“We expect revenue to be in the range of $1.95 billion to $1.98 billion, an increase of 13% to 15%.”

In context

“Dipak Golechha (Chief Financial Officer): Thank you, Nikesh, and good afternoon, everyone. Given all that we have to talk about this quarter, I will do an abbreviated review of our Q2 results. You can refer to the press release and supplemental financial information on our website for our key numbers. For Q2, revenue of $1.98 billion grew 19%. Product revenue grew 11%, while total service revenue grew 22%, with subscription revenue growing 26%, and support revenue growing 14%. Moving on to geographies, we saw consistent revenue growth across all of our theaters, with the Americas growing 19%, EMEA up 19%, and JPAC also growing 19%. We had some puts and takes during the quarter related to billings. As Nikesh mentioned, we saw weakness in the US federal vertical related to some specific programs. This US federal weakness was a meaningful headwind to our billings in Q2 after we saw a slow start in the year to Fed. The impact of these federal deals on our revenue is significant as they are relatively shorter than our average contract term. At the same time, we saw a decrease in our non-product backlog, which offset this Fed weakness in our billings. We continued to see customers closely watching cash outlays around deals, which we discussed last quarter, although this trend played out largely as we expected 90 days ago. Remaining performance obligation, or RPO, was $10.8 billion, and current RPO was $5.2 billion. You likely noticed that our GAAP EPS was $4.89 and GAAP net income was $1.75 billion. These benefited from a $1.5 billion release of a tax-related valuation allowance. This was a one-time item in fiscal year '24, which has been adjusted out of our non-GAAP results. This amount also does not impact our cash taxes. Our average duration on new contracts was relatively flat year-over-year, with average duration for new contracts remaining at approximately three years, while total contract duration was down slightly year-over-year. I did want to spend more time talking about our accelerated platformization and consolidation strategy and give you more of my perspective with some additional framing and detail with a financial lens. Nikesh talked about our programs to alleviate friction with customers. We believe that by moving from a deal-by-deal approach to a program-based and systematic approach, we can accelerate platformization with a customer base and drive vendor consolidation faster by mitigating platformization friction. This results in a number of business benefits for us, ranging from a faster capture of the customer estate and larger platform commitment to higher renewal and expansion rates and faster adoption of our new innovations. For the customer, they are able to execute on the platform deployment with lower risk and consolidate vendors while benefiting from a lower total cost of ownership and a better security posture. As Nikesh gave you the high-level trajectory on our pipeline, I wanted to help you understand how we think about the medium term. Our platformization offers to drive consolidation, effectively provide customers a period of the contract for free as part of their commitment. We expect we may see a period of 12 to 18 months of pressure on our top-line growth rates, notably billings. Some of our platformization programs embed deferred payments into deal structures, which we have spoken about in the past. We expect this will persist through fiscal year 2025 as we anniversary the rollout of these programs and result in billings below the target we provided in August of 2023. Beyond this period, we expect we can sustain higher growth than we provided in these targets in August. From an NGS ARR perspective, we expect less impact on our year-end metrics, and we expect we can continue to meet or exceed our target, which called for a 30% growth rate through fiscal year '26. As Nikesh noted, we are establishing a long-term target of $15 billion of NGS ARR in fiscal year '30. Underlying this trend, we expect customers deploying our full set of platforms to have a higher makeup of NGS products. These offerings tend to be deeply installed in our customer infrastructure. Once a customer deploys the platform, it's easier to continue to consolidate vendors and adopt new innovations. We expect this to drive a significant increase in our overall revenue mix that is recurring. From a revenue perspective, we expect to see less pressure on revenue as compared to billings. Generally, we see a lag in changes in our revenue growth versus our billings growth, and we expect that this will happen here as well. As Nikesh mentioned, part of what gives us confidence to execute on the strategy, and especially to do so now, is our success in driving profitable growth. As we embark on a strategy that we expect will negatively impact the top line in the short term, we have significant confidence that our business scales well and we can continue to see operating leverage from a number of drivers. As I have mentioned multiple times before, we scale well across every line item of our P&L, ranging from customer support to cloud hosting, to sales and marketing, to G&A. We've seen significant payoff from focusing on internal efficiency across all areas of the business. Let me give you some specific examples for Q2. First, in cloud hosting, we signed a significant extension with our primary cloud provider. This contract is constructed to enable us to drive further margin benefits as we scale. Second, within G&A, we're progressing well on a significant employee experience program. This started by analyzing all of our service desk tickets across all channels and identifying all the manual responses needed to address requests. The combination of process re-engineering, automation, and AI is still in progress, but we have already seen positive savings and have a target of automating 90% of the more than 300,000 manual interventions. By the end of Q2, we have roughly halved the cost of our T&E servicing. We are now leveraging this program as a template across other business areas. In short, whilst we made a lot of progress, we still have significant opportunities on the profitability front. That gives us confidence that we can maintain our medium-term operating margin and free cash margin targets beyond this year. Specifically, we believe that we can expand our operating margins by 100 basis points beyond this year, in line with the operating margin guidance we gave in August of 28% to 29%. And this can continue to support our medium-term free cash flow margin target of 37% plus. We expect that this will come despite us absorbing some billing's impact, as we have both the benefit of some prior arrangements with deferred payments contributing as well as efforts we have placed on optimizing the cash dynamics of our vendor spending. In short, I wanted to reiterate what Nikesh said, that it is important for us to be able to manage through this platformization acceleration in a financially prudent manner and we have set ourselves up well to do this over the next 12 to 18 months. Now moving on to the guidance for Q3 and the year. For the third quarter of 2024, we expect billings to be in the range of $2.30 billion to $2.35 billion, an increase of 2% to 4%. We expect revenue to be in the range of $1.95 billion to $1.98 billion, an increase of 13% to 15%. We expect non-GAAP EPS to be in the range of $1.24 to $1.26, an increase of 13% to 15%. For the fiscal year, we expect billings to be in the range of $10.10 billion to $10.20 billion, an increase of 10% to 11%. We expect NGS ARR to be in the range of $3.95 billion to $4 billion, an increase of 34% to 35%. We expect revenue to be in the range of $7.95 billion to $8 billion, an increase of 15% to 16%. We expect operating margins to be in the range of 26.5% to 27%, an increase of 240 basis points to 290 basis points year-over-year. And we expect non-GAAP EPS to be in the range of 5.45% to 5.55%, an increase of 23% to 25%. We expect adjusted free cash flow margin to be 38% to 39%. In the interest of time and to get as many of your questions as possible, we've included the modeling points in the appendix of our earnings presentation. With that, I will turn the call back over to Walter for the Q&A portion of the call.”