Palo Alto Networks, Inc.

Good day and welcome everyone to Palo Alto Network's fiscal fourth quarter 2021 earnings conference call. I am Clay Bilby, head of Palo Alto Network's investor relations. Please note that this call is being recorded today, Monday, August 23rd, 2021 at 1.30 p.m. Pacific time. With me on today's call are Nikesh Arora, our chairman and chief executive officer, and Deepak Galecha, our chief financial officer. Our chief product officer, Lee Klarich, will join us in the Q&A session following the prepared remarks. today's discussion on our website at investors.paluetonetworks.com. While there, please click on the link for the events and presentations where you will find the investor presentation and supplemental information. In the course of today's conference call, we will make forward-looking statements and projections that involve risk and uncertainty and that could cause actual results to differ materially from forward-looking statements made in this presentation. These forward-looking statements are based on our current beliefs and information available to management as of today. Risks, uncertainties, and other factors that could cause actual results to differ are identified in the safe harbor statements provided in our earnings presentation and in our SEC filings. All of the networks assumes no obligation to update the information provided on today's call. We will also discuss non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. We have included tables which provide reconciliations between non-GAAP and GAAP financial measures in the appendix to the presentation and in our earnings release, which we have filed with the SEC. We have several upcoming events, including a virtual analyst day on September 13th, starting at 9.30 a.m. Pacific time. Nikesh Arora, our chairman and CEO, along with members of the executive team, will provide an in-depth review of the company, including growth strategies, financial objectives, and capital allocation frameworks. Management is also scheduled to participate in uncoupling virtual investor conferences in September hosted by Citibank and Piper Sandler. And now I will turn the call over to Nikesh.

Good afternoon, everybody, and welcome to Palo Alto Network's Q4 conference call. I'm trying something new today, so please bear with me. You just got an opportunity to see our ad campaign. You're the first people to see it. We spent a lot of time working hard trying to understand what our customers really want to see from us. And the constant drumbeat we've got from them is innovation at the forefront of cybersecurity. Our ad campaign called We've Got Next amplifies the innovation that our teams have been delivering and our promise that we will be there with you as your partner. We've Got Next. I look forward to seeing this ad be the drumbeat for all of our broadcast media and covering our many platforms over time as we go out in the public domain and keep sharing this with our customers. Moving on, as you all are well aware, we've had a series of cybersecurity events over the last quarter. Against the backdrop where we've seen supply chain attacks, where bad actors try to hack into core infrastructure pieces, which allows them access to enterprises or government systems. These vulnerabilities are being exploited by ransomware actors. The ransomware threat continues to rise. Our Unit 42 team research shows that the average ransom demand in the first half of this year grew from 5.3 million, which is up 518% year-over-year. What these attacks are highlighting is the constant shortcomings of enterprises and of government infrastructure, continually spurring demand and consolidation as companies devalued their cybersecurity posture. It's against this backdrop that our platform approach is working. Three years ago, at our analyst day, we set out the strategy of the company on three fundamental tenets. One, that the network will transform with the introduction of the cloud. This is accelerated with the pandemic, with SASE and virtual firewalls leading the transformation. Not only that, we supplemented our firewall platform strategy with software capabilities like DLP, IoT, SaaS visibility, DNS security, and SD-WAN. Our second insight was the cloud is going to be big and it's here to stay. We have now seven modules in our cloud security platform, which is being used by over 75 Fortune 100 companies. And our third insight was more AI and machine learning will be needed to support the automation of our security platforms and our security operating centers. Our Cortex platform validates that for us every single day. Underpinning this innovation strategy has been a flurry of product releases of all of networks. When I came to the company, we sat down and decided what we needed to do was to get our innovation and product strategy right. Something many cybersecurity companies have struggled to do is stay relevant. You can see from the slide we've gone from 13 major releases to 29 this year, tripling our product release capability over three years of these 63 odd 11 of these 64, sorry, 11 of these have been through acquisitions. The other 53 have been done through organic innovation in the company. And this is not all. We're going to see a lot more innovation coming down the pike as we unfold this year. We will tell you more about this in the analyst deck. A rapid pace of innovation is also being validated by the industry. If you look at this slide, we used to be recognized by two in two categories for leadership in cybersecurity. In FY21, we were awarded six different accolades to validate that now we're leaders in six different categories. Our aspiration is to grow that category of leadership over this year and hopefully get into double digits by the end of this year. So our pace of innovation is alive and it continues. Breaking down into the three different platform pillars, our network driven pillar, which has been driven by SASE and virtual firewalls. I know at the beginning of the pandemic, there was a huge debate, like how long is the work from home trend going to last? Well, all I can tell you is it's far from over. This is going to become the norm. Hybrid work is about to become the norm, and SASE is going to lead that transformation. In this environment, all applications are going to need access to every app from any location. Only parallel networks can provide the comprehensive capability with our consistent network security across all of our platforms. We saw a phenomenal number of large deals in this category. One of our largest deals was with a bank in the JPEG region where it was highly competitive, and our customers spent over $10 million, but Prisma Access was a cornerstone of that strategy. After a phenomenal amount of growth in our SASE product category, we've seen our customer count grow by 50%, and now it's almost 2,500 customers. Also, 25% of these customers are net new to Palo Alto Networks, which is great. Not only are our firewall customers buying products from Palo Alto Networks, but our many new product capabilities are allowing us to penetrate the customer base even further. Beyond the initial demand we see for Prisma Access in our SASE category, we've realized customers want more capability. We recently announced Autonomous Digital Endpoint Monitoring, Experience Management, ADEM, which is fast becoming a standard. We've realized that Bundling the ADEM capabilities with other capabilities around Prisma Access allows us to uplift our Prisma Access deals over time by 25%. In addition to our SASE leadership, last quarter we introduced our fourth generation hardware with high performance and attractively priced appliances. The newly introduced PA400, which is 10 times, 10 times the performance of the predecessor, will expand our presence in the enterprise branch, SMB, and international markets. Most recently in our quarter, a US convenience store chain that previously used us only as a corporate infrastructure, deployed 400 series to 2,300 stores. Also on the high end of our hardware strategy, we're beginning to start seeing refreshes. This has been a trend which had been subdued. People were holding back, sweating their asses during the pandemic. And we realized as the pandemic has eased up, as companies are starting to come back to work, they've seen volumes go up. They have not created more infrastructure. As a result, we're seeing customers who are coming back, even in a hybrid form, starting to do refreshes in the hardware category, which has led to the hardware growth we saw this quarter, which has also underpinned some of the network-driven growth or network platform-driven growth for us at Palo Alto Network. Last but not the least, we continue to maintain a leadership position in our virtual firewalls. We recently launched our partnership with Google, powering their new cloud IDS with our VM series. As you can see, continued acceleration of our software firewall business in its multiple form factors has allowed us to deliver approximately 47% of FVAP billings in a quarter where we even saw hardware growth accelerate. We finished our fiscal year 21 with our software firewall and Prisma SASE next generation security RR at $425 million. As you will see, these numbers will add up to show that our NGS AR for the quarter was north of 1180. Moving to our cloud platform. As you know, we caught this trend early, investing three years ago in the cloud native security opportunity. You might have all seen the flurry of activity from venture capitalists trying to flood this market with a lot more cloud security companies. We're delighted that they're validating our strategy, but we think we're far ahead. A key measure we use for understanding how well our Prisma cloud services are performing is the consumption of our Prisma cloud service. In Q4, we had 2 million credits consumed. This consumption is broadening beyond our initial modules of cloud workload protection and CSPM. We've launched IAM and WAAS modules. We already have seen adoption by north of 100 customers in a quarter. Over one quarter of the global, our total 2,000 customers are Prisma Cloud customers, with total customers growing at 47%. We're also excited that with our BridgeCrew acquisition, we have seen increased adoption of BridgeCrew as customers shift left with cloud security. We're delighted with the results so far and the progress we're making in integrating BridgeCrew with Prisma Cloud. And we continue to see very large deals with Prisma Cloud. Our top three customers in Prisma Cloud committed over $40 million to bookings this quarter. Our largest deal was $20 million in Prisma Cloud, with the customer expanding cloud workload protection and CSPM and adding bridge crew for the entire cloud platform. Including our Marketplace VM and CN series, our Prisma Cloud business finished FI21 with ARR of $300 million. Moving on to Cortex. In Cortex, we have 2,900 customers for our XDR Pro and XR products, nearly doubling year over year. We booked our very first over $10 million fall on transaction for Cortex in the pharma industry. Different by the platform approach, our customer bought most of the platform, they want XDR, they want network traffic analysis, they bought XSort. Today, we announced XDR 3.0. This expands our pioneering XDR service to cloud and identity-based threats, giving organizations a single console for holistic analysis. Xpans continues to innovate as a leader in the emerging attack surface management space, as well as delivering unique integrations with our Palo Alto portfolio. In Q4, we released Xpans capability that enables unknown cloud assets to be discovered and brought under management of Prisma Cloud. We finished FY21 in Cortex NGACRR of over $400 million. And last but not the least, We're very excited about Unit 42. Unit 42 is our capability where we can actually proactively support our customers. This is how we go from being a peacetime company that provides products to our customers to a wartime ally when we are there for them when they need us. We launched proactive capability last quarter in our Unit 42 team. Our business went up 11x in Q4 for the proactive services capability. One of the key engagements we're experiencing is ransomware readiness. We have 39 ransomware readiness assessments where we got engaged and we have 300 more in the pipeline. Over time, we expect these service engagements to allow us to increase our product pull-through to our customers. You can see that our leadership signs where customers are integrating security and consolidating. As a company, we continue to focus on getting more presence in our customers and getting larger deals with them. I'm delighted to say we had 18 customers sign transactions over $10 million in the quarter. We had our first customer that surpassed $100 million in their book business during the fiscal year as the standardized and volatile networks across the entire enterprise. And our millionaire customers were up to 986 in Q4, approximately up 30% for the third quarter in a row. The strategy is showing in our financial results. You can see we saw revenue acceleration in Q4 to $1.2 billion. We also saw that our billings went up to $1.868 billion, up 34%. And our NGS billing of $1.18 billion was in excess of our guidance. Also delighted that our FY21 performance for ClaySec had an error of $734 million and revenue of $602 million. Going into FY22, we're further aligned around our one pilot networks strategy where we see the benefits of being able to cross-sell our platform. I also am very delighted to say we had our first $2 billion quarter ever. I know you see the billions at 1.868, but if you look at the difference between our PO and our revenue, we actually did more than $2 billion of book business this quarter. It's kudos to our team out there in the field and our customers who trust us with their cybersecurity. During Q4, it is clear that we continue to see momentum in our business. We saw product revenue accelerated at Palo Alto Networks. This is revenue which we believe will sustain into Q1 because we're seeing the refresh come in and we didn't ship everything that we saw in our product business in Q4. We're not able to. We've also seen phenomenal growth in our cross-platform adoption. You can see that customers 43% of our customers purchase all three of our platforms, 28% purchase two platforms, and 29% purchase one platform. What's interesting is for customers that acquired two of our platforms, deal sizes were three times the deal size for single platforms. Also, for Global 1000 customers that acquired all three of our platforms, Some of the deals were 14 times the deal size of the largest single platform deal. So it's very interesting to watch our platform approach of consolidation is beginning to show signs of success as we were able to go convince our customers that they should be deploying more than just one of our platform categories. It is clear to us that our transformation is working. In September 2019, our analyst day, we provided FY22 targets. Our just-released FY22 guidance materially exceeds the FY22 targets we set back in 2019, as you can see. As Deepak will highlight, our total company growth for revenue is in the mid-20s, ahead of our prior 20% CAGR target for two years ago. Our business is transforming faster. NGS is growing faster. I look forward to sharing new guidance for you for the next phase of Apollo Networks for the next three years at our analyst day in September. But it's clear that over the last years, our product and strategic transformation to being an innovator in cybersecurity is working. Now we have to share the strategy over the next three years of how we continue to scale this business effectively and efficiently. Multiple drivers give us conviction in objectives for FY22 and beyond. Just to lay it out for you, how do I see growth for FY22 and how do I see a scaling into that growth? One, I believe there's some pent up hardware demand, and we're going to see that come through in Q1 and the rest of FY22. We've also launched new form factor hardware, and we are very excited about the initial response by the customers to this new category of hardware. We also currently benefit from the cloud adoption around the industry, and we think that benefit continues going to FY22. As I said, work from home. is a new normal it's not something that's over i don't think the sassy train has barely left the station i think they have a lot of room to go not just for fi 22 but also beyond and last but not the least i don't believe uh manual processes can keep up with the accelerating pace of sophistication for cyber security so i believe there is tremendous growth going forward both for the cyber security industry and for palo alto networks on the scale front We introduced the concept of speedboats three years ago. Our speedboat model is working well. We continue to iterate and improve it for growth and productivity. We also see our multiple platform success. We believe there is room for synergies as we get into a more cohesive sales motion as we start to see these things working. There's also some products which we have not yet launched, which you will see us launching in the course of the year. And we hope as we launch those products, you're going to start seeing the benefits of our innovation and investments during this year and following years. And our journey to the cloud is well underway, but we also have much to go in terms of optimizing our cloud spend. So we believe there's opportunity to create margin expansion over the long term. We also believe there is sustainable growth in cybersecurity industry. We expect to see these drivers of our top line combined with a continued but moderate pace of investment in FY22 as we plan to add fewer employees in 22 than we did in FY21. Part of this is our expectation that acquisitions will be incremental versus substantive in the coming year. Beyond FY22, we expect to grow operating income faster than revenue. We will update investors further on this at our September 13th analyst day. Ending where I started. You can see why we're excited to talk about what we've got next as we head into FY22. With that, I will turn over the call to Deepak to talk about the details of our Q4 performance and our guidance.

Thank you, Nikesh.