Palo Alto Networks, Inc.

good day everyone and welcome to palo alto network's fiscal first quarter 2024 earnings conference call i am walter pritchard senior vice president of investor relations and corporate development please note that this call is being recorded today wednesday november 15 2023 at 1 30 p.m pacific time with me on today's call to discuss first quarter results are the cash aurora our chairman and chief executive officer and deepak golecha our chief financial officer Following our prepared remarks, Lee Klarich, our Chief Product Officer, will join us for the question and answer portion. 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 Q1 2024 earnings presentation and supplemental information. 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 UBS conference, November 29th. I will now turn the call over to Nikesh.

Thank you, Walter. Good afternoon, everyone, and thank you for joining us today for our earnings call. Q1 was the first quarter of our three-year plan we presented in August. If I were to summarize the quarter, I would say the following. We continue to execute amazingly well in what is a volatile environment. On the geopolitical front, we've been contending with what's happening in Israel and Ukraine. On the hardware or product front, as you see, there has been normalization in the industry. It's something we've been indicating for a while. Backlog has been shipped, supply chain issues are behind us, and product growth is normalizing in the industry. We continue to see normal strength as we indicated in prior quarters in that category. On the macroeconomic front, business practices continue to adapt and adjust to new normal with higher interest rates for longer. Internally, on the product side, we've had one of the strongest starts to our fiscal year. In addition to various recognitions, we have delivered strong innovation across all three platforms. We launched an AI-enabled cloud manager and network security to continue our consolidation and platformization efforts towards zero trust. In SASE, we announced our intent to deliver enterprise browsers for the talent acquisition, which will solve one of the critical issues of remote access, which is not addressed today by any SASE vendor. We released the industry's first integrated UI for Code2Cloud and Prisma Cloud, and announced the acquisition of DIG Security to double down on data security for generative AI in Prisma Cloud. Last but not the least, in Cortex, we launched XIM 2.0 with Bring Your Own AI. On the go-to-market side, Q1 is seasonally a slower start as we kick off the new year, but the team delivered superior revenue and profitability, and we had our highest cash collection quarter in our history. We continue to see steady execution in our firewall, cloud, and endpoint businesses. On SASE, we continue to position ourselves in larger and more strategic deals. And XIM, while in its early days, continues to garner tremendous interest, giving us more comfort around our long-term intentions. So in summary, a strong start in Q1 towards our three-year journey. Early days, but confidence-inspiring. Let's dig into the details. Our Q1 revenue grew 20% and our billings grew 16%, while our RPO growth of 26% exceeded both of these and was driven by our next generation security capabilities. I would like you to pay particular attention to RPO versus billings. Deepak will talk about the difference at length and explain why the street might be confused with our future billings guidance. Our Q1 non-GAAP operating margins expanded by 760 basis points, driving 1.38 in non-GAAP earnings per share, and we generated a record 1.5 billion adjusted free cash flow in Q1. If you look at what's going on from an overall cybersecurity perspective, we have never seen as much adversarial and consistent activity at scale as we have seen in the first quarter. Unfortunately, we don't expect this to abate anytime soon. As a consequence of this increased activity and in recognition of our customers' commitment to us, this week we announced a Unit 42 Rapid Incident Response Retainer at no cost to all of our strategic customers, aimed at providing additional support during this escalating threat landscape. Ransomware attacks are increasing in frequency and severity. The ransom amounts being paid are also increasing. Bad actors are doing damage in a much shorter amount of time. As an example, in a recent engagement of our Unit 42 team, we saw an instance where bad actors extracted 2.4 terabytes of data in just 14 hours. There's also some evidence that the adversaries are beginning to leverage generative AI as a tool to make attacks more sophisticated. Not just that, based on what we are seeing in Unit 42, most attacks are now happening on the back of vulnerabilities in widely used software and APIs, such as a widely exploited MoveIt file transfer software. Unfortunately, these bad actors remain elusive, with no apparent significant increase in convictions in high-profile attacks, and therefore, not surprisingly, this malicious activity continues. At the same time, U.S. publicly listed companies and their boards are confronted with new SEC disclosure requirements around prompt public reporting of material cybersecurity incidents and the enhanced oversight responsibility that comes with that. This result is a continued focus across organizations on understanding security posture, cybersecurity risk, and how to mitigate this risk effectively. This increasingly involves not only the CISO, but the entire IT organization, legal, finance, and the CEO and the full board of directors. This space of malicious activity and the board-level focus on cybersecurity risk is fueling a strong demand environment. Customers often have multiple strategic priorities in cybersecurity, and our broad portfolio enables us to align with these priorities. In Q1, the cost of money remained a constant discussion, and customers' significant focus on this topic is becoming the new normal. The way it manifests itself in our business is that there is always a payment and duration discussion in final deed negotiations. Given our strong balance sheet, we can use a mix of strategies to navigate the environment. This includes annual billing plans, financing through PAN-FS, and partner financing. Whilst this does not impact our business demand or the impact to annual revenue or annual metrics, it does create variability on total billings more than before, depending on financing used or the duration of contracts. I am not concerned about the demand for cybersecurity for this quarter and upcoming quarters. Nor am I concerned about our ability to execute The billings variability is a pure consequence of the payment conversation that we're having with our customers, and this is validated by the fact that we continue to see strong RPO and low churn, suggesting this is a cosmetic impact to our business. We continue to see strong interest across our next generation security portfolio, and we're making progress on our platformization journey. I'll highlight a few deals to talk about the diversity of opportunity across platform buys, as well as the geographical distribution of our deals. For example, A federal government agency signed a $25 million expansion transaction, including adding Cortex-XDR and Prisma Access in highly competitive situations and expanding their network security footprint. This customer has now spent over $100 million of its lifetime across our three platforms. A large global SaaS provider signed an $18 million Prisma Cloud transaction to consume modules across the portfolio. The customer is already a customer for our network security and Cortex platforms. A large educational organization expanded its relationship with us in the first quarter in a $15 million transaction, adding XIM, Prisma Cloud, and an expansion of its network security footprint. And lastly, a nation state signed a $28 million deal, that is a first of its kind, standardizing on both SASE and XIM. This is a long sales cycle and represents our systematic approach to platformization. The story in these deals has been playing out across our large customers. As of Q1, 56% of the global 2,000s has transacted with us across Strata, Prisma, and Cortex. This continued focus on customer cyber transformation has fueled the 53% growth in NGS ARR to report this quarter as we broke through the $3 billion milestone. Another exciting news, as of Q1, recurring revenue across Palo Alto is 83% of our total revenue from 77% a year ago. Let's turn on to updates from our three platforms that are the engine driving our success. First, in network security, we continue to drive innovation across our portfolio and see momentum as customers drive towards zero trust architecture. This month, we unveiled PanOS 11.1, or Cosmos, and Strata Cloud Manager, unifying the management of all of our three form factors and all security services in a single pane of glass, and also leveraging AI to analyze security policies, reduce misconfigurations, and predict and prevent disruptions. Customers who have invested in our platform by deploying all three form factors continue to grow rapidly, up 34%. Of our top 100 network security customers, 60% have purchased all three form factors, up from 50% a year ago. On average, these platform customers spend more than 15 times of the rest of our network security customer spend. The story is similar in SASE. Having just seen our innovations gain multiple industry recognitions in SASE in the second half of our fiscal year, we've continued to invest to build on a leadership position. We're seeing strong momentum in SASE, with ARR growth of approximately 60% in Q1. We also saw 35% of our 5 million or greater network security transactions include SASE, up from less than 10% a year ago. Today was the first day of our event called SASE Converge, where we unveiled several enhancements. We have enabled SASE to access applications with performance faster than the internet. We added visibility and control over interconnected SASE applications and enabled safe access to GenAI tools to ensure data isn't inadvertently leaked. Lastly, we added remote browser isolation technology for an extra layer of security. M&A has always been an important part of our strategy. Last week, we announced our intent to acquire talent cybersecurity. We see an opportunity to expand the addressable market for SASE and solve an important customer problem. As many as 36% of workers classify themselves as independent workers, who often use unmanaged devices for work. In addition, employees increasingly use personal devices for accessing business applications. To enable access for these devices, security teams have an impossible trade-off. They are forced to either ignore security entirely in favor of flexibility and user experience, or to adopt cumbersome technologies like VDI. Talon is a pioneer in the emerging enterprise browser category, and when combined with Prisma SASE after closing, we will enable users to securely access business applications from any device, including mobile devices and non-corporate devices, with a seamless user experience. We intend to include this capacity capability with Prisma Access after closing, and customers will be able to extend the same best-in-class security to unmanaged devices. Moving on to Prisma Cloud. We continue to see a strong endorsement of our integrated platform strategy. This traction is evident in the strong growth of our multi-module customers. We have seen particular success here with modules released over the last two and a half years. There has been a consistent pattern of seeing 100 plus customers for new modules in the first full quarter of launch and rapid growth after that as the benefits of these new modules are broadly understood. This enthusiastic adoption has driven our strong conviction in adding key new modules, including some to our acquisitions. Our IAC scanning capability, which came through the BridgeCrew acquisitions, and CICD security, which came through CIDR, are two such examples. This new module traction is helping to accelerate Prisma Cloud new business ACV in the last quarters. In Q1, we also unveiled a major new Prisma Cloud release, Darwin. Darwin further differentiates our unique position across code, cloud infrastructure, and cloud runtime. Darwin enables a view across all elements of cloud applications, including cloud services, infrastructure assets, compute workloads, API endpoints, data and code. Darwin can also help customers understand risks with deep context and overlay active attack attempts in near real time. Our full coverage from core to cloud enables fixes to be applied immediately versus the months most vulnerabilities take to be passed. About two weeks ago, we announced our intention to acquire Digg Security, which will bring an award-winning data security posture management capability Prisma Cloud. With almost 70% of organizations having data stored in the public cloud, the sprawl of new cloud data services, and the adoption of generative AI, we see an increased need to identify sensitive data, effectively manage user access, and implement robust security measures to prevent unauthorized internal and external access to this data stored in the cloud. After the close of proposed acquisition, DIG's capabilities will be integrated into Prisma Cloud Platform to provide near real-time data protection from code to cloud. Moving on to Cortex. We continue to invest across our product portfolio and expand our customer account as we see continued adoption of XDR, XOR, Xpans, and XIM. In Q1, we had several industry recognitions of our innovation. Cortex-XDR was the only product in the industry to achieve 100% protection and detection in the Round 5 MITRE evaluation. Additionally, XOR, Xpans, and XIM were all named leaders by third parties as quarter. We grew our Cortex Active customer count by 25% to over 5,300 customers. Our traction overall in Cortex is essential as it allows us to sell our transformational offering XIM. XIM has had a very fast start since we released the product just over a year ago. After a strong FY23, XIM's first year of release, which included over 200 million in bookings, we followed up with a strong Q1. We saw our first expansion purchase of XIM, an eight-figure deal, and in Q1, our largest XIM customer to date was deployed with over 300,000 endpoints. We're seeing Ex-Im transform customer security operations and significantly improve their security outcomes. This includes significant reductions in the meantime to detect and resolve security incidents. On the back of potential customers hearing about early Ex-Im success, our pipeline for Ex-Im is over $1 billion, of which $500 million was created just in this past quarter. As I began my remarks, Q1 was the first quarter of us delivering on the three-year plan we presented in August. We're driving profitable growth, investing in innovation, next-generation security, and the industry's largest dedicated security go-to-market organization. At the same time, leveraging the scale of Palo Alto Networks. Demand for cybersecurity is strong, given the backdrop of attacks and the ever-increasing focus and scrutiny around cyber risk. Execution continues to be paramount, given the macro conditions, and we will continue to be adept in responding to changes in the environment. We will manage for long-term growth, operating margin, and free cash flow, and ensure we continue to transform the business and build revenue predictably. You will see this through RPO, and most importantly, our current RPO. Our long-term forecast thesis remains intact. Whilst we expect short-term variability in billings, we don't expect this to have a meaningful impact on our ability to deliver our three-year targets. With that, I will turn it over to Deepak.

Thank you, Nikesh, and good afternoon everyone. I'll cover the specifics of our Q1 results, additional details on drivers behind the results, and our Q2 and fiscal year 2024 guidance. For Q1, revenue was $1.88 billion and grew 20%. Product revenue grew 3%, total service revenue grew 25%, with subscription revenue of $988 million growing 29%, and support revenue of $549 million growing 17%. We saw consistent revenue contribution across all theaters. America's grew 20%, EMEA was up 19%, and JPAC grew 23%. The strength of our next generation capabilities continues to drive our results, with NGS ARL exceeding $3 billion for the first time and growing 53%. We saw strong contributions across this portfolio in Q1. We delivered total billings of $2.02 billion, up 16%. Total deferred revenue in Q1 was $9.4 billion, an increase of 32%. The main performance obligation, or RPO, was $10.4 billion, increasing 26%, with current RPO just under half of our RPO. As Nikesh mentioned, we saw the rising cost of money have an important and incremental impact on customer behavior in Q1. We are responding to this in the ways we have discussed previously, including using annual billing plans, financing through PAN-FS, and partner financing. In Q1, this had a negative impact on our billings, although as you can see, we saw strength in NGS ARR and revenue. Our non-GAAP earnings per share was significantly ahead of our guidance, growing 66%. This was driven primarily by the significant increase in our non-GAAP operating margins, which expanded 760 basis points year over year. We continue to benefit from the scale inherent in our business, especially as some of our next generation security offerings scale. We again delivered strong cash flow in Q1 with trailing 12 month adjusted free cash flow of $3 billion, achieving trailing 12 month free cash flow margins of 41%. Moving beyond the top line, gross margin for Q1 of 78% increased 370 basis points year over year. We again saw year-over-year improvements in product margins with the normalization of the supply chain environment. Service gross margin improved to 78% as our newer offerings continued to gain scale. Our operating margin expanded by 760 basis points in Q1 as we saw higher gross margins and efficiencies across our three operating expense lines. We are pleased with our operating efficiency progress against our medium term targets. We continue to make significant investments to support our top line growth expectations, including investments in product and engineering, building sales capability, and supporting our ecosystems and our go-to-market organizations. Turning to the balance sheet and cash flow statements, we ended Q1 with cash equivalents and investments of $6.9 billion. Q1 cash flow from operations was $1.526 billion with total adjusted free cash flow of $1.489 billion this quarter. As is typical for our Q1, this cash flow performance was primarily driven by strong collections in the prior quarter based on the strength of our Q4 bookings. collections in the quarter, but based on the strength of our Q4 bookings. Over the last several weeks, we announced that we have entered into definitive agreements to acquire two companies. On October 31st, we announced our intent to acquire Digg Security Solutions for approximately $232 million in cash, excluding the value of replacement equity rewards. On November 6th, we announced our intent to acquire Talon Cybersecurity for approximately $435 million, excluding the value of replacement equity awards and inclusive of cash on Talon's balance sheet at closing. We expect both transactions will close in our second quarter of fiscal year 24. During Q1, we repurchased approximately 300,000 shares on the open market at an average price of approximately $227 per share for a total consideration of $67 million. As a reminder, our share repurchase program is opportunistic, and we're committed to returning cash to shareholders over the medium term. Stock-based compensation expense declined by 250 basis points as a percent of revenue year-over-year. As expected, stock-based compensation ticked up slightly as a percent of revenue quarter-over-quarter with the issuance of a portion of our fiscal year 24 grants. On a year-over-year basis, we continue to manage our SBC down as a percent of revenue in line with our long-term plans. Before turning to guidance, I want to frame some of the impacts that we're seeing on our billings. As Nikesh noted, we see strong demand in the market and continue to see customers make a technical selection of offerings across our portfolio. From here, we see more customers asking for deferred payment terms, either with annual billings, financing through PANFS, or pursuing external financing. Some customers are looking for additional discounts for upfront payments as they grapple with the cost of money. Our strong financial position, which includes $7 billion in cash, cash equivalents and investments, combined with our many options in dealing with this dynamic, gives us significant flexibility. This can impact our billings trends quarter to quarter, and we're reducing our billings guidance to account for this through the fiscal year 2024. RPO and CRPO have more of a direct impact on future revenue. This quarter, with duration towards the low end of the range we've seen over the last several quarters, we saw strong trends in CRPO. As we see low customer churn, we're confident that, independent of specific billing terms and contract lengths, we can continue to grow RPO at levels that support our forward revenue growth ambitions. Now moving on to our guidance for Q2 in the year. For the second quarter of 2024, we expect billings to be in the range of $2.335 to $2.385 billion, an increase of 15% to 18%. We expect revenue to be in the range of $1.955 to $1.985 billion, an increase of 18% to 20%. We expect non-gap EPS to be in the range of $1.29 to $1.31 per share, an increase of 23% to 25%. For the fiscal year 2024, We expect Billings to be in the range of 10.7 to 10.8 billion dollars, an increase of 16 to 17 percent. We expect NGS ARR to be in the range of 3.95 to 4 billion dollars, an increase of 34 to 35 percent. We expect Revenue to be in the range of 8.15 to 8.2 billion dollars, an increase of 18 to 19 percent. We expect our fiscal year 24 operating margins to be in the range of 26 to 26.5%, up 190 to 240 basis points versus fiscal year 23. We expect our non-GAAP EPS to be in the range of 540 to 553, an increase of 22 to 25%. And we expect adjusted free cash flow margin to be 37 to 38%. Additionally, please consider the following modeling points we expect a non gap tax rate to remain at 22% for the second quarter and fiscal year 2024 subject to the outcome outcome of future tax legislation, we also expect cash taxes in the range of 230 to $280 million. For the second quarter, we expect net interest and other income of $55 to $60 million. We expect second quarter diluted shares outstanding of 339 to 342 million shares. We expect fiscal year 2024 diluted shares outstanding of 338 to 343 million shares. And we expect fiscal year 2024 capital expenditures of $175 to $185 million and $40 to $45 million in Q2. With that, I'll pass it back to Walter for the Q&A portion of the call.

Thank you, Deepak. To provide as broad a participation as possible, please limit yourself to one question. Our first question will be from Socket Kalia with Barclays, followed up by Hamza Fadarwala from Morgan Stanley. Go ahead, Socket.

Okay, great. Hey, guys, thanks for taking my questions here. Deepak, maybe the question is for you. Appreciate the revised billings guide in this macro backdrop, and to your point, the higher cost of money. I'm curious how you've maybe thought about factors like pipeline, like close rates, and very importantly, billings duration for the rest of the year, as we just try to get comfortable with how much that billings guide has maybe been de-risked.

Saki, thanks for your question. I'm going to take this one because it's more about demand function. I think repetition doesn't spoil the prayer, so I will repeat. The billing's difference is not a change in demand for us or not a function of our pipeline. The billing's change is a consequence of negotiations with customers, and the customer says, you want me to pay you for three years up front? You got to give me a bigger discount. You want to pay me, want me to do a three-year deal? You got to go finance it and manifest. I could do that, but I could say just pay me on an annual basis. I'm okay. I'll collect my money every year. If I go in that direction, my billings changes. It does not change anything in my pipeline, in my close rates, or in my demand function. You understand my point? So we're just giving ourselves flexibility because this quarter we saw a lot more negotiations around those topics. We just don't want to be held hostage to those kind of negotiations where we have to go finance deals to get TCV in there because billings is a TCV metric. TCV is important if I'm concerned about churn. I have very low churn across my product categories. So I'm very happy to collect my money on an analyzed basis that that's what's needed to make sure that I don't get pressure on financing. I don't get pressure on having to give larger discounts. I retain flexibility. I do do a lot of TCP deals. I do a lot of financing, but this allows me the flexibility. So I want to make sure there is no change in the demand function of the market. There is no change in our revenue forecasts.

Got it. Very helpful. Thank you. Thanks, Socket. Next up is going to be Hamza Fadarwala from Morgan Stanley, followed by Brian Essex from JPMorgan. Hamza, go ahead.

Hey, good evening. Thank you for taking my question. And I just want to start by offering my thoughts and condolences to all your employees in Israel. You know, kind of similar vein to Socket's question. I mean, 16% billings growth is certainly not bad in the context of, you know, many of your peers growing single digits, if at all. I'm just curious, because your guidance is still assuming that growth will sustain for the full year. So what's giving you that confidence, given the cost of money, given the hardware digestion, that you can sustain that high-teens billing growth, given what you're seeing in the market?

So Hamza, as Saki had mentioned, we have visibility to our pipeline. So we know there's business out there. We have not seen customers walk away from deals in Q1. It's not like people don't want to do business. We've been very consistent on hardware and our hardware expectations for the last 12 months. We're retaining our consistent expectations on hardware. We don't expect any lumpy movements up or down. We expect it's going to go steadily in the 0% to 5% range, as we've always been talking about. So I think from that perspective, I think to use Saket's word, we feel reasonably de-risked on what's out there in the future. Q1 of the first quarter allows us, you know, we have lots of pipeline we have visibility to. I think I want to reiterate again, we are retaining flexibility. Can I go finance? Of course I can. Can I go finance a three-year deal through PANFS for $7 million of cash? I can, which will have a cosmetic impact of giving me better billings. But what I don't want to do is finance bad deals. This allows me the flexibility of not having to finance them. Nothing changes. I still get my revenue for the year. I still get my CRPO. I still get my annual billings. I just don't get year two and year three billings. It changes my total billings forecast for the year. It's cosmetic. It's mathematics. But it's interesting to see how the street interprets it. Thank you.

Thank you, Hamza. Next up, we have Brian Essex from JP Morgan, followed by Gabriella Borges from Goldman Sachs. Brian, go ahead, please. You're muted, Brian.

Thanks, Walter. Yeah, thank you for taking the question. Nikesh, I was maybe worried if I could dig in on M&A a little bit. Pretty meaningful volume of M&A from a dollar spent perspective this quarter after not having done some for a while. How would you describe the overall environment? How would you, I guess, message to investors the level of M&A that you might do over the next, I don't know, couple of years? Is this more of a one-off IP and acqui-hire that you saw a great opportunity to pick up? Or might there be something meaningful in terms of a longer term trend or, you know, even dollars put through your sales pipeline as you, you know, scale this over your platform or scale both of them over your platform?

So, Brian, thanks for the question. Look, we have not changed our point of view. We have always maintained that we're going to sustain M&A at a level close to a billion dollars a year. So we haven't done one for a while or two. And if you see, if you split the two, we did a cloud security one, and we've been pretty consistent in that rough range in the $150 to $250 million range in terms of adding cloud capability as we see the market evolve. So I think that's kind of consistent where we are. We saw unique opportunities. I mentioned 36% of workers are independent workers. They don't get a SASE remote access solution. We saw more and more discussion in the market where RBI was not, covering every use case and manage devices or not and all your mobile phones don't have management for security the last few hacks that happen to mobile devices so from that perspective customers are asking what is my solution and now what we didn't want to do is to have to deploy yet another independent solution which is disconnected from our overall sasa capability And like we do, we always pay attention to the market. We figured Tal had the best tech in the space, and they were just about to go race to go to a go-to-market sort of implosion or explosion. That would be the other companies. And from that perspective, we saw an opportunity, and we think it's a great fit. It actually makes us the most comprehensive SASE solution. We are going to integrate them deeply into our SASE solution where customers will be able to use enterprise browsers, RBI, or our Prisma Access client. So it's, I don't want to call it a one-off, because one-off sounds like it'll never happen again, but I think it just happens to be the time where we did two at the same time, but they're in two different platforms, two different teams integrating them, so it's not overhead to the organization. But, you know, we're going to keep our cautious approach towards, you know, eating what we can digest. So you shouldn't expect anything that is off the regular pattern we've just, we've sort of shown in the last time.

Helpful. Thank you.

Great. Thank you, Brian. Next question is going to be from Gabriella Borges at Golden Saks with Roger Boyd at UBS on deck. Go ahead, Gabriella.

Good afternoon. Thank you. I want to ask about the two dynamics that you're talking about in your business, the firewall cycle on the one hand and the cost of money impacting billing duration on the other. How do you think about the potential that these two dynamics are actually connected, meaning product mix is also having an impact on billing duration? And how do you think about the risk that cost of money dynamics get worse before they get better, thereby impacting the four-year guide for billings again as we go through the year? Thank you.

So thank you, Gabriella. Look, the firewall business actually is a one-shot business. You sell a piece of hardware and you get paid for it. It's not a ratable business, right? The ratability comes from our subscriptions and services part. it's usually there. We have to look at it from an NGS perspective. Our duration this quarter was on the lower end of duration. It reduced, it went down because we took more annual billing deals or we took shorter duration contract with our customers. So from that perspective, I think we feel comfortable, given the visibility to our pipeline for the rest of the year, that we've created flexibility for ourselves on billing. I think we're going to keep having this debate where you keep calling it guiding down on billings. I'm going to keep calling it flexibility. You're going to keep calling it guiding down on billings. I'm going to keep telling you it doesn't change by numbers. So we just agree that we're going to be saying that because nothing has changed the prospects of Palo Alto from three months ago.

Thanks for your question, Gabriella.

Maybe just to build on that, Walter, I'd say just recognize that we're also maintaining our cash guidance, which would be the other area where you may get concerned and we're not concerned on that front.

Great. Thanks, Gabriella. The next question is from Roger Boyd at UBS, followed by Brad Zelnick at Deutsche Bank. Go ahead, Roger.

Thanks for taking the question. Just looking at the XIOM pipeline, that $1 billion is a pretty impressive mark. Just any color you can provide on the size or the length of those deals as we think about it from an ARR perspective. And I know you've talked about the 3X ARR upsell or expansion potential, but just any color on the size of those deals and how we should think about that kind of flowing into opportunities over the course of fiscal 24.

Yeah, I'm trying to make sure Lee gets to answer some questions. Otherwise, he doesn't want to show up next time. Yeah, exactly.

I will. Yeah, look, we've obviously over the last few quarters been talking about XIM, and the interest we're seeing from customers is very strong, and it's been the fastest sort of growth of a new product that we've ever seen. I think it speaks to a couple of things. One is just the need in the market from customers to go through the SOC transformation. Nikesh talked about the speed of attacks increasing relative to disclosure requirements and things like that. And obviously the number of attacks simply going up as well. That's driving the technology need to have a different solution, a better solution, one driven by AI and automation. And that's exactly how XM was built. And that is what was fueling the interest. The second part of this is with XIM, we're able to replace several of the customer's legacy point solutions in the SOC. So we are consolidating multiple independent piece parts with a single XIM deployment. And third, with each deployment of x and this is, this is a significant investment, the customer is making in us, so it goes investment or three year investments in some cases, because they're standardizing their stock on a. long term runway with us. This is not a short-term decision they're making. So all of those factors are what are fueling the strong pipeline that we shared and the early customer success we're having with that same.

Great. Thank you for the question. Next question from Brad Zelnick at Deutsche Bank, followed by Fatima Bulani at Citi. Go ahead, Brad.

Great. Thanks very much for taking the question. I wanted to ask about your new hardware lineup and the release of Pan OS 11.1. I noticed some of the newer features like quantum security and advanced wildfire patient zero prevention. Just wanted to get your take on the extent to which the new platform can catalyze demand as customers try to look to take advantage of the innovation. And maybe if you could help us compare contrast versus prior product cycles. Thanks.

Yeah, thank you. I always get excited about the next-gen firewall releases, of course.

I made a big friend here.

Look, what we announced was a new high-end chassis, so one that scales beyond a terabit per second. And so there's, obviously, this is for the largest, highest performance networks out there, service provider, and in some cases, large enterprise environments. At the same, we announced ruggedized platforms, platforms that can go to plus 50 degrees Celsius, minus 40 degrees Celsius, because there are harsh environments out there that also need to be protected, right? So this is expanding the use cases that we can support with our hardware connection firewalls. The other pieces you mentioned are also equally exciting from a software perspective. Quantum is still likely a ways off, but there's a lot of companies that are starting to prepare for that, thinking about what happens in post-quantum cryptography in the advent of potential quantum computers and what that will mean. And so this is the start of a set of quantum security capabilities that we're launching for our customers. You mentioned Advanced Wildfire. We added proxy capabilities. We added ADEM capabilities. There's a lot of innovation that's in this release. Generally, what this drives is customers to look to be on our latest Gen 4 or newer hardware architectures, which over time means hardware refreshes and upgrades. And so all of that is good and helps our customers get to the most secure state.

Thank you. Great. Thank you for that. Next question is Fatima Balani at Citibank, followed by Joel Fishbein from Truist. Go ahead, Fatima.

Good afternoon. Thank you for taking my questions. Either for Nikesh or Deepak, some of your pipeline commentary is what I wanted to unpack. As you think about the composition of NGS ARR for the remainder of the year, and bearing in mind some of your product pillars are, you know, I'm not going to say maturity, but certainly they're more penetrated than others. So I wanted to get a sense of how you're thinking about contribution by pillars to your ARR expectations for the year and to the extent anything there has changed. And I recognize that you love all your product pillars equally, but any distinction?

That was where I was going to stop. Yeah. It's very kind of you to remember prior answers, but I tried to give a preview of that in our prepared remarks where I said that we continue to see steady execution in hardware, endpoint, and cloud. So they're following an expected trajectory. We see the pipeline And I said the excitement and upside is coming out of SASE and Forte XIM. And we see that there are large SASE network transformation deals out there, which these things have anywhere from six months or 12 months closing cycles. So we would have to know what's in the pipe for the rest of the year to have some sense of comfort. We also said we grew that business 60% in the first quarter on SASE. We already cannot gush enough about XIM, as you know, so far. So the billion-dollar pipeline we're hoping will close in that six to nine. Interestingly, XIM pipeline closes faster than SASE pipeline or deals close faster because SASE is often very competitive. There are POCs involved. There are feature comparisons between us and one or two other companies. In the case of XIM, you're really competing with the incumbent.

Helpful. Thank you.

Great. Thank you, Fatima. Next question is from Joel Fishbein at Truist, followed by Joe Gallo at Jefferies. Joel, go ahead with your question.

Thanks for taking the question. This is for Nikesh and Lee. Nikesh, you called out the recent ransomware attacks and also the SEC new requirements. I'm curious, number one, is that helping to drive business? And what products essentially would that be driving Palo Alto and why you're sort of in a unique position to sort of address some of these issues?

Yeah, so it's interesting, Joel. Let me connect that to something we announced yesterday. So first of all, I said the activity is at an all-time high. Every day you read about ransomware attacks. Now, the SEC regulations are actually not kicked in yet. I think they kick in December. Yeah. But you're seeing some companies go out there and start to sort of self-report in anticipation because they're all petrified, of course, when you get attacked. So I think you're going to see more and more disclosure. And we've been trying to parse, is it more activity or more disclosure? That's a good question. I think it's more activity. We've seen more and more activity. Our team does the research. We've had the maximum number of inbounds to our incident response team in the last month than we've had before. So clearly, anecdotally also, it's sort of, come true that this is what's happening. Now, typically the anatomy of an attack for us from our vantage point is that when we get engaged in an incident response, typically we go in and we deploy a protection sort of suite. where we go and put XDR everywhere and we'll go run a bunch of analytics to make sure we understand what happened and where the bad actors may still be resident in a customer's infrastructure. Now, typically when we do that and we leave, they don't want us to leave with our stuff. They want us to leave our stuff back in case the guys come back. So from that perspective, you know, the incident becomes a lead, unfortunately, because of the attack, but it becomes a lead for us, and that creates a whole bunch of product conversations around whether we're going to deploy endpoints, whether we need to upgrade their firewalls, whether they need to go down in cyber security.