Some of our platformization programs embed deferred payments into deal structures, which we have spoken about in the past. We expect this will persist through fiscal year 2025 as we anniversary the rollout of these programs and result in billings below the target we provided in August of 2023. Beyond this period, we expect we can sustain higher growth than we provided in these targets in August. From an NGS ARR perspective, we expect less impact on our year-end metrics, and we expect we can continue to meet or exceed our target, which called for 30% growth rate through fiscal year ’26. As Nikesh noted, we are establishing a long-term target of $15 billion of NGS ARR in fiscal year ’30. Underlying this trend, we expect customers deploying our full set of platforms to have a higher makeup of NGS products.
These offerings tend to be deeply installed in our customer infrastructure. And once a customer deploys the platform, it’s easier to continue to consolidate vendors and adopt new innovations. We expect this to drive a significant increase in our overall revenue mix that is recurring. From a revenue perspective, we expect to see less pressure on revenue as compared to billings. Generally we see a lag in changes in our revenue growth versus our billings growth, and we expect that this will happen here as well. As Nikesh mentioned, part of what gives us confidence to execute on the strategy, and especially to do so now, is our success in driving profitable growth. As we embark on a strategy that we expect will negatively impact the top line in the short-term, we have significant confidence that our business scales well and we can continue to see operating leverage from a number of drivers.
As I have mentioned multiple times before, we scale well across every line item of our P&L, ranging from customer support to cloud hosting, to sales and marketing, to G&A. And we’ve seen significant payoff from focusing on internal efficiency across all areas of the business. Let me give you some specific examples for Q2. First, in cloud hosting, we signed a significant extension with our primary cloud provider. This contract is constructed to enable us to drive further margin benefits as we scale. Second, within G&A, we’re progressing well on a significant employee experience program. This started by analyzing all of our service desk tickets across all channels and identifying all the manual responses needed to address requests. The combination of process re-engineering, automation, and AI is still in progress, but we have already seen positive savings and have a target of automating 90% of the more than 300,000 manual interventions.
By the end of Q2, we have roughly halved the cost of our T&E servicing. We are now leveraging this program as a template across other business areas. In short, whilst we made a lot of progress, we still have significant opportunities on the profitability front. That gives us confidence that we can maintain our medium term operating margin and free cash margin targets beyond this year. Specifically, we believe that we can expand our operating margins by 100 basis points beyond this year, in line with the operating margin guidance we gave in August of 28% to 29%. And this can continue to support our medium-term free cash flow margin target of 37% plus. We expect that this will come despite us absorbing some billing’s impact, as we have both the benefit of some prior arrangements with deferred payments contributing as well as efforts we have placed on optimizing the cash dynamics of our vendor spending.
In short, I wanted to reiterate what Nikesh said, that it is important for us to be able to manage through this platformization acceleration in a financially prudent manner and we have set ourselves up well to do this over the next 12 to 18 months. Now moving on to the guidance for Q3 and the year. For the third quarter of 2024, we expect billings to be in the range of $2.30 billion to $2.35 billion, an increase of 2% to 4%. We expect revenue to be in the range of $1.95 billion to $1.98 billion, an increase of 13% to 15%. We expect non-GAAP EPS to be in the range of $1.24 to $1.26, an increase of 13% to 15%. For the fiscal year, we expect billings to be in the range of $10.10 billion to $10.20 billion, an increase of 10% to 11%. We expect NGS ARR to be in the range of $3.95 billion to $4 billion, an increase of 34% to 35%.
We expect revenue to be in the range of $7.95 billion to $8 billion, an increase of 15% to 16%. We expect operating margins to be in the range of 26.5% to 27%, an increase of 240 basis points to 290 basis points year-over-year. And we expect non-GAAP EPS to be in the range of 5.45% to 5.55%, an increase of 23% to 25%. We expect adjusted pre-cash flow margin to be 38% to 39%. In the interest of time and to get as many of your questions as possible, we’ve included the modeling points in the appendix of our earnings presentation. With that, I will turn the call back over to Walter for the Q&A portion of the call.
A – Walter Pritchard: Thanks. We’ll now proceed with Q&A. Please, in the interest of time, ask only one question with no follow-ups. Our first question will come from Hamza Fodderwala from Morgan Stanley, followed by Brian Essex from JPMorgan. Hamza, please go ahead with your question.
Hamza Fodderwala: Good afternoon. Thanks for taking my question. I just wanted to clarify, Nikesh, your comment on spending fatigue. What exactly were you referring to there, just given you also said demand was quite good. And then just the billings cut. It seems like it’s a function of some bundling, discounting, as well as lower duration. Anyway to quantify that at all? Thank you.
Nikesh Arora: Thanks, Hamza. Thanks for the question. Yeah, I think I want to make sure there’s no confusion in our characterization of spending fatigue. Over the last few years, most of our customers have ended up spending more on cybersecurity than on IT. As a consequence, they’re feeling like my budget for cybersecurity keeps going up in double-digits every year because I’m trying to protect against every new threat vector. Yet, you see the number of breaches continues to rise. So our customer are sitting down and saying, if I spend more money, can you show me how I get a lower total cost of ownership across my enterprise? How do I spend less on the services that I have to deploy? And how do I get better ROI? So I think it’s more about optimizing their current cybersecurity budgets as opposed to there being no demand.
Demand continues to be very strong. The customers are demanding to get more for the amount of money they have allocated to cybersecurity. That’s where platformization consolidation kicks in. In terms of trying to quantify duration versus.
Dipak Golechha: So just to be clear, Hamza, from a billings perspective, part of the billings guidance is related to the Fed that we talked about in the prepared remarks, part of it is also because of the platform initiatives — platformization initiatives per se, but also part of it is we just expect there to be more deferred payments like annual billings, things like that as we roll out these programs. That’s what makes it up.
Walter Pritchard: Great. Thank you, Hamza. Next question is from Brian Essex at JPMorgan, followed by Saket Kalia at Barclays. Brian, go ahead.
Brian Essex: Yeah. Thanks, Walter. And maybe to follow up on Hamza’s question. Maybe for Dipak, one thing that caught my ear was the comment about discounting or offering a free period upfront for a certain period of time. Wanted to get a sense of what kind of headwind within that billings guidance is attributable to some of that discounting? And should we be looking at other metrics like average TCV or annualized TCV to get a sense of once those contracts hit a normal run rate, what would a normalized growth rate look like?
Nikesh Arora: Thanks, Brian. Let me jump in here. I think let me clarify in terms of the discounting notion. What’s happening today is when I go to a customer and say, listen, I’d like to replace your estate with the entire platform. The customer says, wait, wait a minute, I got this vendor for IPS, this for SD-WAN, this for SSC. And I got half of my firewalls from another vendor, and they all expire at different points in time. I’d love to deploy Zero Trust, but it’s going to take me two, three years as the end of life, so these vendors happen. And I’m scared that if I rip and replace this at this point in time, is going to create execution risk, not just that, it’s going to hit economic risk. So the propositions we’re going to customers is, listen, let’s lay out a two-year, three-year cybersecurity consolidation and platformization plan.
We’ll go start implementing today, you pay us when they’re done. So what it is, is more of a sort of like you can use our services until you have to keep paying the other vendor, we’ll take it from there. But that’s taking away a lot of the economic exposure and the execution risk for our customers. Now you can call that discount or you can call that a free offer. Our estimate is approximately it works out at about six months’ worth of free product capabilities to our customers on a rolling basis. I think in about 12 months, as our offers start lapping each other, we should go back to our growth rate we’ve been talking about. And I think the right metric is the time frame is to look at RPO.
Brian Essex: Okay. Thank you.
Walter Pritchard: Thank you, Brian. Next question is from Andrew Nowinski at Wells Fargo, followed by Gabriela Borges at Goldman Sachs. Go ahead, Andy.
Andrew Nowinski: Thank you. I wanted to ask about the US federal spending. You said it was soft in Q2, Nikesh and I think it’s going to remain soft for the next six months. But given your comments about how nation state activity targeting the national infrastructure was increasing, I guess, why do you think there’s a disconnect between that trend? And were those comments specific to your Palo Alto customers in the US Fed are more broad-based?
Nikesh Arora: Look, part of it is particular to us. As you are aware, there was a large program. We were part of down selected to be the only vendor. We’d expected we staffed it to make sure we could implement it and we could get the orders. That program didn’t materialize at the pace and at the spending levels we had expected. We saw an early glimpse in Q1 towards the end — you saw it not show up in Q2, and we have it staffed for Q3 and Q4. Remember, Fed is a lower duration number. So it has a much more significant impact to revenue because Fed pays on an annualized basis as opposed to an TCV basis. So you’re seeing the impact of that to our revenue for Q3 and Q4 and some of the billings miss in Q2, which we had to make up with shipping from non-product backlog.
So that’s kind of what happened in the Fed business. One’s bidding, twice shy. So we’re being very cautious about how we expect it to come back or not in the second half of the year. So it’s more pertinent to that as opposed to a broader comment around the federal space. And don’t forget, Fed is, in general, is not a next-generation security adopter because they’re usually slower on cloud services than they are on traditional cybersecurity products.
Andrew Nowinski: Makes sense. Thanks.
Walter Pritchard: Thanks, Andy, Apologies. We’re going to go back to Saket Kalia from Barclays and then go to Gabriela Borges from Goldman. Go ahead, Saket.
Saket Kalia: Hey, great. Hey, thanks, guys. Nikesh, maybe for you, just to touch on the platformization item a little bit deeper. I almost think about these as ramping contracts and you tell me if that’s off. But specifically, as you look at the second half, maybe putting the mechanics of the ramp aside, how do you sort of feel about sort of underlying demand with metrics like ACV or bookings and what percentage of your book of business do you sort of expect to shift to sort of this ramping structure? Does that make sense?
Nikesh Arora: Yes, yes, that makes a lot of sense. I think part of what we’re noticing, Saket, is that we’d like to go from best-of-breed competitive behavior with legacy vendors or New Year vendors and go straight to platform competition. Because you noticed that we have a higher win rate on platform deals. We have a higher win rate and consolidation plays as opposed to best-of-breed head ones, which end up costing more time and energy and you see very, I call it, rogue behavior where people start trying to desperately hold on to customers. So we are trying to shift our go-to-market towards a consolidation play and a platform play. I think, as I said to earlier, the right number to look at in this context is RPO. The underlying demand is strong.
Our book of business is strong. Our pipeline is strong. There is nothing going on in the demand side. It’s just that we see this pushing out of the billings towards later parts as we get more and more consolidation offers and platform offers out there. To give you an example, when we acquired Talend , we made Talend free to every SASE customer, right? Is there going and trying to upsell that every SASE customer and run the risk of running the POCs other secure browsers. We’ve decided to give it away free for the next 12 months until the customer’s renewal comes up. Now that has a billing impact in the 12-month time frame and revenue impact. However, at the end of 12 months, all these will be renewed because our aspiration is to get 50% of our customers to use the enterprise browser.
