Good day, everyone, and welcome to Palo Alto Networks' Fiscal Fourth Quarter 2024 Earnings Conference Call. I’m Walter Pritchard, Senior Vice President of Investor Relations and Corporate Development. Please note that this call is being recorded today, Monday, August 19, 2024 at 1:30 P.M. Pacific Time. With me on today's call to discuss fourth 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 Quarterly Results to find the Q4 2024 supplemental information and the Q4 '24 earnings presentation. 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 are made today are subject to a number of risks and uncertainties that could cause our actual results to differ from those 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 a 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 scheduled to participate in both the Goldman Sachs Communacopia & Technology Conference and the Citi Global TMT Conference in September. I will now turn the call over to Nikesh.

Thank you, Walter. Good afternoon, everybody, and thank you for joining us today for our earnings call. As most of you are aware, the intensity around technology reliance, connectedness, and as a consequence, cybersecurity continues to accelerate. Supply chains and interconnected systems have become the norm for better actors to target. By most metrics, cyber incidents and their impact continue to be on the rise. And we saw it in spades in Q4, notably the large scale breaches. A growing number of technology and business trends are further complicating the situation, creating additional challenges. The combination of these is getting further C-suite attention and focusing on the cybersecurity. Organizations increasingly rely on their IT system, and nothing makes this more evident than a significant outage or security breach. Over the last 6 months, financial damages from an individual breach topped a $1 billion. In other case, the impact on business was existential and required significant work dedicated to system recovery and rebuilding. Our Unit 42 Group is being called into customer crisis situations. You see a wide variation in breach situations, but ransomware remains a significant threat tying many together. The relatively new phenomena of public ransomware extortion is raising the profiles as challenge, as organizations need to deal with the pressures of public disclosure, before they have had time to do an early assessment. In addition, the time customers have to address an issue before damages escalate is shrinking. In fact, our research has found that in nearly half of cases, attackers can exfiltrate customer data in less than a single day of compromise. Geopolitical tensions remain at high levels as evidenced by multiple regional conflicts in the news. Cybersecurity activity is often elevated in these environments, and we see multiple non-government agencies impacted by this nation state activity.…

Thank you, Nikesh, and good afternoon, everyone. To maximize our time spent on Q&A, I will provide you with highlights of Q4. You can review the results in our press release and the supplemental financial information on our website. In Q4, total revenue was $2.19 billion and grew 12%, above the high end of our guidance. Within revenue, product revenue declined 5%, while total services revenue grew 18%. Drilling into services revenue, subscription revenue grew 23%, and support revenue grew 10%. It is worthnoting that, product revenue grew 24% a year ago as the supply chain normalized, resulting in growth above our underlying demand in that period. Despite the tough Q4 comparison due to supply chain constraint reversals in the second half '23, fiscal '24 product revenue grew in the low single digit range, which is in line with our expectations. The firewall appliance market demand was stable in Q4, and we continue to expect growth of 0% to 5%, as we have previously discussed. Moving on to geographies. We saw revenue growth across all theaters with the Americas growing 11%, EMEA up 14%, and JAPAC growing 15%. We saw strength across all of our geographic theaters. Total RPO, a metric that better represents our top-line growth and billings, grew 20% to $12.7 billion. Our current RPO grew 17% to $5.9 billion. The average duration of our new contracts remained at approximately three years, in line with our third quarter. As Nikesh mentioned, our NGS ARR grew well past the $4 billion mark, ending the year at $4.22 billion and growing 43%. Strength in NGS ARR was broad-based across our three security platforms. We reported Q4 billings above the high end of our guidance, driven primarily by double-digits booking growth and higher volumes transacted on [pandas]. On our balance sheet,…

Thank you, Dipak. To allow for broad participation, I would ask that each of our participants only ask one question. The first question will come from Saket Kalia from Barclays with Hamza Fodderwala from Morgan Stanley on deck.

Thanks for taking my question and nice end to the year. Nikesh, maybe for you, it's been a great start to the platformization strategy. I guess the question is, as you look at those top 5,000 customers that we're targeting as part of that 2,500 to 3,500 goal, how much of that is white space versus competitive takeout? And maybe related to that, when we started thinking about the platformization strategy, you talked about giving customers more flexibility, as they transitioned off of legacy solutions. How is that additional flexibility helping with these platformization wins?

First of all, Saket. Thank you. You always seem to manage to get the first question in, so congratulations. Like, as I said, very, very positively excited by the response to platformization. We've literally had customers reach out now. Most recently, customer we were about to close a deal. Customers said, no. I don't want to do this one deal. I actually want to sit down with the whole platformization discussion. We might do it next quarter, but let's not go two point solutions at a time. These are these anecdotes. These are these moments where it gets really exciting for us and our sales teams. In terms of your question about where are they coming from, as you mentioned, a third of our customers in SASE here are net new to the company. So when we platformize them on SASE or Zero Trust network security, they're new to the company. There's a lot of existing customers that are highlighted in our four of our largest deals where they already work Palo Alto customers, but they use the opportunity to go embrace the larger platform because they saw the vision. They participated, and they bought into it. This is where it is really helpful where they say, listen. I really like the platformization idea. I have two parts of the puzzle. But my third part of the puzzle, I need another 12 months for the other vendor to expire so that I can go and respond. I'm like, don't worry about it. You have to. We'll start implementing the third, and we'll turn on our economics the moment the other vendor is done. Now what that does, as I've said in the past, it takes over the execution risk, but they're not worried that they'll stop paying. They'll start paying us then, and they have to worry if it's going to work or not. At the same time, it also creates that economic bridge for them. But for us, it's amazing because, I have a very simple view. This goes back to the days of when CRM was not a platform or ticketing or management IT infrastructure was not a platform. At that point in time, you have four or five applications doing this. But once you bought one that did all five things, you never went back and deployed 4 different things to solve the problem. We believe we have a unique opportunity in the platforms we offer. And as I said, I wish we'd gone there earlier than later. I firmly believe this is what's going to help us get to the $15 billion number faster.

Next up, Hamza Fodderwala from Morgan Stanley followed by Brian Essex from gold from JPMorgan.

Thank you, and congrats on a strong finish, to the year. Dipak, thank you for all the helpful guidance and modeling points. Nikesh, I really appreciate the disclosure on the AI security ARR. I think over $200 million of ARR there already. There's two parts of that. There's the AI for security operations, which has been Cortex XSIAM, which has been the fastest growing product I think you guys have had in Palo Alto's history. And then the other part is securing AI, which, I when we talk to CISOs seems to be a really big problem. It's coming up more and more in all the various industry conferences. So I'm curious. I know it's early days. You just announced some of these products. But based on the pipeline you're seeing today, how fast of a product cycle do you think this could be? Because it seems like an entirely new category altogether.

Thank you, Hamza. So I think as you know, the XSIAM product is excellent in its own regard. We've shown you we did $500 million bookings this year, which I think the second year of a product is spectacular, by all means. And that helped us drive the $900 million in ARR Cortex. And we're seeing super later results from a median time to remediate. I just reviewed a bunch of this this morning. We've got some customers down to under 10 minutes, so it's really exciting. And that does form a part of the ARR. There's a very reasonable part of that ARR that comes from our network security business where we've actually deployed AI operations into our firewalls, which is what I call infusing AI into network security. That allows us to actually anticipate when the customer might run out of capacity, anticipate firewall sort of issues. That's part of it. Not a lot of that revenue is coming from the product we just launched. We launched all of our three products pretty much this year, not even last year, which we did start launching on July 20th through August 16th. All of our AI security suite is done. But as I mentioned, about 1,000 customers are interested in AI Access, which is the thing they're most interested in. There's a financial service organization which, you might know. It's the first time in our history that the entire security team literally walked up to the screen and say, wait. What are you doing here? Yes. We want to talk to you about that. So early days, exciting. And the reason it's exciting, as I said, it's seminal for me because it's very rare that you'd expect a large cybersecurity player to show up with innovation ahead of the market. And now that we can deploy AI Access to all of our 5,000, 6000 Prisma Access customers or we can deploy AI firewalls against all of our virtual firewall customers. It's interesting because all they have to do is turn on a switch, and they don't have to deploy new instances or new agents. It's just going to work. Early days, exciting, and I'm pretty sure these products will go through multiple versions as they get more and more robust.

Next up is Brian Essex from JPMorgan followed by Andy Nowinski from Wells Fargo.

Thank you, Walter, and thank you for taking the question. Nikesh, you mentioned on the call about the outage in July and how that impacted some of the demand on your platform. But what are you hearing from CISOs? Or what did you see in the quarter, one, in terms of, like, follow through from the pipeline for the quarter, was there a pause in that catch up? And then maybe an adjacent question, how might this be changing the way that some CIOs are looking at, the exposure that they may have to one vendor, one type of technology. I know clear that, you've highlighted the difference in the way that you roll out the updates. We're just looking for more higher level, one, deal experience and then two, CIO thought process as they approach to next-gen technology.

Brian, as I've said publicly as well, look, that was a tough event. It simultaneously impacted tens of millions of users, which is unfortunate. I appreciate the way, CrowdStrike handled it. At the same time, it caused two things to happen. One, customers are asking us, you have the same product. How do you deploy it? As I highlighted to you, we have a fundamentally different way in which we do content updates and have been doing it for a very long time. We were able to articulate that. Funnily enough, some of the customers busy remediating that issue while we're trying to get our deals done with them. It's kind of interesting. They were saying, I'm so busy fixing that. We had to sort of drag our deals kicking and screaming in some cases. That was kind of interesting. But I think what it did do is, like you said, it caused customers to step back and say, wait a minute. No. I need to make sure that I'm evaluating all the XDR opportunities in the market. For us, who is, not the number one player in the market, we're top four, I think, in that market, hopefully trending towards three, it's exciting, because customers are willing to give us consideration on the XDR space. It's no longer a slam-dunk for some other place in the market, which is helpful for us, helpful for our sales team, and I think, we can build on that coupled with our XIM capability and opportunities that we just talked about. I think it gives us comfort that is going to keep helping us drive momentum in Cortex.

Next one from Andy Nowinski at Wells Fargo followed by Gabriela Borges from Goldman Sachs.

Good afternoon. Thank you very much for the question. Nikesh, it seemed like one of the common factors of those platformization deals that you talked about on the call, involved consolidation on the SIEM side. And so, maybe once the, deal with IBM closes, do you think your platformization deals could possibly accelerate if SIEM conversion is actually a core driver or impetus of these deals?

I'm going to have Lee answer. Otherwise, he doesn't come to these calls.

But I think the -- our ability to land customers on any of the three platforms and expand is fundamental to how we can approach this with customers. With that being said, XSIAM this this past year has been a bit of a revelation to see our ability to innovate with a new platform, launch it, and quickly get some of the world's largest companies to adopt it and adopt it as a large scale soft transformation. And you're seeing that with the results of that with the medium time to resolution, driving down from days to minutes, less than 10 minutes is world class. And so, to see some of these large customers of ours achieve that so quickly is phenomenal. I believe that, once we have that position in the SoC, that will help to drive the other platforms because the other platforms will help bring -- we'll be able to show where good data sources are and less good less valuable data sources are and actually help our customers walk through a ongoing security transformation, based on the insights that XSIAM is able is able to glean from seeing all of the security data in one place.

Next up, Gabriela Borges from Goldman Sachs followed by Fatima Boolani from Citi.

Good afternoon. Thank you. Nikesh, either for you or for Dipak. You've talked in the past about some of your own internal uses of AI to drive operating efficiencies within your business. Give us a little bit of an update on how that's going. Where do you feel you are in that road map of being able to implement AI to, for example, save in your customer operations center and things like that? And a little bit maybe on how what you've learned from the last year in adopting AI for your sales in-house?

Great question. So, there are three parts, as I said. One, we've infused AI in our products, and we talked about that at length just now. The second part is, using generative AI to create customer helpful AI copilots as well as AI copilots for our customer support teams, because they can also use them. And then third part is just driving internal efficiencies. Let me start with the third part first. We had approximately, give or take, 300 people who were involved in solving employee tickets for our employees, so about 2% of our 15,000 people. We had just launched, last week what we call the internal AI employee experience that has allowed us to reduce that headcount by 50%. We think that can go down to 80% because we've able to been able to automate a lot of the tasks and also use generative AI to answer employees' questions. You can think about 200 people odd, which we don't need, either our own employees or third-party contractors because it's boring work. Its horrible work to have to go keep solving IT problems that have been solved a million times before. Now we've automated a bunch of them, used AI to fix it. So that's one project. We've got some early results. Some of our best developers are 40% better in coding, who have used our internal coding Copilot. It certainly is. We expect that we should be able to deploy that capability across 3,000 of them. Now remember, coding is only a third of their job, because they do other things for the other two-thirds of their job. But even in the third, if my best person is 40% better, an average person is 20% to 25% better, there's opportunities for better code and we can do more. Those are sort of the two internal efforts, if you will. On the customer support side, again, the most fascinating discovery for us is we have an internal customer support copilot, which is consistent with our co-pilots we are sharing with our customers across Cortex, Prisma, and Strata. And those customer support people. The best one is equally productive irrespective of tenure after three months. So I can hire a net new person, have them solve customer problems, and 3 months in, they're as good as somebody who's been here for three, four years. So these are all very promising signs. There's a lot of work that we're doing, but part of our philosophy is if we don't go through the trials and tribulations and try it ourselves. We're not going to get to be a great company using AI. So early days, but very excited.

Next up, Fatima Boolani from Citi followed by Tal Liani from BofA.

Thank you, and thank you for taking my question. Nikesh, I wanted to zero in on some of your Prisma Cloud prepared remarks. You talked about a business acceleration in the back half, and your tone suggested a material improvement in that pillar and maybe a little bit more of a proverbial pep in your step in that segment of the business, especially when I think about last year, when you did allude to some irrational market behavior, market participant, dynamics and activity. I wanted to get to the bottom of what's underpinning some of that back half acceleration and some of the more sanguine kind of outlook on the Prisma Cloud franchise from here.

I'll have to go back and listen to the sentiment analyzer on my own call afterwards. But, reacting to your pep in my step, last year, as I said to you prior that, because of the aggressive new players, they cut prices down 30%, 40%. Whilst we saw the volume increases, pricing was impacted in the industry causing effectively our growth rate not to be as exciting as we wanted it to be. That has stabilized for sure. We also took some remedial steps in turning our business into an ACV business for Prisma Cloud unlike the rest of our business, because we wanted our sales team to act in a similar fashion as the market was seeing. We made a bunch of product improvements, and we actually went to our biggest customers and ensured products were effective for them. And I said, coupled with that, what has also happened is, as I mentioned, that, most of our customers are now using many modules, which are oriented towards network security in the cloud. We run on all four hyperscalers natively, which is in addition to CNAPP, is also our real time cloud security part. So given the 14 modules we have from a comprehensiveness perspective, we found some of the customers where we can uniquely solve their use cases, allowing us to do those large deals. And in a way, the platformization helps. Like [Schlumberger] they bought all three. It wasn't a separate decision for them to go buy Cortex from us and cloud from somebody else and network security from somebody else. That ability to drive your platform also helps drive our cloud security business.

Next up, Tal Liani from BOA followed by Patrick Coville from Scotiabank.

I guess. You spoke in the past about shorter contract duration. What are the implications on free cash flow generation? Are there any short term or long term implications? And then, in general, can you talk about you know, free cash flow improved so dramatically over the last few years. Can you talk about the long-term outlook for free cash flow margin? Thanks.

Sure, Tal. I'll take that one. Just to start off with, I think I said in my prepared remarks, our contract lengths actually did not shrink. They've been roughly consistent at three years for our new deals, and they've been actually relatively constant for quite a while now. You do have some areas where the contract lengths may be shorter. You have others like platformization deals where they're more strategic in nature, but on average, it ends up being that much. I think in terms of the ability to generate free cash flow, frankly, I think the most important part about our free cash flow is really the operating margins. I mentioned that in my prepared remarks that since fiscal year '21, we've actually improved our operating margin by 800 basis points. That really is the biggest buttress to what has happened. And we've been able to absorb the change in the amount of deferred payments going from 6% to 30% in the last quarter, like, over that same time period. So I think we've proven, that we've been able to deliver strong cash flow, like, whilst being able to absorb all of these deferred payments. We feel very confident that we'll be able to continue to do that in in the future.

Next question, Patrick Colville from Scotiabank followed by Roger Boyd from UBS.

Thank you, Walter. Nikesh and Dipak, the financial disclosure you guys give us is terrific. You give us a huge amount of metrics. But the metric I want to focus on is the new RPO guide. RPO rose 20% in 4Q, and the guide implies, I think, a 19.5% in the midpoint in fiscal '25. I guess what gives you the confidence that, there's going to be kind of no deceleration over the next 12 months? Is it specific business lines or is it, IBM QRadar acquisition or hiring? Can you just kind of have a look on that, please?

I think, Patrick, it's a combination of factors. As I mentioned, we've seen the pipeline. We've seen the acceleration in the second half. If you look at our first half versus second half, implied bookings have gone up. We see the pipeline for next year. Obviously, the IBM business is part of that. Obviously, the strength we're seeing in XSIAM is part of that. Our platformization efforts are part of that. This year, we have tried to anticipate that with making sure we have resources in place, for the coverage we need to deliver those numbers.

Next up, Roger Boyd from UBS followed by Matt Hedberg from RBC.

Great. Thanks for taking the question. Maybe just a follow-up to Dipak's comments, a question ago on annualized billings. But you noted, Dipak, that 12% would be kind of the bridge to billings guide this year if you maintain a similar mix of financing and annual billings. Given the shift towards RPO and, ARR guidance, is it fair to assume that that mix will probably not be that similar to what you saw last year, as well as probably additional factors around the interest environment. Is there any thoughts on what you might see from the mix of financing and annualized billings?

Look. I think we'll see a mix more towards annualized billings in a way from financing. I think the simplest way to think about it is, if you do financing, it's another it's another piece of paperwork. It's a loan document at the end of the day. It does create, like more work out in the field. And so, in line with our platformization strategy, we're all about figuring out where all the friction points are and trying to eliminate them, where we can and continue to do the best thing for the shareholders. That's really what we're driving here, and that's what I would expect now.

I thinks it’s code for that to look very different because we may not be doing as many PANFS deals because they contribute to billings, but they don't change RPO and they don't change cash flow. If you don't have too many PANFS deals, it saves time to the field.

Next up is Matt Hedberg, followed by our last question will be Keith Bachman from BMO.

Thanks, guys. Congrats on the quarter and big fan of the new guidance philosophy. I think it really does tie to the business. Nikesh, a question for you. With the election coming up and you guys have historically had a really strong federal business, just sort of curious about how you're thinking about US Fed in 1Q and sort of what could that mean for kind of the up it seems like there's a lot of pent-up demand there on the federal side. Just sort of curious on your outlook there.

Yes. Matt, I've learned in my life never try and foreshadow the government. Usually, it's not a winning strategy. Don't predict insulate, don't predict budgets, don't predict elections. We'll roll with the punches. We have people clearly, we know there's business that we have to renew because they have our Palo Alto capability and products. We're working hard and getting all that done. There's a bunch of new ideas and new projects that we're working on, but we'll keep powering through them. As the elections transpire, depending on what administration comes into place, it's going to impact a bunch of the budgets. But as I said, we had significantly de-risked our federal expectations as we told you earlier, in this calendar year. We're going with a muted set of expectations into the election to make sure that we don't see any bad surprises.

Thanks for that question, Matt. The last one will be Keith Bachman from BMO.

Alright. Thank you, Walter. Good evening. I wanted to ask about XSIAM a bit and break it into two parts. In your slide deck, you noted that your active customer count is up 4x. And I just wanted to hear a little bit about where those customers are coming from. What I mean by that is are these displacements? Are you sitting side-by-side? Just want to hear a little bit more about that. And then, Dipak, for you, in my discussions with IBM, I thought the QRadar business was running about a $100 million, a little bit less than that in ARR and you said tens of millions. I wasn't sure what is being included when you think about the guidance there on what QRadar may add on a prospective basis over the next 12 months or so?

Almost every one of the XSIAM sales is replacing an existing SIEM. And in some cases, multiples. As I mentioned, in case of Schlumberger, we replaced two. In case of the other eight figure deal, we replaced two others. For the most part, it is if you looked at the market share of existing SIEMs in the market, our acquisitions, which are north of a hundred customers, would be a representation of us taking the same amount of share from each of those people. And if you look at the people out there, I think there's a bunch of people, who's been around 15, 17 years who have shared their market. Those will be the people we'll be replacing for the most part. There's no net new SIEM. I don't think they're starting net new companies out there that scale will require, $10 million, $20 million, $30 million SIEM deal. So it's usually we're replacing people who are out there. I will let Dipak answer the IBM question.

Just, to keep things very simple, Keith, and we can we can follow-up with you in more detail offline. There are certain contracts that will be part of the IBM ELA or something like that. We won't be able to recognize the revenue, of just the way that the accounting treatment works, and there'll also be some contracts that require consent from customers. Those are the kinds of things. We do expect over time things to move to XSIAM. Our intention was never to do things, and that's much more ratable revenue anyhow.

It just takes some time to get those customers transferred over. Fair enough.

Our real interest is in converting them to XSIAM as you'd appreciate. That’s right.

With that, conclude the Q&A portion of the call. I'll turn it back over to Nikesh for his closing remarks.

I want to use the opportunity to thank all of you for supporting us and for joining our call. I also want to thank all of our customers, partners and entire ecosystem for supporting our business. And last, but most importantly, all of our employees who worked really hard to deliver these results. Thank you very much.