Palo Alto Networks Inc at Goldman Sachs Communacopia + Technology Conference Transcript

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

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : I wanted to start on the milestones of the last 5 years. And I think about the learning curve that you talked about when you first joined the company, the technical debt and building up the product portfolio going from 1 platform to 3 platforms. And I want to ask a forward-looking question, which is, what do you think the 1 or 2 milestones are that will define the next 5 years of the company?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Do you think you can get there with the 3 platforms that you have today?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Let's stay on the theme of SOC. And I want to think through a little bit how the data set that you have is differentiated because you are collecting telemetry across the 3 platforms. So maybe as the first part of that, talk to us about the R&D synergy that occurs from being able to connect the dots across the different types of data that exist in an enterprise.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : The technology that you're using, the drinking your own champagne, so to say, to get your own SOC operations down to a minute in response time. Are there other vendors that you still need to leverage in order to be able to make that happen? Okay. And so then the question for your installed base is, where do you think customers are in embracing the evolution from endpoint to XDR to or to XSIAM to full SOC transformation?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : So we've seen examples before where regulation changes. And in theory, there is a hope that it changes the urgency on SOC transformation or on security transformation. And sometimes, it doesn't happen. Are you at a point where customers are paying enough attention that you're seeing a change in the urgency because of something like SEC regulations?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Fair enough. So I'm curious, you mentioned a unique way in which SOC transformation is differentiated because of the outcomes-based results. Are there other observations that stand out to you in how SOC transformation is different from network transformation and the types of network transformation that you've seen at Palo Alto Networks with SASE, for example?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : So it's interesting that you started this conversation with talking about the fragmented nature of security and 1.5 points of share are going to something that more accurately represents what we've seen in all those software markets. The other piece of this is what's happening at the TAM level. And if I think through the evolution of security being tied to digital transformation and security bunches up into the right. The question I have for you is, do you think that the security TAM could grow faster over the next 5 years than what it has done over the last 5 years because of the next phase of, let's say, AI catalyzed digital transformation?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : So as you level up the conversation you're having beyond just one piece of the security architecture to what I would describe as more of an architectural conversation or strategy conversation at the highest levels of your customer organizations, how do you think about someone like a Microsoft as a competitor? Or even we had Google on stage earlier talking about their security business standpoint of security to their road map. How does the competitive environment evolve at the strategy level? 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 07, 2023 / 10:45PM, PANW.OQ - Palo Alto Networks Inc at Goldman Sachs Communacopia + Technology Conference

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Does the same level of commentary apply innovation versus competition equally across all 3 platforms? And the reason I ask is because security, the market leadership there is an order of magnitude measurable in market share data, for example, relative to something like Cortex a cloud where it's harder for us from the outside in to look at market share data.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Absolutely. So I want to focus the discussion now on to fiscal year '24. And I remember you made a comment on stage last year on every year has a degree of unpredictability to it.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : And so my question to you is, how did the fiscal '24 process planning compare to fiscal year '23? Are there are 1 or 2 things that stood out to you? I know you've talked about how cost of capital is impacting customer purchases. What was different this year?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Why not make a more active shift towards 1-year billings duration where you can maximize annual billings as opposed to total contract value?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Because then you solve the value of money equation.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Okay. So in the context of the change in the buying environment, what were the key takeaways from sales kickoff? I know you spent a little bit of time previewing with us things like Cortex being sold through the core sales.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Talk to us about the change that happens when you take a specialized product like Cortex this year or SASE last year and you introduce it to your broader sales force. Order of magnitude boots on the ground, how does that change the number of conversations your broader team is having?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : What is the milestone you're looking for to be able to do the same with the cloud? Or do you already have cloud training and enablement?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : And based on the success that you've already had with Cortex, do you already have the buying relationships that you need with the key personas of the enterprise to be able to cross sell Cortex into the firewall [space]?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Yes. It leads to a nice question about the system integrator ecosystem because we know that SIs have relationships with multiple point products to your point. So how do you go about converting or bringing over more SIs over to the platform approach? Can they collectively make the same amount of money or more money selling the Palo Alto platform versus the point products? What are the selling points that you communicate to them?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Absolutely. All right. I'm going to pause and go to questions from the audience. So I'll come back to one of the older debates in the firewall space, which is physical versus virtual. And I'm curious, as you've had more success with virtual firewalls, how do you think about that TAM being substituted versus additive?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Do you find that customers that the network transformation piece of this towards more distributed network security is still tied to the classic 3- to 5-year firewall refresh cycle or has it leveled up into something that's independent? 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 07, 2023 / 10:45PM, PANW.OQ - Palo Alto Networks Inc at Goldman Sachs Communacopia + Technology Conference

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Yes, absolutely. Here's my question on margins. So your FY '26 operating margin targets (inaudible), if I think about the best software businesses that we know that are doing north of 40% with scale, and I think about the comments that you've made on cross-selling into the installed base and how accretive that is from a cost acquisition standpoint because the cost of acquisition is lower and you're selling all of this really rich revenue. How do you think about the limit to where your margins can go over time?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : How do you reconcile that with this idea that security is one of the most innovative or fast-paced product cycle industries? And maybe that's more of an R&D leverage question.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : I'll end with a capital allocation question, which is you've talked about the volume start-ups that your Corpdev team meets with. Any interesting observations to share about the types and qualities of companies your team is finding interesting today versus a year ago or 3 years ago? 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 07, 2023 / 10:45PM, PANW.OQ - Palo Alto Networks Inc at Goldman Sachs Communacopia + Technology Conference

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Absolutely. Fantastic. Please join me in thanking Nikesh for his time.