“We expect Q1 '23 diluted shares outstanding of 108 million to 110 million shares.”

In context

“Dipak Golechha (Chief Financial Officer): Thank you, Nikesh, and good afternoon, everyone. Today, we again reported another strong quarter, which culminates in a strong fiscal year for Palo Alto Networks. For Q4, revenue of $1.55 billion grew 27% and was at the high end of our guidance range. Products grew 20% and total services grew by 30%. By geography, we saw strong growth across all theaters, with EMEA up 33%, the Americas growing 26% and JAPAC growing 24%. The Next-Generation Security ARR grew 60% to $1.89 billion with strength across the portfolio. In the fourth quarter of 2022, we delivered total billings of $2.69 billion, up 44%, which was above the high end of our guidance range. Total deferred revenue in Q4 was $6.99 billion, an increase of 39%. Remaining performance obligation, or RPO, was $8.2 billion increasing 40% with current RPO representing about half of our RPO similar to recent quarters. With nearly all of our hardware products now refreshed, as Lee had mentioned, over 50% of our Q4 product orders were booked with Generation 4. Customer reception has been positive, with the majority of customers still in the early phases of their upgrade. Our Firewall as a Platform billings grew 26%. We also continue to see an increasing software mix within our FWaaP billings, up 2 points to 48% in Q4. Moving beyond the top line metrics I've already highlighted, non-GAAP gross margin of 73.2% was down 210 basis points year-over-year as we continue to incur additional expense for components and shipping. We expect this headwind to persist to March of fiscal year '23. Last Q4, we guided for a fiscal '22 operating margin of 18.5% to 19%. We're pleased to have achieved the high end of our goal by delivering 19% operating margin for fiscal year '22, while absorbing higher-than-expected supply chain costs. Non-GAAP net income for the fourth quarter grew 57% to $254 million or $2.39 per diluted share. Our non-GAAP effective tax rate was 22%, GAAP net income was $3 million or $0.03 per basic and diluted share. Turning now to the balance sheet and cash flow statement. We finished Q4 with cash, equivalents and investments of $4.69 billion. Days sales outstanding was 98 days, several days above where it would have landed without the impact of late quarter shipments. Our discounts continue to be in line with what we have seen over the last year. Q4 cash flow from operations was $524 million. We generated adjusted free cash flow of $485 million. We achieved 33.3% adjusted free cash flow margins for the year, above the high end of our 32% to 33% guide for fiscal year '22. During Q4, we repurchased approximately 755,000 shares on the open market at an average price of approximately $483 per share for a total consideration of $365 million. Additionally, our Board of Directors authorized an additional $915 million for share repurchase, refreshing our authorization for future share repurchases back to $1 billion expiring December 31, 2023. On the M&A front, we closed one very small acquisition in Q4. We reduced our stock-based compensation as a percent of revenue by approximately 3% year-over-year and quarter-to-quarter. SBC will remain a focus area in fiscal '23 as we balance the use of SBC to attract and retain top cybersecurity talent with scale leverage we expect in this area. Lastly, moving to guidance and modeling points. It is worth noting that in fiscal '22, we have flexibility built into our plans that allowed us to execute through some real-time developments during the year, such as supply chain and labor inflation. We've used the same approach in building our fiscal year '23 plans, incorporating a degree of flexibility of outcomes. It's also worth noting that we saw a very strong Q4 business activity. In some cases, this was from customers taking advantage of ordering hardware and especially subscriptions ahead of a price increase that took effect on August 1. We also saw some customers make large commitments in the fourth quarter that might have otherwise happened in fiscal year '23. As you think about next year, note that in the second half of fiscal '22, we have very strong billings with some benefits from an increase in invoicing of multiyear contracts for a few large customers. In Q4, without this impact, our billings would have been in the mid to high 30s. Turning to our guidance for the fiscal quarter of 2023. We expect billings to be in the range of $1.68 billion to $1.70 billion, an increase of 22% to 23%. We expect revenue to be in the range of $1.535 billion to $1.555 billion, an increase of 23% to 25%. We expect non-GAAP EPS to be in the range of $2.03 to 2.06%. For the fiscal year '23, we expect billings to be in the range of $8.95 billion to $9.05 billion, an increase of 20% to 21%. We expect NGS ARR to be in the range of $2.60 billion to $2.65 billion, an increase of 37% to 40%. We expect revenue to be in the range of $6.85 billion to $6.9 billion, an increase of 25%. We expect product revenue to be in the mid to high single-digit percent range year-over-year. We expect fiscal '23 operating margins to be in the range of 19% to 19.5%, which is 50 basis points ahead of the range we provided for fiscal '22 and consistent with the growth targets we presented during our fiscal year '21 Analyst Day. We expect non-GAAP EPS to be in the range of $9.40 to $9.50. We expect adjusted free cash flow margin to be 33.5% to 34.5%, and we expect to be GAAP profitable for fiscal year 2023. Regarding our fiscal year '24 financial targets, which we outlined at our September 21 Analyst Day, we have strong confidence in achieving those objectives, and we hope you take away from our call today some of the reasons behind this confidence. Additionally, please consider the following modeling points. We expect approximately 42% of our operating income to come in the first half of the fiscal year and approximately 58% in the second half. We expect our non-GAAP tax rate to remain at 22% for Q1 fiscal year '23, subject to the outcome of future tax legislation. For Q1 '23, we expect net interest and other income of $6 million to $8 million. We expect Q1 '23 diluted shares outstanding of 108 million to 110 million shares. We expect fiscal year '23 diluted shares outstanding of 111 million to 113 million shares. We expect our Q1 capital expenditures of $35 million to $40 million. And we expect fiscal year '23 capital expenditures of $190 million to $200 million. And finally, as Nikesh noted, we announced today a 3-for-1 split of Palo Alto Networks common stock. The decision was driven by a desire to make our stock more accessible to our employees and the broader group of investors. It is also supported by our underlying confidence in our continued business momentum. Shareholders of record at the close of business on September 6, 2022 will receive two additional shares after the close of business on September 13, 2022 for every outstanding share held on September 6. Our stock will be trading on a split-adjusted basis on September 14, 2022. With that, I will turn the call back over to Clay for the Q&A portion of the call.”