“For the third quarter of 2023, we expect billings to be in the range of $2.20 billion to $2.25 billion, an increase of 22% to 25%.”

In context

“Dipak Golechha (CFO): Thank you, Nikesh, and good afternoon, everyone. For Q2, revenue of $1.66 billion grew 26%. Product revenue grew 15%, whilst total service revenue grew 29%, with subscription revenue growing 32% and support revenue growing 25%. Moving on to geographies, we saw revenue growth across all theaters, with the Americas growing 22%, EMEA up 35%, and JPAC growing 32%. The strength of our next-generation security capabilities continues to drive our results, with NGS ARR of $2.3 billion, growing 63%. Strength was broad-based across all three of our platforms: Network security, cloud security, and security operations. We delivered total billings of $2.03 billion, up 26%, and above the high end of our guidance range. Total deferred revenue in Q2 was $7.6 billion, an increase of 39%. Remaining performance obligation (RPO) was $8.8 billion, increasing 39%, with current RPO representing about half of our RPO, similar to recent quarters. Our non-GAAP earnings per share was significantly ahead of our guidance, and this metric, as well as our trailing 12-month adjusted free cash flow, accelerated. Non-GAAP EPS of $1.05 grew 81% year-over-year, while trailing 12-month adjusted free cash flow of $2.7 billion grew 76% year-over-year. Moving on to the rest of the financial highlights. Non-GAAP gross margin of 75.5% was up 150 basis points year-over-year, driven mainly by an increase in our software mix. On a quarter-over-quarter basis, we saw less pressure from incremental costs related to the supply chain. We've made significant progress in driving leverage. This is something that we articulated at our Analyst Day in September 2021 and kicked off in fiscal year 2022. We have accelerated this in fiscal year 2023 with a focus on profitable growth as evidenced by our Q2 performance. Our operating margin of 22.8% increased 440 basis points year-over-year. This result was driven by improving gross margins and a slower level of headcount additions. We expect to see ongoing improvements in our operational efficiency. As a result, we are raising our fiscal year 2023 operating margin guidance. Non-GAAP net income for the second quarter grew 79% to $332 million, or $1.05 per diluted share. Our non-GAAP effective tax rate was 22%. Delivering fiscal year GAAP profitability is another milestone in our balance of driving growth and profitability. For the quarter, GAAP net income was $84 million or $0.28 per basic share and $0.25 per diluted share. This was our third consecutive quarter of GAAP profitability. As Nikesh noted, we have now been profitable on a cumulative basis for the last four quarters. We believe we now meet the criteria for inclusion in the S&P 500. Turning now to the balance sheet and cash flow statement. We ended Q2 with cash equivalents and investments of $6.2 billion. Our average duration for new contracts increased slightly year-over-year, driven by deals with strategic customers. It remains at approximately three years, where it has been historically. Q2 cash flow from operations was $695 million, with total adjusted free cash flow of $685 million this quarter. Our strong free cash flow in Q2 was driven by increased operating profitability, higher interest income, and improvement in billings linearity due to improving supply chain conditions. During Q2, we repurchased approximately 1.8 million shares in the open market at an average price of approximately $139 per share for a total consideration of $250 million. As a reminder, our share repurchase program is opportunistic, and we are committed to this method of returning cash to shareholders over the medium term. Stock-based compensation ticked up 20 basis points as a percent of revenue sequentially, related to the issuance of our annual grants and the impact from the Cider acquisition. On a year-over-year basis, stock-based compensation was down 350 basis points as a percent of revenue. Before I get to guidance, I wanted to cover my thoughts on operating margin. We have continued to drive improvements in the profitability of our fastest-growing businesses as they have gained scale. Additionally, over the last six months, we have developed and executed detailed plans to accelerate our operating leverage. This includes raising the bar around the return on investment we expect as well as remaining prudent in our hiring. We've also spent a lot of time looking at our peer group and studying benchmark data. As we look towards the second half of the year and into fiscal year 2024, we believe we can continue to execute against our plans and drive higher operating margins. We expect that this will translate into us growing our EPS faster than our revenue growth rates. Now moving on to guidance. We're offering guidance for Q3 and also Q4 to make this explicit and then offering updated annual guidance. You'll see we're maintaining our annual revenue guidance and giving explicit guidance for Q3 to Q4 based on what we see in our pipeline for product revenue. For the third quarter of 2023, we expect billings to be in the range of $2.20 billion to $2.25 billion, an increase of 22% to 25%. We expect revenue to be in the range of $1.695 billion to $1.725 billion, an increase of 22% to 24%. We expect non-GAAP EPS to be in the range of $0.90 to $0.94, an increase of 50% to 57%. For the fourth quarter of the year, we expect billings to be in the range of $3.12 billion to $3.17 billion, an increase of 16% to 18%. We expect revenue to be in the range of $1.937 billion to $1.967 billion, an increase of 25% to 27%. We expect non-GAAP EPS to be in the range of $1.18 to $1.22 per share, an increase of 48% to 53%. For the fiscal year, we expect billings to be in the range of $9.1 billion to $9.2 billion, an increase of 22% to 23%. We expect NGS ARR to be in the range of $2.75 billion to $2.8 billion, an increase of 45% to 48%. We expect revenue to be in the range of $6.85 billion to $6.91 billion, an increase of 25% to 26%. We continue to expect product revenue growth in the range of 10% for the full fiscal year. For fiscal year 2023, we're expecting our operating margins to be in the range of 21.5% to 22%. We expect our non-GAAP EPS to be in the range of $3.97 to $4.03, an increase of 57% to 60%. We expect our adjusted free cash flow margin to be between 36.5% to 37.5%, and we expect to be GAAP profitable each quarter and for the fiscal year 2023. Additionally, please consider the following modeling points. We expect our non-GAAP tax rate to remain at 22% for Q3 and fiscal year 2023, subject to the outcome of future tax legislation. For Q3 and Q4, we expect net interest income and other income of $45 million to $49 million. We expect Q3 diluted shares outstanding of 321 million to 327 million shares. We expect Q4 diluted shares outstanding of 326 million to 332 million. We expect fiscal year 2023 diluted shares outstanding of 320 million to 326 million. We expect Q3 capital expenditures of $35 million to $40 million, with full-year capital expenditures of $165 million to $170 million. With that, I will turn the call back over to Clay for the Q&A part of the call.”