Excellent. Well, hey, good afternoon, everyone, and welcome to day one of the Barclays TMT conference. It's an honor to have with us the team from Palo Alto. Of course, we've got Nikesh Arora, Chief Executive Officer. We also have Walter Pritchard, Head of IR, around here somewhere. We've got about 30 minutes together. Maybe I'll take the first 20 or 25 minutes and do some fireside chat here with Nikesh, which I know is gonna be fun. Maybe in the last five or ten minutes, let's make this interactive. If anyone has a question, I think we've got some mic runners around here. Just pop up your hand and we'll make sure we get your question in. With all that as a framework, Nikesh, thanks so much for being with us here today. Thank you for having me. No, absolutely. Maybe just to start off, make sure we're all on the same page, a lot to recap from last quarter. Maybe to level set for all of us, what were some of the things that you were particularly proud of in Q1 to help maybe frame the discussion? Well, Saket, as you can see, we've had a flurry of reporting in the security industry. I think the key highlights of Q1, whilst there have been reports from many of the security companies which have been on the margin, slightly off from what you might have expected, but across the board as an industry sector, it still is more resilient than most subsectors of technology. That was kinda obvious in Q1. Business is not going away. At least that's not what anyone is telling you. That's not what we're seeing. You're seeing, as per people, ramp deals or business deals elongating, which is something you can contend with. All that means is things are getting more scrutiny because Jerome Powell's big hammer, everybody's worried that he's gonna be successful, in which case, you know, there will be some slowdown of economic growth, and everybody's kind of preparing for it, be it us or our customers, and you're seeing the impact of that in everybody's narrative. I don't think we're seeing as much of it just yet, but everybody's apprehensive and hence expecting that's gonna happen. Now, from our perspective, you know, I was excited that our teams are still able to nail the number. They're still able to go out and get it. We saw it a bit earlier in the quarter, and we decided to accelerate our go-to-market efforts and get people out in the field and pound the pavement much faster. We went ahead and accelerated hiring on key sales roles because we expect that we need more feet on the street. We need people fully trained out there because we think this trend continues over the next six to nine months, which means you can contend it with sort of more activity up front. Generally across the board, you know, there are some increasing signs of customer attention to budgets. We can hopefully execute our way through it. As I have said before, there was a silver lining. The consolidation conversations, the we can save you money conversations by having lesser vendors and lower total cost of ownership, those things are now beginning to work in our favor. Yeah, absolutely. Certainly what I would add to that last quarter, and I'm sure we're gonna talk about later on, is while nailing the number, we were still able to raise the margin guide for the year, despite everything. You know, Saket, it, there's a time and place for everything. You've been asking me, and people have been asking me, "What about your margins?" I always maintain that you've got to balance growth and profitability. Growth was our key focus because we were trying to build new product categories. We're trying to make sure we establish our capability across various categories. We feel comfortable that we have repeatable go-to-market motions in our cloud security business, in our network security business, in our Cortex business. As we told you at the end of Q4, we are converging our network security teams, trying to extract more efficiency out of those teams, and we just put all that, you know, into play. We're beginning to see the benefits. I think long term, you know, if you wanna grow north of 20% in our business, you should be able to sustain north of 20% operating margins. I think that's fair. You know, I think one of the benefits that Palo Alto Networks has is the broadest portfolio in security. Maybe notwithstanding some of the macro backdrop that we mentioned, the question is, how is that broad portfolio helping in closing business? Maybe where I'm going there is, you've talked about building this muscle internally for selling the broad platform. Where do you think the company is in that evolution of platform selling? The first two, three years at Palo Alto, I had to spend 70% of my time with the product teams, making sure we have this extensible platform. It's kinda clear that there are approximately three buying centers. There's a whole network security team, which is focused on zero trust, which is dealing with the impact of the cloud. How do I take my data center infrastructure, figure out a hybrid infrastructure between the data center and the cloud, and now people working from home. They're all busy doing network transformation projects, and we have the ability to come in and say, "I can do zero trust for you." You know, I used this explanation the other day when somebody asked me a question, are firewalls gonna be dead? I was particularly delighted with the way that we talked about this. For all of you who are worried about firewalls and network security, what firewalls are, they are a mechanism to inspect traffic, okay? That's what they do. They look at traffic to see if there's malware, bad URLs, bad DNS. They're just inspecting traffic, making sure traffic flows without security flaws. Traffic's exploding in a big way, whether it's traffic from the campus to the data center, from the data center to the cloud. Generally, traffic is going up. That traffic must be inspected. You can inspect with a hardware firewall, a software firewall, or a SASE product. We're one of the very few people in the industry who actually have form factors in all three categories that work together. Our network security people are working hard towards this platform notion of providing that capability. Cloud, same thing. We have seven different modules. We can go from code to deploy to run. We, again, have a platform in cloud security, and that conversation is beginning to happen and continues to happen. With our most recent launch of XSIAM, we're finally putting our stamp on the idea that SOCs need to be reinvented. They need to be automated, and we have very good early signs that this is going to be an emerging big category. Absolutely. A lot of fun stuff there that I wanna dig into, but maybe we can just dig into the three main parts of the portfolio, maybe starting with Prisma Cloud. Sure. You know, I think Palo Alto has been investing more in software supply chain security, most recently with the proposed acquisition of Cider. Yeah. Of course, started with Bridgecrew. I guess with this now under the Prisma umbrella, can you just talk about how you view the software supply chain opportunity and how Palo could maybe disrupt this with the portfolio that you're assembling? I think it's important for everybody here to understand what the challenge and what the opportunity is. I'm presuming most of you have not done coding in today's environment where... If you have ever coded in the past, in the past, when you coded, you wrote an application, there were application testing software, whether it's Checkmarx or Veracode, which are 15 years old. They check your code. They said everything's cool. You ship it to production, and you're off to the races. You wrote this stuff in, you know, I remember programming in COBOL and Fortran. I'm sure there's a bunch of stuff that happened after that. Today's cloud world is very different. On average, every enterprise has about 100 tools that they use, which are third-party tools, which are grabbed from open source. They grab widgets and images, and it's actually an assembly exercise. Software is assembled more today than it's coded. Mm. That's why it's called a supply chain problem, because you're assembling software together using a bunch of tools which could have a bunch of security flaws. In cloud, the point of insertion of malware, the point of insertion of security flaws is in the coding process. If you don't fix the security in the coding process, you will forever be playing Whac-A-Mole in deployment and production. You gotta get ahead of the problem. The way you get ahead of the problem is you scan every piece of code, you scan every image, you look at every tool that's being used from a third-party perspective. That's where supply chain security comes in. We bought Bridgecrew. That was doing all the scanning. We bought Cider, which is gonna do all the CI/CD work and the supply chain stuff. We've got the left. Now what we can do is we can investigate the left and then track you through your entire development process to see where the problem came from, so you can go fix it. There's nobody else in the industry. We think that generally the industry is about two to two and a half years behind where we are in terms of our thinking, our product capability, and what we're working on. Absolutely. you know, I think you've talked about Prisma Cloud having more of a multi-product opportunity, I think with nine modules. Clearly we've talked about software supply chain is one module, and of course, I think the cloud workload protection is also a popular module. Maybe the question for you, Nikesh, is what modules here do you think have the most room for adoption as you think about Prisma Cloud becoming a billion-dollar business someday? Prisma Cloud will be a billion-dollar business in the next 12 to 18 months, so not someday. That's pretty much in the near future, so. Cool. It depends what a billion-dollar business means. We'll do $1 billion in bookings in the next 12 to 18 months in Prisma Cloud. Got it. We gotta worry about the $5 billion problem, not the 1 billion dollar. Got it. Right? I think about it differently, Saket. The way I think about it is, in our lifetimes, if you look at evolution, in the next five to eight years, there'll be $1 trillion of public cloud being consumed every year, if you believe that. Now, I'll give you a data point. Palo Alto Networks spends approximately $250 million a year in public cloud. If I had to pay for my own cloud security using my own products, I'd be paying somewhere between $10 million-$15 million. Right? That's 5% to 7.5% of my cloud spend. Yep. That's how I benchmark the TAM for cloud security. If there's $1 trillion out there's gotta be a $50 billion-$75 billion spend on cloud security in the future. If you believe that's the size of the prize, the question is, what can I honestly aspire to? I'm saying half of that will be taken by the public cloud providers. They'll just take it away as part of the ELA business. Mm. There's still half up for grabs. There's a $25 billion-$37.5 billion opportunity in cloud security in the next 10 years. The current market is $2 billion. There's a 17x on the high end and a 10x on the low end opportunity in 10 years. Right. I think people have to consume cloud security in its entirety. It's not one particular module that needs to be consumed. You have to secure the entire development process, deployment process, and production process. It's an arms race. You You gotta rush fast to make sure you have the capability and to make sure customers are deploying you in their infrastructure. Sure. Can I aspire to 25% market share? I've got a 29% market share in firewalls. We're the last player in firewalls to show up. I'm the first player to show up in cloud security. That's how I think about it. Interesting. I mean, maybe said another way, in that cloud security market, still a lot of greenfield opportunity. Just a lot of. There's lots of opportunity. You just have to go grind it out. There's not enough perfect go-to-market motions being built. There's not enough solutions or architects out there. There's not enough cloud consumption capability out there. There's a lot of work to be done, but the TAM is huge. Right. Right. I'd love to maybe shift to Cortex a little bit. There's a lot to talk about there, I mean, with Xpanse, with XDR, with XSIAM, to your point. Maybe Xpanse is a good place to start, particularly the large U.S. federal deal that we announced last quarter. Congrats on that, by the way. I mean, maybe the question is, what's the breadth of that opportunity with Xpanse, and are there other potential deals out there like that federal deal that... You remind me of the size, right? But those are- It's a $125 million dollar deal, of which we recognized $67 million last quarter. Look, again, I'm sorry to keep twisting your question slightly differently. No, please. This past weekend, I spent more hours than I needed to on GPT-3. I don't know how many of you have been enthralled by this conversation on GPT-3. It seems to be the talk of town. I was in a board meeting in a private company before this, and the whole conversation was how is GPT-3 going to, you know, upend your business model? Now GPT-4 is about to show up. The reason I bring that up is four and a half years ago, when I started at Palo Alto Networks, I showed up with two words because I didn't know security. I had to show up with some value added. My value added was cloud and AI. Cloud, we know the impact. We built our security business. We reoriented our network security business to build a SASE product, which we're one of two players in the market in. We haven't seen our AI capability yet. Hmm. Our entire AI capability is centered around everything we're doing in Cortex. We took a point of view that saying that security is structured to do post-breach analysis, security needs to become real-time. You can't do anything real-time unless you have good data. We spent the last four and a half years figuring out how to get good data, which is why we launched a product 12 weeks ago called Cortex XSIAM. The whole notion there is you collect all the data you can, you run AI models against it, and try and remediate security. Expanse is one aspect of it. It is the aspect which looks at data which you can see from the outside in, and Cortex XSIAM looks at it from inside out. Question is, can you marry outside in, inside out? Outside in would say, a hacker looks at you and say, "Oh my God, I see seven windows open. I can go in." Look from inside out saying, "I've locked all doors and windows." Say, "Wait a minute, what about the seven that you can see from the outside? Right. It's a way to marry the data from the outside in, inside out. I think, yes, AI is gonna have a huge impact on how real-time security is deployed. I think everybody's got awareness as of last weekend that AI is gonna be real, it's gonna happen, and I think it's a very early days there. We think the next big market that's gonna be created... Remember, in the last four and a half years, we've created three businesses net new, which are gonna be hitting their billion-dollar mark in the next 12 to 18 months. Hmm. There's Cortex, there's Prisma Cloud, there's SASE. We think this whole notion of XSIAM will be our fourth business that gets there in a similar timeframe that we're able to get the first two businesses there. Great, great segue into XSIAM. Frankly, the way that you position it just in inside looking out, tool makes a ton of sense. Maybe said another way it almost feels like a little bit of a cloud-based SIEM replacement to me. Maybe the question for you is. Well, I think SIEMs are old tech. Right. They're sitting ducks waiting to be replaced. I mean maybe we can dig into that a little bit. Sure. Like, you know, how can Palo disrupt that? What I would argue is a relatively competitive SIEM market. It's not competitive. It's like, you know, you're selling chariots and I'm selling cars. We do the same thing. Right. Horses shit, c ars don't. Sorry. I don't know why I said that but... One of the interesting things though that you mentioned about XSIAM last on the last quarterly call was that you kinda, it felt like you wanted to balance demand with capacity there, right? Like, or just you wanted to be careful with how that scales. Sure. Can you just talk to us about the thinking behind that? Traditionally, the way security resolution happens is you deploy a lot of security vendors in infrastructure, you set a bunch of policies. Anytime a policy is violated, you get an alert, and there's people who stare at all these alerts and go and figure out what the alert was. If the alert was caused by a bad actor, you go out and remediate, you block it, if you haven't blocked it by automated means. Maybe your firewall didn't block a bad DNS or bad URL, you had something else happen. It flips an alert. The alert looks at it and says, "Oh my God, this is anomalous activity." We used to get 67,000 alerts a week. It's humanly impossible to interpret them, analyze them, and remediate them. You prioritize. That's what a SIEM does. SIEM says, "I got 67,000 alerts. Let's focus on these 500. These are really important. They look like bad alerts." There's 66,500 more where the first 500 came from. That 67,000 has become 150,000 now because you have deploying more tech and more vendors. This is not a human problem. This is an automation and AI problem. Right. What I meant by it is that the SIEM industry is a sitting duck is, most people are trying to solve this by giving you prioritization tools and UBA tools to say, "Here's a SIEM. Collect all the data into a large data lake. There's a query language that lets you query that database, and you can figure out what happened." Well, if it takes you 27 days to figure out what happened, the bad actor's in and out and stolen your data and put it on the dark web. Right. You've got to get it to as real time as possible. It's taken us four and a half years to get our own internal SOC from 27 days to under 1 minute. Hmm. The question is, can I deploy that for all of my customers? Instead of going on another big rush and saying, "Here's a product, go deploy it," I'm saying, "I'm gonna work the customers myself." We've done the first nine. We've signed design partnerships. All of them have converted into customers for us in the last three months. We're gonna take them down this journey of reducing their Mean Time to Remediate from 27 days to a lot shorter. I think if we can prove that model again and again, then we're gonna go partner with a bunch of SIs out there who will then take our product capability and their execution capability and go take the market on. That's our plan. Makes sense. Makes sense. Maybe we can go to Prisma SASE. I mean, clearly a big change I think this year is moving this out of specialist sales and into your bigger general sales teams, maybe I'll call it. You know, it's still early, but maybe what are some of the early signals that you're seeing? You know, any risks that you wanna make sure you manage just around, you know, the, you know, having too much to sell, maybe focusing on one tool versus the other. How are you thinking about that? Look, as I said, I spent the first 2 years doing product. The next two to three years I'm gonna spend on making our go-to-market more efficient and deploying to every customer. Hmm. At the end of the day, we used to sell firewalls, right? It's the primary business four and a half years ago. Our core sales team out there is the primary We used to be a firewall sales team. We supplemented that with cloud security and Cortex and SASE. As we've converged our SASE capability into a larger network security capability, which is zero trust focused, the functionality is 80% the same, what a firewall does and what a SASE product does. And we've combined the management panes in such a way that you can deploy SASE from us, or you can deploy an entire zero trust framework from Palo Alto, which is pretty consistent. Our sales reps are actually not converging. They're becoming network security zero trust salespeople. Mm. They say, "What is the problem you're trying to solve? You're trying to protect your data and inspect it? Great. The way to do it is through a hardware firewall or software firewall or SASE. What hybrid architecture would you like?" Now, don't forget, we have 62,000 firewall customers out there who all wanna go to SASE. There is a path which is a transition path from their existing Palo Alto firewalls to a SASE outcome, which is a combination of what they already have and what we can give them on top. Our salespeople need to know how all of that fits together and works. We're not merging two different sales teams. We're making sure they have a higher order pitch that allows them to present a zero trust solution. We feel comfortable enough that, you know, we've made enough product integration and marketing capability integration and training that these people can do it in a comprehensive way to all of our customer base. Now, if that gives you more efficiency, it's even better. Yeah, absolutely. I'm gonna shift to the Strata firewall part of the business, but maybe before I go there, any questions here from the audience? You know, I guess, Nikesh, if we think about the Strata piece, or maybe I'll just call it the product business, you know, Palo, just like a lot of the other industry participants, are seeing easing supply, but also, you know, more scrutiny, you know, sweating appliances longer, you know, however we wanna position it. Now, just to be clear, appliances are a much smaller part of Palo's business. Maybe the question is: how do you think about demand for appliances, you know, in this coming year and maybe beyond that to the extent you've got a view? Look, as I said, the firewall need functionality is not gonna go away. You'll continue to have to inspect traffic. The question is: what is your use case and what is the best form factor for that inspection? Right. If your use case is a data center, you're better off putting a box, right? If your use case is a distributed set of 2,000 stores in the country, you're better off using SASE because you don't wanna go send a truck every year to try and upgrade your boxes in 2,000 different stores. Generally, software has a lower total cost of ownership, higher security, 'cause then you can update it simultaneously from a remote location. You want to preference software form factor. There are specific use cases for hardware form factors, which are low latency, high bandwidth use cases. I think generally the firewall requirement doesn't go away. You know, I've heard the comments, perhaps somebody else made recently today. I think the industry grows at 5%-8%. I've always maintained that. I think you get to see 5%-8% growth. In tough economic times, you go towards the lower end. In better times, you get to eight or 10. I think the last two years have been confounding, nobody actually has a good sense of what happened. Most of the industry players did price increases, one or two of them. I think they've gotten a bit confused that two price increases of 10% each can get you 20% growth on a unit for unit basis. Some of them, we're not lucky enough, we cannot pass prices to our customers. We are in the enterprise space. Our customers negotiate our prices. I increase price by 8%, my yield is 1%, I have no incentive to keep increasing price and get a low yield. If you're servicing the small to mid-sized businesses, yet you get to pass price to small to mid-sized businesses, so you get a better uplift on your business. Couple that with people ordering ahead because of supply chain issues, couple that with some of our industry competitors not being able to supply for 12 months, you get a distorted market with differentiated growth rates, which you're not clear what the annual growth rate is. I think you get a 5% - 8% growth rate. Hardware is the easiest thing to postpone, 'cause you already have it deployed. You can say, "Sweat it for one more year, buy it another year." You can't postpone SASE. You can't postpone cloud consumption. You already paid for it. You can't postpone cloud security. You can't postpone, you know, SOC automation. Hardware is the susceptible part of the market. 5%-8% growth, we feel very comfortable we can deliver that. We think that kind of sustainable rate for the next two to three years. Makes sense. Makes sense. I'd love to wrap up with just some more specific financial questions and maybe we can start with billings, Nikesh. I mean clearly you beat your guide last quarter on billings, but we beat NGS ARR by a lot more. Maybe the question is: are there any timing or duration points that we should keep in mind when? Are you saying is that number real? Sorry? Is that your question? Yeah. Is that a real growth? no, of course it is. If I miss, you don't like it. If I do well, you don't like it. No, it's more of a question around when will we see that growth come through billings? I don't know. The lag. There's no lag in financial metrics. I can't add anything to ARR, unlike private companies, which is not already in my billings. Okay. It can only be in my ARR if it's in my billings. Okay. There's no invoicing there's no lag in sort of invoicing versus... I can't recognize something as potential future revenue if it's not in my RPO or it's not in my billings. Okay. Got it. Right? Mathematically true. Well, RPO for sure, but with billings maybe differently, right? In terms of invoice versus a contract. Yeah, you know, remember, I bill for the year. Okay. ARR has this funny word called A, which is annual. Okay, got it. I bill it this year as annual. What I've not billed for next year is not, is next year anyway. Okay. It's not this year's annual. Okay. Got it. Got it. Understand. There's no gap. Okay. I think your question, and I shouldn't be answering questions you're not asking, but I'll answer it anyway. Yeah, please. I think the question was: why is our NGS ARR growing so well? Right? Generally, the answer is, if your billing stays constant, your NGS ARR does a lot better, that means your non-NGS is not, it's shifting to NGS. You could say a non-NGS is not performing, or you could say our transformation is working, which is what we say. Right. Which is true. We said we're gonna make our entire business cloud-enabled, and we're aggressively converting our business to cloud. A lot of our subs are cloud, a lot of our new products are cloud, a lot of our old business we're replacing with cloud-delivered capability, which is part of NGS. Got it. Maybe just in the last couple of minutes that we've got left. One of the things we said at the beginning that I was really happy to see was just the profitability, right? I mean, to me, it was clear that Palo pivot quickly given the macro backdrop. I think we took operating margins up by 50 basis points, free capital margins up by 100 basis points. You know, you mentioned some front loading of hiring. Maybe the question is, are there any other actions that you've taken or plan to take that give you confidence in driving the higher profitability despite the more uncertain macro backdrop? Remember, there's revenue and there's cost. With revenue, you have, the more you become a ratable business, the more visibility you have on revenue. We have ample visibility in revenue. You know, our% of revenue that we know for next quarter continues to go up as we get more and more business converted to NGS ARR. I know what my revenue is gonna be 'cause it's booked in the past, right? I have a good sense of my top line, barring my product sales, which I do in the quarter. Most of my billings or most of my software sales a quarter don't have a huge impact on revenue in the quarter. They actually benefit next quarter. Right. Hardware benefits this quarter, most of everything else benefits next quarter 'cause most of the business is done in the last three, four weeks. Right. Right? Right. I have reasonably high visibility on my revenue on a quarterly basis, barring product sales. Fair. On cost, those are in our control, right? I always maintain that the bigger our revenue base becomes, the more leverage you have on profitability because then you have a lot more revenue to amortize costs against. We're at a point where we have a reasonably good sense of our cost bases. The macroeconomic environment gives us the cover to be able to make sure we can do cost managed things. You know, when everybody in Silicon Valley is hiring people up the wazoo and, you know, two quarters ago, the question you were asking me was, "What's gonna happen to wage inflation? There are so many jobs out there's not enough people. There's a talent war. What about attrition?" Now you're asking me, "How are you gonna maintain cost?" Guess what? My attrition's gone down. My cost of hiring has gone down, right? Which is good for me because I have less productive people leaving. Don't underestimate if my attrition is running at 18%, there's a huge cost of onboarding. Right. You know, a fifth of your workforce gets renewed every year. That's a lot. Yeah. Plus the added people. We have 14,000 people. I joined Palo Alto, 5,000 people. Do the math. Wow. 12,000 people are new to Palo Alto out of 14. Yeah. Just based on attrition. Attrition's gone away. Wonderful. My cost of onboarding, my cost of training, my cost of productivity is amazing. Right. There is leverage in the system. That's the leverage we're trying to bank on to try and make sure that we can focus on better operating margins. Absolutely. Absolutely. Maybe the last question here, just in the short amount of time that we've got left, capital allocation. I mean, just with the increase in free cash flow margins and just the cash that the business is generating, how do you think about sort of rank ordering the priorities that you and the board have in terms of uses of cash? You should be asking that question to the FANG companies. We don't have a cash. We don't have excess cash problem. They have an excess cash problem. Look, we have convertibles to pay. We have $3.6 billion converts that we have to pay off. We will generate north of $1.5 billion of cash this year. If we pay the converts, we'll probably end up with $3 billion-$4 billion in cash. The one silver lining of that big hammer is I can get interest on my cash now, which I never got my first three and a half years of Palo Alto. That's right. We've spent a lot of time with our treasury. We're trying to maximize our interest income. I asked this question, I will leave that question with you guys, and feel free to email Saket with the answer because not me. I went to business school as well, like many of you, and we're taught capital allocation. What is that? Miller Modigliani or whatever. Yeah, yeah. Miller Modigliani. That guy, right? Those two guys, right. The challenge we have is that right now, if I use cash to buy back stock, the EPS impact I have is lower than if I put the money in the bank and get interest. The question for MBAs students is, what would you do? Would you get more EPS because the market is short-sighted, or would you rather buy back stock because long term, your stock is worth a lot more? I've asked this question to legendary fund managers, I won't name them, and they've sided on the put it in the bank and get more interest as income. What do you think, Saket? He writes every day about everything I do. What do you think? Yeah. No, listen. I mean. What should I do? Well, I actually really like the chart from the analyst day that had a really. Answer my question, dude. Huh? This is not fair. I ask you one question, he hedges. What's the answer? Do you want me to do interest income, or do you want me to buy back stock? I would prefer whatever maximizes EPS. You heard it from here. Saket. Well, with that, guys, I think that's about all the time that we've got with Palo Alto Networks. Nikesh, thank you so much for your time.