“We also saw stable demand for firewall appliances in Q2, which we expect to continue through fiscal 2025.”

In context

“Dipak Golechha (CFO): To maximize our time spent on Q&A, I will provide you with highlights of Q2. You can review the results in our press release and the supplemental financial information on our website. In Q2, total revenue was $2.26 billion and grew 14%, above the high end of our guidance. Within revenue, product revenue grew 8% while total services revenue grew 16%. Drilling into total services revenue, subscription revenue grew 20%, and support revenue rose 8%. Our product revenue is approaching 40% software on a trailing twelve-month basis. We expect healthy software contribution to product revenue in the second half of this year, which we expect will increase our product revenue into the double-digit growth range. We also saw stable demand for firewall appliances in Q2, which we expect to continue through fiscal 2025. The appliance market grows 0 to 5%, as we have previously discussed. Moving on to geographies. We saw double-digit revenue growth across all regions, with the Americas growing 13%, EMEA up 18%, and JPAC growing 17%. We were particularly encouraged by the volume of large deals we closed, with some notable large deals in EMEA and JPAC. For example, we had our largest deals ever in both EMEA and JPAC this quarter, each in excess of $50 million. As Nikesh noted, these deals demonstrate the broadening of our large deals success from North America to our international regions. Also, many investors have had questions about the US federal market. We have had prudent expectations in this market this year, and we saw stable federal business in Q2. Much of our federal business is tied to renewals and existing programs with long-standing funding. During the quarter, we also received FedRAMP high authorization across our network, cloud, and security operations platforms. We now have the most comprehensive suite of AI-powered cybersecurity solutions authorized for use in federal networks at the high impact level. Total RPO grew 21% to $13 billion at the high end of our guided range. Our current RPO grew 17% to $6.1 billion. The average duration of new contracts remained at approximately three years. It did trend towards the high end of our historical range in Q2, based on our performance in large platformization deals, particularly customers making longer-term commitments to XI App. Our NGS ARR again delivered strong growth, growing 37% finishing Q2 at $4.78 billion, and was driven by the strength across our advanced subscriptions, SaaSII, and Cortex. Moving down the income statement, gross margin of 76.6% was down slightly as we continue to see the impact to some of our newer SaaS offerings that are growing quickly but have yet to achieve scale. Also, we had some costs in Q2 related to inventory and product transitions that were higher than typical, and we don't expect that will recur in the second half of the year. It is worth noting we have been transitioning our contract manufacturing facility in Texas as our primary manufacturing and fulfillment center. Not only to enable scale and innovation in our appliances, but also to take advantage of our foreign trade zone that can help mitigate tariffs on products we ship to international destinations as we assemble and manufacture all of our firewall appliance products in the US. More broadly, we continue to see efficiencies across the company as we focus on driving profitable growth. We saw operating expenses as a percentage of revenue decrease by 120 basis points as we benefited from scale in our business model and initiatives as a part of continuing to build our culture of efficiency. We delivered $0.81 of diluted non-GAAP EPS and a diluted GAAP EPS of $0.38, continuing to grow along with our overall profitability. As a reminder, in the year-ago period, we had a significantly positive impact to GAAP EPS from the large $1.5 billion release of tax valuation allowance that happened only in fiscal 2024. We generated adjusted free cash flow of over $509 million in Q2. On our balance sheet, you will see that our debt balance came down by over $100 million as we continue to see early conversions of our convertible debts, which occurred at the discretion of the debt holders and was settled by us in cash and equity. In 2025, our remaining debt of just over $500 million matures in June, continuing to see some early conversions. We did not repurchase any shares in Q2, and our buyback strategy remains opportunistic. We have $1 billion in authorization remaining through December 2025. As Nikesh mentioned, we are pleased with the momentum we are seeing in our platformization strategy and the outcome in driving our financial results. I wanted to update you on what we are seeing a year into this strategy. As you all no doubt remember, we announced our optimization strategy a year ago. Over the last twelve months, we've learned from our success and adapted where it made sense. We launched a number of structured sales programs to jump-start this initiative. Our goal was to remove friction related to technology risk and budget challenges for the customer. We have now embedded these practices into how we do this. A year in, we have seen both the industry rally around this approach as well as some of our key ecosystem partners put significant resources behind platformization. This has helped leverage our own investments on the sales and marketing side and brings us closer to enterprise accounts where ecosystem partners have strong relationships. Many of our large platformization deals have been pursued and closed with global system integrators. With these joint successes, partners collectively are putting more resources behind platformization. When we initially announced platformization, we had piloted the program, helping us build conviction in our aggressive launch. Predating our broad announcement, some of our top reps were driving deals with the principles that embody platformization. A year in, we have seen rapid participation significantly increase, with approximately a third of our sales reps having already participated in a new platformization deal win in the last twelve months since we launched our accelerated strategy. Lastly, when we launched the program, we had assumed the platformization would enable us to increase our ARR per customer. As you can see in some of the large deal highlights that Nikesh covered, we have seen success signing larger deals and further expanding our ARR among platformized customers. As you can tell from both the tone and some of the details that we provided, we are very happy with our progress here. I'll reiterate what Nikesh noted last quarter and earlier: our biggest learning is that we should have made this move earlier. Now turning to the bottom line. Our confidence in future operating margin expansion is rooted in our visibility to continued leverage across our P&L. As Nikesh mentioned, we've seen some encouraging results from our AI-based initiatives across multiple areas of the company that give me greater confidence in our ability to drive leverage. I wanted to provide you with an update on some of these AI-based initiatives on what we're seeing so far. In the areas that we have focused on, we've seen meaningful efficiencies that manifest as lower spending, enabling us to drive incremental innovation, or absorb expected increases in volume without additional spending. One of our first AI-based initiatives was focused on our employee-facing processes. In the past, we have leveraged contractors in various business processes in IT. We are on track to reduce this contract labor by about 50% as we close out fiscal 2025, which will result directly in operating expense savings. In our global customer support business, we've leveraged an internally developed Copilot to assist in case resolution. So far, we have seen our support Copilot used in about 85% of cases in network security, which is where we first rolled out this technology. We're seeing approximately a 50% reduction in the time to resolve cases. This results in a better experience for our customers and also our team is being able to absorb more case volume while adding less headcount than in the past. Lastly, we are deploying Copilot tools for our developers early and are seeing some exciting results. We've recently deployed the technology to all of our engineers. These and other initiatives that are still in their early stages give us consistent outcomes and that gives me more confidence in our tangible benefits to our business, including our cost structure. Before I turn to guidance, we have had a lot of questions about how we get comfortable with the sustainability of our cash generation given some of the transitions happening in our business. We began to see an increase in deals with deferred payments in fiscal year 2022 and have seen a significant increase driven by larger transactions, particularly in our SaaS offerings over the last three and a half years. As we have absorbed an increase in deferred payments, our visibility into our free cash flow each year has increased. In fiscal year 2024, when we entered the year with $1 billion in deferred payments scheduled for the year, that was 32% of our fiscal year 2024 adjusted free cash flow. This year, that amount increased to $1.4 billion and our visibility increased to 41% of our expected adjusted free cash flow. Looking forward, we expect to enter fiscal 2026 with $2 billion in deferred payments scheduled for the year, further increasing our visibility into free cash flow in fiscal year 2026. We've progressed substantially over the last several years through the transition of deferred payments. We've also spent significant time ensuring that we're balancing this transition with other uses of cash and opportunities for cash flow optimization. Because our appliance bookings and smaller bookings predominantly are paid upfront, and many of our large transactions already utilize deferred payments, we believe we can manage the trend towards more of our larger transaction bookings utilizing deferred payments as we have done over the last several years. Consequently, our expected increasing profitability as we scale and these financial dynamics give us improved confidence in our free cash flow generation. Our confidence holds for fiscal year 2025 where we continue to expect 37 to 38% adjusted free cash flow margin as well as our cash generation beyond this year. We are comfortable that we can generate adjusted free cash flow margins for fiscal year 2026 and fiscal year 2027 of greater than 37%. As a reminder, we do not guide free cash flow on a quarterly basis, and we do see year-to-year fluctuations in our cash flow. In fiscal year 2025, relative to prior years, we expect to see fluctuations in seasonality driven by the timing of deferred payments from customers, the timing of bookings within the year, and the timing of cash tax payments. But this year, we expect relative to the market that more of our free cash flow will come in Q4. With that, let me turn to guidance. For fiscal year 2025, we expect NGS ARR to be in the range of $5.52 to $5.57 billion, an increase of 31 to 32%. Remaining performance obligation of $15.2 to $15.3 billion, an increase of 19 to 20%. Revenue to be in the range of $9.14 to $9.19 billion, an increase of 14%, operating margins to be in the range of 28 to 28.5%, diluted non-GAAP EPS to be in the range of $3.18 to $3.24, an increase of 12 to 14%. And adjusted free cash flow margin in the range of 37 to 38%. For the third fiscal quarter of 2025, we expect NGS ARR to be in the range of $5.03 to $5.08 billion, an increase of 33 to 34%. Remaining performance obligation of $13.5 to $13.6 billion, an increase of 19 to 20%. Revenue to be in the range of $2.26 to $2.29 billion, an increase of 14 to 15%, and diluted non-GAAP EPS to be in the range of $0.76 to $0.77, an increase of 15 to 17%. We've included our typical modeling points in the presentation for you to review. Before I turn back to Walter for Q&A, we will roll one more video.”