Palo Alto Networks Inc at Citi Global TMT Conference Transcript

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

Question: Fatima Boolani - Citi - Analyst : Well, I'm very excited to dig right into the discussion here. I want to start off with a very stratospheric level question for you. 6.5 years ago, you joined Palo Alto and you came into the industry proper with a fresh set of eyes and a clean sheet of paper. What are the biggest attitudinal shifts and changes you've witnessed in the market from a behavior, procurement, CIO pain point standpoint? And the flip side of that, what has remained stubbornly unchanged?

Question: Fatima Boolani - Citi - Analyst : It's getting heavy.

Question: Fatima Boolani - Citi - Analyst : I'm going to ask you the obligatory macro question. And I'm going to ask you this because you have a really interesting vantage point in terms of the types of pernicious problems and very real problems that you're solving for a lot of organizations across broad swaths of the economy. So you have CIOs, CTOs, CISOs coming through your offices, quarterly business reviews with your customers. So again, just from your vantage point, the macroeconomic conditions have both been favorable to you from the consolidation argument standpoint, but also, it's tough. Budgets are tough to come by. We've all become armchair macro economists in the course of the last 12 to 18 months. So from your standpoint, how is macro weighing or maybe even helping some of your customer dialogues in terms of budgetary allocation and budgetary growth?

Question: Fatima Boolani - Citi - Analyst : I want to go back to an earlier comment you made around, hey, there's this paradigm shift on a recognition from the technical C-suites, recognizing that a best-of-breed strategy obviously has limitations. So I also want to say you single-handedly added the term platformization to the investor vernacular. So on that point, there have been elements of platformization that you've been working on for a number of years, just kind of given how expansive your portfolio is. But circa seven months ago, there was definitely more of a concerted shift and effort towards this notion of platformization. So from a standpoint of what you saw in the market and economy, what was it in the evolution of the customer behavior that prompted you to say, let's make a more deliberate move and have a more institutionalized set of approaches on this notion of platformization? And I think for the uninitiated, you can tell us what platformization is.

Question: Fatima Boolani - Citi - Analyst : On paper, there's so much of a compelling value from exactly what you said, immediate ROI, better outcomes, a lower administrative and operational overhead for an industry that is notorious for having a deficit. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 04, 2024 / 1:10PM, PANW.OQ - Palo Alto Networks Inc at Citi Global TMT Conference

Question: Fatima Boolani - Citi - Analyst : I'm available after today. So when you think about the opportunities for your go-to-market organization to come up with these wealth of data points that are very compelling for your customers, what has changed culturally from a go-to-market perspective from your standpoint to help you drive towards more and more customers in your install base that are platformized? I think you've talked about, hey, there is a cohort of 5,000 customers that are most eligible to see the most amount of success from platformization, but you have 65,000 customers. So what is the eligibility criteria that, hey, these are the 5,000? And how should we think about that long tail of the remaining 60,000 plus?

Question: Fatima Boolani - Citi - Analyst : So related to that, we kind of meandered through this topic around, hey, platformization is allowing you to have very real conversations on dollars and cents with CFOs and even from an architectural and technology consolidation standpoint. So clearly good traction here. I think we're getting a good sense of what the killer advantages are for moving down the platformization curve -- or moving up rather. But these are inherently large deal tickets, right?

Question: Fatima Boolani - Citi - Analyst : It is a good thing. So I want to get your sense from, hey, you're doing more than $2 million on average in terms of ARR per platformized customer. That's big. But even if we take a step back, that's not as big in the grand scheme of things when maybe we compare your business to a service now.

Question: Fatima Boolani - Citi - Analyst : I want to sort of moonwalk into the next area of conversation that ties to platformization, but it's around your next-generation security franchise. This was essentially a non-existent business when you got here six years ago. You're now clocking in at a $4 billion franchise. So the first question, how do you see all of your efforts around platformization contributing to what are implicitly pretty high growth rates in a business of that size as you pave a path towards $15 billion of NGS ARR over the course of the next six years?

Question: Fatima Boolani - Citi - Analyst : Just that path towards -- naturally you're going to have more and more customers with more and more pillars. But even if you can tie it back to that aspirational, if every single one of your customers was paying you $25 million in ARR, that's an excellent outcome. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 04, 2024 / 1:10PM, PANW.OQ - Palo Alto Networks Inc at Citi Global TMT Conference

Question: Fatima Boolani - Citi - Analyst : There you go.

Question: Fatima Boolani - Citi - Analyst : Biggest surprises, and maybe some of the key challenges that you've encountered in, like I said, scaling what was essentially a non-existent franchise six years ago. I mean, certainly the path, it seems linear, but in retrospect, there was probably a lot of twists and turns. Anything you look back on in terms of getting from zero to $4 billion, getting from $4 billion to $15 billion, how you're going to circumnavigate some of those things that you've learned from the first wave?

Question: Fatima Boolani - Citi - Analyst : Now, NGS ARR, as I think most people are familiar, it's a multi-dimensional franchise. So you've got SASE, you've got Cortex, you've got cloud. At the highest level, when you think about the arc of the next six years, amongst those pillars, where are you the most bullish in terms of market share capture, monetization potential? I know you love all the pillars equally. I just want to say that.

Question: Fatima Boolani - Citi - Analyst : So you talked about this. So we'll stick to Cortex just because that seems to have so much more promise. You alluded to the fact that there has been major market shakeups here. I mean, you actually were part of shaking up the market with the AV IBM QRadar. So I wanted to talk about the whole QRadar transaction. It seems like a pretty big strategic coup for you. The calculus there, I think it's apparent why you did it, but I'd love to kind of hear it in your perspective. Why them? Because there are other assets in the space. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 04, 2024 / 1:10PM, PANW.OQ - Palo Alto Networks Inc at Citi Global TMT Conference And then just relatedly from an incremental product and go-to-market strategy perspective, how are you positioning yourself to be in the pole position for when SOC architectures and entire SOCs are modernized? Because I think we are on the cusp of a major technological upgrade of most SOCs over the course of the next five years, seven years.

Question: Fatima Boolani - Citi - Analyst : We were talking about this offline, but I think it's a really helpful line of conversation, just as it relates to incentives and incentive structures around IBM and Palo Alto. So Palo Alto-badged account executives versus IBM-badged services and systems integrators, how is that economic and incentive relationship working? I mean, what's the alignment looking like? You said the alignment is there, but can you put some sort of --

Question: Fatima Boolani - Citi - Analyst : Now, I'd be remiss if I didn't ask you about the NetSec SASE business. You had this be your dominant bread-and-butter franchise, but it's had a renaissance over the course of the last four years. So as you think about the scope of the SASE footprint and the market opportunity against what have been very much evolving market demands, what does the next five years of opportunity look like within the SASE franchise? And how are you focusing and prioritizing innovation in the SASE franchise, just from product development standpoint? And I think the genesis of the question is, there's going to be hardware exposure in your business for a long time to come. And I think there is maybe a perception or a misperception that other parts of the business with much sexier growth trajectories are going to get a lot more love from an R&D allocation standpoint. So what is the product strategy vision around SASE and how you continue to be dominant in the SASE arena, which has historically been where you've been very dominant?

Question: Fatima Boolani - Citi - Analyst : $200 million in ARR?

Question: Fatima Boolani - Citi - Analyst : AI products are about $200 million in ARR in aggregate?

Question: Fatima Boolani - Citi - Analyst : Okay. Just to round out the --

Question: Fatima Boolani - Citi - Analyst : I wouldn't be a card-carrying software analyst if I didn't ask you about generative AI. So I appreciate you saying that. It sounds like a lot of infusion of those capabilities across the portfolio, but more specifically around the governance of AI is kind of the opportunity you're tackling. So I appreciate you kind of front-running that. Just to round out the NGS ARR conversation, Prisma Cloud, it's been an arms race here. How are you ensuring that there's franchise growth durability here outside of your fortunes being tethered to general hyperscaler adoption trends? Historically, I know there's been a lag impact. But how are you kind of thinking about the durability of that franchise? And just from a market structure perspective, very different than it was two years ago, five years ago. Pricing dynamics have also changed. I think maybe you'd argue there's a little bit of an oligopolistic behavior in the market structure, but you've been telling me there was.

Question: Fatima Boolani - Citi - Analyst : I love it. Okay. What's the calling card here for you to take disproportionate share with Prisma Cloud?

Question: Fatima Boolani - Citi - Analyst : Fix that.

Question: Fatima Boolani - Citi - Analyst : Some of us. The growth objective is crystal clear, but I think the unenviable task is you've got, again, a very wide portfolio around innovation, innovation priorities. How are you thinking about R&D prioritization, but also related to that kind of running and driving more and more efficiency as a business? You're a big company now; you've grown up. So there's some of these priorities around, hey, some of us want to see margin expansion and free cash flow growth and all those finicky things. So how are you thinking about the overall aggregate investment envelope and operating expense prioritization?

Question: Fatima Boolani - Citi - Analyst : Last few questions for you to wrap what's been a fantastic discussion. M&A, you've got your fingers very much on the pulse on the market. You've been very active in the space. Observations on dislocations or lack thereof in the private markets, where are we in the cycle of rationalization and innovation and intrigue? And then my final question for you is, the last six years were so much fun for you at Palo Alto. You signed up for another five years to run the company. So I wanted to ask you for your policy agenda in the way we end our conversation for the next year. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 04, 2024 / 1:10PM, PANW.OQ - Palo Alto Networks Inc at Citi Global TMT Conference

Question: Fatima Boolani - Citi - Analyst : Next five years of the policy agenda.

Question: Fatima Boolani - Citi - Analyst : Fantastic. Thank you so much for such a candid discussion. Thank you, Nikesh.