Palo Alto Networks, Inc.

Good day, and welcome to the Palo Alto Network's Fiscal Third Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to David Niederman, Vice President, Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us today on today's conference call to discuss Palo Alto Network's Fiscal Third 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 third quarter ended April 30, 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 fourth quarter and full fiscal year 2019, our competitive position and the demand and market opportunity for our products and subscriptions, benefits to us and our customers, and timing of new products and subscription offerings, including those from our proposed acquisitions of Twistlock and PureSec, continued investment in our products, our ability to drive outsized growth rates, and trends in certain financial results, operating metrics, makeshift, and seasonality. 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, 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 February 27, 2019, 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 investor section of our website located at investors.palatinetworks.com. And with that, I will turn the call over to Nikesh.

Thanks, David, and thank you, everyone, for joining us this afternoon for our fiscal third quarter 2019 results. I'm very excited to be here with you today. This call marks my fourth earnings call as CEO and brings me close to my one-year anniversary with the company. We've accomplished a great deal this year, furthering our leadership in cybersecurity and also setting the foundation for our future growth. When I joined Palo Alto Networks, my primary impression was how cybersecurity is poised to increase in importance to organizations globally and also how the cloud revolution was set to impact the industry. The key themes and my first call were integration, cloud, and more automation. I'm pleased to report that after nearly a year on the job, my confidence in these trends is stronger than ever. Moreover, I'm delighted that we have made progress across all these imperatives and will continue to do so. On today's call, I will briefly go through our financials and then provide an update on our three strategic focus areas, securing the enterprise, securing the cloud, which is where I will spend most of my time given our announcements in this area today. and finally, securing the future with Cortex. Starting with our financials, I'm pleased to report that as we continue our transformation, the team continues to deliver. We had yet another solid quarter. Fiscal Q3 revenues of $727 million represents year-over-year growth of 28%, and non-gap earnings per share increased by 26% to $1.31. Diving to the details of our three focus areas, let's first talk about securing the enterprise. We continue to see success around the world with our next-generation firewall offerings. Network security remains a top priority for companies and CISOs, and we continue to outperform this aspect of the market. Our new products introduced last quarter are performing well, and we've had a number of significant wins this quarter. Here's a couple I'd like to highlight. We signed an eight-figure deal with a U.S. government agency. This is one of the ten largest deals in the history of all our networks and contributed to our strength in product revenues this quarter. We expanded our footprint more than $5 million each with 10 existing customers, many of whom bought a combination of new use cases and also hardware refreshes. This includes deals with one of the best-known brands in the world, a Fortune 50 technology company, and a Fortune 500 consumer finance company. And finally, we introduced DNS Security Service, a new attached subscription to our next-generation firewalls. DNS is already quickly gaining traction, and while it's early days to share metrics around this offering, I can safely say that if DNS were an independent startup company, it would be getting a lot of attention. We're excited by its early success and optimistic for its future prospects. Our core business continues to be strong, with customers becoming more security aware and looking for simplicity in their infrastructure. We continue to make it easier to deploy more services from our firewalls in the most secure way, and you should expect us to add more capability here. Now let's talk about securing the cloud. We continue to be highly focused on delivering technology that enables our customers in their cloud journey. We plan to enable this by delivering a comprehensive set of security capabilities across a broad set of clouds and cloud configurations. This focus and our speedboat approach have led to tremendous progress over the past year. With this, we are delighted to introduce Prisma. Prisma, announced this morning, brings our industry-leading cloud solutions within a single suite to help our customers in their cloud journey. Whether you want to connect your mobile users or branch offices to the cloud, protect your applications and data in the public cloud, protect your SaaS applications, or are worried about upcoming trends in container security or serverless computing, Prisma has a solution. Prisma has our approach to deliver industry-leading cloud security products in an integrated fashion. It will address SaaS, API-based, and inline cloud security across all vectors. We will continue to build on Prisma over the coming quarters and years to make it the industry-leading platform for the journey to the cloud. We believe Prisma is already the number one suite of cloud security product in the world. This quarter, Prisma surpassed a quarter of a billion dollar billings run rate and has approximately 9,000 customers. The products that comprise Prisma are already industry leading in their own right. Take the VM series. We believe we deliver the most VMs across the public cloud landscape with more than 66 figure or higher deals this last quarter alone. Redlock, which forms the basis for Prisma public cloud, surpassed a $100 million billings run rate this quarter. What is even more exciting is that we won more than 10 RedLock deals, each over half a million dollars in the third quarter, with over half of them in the global 2000. This is a rare feat. To acquire a company, transform its revenue, and its profile and trajectory in six months is unheard of. Additionally, we're very excited about the new enhancements for our Global Protect Cloud service. The next version includes the cloud onboarding and management interface and will be available on the Google Cloud platform shortly. In this quarter, we continue our success on GPCS by securing 40,000 mobile users at the biggest car company in their category, 27,000 mobile users at a leading global consumer brand, and 25,000 mobile users at one of the largest high-tech companies in the world. The success of RedLock is a key factor in making us number one in cloud security and gives us the confidence that our introduction of the Prisma suite will boost our ability to keep winning in this space. In addition, today's announcement of our intent to acquire Twistlock, which is the best in its category for container security, will bring best-of-breed products into the Prisma suite. Containers are one of the fastest-growing segments of both private and public cloud workloads, and we are looking forward to offering container security to our customers. We also announced our intent to acquire PureSec, a leading provider of serverless security. These proposed acquisitions will further enhance our cloud security suite. Another example of our ability to acquire companies and accelerate their performance is Dimisto. Which brings me to the third key focus area, securing the future with Cortex. We closed the acquisition of Dimisto at the end of March, and in our first month operating together, I am pleased to report that sales are already doing exceptionally well. Dimisto's multi-vendor orchestration capabilities, analytics, and playbooks are unique. They help our customers further automate their security operations and allow them to focus on solving the most complex threats. This quarter was also notable for the introduction of Cortex XDR at the end of February. In its first quarter of availability, we closed over 50 deals, and the pipeline is strong. XDR is the successor of EDR. XDR enables teams to stop sophisticated attacks and adapt their defenses to prevent future threats by integrating network, endpoint, and cloud data to reduce the signal-to-noise ratio plaguing security analysts. In fact, earlier today, MITRE released test results validating the capabilities of TRAPS and Cortex-XDR. The results from MITRE's attack testing confirm that TRAPS and Cortex-XDR provide the broadest coverage against different attack techniques with the fewest missed attacks out of all 10 vendors recently evaluated. We also had some notable Cortex-XDR wins this quarter, including a seven-figure deal with the U.S. Health Insurance Care Organization with over 26,000 employees, a win at a major Asia-based airline, and a win at one of the largest cities in the world. To wrap up, we had a solid quarter of enterprise execution with strong progress in the cloud and with the initial rollout of Cortex. We continue to see the opportunity to expand our market leadership to be one of the platforms for both today's security needs and those of tomorrow. As my first year comes to an end, I would like to make a few observations and reiterate a few things. One, we will continue to expand our lead as the number one cybersecurity company in the world, one that provides simple, integrated, and leading products to help our customers. The company I walked into had done a great job in building the world's best firewalls and expanding their ability to secure the enterprise. Over the last year, in addition to strengthening our firewall business, we have made tremendous progress in areas which will become equally, if not more important, the cloud and automation. My year here has convinced me that we have the right strategy and the right team, and we're making the right moves. Transitions take time. This one will also take time. But there is no team better prepared than us to make this happen. The new products and delivery mechanisms are more SaaS based and have a different consumption model. In that, many cloud customers purchase annual subscriptions rather than multi-year deals. The brilliance of a SaaS model, though, is the annual recurring revenue stream. As we evolve our business, maximizing this recurring revenue stream will be our primary focus. While this may impact total billings, we would expect to see better margin performance. And most importantly, underlying this trend is a growing demand for our products, which is what matters. Reading some of your notes, I know that you're watching the internal management moves we are making. You should know that any leadership moves that we're making are being made in a thoughtful manner and for the right reasons. Rest assured, while I might not have spent time in cybersecurity, I know how to build great teams. This is an area me and the team are extremely vigilant and focused on. I'm confident that one year out, we're stronger, we have better focus, a more robust product roadmap, and our teams are poised to win. This is a time to believe in our plans and our ability to execute and our strategy to win the increasing addressable market in our industry, and our quest to increase our lead as the number one enterprise security company in the world. And with that, I'll turn the call over to Kathy.