Q3 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- Strong Customer Interest and Monetization of AI Capabilities: PANW is seeing significant customer adoption of their AI-enabled services, with the majority of customers opting into capabilities that increase prices from 20% to 30% of firewall cost, indicating potential for increased revenue per customer.
- Competitive Advantage through Native Cloud Integrations: PANW is likely the only security vendor with native integration with AWS, Azure, GCP, and Oracle in their public clouds, positioning them uniquely to capture market share in securing AI applications across multi-cloud environments.
- Robust Pipeline and Expected Growth in Q4: PANW has a strong pipeline heading into their largest quarter, with management expressing conviction in converting this pipeline into business, indicating expectations for continued growth.
- The company's aggressive platformization strategy is expected to result in lower billings and, to a lesser degree, revenue over the next 12 to 18 months, impacting financial performance through fiscal year 2025. ,
- Increasing deferred payment terms, with customers opting for annual billings instead of upfront payments, could affect free cash flow margins and add uncertainty to short-term cash flows. The company acknowledges this shift may continue and needs careful management to maintain margins. ,
- The pressure on financial metrics due to platformization efforts is anticipated to persist until at least the end of Q2 next year, indicating a prolonged period of adjustment that could impact visibility and predictability of financial results in the near term.
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Billings Growth Recovery
Q: What's the path to recovery for billings growth?
A: Nikesh explained that billing is now an artificial metric due to changes in payment terms and interest rates. Instead, the company focuses on implied bookings and RPO, where they saw a double-digit increase this quarter. They believe they saw a recovery faster than expected, driven by strong deal activity, even though some deals had deferred billing. -
Free Cash Flow Margin Visibility
Q: How durable is the free cash flow margin given current impacts?
A: Nikesh stated that they aim to balance growth in annual billings with maintaining free cash flow margins, targeting 37% plus margin for fiscal '25. Dipak added that deferred payments actually provide more certainty in future cash flows as long as the shift is gradual. They believe they can manage margins without creating a kink in their financials. -
Duration of Platformization Efforts
Q: Will platformization efforts continue beyond this fiscal year?
A: Dipak affirmed that platformization is now their ongoing strategy and will continue for a while. Nikesh added that they previously indicated this focus would persist until the end of Q2 next year, having started in Q2 this year. -
Platformization Deal Targets
Q: Shouldn't new platformization customers be higher over time?
A: Nikesh mentioned that they completed 60-plus platformization deals this quarter. While they are just starting this journey, they see this as a robust goal and are open to updating targets if prospects improve. Achieving these numbers would make them the first in cybersecurity to reach such ambitious goals. -
IBM Deal Rationale
Q: What was the impetus for acquiring IBM's assets?
A: Nikesh highlighted that the deal allows them to transition IBM's existing customers without waiting for contract expirations. It gives them access to IBM's 1,000 cybersecurity sellers who will now promote their XSIAM platform. For a minimal cost of $5 million, this accelerates their position in the SIEM/SOAR market without significant expenditure. -
AI Monetization Opportunities
Q: How will you monetize new AI capabilities?
A: Nikesh explained that advanced AI services on firewalls have already led to an uptick from 20% to 30% of the cost of firewalls. AI-powered subscriptions like AI Access Security will be sold as incremental capabilities. Co-pilots may require customers to upgrade underlying capabilities, leading to additional revenue. -
Increase in Finance Receivables
Q: Will finance receivables continue to expand?
A: Dipak acknowledged that as the business grows, tools like deferred payment plans help meet customer needs. He doesn't mind if finance receivables increase because they provide more certainty in future cash flows. The rise is more related to the current high-interest-rate environment. -
SASE Market Growth
Q: What is the growth outlook for Secure Service Edge?
A: Lee Klarich noted that SASE saw 50% growth over the last several quarters. While the market will remain hybrid, customers are increasingly choosing platform-based approaches. They expect the SASE portion to grow faster for some time before integrating into the total platform growth. -
Pipeline and Q4 Expectations
Q: Can you provide color on the Q4 pipeline?
A: Nikesh stated they have a robust pipeline across most platforms. They have reviewed 500 customers, identifying opportunities for platform delivery and consolidation. The pipeline gives them hope and conviction for converting business, limited only by customer speed and resources. -
Use Periods in Platformization Deals
Q: How do free use periods affect revenue recognition?
A: Nikesh explained that in some cases, they may wait 6 months before charging for services during migrations. Deals with free periods often have longer durations (over 3 years) to compensate. They prioritize ensuring the exit ARR meets expectations, and the impact is more from deferred billing than free periods.