Palo Alto Networks, Inc.

Good day, everyone, and welcome to Palo Alto Network's Fiscal Fourth Quarter 2023 Earnings Conference Call. I'm Walter Pritchard, Senior Vice President of Investor Relations and Corporate Development. Please note that this call is being recorded today, Friday, August 18, 2023, at 1.30 Pacific Time. With me on today's call to discuss fourth quarter results are Nikesh Arora, our Chairman and Chief Executive Officer, and Deepak Galecha, our Chief Financial Officer. Following the Q4 session, we will take questions on our results in the 2024 guidance, with Lee Klarich, our Chief Product Officer, also joining us. We will then continue with the forward-looking portion of our program. For this, Lee, along with several of his product leaders, and BJ Jenkins, our President, will present along with Deepak and Nikesh, with additional Q&A session to follow. You can find the press release and other information to supplement today's discussion on our website at investors.paloaltonetworks.com. While there, please click on the link for events and presentations to find the fourth quarter 2023 earnings presentation and supplemental information. Following the event, we will post the full set of slides, including the forward-looking portion of our program. During the course of today's call, we will make forward-looking statements and projections regarding the company's business operations and financial performance. These statements made today are subject to a number of risks and uncertainties that could cause our actual results to differ from these forward-looking statements. Please review our press release and recent SEC filings for a description of these risks and uncertainties. We assume no obligation to update any forward-looking statements made in the presentations today. We will also refer to non-GAAP financial measures. These measures should not be considered a substitute for financial measures prepared in accordance with GAAP. The most directly comparable GAAP financial metrics and reconciliations are in the press release and the appendix of the investor presentation. And less specifically noted otherwise, all results and comparisons are on a fiscal year over year basis. We also note that management is participating in the Goldman Sachs Conference on September 7th. With that, I'll now turn the call over to Nikesh.

Thank you, Walter, and good afternoon, everyone. Thank you for spending your Friday afternoon or perhaps some part of your Friday evening with us. Our choice of Friday has definitely made us the topic du jour these past two weeks and has made for some very interesting reading of all the analyst notes. We apologize to people who are inconvenienced, but as we had mentioned, in our press release. We wanted to give ample time to analysts to have one-on-one calls with us over the weekend, and we have a sales conference that kicks off on Sunday. We want to make sure all of our information was disclosed out there. So again, we apologize for the unique Friday afternoon earnings call, but clearly we've enjoyed the attention. Well, let me go and just straightaway dive into our Q4 results. We start off the year focusing on excellence and execution. We've stayed true to that. and delivered strong results in Q4, capping off a strong fiscal year 2023, where we met or exceeded our original top line guidance and significantly exceeded our profitability and cashflow guidance. This year indeed required clear focus across our company, and we're all proud that our treatments delivered throughout the year, and especially in Q4. Our Q4 revenue grew 26%, marking our 12th consecutive quarter revenue growth north of 20%. Our billings grew 18% of a very strong 44% growth in Q4 a year ago, and our RPO grew 30% ahead of our revenue growth. Our Q4 operating margins expanded by 760 basis points, driving $1.44 in non-gap earnings per share, and we achieved 39% adjusted free cash flow margins for the year. Our performance in Q4 did not come as a surprise to us. We've been investing in our next-generation security portfolio for some time now to position ourselves in a leadership position for the future of the cybersecurity market. It is this next-gen portfolio driving that is our growth transformation and enabling our leverage. Lee and his team will expand on this in the forward-looking portion of our program. We achieved several important milestones in this quarter, especially in our software and cloud-based businesses this year. Our combined SASE, Cortex, and cloud bookings were north of $1 billion in Q4. Our Cortex platform surpassed $1 billion in annual bookings last quarter, and we achieved the same milestone with SASE this quarter. We also exceeded $500 million in Prisma Cloud ARR. These product performances are all contributed to the strong goals we continue to enjoy in NGS ARR. Remember that our NGS business is largely a capability new to us in the last five years and is primarily cloud delivered. This quarter, we added more net new ARR than any other pure play cybersecurity company. Our platformization is continuing to drive large deal momentum. One way to illustrate the traction of our next generation security capability across network security, cloud security, and SOC automation is to look at the makeup of some of our largest deals. When we deliver best-of-breed products that are also integrated into platforms, we help customers simplify their architectures, lower their cost of ownership, and benefit from differentiated cross-platform capabilities. This is a win-win scenario. Eight out of our top 10 deals saw significant contribution from our next-generation security capabilities. Five were essentially next-generation security deals. Here are some examples. One, a large industrial manufacturer signed a transaction with a total value of $45 million. A Prisma Access expansion led the transaction, but the deal also included significant commitments to Prisma Cloud, XOR, and our IoT security offerings. The customer's success with Prisma Access and our executive-level engagement were keys to winning this additional opportunity. A large professional services firm standardized Prisma Access in a transaction exceeding $40 million, securing their hundreds of thousands of users. The completeness of our offering, particularly our strong capabilities in private access, differentiated us from the competition. By standardizing Prisma Access, the customer consolidated legacy security offerings from many competitors to a single solution. A large retailer also signed a landmark transaction for more than $40 million led by XIM. In this deal, we displaced the incumbent SIM offering and also added our threat intelligence and attack surface management capabilities. Rounding out the examples, a large technology service provider chose our XDR and XIM capabilities in a transaction worth over $30 million. This deal started as an independent evaluation of replacement for both endpoint security and their SIM. This is the second quarter in a row where we have signed an eight-figure deal that was driven by a unique capability to provide both XDR and XIM competing against separate competitors in each of these categories. This sample represents the success we see across industries and regions. As I mentioned, a critical part of our profitable growth formula is selling more to our largest customers. In Q4, we saw our larger deals grow faster than our overall business. Notably, we saw the number of deals greater than 20 million grow faster than our deals over 10 million as our go-to-market motion becomes more and more increasingly successful in selling the platform and building the sort of trusted relationships required to close this quantum of business. Now for the surprise of this quarter. starting with Cortex. There are a number of things I'm excited about in this business as we ended this year. We launched XIM to general availability last October and set an aggressive goal of booking north of $100 million in our first year. The year is not over yet. We have closed out the year achieving $200 million in XIM. This is strong validation that our outcome-based value proposition exam is resonating well with security organizations and also a sign that interest in applying AI to transform security operations is very high. Lee will talk extensively about this in our forward-looking section. Our customers have told us loud and clear that the legacy products powering their SOCs are no longer working and they need to reduce their mean time remediation by an order of magnitude. This becomes increasingly important with the new SEC rules detailing that all public companies will be required to report material breaches within four business days. XIM is shaping up to be our fastest-growing offering outside our original next-generation firewall releases. XIM transactions are large and long-term, which help to further our goal of evolving our customer relationships from vendor to partner. As excited as we are about the early success of XIM, we are also seeing strong growth across the entire family of Cortex products, namely XDR, XOR, and Xpans. We crossed the 5,000-customer milestone in Cortex as we continue to gain share in the market and seed opportunities for upsell to the platform. Our average Cortex deal size grew over 50% a year, reflecting our success in cross-Cortex adoption. Moving on to the next star of the quarter, SASE. SASE continues to become our standout offering. We're seeing strong customer awareness and momentum following our new leadership position in the Gartner SSE Magic Quadrant last quarter. We recognize this quarter with a leadership position in the Forrester Zero Trust Edge wave that was published earlier in the week, establishing Palo Alto Networks as a clear industry leader in SASE. We also have some breaking news on industry recognition. Very excited that Palo Alto Networks has been recognized as the only, I repeat, the only leader in Gartner's first single vendor SASE Magic Quadrant just published on Wednesday. Our recent acceleration in external industry recognition has contributed to customer momentum, and we saw many new customer and large expansion transactions in Q4. This included four transactions over $10 million and many seven figure deals that span numerous industries and regions. Not to be left behind, Prisma Cloud went past $500 million in ARR. Our cloud security platform, where we believe all companies will eventually lead to manage security across multiple cloud applications and providers through a single platform, continue to show strength. Ensuring customers consume our capabilities after committing to the platform is vital. In Q4, we saw steady consumption growth with credits consumed up by 45%. We're also seeing strong growth in customer adoption of multiple modules. This quarter, we are showing our growth in customers with five modules more as this is starting to become a meaningful trend with customers up 179% year-over-year. We continue to make significant organic investments in Prisma Cloud and grow the platform through acquisitions. We launched the CI-CD security module last week based on technology from the CIDR security acquisition. This is our 11th module, and we continue to have the broadest cloud native application protection platform in the industry, with capabilities spanning our customers' entire code to cloud needs. Later in our call, you will get a chance to see our exciting developments and glimpse into our plans for the future. Finishing where I started, I couldn't be more proud of our performance in Q4 and the year. Our teams helped drive steady performance, enabling us to maintain a strong outlook through macro challenges by focusing on crisply executing our differentiated strategy. We continue to drive platformization and capitalize on the opportunity the changing landscape presents through products like XIM. We continue with our go-to-market transformation. For example, we consolidated our SASE sales team into our core a year ago, and we have seen a strong outcome, as you saw, with some large transactions and opportunities across the pipeline. We have continued to not hold back on investing in innovation to ensure we can capture share in a market that constantly presents new opportunities. Lastly, we successfully accelerated some of our efficiency initiatives in fiscal year as we saw the environment change. I'll now pass the floor to Deepak to cover the detailed financial results and our 2024 guidance.

Thank you, Nikesh, and good afternoon, everyone.