Palo Alto : Q4 FY2021 Earnings Call Transcript

Corrected Transcript

23-Aug-2021

Palo Alto Networks, Inc. (PANW )

Q4 2021 Earnings Call

	Total Pages: 21
1-877-FACTSET www.callstreet.com	Copyright © 2001-2021 FactSet CallStreet, LLC

Palo Alto Networks, Inc. (PANW)	Corrected Transcript
Q4 2021 Earnings Call	23-Aug-2021

CORPORATE PARTICIPANTS

Clay Bilby	Dipak Golechha
Head-Investor Relations, Palo Alto Networks, Inc.	Chief Financial Officer, Palo Alto Networks, Inc.
Nikesh Arora	Lee Klarich
Chairman & Chief Executive Officer, Palo Alto Networks, Inc.	Chief Product Officer, Palo Alto Networks, Inc.

.....................................................................................................................................................................................................................................................................

OTHER PARTICIPANTS

Saket Kalia	Brent Thill
Analyst, Barclays Capital, Inc.	Analyst, Jefferies LLC
Keith Weiss	Gray Powell
Analyst, Morgan Stanley & Co. LLC	Analyst, BTIG LLC
Rob D. Owens	Matthew Hedberg
Analyst, Piper Sandler & Co.	Analyst, RBC Capital Markets LLC
Brian Essex	Joel P. Fishbein
Analyst, Goldman Sachs & Co. LLC	Analyst, Truist Securities, Inc.
Michael Turits	Keith Bachman
Analyst, KeyBanc Capital Markets, Inc.	Analyst, BMO Capital Markets Corp.
Jonathan Ho	Ben Bollin
Analyst, William Blair & Co. LLC	Analyst, Cleveland Research Co. LLC

	2
1-877-FACTSET www.callstreet.com	Copyright © 2001-2021 FactSet CallStreet, LLC

Palo Alto Networks, Inc. (PANW)	Corrected Transcript
Q4 2021 Earnings Call	23-Aug-2021

MANAGEMENT DISCUSSION SECTION

Clay Bilby

Head-Investor Relations, Palo Alto Networks, Inc.

Good day and welcome, everyone, to Palo Alto Networks' Fiscal Fourth Quarter 2021 Earnings Conference Call. I am Clay Bilby, Head of Palo Alto Networks' Investor Relations. Please note that this call is being recorded today, Monday, August 23, 2021, 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. Our Chief Product Officer, Lee Klarich will join us in the Q&A session following the prepared remarks.

You can find the press release and information to supplement today's discussion on our website at investors.paloaltonetworks.com. While there, please click on the link for the events and presentations where you will find the investor presentation and supplemental information.

In the course of today's conference call, we will make forward-looking statements and projections that involve risk and uncertainty and - that could cause actual results to differ materially from forward-looking statements made in this presentation. These forward-looking statements are based on our current beliefs and information available to management as of today. Risks, uncertainties and other factors that could cause actual results to differ are identified in the Safe Harbor statements provided in our earnings presentation and in our SEC filings. Palo Alto Networks assumes no obligation to update the information provided on today's call.

We will also discuss non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. We have included tables, which provide reconciliations between non-GAAP and GAAP financial measures in the appendix to the presentation and in our earnings release, which we have filed with the SEC.

We have several upcoming events, including a virtual Analyst Day on September 13th, starting at 9:30 AM Pacific Time. Nikesh Arora, our Chairman and CEO, along with members of the executive team, will provide an in-depth review of the company, including growth strategies, financial objectives and capital allocation framework. Management is also scheduled to participate in upcoming virtual investor conferences in September posted by Citibank and Piper Sandler.

And now, I will turn the call over to Nikesh.

.....................................................................................................................................................................................................................................................................

Nikesh Arora

Chairman & Chief Executive Officer, Palo Alto Networks, Inc.

Good afternoon, everybody, and welcome to Palo Alto Networks' Q4 conference call. I'm trying something new today, so please bear with me. You just got an opportunity to see our ad campaign. You're the first people to see it. We spent a lot of time working hard, trying to understand what our customers really want to see from us. And the constant drumbeat we've got from them is, innovation at the forefront of cybersecurity. Our ad campaign called We've Got Next amplifies the innovation that our teams have been delivering, and our promise that we will be there with you as your partner. We've Got Next. I look forward to seeing this ad be the drumbeat for all of our

	3
1-877-FACTSET www.callstreet.com	Copyright © 2001-2021 FactSet CallStreet, LLC

Palo Alto Networks, Inc. (PANW)	Corrected Transcript
Q4 2021 Earnings Call	23-Aug-2021

broadcast media and covering our many platforms over time as we go out in the public domain and keep sharing this with our customers.

Moving on. As you all are well aware, we've had a series of cybersecurity events over the last quarter, against the backdrop where we've seen supply-chain attacks, where bad actors try to hack into core infrastructure pieces, which allows them access to enterprises or government systems. These vulnerabilities are being exploited by ransomware actors. The ransomware threat continues to rise.

Our Unit 42 team research shows that the average ransom demand in the first half of this year grew from $5.3 million, which is up 4 - 518% year-over-year. What these attacks are highlighting is the constant shortcomings of enterprises and of government infrastructure, continuingly spurring demand and consolidation as companies revalue their cybersecurity posture.

It's against this backdrop that our platform approach is working. Three years ago at our Analyst Day, we set out the strategy of the company on three fundamental tenets. One, the network will transform with the introduction of the cloud. This has accelerated with the pandemic, with SASE and virtual firewalls leading the transformation. Not only that, we supplemented our firewall platform strategy with software capabilities like DLP, IoT, SaaS visibility, DNS security and SD-WAN.

Our second insight was the cloud is going to be big and it's here to stay. We have now seven modules in our cloud security platform, which is being used by over 75 Fortune 100 companies. And our third insight was, more AI and machine learning will be needed to support the automation of our security platforms and our security operating centers. Our Cortex platform validates that for us every single day.

Underpinning this innovation strategy has been a flurry of product releases from Palo Alto Networks. When I came to the company, we sat down and decided, what we needed to do was to get our innovation and product strategy right. Something many cybersecurity companies have struggled to do is stay relevant. You can see from this slide, we've gone from 13 major releases to 29 this year, tripling (sic) [doubling] our product release capability over three years. Of these 63-odd releases, 11 of these - 64, sorry - 11 of these have been through acquisitions, the other 53 have been done through organic innovation in the company.

And this is not all. We're going to see a lot more innovation coming down the pike as we unfold this year. We will tell you more about this in the Analyst Day.

Our rapid pace of innovation is also being validated by the industry. If you look at this slide, we used to be recognized by two - in two categories for leadership in cybersecurity. In FY 2021, we were awarded six different accolades to validate that now we're leaders in six different categories. Our aspiration is to grow that category leadership over this year, and hopefully, get into double-digits by the end of this year. So our pace of innovation is alive and it continues.

Breaking down into the three different platform pillars. Our network-driven pillar, which is being driven by SASE and virtual firewalls. I know at the beginning of the pandemic, there was a huge debate, like how long is the work- from-home trend going to last? Well, all I can tell you is, it's far from over as this is going to become the norm. Hybrid work is about to become the norm, and SASE is going to lead that transformation.

In this environment, all applications are going to need access to every app from any location. Only Palo Alto Networks can provide this comprehensive capability with our consistent network security across all of our platforms. We saw phenomenal number of large deals in this category. One of our largest deals was with a bank

	4
1-877-FACTSET www.callstreet.com	Copyright © 2001-2021 FactSet CallStreet, LLC

Palo Alto Networks, Inc. (PANW)	Corrected Transcript
Q4 2021 Earnings Call	23-Aug-2021

in the JAPAC region, where it was highly competitive and our customers spent over $10 million where Prisma Access was a cornerstone of that strategy.

After a phenomenal amount of growth in our SASE product category, we've seen our customer count grow by 50%, and now it's almost 2,500 customers. Also, 25% of these customers are net new to Palo Alto Networks, which is great. Not only are our firewall customers buying products from Palo Alto Networks, but our many new product capabilities are allowing us to penetrate the customer base even further.

Beyond the initial demand received for Prisma Access in our SASE category, we've realized customers want more capability. We recently announced autonomous digital endpoint monitoring - experience management - management sorry, ADEM, which is fast becoming a standard. We've realized that bundling the ADEM capabilities with other capabilities in our Prisma Access allows us to uplift our Prisma Access deals over time by 25%.

In addition to our SASE leadership, last quarter we introduced our fourth-generation hardware with high performance and attractively priced appliances. The newly introduced PA-400, which is 10 times, 10 times the performance of its predecessor, will expand our presence in the enterprise branch, SMB, and international markets. Most recently in our quarter, a US convenience store chain that previously used us only as a corporate infrastructure, deployed 400 - PA-400 Series to 2,300 stores.

Also on the high end of our hardware strategy, we're beginning to start seeing refreshes. This has been a trend which had been subdued. People were holding back, sweating their assets during the pandemic and we realized, as the pandemic has eased up, as companies are starting to come back to work, they have seen volumes go up. They have not created more infrastructure. As a result, we're seeing customers who are coming back, even in a hybrid form, starting to do refreshes in the hardware category, which has led to the hardware growth we saw this quarter, which has also underpinned some of the network-driven growth, or network platform-driven growth for us at Palo Alto Networks.

And last but not the least, we continue to maintain a leadership position in our virtual firewalls. We recently launched our partnership with Google, powering their new Cloud IDS with our VM-Series.

As you can see, continued acceleration of our software firewall business in its multiple form factors has allowed us to deliver approximately 47% of FWaaP billings in the quarter, where we even saw hardware growth accelerate. We finished our fiscal year 2021 with our software firewall and Prisma SASE next-generation security ARR at (sic) [over] $425 million. As you will see, these numbers will add up to show that our NGS ARR for the quarter was north of $1,180 million.

Moving to our cloud platform, as you know, we caught this trend early, investing three years ago in the cloud- native security opportunity. You might have all seen the flurry of activity from venture capitalists trying to flood this market with a lot more cloud security companies. We're delighted that they're validating our strategy, but we think we're far ahead.

A key measure we use for understanding how well our Prisma Cloud services are performing is the consumption of our Prisma Cloud service. In Q4, we had 2 million credits consumed. This consumption is broadening beyond our initial modules of Cloud Workload Protection and CSPM. We've launched IAM and WAAS modules. We already have seen adoption by north of 100 customers in the quarter. Over one-quarter of the global - our Global 2000 customers are Prisma Cloud customers with total customers growing at 47%.

	5
1-877-FACTSET www.callstreet.com	Copyright © 2001-2021 FactSet CallStreet, LLC