“we expect adjusted free cash flow margins to be between 37% and 38%.”

In context

“Dipak Golechha (CFO): Thank you, Nikesh, and good afternoon, everyone. To make the most of our Q&A time, I will share highlights from Q1. You can find the results in our press release and supplemental financial details on our website. We have removed billings and added NGS ARR and RPO to our supplemental financials to emphasize these metrics. In Q1, total revenue was $2.14 billion, growing by 14%, which is above the upper limit of our guidance. Within this, product revenue increased by 4%, while total services revenue grew by 16%. Looking specifically at services revenue, subscription revenue rose by 21%, and support revenue increased by 8%. As Nikesh stated, demand for firewall appliances remained stable in Q1, and we anticipate growth of 0% to 5% as previously discussed. Our support revenue is primarily linked to our appliance form factor. Geographically, we experienced double-digit revenue growth across all regions, with the Americas up 12%, EMEA rising 21%, and JAPAC growing by 13%. Total RPO increased by 20% to reach $12.6 billion, with about $68 million added sequentially from the acquisition of the QRadar SaaS business. Approximately $30 million of this RPO is reflected in our deferred revenue. Current RPO grew by 18% to $5.9 billion. The average duration of our new contracts stayed around three years, consistent with the previous year but slightly down from Q4. Our NGS ARR grew by 40%, finishing Q1 at $4.52 billion, which includes $74 million from QRadar SaaS. We expect this QRadar NGS ARR to decline to about half by Q4 as we concentrate on upgrading these customers to XSIAM and enhancing our XSIAM ARR. It's also noteworthy that roughly a third of our new platformizations in Q1 originated from QRadar, involving customers with over $100,000 in QRadar ARR who also actively use Cortex XDR and/or Cortex XSOAR. This increase is a one-time effect due to the acquisition. Regarding our income statement, the gross margin of 77.3% was slightly down due to the impact of some new SaaS offerings that have yet to scale. We continue to observe efficiencies across the company as we aim for profitable growth, resulting in a 60 basis points expansion in operating margin, along with higher interest and other income contributing positively to our earnings per share. Our diluted GAAP EPS continues to grow alongside our overall profitability, and we generated strong free cash flow in Q1 due to collections from substantial Q4 bookings. On the balance sheet, our debt decreased by over $300 million. We have seen early conversions of our convertible debt, which occurred at the discretion of the debt holders and was settled in cash and equity. The remaining debt matures in June 2025, although additional early conversions may occur. We did not repurchase any shares in Q1, and our buyback strategy remains opportunistic, with $1 billion in authorization available through December 2025. Before moving on to guidance, I want to highlight the early impact of our shift to focusing on RPO and NGS ARR as our key metrics. This strategy is intended to optimize our business for long-term value creation, and the early results in Q1 have been encouraging. As we prioritized sales enablement and training at the start of the year, we focused on maximizing exit ARR and deal profitability instead of specific invoicing structures. I have seen positive early signs in Q1 where we shortened cycle times in certain steps of our deal closure process. Additionally, we handled several larger deals more smoothly than before. For instance, a seven-figure SASE deal with a major semiconductor company advanced through our process more quickly after structuring the deal around annual billings, contrasted with previous PAN-FS proposals that would have required more scrutiny and approvals. In another seven-figure XDR deal with a healthcare client, we structured the arrangement to meet the client's payment terms while maximizing exit ARR. We are eager to build on this to further improve predictability in our business as we concentrate on NGS ARR and profitability in our deals. In Q1, we narrowed our PAN-FS financing approach to transactions where it was most appropriate, leading to a significant reduction in the volume of such transactions. Instead of PAN-FS, we utilized annual invoicing, which can simplify the procurement process for customers, especially for SaaS offerings. In our previous quarter, I indicated that our billings would likely grow by 12% this fiscal year if we did not alter any practices affecting billings, and this still holds true under the same basis. Quarterly billings analysis is no longer relevant as it does not mirror our current business operations. Based on our Q1 results, we remain optimistic about our cash flow outlook for the year. Now, let’s discuss guidance. For fiscal year 2025, we expect NGS ARR to be in the range of $5.52 billion to $5.57 billion, which is a 31% to 32% increase. This outlook includes the contribution of QRadar SaaS, about half of the approximately $74 million in ARR from QRadar in Q1, along with increased momentum in our NGS offerings that Nikesh and I mentioned. We anticipate remaining performance obligation to be between $15.2 billion and $15.3 billion, reflecting a growth of 19% to 20%. Revenue is expected to fall between $9.12 billion and $9.17 billion, representing a 14% increase. Operating margins are predicted to be between 27.5% and 28%. Diluted non-GAAP EPS is projected to range from $6.26 to $6.39, which is an increase of 10% to 13%, and we expect adjusted free cash flow margins to be between 37% and 38%. For the second fiscal quarter, we predict NGS ARR to be between $4.70 billion and $4.75 billion, reflecting a growth of 35% to 36%. Remaining performance obligation is expected to be between $12.9 billion and $13.0 billion, representing an increase of 20% to 21%, with revenue anticipated to be between $2.22 billion and $2.25 billion, a rise of 12% to 14%. We forecast diluted non-GAAP EPS to be between $1.54 and $1.56 per share, which indicates an increase of 5% to 6%. We have included our usual modeling details for your review. Lastly, as Nikesh mentioned, we announced today a two-for-one split of Palo Alto Networks common stock. This decision reflects our confidence in our ongoing business momentum and our intention to make our stock more accessible to employees and a wider range of investors. Shareholders of record on December 12, 2024, will receive one additional share for every outstanding share held at that time after the market closes on December 13. Our stock will begin trading on a split-adjusted basis on December 16, 2024. With that, we will move to a video, and then we will begin Q&A.”