Tal Liani: I wanted to ask you about the difference between revenue growth, billing and deferred revenue. You increased the guidance for deferred and billings that are very, very strong. We see less of an increase in revenue. What are the dynamics going forward?
Nikesh Arora: I’m going to let Dipak answer, but I will recommend you to try Dali. And you might be able to create a parallel poster of our, and we’ll have to figure out who did, which one.
Dipak Golechha: Yeah. Look, Tal, I think at the end of the day, like we are an enterprise company. And as you see in our guidance, like we have a large Q4 guidance with a lot of customers sweating assets, as Nikesh mentioned in our — in his script. I think, we’re just trying to reflect that in our latest forecast, which is what drives the guidance. And so if you have people sweating assets, we don’t know exactly what will fall in which quarter, and that’s what drives the revenue.
Nikesh Arora: Yeah. Well, I think just to make sure that you don’t — we don’t mix the forest from the trees. We are seeing better growth across our business on a TCV basis across our customers. That’s driving the billings growth, which obviously then falls into revenue, both short-term and long-term and deferred. I think what you’re seeing is the higher mix of software in our expectations going forward, which makes it more ratable over time. It gives us more predictability. Hence, the revenue looks consistent with expectations, and you see the software part, which is sitting in deferred grow faster.
Dipak Golechha: Certainly on SASE, that is the most
Tal Liani: That makes sense.
Clay Bilby: All right. Great . Thanks. Our next question from Keith Bachman of BMO, followed by Patrick Colville. Go ahead, Keith.
Keith Bachman: Many thanks. Good afternoon, good evening. I wanted to ask you, Nikesh, about Cortex, if I could, more broadly, and I’ll break it in two parts. The Cortex journey, the results have been solid, not just this quarter, but for some period of time now. And A, on the competitive front, we’ve been hearing a lot of discussion from some of the leading vendors that pricing has become much more material in winning share of the CrowdStrikes or what have you. It doesn’t appear that that’s the case at all in your results from the growth rates and the profitability. So I just want to hear a little bit about pricing. And then more broadly on B, just the competitive dynamics on your results, and you mentioned $100 million run rate on XSIAM, how has the portfolio helped shaping this outcome as you look out over the horizon over the next number of quarters in Cortex?
Nikesh Arora: So Keith, that’s a great question. And I’m hesitating on my own analogy, which I was going to give you, but I don’t think we should print that. It’s clear, it’s just — I don’t want to put a word against our Cortex business. First and foremost, look, I’ve always maintained that the opportunity in the security market arises when there’s an inflection point. And I think the endpoint industry went through an inflection point a few years ago when we saw the emergence of EDR and XDR players. And you saw that, I’d say, perhaps the normalization of pure endpoint antivirus-type players in the market. And what’s happened is if you look at the evolution, we’ve gone from a few endpoint players to many, and you’re beginning to see convergence again down to two or three people.
And I’d say that we are one of the three growing XDR vendors where customers are choosing us. We have one of the best POC outcomes across the entire market vis-Ã -vis other players. So I’d say today, if you’re looking for an XDR outcome, there’s possibly two or three vendors always in the fray are beginning to see ourselves to. That was not the case three years ago. That was not the case two years ago. So we’re happy with our position, I think, one. Two, XDR is a pipeline business because it’s pretty consistent to your point about pricing, the deal sizes are pretty consistent, and they’re sort of in a range and you got to have a lot of deals to your pipeline and get some conversion going from them. Cloud and SASE can be big. I still have $40 million cloud deal, $40 million SASE deal.
I don’t have $40 million XDR deals. They’re all in the same swim lane, and you can substitute one for the other. And we see consistent growth. Now where I think our secret sauce is kicking in and should kick in is XSIAM only works with XDR. And what’s interesting is we’ve seen very early, we’ve had 15 customers of XSIAM in the last 12 weeks, and they’re all north of $1 million. Very early, we’re seeing customers saying, I’d like XSIAM. And we’re saying, listen, you can only get XSIAM if you’re going to buy XDR. So we’re beginning to see there’s a pull because of an outcome-based oriented XSIAM. Again, as I said to Hamza, don’t get ahead of your skids, this is a shift we’re trying to engender in the industry, but we think that the way to drive XDR for us in the long-term is going to be by creating the best security outcome in the SoC for the customer.
But they realize I need good data. The only way I get good data is to Palo Alto, XDR which allows us to go create the security outcomes in XSIAM. So that’s our approach. Until then, we’re just going to keep our head down, grind at the pipeline, make sure we can win the deals. But for us, we’re headed for the bigger price because I can do a lot of XSIAM business where I can XDR seed it into my customers. So XDR pricing is less contentious for me. It’s more interesting for me to get the right customer in XDR. So you noticed there’s a certain part of the market we play in. We don’t play in the low to mid-end of the market in XDR. We don’t have 500 customer — 500 user customers. We like to get the 10,000, 15,000, the higher end of the XDR customers because we think that is a high transfer into XSIAM in the future.
We’ve been doing that consistently for the last few years trying to build that base so as when the XSIAM is ready, we can start encouraging our customers to evolve from XDR to XSIAM.
Clay Bilby: Next is Patrick Colville of Scotiabank, followed by Matt Hedberg. Go ahead, Pat.
Patrick Colville: Hi, guys. Thank you for taking my question. And it’s good to be back. So I want to ask about margin. So I mean, really impressive to see what you guys printed in the margin. I mean, looking at the numbers for fiscal second quarter. To me, the two most important levers were the product gross margin and the sales and marketing kind of costs that were moderated. I guess as we think about the remainder of the year, how should we model out those two levers? So should we continue to expect less incremental pressure from supply chain costs on the product GMs? And how far can this S&M efficiency go?
Nikesh Arora: Well, I think, Patrick, first of all, is Dipak made your life easier by giving you an operating margin guidance for the year. So you don’t have to worry about the component parts. So you can just look at the total and have a wonderful time. Save you some modeling at Palo Alto. So that notwithstanding, I think between Dipak and I, we’ve both said that — I contemplated putting this in our earnings script. I had a meeting with an investor. Dipak and I had a meeting for hours about six months to seven months ago. And they took us through the brute force of profitability and margins and margin expansion and long-term EPS for Palo Alto. And the other day, Dipak and I looked at each other and say, you know what, growth is important, but growth — profitable growth is even more important.
And I’d say, there’s a series of programs that Dipak has been running over the last six months, which include looking at gross margin across all of our products, looking at our spend across categories, looking at headcount. So this is a sustained program we have in place. We’re going to moderate our way through it to make sure that we don’t impact our ability to generate the right amount of growth and right amount of profitable growth. But I think, the thing I’ll leave you with is that, we’ve given the guidance for the full year for operating margin, how it’s going to evolve. We think it’s a very good place compared to where we were expecting to be right now. And I think, we’ve also given you hope that we don’t believe this is the end. We believe we can keep improving from here.
So for now, that’s all we’re going to say.
Patrick Colville: All right. Thank you, so much.
Clay Bilby: All right. Next, we’ve got Matt Hedberg of RBC followed by Jonathan Ho. Go ahead, Matt.
Matt Hedberg: Cool. Thanks, guys. Congrats from me as well. Nikesh, I have to go back to SASE. I mean the 50% growth in ARR off of a large base is impressive. And you guys took a different approach this year in terms of integrating your core firewall and your SASE sales force. Can you talk about the strides in those conversations into the other sort of 50,000 firewall customers that aren’t SASE customers? How does that discussion go? And if — just because it feels like such a marriage that makes so much sense from a cross-sell perspective?
Nikesh Arora: Yes. Matt, look, I think a happy firewall customer is a customer who at least has a good feeling about Palo Alto. And I think, if they’ve deployed our security services, they’re even better, because they know how those security capabilities work. And now we’re working though each of these customers to trying to work with them on their Zero Trust strategy. SASE is generally a long lead time, long conversation, because it’s not just security. I think the part which sometimes gets lost in this — in some of the analysts, is that SASE is actually — you’re taking — say, the firewall, I give you a firewall, you run the firewalls in your network, it’s all good. You run your growing product. In SASE, I run your network.
I take the traffic from your laptop onto me, on to GCP, and route the traffic for you. So now I’m part of your mission-critical capabilities. That means my network has to be strong, my latency has to be low, my availability has to be high. That’s not a traditional question security CoIP companies have been asked. They’re not used to running networks. That’s why I just fall off my chair when I keep hearing, there are seven other vendors building SASE solutions. I’m like, yes, good luck, learn how to run a network. So there’s no coincidence that we decided that we were not going to run the network. We’re going to let AWS and GCP run the network for us, because that’s what they do really well. And they have cloud capability with low latency. So we’ve built our SASE stack, which runs now concurrently on GCP and AWS, allowing us to give you availability, which is higher than those two individually.
So we think in the long term, that’s the right answer, right? Now, clearly, we’re not 11 years old in SASE. We’re 3.5 years old in SASE. So there are some things which we’ll get stumped on, because there are features and capability we need to keep building, because there are edge cases which had been brought to the forefront. That’s where Lee and his team are doing a phenomenal job, continuing to keep us at the top of the sort of pyramid of that topic. We’re working on some really exciting capabilities in the upcoming future. We’ll inform you in the next upcoming quarters. But we feel very good about our SASE pipeline, our on ramp. They’re lumpy. They’re large deals. But there is product market fit, and we’re seeing success.
Clay Bilby: All right. And our next question from Jonathan Ho of William Blair followed by Saket Kalia. Go ahead, Jonathan.
Jonathan Ho: Congratulations. Just wanted to maybe start out, you’ve seen some tremendous large deal success this quarter. In terms of the platform consolidation discussions with customers, what are you seeing? And is there evidence of customers maybe standardizing on Palo Alto across multiple areas? What could drive that sort of trend over time? Thank you.
Nikesh Arora: So William, the reason we showcased the millionaire customers, the $5 million deals and the $10 million deal slide, is there’s a journey. By the way, I’m going to send you a Palo Alto shirt, so you can at least wear that in this meeting. You can wear that other one other times. But anyway, so yeah, we showed you a slide of $1 million and $5 million and $10 million because customers go through a journey. And it’s very rarely you walk into a fresh customer, and we convinced them to go spend tens of millions of dollars to this and consolidate. So it’s usually an evolutionary process where we’ve become the firewall vendor of choice. They go with us on SASE. They’re working on cloud. They see the concurrence of cloud and SASE.
They have XDR. They want to get to XSIAM. So slowly and steadily, we are showing them the benefits of consolidation. I’ll tell you, us being leaders in 13 categories helps because the first time you used the word consolidation, the first reaction of the CIO or CISO is, wait a minute, I want the best stuff. I just don’t want it because you have it. Then we say, wait a minute, our stuff is the best up as well as it works together. So it’s a journey. It is not something that is a panacea that every customer comes in and walks in, but our teams are now focused towards trying to evolve our customers down that path or across that journey, right? And that’s why we can go out and do a deal. I think our largest deal this quarter is north of $75 million.
