Palo Alto Networks Inc at Morgan Stanley Technology, Media & Telecom Conference Summary

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

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : <_ALACRA_META_ABSTRACT>Palo Alto has obviously changed a lot over the past 20 years. The cyber market has changed a lot over the past 20 years. Maybe narrow the focus in a little bit, I thought maybe we could start out with just like a state of the union, what's going on right now in terms of the demand environment, the threat environment and how Palo is adjusting to that environment?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Got it. I've always been of the mind, similarly, that security demand drives from expanding surface area and AI is going to expand that surface area, especially when you start to talk about agentic computing on a go-forward basis, rising threat environment and regulatory reviews. The one that I wanted to get your opinion on is the rising threat environment, because it's been so persistent over the past 10 years, 15 years, does that still work to drive demand? Or does it just keep the demand at a consistent level?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Got it. Pulling on the thread of AI and generative AI, there's both the demand side of the equation of AI expands the surface area, AI is in the hands of the threat actors. The phishing attacks that I'm getting are a lot more sophisticated. It's harder to tell them apart. It also gives you guys more tools, right? It enables you guys to -- you've talked a lot about the lack of security analysts and that being a critical need within security and something Palo can help pursue. AI seems like a good new tool in your arsenal to be able to help solve one of those core needs in the marketplace.

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : It's an interesting point you bring up about data. When I think about your tenure thus far at Palo Alto Network, and I think it matches with what's been going on in the industry, is an increasing focus on the data, right, making Palo Alto less about we're just blocking different threat vectors, but we are accumulating data about your threat environment, accumulating data about your positioning for that and making use of that data to help protect you on a go-forward basis. And it's part of the like platformization strategy that you have talked about, and it's part of what's driving people to consolidate more of their solution. Is AI another impetus towards that consolidation in that, because AI is going to accelerate the value of that data, it just increases the value proposition of what you're presenting in terms of a consolidated platform or that platformization.

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Right. And I go one step further, the model was get a best-of-breed solution for every different data type, if you will, or every different threat vector and try to tie together all those solutions, which created risk in and of itself because the bad guys could weave between your different solutions. You guys present a concept last year of platformization, of bringing together more of the solution onto one platform, bringing together more of the data. What's the traction been like with that initiative? What's the feedback you're getting from customers about platformization?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Got it. It sounds great. What's the friction? What's the pushback you hear from customers about driving that consolidation?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Because the cost of the breach is going to be directly related to how long is it persistent.

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Right. Got it. So you mentioned the Cortex XSIAM, your next-generation SIEM solution. It's automating security operations center. It's what we think of as the next major product cycle within Palo Alto. What makes you feel that this market is ripe for disruption right now? And where are you winning share?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Got it. I like that analogy a lot. It makes a ton of sense. In the EDR side of the equation, it was like the core technique being used for doing end point detection couldn't keep up with the threat environment. There was a necessity for a technological change. If we draw that analogy down to the technology layer, what is it about the Cortex XSIAM that is solving that similar technology problem? And what exactly is that technology problem?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Taking the focus from reactive to proactive. You guys, last year, I believe, signed that IBM partnership where twofold, like one, you have over 1,000 IBM consultants that are helping you guys sell the SIEM solutions; two, it gave you access to the QRadar asset and you can start to bring those customers onboard to SIEM. How has that partnership been running for you guys?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Got it. How far through that customer base have you guys gotten so far?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Got it. Let's switch gears and talk a little bit about SASE and where we are in that transformation. We've seen a lot of transformation within network security. SASE definitely met a need in the marketplace. It aligned to what we're seeing in terms of the explosion of cloud-based applications. Is there still that same type of appetite for a transformation? Is there still as much opportunity for SASE on a go-forward basis as we've seen over the past couple of years?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Got it. So can we expand upon that in terms of a lot of opportunity left. You're talking about 80%, 85% of the opportunity ahead of us. There's new technological changes that can help to accelerate that transition towards SASE. The competitive market in SASE has definitely expanded as well. Every vendor that I've talked to this week has a SASE solution or expanding their SASE solution.

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : True. How do you guys look to differentiate the Palo Alto Network solution from all the other vendors out there?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : And in terms of being able to leverage that firewall installed base, having that hybrid solution between hardware and software, how do we think about the ASP uplift when a customer goes from being just a more traditional next-generation firewall customers to a SASE customer for Palo Alto?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Right. Got it. You mentioned the Talon acquisition, getting that secure enterprise browser. Relatively early days in terms of this concept and pushing this out within SASE, what's the initial customer response been? Have you guys started to get traction with this solution yet?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Got it. Got it. One more area of the next-gen portfolio I want to touch on cloud security. Pollo was an early mover and early market leader in cloud security. How is the market -- where are we in terms of market penetration? How is that opportunity evolving for you guys over the past couple of years? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 05, 2025 / 11:20PM, PANW.OQ - Palo Alto Networks Inc at Morgan Stanley Technology, Media & Telecom Conference

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Got it. Got it. Old habits die hard, so I got to ask you about the firewall refresh.

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : And it does feel like we're in an up cycle or early innings of --

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Yeah. It is not --

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Okay. I'm listeningto Hamza. The -- could this be a positive for the platformization trend, right? Like as these customers come up for refresh, does that give you a good opportunity to go in there and sell the broader base?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Got it. I want to shift gears a little bit and talk about M&A strategy. And this is something that's been super impressive in the Palo Alto story. I remember early days when you took over as CEO. While the industry view, while the investor view on M&A had been very sour. There's a lot of consolidating acquisitions, a lot of acquisitions that didn't work. You came out with a point of view saying, listen, there's nothing inherently bad about M&A. You just have to target the right M&A. We have to be buying in the areas where the customers are going, not where the customers have been. and has been remarkably successful. I think talent falls into that category. Is that the same philosophy you take on a go-forward basis? And any areas that we should be focusing on of where the puck is going on a go-forward basis?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : Got it. I want to sneak in one last one on the profitability side of the equation. Powell has seen pretty significant improvements in EBIT margins over the last year. Can you talk to a little bit on backers perspective, what's driven that improvement in profitability? And is there a significant upside on a go-forward basis? Is there still further room for leverage?

Question: Keith Weiss - Morgan Stanley & Co LLC - Analyst : So just to be clear, that three- to five-year opportunity is just compounding the improvement from utilizing AI internally and becoming that next-generation company in terms of how you're operating? Yes. Outstanding. Well, unfortunately, that takes us to the end of our time. But Nikesh, thank you so much for joining us and sharing the Palo Alto story.