Palo Alto Networks, Inc.

Good day, and welcome to the Palo Alto Network's Fiscal First Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. David Niederman, Vice President, Investor Relations. Please go ahead, sir.

Good afternoon, and thank you for joining us on today's conference call to discuss Palo Alto Network's Fiscal First Quarter 2020 financial results. This call is being broadcast live over the web and can be accessed on the Investors section of our website at investors.palotonetworks.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 first quarter ended October 31, 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 second quarter, full fiscal year 2020, and our next three years, our competitive position, and the demand and marketing opportunity for our products and subscriptions, benefits and timing of new products and subscription offerings, and trends in certain financial results and operating metrics. 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. 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 annual report on Form 10-K filed with the SEC on September 9, 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 Investors section of our website, located at investors.palatinetworks.com. And finally, once we have completed our formal remarks, we will be posting them to our Investor Relations website under the Quarterly Results section. We'd also like to inform you that we will be attending two investor conferences next month. We will participate at the Wells Fargo TMT Summit in Las Vegas on December 3rd and at the Barclays Global Technology Media and Telecommunications Conference on December 11th in San Francisco. And with that, I'll turn the call over to Nikesh.

Thank you, David. Good afternoon. Thank you, everyone, for joining our call. As most of you know, with this quarter, I am lapping my first Q1 at Palo Alto Networks. In my very first call, I talked about my observations in the industry and our goals as a company. About a year ago, we were a great single product company focusing on integration and automation. We have made some early moves towards the aspirations of the cloud, and we're beginning to build products with AI and ML, recognizing the evolving trends in technology. One year later, I couldn't be happier with our achievements. We made significant progress moving into a leading position in cloud security. making great strides in automation using AI and ML across our product portfolio. Our speedboats are working. We are delivering integration. This is bearing fruit in our customers seeing the benefits and betting more and more on Palo Alto Networks. A few months ago, we set out a three-year plan for the company and shared it with you during our analyst day in September. While I intend to share our progress during this quarter, I also want to provide a report card on how I feel we're progressing towards the longer-term goals that we have set out for ourselves. And perhaps, More importantly, I'd like to share where we're feeling more confident and also where we need more work. This is the first quarter we are marking ourselves against the targets that we presented in September. We have published a slide that is available on our investor relations website that you can download to follow along with my comments. We will be targeting our progress against this plan. Let's start with our overall billings targets and how they're tracking. We are delighted to have done better than our guidance. As I'm learning the rhythm of an enterprise business, I understand that enterprises put a lot of effort in driving good year ends, and then they have to kickstart new years. I was advised that sometimes there can be challenges sustaining momentum into a new fiscal year. But our teams have delivered, and we're off to the races. As I spoke with investors after Analyst Day, many asked me, what makes you confident that you can achieve billings of $800-plus million in next-generation security this year? I'm delighted to report that after a great Q4, we have maintained the momentum and have been able to better our plans, delivering next-generation security billings of $117 million, which is 217% year-over-year. So sticking with my scorecard, I have more confidence in our ability to continue to deliver here, to show our growing confidence, or increasing our guidance for next-generation security billings for the full year to $810 million to $820 million. The one area that we did not deliver to our expectation of the quarter is product. which weighed on the growth of the firewall-as-a-platform category and grew only 11% year-over-year. The category, firewall-as-a-platform, grew only 11% year-over-year. In fiscal 2019, we provided incentives to our teams to build our next-generation security business. By Q4, they showed us they could with very strong results. That momentum carried into the start of fiscal 2020 with strong next-generation security pipeline going to Q1. However, even though we have balanced our sales incentives this year, It looks like it's going to take us a little more for that change to take effect. Despite our performance this quarter, we continue to have confidence in our ability to deliver a 23% CAGR over the next three years in the firewall as a platform category, with contributions from all three form factors, hardware, virtual, and as a service. To help our efforts in this area, we have established our third speedboat to coincide with our secure enterprise pillar. This speedboat will be led by Andy Elder, who was recently the chief revenue officer of Riverbed. This gives Amit, our president, three speedboat leaders, along with our regional leaders. With that change, we have chosen not to replace the position of head of sales and run a flatter organization, allowing us to continue to be nimble in our transformation to a multi-product company. Back to our scorecard. Our revenues remain on target. Now let's travel down to our EPS margins and cash flow. I did get to read many of the analysts' reports on this topic, and I want to help you appreciate a point we made at our analyst day. This fiscal year is our year of investment and transformation. We're not looking to cut costs. We're looking to invest. However, we are holding our teams to a plan. Our plan asks us to deliver an EPF of $5 to $5.10 for this year, and we intend to stick to it, without accounting, of course, for the proposed acquisition of Aboretto, which I just announced. Our Q1 adjusted free cash flow margin was light compared to our annual target due to the timing of certain cash flows. However, we remain on track with our annual guidance. So with that, let's now dive into the exciting product announcements we debuted at our Ignite conference in Barcelona earlier this month. Many of our customers are taking integrated bets across our enterprise, cloud, and AI ML products. While a year ago we were just talking about ambition, today we see the three platforms emerging in our product strategy. As you know, we have branded our cloud solutions Prisma and our application framework and AI and ML products Cortex. That left our firewall business needing a brand. Today we're announcing Strata, a brand for our firewalls and attached subscriptions. Which leads me to the innovations we're making to secure the enterprise. As some of you might be aware, we announced DLP and SD-WAN for Prisma access at our Ignite event in Barcelona two weeks ago. We will extend SD-WAN capabilities to our next generation firewalls with an attached subscription to be available shortly. and then IoT in 2020. In the span of 18 months, we will take our attached subscriptions from four to seven. These new subscriptions will be simultaneously available in a virtual firewall format. As a quick side note, DNS Security now boasts over 1,000 customers and is our fastest growing attached subscription, having launched just in February of this year. In this category, we continue to garner recognition for our technical leadership, and were named as a leader in the Gartner Magic Quadrant for network firewalls for the eighth consecutive time. We were also recognized as a leader by Forrester in their recent Zero Trust Extended Ecosystem Platform Providers Wave Report. We feel good about the overall growth potential for firewalls in the platform and are excited about the ongoing innovation we have planned in this area. Moving to securing the cloud and access to the cloud, let me first talk about Prisma Access. We're very excited about the recent innovations we have announced, including SD-WAN and DLP services, a new cloud-based management UI, and new SaaS service level agreements. Prisma Access is now the industry's most comprehensive secure access service edge platform. This gives Prisma Access the potential to be a leader in a new market category defined by Gartner called SASE, or Secure Access Service Edge. SASE is a convergence of network and cloud security that recognizes the new demands required to secure cloud and mobile workforces, while also delivering on integration and ease of management. Prisma Access is perfectly suited to be a leader in this emerging category, and we're incredibly excited to bring this enhanced product to our customers. Moving across to Prisma Cloud, one of the questions I often get asked is, are you deploying the String of Pearls strategy? The answer is no. I want to point out we're doing something different. We are integrating into three platforms. Our goal is to make life easier for our customers through integration. A prime example is Prisma Cloud. As soon as we acquired Redlock, we integrated it into the evident functionality in four months. This past week, we have announced the integration of Redlock, Twistlock, and PureSec into one platform. Yes, one platform, Prisma Cloud. Now for our SaaS version, you can only buy one product, which is the integrated product. I'm very proud of our Prisma team who have delivered this effort in the record time of five months since acquisition. And of course, we will continue to work on delivering more cross-product capability over the next year. Prisma Cloud allows organizations to obtain a full and unified view of their cloud security and compliance posture across any type of cloud workload, including containers, serverless, and host environments under a single plane of glass. Prisma Cloud also integrates security into software development workloads, allowing developers the ability to see vulnerability status every time they run a build without having to run a separate tool. I personally believe Prisma Cloud is fast becoming the essential multi-cloud, multi-technology platform now with over 1,000 customers. Keeping to the theme of providing more capability, today we announced our intent to acquire Apparetto. After an extensive market scan and thinking through how we believe micro-segmentation can fundamentally be reinvented, we decided to accelerate our efforts to the proposed acquisition of Apparetto. Apparetto has unique machine identity-based micro-segmentation capabilities that complement the existing cloud native security platform capabilities delivered by Prisma Cloud. We are incredibly excited to welcome the team to PowerAuto Networks. In addition to the acquisition, our team continues to drive hard innovation on the Prisma Cloud platform. Now let's turn to Cortex. I'm also proud of this team. This team has outperformed their billing forecast for the first quarter by almost 20%. We introduced Cortex XDR 2.0 at Ignite. This is an integrated version with both endpoint protection and XDR capabilities. We launched Cortex 1.0 about six months ago. We're the only vendor to take EDR and reinvent it with network data to deliver XDR. It's been gratifying to see several other vendors follow suit and offer their own XDR term product. To continue to stay on the bleeding edge in this category, we're extending Cortex XDR's behavioral analytics capabilities to include data and logs collected from third-party firewalls, enabling detection across multi-vendor environments. We announced the inclusion of checkpoint firewall data at Ignite. We also hope to be able to accept data from Fortinet and Cisco before the year is over. This is probably the only time you'll hear me talk about our competitors in a neutral way. In the first nine months of Cortex XDR, We've enabled organizations to reduce alert volumes by up to 50x and speed investigation time by about 8x, filtering out the noise and allowing analysts to focus on most critical threats. Turning to DEMISTO, which is part of our Cortex brand, a couple of months ago, we enhanced our comprehensive security orchestration automation response platform, DEMISTO, by adding a number of new capabilities. Demisto 5.0 redefines the limits of SOAR customizability, enabling users to visualize incident and indicator flows in a completely tailored manner, improving the clarity and speed of security operations. What's even more exciting is what Lee talked about at our Ignite event, our ability to collect telemetry data on how Demisto is being used. We're starting to get this data, and customers will start to see the benefits, where we can give them more insight on how to get the most of this platform, including which playbooks are the most valuable and which integrations work the best. Finally, we're very pleased to announce a new high-end support offering called Platinum Support for our physical and virtual firewalls and our panorama management system. This is a continuation of our goal to provide the highest level of service to our customers. Platinum Support is an enhanced version of our premium support offering and will feature dedicated teams and best-in-class response times and also several other new features designed to ensure our customers' peace of mind knowing that Powerhouse Network's deep expertise is in their corner whenever they need it. This is just an overview of all that we've introduced at Ignite, and I encourage you to review the archive presentations from that event. As a continued measure of that confidence during the quarter, we repurchased nearly $200 million worth of our shares. To conclude, we had a great first quarter. I feel more confident in our ability to deliver the plan we set out for this year. Our product teams have rolled out exciting innovations and have us on the leading edge in multiple categories, from firewalls to XDR to SOAR to SASE and cloud security. As I contemplate our roadmap for the next 12 months, I become even more excited to see these security categories strengthening, knowing that our products will continue to mature and be deployed by our customers around the world. With that, I'll turn the call over to Kathy.