Palo Alto Networks, Inc.
Q2 2015 Earnings Call Transcript
Published:
- Operator:
- Good day and welcome to the Palo Alto Network Second Quarter 2015 Earnings Conference Call. Today's conference is being record. At this time, I would like to turn the conference over to Kelsey Turcotte. Please go ahead.
- Kelsey Turcotte:
- Great, thanks. Good afternoon and thank you for joining us on today’s conference call to discuss Palo Alto Networks fiscal second quarter 2015 financial results. This call is being broadcast live over the web and can be accessed on the “Investors” section of our website at investors.paloaltonetworks.com. With me on today’s call are Mark McLaughlin, our Chairman, President and Chief Executive Officer; and Steffan Tomlinson, our Chief Financial Officer. This afternoon we issued a press release announcing the results for the fiscal second quarter ended January 31, 2015. If you would like a copy of the release, you can access it online on our website. We would like to remind you that, during the course of this conference call, management will make forward-looking statements, including statements regarding our revenue and earnings per share guidance for our fiscal third quarter and non-GAAP operating margin for Q4 of fiscal 2015 and Q4 of fiscal 2016, as well as our expectations regarding our growth, gross margins, seasonality, future investments, CapEx, leverage, profitability, cash flow, and competitive position. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future, and we undertake no obligation to update these statements after this call. For a more detailed description of these risks and uncertainties, please refer to our quarterly report on Form 10-Q filed with the SEC on November 25, 2014 and our earnings release posted a few minutes ago on our website. Also, please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in the supplemental financial information that could be found in the Investors section of our website located at investors.paloaltonetworks.com. Before I turn the call over to Mark, we'd like to inform you that we expect our third quarter fiscal year 2015 earnings conference call will be held after the market closes on Wednesday, May 27. . In addition, we would like to invite institutional investors and sell-side analysts to join an Investor Track at Palo Alto Networks Ignite Conference at the Cosmopolitan in Las Vegas. Our program will start with lunch at noon on Monday, March 30; formal presentations will kick-off at 1
- Mark McLaughlin:
- Thanks, Kelsey. And thank you everyone for joining us this afternoon. I'm pleased to report that we delivered very strong results in our second quarter across all metrics and I’d like to thank our team and our partners for their support and hard work. In Q2, revenue was $218 million, up 54% year-over-year and billings were $283 million, up 51% year-over-year. We also continued to show the leverage in our operating model with non-GAAP operating margin expanding to 12.4%, as well as Q2 non-GAAP EPS of $0.19. Our results continue to demonstrate our belief that our next generation enterprise security platform is highly differentiated and is the right approach to security at the right time in history, and that our business model is unique in allowing us to deliver industry-leading revenue growth rates at scale, while doing so with consistently increasing leverage. At the highest levels it is more and more evident that the world has changed and that cyber security is now critical to the fabric of all things related to technology, business and national security. This means that cyber security has attained a status as a fundamental imperative for every company and organization in the world and this paradigm shift is not abating, but likely to continue for many years. It is also becoming increasingly obvious that legacy technology solutions are incapable of protecting businesses in the age of sophisticated and aggressive cyber attacks. What is needed is a true enterprise class integrated and automated platform capable of not only detection, but prevention as well. Palo Alto Networks is delivering this platform and, as a result, we are able to capture more market share more quickly than other companies have been able to do in the past. Our customers’ consistent feedback is that they are more secure when using our platform than they were with their previous legacy architecture and, as a side benefit, they are spending less on our integrated platform than they used to by cobbling together disparate and point products. In addition to having the right platform at the right time in history, we have also been working very diligently to ensure that we can execute well against a large and growing addressable market opportunity. This requires continuing to develop our world class sales and distribution capabilities, including doing some unique things like hosting our partner representatives in our sales and technical training, as well as ensuring that all the other functions required to support the company’s continued fast growth are scaling well. I am exceptionally proud of the team in this regard and we continue to plan and invest for outsize market share gains, while not losing sight of driving leverage in the model. As you can see from our results, the market is voting in favor of our philosophy, approach and platform and we are beating and displacing the competition at very healthy rate and quickly becoming the industry standard. In Q2, we added well over 1,500 new customers, bringing our total customer count to over 22,500, a more than 40% increase year-over-year. And our global and major account focus continues to pay off with us now serving 81 of the Fortune 100 and 916 of the Global 2000. Examples of new customer wins this quarter include
- Steffan Tomlinson:
- Thank you, Mark, and thank you for joining us on our call today. Before I get into the details of our results and guidance, I’d like to note that, except for revenue figures that are GAAP; all financial figures are non-GAAP unless stated otherwise. In Q2, we continued to execute well against our land, expand and retain sales strategy and are pleased with both the rate of new customer additions, as well as expansion in our current customers. Growth in sales of appliances, subscriptions and maintenance drove double-digit sequential growth resulting in record billings, revenue and deferred revenue. Additionally, with approximately 47% of total revenue coming from recurring services, our hybrid SaaS-revenue model and ramping economies of scale continue to drive leverage in the business, resulting in a strong non-GAAP operating margin and free cash flow this quarter. I am very pleased with the results in the first half of fiscal '15. We believe we can continue to capitalize on macro tailwinds in security spend, the technological advantage of our next generation platform, and the untapped spend in our large customer base, to drive growth and continue to take market share as we head into the back half of our fiscal year and beyond. Now let me turn to the numbers. Q2 total revenue grew 54% over the prior year and 13% sequentially to reach a new record of $217.7 million. The geographic mix of revenue for Q2 was 67% Americas, 21% EMEA, and 12% APAC. Compared to the prior year, the Americas grew 62%, EMEA grew 35% and APAC grew 51%. As in previous quarters, we saw broad strength across a wide range of verticals and we did not have any end customer concentration. The three components of our hybrid-SAAS model, product, subscription, and support, all grew very well in Q2. Q2 product revenue of $115.6 million increased 43% over the prior year and 14% sequentially. We saw healthy growth in our mid-range PA-3000 series, high-end PA-5000 series and PA-7050. In particular, the PA-7050 continued to show strength and is a catalyst to capture more opportunity in the data center market. Our recurring services revenue of $102.0 million increased 69% over the prior year and 12% sequentially, and accounted for a 47% share of total revenue. Looking at the two components of recurring services revenue, the first component is our SaaS-based subscription revenue of $50.1 million, which increased 74% over the prior year and 15% sequentially. Support and maintenance revenue, the second component of recurring services, was $52.0 million, an increase of 65% over the prior year and 10% sequentially. Billings in Q2 were $282.8 million, an increase of 51% year-over-year and 18% sequentially. Growth in subscription attach rates and high renewal rates are driving recurring services billings, which positively impact deferred revenue. Total deferred revenue in Q2 was $535.8 million, an increase of 65% year-over-year and 14% sequentially. Short-term deferred revenue increased to $324.5 million, an increase of 60% year-over-year and 13% sequentially. Total gross margin for Q2 was 77.8%, an increase of 250 basis points compared to last year and 100 basis points sequentially. Product gross margin was 77.1%, an increase of 160 basis points year-over-year and 200 basis points sequentially. The sequential increase was due to in part to favorable product mix. We expect there will be fluctuations in product gross margin primarily due to mix. Services gross margin for Q2 was 78.7%, an increase of 350 basis points year-over-year and 10 basis points sequentially, due in part to ongoing growth in the contribution from high margin subscription services. For the quarter, Research and Development expense was 12.2% of revenue, increasing approximately $3.6 million sequentially to $26.5 million. This was primarily due to headcount growth and project related expenditures. Sales and marketing expense for Q2 was 45.8% of revenue, increasing approximately $9.6 million sequentially to $99.6 million. This was primarily due to an increase in headcount and sales commissions related to first half sales performance. General and administrative expense for Q2 was 7.4% of revenue, increasing approximately $2.1 million sequentially to $16.4 million. This was driven in part by headcount growth and outside services. Total headcount at the end of the quarter was 2,083, up from 1,900 at the end of Q1 fiscal 2015. In total, Q2 operating expenses were $142.5 million, or 65.4% of revenue. Operating margin grew 340 basis points year-over-year to 12.4 % and increased sequentially 180 basis points. Net income for the quarter was $16.9 million, or $0.19 per diluted share using 86.6 million shares, compared with net income of $7.8 million, or $0.10 per diluted share in Q2 2014. On a GAAP basis for the second quarter, net loss was $43.0 million or $0.53 per basic and diluted share. This compares with a Q2 2014 GAAP net loss of $39.9 million, or $0.55 per basic and diluted share. We finished January with cash, cash equivalents and investments of $1.1 billion. Our cash flow from operations, free cash flow and free cash flow margin for Q2 were $76.8 million, $70.7 million and 32.5% respectively. Included in our cash flow results is an approximately $12.8 million payment to Israel made in conjunction with transferring the intellectual property rights acquired from Cyvera out of Israel. Capital expenditures in the quarter totaled $6.1 million. Consistent with the strength we saw in the quarter, linearity in Q2 tracked better than the prior year period. Our accounts receivable balance was $135.3 million this quarter, up from $116.2 million in Q1. DSOs decreased sequentially by 7 days and year-over-year by 5 days to 52 days. Turning to guidance; as we enter Q3 we feel good about the security spending environment and our ability to execute against that opportunity. In Q3 2015, we expect revenue to be in the range of $219 million to $223 million, which represents 45 to 48% growth year-over-year. We expect non-GAAP EPS to be in the range of $0.19 to $0.20 per share using 87 to 89 million shares. Before I conclude, I’d like to highlight a few considerations for modeling purposes. Due to strong growth, seasonality has been difficult to forecast, but we believe that over the longer term, fiscal Q2 and Q4 may show our strongest revenue growth. As a reminder, in fiscal year 2015 we expect to invest approximately $25 million, or $0.17 to $0.18 per share in Traps, our Advanced Endpoint Protection offering. We are on track to hit this investment goal. We expect CapEx for fiscal year 2015 to be in the range of $45 million to $50 million for the year. And as we have said previously, we continue to expect to exit Q4 fiscal 2015 with a low-teens non-GAAP operating margin and to exit Q4 fiscal 2016 at a 22-25% non-GAAP operating margin. With that, I will turn the call back over to the operator for Q&A.
- Operator:
- [Operator Instructions]. And we'll take our first question from Matt Niknam with Goldman Sachs.
- Matt Niknam:
- Hey, guys, thank you for taking the question and congrats on the quarter. The question on margin, so the margin guidance, Steffan, as you alluded to exit rate this year, fiscal year, exiting in the low teens. You're already just under 13% this quarter. Is it fair to assume margins remain fairly flattish in the next two quarters, and maybe, if you can help us think through where you see the incremental spending going towards? Thanks.
- Steffan Tomlinson:
- Yes, we remain committed to the low teens exiting this fiscal year and 22% to 25% exit in Q4 of 2016, and I do think it's fair to say that we're going to continue to balance top line growth with investing in the business and the incremental dollars that are being spent are primarily in our innovation engine, which is R&D and product management, as well as our field marketing organization and filed sales operation, with a low percentage market share and a very large market. We're very much focused on taking as much share as possible but doing it profitably. So you look at operating margins and free cash flow margins, we're able to drive very healthy top line growth and increase profitability.
- Operator:
- And we'll take our next question from Keith Weiss with Morgan Stanley.
- Melissa Gorham:
- Hi, this is Melissa Gorham, calling in for Keith. Thanks for taking my question. Just a question on Traps. Mark, you mentioned dozens of Traps deals in the quarter. I'm just wondering if you could maybe provide some color on the early customer feedback there, and of those deals that you saw, are they taking spend from existing endpoint solutions, or is this just net new opportunities?
- Mark McLaughlin:
- Yes, good question, Melissa. Yes, so the feedback has been very positive, it's kind of -- it's interesting and then I think also drives a lot of optimism for us in this business. When we're talking to customers about this and saying this is what Traps does, it actually does real time exploit prevention, that’s such a disruptive concept that sometimes you have to explain to them twice, I mean and show a train the demo, but when they see it the reaction is wow, that’s pretty disruptive technology and a big step forward. And the second part of your question, we are taking business from competition and some of these deals, some folks are buying it to run side-by-side with their existing vendors. And some of these cases including that seven figure deal that I discussed on the prepared script, we took that from a legacy vendor in a competitive win.
- Melissa Gorham:
- Okay, great. And then just one quick one for Steffan. One of the things that many of us picked up in the quarter was perhaps longer than lead times in terms of inventory. Was that an issue in the quarter? And if so, what have you done to maybe remediate that potential issue?
- Steffan Tomlinson:
- Yes, due to higher order volume we extended our standard shipping lead time from two weeks to up to four weeks. The reality was we're able to ship most of all the orders that came in within a two week lead time, but it was really due to high order volume. So there is no supply chain issue and we are able to satisfy all the demand.
- Operator:
- And we'll take our next question from Raimo Lenschow with Barclays.
- Raimo Lenschow:
- Hey, congrats on the great quarter. Two quick questions from me. First, it's maybe just me, but I am hearing a lot more competitive replacements for Check Point. Can you talk a little bit about the environment that you're seeing there? It seems like it's slowly changing for you guys. And then the second one is obviously, we all hear about increased security spending. How do you see that in your conversations with clients in terms of kind of ad hoc, I need to react to an emergency versus kind of more longer-term planning, which you guys should see? Thank you.
- Mark McLaughlin:
- Yes, good question, Raimo, this is Mark. So on the Check Point, we been displacing Check Point for a very long time at good rates. So when you look at this quarter well over 1500 new customers for the quarter, last quarter 2000 rate. It's very, very hard to post those kind of numbers from new logos if you're not having the, everybody in the market to be a donor to the pileup [ph] across and checkpoint donates quite a bit to us and that is increasing over time. I think as we become the industry standard here I think that’s what truly happening as we continue to take this many customers and build lot more relevance in a market, a lot more awareness in the market on the global basis. And on your spend question, spending seems very healthy right now from a security perspective really no reason to believe that that’s going to change any time. I mean in the future in particularly if you've got the enterprise price platform that solves a lot of the customer's hardest problems. We think we're the big beneficiary there.
- Operator:
- And our next question comes from Philip Winslow with Credit Suisse.
- Philip Winslow:
- Hi, thanks, guys, and congrats on a great quarter. Just wanted you to follow-up on some of your remarks on WildFire. Obviously, you guys are having continued success there. Wondering if you could give us some more details on sort of win rates versus the competition, sort of how you're, who you're seeing out there, how you are comparing with them? And then also, from just a tax perspective, not just with WildFire, but your other subscription offerings, maybe you could give us a sense, I know you only give us metric once a year, but as a sense of sort of how those attach rates are trending, as well as renewal rates? Thanks.
- Mark McLaughlin:
- Yes, sure, Phil, let me take those in reverse. So the tax rate for all of our services are doing well, they're all increasing. So that’s the trend that’s been continuing for quite some time including WildFire which is growing at very fast pace and if you come to Ignite you'll get some more detail around those things. On WildFire itself, everybody in the market today from a network security perspective has some sort of APT offering in the space today. But from who we see in the market, we primarily see FireEye in the market and we continue to win new business where they don’t exist. We continue to win business where people put it side by side and ultimately chose our platform over a standalone product approach.
- Operator:
- And our next question comes from Karl Keirstead with Deutsche Bank.
- Karl Keirstead:
- Yes, thanks. My question is for Steffan. I just wanted to go back to your guidance around seasonality during the quarter. I think you said that you should see the strongest growth in 2Q and 4Q. If you could just clarify -- I know its super preliminary, but are you suggesting that the July fourth quarter might see a growth rate higher than what Palo Alto put up in Q1, and would likely put up in 3Q?
- Steffan Tomlinson:
- It’s a good question, Karl. We guide one quarter out, but directionally you can think about our fourth quarter being typically very strong like most companies fiscal year-end. We can’t really get into the details around what our fourth quarter projects, it's going to be relative to last year's fourth quarter, but the way that the organization is set up we're positioned for growth and in the way the sales cycles work at the end of the fiscal year lots of people are sales accelerator, so you would typically see an increase in sales productivity and deal closure, etcetera. So that’s about all I can get into in terms of the fourth quarter.
- Operator:
- And our next question comes from Andrew Nowinski with Piper Jaffray.
- Andrew Nowinski:
- Great, thanks. Congrats on the nice quarter. I just want another follow-up question on WildFire. It's clearly gaining traction. You added about 1,000 customers this quarter, and then 1,500 total customers. I was wondering if you could give us any color on the mix of new customers that were deploying WildFire versus existing customers that deployed it.
- Mark McLaughlin:
- Andrew, yes, we're doing very well in both regard. So with well over 1,500 new customers in the quarter we're seeing very nice win rates for new logos as they come in the door. And having WildFire's the most advanced APT detection prevention capability baked into the platform allows our sales team to tell a great story for new local acquisition because we're able to talk about something that’s very important for all companies, which is advanced persistent threats and malwares. So it's good to have that in a lead for somebody who is not yet using Palo Alto Networks. With the existing customer base we see very good adoption there as well, because if you're already using portions of the platform our story is -- and what customers are experiencing is the more of the platform you use the better you are from a protection prevention perspective and WildFire is a very strong aspect of that. So we see a lot of demand from our existing customer base as well. So I want to add that portion of prevention into the platform I already own. So both cylinders are firing very well.
- Operator:
- Our next question comes from Walter Pritchard with Citi.
- Walter Pritchard:
- Hi, thanks. Steffan, two questions for you. One, we've heard some of your competitors in the last three to six months, talk about up-ticking their level of spending and bringing down their profitability goals; you're obviously sticking with your profitability goals, as you stated them today. How do you think about the market dynamic there? And this is under -- you're all in the same space, and if they spend more, you may need to spend more. Do you feel like you're adequately covered or is there anything that could happen in the market that could cause you to similarly uptick your spending more so than you're guiding to today?
- Steffan Tomlinson:
- So on that front, what I picked up around the competitive space is a lot of folks are spending more in sales and marketing in order to try to get into the enterprise where you have historically you have companies who have been focused on the SMB or telco trying to get into high-end enterprise that they're building out their sales forces. We believe that it starts with the differentiated product so we have the best platform out there and when we start with that product and that platform we've been building the scale under Mark Anderson's leadership the worldwide field operations, that we already add call it 45% of revenues for sales and marketing, and over time we're going to be getting leverage over that, but there is not some big reinvestment plant that we need to make in order to get the, to get incremental growth. And additionally, if you think about this the productivity of the sales force, we're going to have more ramped sales people than ramping sales people very soon, and that increases the overall capacity that we're bringing into the model. So we don’t envision any derailment from our track right now.
- Operator:
- Our next question comes from Brent Thill with UBS.
- Brent Thill:
- Good afternoon. Mark, on Traps, you mentioned you added a couple dozen customers. I'm curious what you saw on those deals with the rest of the portfolio from Palo Alto? And perhaps, when you look at some of the new versus existing, if you could just maybe give us a little more color on what you're seeing in that early adoption? I had a quick follow-up for Steffan.
- Mark McLaughlin:
- Yes, we're seeing a lot of interest in the existing customer base not surprisingly so. The question I answered a little while ago where I said the power of the platform is at the more of the platform you use the better security you get and usually a better at a better total cost of ownership. Traps, with its integration of WildFire, is a very compelling part of that story, so our existing customer base particularly those people who are using WildFire already are very enticed by what that brings to bear for their security posture. So we're getting very positive feedback from the existing customer base. Also, even though this isn’t the future for us as far as putting up the numbers against it, the ability to talk to customers who don’t own any Palo Alto Networks yet at all and just talking to them about Traps is another entry point for us well. And of course we’re telling that story to our as yet signed on customers that you should just look at Traps if you have endpoint need and then that can drive the adoption of more of our platform later too.
- Brent Thill:
- Okay. And Steffan, you mentioned strength in the 7050. I'm just curious if you could maybe add a little more color what you are seeing in the days in our market.
- Steffan Tomlinson:
- Well we’re seeing more locations to play in the data center market and we see that in a couple of different ways. The first is just organically with the 7050 we’re getting brought in and but also with our partnership with VMWare we had a great use case where there was a NSX -- VM for NSX feel that was out there we ended up selling not only the VM series for that engagement but we also sold the 7050 to protect the north/south traffic with that datacenter. And that's just one example of a number that we're working on where the 7050 is increasing our overall wallet share for the overall datacenter market.
- Operator:
- And the next question comes from Matt Hedberg with RBC Capital Markets.
- Matt Hedberg:
- Yes, thanks for taking my questions, guys. Congrats on the quarter as well. Mark, I wanted to ask about Westcon. I believe they had you initially in 40 countries. I wanted to get an update on that distribution channel, versus some of your initial expectations. And then I had a quick follow-up for Steffan after that?
- Mark McLaughlin:
- Yes, great question, Matt. So about a year-ago Westcon has about little over 30 counties and today we are a little more than double that number so in that last 12 month timeframe we increased that by 100%. We’ve also -- which is important because with that relationship the number of resellers that where under that umbrella has gone up very dramatically as well, so just our distribution, I mean what the reseller capability for the distribution has grown a lot in last 12 months. We’re very pleased with that.
- Matt Hedberg:
- That is great. And then maybe a quick one for Steffan. I know you guys price in U.S. dollars. But I'm curious, are you seeing any evidence of the strengthening dollar in demand overseas?
- Steffan Tomlinson:
- Yes, since we price in U.S. dollars we don’t really see any material shift for the revenue. Where we do see a little bit of benefit is as the dollar strengthens we pay our foreign location salaries, benefits and expenses in local currency. So that does have a modest benefit, but outside of that the real top-line risk isn’t there because we do price in USD.
- Operator:
- And your next question comes from Daniel Ives with FBR Capital.
- Daniel Ives:
- Yes, thanks. Mark, could you just talk about just deals again fast tracked, maybe more at the board level, in terms of what you're seeing on the cyber security, especially in terms of some of the high-level threats that we have seen over the last three months to six months?
- Mark McLaughlin:
- Yes, Dan, I think that we are seeing is that there is certainly a large and growing amount of attention at the board level at the highest levels in company's and boards on these threats. What we’re seeing below that dough is good spending, as you see in the market in general in order to try to solve those things. But as far as that's working out at the buyers we’re seeing more thoughtful and strategic purchases meaning that we’re finding folks are stepping back and saying we want to think about something that is going to very valuable for us three to five years not just the latest just came out last week. We tend to do very well in that kind of environment because we come in with a solution architects we get to show them an architectural standard for security that covers all of their enterprise at every point of the kill chain and how that can provide a very dose of prevention and that is resonating extremely well in the market.
- Daniel Ives:
- Okay. In terms of -- from the White House, some that you were at, and obviously, you are really involved with what you see on the government side. Do you think 2015 is in the inflection point on the federal side, in terms of spending on cyber security or do you think we are still not there, and there still needs to be some bureaucracy and red tape that needs to get cut through? Thanks
- Mark McLaughlin:
- I think generally the government recognize like all organizations they need to be at the forefront of cyber security. It's not so much inflection point in terms of acceptance of what had happened from a technology perspective; I think like to do with budgets. So if you recall, the fiscal '15 for the government where the very tough one. It's kind of going into fiscal '15 or coming off the lot of belt tightening just generally in the government. So I would expect that the fiscal '16 budget is actually just going to be a better budget it's going to be more money in the budget in fiscal '16 than it was in fiscal '15, that's a good thing for providers. And if you are provider like us he got a really good solution for the government who needs to be the front of this we think that bodes well.
- Operator:
- Our next question comes from Gregg Moskowitz with Cowen and Company
- Gregg Moskowitz:
- All right, thank you very much. And I will add my congratulations, as well, on a strong quarter. Question for Mark. Mark, some security vendors held the view that -- or are taking the view anyway that any APT solution that is effectively part of the firewall has some detection and prevention limitations just really because so much of the network traffic is being generating by mobile and other sources. I just wanted to get sense of about the end of it.
- Mark McLaughlin:
- Well our view is that what you are trying to accomplish at the end of there should we try to accomplish is not only great detection but a very, very strong level of prevention, and that's going to across the power enterprise, right. So in order to do that you need to be able to see the traffic everywhere whether it's mobile or data center it doesn’t really matter, right. And if can't see all that traffic meaning you are not in mind then you are going to have a very, very difficult time doing anything from a security perspective whether its APT or anything else. So that's the view that's strip in the importance of being in the I called architecturally favored position of being the firewall in the first place because the firewall is generally the only security device is going to see all the traffic in or out of the network. Now it's off of a mobile device and you VPN into your traffic flow then you are going to supply those network security policies to that traffic regardless of what device is coming off as which is exactly what we recommended folks to. And that's what global protect us for example. So I would completely agree with the statement that you have to see all the traffic in order to secure it and that you are going to be unable to do it unless you are in the firewall position.
- Operator:
- Our next question comes from Michael Turits with Raymond James.
- Michael Turits:
- Hi guys, quick question on the question earlier about 2014 versus 2015, in terms of -- on the spend sustainable. Mark, any shift at all, in terms of security spending, in terms of priorities that you see from 2015 versus 2014?
- Mark McLaughlin:
- Yes, I think that as we've seen folks at the highest level is being paying more attention what I mentioned earlier which is I called what is the security architecture and more and more we're the ones being invited in that conversation to say how should I think about this big picture across the board top to bottom right from an enterprise perspective as opposed to thinking about the point products or it's time to refresh this product or refresh this product. And as the platform provider for prevention in that that's great for us because we have the ultimate answer for that for folks there in the market and is resonating very well.
- Michael Turits:
- And then, obviously, it is very strong overall, but Europe went a little slower than last quarter. Anything going on there or -- and I didn't check if it was a tough comp or not, but anything you noticed?
- Mark McLaughlin:
- Yes, Europe - we like Europe is good market you may recall last quarter we grew little over 60% year-over-year and Europe and then we grew 16% sequentially half of that so that's we like those numbers.
- Operator:
- Next we go to Gur Talpaz with Stifel.
- Gur Talpaz:
- Great, thanks. So there has been a lot of noise within the endpoint market. Can you talk about what you're seeing out there competitively? And do you think customers are starting to understanding inherent advantages of an integrated offering with WildFire versus, let's say, a standalone offering? Thank you.
- Mark McLaughlin:
- Hey, Gur. Yes, a couple of angles on that. The first is that I agree with you is lot of there's a lot of noise in the market on the endpoint. So the reason for that is becoming evident that the endpoints are very important from a solution perspective in order to secure an enterprise, right, because it’s a Wild West in the endpoint and the first thing we see for sure is customers recognizing that the legacy AV technologies are incapable of doing that. So the second thing is the rush of lots of other players in the market say what we’re going to fix that for you. Fixing it actually requires doing prevention, right, that's at the end of the day that's we have to do in order to have a good fix there and we think that our approach with Traps and the customer feedback we’re getting as I mentioned a little earlier is they agree with us that it actually does prevention at the endpoint and because of that its very compelling.
- Operator:
- And next we'll go to Jonathan Ho with William Blair.
- Jonathan Ho:
- Hey, guys. I just wanted to understand a little bit better. Are you starting to see much revenue come from the installed base, in terms of refreshes from four years or four years ago, the initial customers? And how should we think about that trend for the course of 2015, and going into 2016?
- Mark McLaughlin:
- Yes, Jonathan. So what we look at it we definitely see refresh going on in our earlier cohorts. The first really measurable ones for us are 2009, 2010 by numbers. So we are seeing refreshes occurring there. To put that in perspective, the combined customer base for 2009, 2010 is less than 2,000 customers. We have got over 22,000 customers now. So if we continue to see refreshes into those larger cohorts, which we would expect to, that's a tailwind.
- Jonathan Ho:
- Got it. Excellent. And then, if you start to think about the NSX and VMware relation, can you maybe talk a little bit about how significant this could be from a selling perspective and just sort of the initial reception that you're seeing? I know you talked about the wins but just why customers would chose the solution and what potentially the alternatives are, if any?
- Mark McLaughlin:
- Yes. We think that in two regards. The first is that, you definitely want to have relevance in the sense of there is a changing environment in the data centers; it's not just north-south it got to be east-west. So the first thing is, can you adequately represent yourself in that conversation back to the strategic architectures. And say, I have you covered not only north-south but east-west as well. We definitely have north-south covered and we are uniquely integrated and working closer with VMware on the east-west. And when we show that to customers and how tight that integration is and it provides same level of protections in north-south, they're very, very impressed with that. And we can see that playing out through the numbers. NSX selling very well as you may have seen from VMware's results. And as a result of that, we're getting pulled into lots and lots and lots of conversations with customers that’s resulting in deals. And we have well over 300 POCs going right now as an example with VMware customers.
- Operator:
- Our next question comes from Aaron Schwartz with Macquarie.
- Aaron Schwartz:
- Good afternoon. Thank you. On the metric you gave for the top 25 customers had that increased quite a bit, I'm sure number of things are driving that, but was there anything in particular that stood out?
- Mark McLaughlin:
- Aaron, we're seeing a relevance continue to grow in the market in particularly, with larger companies that they are making larger purchases with us. So these are our largest customers, right. And then they continue to make larger purchases. And also, we're seeing some customers on their first purchase jump right on to the top 25 list, right. So it's the mix of those few things that's driving that number up too, right.
- Aaron Schwartz:
- Okay. And secondly, if I could. On the attach, you talked about that direction of moving higher as well. Can you just comment on the duration of what you're seeing now, has that changed at all relative to one or two years ago? Thanks.
- Mark McLaughlin:
- Yes, relative to one or two years ago, up for durations. They are basically in the same zip code relatively. And they are up modestly, but there hasn't been any real like sea change in terms of duration.
- Aaron Schwartz:
- Great. Thank you.
- Operator:
- Our next question is from Jeff Kvaal with Northland Capital Markets.
- Jeff Kvaal:
- Yes. Hello.
- Mark McLaughlin:
- Hi, Jeff.
- Jeff Kvaal:
- Do you guys hear me okay?
- Mark McLaughlin:
- Yes.
- Steffan Tomlinson:
- Good. Thank you.
- Jeff Kvaal:
- Perhaps I got brushed along in my moment perhaps but I was wondering to ask you how you were doing in the service provider market? I know that you've been pushing into that realm a bit. And then secondly, I think you opened the call a little bit, Mark, talking about the seeing a better run rate I think of the security's market over the period of few years than you might have quarter a few ago. I'm wondering if you could delve into this comments little bit more [indiscernible]? Thank you.
- Mark McLaughlin:
- Yes. We're thankful. Yes. Jeff, good question. Let me take those in reverse order. So what I was saying on the prepared remarks in the security market is that the, I see a paradigm shift which is security becoming what I am calling fabric to all technology decisions that are being made by organizations, government, and companies, and that's the result of all these attacks we're seeing and the incredibly evident fact that the legacy technology can't withstand that, right. So I think that paradigm shift at the security's fabric will remain that way for quite some time is the point I was trying to make. That's not going to evade overtime I think that's going to continue to grow over time. Now on your first in the service provider market, we like that market a lot, do very well in that market. As I've said before, we view that market a couple three different ways from an opportunity perspective. The area where we are doing very well right now is selling two service providers who are using our technology in their own networks. The 7050 is an example has been a great boon for us there, because those are big networks, lots of throughput, lots of data center usage, and we are seeing very strong demand in service provider industry for that.
- Operator:
- Our next question comes from Gray Powell with Wells Fargo Securities.
- Gray Powell:
- Thanks for taking the questions. Just a couple. So obviously, you have a lot going on with WildFire and TRAPS, in terms of newer products. How do you feel about the level of internal innovation, or R&D. And then, do you see any technologies that could supplement your current offerings?
- Mark McLaughlin:
- Hey Gray. One thing we never forget is that, we are doing well in the market and Palo Alto has been the successful as we have because we’ve been very innovative and very disruptive, so we start everything with that. And as a result of that, we put a lot of time, effort, people, resources into innovation and I think our track record is pretty good on that. We have a number of things. If you just think back on a last 12 months, we’ve done around TRAPS, around the PA3060, improvements of WildFire. And we’re going to continue to innovate as we go forward as we always have done every single year. If you come to Ignite, we'll talk you a little bit about that as well. So I feel very good about the level of innovation, our track record on delivering that and the pace at which we're rolling out.
- Operator:
- And your last question today comes from Scott Zeller with Needham & Company.
- Scott Zeller:
- Thanks. I just wanted to ask if Steffan has any color he could share for the deferred seasonality. If there is an update on that, please?
- Steffan Tomlinson:
- Yes. Deferred seasonality would most likely trend towards what the revenue seasonality is. So Q2 and Q4, you would see -- if those are the quarters in which we would see the most pronounced strength then the subsequent quarter you would basically see deferred go up as well. I would give you that as colored commentary. I can also say that both long-term and short-term deferred revenue have also been growing just very well. And so we see nice balance between customers who are signing up for one-year deal, but we’re seeing proportionally more customers signing up for a multiyear deals as well. And some of those multiyear deals tend to be skewed to our fiscal Q4. So you should definitely see some seasonality there.
- Mark McLaughlin:
- Great. Well, thanks everybody for being on the call this afternoon, we appreciate it. We had a great first half of our fiscal 2015 and we are very excited about the second half of the year and beyond. As said earlier, I think we are in the right place, at the time in the market with the market leading protection prevention platform. I once again thank to Palo Alto's networks team for all their hard work and their support for customers and partners as we continue our march to become the global leader in enterprise securities. Thank you very much.
- Operator:
- Thank you for your participation. This does conclude today's call.
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