Palo Alto Networks (PANW) Management Presents at 2018 Wells Fargo Tech Summit (Transcript)

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About: Palo Alto Networks (PANW)
by: SA Transcripts

Palo Alto Networks (NYSE:PANW) 2018 Wells Fargo Tech Summit Conference Call December 4, 2018 1:50 PM ET

Executives

Kathy Bonanno - CFO

Analysts

Philip Winslow - Wells Fargo

Philip Winslow

Thank you for coming out. We're very excited to have Palo Alto Networks showing up here. Thank you, Kathy, for flying out. I know it's been a busy couple weeks with earnings last week and now the conference this week. So thank you for making time to come out.

Kathy Bonanno

Happy to be here.

Philip Winslow

Appreciated.

Kathy Bonanno

Very happy.

Philip Winslow

So, I guess, maybe start with the quarter. Your sort of as a starting point for the questions, I mean, maybe kind of take it through sort of your prospect of CFO sort of puts and takes of last quarter and we're kind of just evolved from there.

Kathy Bonanno

Yes, we had another great quarter. We grew revenue just over 30% year-over-year, billings growth 27% year-over-year. We had strong product growth and subscription growth, so really great performance across the board. We also were able to generate another 2,500 new customers during the quarter. So that number of new customer additions has been somewhere between 2,500 and 3,000 customers a quarter for us for sometimes. So had a really solid quarter in terms of execution, really happy with how the quarter performed.

Question-and-Answer Session

Q - Philip Winslow

As you just mentioned, I mean, product growth were just excellent. As I really estimate expectations out of water, I mean, maybe kind of help us understand sort of what is driving that? I mean you mentioned obviously the new customers but also when I think about the amount of money that needs to be spent in your top 10 that keeps going up. So, help us, you kind of through -- what is driving that continued product growth?

Kathy Bonanno

Yes, you're right to talk about new customer acquisitions because that's obviously a big factor in terms of driving our product growth. We also have a huge expansion motion within our existing customer base and we've acquired over 50,000 customers over the course of the Company's history. And so our ability to expand within our install base is very significant and we show a statistic that quarter after quarter show for our top 25 customers. The lifetime value just keeps growing and growing every quarter. So that's a motion that we talked about on a pretty regular basis. And that land and expand go-to-market model has really been working for us for some time and continues towards half of the world records.

Philip Winslow

And one of the questions I get through this on the product side is just to refresh, the idea is like. How do you think the sort of this year refresh was last? How is that contributing to product growth versus some of the examples you just talked about expansion and that new? So how do you think about how refresh with some of this?

Kathy Bonanno

Yes, refresh, obviously, is a very large opportunity for our company and it gets larger and larger every year as the Company's history progressive. And if you think about it just in terms of prioritization, in terms of what drives a given quarter, I like to just talk about the numbers. So in Q1 of fiscal '19, we acquired 2,500 plus customers during the quarter. And if I go back five years, the cohort size of that customer, the size of the cohort that we acquired that year, five years ago was of the order of 5,000 customers for the full year, right. So, 2,500 in one quarter compared to 5,000 in a given year.

So, obviously, that's the magnitude of the new customer acquisitions that we're gathering every single quarter is far more significant than the cohort size of five years ago. And so, the new customer acquisition is a big opportunity for us. And then, if you look at our installed base of more than 50,000 customers acquired since our systems history, the ability to expand within that install base is a really significant opportunity. So refresh fits in there is important, it gets much more important as we as time moves on and the cohort sizes get bigger every single year. For right now, it's a factor and we're happy about the refresh opportunity whenever it comes. And obviously, we want to capture every refresh that we can, but the biggest drivers remain expansion and new customer acquisition.

Philip Winslow

One of the CAGR this quarter is 605 and 606, and one of the questions I got it through that it's felt like there are lots of puts and pulls on deferred revenue, it's quarter three, sequentially year-over-year. So maybe walk through some of the puts and takes on deferred because I think that was -- we think some of it was apples to oranges compare I guess what I say?

Kathy Bonanno

Yes. So, we did get some questions about consensus and our performance relative to consensus on deferred revenue. And reality was that although we try it very hard to communicate the adjustments associated with 606, not all of the estimates in the makeup consensus were in fact adjusted for 606. And so, the starting balance was just off. So, we did have a very small gap relative to consensus on differed revenue, but it was as a result of that modeling issue. And if we went back and lifted all of the analyst models who had adjusted properly for 606, we didn’t see that type of issue. So, we had 34% year-over-year growth in our differed revenue during the quarter which is great.

Philip Winslow

Keep that going. But let's get back for a second and just talk about the competitive landscape, because there's been a lot of sort of much of investors even folks inside of the sort of the industry kind of talked about sort of how's the competitiveness sort of conditioning I guess is changed over the past 12 months. Wonder if you could comment on that sort of how also you think versus your competitors and what trends have you seeing? And how are you thinking about those as you rolling through into next year?

Kathy Bonanno

Yes, obviously, we monitor our win rate versus the competition pretty closely, and we had very nice win rates against our competitors for some time and continue to have. And if you just look at our rate of growth relative to the market rate of growth, you have to know that we’re winning. We’re the largest security player now by revenue and just continuing to grow our rate faster than the market rate of growth. And so, we’re definitely seeing all of the usual suspects in terms of our competitors and we continue to win against that.

And if you just plot out the line, it's not as the line just staying steady in terms of our win rate is actually increasing a little bit overtime. So very pleased with our ability to be competitive in the market and we think that our approach to security and our vision for tightly integrated automated security solution that makes consuming security easier for our customers is really resonating and allowing us to win in the market.

Philip Winslow

Next question is on sort of the platform strategy of how also, obviously, you got over the core perimeter as a firewall products, next generation firewall, you got a lot of add on subscription there you got end point, you got cloud services now, thinking about security from a platform prospective which is not exactly having covered in security, two decades now not been the case historically which very much sort of point product in individual focus. How do you -- what are you hearing from customers when you give them that pitch? How -- what is the feedback from them especially versus some the competitors maybe more point product focus?

Kathy Bonanno

Yes, I mean the point product solution has been sort of go-to answer for companies for long-term time now. They want best in breed technology which of who could blame them. But having to deploy multiple solutions in environment has just gotten to the point of overload for our customers. And so really since the inception of Palo Alto Networks, we have been working on solving that security consumption problems that are customers and easing that model such that instead of deploying more point products, you can do more, you have more functionality started with our next generation firewall and has really evolved to think about securing your infrastructure, no matter where your data live, whether it's in the network, on your endpoints or in the cloud.

What we want to do is provide an integrated and automated solution such that the deployment problem isn't one that we're exacerbating. And that message is real and that vision for security is really resonating with our customers, and I think it's that approach to security that is allowing us to be so successful in the market. And the application framework which we've talked about is kind of the next step in that vision where we're thinking about and making sure that we have sensors -- Palo Alto Networks sensors in the network on the endpoint and in the cloud. And then gathering all of that data, which we have been gathering for some time now into a rich data lake and then allowing us to do machine learning and data analytics against that rich set of data.

And then provide security applications that use that data on top of the data. And then send any answers or any solutions down throughout that infrastructure through your sensors to make sure that you can manage the consumption of security innovations in a way that doesn't require you to deploy more sensors. All you do is you turn on an application and the application framework and run that new innovations, that new technology, whatever it is from the cloud and then deliver that solution or the answer throughout your enterprise in a very automated and integrated fashion. So that's the vision that we've working towards and we really think that that's resonating with our customers because they just can't deploy another thing.

Philip Winslow

Yet another thing.

Kathy Bonanno

Yes. I mean there are what 5,000 security companies.

Philip Winslow

Yes, a lot of things. Let's talk to focus on some of the emerging products. Where you seeing the most traction or the emerging products, particularly in the cloud server side? And similarly like, what are your customers telling about those emerging products sort of all the standalone base but also in that broader context that you just talked about?

Kathy Bonanno

Yes. So, a lot of what we're trying to do is to make sure that we have that infrastructure ready for our customers and able to secure our customers throughout their enterprise. So no matter where the data moves, we want to make sure that we're there and that we can help our customers in terms of providing comprehensive security for that data wherever it lives. And data moves today, right, data doesn't just sit in one place. It moves to end points and end points can be anything from some sort of military vehicle out in the field to your refrigerator to your phone, right. It's no longer just your laptop that you're thinking about securing.

And so wherever data lives and wherever you need that protection, we're working to help give you that comprehensive security in an integrated and automated ways, so that you don't have to continue to deploy multiple point products for every new thing that you want to secure. And so, our newer products things like our VM-Series, which has been in the market for a while and Traps which is our endpoint products. Those are more mature in the newer category but more mature, and we're still innovating a lot with both of those products. Traps is now able to be delivered or managed in the cloud and works on Linux environments.

And we've just acquired a company called Secdo that will give us the EDR capabilities, which we're expanding to provide that remediation capacity, no matter where the data lives. So network end point and cloud, so we’re calling that XDR. But all of the newer things that we been doing are all geared towards building out that platforms and building out that infrastructure that will let us have the sensors in the right place to be able to -- in future just write applications on top of that rich data that those sensors gather and then distribute security protection to our customers in a very highly automated way. So VM-series, Traps, the Evident and RedLock acquisitions that we done, just done for securing third party cloud environment. AutoFocus, Aperture is there all in that category of new things that we’re doing that will help us and help our customers deliver that promise.

Philip Winslow

It's really maybe I've got some product proposals growing, even just recently.

Kathy Bonanno

Yes.

Philip Winslow

It's all going for months like this one and this one there.

Kathy Bonanno

Yes.

Philip Winslow

I can think that maybe you’ve mentioned Evident.io and RedLock. And Nikesh talked a new security offering of for the cloud that was leveraged those two technologies. First off maybe just help us frame what are your goals or intentions sort of in cloud securities sort of how do you think about this market? How you are approaching it?

Kathy Bonanno

So, cloud security obviously provides new challenges to IT professionals, security professionals trying to manage their infrastructure. And a lot of time, companies don’t even know what’s running in at third party cloud provider. A lot of what’s been done in the third party cloud is dev ops type of work. And so, dev ops are quickly pulling up capacity, so that they can run and pass in develop, but they are not necessary talking to their CISOs before they go do this, right. And so, what evidence has been able to do is to go and run, report, reporting diagnostics on your third party cloud infrastructure. So, that CIO or CISO can see everything that they have actually got running in this third party environment. And what our products do is, they allow you to provide control and management of those third party environments.

So that, when Dev Ops goes off and starts developing on the cloud, a CISO or a CIO can go and look at everything that’s running and make sure that the policies are compliant with the Company processes. And so if you want to know in an instance, if you got applications that are running that are open to the internet, which is not a very secure position to be in, these products can help tell that CISO or that CIO automatically what’s running with that type of open environment, right. So, it allows you to do more sort of closely control and monitor and report on everything that you got running in the third party cloud infrastructure.

And then the acquisition of RedLock sort of augments that in terms of just providing security protection and diagnostic for those third party applications. So delivering that visibility and that compliance reporting and compliance capability to our customers is one of the problems that we’re solving in the cloud. But then protecting all of the traffic as it moves in wherever it moves, we have other products like our VM series which is virtual firewall, which allows you to protect North-South traffic, and then Traps which allows you to secure the host running in the cloud. And so, the combination of all of these will allow you to really protect your environment. And really that's what we're always after helping our customers, solve the problem of securing and having great visibility and great management of their data and the cloud is one area where we think it's important for our customers to have consistent policies and consistent visibility and consistent security across their infrastructure.

Philip Winslow

I mean that's one of the things that always struck me about some of the cloud opportunity was I mean one other things, I'm kind of the space for a long time that people talk about the biggest security vulnerability is misconfigured firewalls. And so, would you want to have consistence -- a consistent policy, a considered framework versus having maintained too. Because as you move again, as you got them into that means more risk that means misconfiguration, you don't have consistency. It sounds like it would seem like a natural extension to use whatever calls you've been using on premise for protect your for private network, okay then extend that out, out in the cloud for consumer business.

Kathy Bonanno

Exactly. Yes, you've said that better.

Philip Winslow

All right, that's what we're here for. Helping out you.

Kathy Bonanno

Thank you.

Philip Winslow

But also let's talk about your sales productivity because as I just mentioned I mean the number of products you have is, it has grown so much in recent years. How do you think about sort of sales productivity, structure of the sales force especially in the context of this expanding portfolio?

Kathy Bonanno

Yes, so let me just give you some relative size on our Q4 earnings call. We talked about the size of our non-attached business. So the non-attached business includes most of these newer products that don't attach to a firewall. So VM-Series, Traps, AutoFocus, Aperture, Evident, RedLock, GPCS, which is another very important product that we've just launched, so all of these products are in this non-attached buckets and it's still a relatively small portion of our overall business, but it's growing very fast. And in Q4, we said it was a $274 million business growing at 68% year-over-year. So, $274 million billings run rate growing at 68% year-over-year.

And so, it's obviously growing very fast. And we're having a lot of great receptions for these newer parts of our business. And our goal is really to make sure that if we're doing an acquisition and if we're developing new products in-house, that they get the right type of focus and energy in terms of go to market and R&D sort of mind share such that they can have success in the market. And so, we're building out plans and building out, Nikesh talked about speedboats on the earnings call that will allow us to be very focused and very purposeful about tying together the R&D developments with the go-to-market initiatives and make sure that we're really attacking and addressing that opportunity for us on the newer side.

And so, we're very pleased with the performance of the non-attached part of our business and it's growing very fast for us. But we do think that we can do more and we do think that we can do better and Nikesh has talked about that on the call. And so we're putting a lot of focus there because we think that they're important parts of our business and we can drive them even faster than we are today.

And then, the overall business in which we've been performing very, very well for some time now, our productivity is performing very nicely for us. We're continuing to see strong growth across the globe. We grew 29% in the Americas year-over-year in the last quarters, 35% in EMEA, 35% in APAC. So, we're seeing really strong performance around the globe. Productivity has been doing great. So, we've got a really great execution machine in our go-to-market approach and really great set of customer testimonials. And we had a lot of momentum behind us and I think a lot of great product in the market, so we’re having a lot of success really pleased.

Philip Winslow

Switching gears a little bit here to the application framework because I think it was a little bit of go to market, little bit sort of better differentiated, little bit product itself. But help us sort of understand applications framework better? I know I believe it was on an earnings call you said you had six, six third party -- seven lines obviously own products that help go on the framework, but how do you think particularly from that sort of that third party perspective? What are sort of the opportunities there? How do you think about internally? What are the key milestones or benchmarks that you’re really looking for?

Kathy Bonanno

Sure. Yes, the application frame work as I mentioned is our vision for what the future of security looks like, and you can think about it as kind of an apps store for security, if you will that’s a very simplistic view, but it help sort of drive from the point of in terms of what we’re thinking about. So we mentioned having sensors in the right places, gathering all that rich data and information, so that you can perform security analytics and write applications on that top of all of that rich data. So that’s the applications frame work at its simplest form.

And in terms of third party applications, we don’t think that Palo Alto Networks will be able to innovate everything, not every new idea, not every new security problem is going to be solved by Palo Alto Networks. Why there is so many vendors out there today because there is always some new slice of security problem that somebody is trying to solve for some particular environment. And yes, we want our customers to be able to consume all of that innovation in an easy manner without having to redeploy more sensors and not being able to because they just can’t manage it anymore and they hold up their hands and they forget it I can’t deploy another things.

So what we can offer our customers is that ability to have that innovation and consume it in a way that doesn’t break them down and doesn’t make then unable to manage yet one more thing. Because they will have the foundation of the Palo Alto Networks platform in place, and all of this rich data that we gather and hopefully the best innovation will take place on top of that platform, because the innovators don’t have to go out and try and capture 50,000 plus customers and don’t have to get out and get funding and hire sales team and knocking on enterprise doors because they will have to leverage of the follow up network customers base and install base.

And so it’s a win, win if you will both for our customers in terms of simplicity of deployment and for the developers of this innovation because they have easier access to a large customers base, already that cares about security. And if it integrated with the Palo Alto Networks platform and infrastructure, it’s a much easier answer to actually deliver real security throughout your infrastructure.

Philip Winslow

Well, All right, I've got a bunch more questions, but I will just pause for a moment if there are any from the audience keep going.

Unidentified Analyst

Are you seeing any response from competitors with respect to the application frame work?

Kathy Bonanno

No, we’re really are not seeing response and really we don’t think that our competitors are yet in a position to be able to do what we can do. Not all of our competitors are storing the amount of data that we've been storing and capturing the amount of data that we've been capturing. And they don't necessarily have the integrated infrastructure in terms of the platform to deliver the same level of security and protection. So they don't have the ability to seamlessly offer that security answer.

And so, we used to talk about the fact that, no matter what we introduce, the next day, you hear it from our competition, and introducing something very similar. And we all, you see this everywhere in every environment that you're in, because we're all competitors. And every company wants to have the next steps to great thing, right. But we really haven't seen that in terms of our competitors talking about something similar to the application framework.

Philip Winslow

And how much you think of it is sort of also just like -- call like, and I'm hoping up on the audience side, let me check it myself. But anything sort of a competitive differentiator because you mentioned App Store balance, thinking about it too sometimes it's like the force.com with Salesforce where you kind of have some have a hybrid of somewhere between apps for Salesforce where if I think about Salesforce, it wasn't just about, that's sales cloud application versus Dynamics 365 from Microsoft, it was it was the Salesforce, Sales Cloud plus the ecosystem of third party integrations versus Dynamic. And that led -- that was one of things will lead to actually increased acceleration and share gain for Salesforce. How do you think about it as sort of an opportunity in and of itself versus an opportunity to maybe even accelerate or continue it very least the share expansion in the core?

Kathy Bonanno

Yes, exactly. So not only do we think that there'll be a lot of interest in consuming third party applications and our own applications which we intend. We've already written magnifier application and the logging service on top of our own application frameworks, not only interested in all of that, but we think that because it will be such a game changer in terms of consuming innovation and managing security, that there'll be a lot of demands just for our sensors, network end point cloud, such that will get a lot of pull through demand because if it works for our customers, and if it really does ease this consumption model for them, they're going to want to deploy us more widely. And we think that could be a real competitive advantage for us.

Philip Winslow

Good. I'll pause again for a second -- I'll interrupt to see if there are any more questions from the audience. Otherwise, I'll continue here. Okay, I'll keep going then. When you think about priorities for growth, you called it the calendar '19, I know you give the fiscal '19 commentary in your guidance. But if we think about sort of the drives of growth, obviously, your products has been phenomenal, you talk about increasing attach rates for non-subscription products, plus the attach subscription price. I mean how do you think about sort of the growth leverage here going forward?

Kathy Bonanno

Yes, all of it is. Yes, I mean, while we are developing a lot of new innovation and while we have introduced new products, and they're growing very, very nicely for us. Our network security business continues to just clip along at a very nice pace. And we saw 30% year-over-year product growth, which is really fantastic, and that's firewalls, right. So we definitely feel like all elements of the business are growing very nicely and we do think it's this platform and comprehensive approach to security that is resonating with customers which is why we’re seeing growth generally across the board.

Philip Winslow

And one last question here in the couple of minutes, we have remaining is M&A because Nikesh has talked about M&A on in last couple of calls. So, how do you -- how you actually think about the framework? How you guys think about M&A whether resize, thinking of your revenue plus technology tuck in et cetera?

Kathy Bonanno

Yes, our approach to M&A has really been to acquire technology that are consistent with what we're trying to do in terms of the platform, and things that we can integrate into the platform, things that we can make our platform better for our customers. So that’s really been our priority and our focus for some time now. And you've seen us just since Nikesh has joined the Company due to the RedLock acquisition, very much in line with what we've been talking about trying to develop that cloud security for our customers as they start to think about moving workloads to the cloud, very significant opportunity potentially if that continues to grow and grow for us.

And we want to be there, we want to be ready, we want to capture that opportunity. And we think that we can, we think that we’re into that position to do that. So if we think that it’s a good market for us where we can be very successful, be strong competitor and a strong player in that market, we have every right in every business to be there. And it is something that we can utilize our own sort of skills and what we bring to the table to make it even better, that’s really been our approach and continues to be our approach to M&A.

Philip Winslow

Got it. Well, our time ups here, so, it went by fast, Kathy. Thank you for coming. Thanks for your time. We appreciate it.

Kathy Bonanno

Thank you so much for having me, appreciated.