Palo Alto Networks, Inc.

Good day, and welcome to the Palo Alto Network's Fiscal Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jeff True. Please go ahead, sir.

Good afternoon, and thank you for joining us on today's conference call to discuss Palo Alto Network's Fiscal Second Quarter 2019 financial results. This call is being broadcast live over the web and can be accessed on the Investors section of our website at investors.paloaltonetworks.com. With me on today's call are Nikesh Arora, our Chairman and Chief Executive Officer, Kathy Bonanno, our Chief Financial Officer, and Lee Klarich, our Chief Product Officer. This afternoon, we issued a press release announcing our results for the fiscal second quarter ended January 31st, 2019. If you would like a copy of the release, you can access it online on our website. We would like to remind you that during the course of this conference call, management will make forward-looking statements. including statements regarding our financial guidance and modeling points for the fiscal third quarter and full fiscal year 2019, our competitive position and the demand and market opportunity for our products and subscriptions, benefits and timing of new products and subscription offerings, our ability to drive outsized growth rates, and trends in certain financial results, operating metrics, mixed shift, and seasonality. These forward-looking statements involve a number of risks and uncertainties. some of which are beyond our control and which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today. You should not rely on them as representing our views in the future, and we undertake no obligation to update these statements after this call. For a more detailed description of factors that could cause actual results to differ, please refer to our quarterly report on Form 10-Q, filed with the SEC on November 30, 2018, and our earnings release posted a few minutes ago on our website and filed with the SEC on Form 8-K. 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. For historical periods, we have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in the supplemental financial information that can be found in the Investors section of our website located at investors.paloaltonetworks.com. We would also like to inform you that we will be presenting at the Morgan Stanley Technology, Media, and Telecom Conference in San Francisco on Wednesday, February 27. And finally, once we have completed our formal remarks, we will be posting them to our investor relations website under quarterly results. And with that, I will turn the call over to Nikesh.

Thank you, Jeff, and thank you, everyone, for joining us this afternoon for our fiscal second quarter 2019 results. I'll go briefly through our financials. give you a progress update on our three focus areas of securing the enterprise, securing the cloud, and securing through our application framework. And finally, I'll provide a little more color on the Domisto acquisition. Starting with the financials, I'm pleased to report that the team has delivered another outstanding quarter. Fiscal Q2 revenues of $711 million represents year-over-year growth of 30%. and non-GAAP earnings per share increased by 44% to $1.51. We had a number of big wins this quarter, but there are a few I'd like to highlight. We continue to see success around the world in our next-generation firewall business. People are getting more security conscious and want to deploy our firewall with the attached subscription. To note during the quarter, we did a large deal with a data center in Europe and one of Europe's most prestigious car manufacturers, and had a significant expansion of our hardware footprint in one of the largest online gaming companies in the world, as well as in one of the largest retailers in the world. We're beginning to see fruits of our speedboat strategy. With our increased focus on global protect cloud services, we've had a few spectacular wins, one to secure 25,000 mobile users at a global financial services company, and another to secure 80,000 mobile users for one of France's largest state-owned public services. We also won a very large VM series deal with several subsidiaries of one of the largest broadcasting companies in the United States. And we won a deal to secure 47,000 endpoints at one of the largest university healthcare systems in the United States as well. Expanding more on our three strategy focus areas, first, let me talk about securing the enterprise. Over the last 11 plus years, we transformed the network security market with our next generation firewalls. We use the firewall as a platform to deliver tightly integrated security services. We've had great success with our attached subscriptions, the most successful ones having attached rates of about 90%. Earlier this month, we announced the release of PanOS version 9.0, which added over 60 new features, including the policy optimizer, which helps teams replace legacy rules with intuitive policies that provide better security and are easier to manage. I'm excited about our new DNS security subscription. This is our first new attached subscription since 2011. The subscription utilizes machine learning and predictive analytics to proactively block malicious domains and stop attacks in progress. The only service with this level of capability to be integrated with the firewall. This continues our practice of reducing the number of disparate point products and making security better, easier, and more effective. We're working hard on future subscriptions in our software releases, providing our customers more integration for their cybersecurity solutions in the enterprise. We believe the next-generation firewall will continue to serve as a platform for security services in the enterprise. We also have expanded our hardware family. Our new PA7000 series features throughput capabilities at two times the nearest competitor and will be especially useful to customers with large data centers and high volumes of encrypted traffic. Additionally, we announced the availability of our K2 series, As we discussed in the last quarter's conference call, the service provider market has become a lot more interesting to us with the adoption of IoT and the advent of 5G, where security will be a primary concern. A new K2 series addresses this market, simplifying operations by offering unprecedented visibility, automation, and consistent protection. And finally, we continue our investments in advanced endpoint protection. With TRAPS 6.0, which we announced earlier today, endpoint security just got a lot better. The new behavior threat prevention engine allows Traps to prevent attacks based on their behavior. Traps 6.0 also introduces container security protections and rich data collection for XDR, which I will talk more about later. We're proud to serve close to 4,000 Traps customers, almost half of whom manage Traps from the cloud. Turn to our second focus area, the cloud. We continue to be laser focused on delivering technology that enables our customers in their cloud journey by delivering the broadest set of security capabilities across all clouds and cloud configurations. As of the second quarter, approximately 8,000 customers are using our cloud offerings. The speedboat we created around cloud and the acquisition of RedLock last quarter is already showing positive results. We have exceeded the original forecast for our RedLock business by more than 50%. This is a great example of the power of combining a best-in-class product to follow up a network's execution and distribution. Additionally, our inline cloud security VM series was recently expanded to include support for the Oracle Cloud and initial trials of the Alibaba Cloud. We improved performance of the product by up to 2.5 times and added many new and enhanced capabilities for operating in both public and private cloud environments. We're very pleased with our continued progress with VM series and success we're seeing with customers. The third focus area of our strategy is harnessing the power of advanced AI and machine learning. We started this strategy with the announcement of Application Framework 18 months ago and are proud to announce Application Framework 2.0, which is now called Cortex. We believe this is how security will be managed in the future. Cortex is a significant evolution of the Application Framework. It is the industry's only open and integrated AI-based continuous security platform. Cortex has been deployed in the public cloud, allowing us to leverage its features and scale in rapidly deployed AI. We're also announcing the first application available for Cortex called Cortex XDR. Built to empower SOC analysts, Cortex XDR enables teams to stop sophisticated attacks and adapt their defenses to prevent future threats. Cortex XDR goes far beyond traditional EDR that only works on endpoint data. It breaks down the silos created by legacy technologies to offer the first-ever detection, investigation, and response product that natively integrates network, endpoint, and cloud data. It reduces the signal-to-noise ratio that has been plaguing security analysts. It accurately uncovers threats using machine learning, simplifies investigations automation, and stops attacks before damage is done through trite integration with existing enforcement points. Codex XCR is being launched in conjunction with TRAPS 6.0, our new endpoint product that I mentioned before. Now TRAPS is enhanced for even better endpoint protection using its behavioral threat protection engine. It stops advanced threats in real time by stitching together a chain of events to spot malicious activity. When combined with Cortex XDR, customers can use TRAPS to extend their prevention capabilities to include detection and response across the entire digital infrastructure from a single agent. The more powerful TRAPS product acts as the ultimate data collection sensor for Cortex as well, collecting the most comprehensive data in the industry. We're confident in the uniqueness of our approach, so to make sure our customers can take full advantage of Cortex XDR, We have decided today to include endpoint protection free of charge when they purchase Cortex XDR. Yes, we're declaring our newly developed advanced TravSix product as free if purchased with Cortex XDR. We believe that for true comprehensive investigation of advanced attacks, the data is critical. Customers can now deploy one single endpoint agent that prevents, detects, and responds to attacks across an entire digital infrastructure. And to help us roll out Cortex-XDR, we're also announcing partnerships with five managed security service partners, partners who will deliver 24 by 7 threat monitoring, detection, and response services to our customers. We are excited about these partnerships with Pricewaterhouse, Critical Start, Ontuit, BDO, and TrustWave. They will provide important service to our customers and demonstrate industry confidence in our Cortex platform. These are all exciting changes, and I cannot thank our product team enough for stepping up to the challenge of integration and speed in solving our customers' problems. Lastly, I would like to provide more color on Domisto. Last week, we announced the proposed acquisition of Domisto. Domisto is the leader in the evolving space called SOAR. We believe that Domisto's multi-vendor orchestration capabilities and unique analytics and playbooks will help our customers further automate significant parts of their security operations and allow them to turn their attention to solving unique and complex threats. Domisto, already a partner of Cortex, now will integrate even more tightly into our plans for AI and ML on Cortex. Divisto has an ambitious plan for 2019, with billing projections of approximately $50 to $55 million. To facilitate and support achievement of this plan, we would have Divisto operate as a separate speedboat under the leadership of Slavic Markovic, their CEO, leveraging the broader power network distribution engine At the same time, Slavic will work closely with Lee Clarich and me to accelerate the next step for customer solutions. As I mentioned in the call we had last week, with the addition of Divisto, we now have made a couple of acquisitions over the last six months. While we continue to evaluate companies, my primary focus is on making sure these acquisitions are successful, and we are delighted with both customer reaction and our initial results. In closing, as we approach RSA next week, we know there will be a robust debate about whether the endpoint of the firewall is the center of security. In our mind, this debate is looking at security through two narrow lens. We believe the future of security is about data. It's about data, it's about machine learning from the data, and orchestrating and automating responses. And for customers who are struggling to manage too many disconnected security point products, we believe that our platform approach to security with high levels of integration, analytics, and automation is the answer for the future of security. We believe Cortex is the future. And with that, I'll turn the call over to Kathy.