“We continue to see ample opportunity to expand our operating margins, supporting our free cash flow.”

In context

“Dipak Golechha (Chief Financial Officer): Thank you, Nikesh, and good afternoon, everyone. To maximize our time spent on Q&A, I will provide you with highlights of Q4. You can review the results in our press release and the supplemental financial information on our website. In Q4, total revenue was $2.19 billion and grew 12%, above the high end of our guidance. Within revenue, product revenue declined 5%, while total services revenue grew 18%. Drilling into services revenue, subscription revenue grew 23%, and support revenue grew 10%. It is worth noting that product revenue grew 24% a year ago as the supply chain normalized, resulting in growth above our underlying demand in that period. Despite the tough Q4 comparison due to supply chain constraint reversals in the second half '23, fiscal '24 product revenue grew in the low single-digit range, which is in line with our expectations. The firewall appliance market demand was stable in Q4, and we continue to expect growth of 0% to 5%, as we have previously discussed. Moving on to geographies. We saw revenue growth across all theaters with the Americas growing 11%, EMEA up 14%, and JAPAC growing 15%. We saw strength across all of our geographic theaters. Total RPO, a metric that better represents our top-line growth and billings, grew 20% to $12.7 billion. Our current RPO grew 17% to $5.9 billion. The average duration of our new contracts remained at approximately three years, in line with our third quarter. As Nikesh mentioned, our NGS ARR grew well past the $4 billion mark, ending the year at $4.22 billion and growing 43%. Strength in NGS ARR was broad-based across our three security platforms. We reported Q4 billings above the high end of our guidance, driven primarily by double-digits booking growth and higher volumes transacted on average. On our balance sheet, you will see that our debt balance came down by $199 million and is now under $1 billion. Like in Q3, this reduction was driven by the early conversion of our convertible debt, which occurred at the option of the debt holders and was settled for us in cash and equity. Our remaining debt matures in June 2025, although we may continue to see early conversions. We did not repurchase any shares in Q4, and our buyback strategy remains opportunistic. Our Board of Directors approved an additional $500 million buyback authorization, such that we now have $1 billion in authorization remaining through December 2025. I wanted to give you some context around our NGS ARR, RPO, billings, and total services revenue metrics. You can see the relatively steady trends in RPO and NGS ARR, which closely match the trend in total services revenue, while we have seen more volatility in billings. We've talked for a year now about the factors that impact our billings. Over a year ago, we began to see the impact of rising interest rates on how customers perceive the cost of money in procurement situations. This was causing many to ask for payments to be spread over multiple years, instead of an upfront payment. In response, we leveraged programs such as annual billings and our financing capability. The impact on billings varied based upon which program the customer chose and how the deal was structured. Also, during this fiscal year, we rolled out our platformization strategy and offered customers more flexibility in payment terms when making large strategic commitments. This has had a further impact on our billings. In both of these situations, we found ourselves facing the choice of maximizing billings or focusing on NGS ARR, and we want all to have all of the incentives aligned to the latter. RPO and revenue are both important to understanding our business momentum. Revenue gives you the near-term view of our growth. Our RPO helps you understand the longer-term trend and the scale of our book of business that will drive revenue. This aggregate measure is driven by contracts we sign each quarter, and the long-term growth in RPO influences our revenue growth over time and gives you visibility into the future trend. As a reminder, the contracts included in our RPO are all non-cancelable and non-refundable in nature. We aspire to continue to grow RPO ahead of our target forward revenue growth rate as that helps us build confidence in these growth rates. Now focusing further on NGS ARR. As a reminder, NGS ARR is an important metric for us as it shows the return on the significant investments we've been making in the next-generation areas of our cybersecurity market that are also growing the fastest. We expect these offerings will disproportionately drive our growth as we transform our revenue. Our recent rollout of platformization has sharpened our focus on maximizing ARR. For example, we started the account review process early in fiscal year 2024 to identify white space among the largest organizations globally and maximize ARR. As we followed up with the rollout of our platformization strategy, we focused not only on the total deal value or the cash collected upfront, but also on an exit ARR and profitability of the recurring revenue stream. We can accommodate customer points of friction while maximizing this recurring revenue as we structure deals with customers to encourage their strategic adoption. These friction points include the challenge of replacing multiple products simultaneously and the issues around double paying while working through complex contract terms. In making these short-term concessions to billings, we ensure a valuable long-term relationship with a deal that meets our and the customer's needs. I've talked to you about how NGS ARR and RPO are becoming more prominent in our focus as we drive our platformization strategy. The shortcomings related to billings have become significant over the last 12 to 18 months and further increasing as we drive our platformization strategy. In evolving our metrics, we solicited the input of some of our largest shareholders and looked at how our peer companies are giving guidance. Investor feedback was that quarter-to-quarter billing volatility is merely a distraction, and it does not impact our assessment of the shareholder value we can create over the medium and long-term. We've seen a number of companies disclose ARR and adopt an RPO-related metric to help investors better understand the business trajectory, some of those companies include Adobe, Salesforce, ServiceNow, and Workday. As a result, beginning this quarter, we will focus on NGS ARR as our key top-line guidance metric, in addition to revenue. We will provide NGS ARR guidance both quarterly and annually. We will also provide total RPO guidance quarterly and annually this year to help investors understand the size of our book of committed contracts compared to their future expectations for our revenue. Since we know this is a change for you after many years of guiding billings, I wanted to help provide a one-time bridge back to what we would expect our billings to look like if we were not to change any of the practices in our business that impacts billings. If we were to keep the mix between our financing and billing programs in fiscal year 2025 in line with what we had in fiscal year 2024, we would expect this to drive 12% growth in our billings in fiscal year 2025. Before I get to detailed guidance, I want to give investors some additional color on the drivers of our cash flow as that is an area that we continue to receive questions on. First and foremost, our improving operating margins have been the most important driver of our free cash flow margin. We have seen our operating margins improve by over 800 basis points since fiscal year '21 when we began a more intensive focus on profitable growth. This higher operating margin has helped us to put a higher floor under our free cash flow margins. We continue to see ample opportunity to expand our operating margins, supporting our free cash flow. Beyond improvements in our operating profitability, the timing of customer cash payments can impact our free cash flow. Over the last four years, we have gradually absorbed an increase in customer preference for payments over time, increasing this proportion of our bookings from 6% in fiscal year 2020 to 30% as of the most recent quarter, while maintaining or even increasing our free cash flow margins. I'm happy that we've been able to do this, and we have confidence we can continue this gradual transition within the business and sustain our free cash flow margins at 37% plus through fiscal year 2026. I also wanted to update you on the pending transaction with IBM. We continue to expect the deal to close by the end of September depending on the timing of regulatory approvals and other customary closing conditions. At this point, we've included several tens of millions in acquired revenue from legacy QRadar SaaS products in our fiscal year 2025 revenue guidance, with this number decreasing over time based on the speed at which we migrate our customers to XSIAM. We have also embedded the ongoing expenses in our operating margin, cash flow margin, and EPS guidance. Now moving on to guidance. For the fiscal year 2025, we expect NGS ARR to be in the range of $5.42 billion to $5.47 billion, an increase of 28% to 30%; remaining performance obligation of $15.2 billion to $15.3 billion represents an increase of 19% to 20%; revenue to be in the range of $9.10 billion to $9.15 billion, an increase of 13% to 14%; operating margins to be in the range of 27.5% to 28%; non-GAAP EPS to be in the range of $6.18 to $6.31, an increase of 9% to 11%; and adjusted free cash flow margin to be 37% to 38%. For the first fiscal quarter of 2025, we expect NGS ARR to be in the range of $4.33 billion to $4.38 billion an increase of 34% to 36%; remaining performance obligation of $12.4 billion to $12.5 billion an increase of 19% to 20%; revenue to be in the range of $2.10 billion to $2.13 billion, an increase of 12% to 13%; and non-GAAP EPS to be in the range of $1.47 to $1.49, an increase of 7% to 8%. Since we know this is a change for you all after many years of guiding billings, I wanted to remind you of the one-time bridge back, which we talked about before. Finally, we included our typical modeling points in the presentation for you to review. With that, we're going to play one more customer video, and then we will move to the Q&A portion of the call.”