Good day, everyone, and welcome to Palo Alto Networks' Fiscal First Quarter 2024 Earnings Conference Call. I am Walter Pritchard, Senior Vice President of Investor Relations and Corporate Development. Please note that this call is being recorded today, Wednesday, November 15, 2023 at 1:30 p.m. Pacific Time. With me on today's call to discuss first quarter results are Nikesh Arora, our Chairman and Chief Executive Officer; and Dipak Golechha, our Chief Financial Officer. Following our prepared remarks, Lee Klarich, our Chief Product Officer, will join us for the question-and-answer portion. You can find the press release and other information to supplement today's discussion on our website at investors.paloaltonetworks.com. While there, please click on the link for events and presentations to find the Q1 2024 earnings presentation and supplemental information. During the course of today's call, we will make forward-looking statements and projections regarding the company's business operations and financial performance. These statements made today are subject to a number of risks and uncertainties that could cause our actual results to differ from these forward-looking statements. Please review our press release and recent SEC filings for a description of these risks and uncertainties. We assume no obligation to update any forward-looking statements made in the presentations today. We will also refer to non-GAAP financial measures. These measures should not be considered as substitute for financial measures prepared in accordance with GAAP. The most directly comparable GAAP financial metrics and reconciliations are in the press release and the appendix of the investor presentation. Unless specifically noted otherwise, all results and comparisons are on a fiscal year-over-year basis. We also note that management is participating in the UBS Conference on November 29. I will now turn the call over to Nikesh.

Thank you, Walter, very good afternoon, everyone, and thank you for joining us today for our earnings call. Q1 was the first quarter of our three-year plan we presented in August. If I were to summarize the quarter I would say the following. We continue to execute amazingly well in what is a volatile environment. On the geopolitical front, we've been contending with what's happening in Israel and Ukraine. On the hardware or product front, as you see, there has been normalization in the industry, it's something we've been indicating for a while. Backlogs is being shipped, supply chain issues are behind us and product growth is normalizing in the industry, we continue to seize normal strength as we indicated in prior quarters in that category. On the macroeconomic front, business practices continue to adapt and adjust to a new normal with higher interest rates for longer. Internally, on the product side, we've had one of the strongest start to our fiscal year. In addition to various recognitions, we have delivered strong innovation across all three platforms. We launched an AI-enabled Cloud Manager and Network Security to continue our consolidation platformization efforts towards Zero Trust. In SASE, we announced our intent to deliver enterprise browsers, the Talon acquisition, which will solve one of the critical issues that more access, which is not addressed today by any SASE vendor. We released the industry's first integrated UI for Code to Cloud and Prisma Cloud and announced the acquisition of Dig Security, double-down on data security for Generative AI and Prisma Cloud. Last but not the least, in Cortex, we launched XSIAM 2.0 to bring your own AI. On-the-go to-market side, Q1 is seasonally a slower start as we kick off the new year, but the team delivered superior revenue and profitability and…

Thank you, Nikesh, and good afternoon, everyone. I'll cover the specifics of our Q1 results, additional details on drivers behind the results and our Q2 and fiscal year 2024 guidance. For Q1, revenue was $1.88 billion and grew 20%. Product revenue grew 3%, total service revenue grew 25%, with subscription revenue of $988 million, growing 29%, and support revenue of $549 million, growing 17%. We saw consistent revenue contribution across all theaters, Americas grew 20%, EMEA was up 19%, and JPAC grew 23%. The strength of our next-generation capabilities continues to drive our results with NGS ARR exceeding $3 billion for the first time and growing 53%. We saw strong contributions across the portfolio in Q1. We delivered total billings of $2.02 billion, up 16%, total deferred revenue in Q1 was $9.4 billion, an increase of 32%. Remaining performance obligation or RPO was $10.4 billion, increasing 26%, with current RPO just under half of our IPO. As Nikesh mentioned, we saw the rising cost of money have an important and incremental impact on customer behavior in Q1. We're responding to this in the ways we have discussed previously, including using annual billing plans, financing through PANFS, and partner financing. In Q1, this had a negative impact on our billings, although as you can see, we saw strength in NGS ARR and revenue. Our non-GAAP earnings per share was significantly ahead of our guidance, growing 66%. This was driven primarily by the significant increase in our non-GAAP operating margins, which expanded 760 basis points year-over-year. We continue to benefit from the scale inherent in our business, especially as some of our next-generation security offerings scale. We again delivered strong cash flow in Q1 with trailing 12-month adjusted free cash flow of $3 billion, achieving trailing 12-month free cash flow margins of…

Thank you, Dipak. To provide as broad participation as possible, please limit yourself to one question. Our first question will be from Saket Kalia with Barclays followed up by Hamza Fodderwala from Morgan Stanley, go ahead, Saket.

Okay, great. Hi, guys, thanks for taking my questions here. Dipak, maybe the question is for you. Appreciate the revised billings guide in this macro backdrop and to your point the higher cost of money. I'm curious how you maybe thought about factors like pipeline, like close rates, and very importantly billing things duration for the rest of the year as we just try to get comfortable with how much that billings guide has maybe been derisked?

Saket, thanks for your question. I'm going to take this one because it's more about demand function. I think repetition doesn't spoil the prayer, so I will repeat. The billings difference is not a change in demand for us or not a function of our pipeline. The billings change is a consequence of negotiations with customers and the customer says, you want me to pay you for three years upfront, you got to give me a bigger discount. You want to pay me, want me to do a three-year deal, you got to go finance it in benefits. I can do that, but I can say just pay me on an annual basis, I'm okay. I'll collect my money every year. If I go in that direction my billings changes. It does not change anything in my pipeline, in my close rates or in my demand function. Those are my point. So we're just giving ourselves flexibility because this quarter we saw a lot more negotiations around those topics, we just don't want to be held hostage to those kind of negotiations where we have to go finance deals to get DCV in there. Billings is a DCV metric. DCV is important if I am concerned about churn. I have very low churn across many product categories. So I'm very happy to collect my money on an annualized basis and that's what's needed to make sure that I don't get pressure on financing, I don't get pressure on having to give larger discounts. I retain flexibility. I do a lot of TCV deals. I do a lot of financing. This allows me the flexibility. So all I want to make sure is, there is no change in the demand function in the market. There is no change in our revenue forecasts.

Got it, very helpful. Thank you.

Thanks, Saket. Next up is going to be Hamza Fodderwala from Morgan Stanley. Followed by Brian Essex from JPMorgan. Hamza go ahead.

Hi, good evening. Thank you for taking my question. I just wanted to start by offering my thoughts and condolences to all your employees in Israel. You know, it's kind of similar vein to Saket's question, I mean, 16% billings growth is certainly not bad in the context of many of your peers growing single-digits, if at all. I'm just curious because your guidance is still assuming that growth will sustain for the full year. So what's giving you that confidence given the cost of money, given the hardware digestion that you can sustain that the high-teens billings growth given what you're seeing in the market?

So, Hamza, as, you know, Saket mentioned about pipeline, we have visibility to our pipeline, so we know there is business out there. We have not seen customers walk away from deals in Q1. It's not like people don't want to do business. We've been very consistent on hardware and hardware expectations for the last 12 months. We are regaining our consistent and expectations on hardware. We don't expect any lumpy movements up or down. We expect this is going to steadily in the 0% to 5% range as we've always been talking about. So I think from that perspective, I think to use Saket's word, we feel reasonably derisked on what's out there in the future. Q1 is the first quarter, allows us, you know, we have lots of pipeline, we have visibility to. I think I want to reiterate again, we are retaining flexibility. Can I go financing? Of course, I can. Can I go finance a three-year deal through PANFS or $7 billion of cash? I can, which will have a cosmetic impact of giving you better billings. But what I don't want to do is finance bad deals. This allows me the flexibility of not having to finance them nothing changes, I still get my revenue for the year. I still get my CRPO. I still get my annual billings. I just don't get year two and year three billings, but changes my total billings forecast for the year. It's cosmetic, it's mathematics, but it's interesting to see how the street interprets it.

Thank you.

Thank you, Hamza. Next up we have Brian Essex from JPMorgan, followed by Gabriela Borges from Goldman Sachs. Brian, go ahead, please. You're muted, Brian.

Thanks, Walter. Yes, thank you for taking the question. Nikesh, I was maybe wondering if I could dig in on M&A a little bit, pretty meaningful volume of M&A from a dollar spent perspective this quarter after not having done some for a while, how would you describe the overall environment and how would you, I guess message to investors the level of M&A that you might do over the next, I don't know, couple of years? Is this more of a one-off IP and aqua hire that you saw a great opportunity to pick up or might there be something meaningful in terms of longer-term trend or even dollars put through your sales pipeline as you scale this over your platform or scale both of them over your platform?

So, Brian, thanks for the question. Look, we have not changed our point-of-view. We have always maintained that we're going to sustain M&A at a level close to a billion here. So we haven't done one for a while or two. And if you see, if you split the two, we did a cloud security one, and we've been pretty consistent in that rough range in the $150 million to $250 million range in terms of adding cloud capability as we see the market evolves, so I think that's kind of consistent, where we are. We saw a unique opportunity, as I mentioned, 36% of workers are independent workers, they don't get SASE remote access solution. We saw more and more discussion in the market, where RBI was not covering every use-case and managed devices were not, all your mobile phones don't have management for security. Last few hacks that happened to mobile devices. So from that perspective customers asking, what is my solution, and now, what we didn't want to do is to have to deploy yet another independent solution, which is just disconnected from our overall SASE capability. And like we do, we will always pay attention to the market. We figured Talon had the best tech in the space and they were just about to go race to go to the go-to-market sort of implosion or explosion with other companies. So - and from that perspective, we saw an opportunity and we think it's a great fit. Actually, it makes us the most comprehensive SASE solution. We are going to integrate them deeply into our SASE solution. Our customers will be able to use Enterprise Browser RBI or our Prisma Access client, so it's - I don't want to call it a one-off, one-off sounds it will never happen again, but I think it's just happens to be the time where we did two at the same time, other than to different platforms, two different teams are integrating them, so it's not overhead to the organization. But we're going to keep our cautious approach towards meeting what we can digest. So you shouldn't expect anything that is off the regular pattern we've sort of shown it last time.

Got it, helpful. Thank you.

Great, thank you, Brian. Next question is going to be from Gabriela Borges of Goldman Sachs, with Roger Boyd at UBS on-deck. Go ahead, Gabriela.

Good afternoon. Thank you. I want to ask about the two dynamics that you're talking about in your business, the firewall cycle on the one hand and cost of money impacting billings duration on the other. How do you think about the potential that these two dynamics are actually connected, meaning product mix is also having an impact on billings duration and how do you think about the risk that cost of money dynamics get worse before they get better, thereby impacting the full-year guide of billings, again as we go through the year? Thank you.

So thank you, Gabriela. Look, the firewall business is actually is a one-shot business. You sell a piece of hardware and you get paid for it. It is not a ratable business, right? The ratability comes from our subscription and services part. It's usually there we have to look at it from an NGL perspective. Our duration this quarter was on the lower-end of duration. It reduced, went down, because we took more annual billing deals or we took shorter-duration contracts with our customers. So from that perspective, I think we feel comfortable given the visibility to our pipeline for the rest of the year that we have flexibility for ourselves on billing. You know, I think we're going to keep having this debate, where you keep calling it guiding down on billings, I'm going to keep calling it flexibility, you want to keep calling it guideline downward billing, so I'll keep telling it doesn't change my numbers. So we just agree that we're going to be saying that because I don't - nothing has changed the prospects of Palo Alto of three months ago.

Thank you.

All right. Thanks for your question, Gabriela.

May just to build on that, Walter, I'd say like just recognize that we're also maintaining our cash guidance, which would be the other area where we may get concerned, we're not concerned on that front.

Great, thanks, Gabriela there. Next question is from Roger Boyd at UBS, followed by Brad Zelnick at Deutsche Bank. Go ahead, Roger.

Great, thanks for taking the question. Just looking at the XSIAM pipeline, that $1 billion dollars is a pretty impressive mark, just any color you can provide on the size of the length of those deals as we think about it from an ARR perspective? I know you've talked about the 3x ARR upsell or expansion potential, but just any color on the size of those deals and how we should think about that kind of flowing into opportunities over the course of fiscal '24.

Yes, I'm trying to make sure Lee gets to ask some questions otherwise he doesn't want to show up next time. Yes, exactly.

Yes, look, we've obviously, over the last few quarters we have been talking about XSIAM, and the interest we're seeing from customers is very strong and it's been the fastest sort of growth of a new product that we've ever seen. I think it speaks to a couple of things. One is just the need in the market from customers to go through the SOC transformation. Nikesh, talked about the speed of attacks, increasing relative to disclosure requirements and things like that, and obviously the number of attacks going up as well. That's driving the technology needed to have a different solution, a better solution, one driven by AI and automation. That's exactly how XSIAM was built. And that is what was feeling the interest. The second part of this is, with XSIAM, we're able to replace several of the customer's legacy point solutions in the SOC. So we are consolidating multiple independent piece parts with a single XSIAM deployment. And third, with these deployments of XSIAM, this is a significant investment the customer is making in us [technical difficulty] investments are three-year investments and in some cases even longer because they're standardizing their stock on a new platform. They want that long-term runway with us. This is not a short-term decision they're making. So all of those factors are what are fueling the strong pipeline that we shared in the early customer success we're having with the saying.

Great, thank you for the question. Next question from Brad Zelnick at Deutsche Bank, followed by Fatima Boolani of Citi. Go ahead, Brad.

Great, thanks very much for taking the question. I wanted to ask about your new hardware lineup and the release of PANOS 11.1. I noticed some of the newer features like quantum security and advanced wildfire patient zero prevention. I just wanted to get your take on the extent to which the new platform can catalyze demand as customers try to look to take advantage of the innovation and maybe if you could, you know, help us compare contrast versus prior product cycles. Thanks.

Yes, thank you. I always get excited about the Next-Gen firewall releases of course. Look, what we announced was a new high-end chassis, so one that scales beyond a terabit per second. And so there is, obviously, this is the largest highest performance networks out there, service provider and in some cases large enterprise environments, at the same ruggedized platforms, platforms that can go to plus 50 degree Celsius, minus 40 degrees Celsius, because there are harsh environments out there that also need to be protected, right? So, this is expanding the use cases that we can support with our hardware next-gen firewalls. The other pieces you mentioned are also equally exciting from a software perspective. You know, Quantum is still likely a ways off, but there's a lot of companies that are starting to prepare for that, thinking about what happens in post-Quantum cryptography in the advent of potential computers and what that will mean, and so this is the start of a set of Quantum security capabilities that we're launching for our customers. You mentioned, advanced WildFire, we added proxy capabilities. We added ADEM capabilities, so there's a lot of innovation that's in this release. Generally in what this drives is customers to look to be on our latest Gen IV or newer hardware architectures, which over time means hardware refreshes and upgrades. And so all of that is good and helps our customers get to the most secure state.

Well, thank you.

Great, thank you for that. Next question is Fatima Boolani at Citibank, followed by Joel Fishbein from Truist Securities. Go ahead, Fatima.

Good afternoon, and thank you for taking my questions. Either for Nikesh or Dipak, some of your pipeline commentary is what I wanted to unpack. As you think about the composition of NGS ARR for the remainder of the year and bearing in mind some of your product pillars are, you know, I'm not going to say maturity, but certainly they are more penetrated than others, so I wanted to get a sense of how you're thinking about contribution by pillars? Your ARR expectations for the year and to the extent, anything there has changed and I recognize that you love all your product pillars equally, but any distinguishable -

It's very kind of you to remember prior answers, but I'll try to give - I tried to give a preview of that in our prepared remarks where I said we continue to see steady execution and hardware endpoint and cloud, so they're following expected trajectory. We see the pipeline and I said the excitement and upside is coming out of SASE and XSIAM. And we see that there are large SASE network transformation deals out there, which these things have anywhere from six months to 12-month closing cycles. So we would have to know what's in the pipe for the rest of the year. Do you have some sense of comfort? We also said we grew that business 60% in the first quarter on SASE. We already - we cannot gush enough about XSIAM as you know so far, so the billion-dollar pipeline, we're hoping will close in that six to nine months. Interestingly, XSIAM pipeline closes faster than SASE pipeline deals, because SASE is often very competitive. There are POCs involved. There are future comparisons between us and one or two other companies. In the case of XSIAM, you're really competing with the incumbent.

Helpful. Thank you.

Great, thank you, Fatima. Next question is from Joel Fishbein at Truist, followed by Joe Gallo at Jefferies. Joel, go ahead with your question.

Thanks for - thanks for taking the question. This is for Nikesh and Lee. Nikesh, you called out the recent ransomware attacks and also the SEC new requirements. I'm curious, number one, is there - is that helping to drive business and what products essentially would that be driving Palo Alto and why you're sort of in a unique position to sort of address some of these issues?

Yes, so that's interesting, Joel. Let me connect that to something we announced yesterday. So first of all, I said, the activity is at an all-time high. Every day you read about ransomware attacks, now the SEC regulations are actually not kicked in yet. I think they kick in December. But you're seeing some companies go out there and start to do sort of self-report in anticipation because they're all petrified, of course, when you get attacked. So I think you're going to see more and more disclosure and we've be trying to parse, is it more activity or more disclosure? That's a good question. I think it's more activity. We've seen more and more activity. Our team does a research. We've had the maximum number of inbounds to our Incident Response Team in the last month than we had before. So clearly, anecdotally also, it's sort of come true that this is what's happening. Now, typically, the anatomy of an attack for us from our vantage point is that when we get engaged in incident response, typically, we go and we deploy a production sort of suite, where we go in and put XDR everywhere and we'll go run a bunch of analytics to make sure we understand what happened and where there is sort of the - that access may be still be resident in a customer's infrastructure. Now, typically when you do that and we leave, they don't want us to leave with our stuff, they want us to be one step back in case the guys come back. So from that perspective, you know. The incident becomes a need unfortunately because of these act, but it because the lead for us and that creates a whole bunch of product conversation around whether we're going to deploy endpoints, whether we need to upgrade their firewalls or whether they need to go down a cybersecurity transformation. I'll tell you nine times out of 10, every one of those customers ends up in the cyber security transformation because they discover that they have a lot of stuff that they should have upgraded or changed in that process. So that's kind of what happens. Those are the products, which typically end-up those customers.

Maybe I'll just add one point, Nikesh described the multi-extortion ransomware attacks being on the rise, 37% increase, the key to that is, a lot of companies sort of become used to, call it, normal encryption-only ransomware attacks. So they invested in backups so that when that happens, they backup from a green backup and they're back and operational. These multi-extortion attacks actually steal data and then extort the target, and so this can't simply be dealt with backups and this is driving a need for a better and greater investment in prevention of the attacks and not just the recovery cycle. So that connects the sophistication to the investment needed as well.

Thank you.

Great. Next question from Joe Gallo at Jefferies, followed by Gray Powell of BTIG. Joe, go ahead.

Hi, guys, thanks for the question. You've made several acquisitions further bolstering Cloud, congrats on that 12th module. Nikesh, when do you think the platform message truly cement itself in that market as it currently feels like the Wild West and then has the pricing environment stabilized there at all?

Great questions. Yes, the pricing has stabilized, you know, we saw tremendous pricing pressure in the last fiscal year with the emergence of few competitors who are willing to do whatever it takes to try and dislodge our platforms or solutions. So I think it's fair to say that pricing is beginning to stabilize. I think what's interesting is, we're seeing customers come the second time around and start looking the platform. I think the first wave so far and there's still part of the customers are still in that wave. First wave is still very module driven. I want to see SPM solution, I want to see an app solution and I want to look at SCA. So you'll find that there are different people in the customer's organization who are responsible for different pieces of the cloud security pie and end up trying to look for best of breeze, kind of like replicating what happened in enterprise security. But as soon as they start putting big deployments of scale of any kind, they have to start having a platform. I just told you, we had an $18 million deal for a platform for a large SaaS company. Now, we don't have every large SaaS company which is deploying a platform - sorry, every large SaaS company needs a platform because they have eight different tools that they're not able to stitch together. So I think it's going to be sort of a --- sort of a recursive journey where we'll show that we'll land with some customers - and some customers, other people will land with their modules, but eventually, each of those customers has to go through a platform conversation. So we're sort of focused on our platform story. We're focused on making sure we make our platform more and more robust. I was at a CIO event before this morning. There are 30 of them there. And the first question was, it was interesting, you guys bought Dig or did a security posture management, how is that integrated into the following five things we have running and like, well, the following five things will talk to each other for you.

Thanks.

All right. Thanks for the question, Joe. Next question from Gray Powell at BTIG, followed by Ben Bollin at Cleveland Research. Gray, go ahead.

Okay, great. Thank you very much. Yes. So maybe a broader question. It's pretty clear that the firewall space or that there's headwinds across, you know, the firewall appliance space this year, it's impacting everyone. But you're still guiding Q2 billings to about 17% growth. Your closest competitor is guiding to minus 5%. Historically, you've been fairly correlated with them. So I know you can't speak to their business, but can you talk about what's different on your side? Why you're more insulated? Is it more the NGS portfolio? Is it data center exposure? Is it share gains? Is there just anything you can kind of help us to think through those dynamics?

Yes. All of the above. Sorry, I'm trying to - I mean I can't process which competitor he's talking about, but okay. Look, we are in multiple businesses. In our firewall business, as we said, on the hardware business, we see that 0% to 5% as being where the market is and some of that we achieved through refresh, some of that we achieved through our own customers expanding so that we achieved through the replacement of other people's firewalls. We've - in the last, I'd say, 18 months, we've been very diligent about making sure we normalize for the effects of backlog or supply chain in that guidance and that thinking and you see that in our numbers. So I don't think that's going to change much for us. I can't comment on other people's billing variability. We just saw the impact of billing variability to our numbers this quarter. So I'm sure they have the reasons of building variability. In terms of SASE, as I said, you know, we're - we can compete with a different set of people not with the hardware people. We saw 60% growth this quarter and we have visibility on the pipeline for the rest of the year, which gives us comfort that there is business to be had there. We told you about XSIAM, which is again a category which is more in the soft management space, which is a different set of competitors. If you're talking about XDR, it's a different set of competitors. And then cloud security, where our competitors want to startup. So I think the portfolio allows us to look at different growth rates in different pipelines, across the spectrum. As I said, the demand function is not going down for cybersecurity across the board. The only thing that's changing is people saying, I'll do a two-year, one-year deal or a three-year or a five-year deal, I'll pay you later, you finance it around year-over-year. That's the only confusion you're seeing. And I think if you do all that in the market, you can figure out the underlying growth rates are strong for some people in certain categories.

Okay. Thank you.

A follow-up - our next question comes from Ben Bollin at Cleveland Research, followed by Ittai Kidron from Oppenheimer. Go ahead, Ben.

Good afternoon, everyone. Thanks for taking the question. I wanted to piggyback Gray - Gray's question a little bit. When you look at the underlying product revenue, how much of that is physical appliance versus the software form factor? And then a follow-on would be interested in your thoughts on how the trajectory of branch firewall looks over time as customers adopt, you know, more VMs and SASE to get that scale. That's it. Thank you.

Yes. So let me take the first part of the question. I mean, our product revenue when Nikesh talked about zero to five is actually across hardware, virtual firewalls, another software that's counted in product revenue. We talked about that last time then. I think it's very customer-specific in terms of what their actual needs are. So again, rather than trying to pass through each of them, I think it's looking at the aggregate. We feel pretty comfortable in that 0% to 5% range. So software is about 35% or about 30% this quarter, right? And then just --

You can see that in the gross margins. Our gross margins continue to improve for product because software is obviously a higher gross margin product for us.

And then I think your second question was around what is the impact of this on the branch deployments. The - there's really primarily two models for the branch. One is a SD-WAN-only branch, that tends to be for smaller branches where all of the security or just about all the security moves into SASE is cloud-delivered. And the second model is a next-gen firewall typically with SD-WAN built-in branch, which is still often connected back to SASE for global network connectivity, et cetera. So there - so the shift to software in SASE doesn't replace the need for the branch to have that local intelligence and to be an extension of the customer's network and ultimately, the extension of the network security posture, zero-cost posture.

Thank you.

Next up, Ittai Kidron from Oppenheimer followed by Patrick Colville from Scotiabank. Go ahead, Ittai.

Thanks, Walter. Dipak, can I just - not sure I got the answer for Ben's question quite right. On hardware, can you tell us exactly hardware, what percent of revenue that is? And Cisco in conjunction to you right now reported also results, and they've talked about - they've significantly took down their next quarter guidance in the view that for the last two, three quarters a lot of hardware was sold but not installed and so there'll be some digestment period in there. My question to you, when you sell firewalls, how much visibility do you have into how much of that is actually goes and sit on the shelf which is actually gets deployed in the field? And so is there a risk or is there a blind spot here, where you might not know exactly how your customers are handling hardware - firewall hardware and could that catch up somehow with our business as well.

Okay. So I don't - I did not listen to the Cisco call because we're here. And even if I had the time, I wouldn't. So I don't understand, it's a very large hardware business. Remember, hardware is a small part of our business, A. B, we only report in revenue what we sell and ship to the customer. So there's nothing - if it's sitting on the shelf at a customer then it's still sold from our perspective.

Yes. But I don't have any color to interact, but you have visibility especially again installing that.

Yes. Every share-based payroll is deployed has to be registered with us. So we have reasonably good visibility into firewalls that are sold to deployed. And any - I would say, it's fair to say and there are specific issues where a customer may have bought extra firewalls because [indiscernible] but there's no - I say there's no uncharacteristic or different activity we see in the last three months that has been away from the normal. So we don't have suddenly the last quarter, a lot of customers going a lot of firewalls. I think I'm going to try and guess, but there was this whole backlog situation and supply chain problem where people may have bought ahead because we're expecting supply chain prices to continue. And now they've got a bunch of stuff that is ordered sitting around that they can deploy, they don't order more, we don't have that situation. We never went down that path. We didn't hit a lot of backlog. We shipped - You know, we never went past 12 things of shipping in our product. So we did - I know that in the industry, some people are up to 1 year in terms of shipping backlog, we have 12 weeks or back to four to six weeks. So it really is not an impact for us from that perspective. So I think that should give you some better sense of what the spread is. We have reasonably decent visibility into our pipeline can be up or down the margin? Yes, but nothing as substantive as what you might have seen from other people.

Thanks you.

Thanks, Ittai. We'll take our last question from Patrick Colville at Scotiabank. Patrick, go ahead.

All right. Thank you, Walter, for squeezing me in and got a sore throat, so sound a bit like Jason Statham. So forgive me for maybe quiet, to me, the standout metric was the non-GAAP operating margin, which was 28% typically 1Q is like the low watermark for margin, but based on your guidance is actually can predicted to be the high watermark. So I guess, you know, I presume Talon and Dig are going to be dilutive. But Dipak, are there any other puts and takes that you know we should consider around operating margin?

No. I mean, I think you obviously talked about the talent, which is part of the rationale for the annual thing. We did have some expects - expenses that we expected to incur in Q1 that will now come later in the year, some around the marketing areas as well. But I would say it's just a normal course of operating business. And fundamentally, I think Dig and Talen explains the majority of the rest. I will just say on a year-on-year comparison, we did have, you know, hiring that had a different, you know, level of hiring activity this year, it's a lot more normalized in terms of how we're ramping. So there's just a little bit of base factor calculation in there but nothing really added.

All right. Thank you, Patrick, for your question. Thanks everybody for participating. And with that, I'll pass it over to Nikesh for his closing comments.

Well, thank you very much again, everyone, for taking the time to attend our earnings call. I would be remiss if I did not use the opportunity to thank all of our employees across the world and the ones in Israel, especially given what's happening in that part of the world. I also wanted to thank all of our partners and customers for trusting Palo Alto Networks.