployed throughout your network. With the wildfire service, you're getting Modern malware servers right on top of the box already deployed into your network and it's already your main enforcement point because it's the because of the firewall.
So from a pure security perspective, what you'd like to have is the disparate pieces of technology you're forced to get in different Today actually be integrated in an innovative way, because that's the best possible way to detect and then really quickly prevent that malware. And that is what we have in the market. Just generally as an architectural matter, that's the way the world's going.
Great. Thank you.
Thank you. And your next question is from Michael Turits, Raymond James.
Hey, guys. Just sort of housekeeping questions. Any more precision you give us on the number of customers out of the ending customer count? And How much hiring you did this quarter? What was the net headcount adds?
And what we should expect
of those going forward still looking in the 75 to 100 range?
Yes, sure. Hi, Michael. So on the first question, the customers, we continue to add customers at a very nice pace. So this is the 5th quarter with over We haven't gotten into the numbers about what they are over 1,000. The reason for that is there's really no magic to 1,000.
I mean, it's a great Perfect. I think you put out there, but this is a really great quarter for us from a customer ad perspective, very high numbers. And we hope to Say that for quite some time. Just as importantly as adding new customers, which is the land part of the model is the expand part. And once we get them into our Way we've been able to demonstrate the 3 details of that is really important to see that driving driven through our service line and deferred revenue All the solvency, Byron.
I'm sorry, Stefan, go ahead.
I was
going to say and then Just a follow on point to that, you can also see that in the LTV metric that we talk about, which has increased very nicely sequentially To 11.4 times repeat order value for the top 10 or top 25 Enterprise customers that we have.
And then we added 100 head in this quarter. We said we'd do anywhere from 75 to Quarter basis as far as the target that obviously is going to fluctuate quarter to quarter hiring patterns and when people show up, but we put 100 in this quarter Q2.
If I could just ask you about the accounts receivable and you said it was more back end loaded. What was going on there? Did that happen?
It was typical
of many companies in terms of the January month, the 1st couple of weeks are always a little bit Low because the majority of corporations are on a calendar year budget. So when once those budgets are finalized, we saw a very nice Pickup at the end of the month. And that's a normal pattern that we've seen in January in past January's. We also did See a good calendar year end December month. We don't break that out specifically, but we did participate in a nice December month as well.
Okay. Thanks.
Thank you.
Thank you. And your next question is from Jason Nolan, Robert Baird.
Great. Thank you. Mark at RSA there was talk of the perimeter being porous and Ineffective and I guess part of the answer there is wildfire for APT and malware. But do you see any change architecturally where the PA Appliances will be in more locations in the network or virtual in GFWs, I guess. What are you seeing more broadly?
The answer is kind of yes. I mean you see it everywhere, which is you want to protect the perimeter, you want to protect the branch office So the perimeter doesn't get it back. We definitely want to protect the data center. Those are the 3 main areas that we generally enterprises focus on. That's where we have offerings Yes, for all 3 of them.
And again, like I said a little earlier, because of that, because of the move to virtualization and data centers, flexibility From how you are able to provide security is very important. And ideally, you would want your firewall Be very flexible with services in order to do that in all those places in the network and you'd want a virtualized version of that as well if we have all of
Thank you.
Thank you. And your next question is from Phil Winslow, Credit Suisse.
Hi, this is Harris Hyre on behalf of So and So. Thanks for taking the question. I was hoping you could comment on the pricing environment in the last quarter versus And also if you can just comment briefly on the pads rate renewal.
Yes, sure. Your first question is on pricing. Is that it Harris?
Yes.
Okay. Yes. Well, this is it has always been a very competitive market and it's not unusual for players Make up for lack of functionality by aggressive pricing. So we've definitely seen that. What we found in the past, we continue to see is that our technology Really disruptive and it's solving really strategic issues.
And as a result of that, we're not immune to pricing pressures, but we've been able to maintain premium pricing for
And on the attach rate on subscriptions, what we've said in the past still holds up. We're typically selling And the attach rate, I mean, is extremely high. We've said it's well north of 90%. The renewal rates For maintenance again is very high. You can't really deploy enterprise network security without being on maintenance, because You'd get bug fixes and patches as part of that maintenance program.
And the renewal rate on Subscriptions are high as well. We haven't put a finer point on that. And that should
Okay, great. Thank you.
Thank you. And your next question is from Jonathan Ho, William Blair.
Hey, guys. Good. The first question
I have is around the primary firewall adoption. And can you talk a little bit about the trend there and whether you're seeing I mean historically you've said over 2%. Are you seeing an acceleration there, especially relative to Gartner's comment?
Yes, Jonathan. We are. So what we've said in the past is that over half of Our new sales and for half of our existing customer base usements is primary firewall and that number continues to go in the right direction for us. And I think what Carter is saying here is that enterprises are have been coming around rapidly coming around You really need a next gen firewall in order to have the best level of security in the market today. So their expectation is that as those purchases Most of them meaning more than half of those are going to be for next gen carols.
So I think that all points to continue to propagate.
Got it. And just in terms of the PA-three thousand line, just wanted to understand a little bit about how much of an impact that product set It's having I know it's been out for a little while, but is this driving some of the new expansion opportunity? Or has it seemed more market acceptance? Just want to get some sense of how that line
Yes. We got a lot of input from customers along the way that they'd like to see a device in that range. So we delivered it and it's sold Very well from the first day we introduced that and I expect it would continue to sell well. So we're very pleased with the performance.
Great. Thank you. Thank you.
Thank you. And your next question is from Karl Keirstead, BMO Capital Markets.
Hi. This is Shakeel Alam in for Kalkirstead. Two questions. Can you talk a little bit more about demand environment? You mentioned strong enterprise demand In your prepared comments.
And I just wanted more color on that. You also talked about enterprises wanting to consolidate to And more of a single architecture. Are you seeing an uptick in 1 demand and also just that kind of trend of More consolidated architecture. And then also my second question, just be able to give a little more color around the 50% of new customers that Are buying primary firewall? Are they in terms of their size, are they getting larger?
Anything you could give us there
Yes. I'll take that in reverse just so I don't forget. On the new ones, when we say 50 The new customers are using its primary firewall. That's across the board, meaning that it's all across the entire Customer base. We're really focused as we've said before on a global 2000, so it includes those folks as well.
And as We are continually and rapidly accepted in the market as an enterprise network, a firewall provider With technology what we have seen is that deals get done quicker and the initial deals get bigger and then the follow on purchases Faster and the volume purchases get bigger. So that's generally what we've seen and continue to see. And on your first question, it's kind of plays that which is, yes, demand is Has been and continues to be very high for this technology. And again, partners echoing that just a few Few weeks ago, but we certainly seen that from a demand standpoint for our technology. And then on the other question around what I was saying Actually, it's I mean, you guys you can call it consolidation.
We think of it more as the data integration of the technologies required to combat what you're And on the security sphere today, we believe that over time, this doesn't happen overnight, but over time Perpetually, customers want demand will get more and more of the functionality natively from the firewall. Simply, I mean one is it's great convenient cost wise, but way more importantly is that, that is a better security solution. I'll use malware. I know everybody's focused on that We are able to use malware as an example. If you have you want to see the malware coming in, so that would be traditionally a malware Device seeing the malware coming in, when the malware is in, you would want to see if it's trying to talk outside the network.
The malware device won't Your IPS device would be the one listening for the command and control to see if it's communicating out. And then if it was and you were able to put a signature on it with your AV device, then you'd want to communicate Back to your firewall so that you can write it have a signature to enforce it. That's kind of what the mishmash all looks like out there. That's not very VINODORE secure. So that's why we continue to see customers driving and pressing for better security in In a natively integrated fashion, which is what we brought to market.
Great. Thank you. Thank you.
Thank you. And your next question is from Walter Pritchard, Citigroup.
Thanks. Mark, just on the product side, I'm wondering if you could compare and contrast Sort of the pressure to move with a higher end box even higher than where you are today versus move down into The low end and I'm wondering just kind of branch versus data center where you've been pulled more so as you see incremental demand?
Well, both directions. So I think on the let me talk about the smaller side first. I think customers would like to see us have even smaller boxes Then the PA-two hundred with all of the functionality, right, you can get with the next gen firewall and that's been challenging just from how do you deliver all That is the right cost and profitability to do that. So we thought about that, continue to think about ways to get that done. And then on the higher end, There is a set of the customer base that not everybody does.
They don't I'll tell you why, but not everybody, but would see a higher throughput box on And doing all the next gen functionality that we do in the boxes we have today, those tend to be large, large data center Deployments or carriers or folks like that. So we're definitely paying attention to that. We're taking that input very seriously. And Yes, I think you could expect to see us do something in that area in the future. Generally No.
One of the things that the markets have been used to for a really long time is saying, if I want to get X gate or X throughput, protected Throughput, with everybody else's technology, if you want to 2 gigs of protected throughput, you probably have to start with 40 gig box to get it because all the performance degradation, we don't have that problem. So you get 2 gigs in, 2 gigs out, right? You get what you pay for as opposed to having to start with something very expensive. So we've been able to service lots and lots and lots of throughput demand because of that.
Got it. And then just Stefan wondering on the just a clarification on the deferred revenue. You did have a very strong quarter here. I'm wondering if there was any sort of Abnormal seasonality, there's a lot going on in government things like that. Any pull forward in maintenance and longer term Maintenance deals that or anything that because the seasonality here looks much more pronounced than it did last year?
Our deferred revenue grew nicely and we have seen an uptick in multiyear deals, both on the subscription side and on the maintenance side. So nothing too out of the ordinary was happening there.
Okay, great. Thanks very much.
Thank you. And your next question comes from Tal Liani, Bank of America Merrill. Thank you.
Hi, guys. This is Ron Semper on for Tal Liani. Just a couple of housekeeping questions. Headcount, should we think of the same run rate for the rest?
We talked about a range of 75 to 100 and timing of heads on board. Sometimes there are some variances, but we still feel comfortable with that range. This Well, with that range, this past quarter we added exactly 100. And I think going forward the 75 to 100 range Makes sense for us for the balance of the fiscal year per quarter.
All right. And then how about the investment in the Channel, how many partners did you add to that this quarter?
We haven't broken out what we've done on a quarter by quarter basis. What we said in the past, we've got about 800 And over about the last few years, we've added 250 and we'd expect to do that on a continued rate. So we use that sort of as a benchmark. We're very interested in the quality of folks over the quantity of folks just because when you have the newer or relatively newer disruptive technology having highly trained Partners being able to sell into accounts per year almost all the way to the displacement is very important to we focus a lot on that.
And how is the ramp been on the recent adds?
Great. It's in line with our expectation.
Great. Thank you very much.
I have 2 questions. First, just curious if you've seen any change in the competitive landscape Coming from other next generation firewall vendors. And then secondly on the wildfire, the subscribers, I think you said around 1200. Was there any pent up demand? Is that something that was kind of just because of the initial release?
Or might we expect that to Continue growing at a similar rate.
Yes, Eric. Well, on both. So the first one on the competition The answer is no. I mean, so we believe this to be true that we're the only real next generation firewall provider in the market. Lots Folks are doing marketing around application identification control, which they mean they can block applications.
And then they They try to call that next gen firewall, but we're the only offering in the market that can truly safely enable applications and that's the difference. So we see a lot of Competitive marketing, but we haven't seen any catch up from a competitive technology standpoint, which is the only thing we really care about at the end of the day. On the wildfire side, yes, it should have been more clear a little earlier. So We've had a free version of Wildfire in the market for over a year and we've had a really good customer adoption on the free version. So we 1200 total customers today using Wildfire.
And then of that base of the customers, when we released our Paid for a version of Wildfire in November. We saw some new customers buying that, existing customers starting to pay for that from an attach rate perspective. So I want to be clear, We don't have 1200 paid for subscriptions yet. That's the total base of customers that are and the attach rates on these numbers are good So far for us.
We attach rate for the paid version?
For the paid version, yes.
Okay. Any details On how that performed in the quarter?
Better than we hoped for.
Very good. Thank you.
Thank you.
Thank you. And your next question comes from Brent Thill, UBS.
Thanks. Mark, just on Wildfire, how do you think of the ASP lift? And if you just use maybe some simple numbers to help us understand what you're seeing initially on those paid for customers?
Yes, Brent. We're trying Keep it really simple and like we have for all our prescription services. So all of our subscription services are the same And that when you buy a device, the device cost X, right, has a list price on it and the subscription service is 20% of That's true for Wildfire as well. So if you're going to attach a paid subscription of Wildfire, it's 20% of the list price of the box you're putting in.
Okay. That's great. And if you could just give us your thoughts on the government, what you're seeing in your pipeline, how you think about the potential upcoming impact of Things going on there right now, that'd be helpful. Thanks.
Yes. The government market has been a good market for us. And think if we continue to be just by the nature of what we do for a living. With that said, no verticals more than percent of our business today. So keep that all in context.
I think your second question is really part of this around sequestration. So There's lots of speculation anxiety in general about whether that's going to occur. I guess we'll find out tomorrow, right? And if so, what that's going to mean impact wise? I think it's too Early to tell, but there are a few things that remain consistent.
One is that cybersecurity is a national priority. You can see That is lately just a couple of weeks ago with the President's executive order on cybersecurity. And then second thing, in general, is all enterprises and to some degree the government more so than an enterprise if you They're that way. They are being forced to do more with less from a budget perspective. So if you got a better solution, flex quickly at low cost and I think that's a really desirable offering.
That's what we have and I think the government has found that attractive and will continue to Quite attractive. So having said all that, nobody really knows what the impact of sequestration is going to be and we of course baked on that in Thanks, Mark.
Thank you. And your next question comes from Greg Moskowitz from Cowen.
Okay. Thank you. Hi, Mark. Just a follow on to one of Walter's questions. How is demand this quarter across your current set of low, mid and high end Was it strong across the board or did one area for example perform a little better than the other?
It's strong everywhere, Greg. The what I was saying a little Earlier was the 3,000 sold is selling very well higher than what we thought it would selling, which is always great. So I call that the Yes, everything is selling well. That's a good aberration and it's selling better than we thought it would. But everything continues to move.
Okay, great. And then for Stefan, your services gross margins have been on a nice upward trend over the past few quarters. Looking forward, I'm sure you're going to make some investments in your support organization at the same time. Presumably, your mix of subscriptions will Continue to increase. So just wondering how you're thinking about specifically about service margins from up here?
Well, we're not going to break out specifically How each of the components of the services gross margin work or the product This is gross margin in particular, the dynamic around subscription versus maintenance and the customer support organization, Subscription revenue is going to be recognized ratably over the life of the contract. And so there will be a Consistent small tailwind that builds over time as we sell more subscriptions. The cost of Support to deliver maintenance is very much headcount driven and systems driven and those costs are more pronounced upfront. So we have a couple of countervailing forces playing against each other. We've been more disciplined in getting more efficiency out of our support organization, which is helpful and as Wildfire and other subscriptions continue to build, there should be a positive tailwind to service Gross margin over time, there will be some near term fluctuations.
I think the biggest thing to understand is Given that this is the 5th consecutive quarter, we've added over 1,000 new customers. We want to make sure that we're adequately resourced to ensure a great Customer experience and that's a big differentiator between us and in the competition.
Great. Thanks very much. Thank you.
Thank you. And your next question is from Aaron Swartz, Jefferies.
Good afternoon. Just a quick Follow-up question on the deferred revenue. Obviously, that's been well ahead of what we have modeled. Should we expect I would assume we would, Should we expect a more pronounced revenue mix shift to services as we build the models out in the back half here and into 2014?
It's a little too soon to tell. We are primarily a book and ship business. If you look just on a revenue basis, still we're Approximately thirds of our revenues from products. Over time, we think directionally Services as a percentage of total revenue and total billings we'll be building. But given the fact that we're adding so many New customers per quarter and we're following our land expanded extend strategy of mining our installed base and selling To new opportunities within that base, we expect to see both robust product growth
And services growth.
We'll monitor it over time, but right now we're not making any predictions on the split.
Okay. And then sort of just a follow-up question. You spoke about the trend of a couple more multiyear deals. I think you said that was balanced between The maintenance and the subscription services. What's actually driving that?
Is that more of a customer preference? Or do you have your is the sales and partner Our program actually out trying to do multiyear deals. Thanks.
Most of it is customer driven and the fact that we are selling into The Global 2000 and high end enterprise, they want to standardize on us and they're effectively Making that standardization call with a multiyear deal and that has translated into Structurally us being very well situated in the account for both the existing deal and for follow on purchases.
Great. Thanks for taking the question.
Thank you. Thank you.
And your next question is from Keith Weiss, Morgan Stanley.
Excellent. Thank you for taking my question guys and very nice quarter. One of the things that I noticed in the quarter is you The Q2 in a row of really robust sequential increases in EMEA. Anything in particular Better there or sort of catalyzing growth there that's really leading to those 2 nice clinical uptick?
Yes. Hey, Keith. Well, you can see as you noted from the numbers, we increased the business sequentially the last 3 quarters in a row and particularly in the last two quarters at really healthy rates. So obviously, we're pleased with that. I think it's a little too early to speculate as whether any of that means as a general matter resurgence of confidence in the EMEA market Macro wise, but we're in a position of selling really high value technology and a great secular trend.
It's going to affect enterprises all around the world, including EMEA. So we'd expect security to Remain top of mind and a budget issue over there or top of budget issue over there. More specifically to your question for us, what we have seen is larger companies We've been working on larger projects, starting to bring those projects to fruition and replacing legacy technology with Palo Alto. And that's a positive again for us in the Q2. So I don't know if that means that the purse strings are opening more generally over in EMEA, but that's That's what we're seeing specifically to us.
Got it. And then in terms of where you're investing in additional capacity or additional distribution capacity, can you give us Any color on is it spread out evenly across the globe or is it more of an international focus?
We're investing pretty much everywhere. We have one of the things that markets done nicely is to do, I'll call Elevation of when you're putting the dollar in, where do you expect to get the most out and trying to get a good balance of that on like earlier high Growth markets versus more stable places where you might just be splitting territories. But generally, we're investing everywhere because we're still Yes. We're growing very nicely, but we're still under distributed pretty much on a global basis because the market is so large and there's so many folks involved in. Got it.
And maybe if I can sneak in one last one. I think on the last conference call, you talked about really good volume increases from the PA200. I think you talked about Greater than 70% unit growth in the quarter. Any chance to give an update on that unit growth number?
Yes. I'm sorry, I don't remember that specifically, so I'm looking
at that. Yes. On the volumes, We don't typically go to the level of granularity around giving product unit growth sequential or year over year numbers. But I can tell you just by virtue The revenue growth unit volumes were up across the board. Each of the Main appliances that we sell had very strong demand in the quarter.
The biggest Positive development that we had in this quarter was the traction we had with the PA-three thousand which we introduced in November and the uptake on that was It's extremely strong. But I'll tell you both the high end PA5000 and the low end the PA200, They all had nice performance in the quarter.
Thank you. We have time just to take 2 more questions, one from each of following parties. The next question comes from Frederic Greig, Nomura.
Hey, thanks guys. Just to circle back quickly to the new customers added in the quarter. Can you give us an idea if the average size of these new customer purchases is increasing and what the dynamics are that's causing those initial purchases to grow?
Yes, Frederic. A couple of things to that. So the answer is yes. I'll call it the ASP around that continues to go up. And I think the reason That again just goes back to the more accepted power they'll become, the more likely you are to make a bigger purchase with us upfront.
As we said many times in the past that we were really not focused on that number. What we really are focused on is lifetime value to customer and we have a raft of examples of So she spent well over $1,000,000 with us. It started with a relatively smaller 5 figure sort of deal, but then Rapidly ramped at well over $1,000,000 So that's what we'll be focused on is the timing ramp and the pull on the initial purchase.
Got you. Thanks a lot.
Thank you. And your next question is from Sheffley Safari, FBN Securities.
Yes. Your mix effect was negative because of the I think you had ramping sales of the 3,000 series. But you I think you hinted that as those sales mature, the margins will improve. So I'm just curious about how you see the mix dynamics playing out over the next several quarters. You also hinted at Potentially a new high end box at some point, higher throughput box.
So it seems like this is a low point in terms of mix. So any thoughts On the mix dynamics going forward?
Yes. As Stephane said it earlier, we have very strong demand for the 3,000 series, which is great and selling very well. As with all new particularly hardware launches, you don't move the same kind of product growth margin you get So you scale it to volumes when you start to do savings, we'd expect to see that over time with the 3,000 series. We Saw the exact same thing last year roughly at this time in the introduction of PA200 where sold really well out the door and had lower gross margin Because it was a newer product that's improved as we expected over time. And I did say a little earlier that there is Dan from part of the customer base for larger devices, which we certainly would think about.
If we did that, we would launch that Device had lower gross margin than it would later on when you had increasing demand. And one thing I do is note is you should expect us to continue to launch Devices in our family of products for probably all the time. It's based on what we're getting from the Customers that we're receiving the ability to do that.
Thank you. And I would now like to turn Call over to Mark McLoughlin for closing remarks.
Well, great. Thanks again everybody for being on the call today. I want to reiterate my Alta Networks team and the support of all of our customers and partners as we continue to revolutionize the enterprise network security market. We look forward to seeing all of you at our Analyst
connect. Good