Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Palo Alto Networks Incorporated Earnings Conference Call. My name is Chanel, and I will be your operator for today. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session. And we will be happy to assist you.
As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Maria Rielly, Investor Relations. Please proceed.
Good afternoon, and thank you for joining us on today's conference to discuss Palo Alto Networks' fiscal Q1 2013 financial results. This call is also 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. After the market closed today, Palo Alto Networks issued a press release announcing the results for fiscal Q1 ended October 31, 2012.
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 415-217-7722, 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 our expectations regarding securities spending and our ability to increase our market share Trends in our business and operating results, including our operating margin and non GAAP effective tax rate and our revenue and non GAAP earnings per share for the 2nd fiscal quarter of 2013 ending January 31, 2012. These forward looking statements involve a number of risks and uncertainties, Some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. These forward looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call.
For a more detailed description of these risks and uncertainties, Please refer to our annual report on Form 10 ks filed with the SEC on October 4, 2012, the final prospectus for our secondary public offering filed with the SEC on October 18, 2012, 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. Talloaltonetwork.com and in our earnings press release. Now I'd like to introduce Mark McLaughlin, Chairman, President and Chief Executive Officer of Palo Alto Networks.
Mark?
Thank you, Maria, and thank everyone for joining us today. I'm delighted to be here to share with you our achievements in the fiscal Q1 of 2013. Palo Alto Networks is transforming network security Our clear technology differentiation continues to drive our growth. Customers globally are recognizing the benefits of our solution to solve their pressing network security needs and this is reflected in our growth which continues to significantly outpace the industry. Today, I would like to outline some of the progress we've made in recent months, which includes a strong Q1 with record revenue, The addition of over 1,000 new customers in the quarter and hosting our first ever user conference where we further extended our technology lead with multiple product introductions.
On the financial side, in the Q1, we generated record revenue of approximately $86,000,000 which represents 50% year over year growth At approximately 14% sequential growth, we also demonstrated continued growth in operating leverage and delivered non GAAP EPS of $0.04 for diluted share. On the customer side, we continue to focus on our land, expand and extend strategy to drive results and fuel our growth. From a LAN perspective, during the Q1, we added over 1,000 new end customers, bringing our current customer count to over 10,000 total end customers. This is the 4th consecutive quarter in which we added over 1,000 new customers. And on the expand and extend side, our customer lifetime value continues to grow As evidenced by the lifetime value of our top 25 customers increasing to 9.9 times their initial purchase, up from 9.5 times last quarter.
Some examples of wins in the field in the Q1 were in a competitive bid against Check Point and Fortinet. We landed a new deal at a major European telecom operator. We're replacing Check Point firewalls and McAfee's IPS for internal IT systems protection as well as replacing Juniper and Tipping Point for their MSSP business. Additionally, we became the primary firewall for 1 of the leading European broadcasting companies replacing Cisco and Juniper in a multimillion dollar transaction. And for this customer, we also provided them with our real time threat prevention services.
We also expanded our relationship with a very large U. S. Government agency. At this agency, we won the data center IPS business about 5 quarters ago at one location. And this quarter, we expanded our presence to all their data centers throughout the United States for IPS Firewalls.
We replaced McAfee and beat Sourcefire for distributed security at a global health and beauty company base in the U. S. And finally, on the extend side, one of the leading lifestyle media companies in the world deployed us as a data center IPS solution 6 quarters ago. In the fiscal Q1, we expanded our presence as a customer deployed us as their global data center firewall replacing Cisco. Also in November, we hosted our first ever user conference Ignite, where we had close to 1,000 attendees from over 500 companies and 25 countries.
It was exciting and validating to hear repeatedly from our customers that we're helping them to solve their security problems with unmatched solutions. The message from our customers that resonated loud and clear was that our solutions are clearly unique in the marketplace as no other competitor is able to safely enable applications. At Ignite, we also launched 4 new products, all of which address today's virtualized and physical enterprise networks and further extend our technology lead over the competition. First, we launched 2 new hardware platforms that will address identified opportunities within the enterprise. The PA-three thousand series, which is a mid range next Generation Firewall and the M100, which is an easy to deploy high performance management appliance for our Panorama management system It introduces distributed log collection capability for large scale enterprise deployments.
This launch represents a significant step forward for our management tools. Also, we introduced our new VM Series, which is a virtualized next generation firewall platform that brings next generation network security into the virtualized data center environment. We believe virtualized security will become increasingly as important as more core applications are run-in virtualized environments and we intend to be a leader in this emerging space. We launched the VM Series in collaboration with VMware to provide our shared customers the ability to address their security and compliance needs while accelerating their adoption of virtualization. We also formally launched Wildfire, our subscription based our subscription cloud based modern malware detection and prevention service.
This new service gives subscribers 1 hour response times for the delivery of modern malware signatures and integrated on box logging and reporting. To date, Wildfire has discovered more than 70,000 new malware files that had not been identified by existing anti malware solutions And the enhanced response will ensure that the damages caused by 0 day malware and targeted attacks are mitigated for our customers. Wildfires not only detects modern malware, but for the first time enables enterprises to prevent malware. All of our newly unveiled products are supported by the release of Pan OS 5.0, which has more than 60 new features focusing on solving unique network security problems in cloud environments, Scaling and simplifying network security management in large enterprise environments, enhanced IPv6 capabilities Increased control for managing the growing amount of SSL traffic in the enterprise. Increasingly, we are becoming a partner of choice for other leaders in the technology world.
We announced a new multi phase relationship with Citrix that starts with validated joint solutions for their virtual application and desktop virtualization solutions as well as other as well as popular enterprise applications. Separately, we added 9 other leading companies to our technology partner program, including RSA, SafeNet and Skybox Security. Security remains a top priority for CIOs around the globe. In general, we see that security spending is resilient Even in a challenging macroeconomic environment, we believe that there will continue to be significant displacement in security spending amongst vendors With the market favoring the next generation technologies that provide significantly better security and is increasingly better value. As we look forward, we will continue to be aggressive in maintaining our technology advantage, increasing our market share and ensuring the highest levels of customer satisfaction.
With that, I'd like to turn the call over to Stefan for a detailed look at our financial results. Stefan?
Thank you, Mark, and thank you all for joining us today. I'd like to mention that unless specifically noted otherwise, we're discussing all numbers except revenue on a non GAAP basis that excludes share based compensation expense And where relevant, it's tax related effects. In Q1 'thirteen, total revenue grew to a record $85,900,000 an increase of 50.5 percent over a very strong Q1 2012 and 13.6% sequentially. In Q1 'thirteen, product revenue of $55,500,000 grew 29.5% year over year and 12.3% sequentially, driven by sales of our series of appliances. Services revenue, which is comprised of both subscription and support of $30,400,000 increased 113.4% year over year and 16.1% sequentially.
Services revenue accounted for 35.4 percent of total revenue, an increase of 80 basis points sequentially. This is in line with our expectations It underscores the power of our hybrid revenue model as it provides enhanced visibility. The geographic mix of revenue was 64% Americas, 23% EMEA and approximately 14% for Asia Pacific, with all theaters posting growth on a year over year and sequential basis. Total non GAAP gross margin in Q1 was 72.6%, in line with our target range. Non GAAP gross margin decreased 160 basis points year over year and increased 70 basis points sequentially.
Q1 non GAAP product gross margin was 74.2%, down 180 basis points year over year and 60 basis points sequentially. The sequential decrease was primarily due to product mix. Looking forward, product gross margins will fluctuate as we introduce new products Such as the PA-three thousand, which was introduced in November. New products have a higher initial cost of goods sold, but will improve over time as volumes increase. Our non GAAP services gross margin was 69.5%, up 60 basis points year over year and 2.90 basis points sequentially.
The sequential increase was primarily due to the timing of headcount and project related expenditures in the quarter. Services gross margin will also fluctuate depending on the timing of the ramp of our service Moving on to operating expenses, we continue to invest in product development and expand our sales and go to market organization. Q1-thirteen non GAAP R and D was $11,600,000 an increase of $1,400,000 from the prior quarter, primarily related to spend on programs and headcount additions. As a percentage of revenue, non GAAP R and D expense was 13.5%, clad with Q4 2012. Q1 twenty thirteen non GAAP sales and marketing expense was 38,300,000 An increase of $2,800,000 from the prior quarter.
And as a percentage of revenue, it was 44.6%, a decrease of 230 basis points sequentially, primarily due to operating leverage. Q1 'thirteen G and A expense was $7,900,000 an increase of $800,000 from the prior quarter or 8.4% as a percentage of revenue, flat with Q4 2012. In total, Q1 'thirteen non GAAP operating expenses were $57,100,000 or 66.5 percent of revenue, increase of $5,000,000 or 9.6 percent from the prior quarter. Moving on to operating margin. In Q1, we saw a strong increase in non GAAP operating margin, which grew 300 basis points sequentially to 6.1%.
The sequential improvement in operating margin this quarter can be attributed to natural leverage as we scale as well as timing of headcount additions. As we've stated previously, Our goal is to grow operating margin in a steady manner, but we've also noted there will be near term fluctuations. Our non GAAP effective Tax rate for the quarter was 42.6%. This rate will continue to fluctuate throughout the fiscal year as it's dependent on our global pre tax profit mix and potential discrete events such as the removal of our domestic valuation allowance. Non GAAP net income for Q1 was $2,900,000 or $0.04 per diluted share using 77,800,000 shares.
This compares to non GAAP net income of $1,900,000 or $0.03 per diluted In fiscal Q4 2012 and non GAAP net income of $5,600,000 or $0.01 per basic and diluted share in fiscal Q1 2012. On a GAAP basis, net loss was $3,500,000 or $0.05 per diluted share on a basic and diluted basis for Q1 'thirteen. Turning to the balance sheet. We finished October with cash, cash equivalents and investments of 342,100,000 In Q1, cash flow from operations was $23,100,000 free cash flow was $19,100,000 And free cash flow margin was 22.2%. Cash flows benefit from our hybrid revenue model in which we build for our services at the beginning of the engagement And we collected cash shortly thereafter.
We ended Q1 with $56,400,000 of accounts receivable, Up from Q4 2012 balance of $45,600,000 Average day sales outstanding were 53 days in the middle of our target range of 50 to 55 days And up modestly from 50 days reported in Q4 2012. Moving down the balance sheet, our hybrid revenue model helped to increase Total deferred revenue to $160,400,000 an increase of 86.2% year over year and 18.1% sequentially. Short term deferred revenue of $101,400,000 increased 17.5% sequentially. While we're continuing to see an uptick in multiyear deals, Majority of our services engagements are on an annual basis. Let me now turn to our guidance for Q2, twenty thirteen.
We expect revenue growth to accelerate on a year over year basis and be in the range of $90,000,000 to $94,000,000 This equates to 59% to 66% year over year growth. Additionally, we expect non GAAP EPS to be approximately $0.04 per share using 78,000,000 to 80,000,000 shares on a diluted basis. With that, I'll turn the call over to the operator to open the Q and A session.
And our first question comes from the line of Greg Dunham, Goldman Sachs.
Yes. Thanks for taking my question. I guess first question, A common question I get is how often is Palo Alto used as the primary firewall vendor? And you kind of highlighted a couple Wins there and you also noted that the 9.9% statistic from existing customers. But can you address that concern from Some investors and how that's progressed over time?
Thank you. Yes, Shay, Greg, it's Mark. Yes, so we've said before that when we were on the road example that about Half of our installations were the primary firewall and more than half of our new sales were the primary firewall. So I think what you're seeing in our results here Plus the lifetime value statistics we're quoting is that more and more often we are the primary firewall either in the initial sale and Specifically, when we're already in an account that is happening more and more often as well. So that is trending in a positive direction for us where we Are becoming a primary firewall and installations where we've already been put into a company and more of our new sales are primary firewall as
well. Thank you.
Our next question comes from the line of Keith Weiss of Morrissey and Stanley.
Excellent. Thank you for taking my question and nice quarter.
I was just wondering if you
could give us a little bit more color into the environment and in particular, two areas. 1, the federal government. I know you guys had a really good year last year in federal government. Just wanted to see how it turned out this year? And maybe give us a little visibility into what you guys are thinking about fiscal cliff and whether that's going to impact you guys at all?
And then maybe a little bit on EMEA, it looks like EMEA, you had a nice bounce back there and or a nice bounce there in terms of growth, the absolute revenue number from Q4 into Q1. How are you guys feeling about EMEA given the current macro over there?
Yes, sure, Vicki. Let me start with the highest level question on the fiscal cliff, which is, It's really uncertain to say what kind of impact that would be. I think from if it was going to be a big impact, probably it would be more in the government space if there was sequestration or things like that. The main impact of that sort of thing primarily would be at the end of the year for the Fed, which has gone by. So there's quite a bit of time for everybody to get all that stuff worked out.
Yes, that sort of macro condition aside in the Fed space, for us that continues to be a very strong vertical for us. We expected A strong quarter from the Fed as usual in Q1 and it performed to our expectations. All that aside, still no vertical accounts for more than 15% of our overall business, and we're still very nicely diversified. And then from an EMEA perspective, We continue to keep our eye on that like a lot of companies do, particularly in Southern Europe, but that region for us had very strong year over year performance And also we had good strong sequential growth in EMEA this quarter as well. Excellent.
Thank you, guys.
And our next question comes from the line of Phil Wenzel of Credit Suisse.
Hi, thanks guys. Good quarter. You had a particularly strong number in deferred revenue this quarter. I wonder if you could just comment on the trends that you're seeing in terms of just attach rates of The various subscriptions and then renewal rates. And I just have one follow-up to that.
Sure. So deferred revenue grew very It grew faster than our revenues on both quarter over quarter and year over year basis. When you think about the Profile of the deferred revenue, it's split between subscriptions and maintenance. The attach rates have And now, we've just started to monetize wildfire. That wasn't in these latest results, but that will be a benefit for us going forward.
The attach rates haven't really changed that much since we talked last time, although we typically get, call it, 1 to 2 Subscriptions at the time of the initial sale, but as part of our land, expand and extend strategy, we are getting more Subscriptions that are being sold into accounts after we land them. On the maintenance front, the attach rates remain very high And the renewals for both maintenance and subscriptions are also very high.
Yes, got it. And then just one quick Just pricing. I mean one of the concerns that investors have had is that there's a sort of a price war going on in the perimeter security market. Just curious what you're seeing in terms of pricing this quarter versus last and sort of year over year? And any commentary around that would be great.
Yes. Hey, Phil. Yes, we do see competition getting aggressive on pricing. We've seen that for quite some time. There's been not a lot of impact to us on that because of a number of things.
At first and most importantly, as the customer see the difference. So it doesn't matter how You want to sell your technology if it doesn't actually solve the problem they're trying to solve, which in this case is Can I Safo enable an application? And since we're the only guys in the market who have that technology, people continue to buy and they continue to pay premium price for that. I think you see that reflected as well as our margins are very good. They So we do see pricing pressure out there, but we don't see that being a successful tactic against us.
Great. Thanks guys. I'm glad to see that reacceleration next quarter.
Thanks, Rob. Thank you.
Our next question comes from the line of Joel Fishbein, Lazard.
Good afternoon, guys. You guys, it looks like you're spending on sales and marketing almost doubled year over year. Can you just talk about Ways in which you're focused on increasing distribution and maybe going after different vertical markets there that would be helpful.
Sales and marketing is definitely an area where we're going to continue to make meaningful investments in. What's been happening over the last year is we have again a high touch indirect fulfillment model where we have quota carrying salespeople And we are basically selling everything we can get in front of. We're balancing that with a robust channel strategy where we have a 2 tier distribution system. So we've been Selectively adding high quality partners to help extend our feet on the street without incurring too much cost. Now you can see on a sequential basis, Actually sales and marketing as a percentage of revenue showed some nice leverage coming down, Call it about 200 basis points.
And that's something where our target model is 30% to 33% for sales and marketing. We feel like with the combination of our high touch folks with a robust channel strategy and the additional partnerships that we've announced With Citrix and VMware, etcetera, we should be getting more leverage out of sales and marketing going forward.
Great. Thanks. Thank you.
Our next question comes from Jason Nolan, Robert Baird.
Great. Thank you. Getting a lot of questions on software defined networking and we saw the big switch networks announcement. I guess how important is SDN to you and how are you positioned?
Yes. So I think SDN is a trend that lots of folks are talking About now and from our perspective, it's a good thing if it actually takes hold just because it makes what we're selling even more unique and Relevant makes the non proprietary hardware guys less relevant. I'll let Nir is with us here too. I'll let him dive in on that for just a second.
Yes. If you look at SDN, SDN is really looking at solving one big problem, which is very frequent changes in virtual data centers where things move around. And when virtual machines move around or when they're added or removed from the infrastructure, security and networking have to follow them. That's really what SDN is trying to solve. If you dig into the announcements that we've made around virtualization, a few weeks ago at Ignite as part of fan OS version 5.0, You will see that there is not just that we announced a virtual firewall, the VM series, but we also announced functionality that can track the movement of virtual machines in data Track their addition, their removal, their movement from one place to another.
And by that, by integrating that into your VM infrastructure, into your Orchestration tools, we are able to effectively perform what SDN performs, which is track changes in their data center And adjust to them in real time without needing to change any configuration manually. I think part of Our work with VMware is also around that.
Thank you.
Our next question comes from the line of Michael Turits, Raymond James.
Hey, guys. Two questions. One, was there any change in the mix of change the amount of license that isn't deferred? I don't know if that had any impact on product or license since That was a little bit slower than the rest of the business.
Yes. There is really no change in mix In deferred revenue, as we said previously, the vast majority is services in deferred revenue. So there was not any mix change.
Okay. And then did you where did you end in terms of Headcount, what was the net add in terms of headcount this quarter? And what do you expect that to be like over the next several quarters?
Yes. So we ended at 847 total headcount in Q1 'thirteen and that was Off of a Q4, 2012 number of 755. And what we stated previously was we anticipate adding approximately 75 to 100 As per quarter, the prior quarter we came in at the lower end of that range. This quarter we came in near the high end of that range. There's going to be some fluctuations as we go forward, but we are heavily investing in the business, but doing it in a profitable manner.
And if I could squeeze one more in. What about your expectations around CapEx? I know that you've planned some accelerations there. What's the schedule for that?
The CapEx this quarter was approximately $4,000,000 And for the rest of the year, we'll be in the, Call it low to mid single digits. We're not providing specific guidance on a quarterly basis, but expect to be in the low to mid single digits in terms of CapEx.
Great, Stefan. Thanks very much.
Thank you.
Our next question comes from Tal Liani, Bank of America Merrill Lynch.
Hello. My question is about the gross margin and breakdown between services and products. If I compare your gross margin to some of your competitors, your margins are lower. But earlier in their life cycle, they also had Similar gross margin if I compare it to Fortinet for example. And later on in life, they had a massive Based in gross margin to the 80s and high 80s.
So the question is, is there something different in your business model That is going to result in lower potential upside to gross margin. Is gross margin mostly the services side, is it the function of Volume, how do we compare between you and other companies in the space on this number? Thanks.
Well, let's start with our target model, which is 70% to 73%. We've been operating within that range. When you make a comparison between Palo Alto Networks and some of the other folks out there, whether or not it's Fortinet or Check Point or Cisco In the security business, every company is slightly different. What we've said to folks over time is once we get to our target model, which is When we talk about target model, we also look at operating margin, which is 22% to 25%. We will reevaluate where we are in gross margin.
So this isn't a long term target. This is a target model that will be reassessed structurally. A tailwind for gross margin will be Increasing subscription sales and as a positive potential tailwind down the road as we just introduced the paid for version of wildfire, Which will be additive and it's very high gross margins for us. The maintenance part of our services revenue is very much in line with other companies of similar size and scale. But unlike other companies that we compete with, we're adding Over 1,000 customers per quarter, we're growing.
If you look at the checkpoints, the Ciscos and the Fortinet, if you just compare numbers on a sequential basis, We're growing 10 times to 12 times faster against some of those folks there. So we're making the investments in the maintenance organization To ensure that we have the best customer service that's out there. So to net it off, we think that long term, There could be some upside to the gross margin target, but we want to get to our target model first, then we'll reassess.
Excellent. Thank you.
Our next question comes from Jeff Gallo, Barclays.
Yes, gentlemen. Thank you very much. I have two questions. Mark, maybe this is one for you or Nir. And that is, could you help us understand the ADC vendors role in all this?
I think many of them have Sorry to talk a lot more aggressively about security in the past several quarters. And then Stefan, one for you as well. Is there a Seasonality elements to the deferred revenue affiliated with your fiscal year end, should we expect A different pattern in the upcoming quarter? Thank you.
Yes,
Jeff. I'll take the first one on the ADC side. I think specifically you're probably talking about that 5 Talks more and more that security is a growth opportunity for them. When they are doing that, they're talking about a different space than we are in from a security So they are sitting in different part of the network for different purposes. And from a network security perspective, they're primarily continuing to talk about Yes, Steve from inspection firewalls at different points in the data center market we do not play in today.
So I'll let
Yes, I can give you some more details around that. If you look at where Customers deploy security. There are several places. 1st is, of course, the perimeter, the Internet facing It's what's called the Internet facing firewall. And really the requirements there are next generation firewall, meaning safely enabling applications, Scanning traffic for viruses, for spyware, for all kind of malware, for exploits, for data leakage and so on.
And of course, we don't see F5 playing in that market We don't see State Farm Inspection as a viable solution in that market at all. The second area where security is deployed is in the data center. And There are 2 use cases. The first use case is the external data center, the Internet facing data center where you run your web servers. And the requirements there in many cases Security perspective are pretty minimal, meaning allow only traffic to the web servers, meaning to ports 8 and 443 and then blocking all the rest of the traffic.
That of course can be achieved using a simple step for inspection firewall and I think that's what the ADC vendors such as F5 are doing. They call it an outbound firewall. The 3rd area where you see security being deployed, which is still in data center, is in the corporate data center. In the corporate data center, the requirements are again for next generation firewalls because customers want to control access to applications, Controller who can access which application perform, which functions in these applications and also scan the data for bad things and for good things moving around. That's again something that we don't see the agency vendors playing in and we're not sure whether they have a path of Getting there without significant investments in anti malware technology, in IPS technology, data leakage technology, As well as next generation firewall technology.
In terms of our market size, we think that the external firewall Excuse me, external Internet facing data center firewall is a much smaller market than the corporate data center and the Internet firewall, the perimeter firewall. And these are the areas we focus at. We believe the ADC markets the ADC vendors are focusing on the small part of the market, Which is the Internet facing security or Internet facing firewall.
And Jeff, on the second Question, is there a seasonality element to deferred revenues? I would say that it's a little still too soon to call seasonality trends, although We're seeing a little bit of natural fiscal year seasonality with Q4. We were happy that and pleased with our Sequential growth on a revenue basis and on the deferred revenue. With our guidance, we're obviously guiding up sequentially And you would expect that there would be also an increase in deferred revs. We are not going to get into the specifics around What the rate of growth in deferred revenues is forecasted to be, but we anticipate that that balance should grow.
Thank you very much.
Thank you.
Our next question comes from Walter Puchar, Citigroup.
Thanks. Mark, I'm wondering if you could talk about you've had, I think Mark Anderson, the new Head of Sales on board here for now full quarter. I'm wondering if you could talk about what changes Have been made or you foresee making under his leadership in running sales?
Yes. Thanks, Walter. Yes, Mark is doing a fantastic job, not surprisingly for us given all Demonstrated success he's had at F5 in building a business growing these kind of rates over time at scale. A number of things That you're doing that are probably relevant. The first is that we're very, very focused on large accounts.
So the company has always been Successful in the selling and I'll call the Global 2,000. And you can see from our LTV numbers that we continue to add business in all of the accounts, Particularly in the large accounts as well. We just really hadn't been super organized about that and Mark's done a lot of work on bringing a lot of organization and focus into Larger accounts, we can keep the LTV growing there as well as across the entire customer base. In addition to that, Making sure that we're doing as good a job as we can with the channel in a coordinated fashion. We didn't really have an owner Across the company from a channel perspective before Mark's really taken the reins on that as well with some new hires in the organization working With the channel folks.
And the third is just a lot of operational discipline that he's brought to the system as well from And the numbers, commit, culture, those kind of things, which are very important, obviously, when you run into a publicly traded company. So we all very, very positive things going on here.
And then I'm not sure if for Mark or for Stefan, but you mentioned the LPV number and the 9.9 versus the 9.5. Can you talk about how much of that you're seeing come in from You know, layering and annuity and wildfire being the most recent versus just simply going in and more fully penetrating a customer that starts out with you guys in one part of the network?
It's a mix in a good way, a good blend. So in the cases where the customers are doing repeat purchases and these are Pretty much across the board of all the customers doing these repeat purchases. We find 2 things that happen Yes, they are a good blend of their buying more devices as they continue to spread those out in the network and they continue to buy more services to put on those devices. I think an interesting Walter is what's penetration even in some of our largest customers and in our conversations with them, looks at their networks, How large the networks are boxes that have been deployed over time. We think that's still even some of our largest customers relatively small, just penetration because These guys measure devices in 100 and sometimes 1,000 devices in some of these biggest networks.
Got it. Great. Thanks for taking the questions.
Thank you.
Our next question comes from Gregg Moskowitz, Cowen and Company.
Thank you and good afternoon guys. Mark, I know we're only about 3 weeks removed from the Ignite user conference, but just wondering even anecdotal?
Operator?
We need to get another phone line up.
Hey everybody, this is Mark. I understand there's some issues where folks Can't hear us, but we can't hear anything on the line. So
This is the yes, I'm back on the line, sir. I do apologize. All our lines have just dropped. So Our next question comes from the line of Greg Moskowitz, Cowen.
Hey, Greg. Are you back?
I'm back. Can you guys hear me?
Yes, we are. Sorry about that. Not sure what happened. Okay.
2nd time is a charm. Hi, guys. So, Mark, I know we're only about 3 weeks removed from the Ignite user conference, but just wondering anecdotally what the early interest has been like thus far for your PA-three thousand appliances?
It's good, Greg. So if I could just take at a higher level and I'll talk 3,000 for a second, but the user conference period we had, it's our very first one. We had almost 1,000 folks there and I thought it was very interesting that almost all of them paid To attend, which is unusual in these tough times. But great, great feedback from folks across the board about things we've done and very Excited about the things that we launched. We put a lot of stuff in the market here recently and spent a lot of time with the customers explaining it.
The 3,000 in particular is a device that was clearly being asked for from the market. There's a clear market need for that for a mid range Of device and we've been selling it ever since the day we announced it.
Okay, great. And then just a quick follow-up for us, Stefan. The tax rate as you noted was higher this quarter and I understand there are going to be fluctuations going forward. Just wanted to get a sense for fiscal 2013, are you still The tax rate to be 34% to 39%.
Yes. Right now, I think it's going to be at the higher end of that range. After we get through this fiscal quarter, Q2, we'll give a little bit more guidance on the back half For the back half of the year, for the next call.
Okay, great. Thank you very much.
Yes.
Please, Sam, for your next question. Our next question comes from Brent Thill. Please go ahead from UBS.
Thanks. Good afternoon. Just as it relates to some of the value added subscriptions that you can cross sell the clients, can you just give us bring us up to speed on where you're at? And Maybe you'll talk a little bit about the economic model in terms of what you're seeing from customers.
Sure. Assuming subscriptions and services. So now with the paid version Wildfire now in the market. We have 4 subscription services. We have Threat Prevention.
We have the URL Web Filtering. We have our Global And now the paid for version of a wildfire, the economics are similar for the subscription services. So it's 20% of the list price of the device Per subscription service. So there's been no change to that since the last time we talked.
Okay, great. And maybe for Nir, just as it relates to everyone's talking about EPT and they're looking at potentially incrementally priced products To go after this, are you thinking of this as an incrementally priced piece or is this embedded in the platform?
So the way so our APT or modern malware service called Wildfire is made of 2 pieces. The first piece is Collection service where we collect we let our customers run their traffic through a separate Through a cloud based service, which we don't charge for and we scan their traffic and we look for malware in it. And if we find malware, we take that malware and we generate immediately signatures to go and block that malware and similar malware trying to get on the customer network As well as to block existing instances of that malware that are already on the customer network trying to communicate back with the bad guys. Receiving those signatures is a paid for service. So sending us traffic for examination is a free service.
And this is really what our competitors Meaning, if you look at the stand alone APT vendors, what they're selling is a detection service. They don't have prevention capabilities, mostly for the fact that they don't have a high speed firewall, IPS and anti malware device Sitting in the network, they don't provide that and nobody is looking at them to provide that. So we decided to give that part to the customer for free because we also see value from collecting those samples. The second part that we do, which is unique to Palo Alto Networks, no one else in the market can do that, is to turn those signatures around. It is we turn this malware around into signatures That as I said are designed to block both the malware trying to get in the network as well as existing instances of the malware trying to get out of the network.
This is unique to Palo Alto and this is what we charge for as part of the new wildfire subscription service.
Great. Thanks for clarifying.
Again, we do apologize for the technical Our next question comes from the line of Frederic Reade of Nomura.
Hey, thanks guys. 2 for me. First, some Public software companies disclosed how changes in billings terms may have impacted year over year billings growth in the quarter. Could you give us a similar commentary? And second question is just on the competitive environment.
You're clearly taking share, but when you compete against Check Point, Cisco, Juniper, who do you have the best win rate against and why?
On the first one, we have a hybrid revenue model And one element of that revenue model is SaaS based. We are the crown jewels of the company are in software, But we are an appliance based vendor that has a portion of the revenue stream being SaaS. So with that as the backdrop, There's no changes in billing terms for our services or subscriptions or maintenance. So there is no impact on a quarter over quarter basis relative to billings. Now I will say that billings It's not something that we focus on because we're primarily a book and ship business.
With that said, billings was $110,000,000 in the quarter And it grew faster than revenue.
And yes, Frederic, on your competition question, those are the 3 firewall vendors we see in the market you mentioned, Cisco, Juniper and Checkpoint. And we've been taking share from all three of those vendors. As far as Which one we see more often? Cisco has the largest market share, so we tend to see them in more instances. Remember, most of the sales we do are displacement sales, so they are in more Accounts are ready to start with, so we tend to see them more often as far as who we're displacing, but it generally just follows the market share where folks are already installed.
I guess I was wondering more I guess win rate. Do you beat Cisco 60% of the time, checkpoint 70% of the time? Do you have a statistic like that?
Yes. I think the better way to look at that is the way we look at it is when we get into an account, like we said earlier, if we can get the technical valuation done, our win rates Are very high and that is across the board against any competitor, doesn't matter who it is.
Great. Thanks a lot.
Thank you.
Our next question comes from Jonathan Ho, William Blair.
Hey, guys. Just one question around the competitive Are you seeing any competitive response or any shift there in terms of maybe reaction from some of the incumbents that are losing significant share either on the pricing On the product side?
Yes, Jonathan. As I said a little, I'll take those in reverse. On the pricing side, we've seen some more aggressive pricing in the market, which is A natural response if you don't have the technology that the customer is after, which is the more important piece. We haven't seen any competitive response To what we're doing as far as safely enabling applications. So interestingly as well, we pay attention to that question a lot.
We think we're very far ahead of the competition already. We think we widened that gap with the 5 products we put in the market in the last A few weeks and when we asked our close to 1,000 customers that came to our user conference what they thought about that, just resoundingly, they were very clear that we're unique in the market.
Got it. Got it. And can you guys talk a little bit about channel incentives and training and maybe some of The results of the investments that you guys have made on that side and potentially what the impact could be sort of going forward?
Yes. So on the channel side, we have a bit of a different model than other folks. So we're a quality versus quantity shop. We have about 850 channel partners today We've grown that. That will continue to grow over time at a pace we like.
The reason I mean a pace we like is It's very important when you have the disruptive technology in the market and you're almost always displacing an existing Provider that you're adequately trained and can represent the technology in order to get the sale done. So we're very careful with who we bring on from a channel And then we spent quite a bit of time with them and this does cost money and resources to get them educated and trained and tested and certified. But the results are speak for themselves as when they go through all that with us, they do very well. We had our North American partner conference right after our user conference actually. And it's very interesting with over 200 of our partners there.
Just to ask a quick question of how many folks had more than doubled their business with Palo Alto Networks in the last years from last conference And we had multiple dozens of people stand up in the room and everybody else in the room said, Mitch, I'd like to do that too, right? So that continues on the interest side. Also these are conference call that we trained a couple of 100 we certified a couple of 100 of our partners and users as Through testing, which is important as well as make sure they understand the product. So I think that's all working really well for us and at the pace that we like it.
Got it. Thank you.
Our next question comes from Catherine Trebnick, Northland Securities.
Good afternoon. Could you provide at the beginning of the call, you had said that you were up significantly 14% quarter over quarter. But could you delve into some of the Vertical segments that are possibly driving some of this and if those are driven by any of compliance or regulatory in nature? Thanks.
Yes. Hi, Catherine. So if we look if we break down our entire business from a vertical perspective, it's very nicely distributed, not only vertically, but But it's very nice to distribute it, so we don't have an overwhelming concentration in any vertical, which we think gives Yes, it's a good degree of a lower risk in the business. No vertical accounts for more than 15% of our business today. And the ones that tend To be higher, it's closer to the 15 are financial services, the public sector space and the high technology space, not surprisingly since they have a lot of assets online
How about healthcare? I'm kind of curious on that since there's a lot of moves to digitization of all the patient records. It seems like that might
Yes. No, that's very precious. So I think healthcare is probably number 4 or 5, I listed the first three, but you picked up on it. It was either the next one or one right to live. But yes, I think what you're getting at is that in a number of industries, They have different compliance requirements, regulatory requirements in other industries.
And if you if that's the world you live in, then you're likely to be very interested in our technology and healthcare
All right. Thanks.
Thank you.
Ladies and gentlemen, that concludes the presentation. I'd now like to turn the call over to Mr. Mark McLoughlin for closing remarks.
Thanks again everybody for being on the call today. Sorry for some of the technical difficulties there. I'd like to reiterate my appreciation for the hard work of the Palo Alto Networks And the support of all our customers and partners as we continue to revolutionize the enterprise network security space. We look forward to speaking with you again next quarter. Thank you.
Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.