It’s one of the best products we’ve acquired. It has tremendous market traction. When we acquired it, there were 100 POCs in place going on at customers. And we told them, listen, if you’re a Palo Alto customer, just use it. It’s part of our product. It’s part of the licensing. You don’t have to pay us more, you don’t have to do a new contract. What that does, it allows us to penetrate a market segment which would end up being competitive, we end up getting some share and spend the rest of our lives trying to create more traction and more market share in the future. Is that great. It’s free. Our incident response offer. We never had 400 Fortune 2000 customers dealing with us on incident response. We launched an offer in 90 days, we’ve got 400 customers.
We gave them 250 hours free, right? That’s 100,000 hours of breach consulting for free, but that drives a future business for us where they become our cybersecurity partner of choice. So we’re trying to seed ourselves into our customers’ platform and consolidation strategies so that we don’t have to keep fighting on individual breach individual best-of-breed deal every time we go to a customer.
Saket Kalia: Makes sense. Thanks, guys.
Walter Pritchard: Great. Thanks, Saket. We’re going to go next to Gabriela Borges with Fatima Boolani from Citi on deck.
Gabriela Borges: Hi. Good evening. Thank you. Nikesh, I wanted to ask how you think about the risk of potentially cannibalizing the customers that are willing to pay full price today as you implement the bundling strategy? And then how do you think about —
Nikesh Arora: If you find them, let me know. Sorry, go ahead, please ask the question. How do you?
Gabriela Borges: Yes. It’s also a longer-term question on how do you think about maybe catalyzing a race to the bottom with pricing pressure. So as you think about ramp deals, technology that maybe was $100 today or a year from now, by the time you get to renewal, is no longer worth $100 because you’ve created pricing competition or you’ve created a competitive response.
Nikesh Arora: I think there are two answers. Yes, let me answer two parts of the question. I think this is — to think about it as a price war is a wrong way to think about it. Actually, we’re averting a price war by driving a platformization approach. I will explain how. First of all, all of our customer deals are discussed, negotiated POC. So it’s very rarely that we have a customer who does not understand the value of what they’re offering. Because the competitive market, we have a price. Our competitors are who normally rational competitors have a price. So we don’t think that we’re cannibalizing a full price paying customer we are possibly. I think what we are doing, Gabriela is that we’re avoiding the unintended consequence where a customer says, oops, I have no time left.
Because what happens to customers with all the right intentions we’ll say, I’ll renew, I’ll buy Palo Alto in 12 months from now when my current contract goes away. They take a little while analyzing and they get to six months, oh my God, if I’m not able to deploy you in six months, I’m going to have an exposure, so I’m going to go try and get a renewal. When they’re trying to get a renewal, the other vendors know this is not going to be their business for too long. So that’s when international pricing behavior happens. It’s not when they execute early and deploy early. So actually, averting the last minute race to the bottom like you called it, by making sure our customers don’t have to worry about the execution risk and trying to get renewals and trying to get best pricing in the last six months.
Gabriela Borges: Thank you.
Walter Pritchard: Great. Thanks, Gabriela. Next up is Fatima Boolani from Citi. And after that, Roger Boyd from UBS.
Fatima Boolani: Hey, good afternoon. Thanks for taking my question. Nikesh, on the platformization strategy. I was hoping you could drill into what the catalyst was for this to be a midyear change. What were you hearing from customers where you said we’ve got to pull the trigger in the middle of the year because it’s admittedly atypical. And then as a related note, when you’re rolling this out, if you’ve got customers who are not paying you for six months, how are salespeople going to get compensated for that free freemium sort of stance you’re taking. So just how are you protecting I guess, the piece of the go-to-market organization as it relates to the new strategy?
Nikesh Arora: Thank you. Dipak did warn me this one will take a little bit of explaining. And — so let me go back to what Saket said. For simplicity purposes, think about a ramp deal. So our sales people still get paid on TCV, right? So they’re still going to do a three-year deal or a five-year deal. We’re not doing six months or 12-months deals. So you’ll see that in our RPO. You’ll still see us doing ramp deals for the first six months may not be charged, but the next 4.5 years is or the next 2.5 years to sort our salespeople will get paid on the TCV deals like they get paid today, right? That’s not a problem. I think that’s the best way to think about it and, I’m sorry, there was another part that I missed, I apologize.
Fatima Boolani: Just the impetus of it being —
Nikesh Arora: I’d say the impetus, Fatima is fascinating. We are — we’ve managed to double our business in the last five years. And for us to get to a double from here and more, we’ve had to step back and say, what did we do? We got 21 categories where we’re best-in-breed to realize we’re still fighting best-of-breed deals while we should be selling the platformization strategy and we realized selling the platformization strategy, which we have been for the last six months, as we said, we have been trialing this out, we’ve been running this play with about six months discovering, when we go in with the platform approach, we win more often than if we go into the best-of-breed only. Otherwise, we get whittled down on price, XDR to XDR or SASE to SASE.
When you go with XSIAM with XDR, XSIAM and XSOAR, then we don’t get a little down on price because customers see the TCO value and the ROI of doing the entire replacement together. But the moment we go up with that is like lots a lot of risk. I got to replace everything in the next six months. I’m not willing to commit, let’s go one at a time. And they go one at a time, I get riddled down on price with a legacy vendor.
Walter Pritchard: Great. Thanks, Fatima. Next up, we have Roger Boyd, and after that, it will be Jonathan Ho from William Blair.
Roger Boyd: Great. Thanks for taking the questions. Another follow-up on the platformization. But as you get more accommodative on some of these offerings, more aggressive on discounting. What are you expecting to see from a contract duration perspective? It sounds like the focus is going to be on RPO, but are you expecting to see contract duration actually extend in exchange for some of this economic flexibility? Thanks.
Nikesh Arora: I think that’s a great question. I think the way to think about it is that we still have two parts of our business. We’ll still have the regular part of our business, which is still growing and competing best-of-breed. We expect that business to continue. Remember, this platformization really applies to where customers have the opportunity to consolidate and platformize. There are still many who are in different parts of their cybersecurity journey or the IT journey. So to the extent that we are dealing with the customer who’s willing to consolidate with us, you will see contract durations go up because we’re not going to do this if you’re not going to get a commitment for a three to five year deal because it does not behoove us to do those deals if you don’t see a long-term commitment to the customer because we are going to be consolidating multiple security products to them and working with them to implement them across the enterprise.
Walter Pritchard: Great. Thank you. Next question, Jonathan Ho from William Blair. And after that, we’ve got Adam Borg from Stifel.
Jonathan Ho: Great. Thank you for taking my question. I guess one thing I’m trying to understand a little bit better is this ability to standardize on the platform, give you something similar to what Microsoft has done with their E5 bundling to sort of force customers or package very attractive terms for customers to switch. And I guess how does that maybe play out in terms of customers’ willingness to commit to a single vendor platform? Thank you.
Nikesh Arora: That’s a great question, Jonathan. Very apt question. Look, it allows us to do a much better job of putting stuff together across our portfolio as opposed to having to do each of these deals on an individualized basis. So you’re bang on the idea that this consolidation benefits us and allows us to drive towards that platform much faster. That’s helpful. I think it also gives us financial flexibility in terms of pricing deals. That’s also very important, very true. But I’ll give you an example, right, just this morning, I was on the phone and the customer is trying to buy an IoT capability. Independently, that IoT capability is going to cost them north of $5 million. They already have our firewalls. We allowed them to activate IoT of our firewalls, which cost us a lot less than $5 million.
But that allowed them to consolidate. And now when the renewal comes up in six months or 12 months, they’re going to be able to renew for a higher amount. So that degree of flexibility that we can offer our customers, but they don’t have to go end up spending more and building yet another vector that they have to go consolidate in the future is what we’re trying to drive to.
Walter Pritchard: Great. Thanks, Adam. Next up is Keith Bachman from BMO followed by Tal Liani of BofA.
Keith Bachman: Hi. Thank you. You confuse me, Walter. I think Dipak for you, you mentioned we certainly have the billings guide for Q3 and then implied for Q4, something like 10%. And you indicated that this was going to be a 12 to 18 month sort of impact as you try to anniversary consolidating spend. But is there any trough or any way to think about FY’25? I mean is it still double-digit billings growth that we should be thinking about? Or any kind of metrics on how you think about the six to, or excuse me, 12 to 18 month impact where you’re trying to anniversary the program?
Dipak Golechha: Yes, our aspiration is that towards the second half of ’25, we should revert back to our original expectations of mid to high double-digit growth. But as I said, so 12 to 18 is obviously we have to go experience these programs to see how they persist. But at some point in time, they will start to lap and give us better upside in the larger size deals that we’re able to do.
Nikesh Arora: I just want to make one more point, sorry, on this context. One of the things that I think should not be lost what Dipak has said. We have maintained our absolute free cash flow guidance for the year and absolute EPS guidance for the year. So we believe we can make all this happen whilst holding our earnings and free cash flow constant.
Keith Bachman: Yeah, noted.
Walter Pritchard: Great. Next, we’re going to go back to Adam Borg and then we’re going to go to Tal Liani for BofA.
Adam Borg: Awesome. Thanks, Walter. Thanks, everyone for taking the question. Maybe just on XSIAM, it was good to see the traction there. Maybe talk more about the displacement opportunity that you saw in the quarter. I think you talked about replacing — displacing up to 19 different vendors since being introduced and talk more about how you plan to further penetrate that as part of this broader platformization approach. Thanks.
Nikesh Arora: Thanks, Adam. So Adam, we’ve displaced 19 unique different SIM vendors. And the reason that’s relevant for us is that tells us that our platform has capability that spans multiple use cases and different types of products in the market. It’s not like we only replace one kind of SIM. We have been able to replace different kinds of SIM, which offer different capabilities in our customers. And we still believe this is the fastest and best cybersecurity product that has been created. We are north of 65 customers now in nine months. As we said, we have signed a larger number of deals this quarter. And on a deal basis, we did a $90 million in TCV. So we’re really excited about it. This does resonate with our customers.
We are launching tomorrow an offer to replace end points for our customers who are stuck with legacy end points which is one of the things that holds us back in being able to deploy XSIAM. We’ve also announced support of other non-legacy vendors that they have in their infrastructure. So our customers have been asking for that so we can support some of the other leading edge XDR capabilities in the market. So we are making a concerted play to be able to be the SOC of choice. It is radically different and better than most other SIMs out in the marketplace. So we are putting a concerted effort, very excited about where we are with it.
Adam Borg: Great. Thanks.
Walter Pritchard: Thanks a lot, Adam. Next up, Tal Liani from BofA followed by Brad Zelnick at Deutsche Bank.
Tal Liani: Hi. First, just a clarification, you spoke about discounting or pricing. Is there any product where you see more discounting than others? Is it on the legacy firewall side? Or do we see it on SASE or Cortex? Or should we look at it as a complete kind of pricing for the platform?
Nikesh Arora: I think the best analogy is Jonathan’s analogy, which is the bundling of multiple things into one capability, more like I don’t want to call it that one. More like one of the other vendors has a certain bundling philosophy. I think it’s more like that than it is about individual product categories because it’s not about if you buy SASE, I’ll make it cheap, or if you buy XDR, I’ll make it cheap. It’s about — if you commit to my network security platform, the combined whole of it will be much better TCO and ROI for you, and I’ll take the execution risk. You don’t remember, the exit ARR for me is going to be no different than it is today and I think that’s why I don’t like the word discounting or reduced pricing. The exit ARR will be consistent with what I would get today. I would end up taking the execution risk away from the customer.
Walter Pritchard: Great. Thank you, Tal. Next up, we have Brad Zelnick from Deutsche Bank. And after that, Matt Hedberg from RBC.
