Palo Alto Networks Inc Q4 FY2023 Earnings Call

Good day, everyone, and welcome to Palo Alto Networks Fiscal Fourth Quarter 2023 Earnings Conference Call. I'm Walter Pritchard, Senior Vice President of Investor Relations and Corporate Development. Please note that this call is being recorded today, Friday, August 18, 2023 at 1:30 Pacific Time. With me on today's call to discuss fourth-quarter results are Nikesh Arora, our Chairman and Chief Executive Officer; and Dipak Golechha, our Chief Financial Officer. Following the Q4 session, we will take questions on our results in the 2024 guidance with Lee Klarich, our Chief Product Officer, also joining us. We will then continue with the forward-looking portion of our program. For this, Lee, along with several of his product leaders and BJ Jenkins, our President, will present along with Dipak and Nikesh with additional Q&A sessions to follow. You can find the press release and other information to supplement today's discussion on our website at investors.paloaltonetworks.com.

Thank you, Walter, and good afternoon, everyone. Thank you for spending your Friday afternoon or perhaps some part of your Friday evening with us. Our choice of Friday has definitely made us the topic de jure these past two weeks and has made for some very interesting reading of all the analyst notes. We apologize to people who are inconvenienced but as we had mentioned in our press release, we wanted to give ample time to analysts to have one-on-one calls with us over the weekend, and we have a sales conference that kicks off on Sunday. We started off the year focusing on excellence and execution. We stayed true to that and delivered strong results in Q4, capping off a strong fiscal year 2023, where we met or exceeded our original top line guidance and significantly exceeded our profitability and cash flow guidance. This year indeed required clear focus across our company, and we're all proud that our team delivered throughout the year and especially in Q4. Our Q4 revenue grew 26%, marking our 12th consecutive quarter of revenue growth north of 20%. Our billings grew 18%, a very strong result considering 44% growth in Q4 a year ago. Our RPO grew 30%, ahead of our revenue growth. Our Q4 operating margins expanded by 760 basis points, driving $1.44 in non-GAAP earnings per share, and we achieved 39% adjusted free cash flow margins for the year. We've been investing in our next-generation security portfolio for some time now to position ourselves in a leadership position for the future of the cybersecurity market. It is this next-gen portfolio driving our growth transformation and enabling our leverage. Lee and his team will expand on this in the forward-looking part of our program. We achieved several important milestones in this quarter, especially in our software and cloud-based businesses this year. Our combined SASE, Cortex, and cloud bookings were north of $1 billion in Q4. Our Cortex platform surpassed $1 billion in annual bookings last quarter, and we achieved the same milestone with SASE this quarter. As I mentioned, a critical part of our profitable growth formula is selling more to our largest customers. In Q4, we saw our larger deals grow faster than our overall business. Notably, we saw the number of deals greater than $20 million grow faster than our deals over $10 million as our go-to-market motion becomes increasingly successful in selling the platform and building the sort of trusted relationships required to close this quarter of our business.

Thank you, Nikesh, and good afternoon, everyone. Beyond providing the detailed results this quarter, I also wanted to highlight some additional business insights through the Q4 numbers to help you understand our results and provide context for our go-forward plans. As Nikesh mentioned, we saw strength across our various metrics, starting with the top line. RPO grew 30%, well ahead of our revenue growth. Broadly, the industry has experienced an increase in deal scrutiny as well as deal pushouts. The environment has become more challenging this year, and we started telling you about that at the beginning of our fiscal year. We got ahead of this changing environment by front-loading our sales hiring for the year. As a result of these efforts, we did not see a significant impact in Q4 from unexpected deal delays. We did see, however, a couple of impacts on the top line from the changing environment: first, the rising cost of money has caused customers to hold on to their cash and more frequently seek deferred payment terms.

Great, guys. Thanks for taking my question. Maybe, Nikesh, with you, the macro. Good results in the quarter. I wonder if you could just talk a bit more broadly about some of the broader trends that you're seeing.

Interest rates are higher, leading CFOs to closely examine deals. As a result, it’s essential to be well-prepared to address their inquiries and demonstrate the business value your cybersecurity products provide.

Thanks, Dipak. We'll take about 15 minutes now, and we'll have a few questions.

Thank you so much Walter. So many questions to ask, but I'm going to keep it high level. Nikesh, heading next week into sales kickoff, you're going to once again rally the troops to perform even better next year. What are the highest level messages that you're going to focus on to ensure that they really step up their game and can overachieve and do even better next year?

Salespeople like to win. And I think what has become apparent in fiscal '23 for our teams is that we can win in each of these categories. They were used to winning in firewalls. I will tell you, our win rates have gone up tremendously in SASE. Finishing where I started, I couldn't be more proud of our performance in Q4 and the year. Our teams helped drive steady performance, enabling us to maintain a strong outlook through macro challenges by focusing on crisply executing our differentiated strategy.

Thank you, Nikesh. Now in a second, we're going to go into more detail on our three leading platforms. But first, I want to share some context. After all, we're a cybersecurity company, what's happening in the threat landscape. That is a huge problem. That requires a very different approach. But on average, the industry is able to respond and remediate attacks in about six days. That doesn't work. And even more challenging now with the SEC new rules of being able to disclose within four days. We recognize that Palo Alto Networks was built for innovation from day one. And today, we have over 4,400 product, engineering and other experts that are building and driving innovation.

The average enterprise today uses over 100 applications, some for commercial and some for internal use. With AI-led code development, I expect this trend to continue. Now typically, the security practitioner, it takes months and months to resolve these 2,000 issues, because they don’t have the context, don’t have the traceability to fix the root cause of the problem.

With Cortex, Palo Alto Network's SOC can protect its network with a small team working on startup ships, resulting in less than one minute incident resolution.

Thank you, Walter. I just want to take the opportunity one more time to thank all of you. I know this was a unique one.