“In short, demand is robust, and my expectation is that we will continue to see it be that way for the next many quarters.”

In context

“Nikesh Arora (Chairman and Chief Executive Officer): Thank you, Walter. Good afternoon, everyone, and thank you for joining us today for our earnings call. I hope everybody enjoyed our new marketing campaign teaser featuring Keanu Reeves that goes live on national media. Let's start at the beginning, and I'll update you on what we have experienced in Q3. First and foremost, cyberattacks continue unabated. We're seeing a consistent stream of nation-state activity that is systematically looking for software supply chain and hardware zero-day vulnerabilities and attempting to exploit them at scale. Additionally, there continues to be a robust stream of attack activity targeted at large enterprises and pieces of critical infrastructure. We continue to see high-profile breaches, some of which were widely reported in the press again this quarter. Most organizations face the challenge of an ever-shrinking time window for a bad actor to enter their environments, find valuable data, and exfiltrate it. The window is now measured in hours. In comparison, the time it takes for an organization to discover a breach and stop the malicious activity continues to be measured in days and weeks. While not a new phenomenon, with new disclosure mandates, this challenge is now clearly out in the open. With AI, we expect the attacks to come at an even faster pace. I don't need to elaborate on the current enthusiasm around AI. Almost every one of our customers is either experimenting with AI or plans to deploy some use cases in the near future. As usual, their employees are way ahead. Almost 50% of employees of most companies are using some sort of AI application, LLM, or co-pilot to explore, learn, and make themselves more productive. While this is great for the evolution and adoption of AI, it introduces a whole new set of threats. As some of you are aware, we have recently announced a suite of products which are aimed to secure this AI usage by design. More about this later, but I expect this to continue to provide a tailwind to the cybersecurity industry. On spending for cybersecurity, we see no change of pace or trajectory. Most customers have a series of projects they want to get done, and the only limiting factor seems to be their execution capability. Customers continue to focus on zero-trust transformations, coupled with the need for new network architectures to adapt to a more hybrid infrastructure. The resurgence of cloud migrations is being driven by the need to get their data in the cloud to be AI-ready, causing discussions around the cloud security platform. As you may all have noticed with all the M&A activity, the security operations space is getting rejuvenated, which is something we've been preparing for with XSIAM. At the accelerated pace of change in cyber, even with healthy increases in cybersecurity funding, many organizations aim to simply keep pace with the volume of threat activity they see. Most cannot do this and are increasingly receptive to a better way of tackling their security challenges, windows sprawl, and architectural complexity. We firmly believe that the answer is the platformization of cybersecurity over time. I'm delighted to report that despite the concerns around our platformization approach after our last quarter, the customer feedback has been nothing but encouraging. We have initiated way more conversations on our platformization than we expected. If meetings were a measure of outcome, they have gone up 30%, and a majority of them have been centered on platform opportunities. In short, demand is robust, and my expectation is that we will continue to see it be that way for the next many quarters. With this backdrop, we are pleased with our strong Q3 results. As you can see, we delivered top-line growth ahead of the market and continue to drive growth while improving profitability. Our performance was highlighted by 47% growth in our next-generation security ARR. As we continue to transform our business to a security software business, we saw 23% growth in RPO, an uptick from last quarter. This translated into 15% revenue growth and 3% growth in our billings. As we have articulated earlier, we don't see the billing metric as a true indicator of business strength. It continues to be impacted by payment terms where more and more customers prefer annual billing plans. However, if you examine implied bookings, you will note that we saw an uptick over the last two quarters. We actually ended up billing backlog this quarter. We continue to operate our business efficiently. Our operating margin expanded by 200 basis points year-over-year, driving 25% growth in operating income and 20% in our EPS to $1.32. Our cash generation was strong and again our GAAP net income grew substantially year-over-year. Before I continue with highlights from Q3, I'm aware that our accelerated consolidation and platformization strategy created significant conversation last quarter. We have also had questions from analysts and investors on this topic since we reported our Q2 results in February. I thought I'd share more background on how we got here to provide context and also offer a platformization framework for you to help understand why we're convinced that we can build a much larger business over the next several years and platformization is key to achieving that. When we embarked on our journey to transform our company, we were keen to create interest and convince our customers that we could solve their problems not just with our next-generation firewalls and the associated subscriptions but also with a set of best-of-breed products across 20-plus categories organized across three platforms. That strategy was hugely successful and saw us achieving nearly $4 billion in NGS ARR. The primary focus of our teams was landing multiple products across our three platforms and our customers. Whether we were able to land at a brand new customer for Palo Alto Networks or we added products from new platforms to our existing customers, we were happy. Landing could range from a single product used in part of the organization to broader usage across the organization. From that lens, if you look at our top 5,000 customers, we have landed two or more of our platforms at about half of these customers, and these customers contribute just over 80% of NGS ARR. If you look at this by platform, we have landed 97% of these top 5,000 in network security, over 20% of them in Prisma Cloud, and over 40% with Cortex. By all means, our land-the-platform strategy was extremely successful. In landing with multiple platforms, many of our customers have leveraged our capabilities across key cybersecurity buying centers, such as network security, cloud security, and security operations. Most of this cross-platform adoption has happened more organically with customers adopting incremental products on Palo Alto Networks at their own pace. Governed by the complexity of the environment and the friction of dealing with contracts with multiple vendors, not many of our landed customers are fully platformized. And for those that are fully platformized, we saw encouraging results. We realized that for fully platformized customers, while they saw better security outcomes, our ARR profile was also very different. While our average next-generation security ARR for our landed customers ranges from $200,000 to $800,000, for our land strategy, we discovered that our ARR for fully platformized customers ranges from $2 million to $14 million, depending on how many platforms the customers are standardizing on. This drove us to accelerate the rollout of our platformization strategy at the end of the last quarter following successful pilots earlier in the year. We created interest in the market, we started conversations with customers looking to begin their platformization journey, spurring existing sales cycles to a more strategic outcome. Having personally reviewed over 500 of our top customers in detail this past quarter and having had a few hundred conversations with CSOs, CIOs, and CEOs, I continue to be convinced of our opportunity to deliver full platformization to our top customers. We're still early in the results from full platformization. Across these top 5,000 customers, we have completed about 900 through Q3 2024. Our Q3 efforts resulted in approximately 65 incremental platformization sales in Q3, which is up 40% since Q2. It was this framework that laid the foundation for our goal of $15 billion in next-generation security ARR by fiscal year 2030 that we first discussed last quarter. With our incremental momentum in platformization, we see a runway to delivering approximately 2,500-plus platformization sales, up from the current 900, while continuing to land our multiple platforms in our customer base and adding new customers. I showed you the benefits we see in our ARR from our success in driving platformization. Our customers also see significant benefits as they adopt our full platforms. We have talked to you in the past about reductions in median time to resolution with XSIAM, which takes less than one-tenth of the time it took before XSIAM was deployed as customers platformized on Cortex. IDC recently validated the benefits platform customers see in a study published earlier this year, independently proving much of what we have talked about. Customers saw productivity benefits, as much as 30% to 40% efficiency improvements and significant improvements in security outcomes. I could talk further about the benefits, but what really brings us to the forefront are some examples of our significant transactions in Q3. A U.S. county agency signed a seven-figure transaction, landing our firewall subscriptions as well as Cortex XDR and becoming a Palo Alto customer for the first time. We displaced a competitor that had sold both of these capabilities to the customer and competed against us on an appliance vendor that could not offer best-of-breed capabilities across these two categories. A large U.S. financial services company that was an existing platform customer faced significant challenges in their SOC. Despite a staff of 40 in the SOC, they were not achieving their goals and sought a transformation plan. We signed an eight-figure deal including XSIAM, our ITDR, or identity threat detection and response offering, and our managed detection and response service. A global data services provider was unhappy with its incumbent SASE provider, facing outages that created lost productivity. It was also never able to integrate its VPN and URL filtering capabilities fully. The customer selected our SASE capability for approximately 65,000 mobile and branch office users, including CASB, DLP, enterprise browser, and ADEM capabilities for many of them. This was a highly competitive situation, but our ability to deliver consolidated capabilities through a platform across several areas as well as our superior security versus the incumbent won us the business. Finally, a large healthcare company experienced a breach and engaged our Unit 42 Incident Response Services. After we helped the customer remediate and get back online, we were able to educate the customer on the benefits of platformization. The customer fully platformized with us, standardizing on network security, Prisma Cloud, and Cortex. This transaction was the largest in the history of Palo Alto Networks at nearly $150 million of TCV. Beyond these showcase deals, our overall large deal activity was healthy in Q3, as shown by significant increases in our accounts with transactions over $1 million, $5 million, and $10 million in the quarter. We also recently announced our partnership with IBM. IBM and Palo Alto Networks have done what in my mind is a one-of-a-kind partnership. This partnership involves migrating the QRadar customers of IBM to XSIAM, where IBM will be able to deliver industry-specific capabilities on XSIAM using Watson. Given their leadership position in the Gartner Magic Quadrant, now we can collectively deliver an even better solution to both their existing and new customers. Enabling over 1,000 IBM security consultants on the entire Palo Alto Networks portfolio will allow us to drive platformization in an accelerated fashion. We will be IBM's preferred cybersecurity partner across network, cloud, and SOC while driving a significant book of business for IBM. Additionally, IBM will platformize on Palo Alto products. It will extensively leverage Watson across both our operations and products. Lastly, we will work on co-developing solutions for cloud security. Last quarter, when we rolled out our accelerated consolidation platformization strategy, we also activated our AI leadership strategy. Leading up to this, over the last year, we've oriented an increasing portion of our R&D investments towards AI. We have seen growth in customer interest in adopting AI to drive business value and bad actors using AI. In early May, we announced our comprehensive suite of AI security offerings and believe we will be first to market with capabilities to protect the range of our customers' AI security needs. We rolled out three products to safely enable the use of AI from employees using AI to enterprises building AI into their applications. AI Access Security, AI SPM, and AI Runtime Security put us at the forefront of securing AI adoption. We also believe our co-pilots across our three platforms, which are context-aware, can perform and automate user actions, surface alerts and best practices, and provide in-product support all with near-perfect accuracy. Furthermore, we announced our Precision AI Security Bundle to leverage inline AI to counter AI attacks with AI Defense. We have had strong early customer engagement with these offerings, which we expect to be made generally available at the beginning of July. As you heard from our teaser trailer with Keanu, this isn't sci-fi; this is precision AI. More broadly than AI, it has been a busy last three months from an innovation perspective. On our SASE 3.0 launch, which we rolled out early this month, debuted with several unique industry-defining capabilities. We announced the industry's only secure enterprise browser integrated into SASE, and as end-user engagement with AI applications grows, the browser becomes an important defense layer against AI threats. Additionally, it is becoming clearer that the browser offers a better way to secure contractors, mobile devices, and managed devices, with SASE integration providing a simpler and more secure approach to adoption. We launched AI-powered data security integrated into SASE, leveraging the industry's first LLM-powered data classification. This new classification engine combines the strength of context-aware machine learning models with the power of LLMs, understanding how to increase classification accuracy. Lastly, as part of our SASE 3.0 rollout, we launched application acceleration, which understands each user's journey with enterprise SaaS and cloud applications, optimizing performance for these applications. Customers see performance up to five times faster than the user experience in general internet. This rapid cadence of innovation in SASE has enabled us to maintain SASE ARR growth above 50% for the sixth quarter in a row. At Prisma Cloud, we have completed the first phase of rollout of data security posture management, which came from the Dig Security acquisition. We also added support for more than 100 new APIs across the major hyperscalers to stay ahead of our customers by securing the cloud services. Based on our Cortex Xpanse technology, we did launch Cloud Discovery and Exposure Management, leveraging our Xpanse data natively in Prisma Cloud. Over 100 customers now use this capability to evaluate internet exposure risks and discover unknown internet-exposed cloud assets. Also during Q3, we launched Cloud Detection and Response, which extends our XDR capability into the cloud and gives customers a unified view of their entire environment from cloud to endpoint to network. Cloud Detection and Response and Cloud Detection and Response show the power of having both Cortex and Prisma Cloud platforms, as we can leverage these sophisticated capabilities to benefit cloud customers. Last but not least, on Cortex, we launched XSIAM about 18 months ago, and this offering has already elevated the profile of Cortex in the market. We see steady demand for XDR, the foundation of Cortex, where we are landing many new customers, and now we have over 5,800 customers on XDR. With $400 million in cumulative XSIAM bookings coming out of Q3, this offering is really going mainstream with customers understanding the value proposition versus the traditional SIEM. XSIAM has accelerated our Cortex ARR growth, and we continue to see a strong pipeline of opportunities. We are converting our innovation into recognized leadership, adding two new positions this quarter. One was in managed detection and response; the other in data security posture management, leveraging our Dig acquisition and demonstrating our ability to acquire technology and rapidly integrate it into our platforms. As many of you have undoubtedly seen, our rollout of platformization has stoked a long-standing debate within the cybersecurity industry about whether customers desire a platform or best-of-breed cybersecurity. From Palo Alto Network's perspective, we've proven it is possible to deliver the best of platform. This is why we have invested in building leading products, and we have now recognition for product leadership in 23 categories while also delivering on the benefits of integration across all three platforms. To summarize, before I pass off to Dipak, please take away a few conclusions from my prepared remarks. One, we put out strong Q3 results in a positive spending environment where cybersecurity priorities are well funded. Beyond the continuation of a challenging threat environment, new threat vectors from AI are starting to surface as the usage of AI grows. We've been pleased with the initial traction of our accelerated consolidation platform strategy. This drove an increase in bookings, with deferred payments and impact on our billings, something we expect will continue. We had a big quarter of innovation, especially as it relates to AI, where we strive to lead the industry in securing this powerful productivity medium while also doing so comprehensively. As we look forward, we have significant pipeline heading into our largest quarter of the year. We're just beginning to see the benefits of platformization accrue to our business. We will continue to make further investments here while balancing delivering profitable growth and have chartered a path with conviction towards being a $15 billion NGS ARR company. With that, let me pass you on to Dipak.”