Palo Alto Networks, Inc (PANW) Q3 2023 Earnings Call Transcript

Palo Alto Networks, Inc (NASDAQ: PANW) Q3 2023 Earnings Call dated May. 23, 2023

Call participants:

Walter Pritchard — Senior Vice President, Investor Relations and Corporate Development

Nikesh Arora — Chairman and Chief Executive Officer

Dipak Golechha — Chief Financial Officer

Analysts:

Saket Kalia — Barclays — Analyst

Hamza Fodderwala — Morgan Stanley — Analyst

Lee Klarich — Chief Product Officer

Brian Essex — JP Morgan — Analyst

Brad Zelnick — Deutsche Bank — Analyst

Andrew Nowinski — Wells Fargo — Analyst

Matt Hedberg — RBC Capital Markets — Analyst

Gabriela Borges — Goldman Sachs — Analyst

Adam Tindle — Raymond James — Analyst

Gregg Moskowitz — Mizuho Securities — Analyst

Shaul Eyal — Cowen — Analyst

Presentation:

Walter Pritchard — Senior Vice President, Investor Relations and Corporate Development

Good day everyone and welcome to Palo Alto Networks’ Fiscal Third Quarter 2023 Earnings Conference Call. I am Walter Prichard, Senior Vice-President of Investor Relations and Corporate Development. Please note that this call is being recorded today, Tuesday, May 23, 2023 at 1:30 PM Pacific Time.

With me on today’s call are Nikesh Arora, our Chairman and Chief Executive Officer, and Dipak Golechha, our Chief Financial Officer. Following the prepared remarks, our Chief Product Officer, Lee Klarich will join us in the Q&A session. You can find the press release and other information to supplement today’s discussion on our website at investor.paloaltonetworks.com, while there, please click on the link for events and presentations, where you will find the investor presentation and supplemental information.

During the course of today’s call, we will make forward-looking statements and projections regarding the company’s business operations and financial performance. These statements made today are subject to risks and uncertainties. We assume no obligation to update them. Please review the press release and our recent SEC filings, to see these risks and uncertainties. We will also refer to non-GAAP financial measures. These measures should not be considered a substitute for financial measures prepared in accordance with GAAP.

The most directly-comparable GAAP financial metrics and reconciliations are in the press release and the appendix of the investor presentation. Unless specifically noted otherwise all results and comparisons are on a fiscal year-over-year basis. We also note that management is participating at the Bank of America Global Technology Conference on June 6.

I will now turn the call over to Nikesh.

Nikesh Arora — Chairman and Chief Executive Officer

Thank you for joining us.

Operator

Good day everyone and welcome to Palo. It’s a bit of a little to repeat AI action there.

Nikesh Arora — Chairman and Chief Executive Officer

Thank you, Walter. Good afternoon, everyone, and thank you for joining us today for our earnings call. As you can see once again. Our teams have delivered, a balanced quarter between our top and bottom-line performance in the current macroeconomic environment.

In Q3, our billings through 26% year-over-year, and revenue grew 24%, while RPO grew ahead of these up 35%. Our Q3 non-GAAP operating income and our trailing 12 month adjusted free cash flow, both grew about 60% year-over-year, while we achieved our fourth consecutive quarter of profitability on a GAAP basis.

Let’s talk about the macroenvironment. The overall macro trends of cautious spending, deal scrutiny and constant value consciousness persist. Moreover, the behavior continues to be more widespread across a larger swath of our customers. Against this backdrop, we have been staying ahead with rigorous execution.

We’ve increased our own deal scrutiny, gotten ahead of the challenges and continue to sharpen our business value focus while demonstrating superior security outcomes to our customers. From a technology trend perspective, there is no significant change. The teams we have seen around, cloud adoption, automation and hybrid work continue with minor variations.

Network transformations, albeit with long cycles continue to be undertaken because they offer cost-savings and are part of the modernization stack for most customers as they go down, their cloud and network transformation journeys. This in-turn continues to drive a sustained demand for Sassy and hardware and software firewalls.

As we have shared before, the theme of consolidating around platforms continues to come up and we are well-positioned to offer solutions in this regard. Needless to say, in the last three months, Chat GPT and generative AI have revived interest in AI as a technology. As we have always maintained, AI is a data problem and security is a data problem and has an interesting — AI has an interesting role the play in security.

Both for its ability to help deliver superior security outcomes in near real-time. and unfortunately the potential threat associated with AI being used to generate tax. We have and continue to work on these problems, we should talk more about this today. On the other hand, it continues to see limiting limited underlying growth in hardware in the industry, whilst the supply-chain crisis and its effects at all but over there is a shift that the crisis created[Phonetic]. We have seen a higher appetite for software-based solutions and networking and higher appetite for cloud deliver FormFactor’s. This is particularly salient to the current capex constrained environment.

On the advisory front, there seems to be no impending recession and threats. Increased cloud activity in connectivity continues to drive the threat environment. This is best illustrated by recent findings in the seventh instalment of our Unit 42 cloud threat report. It still takes the average security team approximately six days to resolve a security alert. And contrast it only takes a threat actor, a few hours to exploit the newly discovered vulnerability.

While over 7,000 malicious versions of open-source software packages were circulated in 2022, less than a quarters of packages are source properly to ensure a clean software version is incorporated into a typical customers code base. Regulatory interest continues to rise as prevalent across multiple governments there is sustained activity around incremental regulatory mandates and executive orders to create awareness around cyber security. This is true not only at the government level, but also as company’s Board of Directors are bringing additional oversight and drive an alignment of accountability for cyber security, this requires incremental organizational focus and investment by our customers.

On the macro front, customers anticipate that global growth may slow. Some are grappling with rising capital costs and are watching their bottom-lines more closely, this means looking for efficiencies in their business. But then cyber security, complex architectures and long vendor rosters have come into focus and many customers see this as an opportunity to simplify and drive consolidation. Five years ago, when I highlighted the need for platform architecture and consolidation, the idea was met with some resistance, but over the last few years our industry-leading solutions, three platform approach has continued to take hold and has allowed us to provide a much-needed option for simplicity, a modern stack and better security outcomes for our customers.

I mentioned earlier that our customers engaging in more scrutiny of deals and value, resulting in robust discussion internally and with us. We continue to work hard to stay ahead of deal cycles engaging the CFO and procurement departments. The cost of money continues to become a topic of conversation as customers enter into larger and longer-term relationship with us, some also seek more flexible business trips. A strong balance sheet allows us to accommodate customers’ while we maximize our medium-term cash flow.

Let’s turn to efficiency and operations. As we started this fiscal year, we pivoted our efforts and focused our effort and doing more with less. Our teams responded effectively. Coupled with the winning the supply-chain crisis, we have been able to adapt our operating model significantly. Dipak will get into specifics, but it suffice to say, we have found a new rhythm and at our scale we believe we can continue to drive better margins from our business. We’ve achieved this through selective hiring in our customer-facing teams as well as streamlining our go-to-market efforts, in addition to hiring for key innovation areas, which we expect to continue to do. These efforts are self-evident in our higher Q3 operating margins and our increased operating and free cash flow margin guidance for the year.

We continue to see platformization in cyber security. I talked about consolidation earlier, the key part of our thesis about networks has always been to drive superior cyber security outcomes for our customers, to do that we need a robust portfolio that works both individually and cohesively to reduce the burden on our customers, who have to stitch together disparate cyber security products.

We’ve had to navigate this fine line with our customers. We continue to see the benefit of this approach and think we are in a multi year trend. We have the opportunity to do to security, what we have seen, done in financial software, HR software or CRM where customers have adapted to platforms, due to the inherently superior benefits from data integrity, integration, seamlessness and outcome orientation. As they say, the proof is in the pudding, you can see our success here, driving larger platform transactions. Across the board the size of the transactions we are signing is increasing. This is evidenced by booking from transactions valued at over $1 billion, $5 million and $10 million in third-quarter, which are up by year-over-year by 29%, 62%, 136% respectively.

We see a similar trend in cohorts of our customers, for example, when we look at the average lifetime value for our 200 largest customers, we seen steady growth of 30% plus over the last three years. When we look at purchases of our platforms, amongst the global 2000, we see now that 53% of our customers brought a product in all three platforms of Startup, Prisma and Cortex, up from 48% a year-ago and 33% two years ago. We see this as a continuing trend. It convinces us that the opportunity to impact outcomes for our customers is large, if you can get this right. We see the path to continued success with large customers and multiproduct expansion in our installed-base.

I’ll now update you on our three platforms starting with network security. We are the comprehensive Zero Trust Network Security Company.

This quarter, we were proud to be named a new leader in Gartner’s most recent Security Service Edge Magic Quadrant. This recognition is app as our teams have been delivering significant innovation and seeing stronger customer adoption and Sassy four years. This in addition to our leadership position, SD-WAN, makes us the only SaaS vendor industry to be named a leader in the Gartner SASE and SD-WAN Magic Quadrant.

Add to that, our leadership position in-network firewalls and our number-one market-share position virtual firewalls. We are the only vendor with clear leadership across Zero Trust Network Security. This leadership across the network security category is a testament to our ability to drive significant innovation in new markets, while maintaining our leadership in core markets and offering this innovation as part of our cohesive platforms.

Let’s talk about Sassy. Sassy remains one of the fastest-growing markets with all the cyber security. Our ARR is growing over 50% at-scale. We have surpassed 4,200 customers in Q3, our success has spread across all three major geographies, as highlighted by large deals in each of these territories in Q3.

Let me tell you about three of these notable wins. First, a global beverage company with U.S. headquarters signed the transaction, north of $30 million, which includes $24 million of Sassy for complete Sassy transformation that included Prisma Access Prisma SD-WAN and our Adam, our autonomous digital experience management for tens of thousands of employees.

Second a Japan based technology company signed an eight-figure transaction to modernize its network and network security, after an extensive POC. Before standardizing our SASE, the customer replaced its legacy firewalls and other network security capabilities and standardized on our next-generation firewalls, driving a full Zero Trust network strategy.

Finally, our European technology companies signed a high seven figures as deal that was part of an overall transaction to Palo Alto Networks of once again. Nearly $30 million in total value the customer bought from us because of our multiple network security form factors in the broader transaction, we added capabilities such as IoT and fully adopted our core network security subscriptions.

You all might remember at the beginning of this fiscal year. As part of our scaling efforts. We combined our SASE sales organization into our core sales organization. Drivers here that we saw SASE demand going mainstream and we saw encouraging signs that our core sellers could sell, the more complex offering. After three quarters of executing as a combined organization. We’re delighted to report that over 80% of our core reps participating in the creation of Prisma SASE pipelines as we enter Q4.

Q3 was a strong quarter of innovation, highlighted by our AI-powered SASE. launch. This flagship releasing includes capabilities to enable organizations to automate their increasingly complex IT and network operation center functions with AIOps. It improves monitoring for networks and after the branch office and significantly improves integration with IoT Security.

Moving over to our firewall business. Rather than SASE, the future of network security is clear to us, it is centered around software and while we have led and expect to continue to lead the hardware appliance market for many years. Software and cloud-delivered form factors have been an increasing focus since I joined as CEO. There are multiple reasons why the shift to software is accelerating. In the changing macro-environment, customers are more challenged in their capex budgets, which often fund appliance purchases, as a result, the interest in software and cloud-delivered form factors remain high. This is especially true when type two strategic initiatives around cloud adoption. Illustrating this, we saw a significant uptick in customer requests to evaluate our virtual firewall offering at the beginning of the pandemic.

Customer interest in VMs have also sparked by supply-chain challenges, where we saw evaluation sustain. We continue to see primarily net-new demand for software and cloud-delivered form factors, however we are seeing more appliance replacements been planning for this trend to continue and possibly accelerate. Beyond the strength, I already covenant SASE, we saw VMC’s deals over $1 million more than double in Q3, including an eight-figure deal we signed with the government agency where they moved from a primarily appliance centric model the VM series, that they fully leverage public-cloud as their primary infrastructure.

This year so-far, our VMC’s bookings are up more than 40% year-over-year and it grew over 55% in Q3. Most investors have equated, our product revenue with hardware. However, given the drivers. I have mentioned here, this has been rapidly shifting. Software now contributes 30% of our product revenue. This is up from about 10% three years ago. We expect this trend to continue and as Dipak would remind you, bookings from our VMC and SASE transactions are recognized as revenue, more over-time then on appliance booking.

Given the conversation about AI. As I mentioned, there is a renaissance in artificial intelligence driven by significant advances in large language models, the development of more powerful and efficient computing, the broad availability of large volumes of training data, as a result, we have all seen some of the fastest innovation cycles and launches of unique application last several months. At Palo Alto Networks, we have been focused on this technology for many years and our efforts have been accelerating over the last two years.

The first to introduce machine-learning capabilities as part of our Wildfire offering, seven years ago. In the ensuing years, we added AI and machine-learning capabilities across our network security portfolio and has been a critical driver of our innovation and differentiation in the market. In 2020, we introduced the industry’s first machine-learning power next-generation firewall where machine-learning detection and move-in line to prevent zero day attacks. Since then we have overall, nearly all of our security subscriptions with advanced AI capabilities, DNS security, Advanced URL filtering, Advanced Threat Prevention, Advanced

Wildfire, all harnessed machine-learning for line detection and prevention of zero-day attacks. This means even new attacks that have never been seen before are blocked at the very first attempted used by an attacker.

Additionally, we applied AI to IoT Security to discover identify and secure IoT devices and most recently it was expanded to cover both medical IoT and OT securities needs. We had a signature release in SASE that included AI-powered autonomous digital experience management in addition to leveraging the AI SD-WAN as well as AI-powered fishing prevention. In short, we have really been accelerating the application of AI to our network security stack and is one of the most mature application of AI in the security industry today.

We are not only ahead in investments in AI and machine-learning as a differentiate in our products, but these investments have driven tangible customer benefits. In a typical day we analyzed, nearly 750 million, yes 750 million new unique telemetry objects worldwide. This includes files, URL, domains, DNS connections and other signals. Our AI models analyze this data and everyday we see 1.5 million new attacks that have never been seen before. We take this new insights and add them to all the other things we have already know about and we use them to block 8.6 billion attacks across our customer-base daily. This forms the foundation, how we do better security across our network security platforms and this is how we continue to get better and better at detecting zero-day attacks and being in a position actually to prevent those attacks as well.

Moving on to Prisma Cloud. Our early deal in Prisma Cloud continues to strengthen. Most of our competitors continue to provide only point products, while customer demand continues to shift towards the platform approach within this connecting the left-side to the right-side, otherwise known as core to cloud is becoming paramount. As an example of our platform success, we continue to see strong usage of our cloud security posture management and cloud workload protection offerings. Customers are increasingly standardizing on these foundational modules, but 49% of Prisma Cloud customers using both see CSPM and CWP.

This quarter Gartner noted that in 2022, only 25% of enterprises buy these capabilities from a common vendor. We expect this will increase to 60% of enterprises by 2025. At the same time, we continue to stay ahead of the industry’s need for new capabilities, but just core to our commitment as a platform, we are on-track to launch our 11 modules as we innovate, cyber security.

We’re also focused on driving industry certification in Prisma Cloud, in this last quarter we were accepted by the joined Advisory Board and reached ready status for FedRAMP High, the first for a cloud security platform. This comes in addition to other certifications, we have achieved including recently-announced Prisma Access achieving Impact Level five or IL5 provision authorization. IL5 is the highest unclassified authorization level for DoD agencies under the FedRAMP process.

We continue to see steady growth in consumption of Prisma Cloud credits, which were up 44% year-over-year in Q3. Our platform is key to the steady. We continue to see customers increase their consumption as they deploy workloads and strategically leverage the public-cloud at the core to IT and business strategy. This includes migrating workloads to the hyperscale cloud, building new application in the cloud and leveraging new cloud services, that also deploying new Prisma Cloud modules, of which we currently have done.

The number of customers using two or more Prisma Cloud modules grew 37% area, while the number using four or more modules, almost doubled. We now have one in five of our Prisma Cloud customers using our cloud code module across our capabilities and infrastructure, good SCA or Software Composition Analysis and Seacoast management as the leverage, the more efficient approach to detect an immediate security issues as core decision for cloud applications before it reaches production.

Now moving on to Cortex. This has been a net-new business for Palo Alto Networks. A business which was born to believe that we need to bring next-generation innovation to the SOC and all the related activities, just like we have got firewall business years ago. We’re delighted to announce that Cortex achieves a $1 billion booking milestone in the last 12 months.

Cortex was born in 2019 and since then, we have focused intensively on ensuring we have industry-leading capabilities across endpoints SOC automation and tax surface management. The last four years, we have residual leading player in automation, application of AI, attack surface management continue to climb the charts of the XDR industry as one of the most technically capable solutions.

We are particularly proud of the fact that XDR has consistently led security efficacy. XDR delivered 100% prevention at 100% detection across 19 evaluation steps conducted by Mitre and has had the highest-quality deductions of any part in the latest round of revaluations.

On the back of our hardware driving these capabilities, we have built Cortex business to or $1 billion in bookings over last 12 months, as I mentioned. Is up from $150 million in annual bookings when we launched Cortex as a business in 2019. As we look-forward, these three core capability in Cortex are precursors to leading the next-generation autonomous security operation center which pulls this all together, it was launched publicly a few months ago called XSIAM.

Our next-generation SOC platform XSIAM bill totally on AI is on-track to be our fastest-growing new offering. XSIAM represents another significant opportunity within Cortex, as we fulfill our vision around autonomous security operations. Like network security or a decade ago security operations have evolved slowly. XSIAM is now paving the way for us to drive AI driven security transformation outcomes.

After launch in late Q1. Our design made significant commercial commitments to XSIAM. We followed that up in Q2 by broadening our go-to-market and achieving early success with $30 million in bookings. This quarter, we established momentum for XSIAM with quarterly bookings more than doubling sequentially as we signed our first eight-figure deal and transactions across all three of our major geographic theaters with this product. We remain optimistic about the prospects of XSIAM. With the product, the center of customers security operation center transformation. We’re seeing XSIAM give us access to a broader swath of our customers budgets based on what we have achieved this quarter and what we see in the pipeline, we’re confident we can achieve our goal of $100 million in bookings, faster than we originally anticipated.

This will make it one of the fastest-growing security platforms from Palo Alto Networks. Not only does XSIAM bring together the core capability to Cortex also brings AI driven outcomes to customers. This settles a new approach to security, an outcome-based approach. The inspiration, came to us from our own SOC where we were woefully slow in our own meantime remediate five years ago, IMTT wasn’t days, which in today’s administrative environment is unacceptable.

With that insight mine, we were able to collect billions of events and then using AI, reduces down to just over 100 alerts from a handful of incidents from here. Continuing to use AI and automation, we are able to investigate and respond while detecting incidents, a matter of seconds that responded high-priority ones in under a minute. This is one of the most compelling outcome stories in security. So far in the early customers that are farthest along on this journey with us.

We are seeing the benefits accrue in a similar way, we process over three and half petabytes of data a day across the customer state of XDR and XSIAM. From here, we apply approximately 1,000 AI models to detect attacks. We then leverage smart scoring these automation to accelerate investigation response. We are seeing early indications that customers are able to see reductions meantime to respond from days or weeks down hours or minutes, just like we did. Stepping back, we are fortunate to be focused and Palo technology market that is more resilient. Our customers depend on their partnership with us to address challenges that are only becoming more sophisticated.

The market is tough and definitely more challenging than when we started the year. I am proud that our team has executed through this environment. Our strategy focused on having industry-leading capabilities, helping customers simplify their architectures and consolidating vendors is working.

Given our diverse portfolio of products, some of our products are growing faster in any given quarter, others are moderating, combined you see this portfolio benefit in the top-line results we reported today. We also see significant opportunity as we begin to embed generated AI into our products and workflows.

There are three ways that our investment is degenerative AI will benefit us first. Generative AI will help us improve our core under the hood detection and prevention efficacy by further advancing the state-of-the art AI and ML in our products that I spoke of today. Second, it will manifests itself and how our customers engage with our products.

We will leverage our large cyber security dataset and tell them that you to provide a more intuitive and natural language driven experience within our products, which will improve NPS and drive efficiency benefits for our customers. And finally. As our employees leveraged generative AI will drive significant efficiency in our own processes and operations across the enterprise.

We intend to deploy proprietary Palo Alto Networks security in the coming year and are actively pursuing multiple efforts to realize these three outcomes. Our portfolio approach companies oral scale and focus and efficiency have enabled us to drive significant leverage.

We are well-ahead of schedule here and we’re not done. As we continue to execute our plans, we see additional opportunities for efficiency. With our visibility into incremental leverage. We continue to see the operating profit levels in our fiscal year 2023 guidance as a baseline to build upon.

With that. I will turn the call over to Dipak, to discuss the details of Q3 and our guidance.

Dipak Golechha — Chief Financial Officer

Thank you, Nikesh and good afternoon, everyone. For Q3, revenue was $1.72 billion and grew 24%. Product revenue grew 10%, total service revenue grew 29% with subscription revenue of $838 million, growing 31% and support revenue of $495 million, growing 25%. Moving onto geographies, we saw revenue growth across all theaters with the Americas growing 24%, EMEA up 23% and and JPAC growing 24%.

The strength of our next-generation security capabilities continues to drive our results. With NGS ARR or $2.6 billion growing 60%. We saw strength across all three platforms, network security, cloud security and security operations. We delivered total billings of $2.26 billion, up 26% and above the high-end of our guidance range. Total deferred revenue in Q3 was $8.1 billion, an increase of 38%.

Remaining performance obligation, or RPO was $9.2 billion increasing 35% with current RPO, just under half of our RPO. Our non-GAAP earnings per share was significantly ahead of our guidance, growing 83% year-over-year. We again delivered strong cash-flow in Q3 with trailing 12 month adjusted free-cash flow of $2.8 billion, growing 68% year-over-year.

Moving on to the rest of the financial highlights. Non-GAAP gross margin of 76.1% was up 320 basis-points year-over-year, driven mainly by a higher software mix reduced supply chain costs and some efficiencies and customer support. Our non-GAAP operating margin of 23.6% increased 540 basis-points year-over-year. In addition to improving gross margins, slower headcount additions contributed to our operating leverage. Based on our performance in Q3, we are raising our fiscal year ’23 non-GAAP operating margin guidance. Non-GAAP net income for the third-quarter grew 86% to $359 million or $1.10 per diluted share. Our non-GAAP effective tax-rate was 22%, we again delivered GAAP profitability, in Q3, with GAAP net income of $108 million, or $0.31 per diluted share.

Now turning to the balance sheet and cash-flow statement. We ended Q3 with cash equivalents and investments of $6.7 billion. It is worth reminding investors that our 2023 convertible notes will mature on July 1st 2023. And we expect to settle the principal obligation with cash on our balance sheet of $1.7 billion. The excess will be settled in shares. These shares have previously been accounted for in our non-GAAP diluted shares outstanding. Q3 cash-flow from operations was $432 million with total adjusted free-cash flow before $101 million this quarter.

Stock-based compensation declined by 90 basis-points as a percentage of revenue sequentially on a year-over-year basis. Stock-based compensation was down 220 basis-points as a percent of revenue. As we look-forward, we remain focused on profitable growth. At our Analyst Day in 2021, we outlined plans to drive 50 basis-points to a 100 basis-points of margin expansion annually.

In fiscal year 2023 and fiscal year 2024. In the months leading up to this profitability commitment, we focus in-depth on optimally balancing investments in our business and opportunities to capture efficiencies and benefit from our growing scale. As a result, we came out of this effort with significant conviction in meaningful operating leverage.

In fiscal 22, we started implementing these plans but faced supply-chain challenges that unexpectedly drove higher costs. While the supply-chain was uncertain as we enter fiscal year 2023, we also saw signs of changing macroeconomic environment. As such it was the right time to accelerate our efficiency plans. We focused our head count additions in sales and R&D to fuel our medium-term growth prospects. Outside of these critical investment areas, we’ve leveraged our scale and employ technology to accommodate our growth in other business areas. Additionally, supply-chain challenges have continued to abate at an increasing pace, helping to improve our gross margin. The result has been a significant acceleration in operating margin expansion through the first three quarters of fiscal year 2023 and also increases to our operating and free-cash flow margin guidance through the year.

As you see with our guidance for non-GAAP operating margin in fiscal year 2023 when least 300 basis-points ahead of the midpoint of our fiscal year 2024 range but we imply back-in 2021. We now see our fiscal year 2023, non-GAAP operating margins as a baseline to build-on in the future.

Moving on to guidance for the fourth fiscal quarter of 2023, we expect billings to be in the range of $3.15 billion to $3.20 billion, an increase of 17% to 19%. We expect revenue to be in the range of $1.937 billion to $1.967 billion, an increase of 25% to 27%. We expect non-GAAP EPS to be in the range of $1.26 to $1.30, an increase of 58% to 63%.

For the fiscal year 2023, we expect billings to be in the range of $9.18 billion to $9.23 billion, an increase of 23% to 24%, we expect NGS ARR to be in the range of $2.80 billion to $2.85 billion, an increase of 48% to 51%. We expect revenue to be in the range of $6.88 billion to $6.91 billion, an increase of 25% to 26%.

We expect product revenue growth in the range of 15% to 16% of fiscal year ’23, as we see supply-chain challenges normalize as we exit fiscal year ’23. The fiscal year ’23, we expect operating margins to be in the range of 23% to 23.25%. We expect non-GAAP EPS to be in the range of $4.24 to $4.29, an increase of 69% to 70%. We expect our adjusted free cash flow margins to be 37.5% to 38.5% and we expect to be GAAP profitable for fiscal year 2023, including in Q4.

Additionally, please consider the following modeling points. We expect our non-GAAP tax-rate to remain at 22% for Q4 ’23 and fiscal year ’23, subject to the outcome of future tax legislation. The Q4 ’23, we expect net interest and other income of $50 million to $55 million. We expect Q4 diluted shares outstanding, $326 million to $332 million. We expect fiscal year diluted shares outstanding $322 million to $324 million and we expect Q4 capital expenditures of $35 million to $40 million.

With that, I will turn the call-back over to Walter for the Q&A portion of the call.

Questions and Answers:

Walter Pritchard — Senior Vice President, Investor Relations and Corporate Development

Thank you, Dipak. To allow for broad participation. I would ask that each person ask only one question. Our first question will come from Saket Kalia of Barclays. With Hamza Fodderwala from Morgan Stanley on deck. Saket you’re muted. All right. Why don’t we go to Hamza.

Saket Kalia — Barclays — Analyst

Okay, can you hear me now. Yeah. Go ahead. Sorry, I didn’t been let me unmute. Thanks so much for taking the question here and nice job to the team executing in a very challenging environment. The cash may be a lot of good things to talk about, but I’d love to just double-click on the operating margin improvement here that you’ve seen and really a new baseline, that the team is creating going into next year, maybe the question is can you and Dipak maybe talk about what areas the team is — what areas the teams finding efficiency. And what are the opportunities for efficiency maybe going-forward as well? Thanks.

Nikesh Arora — Chairman and Chief Executive Officer

Thanks. So. I’ll prep and start as Dipak highlighted. Supply-chain crisis, all but over and there were some adverse impacts to gross margins by given by hardware. I think the product mix is in our favor as we go from hardware to software, our gross margins are way better on software than they generally are on hardware given software firewalls, are much, much more profitable for us.

Coupled with that. I think, what Dipak really has been driving for the last year as we flipped into the new macroeconomic environment has been a real focus on resource utilization, ROI as well as making sure we are focused on hiring only on step where it’s important. He also talked about streamlining sales forces. I remember, Saket, we have the conversation around making sure our SASE team is integrated with our core, which saved us hundreds of heads in terms of efficiency as well as driving more outcome and output from a SASE perspective.

Generally, those have been some of the key drivers, but Dipak. Did you want to add something.

Dipak Golechha — Chief Financial Officer

No, I think you covered it well. I think we’ve talked this before well — on Cloud, we scale well, as a company, right, and I think that’s across all the different elements of our P&L. I think the Nikesh has talked about the supply-chain, he talked about the OpEx. I’ll just also mentioned cloud-hosting and cloud consumption as we get bigger and we consume more, we have the ability to go back to our service providers, and try negotiate better contract. So. I think across all the areas of the P&L we scaled pretty well as a company.

Nikesh Arora — Chairman and Chief Executive Officer

And I think to your question in terms of where this goes as Dipak said, this is a new baseline. We think there is continued opportunity from here. And we haven’t even factored in the potential impact of Genetive AI. As you’ve been hearing all the conversation in the industry. We’re still working on it. We’re understanding it, we’re really looking at processes, but we believe there is a there – there, we think there will be an opportunity in the future to get more efficiency from Generative AI as we go-ahead and implement some of the capabilities through our organization.

So I think there is upside, both in the continued efforts of what Dipak has been driving for the last nine months and there is the sort of the icing on the top is the potential application of Generative AI as we can grow business over the next few years.

Saket Kalia — Barclays — Analyst

Got it. Well done. Thank you.

Nikesh Arora — Chairman and Chief Executive Officer

Thank you, Saket.

Walter Pritchard — Senior Vice President, Investor Relations and Corporate Development

Thank you. Next question is from Hamza Fodderwala from Morgan Stanley. With Brian Essex from JPMorgan on deck. Hamza go ahead.

Hamza Fodderwala — Morgan Stanley — Analyst

Hey guys, good evening. I hope you can hear me okay. Maybe a question for Nikesh and Lee Klarich, if he is around. Nikesh, on AI — you’ve clearly been thinking about this a lot, based on what I can tell from your twitter. But we were at RSA last month and…

Nikesh Arora — Chairman and Chief Executive Officer

Okay.

Hamza Fodderwala — Morgan Stanley — Analyst

While there’s a lot of opportunity around AI, there seem to be a lot of risks around data security, around sort the data that these models are trained on, so I’m curious as you had that AI-based conversation with your customers, how are you getting them comfortable around that to really leverage the full capabilities of AI to automate their sites.

Nikesh Arora — Chairman and Chief Executive Officer

I think there is two different parts of it. I think, one part is us using AI already in our products where we have been using it for a while is like a pattern recognition, look at what is telling us from a from a real-time analysis of data perspective, as I mentioned. We deploy over1,000 AI models to go look at what happened in next time, this all proprietary is happening in our instance, this is not an LLM that’s going out and getting framed.

This is a proprietary AI model used by Palo Alto Networks built by Palo Alto Networks being used for a specific use-case and adopts for security. Now, to the extent that we intend and we’ll deploy conversational AI in our models, we are working with every public model and OpenSource model out there to understand how can we build it, using our own proprietary data, I don’t Lee, did you want — can you elaborate on that please [Speech Overlap].

Lee Klarich — Chief Product Officer

Yes, of course. It’s very early in the large language module adoption that we’re seeing. And as you point out, there are a number of risks associated with them, particularly in enterprise use cases. We’ve already seen some examples where data has fed into large language models without the understanding how the data will be used in the data has been publicly — made public available even though was confidential. So it’s very clear that there sensitivity there, there’s also sensitivity from a security perspective, things like prompt injection attacks, data poisoning and things like that that have to be taken into account.

The — and so I think what we’ll see is the enterprise use cases of LLM’s will evolve a little bit more actually as they need to evolve a little bit more methodically and carefully to take the security challenges into account. At the same time though. It’s also important to recognize that they offer tremendous promise as Nikesh mentioned earlier, in terms of being able to help guide product adoption, product usage, to help enhance security capabilities and to drive greater efficiencies across the business.

Nikesh Arora — Chairman and Chief Executive Officer

I think to capital I think there is no doubt we will continue to deploy our proprietary AI models for XSIAM or front network security use cases are highlighted. We believe in our preliminary analysis over the last three months and driving a lot of these work streams, internally, that there is a there – there with Generative AI.

So we believe that we will be deploying Generative AI over the course of the next few months and we’ll talk more about it later event, but we think that has an opportunity both to significantly improve our customer efficiency and the efficacy of our products at the same time also to drive efficiencies within the way we run Palo Alto Networks.

I think last but not the least, which something you didn’t ask but I’ll say, separately Lee and his team have been working hard to see and look at the adverse impact that Generative AI could have in terms of adversaries using Generative AI to build new malware, during trying to attack our customers and there’s a lot of work we’re doing as well to make sure we are able to protect our customers against any such activity that is conducted using Generative AI.

Hamza Fodderwala — Morgan Stanley — Analyst

Thank you.

Walter Pritchard — Senior Vice President, Investor Relations and Corporate Development

Thanks for your question, Hamza. Next question is from Brian Essex with JPMorgan, followed by Brad Zelnick from Deutsche Bank. Brian go-ahead.

Brian Essex — JP Morgan — Analyst

Yeah. Hey, good afternoon and thank you for taking the question. And to follow-up on Saket’s comments, nice progression in operating margin here and it’s good to see cash-flow margin guidance, go up as well. If I could tick down — If you could maybe peal back a couple of layers on that core drivers of that cash-flow margin improvement and how sustainable it is.

We noticed that CapEx look like — it looks like it’s a little bit lower than you previously guided to. So just wondering, as we kind of look at that as a foundational metric to lean on for evaluation. How sustainable is that in as we kind of forecast operating margins going-forward, should that I guess gap between operating margins and cash flow. Margins remain relatively consistent going-forward.

Dipak Golechha — Chief Financial Officer

So, Brian, thanks for the question. Let me just start-off with like the biggest driver over the long-term is really just strength in your bookings, at least your billings and then it comes down, then the foundation really is your operating margins. That makes up the base that you can do on your cash.

There are multiple other factors but do recognize that when we came into the year. The interest rates were at a different level. We have had the benefit of higher interest rates, we’ve deployed a lot of our cash that we earned interest income. We’re not predictors of interest rates, but fundamentally, we believe that, that will continue to be a tailwind for our cash generation. And then last but not least, we do have PANFS, we have a certain amount of our business that we do structure and financing. Frankly that’s been broadly in-line with what we assumed at the beginning of the year, but those are really the drivers and we feel pretty comfortable on what we’re able to do with those different drivers in delivering on this.

Brian Essex — JP Morgan — Analyst

Great, thank you.

Walter Pritchard — Senior Vice President, Investor Relations and Corporate Development

Great. Thanks, Brian. Next question from Brad Zelnick of Deutsche Bank. Followed by Andrew Nowinski at Wells Fargo. Go ahead, Brad.

Brad Zelnick — Deutsche Bank — Analyst

Great, thanks so much for the question and nice job both to you, Nikesh, Dipak and the entire team. Nikesh my question is about M&A, which I feel like typically comes later in the call [Speech Overlap] I feel it’s such a great opportunity right now, what’s the hurdle to doing a large deal. And can you remind us how you think about transformative M&A and just related to that, your competitors naturally knock you on having grown through acquired innovation. Just to set the record straight, can you talk about how much a priority and a focus it is, to have a deeply integrated product.

Nikesh Arora — Chairman and Chief Executive Officer

Brad. I think first of all. I mean we study — you’re asking about transformational M&A. I think, I feel like somehow we have Palo Alto Networks, have been going through a transformation already for the last five years. Let me talk about it, the [Indecipherable] parts, One and I’d like to bust the myth of the notion that we’ve grown our innovation through M&A because pretty much the entire XSIAM product that we’ve built, which is now going to be one of the fastest platforms of Palo networks is homegrown, it was built by our team internally, it was designed, built and delivered by the Cortex teams. So I think it’s a disservice to them to say that some one of the fastest-growing platform being built at Palo Alto Networks was acquired.

Similarly, our next-generation firewalls or our SASE product — our SASE product for the most part is entirely homegrown, driven by the security capabilities that been built using our firewall as well as our virtual firewall business. I think majority of M&A has been focused on building our cloud security portfolio, but we felt where we needed to be assertive and be out there in the front and I would say auxiliary capabilities, whether it’s an automation with X or auxiliary capabilities on attack surface management.

So bottom-line, we’re very comfortable with the three platforms that we have and what we need to get done. I think we’ve been very clear about from an acquisition perspective, we look for product capability, where we can take product capability and attached that and make sure we can solve more problems for our customers that they’re looking at. So from that perspective. My view on M&A is consistent that we find something interesting and industry trend which is added incremental deck capability, we will do it.

I think from a transformational M&A. I think, we can transform this company and have continue to transform it to where it is based on our innovation and our balance of execution. I think we will continue to do that. I don’t think the market is particularly cheap yet, if you were to try and look for transformational M&A and I think it’s kind of a double edge situation, One, I think we continue to get stronger as we get execution under our belt, every country growing value as Palo Alto Networks.

And if some of the large players out there, end-up committing missteps. And we’ll go take a look at it but for now, I feel very comfortable with the position Palo Alto has in the industry. I feel very-very comfortable with the amount of cash we have on our balance sheet. I believe it is our job to keep our heads-down and keep executing because it’s a tough market, and I think one of the things, which was brought up just a minute ago. I think the opportunities from AI have not been fully comprehended by most enterprise businesses. I think we are going to undergo a transformation both as Palo Alto Networks as well as generally in enterprise software industry over the next 12 months to 24 months as we embrace Generative AI. I think that’s the real opportunity and challenge in front of us and I think half of the people out there will get it wrong and hopefully, we’re on the right-side of history.

Brad Zelnick — Deutsche Bank — Analyst

You’ve done a great job keep it up.

Walter Pritchard — Senior Vice President, Investor Relations and Corporate Development

Thanks for the question, Brad. Next question is from Andy Nowinski from Wells Fargo, followed by Matt Hedberg from RBC. Andy, go-ahead.

Andrew Nowinski — Wells Fargo — Analyst

Okay, thank you and congrats on a great quarter. So nearly every single vendor and nearly every single reseller we talk to says they’re seeing an elongation of sales cycles, yet you seem to defy those headwinds with massive growth in large deals and customers spending $5 million and $10 million with you. I guess, would you view this as an inflect — an important inflection point as it relates to sort of consolidation in that if you can drive large deals in this macro constrained environment, you could potentially see an acceleration of those consolidation trends when the macro improves.

Nikesh Arora — Chairman and Chief Executive Officer

Are you predicting a macro improvement. Andy?

Andrew Nowinski — Wells Fargo — Analyst

I certainly hope so.

Nikesh Arora — Chairman and Chief Executive Officer

Well look. I think first and foremost. I don’t want to leave you the [Indecipherable] with any impression that the macro is not hard. It is hard out there. I think everything you are hearing from resellers, some other people in the industry is true. Customers are spending more time paying attention to deals customers are taking longer, some are rightsizing deals, some are focusing things that are important, some are looking for financing, some want to pay annually. So all the effects that you talked about are true in the industry. And we see — recognize this towards the end of our first quarter and I’ll tell you what we’ve been we’ve been working at double time like literally the day Dipak, sort of shut the doors and us being able to book anything this quarter, we are out there hunting for next quarter.

We have a big number to hit this quarter. We’re out there in the field, we’re executing our teams are out there, so. As you probably appreciate there is no magic in the world around the fact that our quarter ended July 31st. There is no budget year end for any part of the world in July 31st. Is this a date which been created the Palo Alto finishes the year Q4 in July 31st, which means we have drawn has hard as we can to get business done by July 31st. We know that’s the end of our year, we know that’s the end of our quarter, our customers know that.

So what we’re doing is we’re getting ahead of it. We’re hoping that us getting ahead of it and continuing to rigorously execute is going to allow us to be able to improve our conversion rate and our conversion rates on our pipeline are down, guess what you drop more pipeline, therefore, your conversion rate that’s down still allows you to make the number that you promised the street.

That’s what we’ve been trying to do. And as I’ve said, the macro is hard and we’re going to keep trying to keep our heads-down and execute.

Andrew Nowinski — Wells Fargo — Analyst

Thanks Nikesh Keep up the good work.

Walter Pritchard — Senior Vice President, Investor Relations and Corporate Development

Great, thanks, Andy. Next question from Matt Hedberg at RBC, followed by Gabriela Borges of Goldman. Go-ahead, Matt.

Matt Hedberg — RBC Capital Markets — Analyst

Thanks a lot. My congrats again team, outstanding results. I guess, Nikesh or Lee. On the success you’ve seen thus far XSIAM, you noted — you essentially have full access to some budget right now. And I’m curious with some of the large deals you’re seeing, are these generally replacing legacy XSIAM vendors or are you actually generating new TAM that didn’t exist previously.

Nikesh Arora — Chairman and Chief Executive Officer

So, Matt, I’ll let Lee jump-in and talk about some of the specifics, but I’ll tell you what every one of these deals is it replacement of a legacy SIM or a data store. In addition, we do not sell XSIAM without our endpoint products, you have to buy Palo Alto Cortex XDR to deploy XSIAM because we believe the only way to have normalized, good source — single-source of truth data is deploy our endpoint product and then we use that as I showed in the AI funnel of how we can go cross correlate that and go drive security outcomes.

Matt Hedberg — RBC Capital Markets — Analyst

So, in every case, we are replacing an existing lender, but. I will tell you this SOC industry is upside-down. It was designed so-far to go understand when a breach happens to happened and trying to figure out how to remediated and those remediation times as I highlight are six days and now most modern attacks are in and out in under 12 hours.

So if you’ve got a SOC infrastructure, but it allows you to come up with what happened to you after six days, the bad actors have gone in and out in 12 hours. You have a mismatch. That is a problem, but can you highlight some of the key, key use cases where we have seen in the first 30 plus customer that we have what’s driven some of this transformation? Nearly. So XSIAM is replacing the SIM it’s service also replacing other tools in the SOC as well. Three is three core elements to how this is happening, the first is around data as you saw three and half petabytes a day is being adjusted and analyzed. Data is the key to driving good AI and XSIAM is specifically designed to be able to ingest large amounts of data across different data sources into an AI. Second is, how we drive AI-based analytics on that data, build to detect attacks in real-time. This is something that the traditional SIM industry was just not well-designed to be able to do. That is driving the meantime to detection that you’re seeing and then three is the integration of automation natively into XSIAM that allows us to drive the meantime to remediation down from what in the past used to be in many cases days, down to two hours and even minutes. And so, in all of the XSIAM deployments. We’re seeing it’s amazing how quickly we are seeing the outcomes that we saw in our own SOC when we deployed in operationalize XSIAM. I think lot of people [Speech Overlap] sorry Matt the only thing I’ll add this that over the last 15 years, what has happened is the cost and value equation in existing SOCs has diverse tremendous. So people are spending a lot of money collecting data and large data stores and they’re not getting adequate value out of it. And then I’m getting adequate security outcomes out of it, so. I think that is a big gap. That gap is something we’ve been we have built a to try and fill and now it really is very early days for us. I think the fact that we’ll get $200 million in a time span did you thought was aggressive less than that. I think tells us, there is a huge potential out there, which means you have to keep our heads-down, again keep building, keep executing and keep trying to solve the problems that our customers are presenting in front of us, but. I have a good feeling about this. [Indecipherable] Thanks.

Walter Pritchard — Senior Vice President, Investor Relations and Corporate Development

Great. Thanks, Matt. Next question Gabriela Borges of Goldman Sachs. With Adam Tindle from Raymond James on deck. Gabriel, you go ahead.

Gabriela Borges — Goldman Sachs — Analyst

Good afternoon, thank you. Either for Lee or Nikesh. I wanted to ask about your cloud security strategy and Prisma. Specifically with respect to how you think about the right balance of incentives that you give customers upfront to catalyze adoption. And then also how you think about the balance that top-down growth versus conogent growth given that DevSecOps, DevOps some of those tools seem to be driven by-product wide growth as well. Thank you.

Nikesh Arora — Chairman and Chief Executive Officer

Yeah, Lee. Answer that question.

Lee Klarich — Chief Product Officer

So one of the challenges that we’ve set-out to address with Prisma Cloud was this fundamental challenge in enterprise, cyber security, sort of the proliferation of point products, every time there’s a new security need there is a new product and then customers become the system integrator of [Indecipherable] point solutions and they spend more time trying to be the system integrator than they are actually getting the value from the products.

And so with Prisma Cloud, we’ve taken the unique approach of building a platform where we can deliver many different capabilities pre-integrated from the same-location. Now at the same time, we did that in the technical side, we also approached it from a sort of adoption side and I’ll call it the procurement side of having a single Prisma Cloud credit system that makes it really easy for customers to buy a level of capacity and then simply use it, to adopt, as much of the platform as they need and when they need.

And so we’ve it’s allowed us to focus more of our attention in terms of how we engage with customers and how the product works on. In-product adoption guided adoption of additional capabilities and enabling them to easily use more-and-more the services as they need them as opposed to having to go back and turned every module into a new transaction with the customer.

And as you saw from what Nikesh showed the new credit usage year-over-year going up about 44% year-over-year, but then also the number of customers, two or more three or more-for-more modules in the case of four or more almost doubling year-over-year shows how well that is working.

Walter Pritchard — Senior Vice President, Investor Relations and Corporate Development

Great, thanks, Gabriela. Next up Adam Tindle, Raymond James. Followed by Gregg Moskowitz, Mizuho. Adam, go ahead.

Adam Tindle — Raymond James — Analyst

Okay, thanks, good afternoon. I want to start by just acknowledging the progression in operating margin, it’s really impressive. The commitment to that being a baseline is a really important point. If I’m thinking about tomorrow, some of the distracting questions that might come up would be around product revenue. I think grew 10% year-over-year in Q3 and you had previously guided, the fiscal year to 10%, but if I saw on the slides, correctly. I think you’re now raising that to 15% to 16%.

So what’s driving that increase in-product revenue and the acceleration in Q4 despite the cautionary comments and anything we can think about in terms of puts and takes to product revenue. As we think about fiscal ’24, so we don’t get ahead of ourselves. Thanks.

Nikesh Arora — Chairman and Chief Executive Officer

Yeah. Adam, I think there’s two-parts to it. One is, as you will appreciate, we highlighted that software has begun 30% of our product revenue. So we whilst when you book a hardware firewall, you had dollar-for-dollar for revenue and software, you don’t get a dollar-for-dollar of revenue there is some part of an amortized value we get from our software firewalls and some part of our SD-WAN, which becomes part of our product revenue.

So we have to run harder on billings to be able to deliver product revenue in the context of software, but as I mentioned, our virtual firewalls, 55% this quarter, They grew at 40% for the year so-far. This is a tailwind, we had not expected, at the same time, the hardware as I mentioned, is not as strong as we’d expected.

So they balance each other out. But in balances in favor of software for now coming off a low-base of last year. So as a result, we have been able to improve our product revenue guidance, obviously it comes at a cost of services revenue, because some of our software has now have to work triple time to be able to deliver product revenue.

S I think that’s the context in which you should think about it overall, where there has been a draw from one-side and a partial give on the other side, on the product revenue. However, given our RPO is growing way ahead of revenue. It just means we are setting up a lot of revenue for future rainy day.

That sounds about right financial,

Lee Klarich — Chief Product Officer

[Indecipherable] rainy day area. The only other thing that I would maybe just add to that is simply the supply-chain dynamics that Nikesh talked about and in his remarks. I mean that does have some factors, but we really have been able to with a world-class team get ahead of the supply-chain reality and so that may explain some of the variability, you’re saying.

Walter Pritchard — Senior Vice President, Investor Relations and Corporate Development

Great, thank you, Adam. Next up, Gregg Moskowitz from Mizuho followed by Shaul Eyal from Cowen.

Gregg Moskowitz — Mizuho Securities — Analyst

Thank you. Can you hear me.

Walter Pritchard — Senior Vice President, Investor Relations and Corporate Development

Yes.

Gregg Moskowitz — Mizuho Securities — Analyst

All right. If a follow-up for Lee or Nikesh on Generative AI. So your comments and overland’s were helpful, but do you think Gen AI will tilt the scales in favor of Palo Alto and perhaps some other security vendors over-time or is it ultimately more likely to cause an even faster Game McCadden analysis between the vendors, and the attackers, how do you see this playing out?

Nikesh Arora — Chairman and Chief Executive Officer

Well, I think first and foremost. The benefit of Generative AI so-far is two fold right. One is its ability to summarize data and give you access to information much faster. Can I imagine a sales rep of Palo Alto having access at their fingertips, we’re about all Palo Alto information, of course, I can can I imagine my customer support people, having access to amazing amounts of revision, that’s at the tip of their fingers so they can answer customer questions faster, can I imagine showcasing that information directly to my customers as you’re seeing the industry now suddenly a plethora of copilot start to emerge in every products.

So I think that is going to become an obvious benefit of Generative AI. Now don’t forget it relies on one principle called having a lot of data. But it’s very important that whether they’re using it for external — sharing your information from the customers to your customers, you need a lot the data you have to clean all your data processes and have a. Secondly, if you’re in the security business, it definitely helps. If you have the largest digital link in the world while [Phonetic] security data. So from that perspective. I think it favors the people who have a lot of data already as part of their strategy and they have built a business in the back of our data lead strategy. I think not just specific to security in any industry, especially consumer Internet, if you’ve been UI company you have something to worry about. And if you’re a travel booking operator or something that just takes other people’s data and makes a better UI. you have something to worry about.

So I think from that perspective, it favors companies which have tremendous amounts of data. And then the second thing is also important understand. If I have 14,000 people they spend thousands of $1 billion in customers or more. There is leverage, I can go spend $30 million, $40 million, $50 million deploying that LLM and saving half my cost, if you’re running a small company and your entire cost of $50 million. It probably doesn’t behoove you to go out and create a LLM based Generative AI project to go out and pay and takeaway $20 millions of costs.

I think it also benefits people of scale, we’re able to drive efficiency using AI across the enterprise, allowing them to grow their business, much faster with limited resources. Does that help.

Gregg Moskowitz — Mizuho Securities — Analyst

It does. Thanks Nikesh.

Walter Pritchard — Senior Vice President, Investor Relations and Corporate Development

Great, thanks Greg and Shaul Eyal from Cowen. Our last question.

Shaul Eyal — Cowen — Analyst

Before that. Good afternoon. Congrats team. Nikesh, I want to go back actually Brad was asking about M&A. I want to ask about the competitive landscape, but specifically with a focus maybe on the seen upfront. So my question is how do you think about it. Any change do you think that the product right now as it stands is comprehensive or anything you might be thinking of maybe augmenting specifically on the seen upfront? Thank you for that.

Lee Klarich — Chief Product Officer

We have by far those comprehensive cloud-native application protection platform there is. That doesn’t mean that we do everything. But we do far more than any other solution out there. There is tremendous amount of focus on delivering capabilities that we’ve been building internally organically amongst the team. We’ve seen the most recent one we delivered a secret scanning. Just a few months ago to seeing very good early adoption of that.

At the same time, we’re also delivering on the latest acquisition of cyber security, where we expect that to become a new module in the next couple of months available to all of our Prisma Cloud customers. And so the Nikesh talked about how we’ve leveraged M&A in the past to help build some of the key technology areas Prisma Cloud. Which is absolutely true.

We have also shown an ability to deliver new cloud security capabilities organically and be very successful at that. And right now, feel-good about the balance of both those capabilities and how we’re bringing together and how we continue to deliver new innovations.

Shaul Eyal — Cowen — Analyst

Thank you.

Walter Pritchard — Senior Vice President, Investor Relations and Corporate Development

Thank you for the question. With that, we’ll conclude the Q&A portion of the call and I’d like to pass it back to Nikesh for his closing remarks.

Nikesh Arora — Chairman and Chief Executive Officer

Well, thank you very much. Again, everybody, for joining us. We look-forward to seeing you many of you at the upcoming investor events. I also want to once again take an opportunity to thank all of our employees who worked very hard in a very dedicated fashion, as you all know, to help us achieve these results. Not only that, a big thank you to all of our partners and our customers around the world. Have a wonderful day. Thank you