Palo Alto Networks (TICKER: PANW) Palo Alto Networks Inc S Panw Ceo Nikesh Arora Presents Citi 2021 Global Technology Virtual

Palo Alto Networks, Inc. (NASDAQ:PANW) Citi 2021 Global Technology Virtual Conference Call September 15, 2021 1:00 PM ET Company Participants Nikesh Arora - Chairman and Chief Executive Officer Conference Call Participants Fatima Boolani - Citigroup Inc. Fatima Boolani Good day. Good afternoon. Welcome to day three and the final day of what's been a terrific Global TMT Conference here at Citi. I am very pleased to host this afternoon session with Palo Alto Networks. And with me, I have CEO, Nikesh Arora. Nikesh, thanks for joining us. Nikesh Arora Hi, Fatima. How are you? Question-and-Answer Session Q - Fatima Boolani Good. Glad to have you. Before we get into the meat of the discussion because I know we have plenty to talk about. I just wanted to remind the audience, if you do have any questions, please feel free to email them to me at fatima.boolani@citi.com and I will do my very best to get them incorporated in our conversation and dialogue. So with that housekeeping aside, Nikesh, I want to start with you, it's been an eventful couple of days for you this week and last week, and so I want to dig right into the Analyst Day. You had your first Analyst Day in two years on Monday. What are the main highlights you want to emphasize and impress upon investors? Nikesh Arora Well, first of all Fatima, thank you for having me here and good to see you in a different setting covering this name and part of the market. Look, we had an Analyst Day on Monday, and part of the emphasis was showing that we are sort of entering our next phase of Palo Alto Networks, where the last phase was defined by us doing a lot of heavy lifting, doing a lot of product building and getting into categories and establishing ourselves where we had ideas and we wanted to get to a point where we had good product market fit, good customer adoption, and really understanding how to get that to scale. And we are at a point where we have three very well developed platforms around Strata, Prisma and Cortex, the first one around network security, the second one around cloud security and third one around automating the SOC capabilities. And we really felt this was the right time given the tailwinds we are seeing in cybersecurity, given the digital transformation we are seeing. To emphasize that, we see a robust opportunity ahead of us. We see us being able to do $8 billion in revenue by FY2024, $10 billion of billings, get our free cash flow rate up to 35% by 2024. So really getting to a point where we think we are not just the largest cybersecurity business, but as a cybersecurity business across all three platforms, development at scale. Fatima Boolani And maybe on a related note, taking a step back, you've been at the helm for now three-and-a-half years. So I want to ask you what has surprised you most, both negatively or positively in the last three-and-a-half years as CEO, and maybe how have these observations influenced a lot of what you talked about at Analyst Day, and frankly, the refreshed growth and margin algorithm that you've put out? Nikesh Arora Yes. Look, I think from a positive surprise perspective, what is interesting is as we didn't quite say it like that point in time, now we can say, we had a bunch of technical debt we have to pay because cybersecurity companies make their swim lane or win that swim lane and really let other people win those swim lanes. And we actually set an aspiration to have a consolidated platform across eight different categories, and we feel that - we feel vindicated, we feel like we built the three swim lane platform, which talks to each other yet can also be picked up as a best-of-breed in this category. And that surprises me that to get a team and get it motivated and get it to a place where we can actually execute that in the last two-and-a-half, three years was very surprising positively so. The part which I've learned is that you still have to go tackle this one customer at a time and each customer has their own maturation cycle and an option cycle or acceptance cycle, and then forth their budget cycle. So it's kind of not like if you build it, they will come, we have to build it and go to every one of them and convince them they have to go migrate down this path. And I think the recent cyber attacks, the cyber events that we've seen have allowed us to go convince those customers have opened the door for us to have those conversations. So more work to be done there, but at least I feel a lot better today than I did three years ago in terms of saying that time we are building products in certain categories, today, we believe we have leading products in those categories. That's a different challenge, but somewhat a higher degree of comfort. Fatima Boolani So on this notion of build it and they will come a good segue into thinking about your addressable market opportunity. You talked at length about being able to prosecute what is close to a $100 billion TAM growing in the teens. So relative to your medium-term outlook, which you put out a 22%, 23% ZIP code between revenue and billings. Help us think about which solution pillars in a much broader platform footprint do you think are going to drive that outsized growth relative to the market growth in advocate? Nikesh Arora Yes. If you look at the three categories on network security side not only is hardware growing again, the industry is somewhat low-single digits, mid-single digits. But if you couple that with the fact that people might get into cloud need software firewalls, and really we've seen this huge upsurge in SASE or remote security demands where actually the network TAM also bending into the network security TAM because you are not only providing security, but you are also providing remote connectivity and monitoring an SD-WAN, which is kind of often in the network space. So that allows the network security TAM to be faster than just the firewall TAM. So not only are we seeing the TAM growth, we also have more product in that category. So we didn't have SASE two years ago, now we do. So we are seeing -now we expect to see growth there. And from a scale perspective, that's still the largest part of our business. So that part of the business should grow and is the largest part of the business. So in absolute dollars, that's probably going to kind of contribute the most. Adjacent to that is the cloud security space, where the public cloud doing a $150 billion between Amazon AWS and Azure, we think that cloud security TAM is approximately 2% to 5% of whatever you spend on public cloud. Now, what you spend on the public cloud is today, what you deploy, it will take you 12 months to 24 months. So there's a bit of a lag between when people commit to go into the public cloud, actually deploying full scale security there, we are tracking how many customers can we penetrate. How many modules the other customers use because we believe the more penetration we see there, the more module adoption we see, the better the prospects to longer-term as more and more volume goes to the public cloud. So from that perspective, that will see steady growth and it will bear the growth of deployment in the public cloud for most of our enterprise customers. And last but not the least, on the security operations side, it's a competitive market on the XDR front. We are finally hitting our stride in terms of being able to get 300 to 400 customers a quarter, fully ramp that up further. But at the same time, we think that category expands in the next five years into more of a SIEM plus XDR plus automation category and where, in that category, we are very well placed. We are the - I guess, the second largest security automation business or one of the top two. We have XDR, which is now hitting Insights and Xpanse, which is weak in this category of Attack Surface Management. The more we integrate them, the more we can get an ingestion as part of that flow, we think again, that TAM expands for us and allows us an opportunity of growth there. Fatima Boolani I want to jump back and sort of pull on some of the threats vis-a-vis your network security business. It is sort of your flagship, bread and butter business, so to speak. And specifically, the hardware and product business, certainly investors have this view that hardware form factors are going the way of the dodo bird just kind of given the broader secular trends we are seeing, right? So can we just miss bust around here for a second because it is still about 20% to 25% of your business and immensely profitable. So just some of the puts and takes on the hardware and product business specifically, and you did characterize some increased confidence in that business after a period of some delays. So what are some of the assumptions that are sort of going into that confidence in hardware market? Nikesh Arora In the firewall business, we're glad that we've managed to convert 47% of that business to software. We think that gets to about 62%. So I think the industry was around - 60% of the firewall business will be software, we are at 47%, three years ago, we were in the 20%. So having reversed that transformation, and that's your thesis, the dodo bird, then there should be - others who should be more worried than us. But the dodo bird is alive. It's kicking and it's waking up again. And thinking of it is the people coming back from the pandemic, a lot of people postponed some capacity increases during the pandemic, there's nobody there, the data center upgraded their firewalls. So I think we'll see that happen. Couple that with the fact that it's time for refresh now in the next six to 12 months, again for us where we already have launched a - so a third piece, we've launched a newer, lower end form factor, which we have in the market where some of our competitors takes the lion's share of that market. With that launch, we are no longer letting lot of people to get a big walk in that space. So coupling all of those things, adding Okyo, which we just launched last week, add all those things together and we believe there is a mid single-digit growth rate that we can deliver. Hardware, couple that with all of our firewall business, we think we grow our firewall-as-a-platform business north of 20%. So we still keep taking share - more share in software. 80% [ph] of hardware is alive and the dodo bird lives on. Fatima Boolani And how would you sort of counter argue or respond to investors who believe that cloud migration and cloud adoption is mutually exclusive from - and remote work and hybrid work is mutually exclusive from stronger refresh activity in the branch office and in the data center for hardware form factors specifically? Nikesh Arora I'm sorry, mutually exclusive in what way? Fatima Boolani So a lot of investors do have this view that as much as - you're seeing some of these trends, you still have the drumbeat of remote work and flexible work, right? So you never really going to get back to that 100% in the office sort of situation. And so how do you sort of reconcile, again, some of the - a lot of the strengths that you're - and the revitalization you're seeing in the hardware business with a dynamic from a - work from anywhere standpoint that would actually be counterintuitive to that confidence? Nikesh Arora No. But I think - Fatima, I don't know. I mean, Citi being started shutting down the buildings and shutting down capacity because you guys aren't back to work. So I don't think companies can get away with thinking one planned capacity for all employees coming to work or - network capacity for everyone to work remotely. So you're seeing that capacity actually happen on both ends. And to be fair, actually, the remote security capacity expansions fully happen in the market. I think that's a five to eight-year trend we're going to see how [did the company going to get through] [ph] that cycle. So I think that's net tailwinds on the network security business. I don't think any CIOs or CISOs sitting there saying, I'm going to lower the capacity of my data center because don't forget, remote access or you accessing your data center is very marginal use case. There's tons of volume associated with the end consumer services that offer because I'm offering e-commerce, I'm offering streaming. I've got nothing to do with where I'm working in the office or working at home, it has to do with how much volume I'm processing behalf of my business, that volume is going up, whether you work from home, whether you work in the office. So I don't think there's any question in my mind that we're going to need more firewall capacity in the next five years than we have today. Fatima Boolani Fair enough. Maybe shifting gears, you talked about a couple of new metrics that I found really interesting and fascinating. You've essentially doubled the number of accounts in your base that pay you $1 million and the number of accounts that pay you $10 million has almost tripled, I think it's a little over 2x coming off a small base, albeit. And in the fourth quarter, you talked about a customer with whom you booked $100 million of business. So what are some of the commonalities between these mega customers that you see and what catalysts need to transpire for your entire base of 85,000 customers to mimic the same behaviors that you're seeing from these mega customer accounts? Nikesh Arora Well, as long as the 85,000 customer generates the same revenue in the first month, okay, at a more serious curve. Look, people who bought Palo Alto Hardware Firewalls five years ago or four years ago, couldn't buy a whole lot. They had everything sort of in the - and everything - the hardware portfolio was with them. They are salespeople who have built great relationships with those people and customers are happy with the Palo Alto implementation walk up and say, hey, you guys moving to the cloud, you get cloud security, or you guys need endpoint security, you got XDR, you won't go do automation, you should get XSOAR. So our satisfied customers are at the top of the pyramid, who are very happy with our products and services now have the opportunity of getting more from us because we've given them a great experience. So from that perspective, the number of customers we can get to spend $10 million thus tells you that they are buying more than one Palo Alto platform. And it's not like it's over time, the million-dollar customers evolve five, five and evolve to 10, 10 evolve to 20 and 20 evolve to 50. We had north of $50 million deals on last quarter. You couldn't configure a hardware solution customer or they'd have to spend $50 million, you'd have to promote security in there. You have to have Prisma cloud in there. You have to have XDR in there. So having a lot more best-in-class product in our portfolio helps us target or deliver those capabilities to those customers. So that's the catalyst that's going in. For that to continue to proliferate and for that to get bigger and bigger, we need to make sure that our entire sales team is fully trained. We need to make sure that we're driving the right relationship between our core team and our specialist team. And that's what we're focusing on, and that's what in terms of next two, three years are about. Fatima Boolani I can appreciate some of the newer solution pillars are improving your reach with brand-new logos. So customers that previously have never transacted with you, right? But the reality is you do have a substantial base of customers to form. So as you and Dipak were soundboarding on the medium-term guidance, can you help us think about what sort of embedded in that medium-term outlook in terms of customers graduating from paying you $0.5 million to $1 million to $10 million to $100 million, I mean, what's baked into that outlook? Nikesh Arora Well, it is both of a bottom up and top down analysis that in terms of how do we see the progression of our customers deploying more and more Palo Alto. At the same time, there's robust planning from our perspective in terms of what does our opportunity pipeline look like, what does our penetration look like. And really most of the impact is going to happen in our global 2000 customers. They have the capacity to spend tens of millions of dollars and they have the need to spend tens of millions of dollars. That's where kind of like a lot of the concentration is, and there's a lot of BJ's arrivals, there's a lot of work we're doing and making it more efficient to work with the channel, making more efficient work across some of our international regions. So we have a lot of opportunity to penetrate a lot more customers. And to your point, I give you an anecdote, 25% of our Prisma Access customers are net new to Palo Alto. When that happens, you go to somebody and say, listen, I am going to buy firewalls. I bought them three years ago from somebody else. But I love the way you guys are doing your remote security. Let's go start with that project and when it comes time for renewing the firewalls, we'll take a look at you in that context because you deployed Palo Alto remote security. So it opens the door again for us to go back to a customer where somebody else has gone in and sold them something else out of their portfolio where we have the opportunity because of a larger portfolio sharing other capabilities. Fatima Boolani A big part of - I imagine your bottoms up planning and forecasting has been looking at your go-to-market organization and your sales capacity. Can you just level set with us in terms of how much that sales capacity has grown in 2021? Some of the broad expectations you see playing out in 2022, and I'm just hearkening back to some of what Dipak was saying on the earnings call. But just if you can give us a reminder there and then we can chat about the speedboat initiatives in a little bit more detail? Nikesh Arora Yes. Look, we have about 4,000 sales people out in the field, about 3,200 in the core business, 800 odd in our specialists roles where they step in to support our core team when we have large complex deals where we're competing aggressively with other players in the industry. So kind of a model we're diving from an efficiency perspective where we have dedicated people if required larger deals because sometimes we end up in a situation where competition is proposing a certain solution. We have to close our solution. We need to make sure we have qualified people. And we've managed to hone that capability and process over the last two years as we've built these newer capabilities and newer speedboats. And part of going forward in the year, next year and year after is to see how to continue to get leverage from that joint one Palo Alto motion across all of our platforms, at the same time have the specialist capability if we have to go and do a hand-to-hand combat situation vis-a-vis individual customer. Fatima Boolani So just by my math, just a quarter of your sales force is even specialized in solution disciplines, if you will. Nikesh Arora Yes. We have 50% of our salesforce sells Cortex and 50% of our salesforce sells some other products. So it sound like our core team doesn't sell all this stuff, they do. The specialist team is available to assist them when needed. So you don't need one is to one coverage from a specialist perspective. You can actually - the relative revenue we have, the billings we have from NGS versus others, so you can see that our specialist salesforce are not out of proportion from the overall business. Fatima Boolani So is there something that you need to do from an enablement standpoint to get the broader proportion of the sales capacity to be equipped to sell more of the portfolio? And maybe as a related question, as you think about the sales quota strategy for the rep base, are you incentivizing behaviors in a certain way to advantage the adoption of certain pillars? Or how do you think about that as you know the carrot and stick approach to drive adoption behavior and selling behavior? Nikesh Arora Look, there's constant enablement that goes on in the company. We launched our product. We make sure that our teams are enabled. Having said that, with a $50 million deal or $20 million deal, you need the dedication of the core salesperson to work with each of the stakeholders on the customer's side, make sure that a lot of people puzzle are in place. You bring in specialists to deliver the capabilities on the cloud side or the Cortex side or the firewall side. So the enablement is there. People can actually sell all things, but sometimes you will need specialists help when it comes to specific technical issues or specific deployment questions and how it works. And so that's why we're striking the balance between the core and the specialist team. In terms of incentives, you spend three years honing this mechanism about how do we make sure that the teams are incented. So our core teams are incented to sell everything. In addition to that, our speedboat teams are incented to sell their product and we are able to strike the right balance in terms of making sure that there's ample focus on every category. We want to drive revenue. We've tried different ways and we think we've got [indiscernible]. Fatima Boolani That's helpful. I think the flip side of the sales enablement coin is the attrition aspect. Again, you've been very assertive in your sales hiring. It's a very competitive labor market right now. I think it's a great time to be enterprise software and a cybersecurity salesperson right now. And so how do you manage that aspect of the sales productivity enhancing equation? Nikesh Arora Well, we understand the market is - right now the market is very hot. It's very, very exciting if you're an enterprise salesperson. Having said that, our sales attrition is actually lower this year than it was in prior year and part of that is because we think our portfolio is robust. People are finally finding out and selling firewalls for the last three years to these 10 customers. I have more capability of selling SASE or cloud or Cortex. And I really know them, they like our product, they like the company. That helps. Our employer brand has gone up tremendously in the last three years and Liane alluded to that while she was presenting at our Analyst Day. So that's helped. Our stock price helps because people have a lot of unvested equity if the stock price goes up. So all these things go in and honestly maybe a way more emotional for me than it is, but people enjoy working here. And you go to a new startup, its great. You can get a new job. You can probably get 10% more money, but you got to go sell a $100,000 ACV product and go grind yourself out, or you could be doing $10 million deals at Palo Alto. Fatima Boolani Fair enough. Another aspect of... Nikesh Arora So just to add to that, we watch our business and as we enter Q3 to see how our business is going to land for the year and how we expect next year to be. So we've actually hired in advance of our next year because it takes four to six months to get your salespeople up and running and be productive. So you want to get them in. You want to get them enabled. You want to understand what the capabilities are, where their accounts are because you want to hit the ground running. So we've actually hired aggressively in Q3 and Q4 to prepare for this fiscal year, and we've seen a lot of attrition than we expected. So we feel comfortable that we can - we have ample sales capacity to deliver what we have to deliver, yet at the same time manage our attrition that we are bound to see. Fatima Boolani I like that detail. The other angle of sales capacity and sales execution is having more reps to market with distribution. You've been pretty vocal about the fact that the traditionally defined channel partner or value added reseller is perhaps no longer a reliable proxy for the type of momentum that you're seeing in the business that you're seeing in the pipeline, right. So talk to us about what's changed and ultimately how we should gauge your success in the marketplace outside of your direct salesforce and direct sales touch? Nikesh Arora Well, I think most of our business still comes from a channel, but I think the definition of channel has expanded. I was reading one of the notes last quarter, when we're in our quiet period and somebody had gone and done a channel check, and we actually knew from reading the note who they might have talked to. Problem is they don't understand that today Accenture, Lloyd, Pricewaterhouse, Orange Business Services, AT&T Business Service, Verizon Business Services, these guys are as bigger channel partner, if not bigger than some of the other traditional partners. And these guys are not open to conversations about channel checks in the quarter. So you could miss the entire profile, not just us, I'm sure, many other enterprise companies because we're selling stuff on Google's marketplace, and [indiscernible] marketplace through Accenture transformation services, through IBM's transformation services. You're not going to pick it up. You're going to pick up the traditional hardware-based channel partners, 25% of our business, like you said, is hardware, 75% are software and services. So the channel makeup is changing. The partners are changing. A lot more of the transformation is driven by consulting companies, where product is part of the overall capability, but it's not leader. So you got to make sure we're connected well with all the SIs and SVs. We've been doing a lot of work in that area over the last two years and we feel really comfortable that we have good partnerships. Some business comes direct, especially when the business gets to scale. Like when you have a $50 million deal or customer spending $100 million, they want to eliminate any friction, any third parties, any leakage of discounts, any leakage of commission. So they're trying to make sure they optimize the economic value for themselves, so. And at that point in time, it use them and us to put legal people in the room to go and get the deal done as opposed to deal with some other third-party favor, which is - it's not unique to us, which is kind of very standard across the industry. If you're going to do a very large deal, you're going to make sure that you optimize it for your scenario. Fatima Boolani I suspect the evolution of your partner base necessarily had an impact on your economic arrangements with your partner base. Anything to shed light on there, I mean, you're selling a lot more subscription and cloud delivered and cloud form factor solutions. So how does that sort of translate into how the economics have evolved between you and your largest partners? Nikesh Arora I mean, honestly, they stay pretty consistent because many of our largest hardware partners are not sitting on their laurels. They actually understand that dynamics much better than they might let out. They're building services business there. So there's a balance of us selling product and giving them services business where they come in and provide some of the transformation service or they provide some of the deployment services or they provide some of the monitoring services. So there is a - I think the economic balance is pretty consistent, but the kinds of things that they're doing to support the customers might have changed. Fatima Boolani Fair enough. I want to jump back to growth trajectory and topline trajectory specifically from the standpoint of billing. So again, taking a step back, if I look at the last eight quarters, reasonable degree of variability in your growth rates, right, 17% to 34%, if I just look at the quarterly growth rate over the last eight quarters, you're anticipating a low-20s sort of plateau looking forward and in your medium term guide. And so help us understand some of the distinct factors are in your billings trajectory going forward relative to what you've seen. And maybe that's in the form of some payment terms that are lapsing from what was a very difficult year for a lot of organizations last year or anything you've seen around duration from your customers shifting. So any sort of points we can digest on sort of billings trajectory and what's sort of going into that because it's a complex figure? Nikesh Arora I think, honestly, Fatima, a better gauge for investor's is the RPO. Because if you look at the market, there's financing that gets involved, there's annual billing terms that get involved. So that will color and has the ability to create variability in billing. Like, if I do $100 million deal in the quarter and the customer says, I'll pay you every year. You suddenly have to take off, it's a three-year deal to take off $66 million of billings. It's still an RPO, but I can't report as a $100 million billing. I can only report $33 million billing. So those things come and go. And unfortunately, customers don't care that changes your growth rate percentage quarter-over-quarter. They just want to get the deal done the way they want to get it done. So I think if you look at the RPO trend that shows you a much more consistent evolution over time, over quarters because it lead by duration impacts and duration impacts are not that major. Our duration has been pretty consistent for the last three years in the 35 to 36 months range. So that really doesn't impact billing. What does impact billings is the annual billing. When people went into the pandemic, they're like, I want to pay all the cash upfront. I'll pay you every year because I'm preserving cash flow or somebody says I want to be financed. And we set a plan for that reason so that people get financed. Now that doesn't - that is kind of like annual billings. They pay us when they're willing to pay us, but beneficial is up in billings, but annual billings doesn't. So you get a lot of movement from an accounting perspective. If you look at RPO, it gives you a very clear picture. We booked the business. We're eventually going to bill it. And I think that Dipak showed a phenomenal slide, shows that our RPO has gone up to 58% of the revenue, right, which tells you a lot more predictability and visibility into future revenue than we did when it was 47%. That number - as long as the RPO growth rate is growing faster than your revenue growth rate, your revenue growth rate has an upward lift towards the RPO growth rate. Fatima Boolani You mentioned payment concessions and again, it was a very unique year last year. Can you give us... Nikesh Arora Prefer to say payment terms. Fatima Boolani Payment terms. Flexible payment arrangements... Nikesh Arora [Indiscernible] do not pay. Obviously, I'll pay you every year at the beginning of the year, still paying me before I give you the service. That's a great business to be in. Fatima Boolani Fair enough. How about flexible payment arrangements for customers in dire financial straits in the middle of the pandemic induced prices? So we're essentially sort of anniversarying some of those timed arrangements. How should we see that sort of unwind actually help the model this year and you brought up Palo Alto financial services? Curious about customer uptake, how impactful it is to the model and how we should think about that as a competitive tool for you in marketplace? Nikesh Arora Well, it helps get business done in cases where customers are not willing to fund their entire purchase or they're not ready to do it. So it's been net positive to helping the business. From a model perspective, I would suspect we've given you a very clear evolution of free cash flow guidance and pretty much the billing stuff and the manifest stuff impacts free cash flow. So to the extent, we've given you very clear free cash flow guidance. We've absorbed any modeling impacts of billings or manifests in there. And to the extent billings vary because of annual billings, actually RPO is a better way to look at it and then give you a better sense of whether the business have continued strength or the billings are getting varied because of some mechanical factor. Eventually, we build them, right. If you didn't build people last year for a lot of the business we booked, we'll build them this year. Fatima Boolani Good segue into a discussion around profitability since you brought up free cash flow and your free cash flow guidance. But let's start with the P&L. You're looking at about 50 basis points to 100 basis points of improvement after fiscal 2022 through fiscal 2024, that's a steady improvement. But I'm wondering what's holding back a more visible improvement, especially as you exit, what was a very heavy investment period for you in fiscal 2021 along with M&A that was very dilutive to the OpEx profile? Nikesh Arora The M&A wasn't as dilutive to the OpEx as our investment in the product capabilities and so far go-to-market capabilities was and remember we have to grow the business 23%, 23% in billings faster in RPO. So that is required to make sure that our feet in the street, and we believe we can still extract margin out of that business. We don't want to sacrifice the growth opportunity. So we will be cautious about trying to squeeze the margins too much. But I don't think our operating margin leverage stops in FY2024. We're just guiding you to FY2024. So unfortunately doesn't fall into neat package by then, or it should continue to evolve the option and continue to get better. And I think we have to strike the balance between revenue growth in that $10 billion, a company that grew at 23%, 22% is the largest cybersecurity company out there. Fatima Boolani And maybe to ask it in a slightly different way, what would need to happen for you to materially exceed that 50 to 100 per annum basis point improvement book and on the operating margin front, what would it really have to go right for you to exceed that threshold? Nikesh Arora I think those are very good numbers, Fatima. I think those numbers are spectacular. I mean... Fatima Boolani Just poking the bear. Nikesh Arora Yes. Calling me a bear, okay. Fatima Boolani On the same line of discussion vis-a-vis free cash flow, we talked a little bit about what some of the contributing factors are, and really the inputs in billings and some of the assumptions there on given terms and duration. But when we think about what are - essentially two - two very different businesses under the hood as it relates to profitability profile. When I think about your hypergrowth businesses within the NGS bucket, can you point out for us what the lowest hanging opportunities are for efficiency gains in sort of ClaiSec, what you historically call the ClaiSec business? Nikesh Arora I'm sorry, are you talking about free cash flow perspective or an operating... Fatima Boolani From a free cash flow perspective? Nikesh Arora As you look at the free cash flow perspective, you should look at a slightly different - the total overall billings and bookings company. And you were telling you're going to improve operating margin, so that will have an impact and flow through our free cash flow capabilities because it'll reduce the expenses, right. At the same time, some moderation of our annual billings plans, some moderation of manifest gives us comfort. We can get to 35% free cash flow margins. I mean, the contribution of NGS and ClaiSec are all embedded in our operating margin assumptions, which we are saying would expand by 50 basis points to 100 basis points. Fatima Boolani I think you shared some disclosure with us over the proceeding quarters where - again, the bread and butter NetSec business was pushing at about 45% for cash flow margins. So conversely that's some of the best-in-class in the marketplace right now. So maybe the question to you is how sustainable is that high watermark in that core business? Nikesh Arora Well, the NetSec business - hardware, software and SASE, as SASE grows, SASE has a slightly different margin profile. So our bread and butter business should still deliver phenomenal cash flow, but the margins will moderate as SASE gets more from a mixed perspective. At the same time, our Caviar business, since you call the other one, the bread and butter business. Our Caviar business [indiscernible] and driving our 40% CAGR on NGS, will first turn from cash flow margin positive, but at the rate which is growing is very hard to drive too much margin expansion there because from a cash flow perspective, the growth rates are phenomenal. And as they moderate, you'll see more and more cash flow spin out, but they'll get free cash flow margin positive before they get operating margin positive, and that's all in our guidance for FY2024. Fatima Boolani Maybe a refiner point on the Caviar businesses, if you will. And the Caviar suite of solutions, you've been pretty deliberate about what your infrastructure strategy and your delivery strategy is going to be, you are going to leave that to hyperscalers whose day job is right. So can you just talk a little bit about how that is impacting the gross margin profile of the aggregate business? And specifically, what that infrastructure strategy looks like as the cloud portfolio scales an adoption? Nikesh Arora Fatima, I joined Palo Alto Networks three years ago. We had seven or nine data centers, and we're trying to build a service that would be available to 150 countries with low latency, quick access to SaaS capabilities, quick access to public clouds. And having spent 10 years at Google, I know the amount of investment that Google and Amazon or Azure does in building that capability and making it available. I think three to five years from now, we'll not be having this debate or conversation. There must be some insight that majority of the Internet companies that are created in the world all go directly to deploying the public cloud, do not deploy a data center architecture because they understand that the speed, agility and leverage you get from using the public cloud is different. So we've been very, very deliberate. We're pretty much off the data center strategy internally. We're pretty much a public cloud company. We work on pretty much all three clouds and provide our capabilities from that perspective. As it relates to our gross margin profile, you've seen that we've given gross margin guidance where we plan to be pretty consistent where we are. That's puts and takes pure on-prem software businesses have higher gross margins, hardware businesses have slightly lower gross margins and cloud delivered businesses have slightly lower gross margins than that. When you add it all together, shake it. We think we can maintain the current margin profile of the company at 75%. As we scale our Caviar business or SASE business, we get more leverage from the public cloud providers in terms of better economics. At the same time, as we scale, we're able better - able to design our services [indiscernible] public cloud because it's not just leading with hyperscalers. We have a lot of people. We are constantly evolving our design of the services to consume less resource as we get scaled, the less resource we consume, the better the margin profile business. And I think 75% gross margin business is a phenomenal business if you can generate 35% free cash flow. Fatima Boolani Having spent some time at Google prior to taking over here, I think you'd have some interesting perspectives on this. It seems like a lot of hyperscalers like to eat very young, so to speak sort of co-op some of the technology and sort of embed it, right, and then sort of talk about the virtues of cloud native offerings, right. So how much does the hyperscaler innovation around cybersecurity and embedded cybersecurity keep you up at native? Nikesh Arora It's kind of interesting. I'd say there's one of the three who is very aggressive in security space. The other two are not as aggressive. It's a 2% to 5% price of the total cloud spend. And I think they have a lot of work to do on the 95% price in their very competitive situations. So it's very hard to win at the 95% price and the 2% to 5% price at same time. Of course, they have the opportunity to leverage by throwing everything in a kitchen sink in an ELA type situation, but it kind of falls apart. The moment you go to a customer who is multi-cloud because a customer wants their solution to work across Google, Amazon, Azure, Oracle, Alibaba, so wait a minute. If I use the toolkit of a certain hyperscaler, which are always - almost always optimize better for their native solution than they are for the other cloud. So that's where we shine where we are able because we don't run a public cloud. Our job is to make sure our features work consistently across all public clouds, and that's where we see our sell-throughs, that's where we see our leverage. We don't see our leverage in a 100% dedicated Azure or 100% dedicated AWS. The good news is 70 plus percent of the customers out there are going multi-cloud, but on-prem. So that use case is much better for us than a dedicated hyperscaler use case. Fatima Boolani Fair enough. Well with that, I'm going to cap the discussion there. We covered a ton of ground. So I want to thank you for all the insights and a really good discussion. Thanks, Nikesh. Nikesh Arora Thank you, Fatima, and good luck with launching coverage and all the security stuff. Fatima Boolani Take care.