Palo Alto Networks Inc Fireside Chat Hosted by KeyBanc Capital Markets Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : Sure. So I do like to start with macro. So -- and by the way, so I'll sometimes maybe address to you, Nikesh, or to you, Lee, but obviously, at any point, either of you are more than welcome to add whatever is appropriate. But on the macro side, Nikesh, I also would like to start about where are we in the spending cycle relative to COVID and work from home as it impacts security? And I would just frame that to think that certainly, in security, there was an initial spending cycle just to deploy and to enable work from home in certain types of security technologies. So the question is, are we through that first cycle of capacity increase? And where are we relative to that? And what stage might we be in now?

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : So maybe we'll just try to be a little bit more specific in the sense of when you were spending for that initial...

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : Yes, it's micro, it's macro. Feeling back an ECO 101, ECO 102. So when -- in that initial move to deploy more capacity, so what were the products? Was it -- were they just more traditional products? Was it IPSec VPNs? Was it more end point? And now as you move into what you just call a step function to adapt to digital transformation, work from home, on more of an electronic world, has that changed? And how aggressive are people being in those new investments, do you think?

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : So I'll ask you a strategic/financial question. If we're spending less on hardware and more on software, obviously, you've been taking the company in that direction from some time. Is that strategy working out in terms of the mix shift and are you doing that aggressively?

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : So back to that question about what people were buying and they're buying down. I called out just to name a classic/legacy technology, IPSec VPNs. And here, obviously, I'd love to hear Lee's input as well. Are people ready because of this need to work from home? Are they ready to go to new types of Zero Trust architectures where you're working through Prisma Access as opposed to, say, again, is IPSec VPN?

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : So that's the assumption. In other words, whether I'm in at home, actually on campus or at a branch, a lot of the resources they need to access might not be behind what was the data center firewall. But might be out in the cloud, it might be in a distributed environment, more -- would have been a hub-and-spoke environment. So do you call it a direct app? Is this another term for what Gartner and others have called a SASE architecture? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 02, 2020 / 3:45PM, KEY.N - Palo Alto Networks Inc Fireside Chat Hosted by KeyBanc Capital Markets

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : So I'd love to -- I mean, I actually have that sort of set to talk about later on in the agenda here, but since we're on this SASE discussion now, let's go down that path a bit. Again, as you pointed out, this is a real change in architecture. And I think, Nikesh, you saw that a few years ago, it began taking the company in that direction by -- you had GlobalProtect Cloud Services, which was an early offering that had some capabilities here. You evolved that into Prisma Access. You ended up buying components including SD-WAN with CloudGenix as well as we've been developing there. This is all coming together here. So for Nikesh, tell me, am I right and you haven't seen that evolution coming? And where is that going? And Lee, I'd love to hear you talk about the specific technology choices that you made there and how those might compare to some of the other options that are -- competitive options that are out there for delivering this direct-to-app or SASE architecture?

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : Yes. I think -- I mean, where I like to -- a couple of the things that I want to make sure that we cover there. One is that you've chosen to partner with GCP and other cloud providers to provide this network. Other participants in SASE have done -- built more of a proprietary network. So I'm curious REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 02, 2020 / 3:45PM, KEY.N - Palo Alto Networks Inc Fireside Chat Hosted by KeyBanc Capital Markets about that question to begin with. And then the other one, I think -- I don't know, Nikesh, I think the quote from the last earnings call was something about people are -- is people are finally starting to listen to near. Was it standing on the rooftops and talking about -- I think you might have said screaming, but also talking about firewall versus proxy architecture. So that debate still rages.

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : Right. So I feel like though you're talking about full stack, you're essentially saying you need essentially layer 3, which is the IP layers you need for firewall capabilities, which is now outsourced into Prisma Access as well as layer 4 and up, which is more of a proxy or application-based approach. So again, another way of saying, if I'm not wrong, that a proxy is not enough in your view?

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : I guess there's a financial question aspect to the question about the choice of using public cloud as well. One of the things that was wonderful about the last earnings call was the ability to look into your cloud business and your network security business. But one discussion was about margins. Now SASE and Prisma Access, I believe, are in the network security side. But in terms of the way that you break those out, but it still raises the question of whether or not in your partnerships with the public cloud providers, whether it's on the SASE side or on the cloud security side as we'll get to in a minute, if you're getting the full economics that you could and how that might evolve over time. You're on mute.

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : That was it? I missed it.

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : Well, not that sell siders never ask provocative questions, but I guess I didn't mean full economics in any negative way.

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : How to wake you up, right? It does get the competitive genes going. Nikesh, when you came, I don't know if it's true on your side. I always remember where I am when important things happen. And when you joining Palo Alto was announced, I was walking out of the subway station in Main Street and Flushing Queens. That's where I was when I found out you joined.

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : No, some people, they remember like where they were when the shuttle blew up, JFK was assassinated. I remember where I was when Nikesh was named CEO. I was in Flushing Queens.

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : In any case, look, you came from SoftBank and from Google, sorry, and you were viewed and rightly so as a guy who could help usher Palo into the cloud era. What did you see as the requirements for securing the cloud at that time? And other words said, "Hey, it's a cloud environment. What do we have to do differently besides just put up firewalls?" And how has that changed in the last several years?

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : Great. And I wonder, Lee, do you have anything to add in terms of sort of the technical challenges for the, let's say, a different type of focus that's needed for securing cloud workloads, in particular, and an obvious thing to say, well, it's not just a networking problem. It's more of an application layer problem or the networking that does take place as more virtual or change? And for example, you made this acquisition of Aporeto recently, which I would imagine is aimed at helping for cloud workloads. So talk to me about how you think technically securing a cloud workload is a different kind of its challenge than an off-frame workload. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 02, 2020 / 3:45PM, KEY.N - Palo Alto Networks Inc Fireside Chat Hosted by KeyBanc Capital Markets

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : And am I right that Aporeto will be useful for cloud workloads in particular?

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : Got it. That actually brings up another question. I feel like -- I don't know, maybe some others have discussed this with you recently. I feel like I haven't heard your response on it. It was when -- and you bring up identity. So at one point, it didn't seem, Nikesh, as if identity was an area that you wanted to address initially. Is that still the case? And has your view -- the role of identity and what you need to do changed at all?

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : Nikesh, you started and you answered one of my questions, talking a bit more about Cortex and that's been a big direction for you guys in the last quarters. I think that in the way that you're breaking it out, you now call it the business unit or the P&L of cloud/AI. So I'd like you to talk again about the evolution from the time that we first saw the idea behind Palo Alto having a data integration layer or data lake and how that has evolved now to the data lake that you have towards the use of Cortex as it integrates into the things as end points, for automation. So talk about that whole unit and really where it's going.

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : And is that ad?

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : Yes. But again, I believe, as I pointed out in my quick intro, you were here from the beginning. And I think, at least, yes, it's true. Obviously, the next-gen firewall took firewall from layer 3 and -- layer 3 up through 4 through 7. But it was -- a firewall was a box that sat in a network architecture. And it's a different type of intellectual capital, human capital that's required to do data science. So how have you guys evolved the company in terms of capabilities in-house to provide that AI angle on things, build data lakes to make these intelligent systems that can be reacted?

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : Well, I think we've come to the end of 45 minutes. I want to thank you both for being here, and I want to thank Nikesh for being tolerant in my getting at least 1 of the 2 companies that he used to work for correct. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 02, 2020 / 3:45PM, KEY.N - Palo Alto Networks Inc Fireside Chat Hosted by KeyBanc Capital Markets

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : But thank you guys a lot. Relatively early on the West Coast. It's been a -- I've done Palo Alto for a very long time. I mean it was early -- way before they went public and the guy who was working for me, he's doing some channel checks. He said, you know what, this Palo Alto Networks, they're just popping up everywhere. And my association from the company began there and I'm really happy to say it's continued to this day. So guys, thanks very much for supporting that. And I look forward to working with you.

Question: Michael Turits - KeyBanc Capital Markets Inc., Research Division - Analyst : Thanks.