- Revenue: $1.98 billion, with product revenue growing 1% and total service revenue growing 20%.
- Subscription Revenue: Grew 25%.
- Support Revenue: Grew 11%.
- Geographical Revenue Growth: Americas up 15%, EMEA up 20%, JAPAC up 8%.
- Next-Generation Security ARR: Grew 47%.
- RPO (Remaining Performance Obligation): $11.3 billion, with current RPO at $5.4 billion.
- Operating Margins: Expanded by 200 basis points year-over-year.
- Operating Income: Grew 25%.
- EPS (Earnings Per Share): $1.32, a 20% increase.
- Cash Flow: Strong cash generation.
- Debt Reduction: Debt balance reduced by $659 million.
- Share Repurchase: $500 million spent to repurchase 1.7 million shares.
- Billings Guidance for Q4 2024: $3.43 billion to $3.48 billion, an increase of 9% to 10%.
- Revenue Guidance for Q4 2024: $2.15 billion to $2.17 billion, an increase of 10% to 11%.
- Non-GAAP EPS Guidance for Q4 2024: $1.40 to $1.42 per share, a decrease of 1% to 3%.
- Billings Guidance for Fiscal Year 2024: $10.13 billion to $10.18 billion, an increase of 10% to 11%.
- NGS ARR Guidance for Fiscal Year 2024: $4.05 billion to $4.10 billion, an increase of 37% to 39%.
- Revenue Guidance for Fiscal Year 2024: $7.99 billion to $8.01 billion, an increase of 16%.
- Operating Margin Guidance for Fiscal Year 2024: 26.8% to 27.0%, an increase of 270 to 290 basis points year-over-year.
- Non-GAAP EPS Guidance for Fiscal Year 2024: $5.56 to $5.58 per share, an increase of 25% to 26%.
- Adjusted Free Cash Flow Margin Guidance for Fiscal Year 2024: 38.5% to 39%.
Release Date: May 20, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Palo Alto Networks Inc (PANW, Financial) reported strong Q3 results with top-line growth ahead of the market.
- Next-generation security ARR grew by 47%, highlighting the company's transformation into a security software business.
- Operating margins expanded by 200 basis points year-over-year, driving 25% growth in operating income.
- The company announced a significant partnership with IBM, which is expected to enhance their market position in the SIEM/SOC category.
- Palo Alto Networks Inc (PANW) continues to innovate, particularly in AI security, with new products aimed at securing AI usage.
Negative Points
- Billings growth was impacted by deferred payment terms, reflecting a shift in customer preferences due to the higher cost of money.
- The company acknowledged that the accelerated consolidation and platformization strategy created significant conversation and concerns last quarter.
- Lower product bookings in the JAPAC region led to only 8% revenue growth in that geography.
- The transition to platformization is expected to impact billings and revenue growth through fiscal year 2025.
- The financial impact of the IBM partnership is still uncertain, with recognized revenue potentially being much lower than the $100 million in QRadar SaaS revenue reported for calendar year 2023.
Q & A Highlights
Q: As we look at your efforts of incentivizing platform consolidation or platformization, can you help me understand the duration that you anticipate pursuing these efforts? Is this going to be a more temporary type of effort where it kind of just lasts through this fiscal year? Or do you expect it to stretch into next year?
A: Platformization is now our strategy, so it will continue for a while. At some point, it just becomes a normal motion, and then we're lapping a period where we've been doing platformization already. We said last quarter that this should persist until the end of Q2 next year.
Q: Can you give us an update on the state of the channel, particularly how they're acclimating to platformization and your strategy with GSIs like IBM and Accenture?
A: There is no contention between the traditional VAR channel and GSIs. In platformization deals, customers require consulting effort to re-architect their security stack, typically engaging with the SI community. Partnerships with GSIs like IBM and Accenture are crucial for these transformations. Both strategies will coexist, and many VARs have also transitioned to a part consulting model.
Q: You mentioned a significant pipeline heading into fiscal Q4. Can you give us more color into that pipeline?
A: We have reviewed over 500 of our top customers and identified opportunities to deliver platforms and consolidate. The pipeline is robust across most of our platforms, and it's limited by the customer's speed and resources to execute.
Q: Last quarter, you mentioned Thunderdome. Any update on that transaction and how we're thinking about federal into Q4?
A: The Thunderdome contract was activated last quarter due to a zero-day vulnerability in certain VPNs. We saw some activity around Thunderdome, but we still maintain that these missions will execute one at a time. Our expectations for Thunderdome's evolution in our financials remain unchanged.
Q: If you won a $150 million deal, does it go through billing? And what's the path for recovery for billing?
A: We built backlog this quarter, meaning we booked more business than we billed. Billing is an artificial metric influenced by the cost of money. Quality metrics are implied bookings or RPO, both of which saw an uptick this quarter. We believe we saw a recovery faster than expected.
Q: How do you think about the growth profile of the secure service edge market and your ability to grow at or above that?
A: The market will be hybrid for a long time, requiring a combination of hardware, software, and SASE. SASE growth has been strong, with 50% growth over the last several quarters. The hybrid nature means customers will increasingly choose a platform-based approach, optimizing traffic across different form factors.
Q: In order to reach your fiscal '30 goals, why shouldn't new platformization customers be a lot higher than the current rate on a multiyear basis?
A: We have just started the platformization journey and are positively surprised by the 60-plus deals done this quarter. If prospects get better, we will update our targets. For now, the goal seems robust and will make us the first company in cybersecurity to reach such an aspirational number.
Q: Can you share the incremental profitability impact of platformization and why your business could see higher operating margins?
A: Consolidating sales and marketing costs to large deals and upselling to the same customer base reduces the cost of sales as a proportion of revenue. As we address more customers in our existing landed base, we can aspire to higher profitability, especially with the impact of AI making us more productive.
Q: What was the impetus for acquiring IBM's QRadar assets, and couldn't you capture those on-prem customers for free over time?
A: Acquiring these assets allows us to transition customers off their existing contracts without waiting for them to expire. It also gives us access to IBM's on-prem customer base and the opportunity to transition them to XSIAM. This partnership cements our place in the SIEM/SOC category and accelerates our market presence.
Q: As you add more AI capabilities to your platforms, what are customers looking to benefit from, and how do we think about the monetization opportunity?
A: Customers benefit from better productivity, incremental capabilities, and advanced telemetry. AI Access will be sold as an incremental subscription, and AI firewalls will come at a premium. Co-pilots will be available as productivity tools, with some requiring advanced telemetry modules for enhanced functionality.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
