“Second, we saw some isolated instances of customers extending the life of hardware potentially driven by macro forces. We expect that on the margin. This could continue into FY '23.”

In context

“Nikesh Arora (Chairman and CEO): Thank you, Clay. Good afternoon, and thank you for joining us today for our earnings call. As you can see from the video, we were excited to celebrate the 10th anniversary of our IPO in early July. Our employees are engaged and excited as we continue confidently on our mission to be the cybersecurity partner of choice. Moving to Q4, I'm pleased to report that we again saw very strong results, starting with top line results that were well ahead of the guidance we initially outlined for fiscal year '22. We delivered this growth while balancing our profitability commitments, and we also made significant investments to continue to transform our company and take advantage of the large and rapidly growing market opportunity we see in cybersecurity. On the top line, billings growth of 44% was the highest we've reported in four years. We also grew RPO ahead of our revenue growth rate. The key focus of our team has been rapidly positioning us as a constant cybersecurity innovator. And one way we measure our progress is how our NGS ARR develops. We're delighted to report this metric grew 60%, reaching $1.9 billion exiting the year. We are expecting it to reach $2.6 billion in FY '23. If this was an independent start-up, it would be amongst the fastest-growing cybersecurity businesses to achieve scale. Within our core network security business, Firewall as a Platform billings grew 26%. When we started reporting this metric, the intent was always to show that we continue to take share in the network security market, and at the same time, transform the business to a software business. Today, close to 50% of that comes from software form factors. Operating income grew 52% in Q4 and our operating margin for the year finished at the high end of the guidance range, with adjusted free cash flow margin coming in above the high end of the range we provided. We achieved a major internal goal we've had on the profitability front, delivering GAAP profitability this quarter. Looking forward, we're guiding to full year GAAP profitability in fiscal 2023. We've had many of you ask us about the macro environment and how it is impacting our business and the markets we serve. In the last year, we arguably saw the most challenging supply chain conditions the technology industry has ever seen. We executed through this well during the year with modest impacts to our gross margins. We expect conditions will eventually ease. For our planning, we're assuming material improvement won't be seen prior to the end of fiscal year '23. However, as the supply challenges fade, we expect this will start to have a favorable impact on our product gross margins. There's a continuing debate on inflation, its nature and duration. We saw some labor and other inflationary pressures in the second half of the fiscal year. We do not anticipate these pressures going away in the next fiscal year and we have planned for it to persist through fiscal year '23. And hence, it is included in our plan and is reflected in our guidance. With respect to the macro impact on demand, we've just come out of Q4 with exceptional 44% billings growth. In enterprise sales, as most of you know, there is Q4 magic. We did, however, see some marginal changes in the macro environment in Q4. Whilst early, it is important to see how the overall macroeconomic conditions develop over the next year. First, we saw more longer duration deals as customers increasingly have the confidence to make large long-term commitments with us. This is important to the transformation objectives we set out for Palo Alto Networks. It confirms and validates our view that customers will consolidate if we give them constant best-of-breed products and ensure that they are integrated to deliver better security outcomes. Second, we saw some isolated instances of customers extending the life of hardware potentially driven by macro forces. We expect that on the margin. This could continue into FY '23. It is counterbalanced by some customers refreshing their state and our continued share gains in the hardware form factor. Third, in transformational projects, the vast majority of our customers continue on their investments here despite the expected short-term macro impacts. Security spending is tied into our customers' desires to move to the cloud, drive more direct relationships with their customers, modernize their IT infrastructure, as well as drive efficiencies while adapting to a new way of working. Those efforts continue. Coupled with heightened awareness and the need to do something around cybersecurity, we expect secular tailwinds to persist in cybersecurity, and we are best positioned to deliver against our customer needs. Another trend I would like to highlight is the return to Palo Alto Networks by employees who had left for seemingly greener pastures. Over a six-month period, as part of our Welcome Home Program, we have engaged with many former employees. To date, dozens of top performers have been rehired with many more in the funnel. Over 70% of people reached out have expressed a desire to come back to us and a significant number already have. 50% are returning from start-ups, the next largest percentage coming from peer companies. We're happy to welcome these employees back to Palo Alto Networks. As we embark on new fiscal year, my fifth as Palo Alto Networks CEO, it's worth reflecting on where we came from. Our transformation strategy has not been easy, but we are unwavering in our resolve to build the most comprehensive and relevant offerings for our customers, taking away their complexity and delivering a better security outcome for them. We see a path to being the largest cybersecurity company backed by constant innovation and excellent execution, becoming our customers' cybersecurity partner of choice while delivering increasing value to our shareholders. Just four years ago, we were a different company. We have reinvented the firewall market and captured the market share leadership position. Our software story in network and security was early, with some traction in our virtual firewalls and a fledgling precursor to SASE called GlobalProtect Cloud Services. We made our first acquisition in cloud-native security and had early point products that will become part of Cortex. When we step back and take stock in the industry, we had a key hypothesis, which we then tested, proved to ourselves and have reproduced across the business today. There has not previously been a cybersecurity company with a leadership position in multiple categories, nor did the customers believe that a cybersecurity platform could anchor their architecture. We set out on this ambitious journey as you see at Prisma Cloud and Cortex as well as innovated significantly in our network security capabilities. Fast forward to today, our transformation has taken us far. We are a recognized leader in 11 cybersecurity categories across our three platforms. Next-generation security contributed more than 38% of our billings, helping to accelerate our growth. In network security, we now have the most comprehensive solution across three form factors that share a common architecture and also offer a suite of market-leading security subscriptions. We have built, assembled and integrated capabilities in nine modules that make up Prisma Cloud, which is now the leader in cloud-native security. Lastly, we have three anchor products in Cortex, with our new XSIAM product showing promise in revolutionizing security operations, which is going to hold us in good stead. The proof that this transformation is working is in the momentum we are seeing in our customers. The number of customers that spend over $1 million annually with us continues to grow, with the millionaire count now in excess of 1,200, and the number of Global 2000 customers that have purchased products in all three of our platforms is now 50%. While we've had many large customer wins recently, I want to highlight a team in three transactions. The first is a technology company that purchased products in all three of our platforms in a transaction over $75 million in value. The second is a financial services company that standardized its network security on our platform, including adding VMs and deploying Prisma Cloud, spending north of $40 million. And third is a professional services company that spent over $75 million across Strata, Prisma and Cortex. One of the outcomes from our transformation over the past four years is a steady increase in our subscription and support mix, primarily driven by the growth of our next-generation security business. Subscription and support now exceed 80% of our billings. This has resulted in greater predictability in our revenues. We have seen growing commitments from our customers represent a greater portion of next year's revenue. As we enter fiscal year '23, that number is 59% at the midpoint of our guidance. Increasing revenue visibility gives us further confidence in our ability to invest and drive future growth. This number is over 70% for the revenue we expect in Q1. All of this has occurred while our revenue growth has accelerated from FY '20 to FY '22, in part due to the accelerated growth in our next-generation security offerings, while we have also taken share in traditional network security appliance form factors as reported by third parties. Despite the success so far in our transformation, we still see significant potential ahead of us. We estimate our large addressable market to be growing at a rate of 14%. At 29%, our fiscal year '22 revenue growth more than doubled this market growth rate. As we have transformed the business, we have seen our revenue growth reaccelerate. Even with this significant growth over the last four years, we still only represent approximately 6% of our TAM we last presented at our Analyst Day in September 2021. 6% share of the market is low for the market leader as compared to other categories and technology. So we see ample room to grow. There are numerous trends that excite us around our ability to drive this growth and continue our share gains. You may soon see a day where there will be $1 trillion in public cloud consumed. Our observation thus far in this early market is that companies allocate 2% to 5% of the cloud budget to security, creating a significant Prisma cloud opportunity. There are 3.5 million worldwide cybersecurity jobs that are unfulfilled. Our view is that more training and hiring alone will not effectively and efficiently counter the growing use of automation employed in attacks and the volume of alerts that is overwhelming the security operations center. We believe a new paradigm in security operations is needed that heavily leverages AI and automation. We are targeting this opportunity with our Cortex products and XSIAM products specifically. Lastly, hybrid work is here to stay. There are more than 1 billion knowledge workers globally. We believe we have a strong position in SASE with our coverage of users and branch offices today, just scratching the surface of lost opportunity. We have a clear mission in front of us in each of our security platforms to harness the opportunity that we have outlined. As this is Q4, I figured, rather than having me outline all the accomplishments from our product team, I would invite Lee Klarich, who patiently listens and sits in our calls, to give you a more detailed update to help you understand how we will continue to build on the success we had in FY '22.”