Kelsey Turcotte - Vice President of Investor Relations Mark McLaughlin - Chairman of the Board, President, & Chief Executive Officer Steffan Tomlinson - Chief Financial Officer

Matthew Niknam - Goldman Sachs Melissa Goram - Morgan Stanley Raimo Lenschow - Barclays Philip Winslow - Credit Suisse Karl Keirstead - Deutsche Bank Andrew Nowinski - Piper Jaffray Walter Pritchard - Citi Brent Thill - UBS Matt Hedberg - RBC Capital Markets Daniel Ives - FBR Capital Gregg Moskowitz - Cowen and Company Michael Turits - Raymond James Gur Talpaz - Stifel Jonathan Ho - William Blair Aaron Schwartz - Macquarie Jeff Kvaal - Northland Capital Markets Gray Powell - Wells Fargo Securities Scott Zeller - Needham & Company

Good day and welcome to the Palo Alto Networks’ Second Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Kelsey Turcotte. Please go ahead.

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 investor’s 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 our 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 involved 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 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 can be found in the investor’s 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 30th, formal presentations will kick off at 01:00 PM Pacific time. While the event will be webcast, guests who attend in person are invited to stay for the conference which will run through Wednesday, April 1st. To register, please e-mail me at kturcotteme@PaloAltoNetworks.com or call me at 408-753-3872. And with that, I will turn it over to Mark.

Thank you, Kelsey, and thanks, everyone, for joining us this afternoon. I’m pleased to report that delivered very strong results in our second quarter across all metrics and I would like to thank our team and our partners for their support and hard work. In Q2, revenue was $280 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 expanded 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's 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 that 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 were able to capture more market share more quickly than other companies have been able to do so in the past. Our customers consistent feedback is that they are more secure when using our platform than they were with previous legacy architecture and as a side-benefit they're spending less on an integrated platform than they used to buy cobbling together desperate 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 scale well. I'm exceptionally proud of the team in this regard and we continue to plan and invest for outsized 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, 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 a CheckPoint and Cisco replacement at one of the United States’ largest energy providers that purchased high-end data center appliances in combination with subscription services, including WildFire; a global financial institution in Europe who replaced CheckPoint and Cisco and sold PA-7050s for the data center and working with our partner, VMware, also included Palo Alto Networks’ edition for NSX; and one of the world’s largest insurance companies where with our partner, Dimension Data, we’re replacing incumbent Cisco and a global firewall refresh and won a very competitive bake-off for an APT solution with WildFire. On the expand side of the business, we know that satisfied customers make repeat purchases, and we’ve placed a great deal of emphasis on customer service and support. Our customer satisfaction scores are among the highest in the industry, and we continue to invest in the infrastructure and talent required to ensure that our customers are getting the most out of their technology investment. As a result, we see significant expansion in the lifetime value of our customers. For example, to make our top 25 customer list in Q2, a customer had to have spent a minimum of $7.4 million in lifetime value, a more than 60% increase over the $4.6 million required in our Q2 of our last fiscal year. These customers typically make purchases quarter after quarter, as they you add new products and subscriptions. In fact, all of our top 25 customers placed a repeat order with us in Q2. Additionally, we continue to widen the innovation gap with new products and subscription services, which address our customers’ greatest security needs and are driving a market share shift in our favor. In the high-end data center market, our 120-gig PA-7050 chassis continues to resonate with enterprise customers across all verticals. This quarter, we closed multiple seven-figure PA-7050 deals to protect north-south data center traffic including one with a multibillion-dollar North American media company. When coupled with our Palo Alto Networks Edition for NSX to secure east-west traffic, we have a very compelling and highly differentiated data center security solution. In the mid range data center market, the PA-3060, which we launched in Q2, did very well further expanding our footprint in that segment of the market. WildFire had yet another strong quarter as well. We now have over 5,000 customers paying for WildFire, up from approximately 4,000 last quarter. WildFire is being purchased across all verticals with organizations including an international digital-based e-commerce and a large North American based public utility company making purchases in the quarter. Both are examples of businesses that bought WildFire for its ability to turn unknown threats into known threats in a matter of minutes and the benefits of its automated threat intelligence sharing over the entire customer base. Q2 was our first full quarter in the market with Traps or advanced end point protection solution integrated with WildFire. Traps opens an incremental $4 billion endpoint market, which is yet untapped for us. Similar to what we saw in firewall market about a decade ago, we believe that legacy endpoint solutions have not kept pace with the threat landscape, leaving customers vulnerable to attack and the market right for disruption. In Q2, we added dozens of new Traps customers and closed our first seven-figure transaction with a large healthcare organization. Although it’s early, we are pleased with our progress and are excited about the future in this market. It’s a very exciting time in general for Palo Alto Networks. I consistently tell our team that our platform is solving very hard problems for our customers and as a result, we believe that we have the potential to capture a historic market share in a very large addressable market and that we have only just begun. We believe that our innovation engine, proven and scalable go-to-market capabilities and focus on scalable support capabilities will allow us to drive outsized growth, while standing profitability and generating significant cash flow with our model. Before I conclude, I'd like to reiterate Kelsey’s invitation to join us for Ignite 2015 Conference and Investor Track starting Monday, March 30th at the Cosmopolitan Hotel in Las Vegas. I hope to see all of you there. With that, I'll wrap it up and turn the call over to Steffan. Steffan?

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 continue 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 products, subscriptions and supports drove double-digit sequential growth resulting in record billings, revenue and deferred revenue. Additionally, with approximately 47% of total revenue coming from occurring services, our hybrid SaaS revenue model and ramping economies of scale continue to drive leverage in the business, resulting in strong non-GAAP operating margin and free cash flow this quarter. I'm very pleased with the results in the first half of fiscal 2015. We believe we can continue to capitalize on macro tailwinds and 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 geographical 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 a 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 market opportunity in the data center market. Our recurring services revenue of $102 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 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 deterred 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 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 and the contribution from high margin subscription services. For the quarter, research and development expense was 12.2% of revenues, increasing approximately $3.6 million sequentially to $26.5 million. This is 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 is primarily due to an increase in headcount and sales commissions related to the 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 in 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 million or $0.53 per basic and diluted share. This compares with 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 entered 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 million 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 longest 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’re 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 year. And as we 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% to 25% non-GAAP operating margin. With that, I’ll turn the call back over to the operator for Q&A

[Operator Instructions] And we’ll take our first question from Matt Niknam with Goldman Sachs

Hey, guys. Thank you for taking the question, and congrats on the quarter. Just a question on margin. So the margin guidance definitely, as you alluded to, the 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 to where you see the incremental spending going towards? Thanks.

Yes. We remain committed to the low teens exiting this fiscal year and 22% to 25% exiting 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 field sales operations with a low percentage market share and very large market. We are 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 are able to drive very healthy topline growth and increase profitability.

And we will take our next question from Keith Weiss with Morgan Stanley.

Hi. This is Melissa Goram 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 am just wondering if you can 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 it just net new opportunities.

Yes, good question, Melissa. Yes, so the feedback has been very positive. It’s interesting. And I think it also drives 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. And then show 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 to run side-by-side with their existing vendors. And some of these cases including a seven-figure deal that I discussed with the prepared script, we took that from a legacy vendor in a competitive win.

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 lead time's in terms of inventory. Was that an issue in the quarter? And if so, what have you done to maybe remediate that potential issue?

Yes, due to high 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's no supply chain issue and we're able to satisfy all the demand.

And we’ll take our next question from Raimo Lenschow with Barclays.

Hey. Congrats on a great quarter. Two quick questions from me. First, it's maybe just me, but I'm hearing a lot more competitive replacements from 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 react to an emergency versus kind of more longer term planning which you guys should see? Thank you.

Yes. Good question, Raimo. This is Mark. So on the Check Point; we've been displacing Check Point for a very long time at good rates. So when you look at this quarter, well over 1,500 new customers for the quarter, last quarter 2,000. It's very, very hard to post those kinds of numbers from new logos if you're not adding everybody in the market be a donor to the pile up across. And Check Point donates quite a bit to us. And that is increasing over time I think as we become the industry standard there. I think that’s what's really happening as we continue to take this many customers and build a lot more relevance in the market, a lot more awareness in the market on a 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 in the future. And particularly if you've got the enterprise class platform that solves a lot of customer hardest problems, we think we’re the big beneficiary of that.

And our next question comes from Philip Winslow with Credit Suisse.

Hi. Thanks, guys, and congrats on a great quarter. I just wanted you to follow up on some of your remarks on WildFire. Obviously, you guys are having just continued success there. I wonder, if you could give us just more details on sort of win rates versus the competition, sort of you how you’re – who you’re seeing out there and how you’re comparing with them? And then also from just an attach 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 sense of sort of how those attach rates are trending as well as renewal rates? Thanks.

Yes. Sure, Phil. Let me take those in reverse. So the attach rates for all 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 a 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 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 business where they don’t exist. We continue to win business where people put us side by side and ultimately choose our platform over a standalone product approach.

And our next question comes from Karl Keirstead with Deutsche Bank.

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 it’s 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?

That’s a good question, Karl. We guided one quarter out. But, directionally, you can think about our fourth quarter being typically very strong, but most companies’ fiscal year-end. We can’t really get into the details around what our fourth-quarter projection is going to be relative to last year's fourth quarter. But the way that the organization is set up where we are positioned for growth and the way the sales cycles work, at the end of the fiscal year, lots of people are in sales accelerator say, and 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.

And our next question comes from Andrew Nowinski with Piper Jaffray.

Great. Thanks. Congrats on the nice quarter. I just want to know a follow-up question on WildFire. It’s clearly gaining traction and you added about 1000 customers this quarter and then 1500 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.

Yes, Drew, we are doing very well in both regards. With well over 1500 new customers in the quarter we are seen nice win rates for new locals as they come in the door and having WildFire is the most advanced APT detection prevention capability baked into the platform, allows our sales team 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 prescription [indiscernible] and malwares, so it’s good to have that as 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 are only using a good portion of the platform, our story is what more customers are experiencing is the more platform you use the better you are from a protection, prevention prospective 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 am already on. So both the cylinders are firing very well.

Our next question comes from Walter Pritchard with Citi.

Hi. Thanks. Steffan, two questions for you. One, we've heard some of your competitors in the last three to six months talk about uptick in their level of spending and bringing down there profitability goals. You’re obviously sticking with your profitability goals as you stated them today. How do you think about sort of the market dynamic there and just want to see where on the same space and the space been more, you may need to spend more. Do you feel for 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?

So, on that front, what I've 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 companies who have been focused on the SMB or telco, trying to get into high-end enterprise so 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 you – when we start with that product and that platform, we've been building to scale under Mark Anderson's leadership the worldwide field operations that we're already at, call it, 45% of revenues for sales and marketing. And over time, we're going to be getting leverage over that, but there's not some big reinvestment plan that we need to make in order to get the 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.

Our next question comes from Brent Thill with UBS.

Good afternoon. Mark, on Traps, you mentioned you added a couple dozen customers. I am 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 bit more color on what you’re seeing in that early adoption? And I had a quick follow-up for Steffan.

Yes. We’re seeing a lot of interest in the existing customer base, not surprisingly. So the question I answered a little while ago, I said the power of the platform is that the more of the platform you use, the better security you’d get and usually 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 were 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 is in 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 as 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 an endpoint need, and then that can drive the adoption of more of our platform later to.

Okay. And, Steffan, you mentioned strengths in the 7050. I’m just curious, if you could maybe add a little more color on what you’re seeing in the data center market?

Well, we’re seeing more invitations to play in the data center market, and we see that in a couple of different ways. The first is just organically where with the 7050 we’re getting brought in but also with our partnership with VMware. We added a great use case where there was 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 for that data center and that’s just one example of a number that we are working on where the 7050 is increasing our overall wall share for the overall data center market.

And the next question comes from Matt Hedberg with RBC Capital Markets.

Yes, thanks for taking my question guys. Congrats on the quarter as well. Mark, I wanted to ask about Westcon. I believe the hedge you initially in 40 countries, I wanted to get an update on that distribution channel versus some of your initial complications and then I have a quick follow-up for Steffan for that.

Yes, great question, Matt. So about a year ago Westcon did a little over 30 countries and today we are a little more than double that number. So in that last 12 months timeframe we increased that by 100%, which is important because with that relationship, the number of resellers under that umbrella has gone up very dramatically as well so just our distribution -- I mean the reseller capability below the distribution has grown a lot over the last 12 months and we are very pleased with that.

That’s great. And then maybe a quick one for Steffan, I know you guys priced in U.S. dollars but I curios are you seeing any evidence of the strengthening dollar and demand overseas.

Since we price in U.S. dollars, we don't really see any material shipped for the revenue. Where we do see a little bit of a benefit is as the dollar strengthens, we pay our foreign locations salaries, benefits and expenses in local currency. So that does help have a modest benefit. But outside of that, the real top line risk isn't there, because we do price in USD.

And our next question comes from Daniel Ives with FBR Capital.

Yes. Thanks. Mark, could you just talk about your deals getting fast tracked and maybe even more at the board level in terms of what you're seeing out in the cyber security, especially in terms of some of the high-level threats we've seen over the last three to six months?

Yes. Dan, I think that we're seeing is that there's certainly a large and growing amount of attention at the Board level, the highest levels in companies in boards on these – the threats. What we’re actually seeing below that though is good spending, as you can 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 who are stepping back and saying, we want to think about something that is going to be very valuable for us for three to five years, not just the latest or that just came out last week. We tend to do very well in that kind of environment, because we come in with solutions 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 strong dose of prevention and that is resonating extremely well in the market.

Okay. In terms of – from the White House Summit that you had and obviously you're really involved with what you see on the government side. Do you think 2015 is an interesting inflection point on the federal side in terms of spending on cyber security or do you think we're still not there and there still needs to be some bureaucracy and red tape that need to tear there or cut through? Thanks.

I think, generally, the government recognizes, like all organizations, they need to be at the forefront of cyber security. It’s not so much an inflection point in terms of acceptance of what has to happen from a technology perspective. I think it has a lot to do with budget. So if you recall, the fiscal 2015 budget for the government was a very tough one. It was kind of going into fiscal 2015 they were coming off of a lot of a belt tightening just generally in the government. So I would just expect that the fiscal 2016 budget is actually just going to be a better budget. There is going to be more money in the budget in fiscal 2016 than there was in fiscal 2015. That’s a good thing for providers. And if you’re a provider like us who has got a really good solution for the government who needs to be at the very front of this, we think that bodes well.

Our next question comes from Gregg Moskowitz with Cowen and Company.

Thank you very much, and I’ll add my congratulations as well on a strong quarter. A question for Mark. Mark, some security vendors held the view that or [indiscernible] 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 generated by mobile and other sources. I just wanted to get your perspective on that, if I could.

Well, our view is that what you’re trying to accomplish under there or should be trying to be accomplish is not only great detection but a very, very strong level of prevention, and that’s got to be across the entire 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 you can’t see all that traffic and meaning you’re not in line, then you’re going to have a very, very difficult time doing anything from a security perspective, whether it’s APT or anything else. So that’s the view that’s driven the importance of being in the – I call it – the architecturally favored position of being the firewall in the first place because the firewall is generally the only security device that is going to see all traffic in or out of the network. And if it’s off with a mobile device and you VPN it into your traffic flow, then you are going to supply the network security policies to that traffic regardless of what the device is coming off of which is exactly what recommend folks too and that’s what Global protect us for example. So I would completely agree with the statement that you have to see all of traffic in order to secure it and that you're going to be unable to do that unless you are in the firewall position.

Terrific. Thanks. Operator: Our next question comes from Michael Turits with Raymond James.

Hey, guys. A quick question on – the question earlier about 2014 versus 2015 in terms of spends, Mark, any shift at all in terms of security spending in terms of priorities that you see from 2015 versus 2014?

Yes, I think that as we've seen folks at the highest levels being paid more attention which I mentioned earlier, which is 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 from an enterprise perspective as opposed to thinking about the point product or it’s time to refresh this product or refresh this product. And as a platform provider for prevention in that’s great for us because we have the ultimate answer for that for folks there in the market and it is resonating very well.

And then, obviously, a very strong quarter but you had a little slower than last quarter? Anything going on there, or the check [indiscernible].

We like Europe. It’s good market. You may recall last quarter we grew a little over 60% year-over-year in Europe and then we grow 60% sequentially after that, so that’s – we like those numbers.

Good. Thank you very much.

Good. Thanks Mike.

Next we’ll go to Gur Talpaz with Stifel.

Great. Thanks. So there's been a lot of noise up in the endpoint market. Can you talk about what you're seeing out there competitively? And do you think customers are starting to understand the inherent advantages of an integrated offering with WildFire versus, let's say, a standalone offering? Thank you.

Yes, Gur. Yes, a couple of angles on that. The first is that, I agree with you, there's a lot of noise in the market on the endpoint side. The reason for that is it's becoming evident that the endpoints are very important from a solution perspective in order to secure an enterprise, right? Because it is the wild west in the end points. And the first thing we see for sure is customers recognizing that the legacy AB technologies are incapable of doing that, right? The second thing is the rush of lots other players in the market say, well, 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 what you 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 end point and because of that it's very compelling.

And next we’ll go to Jonathan Ho with William Blair.

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 or five years ago, the initial customers? And how should we think about that trend for the course of 2015 and going into 2016?

Yes, Jonathan. So what we look at is we definitely see a refresh going on in our earlier cohorts. The first’s really measurable ones for us, so our 2009 and 2010 by numbers. So we’re seeing refreshes occurring there. To put that in perspective, the combined customer base for 2009 and 2010 is less than 2,000 customers. We’ve got over 22,000 customers now. So we continue to see refreshes into those larger cohorts, which we would expect to. That’s the tailwind.

Got it. Excellent. And then, as you start to think about the NSX and VMware relationship, can you maybe talk a little 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 choose the solution and what potentially the alternatives are, if any?

Yes. We think of it 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 center. It’s not just north-south. It’s 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 closely with VMware the east-west. And when we show that to customers and how tight that integration is and provide the same level of protections in north-south, they are very, very impressed with that. And we can see that playing out through the numbers. NSX is 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.

Our next question comes from Aaron Schwartz with Macquarie.

Good afternoon. Thank you. On the Metro you gave for the top 25 customers, that increased quite a bit, and I’m sure a number of things are driving that. But was there anything in particular that stood out?

Yes. We’re seeing our relevance continue to grow in the market and particularly with the larger companies that they’re making larger purchases with us. So these are our largest customers, right? And then they continue to make larger purchases. And also we are seeing some customers on their first purchase, just right onto the top 25 list. So it’s a mix of those two things that’s driving that number up to the right.

Okay. And secondly, if I could, on the attached you talked about that, direction moving higher as well. Can you just comment on the duration of what you're seeing now? Does that change at all relative to one or two years ago? Thanks.

Yes, relative to one or two years ago up for durations, they are basically in the same zip code relatively. They are up modestly. But there hasn’t been any real -- change in terms of duration.

Great. Thank you.

Our next question is from Jeff Kvaal with Northland Capital Markets.

Yes. Hello.

Hi, Jeff.

Can you guys hear me okay?

Yes.

Good. Thank you. I also have one of my [indiscernible] but I always wanted to ask you how you are doing in the service provider market. I know that you have been pushing into that round of this. And secondly, I think you opened the call a little bit Mark, talking about seeing a better run rate I think for the security market over a period of a few years, then, you might the quarter or two ago, I am wondering if you could delve into those comments a little bit more?

Yes, Jeff, good questions. Let me take those in reverse. So what I was saying in the prepared remarks in the security market is that the IT paradigm shift which is security becoming what I am calling fabric to all technology decisions that are being made by organizations, governments and companies. And that’s the result of all these attacks we're seeing and incredibly evident fact that the legacy technology cannot withstand that. Right. So I think that paradigm shift of that security fabric and will remain that way for quite some time. As the point I was trying to make is, that’s not it going to abate overtime. I think that’s going to continue to grow overtime. And on your first question, on service provider market, we like that market a lot. We do very well in that market. As I’ve said before, we view that market a couple of – three different ways from an opportunity perspective. The area where we're doing very well right now is selling two service providers for using technology in their own networks. The 7050 as 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're seeing very strong demand in service provider industry for that.

Our next question comes from Gray Powell with Wells Fargo Securities.

Great. 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 technology sets that can supplement your current offerings?

Okay, great. There's one thing we never forget is that we're doing well in the market and Traps has been as successful as we have, because we've been very innovative and very disruptive. So we start everything with that. And as you solve that, we put a lot of time and effort, people, resources, into innovation and I think our track record is pretty good on that. We have a number of things so if you just think back in the last 12 months what we've done around Traps, around the PA-3060, improvement to 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 to 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 in which we’re rolling out.

Got it . Thank you very much.

Thank you.

And our last question today comes from Scott Zeller with Needham & Company.

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?

Well, 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’d give you that as color 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 a nice balance between customers who are signing up for a one-year deal but we are seeing proportionally more customers signing up for multi-year deals as well. And some of those multi-year deals tend to be skewed to our fiscal Q4. So you should definitely see some seasonality there.

Thank you.

Yes.

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’re very excited about the second half of the year and beyond. As I said earlier, I think, we’re in the right place at the right time in the market with a market-leading protection and prevention platform. I, once again, thank Palo Alto Networks’ team for all their hard work and their support for our customers and partners, as we continue our march to become the global leader in enterprise security. Thank you very much.

Thank you for your participation. This does conclude today’s call.