Palo Alto Networks, Inc.

Hello, thanks for coming. We really appreciate it. Good afternoon. I'm David Niederman. I'm Vice President of Investor Relations at Palo Alto Networks. Thanks for joining us today to discuss our fiscal fourth quarter and full year 2019 results. This meeting is being broadcast live over the web and can be accessed on our Investor Relations section of our website, investors.palatonetworks.com. Earlier this afternoon, we issued a press release announcing our results for our fiscal fourth quarter and full year ended July 31st, 2019. We also provided a script of certain fiscal fourth quarter and full year 2019 financial results and operating metrics along with applicable reconciliations as exhibits to a current report on Form 8K filed with the SEC earlier this afternoon. Copies of these materials can also be found on the investor section of our website. I'd like to remind you that management will be making forward-looking statements, including statements regarding our near and long-term financial guidance and strategy, as well as modeling points for Q1 2020 and full-year fiscal 2020. Please kindly take a moment to review the Safe Harbor language provided with the meeting materials. 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 provided reconciliations of these non-GAAP financial measures to GAAP financial measures and the supplemental financial information that can be found at the end of the presentation and the investor section of our website, located at investors.palitonetworks.com. On stage with us today will be Nikesh Arora, our Chairman and Chief Executive Officer, Kathy Bonanno, our Chief Financial Officer, Lee Klarich, our Chief Product Officer, and Nir Zook, our Chief Technology Officer. We will have a Q&A forum at the end of the financial presentation. And with that, I'll turn it over to Kathy.

Hi, everyone. Thank you so much for coming today. Oh, look, a spattering of applause. How nice. I appreciate that. Thank you. Thank you all very, very much for coming today. We appreciate your interest in Palo Alto Networks. We have a lot to cover today, and so I'm just going to get right into it. I'm going to start by providing a quick overview of our fiscal Q4 results for the fiscal year 2019 and full year results. Nikesh will then come up and he'll walk you through our strategy and our operating framework for the next three years and then Lee Klarich and Nir Zook will take you through our product strategy and I'll return to cover forward-looking guidance at the end. So let's turn now to fiscal fourth quarter 2019 which capped off another great year for Palo Alto Networks. In the quarter We grew revenue 22% year-over-year to approximately $806 million. Quarterly billings crossed the billion-dollar mark, a first in the company's history. And our performance in Prisma and Cortex, or as we refer to them collectively as next-gen security, was especially strong. Our next-gen security billings were approximately $192 million in the quarter. This represents a $768 million annual run rate, and accelerated our growth to approximately 180% year over year. For the full fiscal year, we also delivered strong top line results. And full year free cash flow was approximately $924 million. If we adjust for the cash charges associated with our headquarters in Santa Clara, and the retirement of our 2019 convertible debt, free cash flow for the year was $1.1 billion at a margin of 36.7%. So let's turn now to some of the product highlights for the quarter. In Q4, we completed the acquisitions of Twistlock and PureSec, and we are actively integrating them into our Prisma Cloud offering. We also released significant updates to Prisma Access, including providing over 100 network onboarding locations around the globe and providing clean pipes for service providers, along with several other unique capabilities in that release. In addition, we released TRAPP 6.1, which included expanded support for Mac OS and Linux, further strengthening our endpoint and XDR offerings. And we received FedRAMP certification for wildfire cloud, a huge milestone towards shifting government wildfire usage towards the cloud. And as you probably just saw, earlier this afternoon we announced our intent to acquire Zingbox, an enterprise IoT security company. As Nikesh will discuss a bit later, this acquisition is yet another example of our ongoing strategy to consolidate new technologies into our next generation firewall platform, making it easier for customers to protect their complex enterprise environment. In addition to product releases, we had several notable wins during the quarter. We displaced Symantec and Zscaler at a Fortune 50 US retailer to secure their data center and network of more than 2,000 retail outlets. We displaced Zscaler and beat Fortinet at a major European national healthcare provider in their digital transformation project. They're securing their hundreds of hospitals along with all of their patients and employees. It was a great win for us in the quarter. We beat CrowdStrike and displaced Symantec with our Prisma and Cortex platforms at a global insurance company with more than 25 million policyholders. And we beat Fortinet and displaced Cisco to become the standard security platform for the government of one of the most populous regions in Asia Pacific. In summary, there was a lot of great news in the quarter. We continue to have high win rates against our competition and add thousands of new customers every quarter. In Q4, we added nearly 3,000 new customers and are now privileged to have won nearly 65,000 customers. We're looking forward to another great year in fiscal 2020, and we'll now move on to the rest of the presentation. Please welcome our CEO, Nikesh Arora.

Good afternoon. Thank you very much for joining us. And thank you, Kathy. Normally when I get up on stage, I usually ask the audience, what can I answer that you leave here happy? Now, many of you are so kind, you've written me very long notes about what you want me to tell you, which is going to make you happy. So it's very helpful. It's like I have my marching orders. You've given me the script. So Keith Weiss from Morgan Stanley, yes, we will talk about product evolution M&A. Keith Backman talks about depth and duration of depressed cash flows. Sounds very depressing, but we'll talk about that. They're not depressed. We will go down to the details of our next generation security business and explain the financial models around you so you don't get spooked by duration issues. And yes, Brad, no hardware company this size had made a transition like this, but hopefully we just need to keep growing and not make the transition. You do notice that we're displacing your favorite company, Zscaler, in many situations. But I'm scared today if Brad changes the recommendation, something's going to happen to the rest of you guys. So for now, I'm happy with Brad where he is. So it's been about 12 plus months I've been at Palo Alto Networks, and I know you guys have been asking for us to come about and explain how we're thinking about this company going forward. So hopefully in the next 75, 80 minutes, me, Nir, Lee, and many of my management colleagues will share our plan for the next three years with you in terms of where we want to take this company. Before I go there, I thought what I would do is quickly walk you through what I've learned in the last 12 months. Now, unfortunately, there's going to be no earth shattering secrets in what I'm going to tell you in the first section, but hopefully you'll get a sense that I've been studying this industry for a while, and the problems are obvious, right? This is a $140 billion industry, and we have too many vendors. I've gone to over 300 customers in the last one year. The winner so far is 212 cybersecurity vendors deployed in one customer. That's a lot. What happens is when you have 212 cybersecurity vendors and cybersecurity is only 8 or 10% of your spend, it's way too many vendors for the amount of spend you do on IT compared to the rest of the vendors you have. What that results in is people are deploying too many tools. One of these customers, not the 212 vendor customer, has nine endpoints deployed. You don't have nine CRM systems. You don't have nine HR systems. You have nine endpoints in one financial services organization. We think that model is broken. It's wrong. It cannot be the path of securing that enterprise for the future. If you think what we do in the industry is we give you the tools, and you say, now, you can write policy against it. You can spin up a bunch of alerts, and we'll give you all the alerts, and you can figure out what to do with them. So we have tremendous amounts of alerts being generated in many of our customers, and Lee and Nero talk more about this. on average a customer can get 175,000 alerts a week. That's a lot of alerts. And then you spend a lot of time and effort manually going through your issues and investigating, which can take anywhere from four to 57 days. We have an industry where we have too many vendors, too many tools, too many alerts, and too much manual labor. We think at the same time, while we're busy complicating the industry, Our friends, the adversaries, have gotten more and more sophisticated. The days of malicious software, the days of keyloggers are gone. Now we're talking about AI-based bots, ML-based attacks, and people are really addressing your entire enterprise infrastructure, trying to figure out how to get in. The amount of breaches have actually gone up. Last year, there were about 3,800 breaches, and most of these breaches were automated attacks. So it's kind of an interesting situation in the industry. We have a situation where people are spending more and more money on cybersecurity and they're feeling less secure. This is a problem. This problem needs to be fixed. So we believe we need a new paradigm for security. And much of what we're going to talk about is what that new paradigm is going to be or needs to be. We believe we need to go towards lesser number of vendors. We believe we need to go towards more comprehensive security. We believe this has to be more of an automated industry as opposed to an industry that is full of a lot of manual labor. So a lot of what Lee and Nir are going to talk about is going to be how our products are going to enable that going forward. And we will talk specifically about some of the things we're working on which will be unveiled over the course of the next few quarters and years and how we intend to make this happen. At the same time, we are at an inflection point in the industry. In my travels the last 12 months and my time at Google, I haven't met a customer who's not thinking about going to the cloud. Almost every customer I've met, approximately 300 of them, is in some way, shape, or form on their journey to the cloud. Some of them are evaluating the cloud. Some of them are deploying some applications in the cloud. Some of them are in a hybrid cloud environment. Some of them are going to go to multiple clouds. But there's not a customer who's not talking about the cloud. Interestingly, we don't believe that cloud security has matured as fast as the cloud platforms have. So the best security you can get is some cloud native security offered by an individual platform provider, but you actually don't have comprehensive cloud security that allows you to make that journey to the cloud in a more comfortable and happy fashion. So our belief is as we see this cloud market go to potentially a trillion dollars in the next five years, There is a huge opportunity for cloud security to play a relevant role in allowing these customers to make that cloud journey over the next three to five years. This is a big opportunity, and the big opportunity we have here is to make sure we don't make the same mistakes we've made in enterprise security. We need to get cloud security right. We anticipate in cloud security there's an opportunity for us to become a platform of choice and customers not have to deal with the problem of too many tools, too many vendors, too many alerts, and too much manual labor. And we'll talk more about that when Lee and Nir come and talk about what we've been doing in the last 12 months for cloud security. But before I have them come up on stage and talk about the opportunity ahead of us, I want to make sure I give you a sense of what have I been doing for the last 12 months. I know you guys have been writing all these notes and trying to figure out what we're up to as a company. Let's take a look at where we've come from. Twelve months ago when I came to Palo Alto Networks, we had a phenomenal company, a company that had built an amazing firewall. had a great brand, tremendous amounts of trust with our customers, and over 50,000 customers in the market. There's a lag between when I click this and the slide shows up. This was Palo Alto Network. We were primarily a firewall company. We'd made a few acquisitions, and we had done a bunch of projects on the side. But despite the way we had implemented them, we had managed to get 8% of our billings from non-adapted services outside of our firewall business. The worrying thing was, though, I noticed we would acquire companies and decouple them and merge them into our hardware-based business. Now, that's a bad thing if you start taking software businesses and start making them work like hardware businesses. Hardware has a certain QA cycle. It has a certain deployment cycle. Software has a slightly different cycle. It was very important for us to make sure we were going to get this right. So we spent the last 12 months focusing. Now, I may not know enough about cybersecurity, but having spent, as many of you know, I spent 10 years at Google, the one thing I did learn at Google is the first and foremost, you have to get your product strategy right. So our head of product, Nir, our CTO, and many of our product colleagues have spent many nights sitting with me writing and rewriting product plans, looking at competition, looking at our strategies, looking at whether we are set up to win or not, and literally re-architecting many of our products and our strategies to make sure we set ourselves up to win. We spent hours there, written documents, and probably on their 15th iteration, where we went through every product category and said, why do we make this acquisition? What is the way to win in this category? How are we going to win? Do we have enough resources deployed against it? And once we get the product right, do we have the go-to-market capability to go make this happen in the market? It wasn't simple. It wasn't easy. But some of the results are very exciting. In our firewall business, we had been selling subscriptions, four subscriptions against our firewalls. I mean, Satin talked about why cannot the firewall become a platform? Why cannot we take what we have as a firewall and instead of having 20 different network appliances and a customer's infrastructure, why can't our firewall become the platform of the future for enterprise security? So as Lee and Nir will talk about, we are going to go from four to potentially ten, maybe more subscriptions over time because we believe once our customers trust us to be part of their enterprise infrastructure, we have the ability to go and deploy more and more capability into that infrastructure. And we will talk about our latest acquisition of Syncbox. The whole intent is to make that another subscription firewall. We believe our customers will deploy that firewall just the way they've deployed DNS security, which we launched a few months ago. So on our firewall side, we have built, we have continued to build the next generation firewall into a faster, better firewall. But really, when we went back to the drawing board, we sat back and said, Nir, if you were starting a company, and building firewalls today if you wanted to, although some of you believe that firewalls are not going to be interesting. We'll talk about why they're going to continue to be interesting. We sat down and thought how would you re-architect the firewall business and how would you build it going forward? So what you will see as part of our enterprise strategy firewalls is our expectations of how this market is going to evolve and how do we need to be in the top right of that magic quarter and continue to go further in that direction as opposed to not continue innovation. Not only that, on our cloud front, We had one acquisition called Evident we'd made 12 months ago. Over the last 12 months, we've examined the cloud security space very, very carefully. We believe there needs to be a comprehensive multi-cloud, multi-technology platform available for cloud security. We have made two acquisitions in that space with Twistlock and PureSec, and we hope to be able to integrate them very swiftly, hopefully before the end of this calendar year, and be able to provide the best cloud security platform to our customers. Prisma Cloud, I'm not confusing this with VMs or any other product, has over 1,000 customers already. We do not believe there is any cloud security company in the world today with over 1,000 customers securing the public cloud. None. And we've been able to achieve that over the last 12 months. Not only that, we looked at our product called GPCS, which is effectively Prisma Access, which is, I shouldn't talk about competition just yet, so. It's a product with real security that helps you secure cloud-native architectures, unlike some of the fakes on the market. Fake is a popular word in today's lexicon. So we took Prisma Access, we resourced it, we moved it to Google Cloud, we onboarded to 100-plus locations, and you saw the results. We had the biggest quota for Prisma Access in Q4 than we ever had in the company. We have our first over $10 million deal. for Prisma Access where, as we highlighted, we displayed Zscaler. So I feel very confident in our ability to keep building Prisma Access as one of the future architectures for securing the cloud. On securing the future, we looked hard at the SOC industry. And we'll talk about it. We weren't comfortable with the way the industry is going. We're not comfortable where the solution needs to be that you take all your data, put it in a very large data repository, run a bunch of analytics against it, and spin up more alerts. Take those alerts, give them to the SOC analyst saying, hey, you had 174,000. I've got another 100 really good alerts for you to take a look at. That's not the right answer. We looked at the market. We acquired Demisto. Demisto has done really well for us. And we believe the future of SOCs is going to be more towards automation. And Leonid will talk more about what we're able to do in that space. We also took what was our Tras acquisition and our LightSiber and Syver acquisitions and looked hard at the EDR space. and said, where is the endpoint industry going to evolve to? How are we going to win? We launched XDR four months ago. We've had our first full quarter of XDR, and we're delighted with the fact that 250 customers have already been acquired by the XDR team. Now, this wasn't done without our ability to run not just the product focus, but also a focus in our go-to-market capability. Over the last 12 months, We have taken our Prisma and Cortex teams from 500 people to 1,500 people, and we did that by hiring new people and acquisitions and effectively redeploying resources from what would have been part of our core business into our new business, which is what has allowed us to accelerate our Prisma and Cortex growth rates from approximately 70-odd percent to 180%, as Cathy highlighted. I feel very confident that that is a number or some numbers we can really focus on and drive further, and we'll talk more about where we expect those numbers to go over the next three years. So what does it look like today? We've been able to grow our billings from our next generation security service to $452 million, approximately 13% of our total billings in FY19, and we feel very, very confident that we have our product portfolio cleared up, and we believe we are actually in the process of delivering and deploying three different platforms in the market, one around our firewall, one around our cloud security, and one around securing the future where both the firewalls and our cloud security capabilities come together in the SOC. So we believe our opportunity in the enterprise is to be able to simplify enterprise security, reduce the number of vendors and the reliance our customers have on vendors, And it's fascinating, as Cathy highlighted, one of our very large retail customers we acquired in Q4 has gone to a single vendor solution. A single vendor across all forms of firewalls. Firewalls in the data center, virtual firewalls against their cloud instances, and Prisma access against their network security needs. So we are noticing customers re-architecting their security as they think about going to the cloud. They're rethinking do they need multiple vendors to secure them across these various form factors, across these various technologies. And many of the smarter ones, of course, I'm going to say that, are making the choice towards consolidating into a single vendor platform. Not only that, on the cloud front, We've had customers after we acquired Twistlock and Redlock who were in evaluation mode have signed multi-million dollar multi-year deals with us because now they believe with Twistlock and Redlock and PureSec with Palo Alto Networks, we are going to keep building and investing in these products and continue to grow them further. And they're delighted with our vision in terms of how we plan to deliver cloud security to them. We believe we have an opportunity to keep Being ahead of the curve of cloud security, and it's funny, when we acquired Redlock, the Redlock team came to me and said, we're going to go build container security for you. I said, that sounds wonderful. I came to New York, and I went to about 10 or 15 customers in the financial service and said, look, you're using our Prisma cloud security. We're going to build you container security in nine months. They're like, we don't have time. We're going to take what's out there, the best-of-breed container security, and we're going to use it. It's interesting. Our customers want best of breed, but they don't want to wait for an integrated platform to appear and be available across multiple technologies. So we have been able to take RedLock and Prislock and PureSec and put them together and offer best of breed across container, serverless, and public cloud to our customers as a platform. We believe our opportunities to stay ahead in that space and deliver a comprehensive multi-cloud, multi-platform integrated security solution for our cloud. Last but not the least, in the future, we believe we have the opportunity of taking good data as opposed to all data, taking that and applying analytics to it, and being able to provide tremendous amounts of automation to allow our customers to be able to secure the future. So I had an option of standing up here and regaling you with my product capability and my product knowledge, but I figured one of the highlights of today could be for you guys to hear from our founder, who's promised to give you an unfiltered version of what he thinks about the industry, and how things need to go from there. And then we'll have Lee try and moderate him to make sure he doesn't go off the rails. But before I invite them, I'm delighted to say last time we did an analyst day, we pointed you to a pilot network stamp for about $19 billion. We believe with all the product investment and product capability we've developed, we now have the opportunity of addressing close to a $73 billion dam in FY22. The magic of FY22 is you will notice when I come back, after Lee and Nir have talked about our product investments, I'm going to give you guidance for the next few years in terms of what we expect our billings to be and what we expect our next-generation security capabilities to get to, our cash flows and our operating margins. So hold your breath, or don't hold your breath, just hang in there. With that, let me welcome Lee and Nir up on stage.