Palo Alto Networks Inc (NYSE:PANW) Q2 2023 Earnings Name dated Feb. 21, 2023.
Company Members:
Nikesh Arora — Chief Government Officer and Chairman
Dipak Golechha — Chief Monetary Officer
Analysts:
Brian Essex — JPMorgan — Analyst
Hamza Fodderwala — Morgan Stanley — Analyst
Fatima Boolani — Citigroup — Analyst
Brad Zelnick — Deutsche Financial institution — Analyst
Tal Liani — BofA Securities — Analyst
Keith Bachman — BMO Capital Markets — Analyst
Patrick Colville — Scotiabank — Analyst
Matt Hedberg — RBC Capital Markets — Analyst
Jonathan Ho — William Blair — Analyst
Saket Kalia — Barclays — Analyst
Joe Gallo — Jefferies — Analyst
Ben Bollin — Cleveland Analysis — Analyst
Presentation:
Operator
Good day everybody and welcome to Palo Alto Networks Fiscal Second Quarter 2023 earnings convention name. I’m Clay Bilby, head of Palo Alto Networks Investor Relations. Please observe that this name is being recorded at the moment, Tuesday, February twenty first, 2023, at 1:30 PM Pacific Time. With me on at the moment’s name are Nikesh Arora, our Chairman and Chief Government Officer; and Dipak Golechha, our Chief Monetary Officer. Our chief product officer Lee Klarich will be a part of us within the Q&A session following the ready remarks.
Yow will discover the press launch and knowledge to complement at the moment’s dialogue on our web site at buyers.paloaltonetworks.com. Whereas there, please click on on the hyperlink for Occasions and displays, the place you can find the investor presentation and supplemental info. Through the course of at the moment’s name, we are going to make forward-looking statements and projections relating to the corporate’s enterprise operations and monetary efficiency. These statements made at the moment are topic to dangers and uncertainties. We assume no obligation to replace them.
Please evaluate the press launch and our current SEC filings, to see these dangers and uncertainties. We can even consult with non-GAAP monetary measures. These measures shouldn’t be thought of as substitute for monetary measures ready in accordance with GAAP. Essentially the most directly-comparable GAAP monetary metrics and reconciliations are within the press launch and the appendix of the investor presentation. All outcomes and comparisons are on a fiscal year-over-year foundation, until particularly famous in any other case. We’d additionally like to notice that administration is scheduled to take part within the Morgan Stanley TMT Convention and JMP Securities Expertise Convention in March. I’ll now flip the decision over to Nikesh.
Nikesh Arora — Chief Government Officer and Chairman
Thanks, Clay. Good afternoon, and thanks everybody for becoming a member of us at the moment for our earnings name. I’m happy to report that we had one other robust quarter. The steadiness of topline development, vital growth and non-GAAP working margin and robust free-cash movement. Billings and income, every grew 26% Yr-over-Yr. Our RPO grew 39% as we proceed to signal giant multi-year offers with our clients. We additionally delivered an acceleration in our working leverage in Q2 as we targeted on driving worthwhile development. Our non-GAAP working earnings grew 55% 12 months over 12 months supported by a non-GAAP working margin, which exceeded 22% for the quarter, up over 440 basis-points year-over-year.
This translated to a different quarter of profitability on a GAAP foundation, now we have now been GAAP worthwhile on a cumulative foundation during the last 4 quarters. As well as, a powerful free-cash movement era this quarter additionally places us on-track to outperform prior steerage. I do know lots of you might be questioning concerning the macro-environment, so I wished to begin with an replace there. There’s clearly a harder macro rising on the market because the Fed continues on its campaign to tame inflation. The altering macro is clearly making enterprise leaders, extra cautious. A few of our clients are seeing indicators of a slight slowdown, whereas others are much less impacted.
On our subject we’re not completed but whereas not anticipating shocks I do assume we are going to see extra cautious exercise over the subsequent few quarters. Clearly warning is considerable driving extra scrutiny making clients demand extra worth from their companions. We’ve seen some initiatives get delayed or de-scope, none canceled, whereas most proceed on monitor. We’ve all the time maintained that we anticipate cyber safety to be resilient, and we proceed to see proof of that. On the massive deal entrance, this habits is unquestionably widespread. For us this has meant we have to get forward of this and work intently with our CIO and CISO companions, not simply that’s creating extra conversations round fee phrases, reductions, and scope as a take care of buying groups, one thing we’ve been working with our clients on as properly.
I’m delighted that based mostly on our subject groups getting forward of this drawback early this quarter, we didn’t see any main offers slip from the quarter, our deal cadence and high quality was per the identical quarter final 12 months. On an equally optimistic observe this atmosphere drives the necessity for consolidation, not simply to generate clear safety outcomes, but in addition to scale back the safety vendor sprawl that has been prevalent in our clients’ infrastructure and the necessity for a long-term safety technique based mostly on complete price of possession and worth. We really feel lucky that with our portfolio, we’re best-positioned to ship this to our clients.
Inside our personal enterprise two issues have occurred, one now we have turn into extra targeted on effectivity, from early this 12 months, for instance, our headcount development this 12 months is prone to be decrease than any of the final three years. On the similar time, we don’t anticipate slowing down the tempo of our growth or enterprise outcomes. Dipak and his crew have been rigorously inspecting, our price construction throughout our portfolio to make sure we’re set-up to ship constant gross margin in all areas.
This has been one of many main drivers of our improved working margin and we hope to proceed to enhance as we scale. Secondly, as anticipated supply-chain challenges and product have abated considerably versus six months in the past. Whereas that is evident in our product gross margins and our total profitability. There are some lingering in lingering impacts, which we anticipate will additional a bit by way of the top of this 12 months. Let’s additionally take a second to debate {hardware} development. Over the past 12 months, plenty of elements have impacted {hardware} development together with provide constraints, uneven demand, given supply-chain impacts on backlog. Moreover, now we have observed our clients proceed to be extra targeted on their cloud, community and safety operations transformations and are prepared to sweat their {hardware} belongings longer.
Underlying all this, we nonetheless imagine that the business {hardware} development charge is the low-to mid single-digits as all these extraneous elements mitigate over the subsequent few months we are going to see the long-term development gravitate again to these ranges. So what does it imply for the second-half of this 12 months and past. Considerably counter to the market we’re elevating steerage, each on prime line metrics and profitability. After all this requires the present demand to maintain and for us to keep up a continued deal with execution. They’ve a singular alternative on this atmosphere has strengthened our place available in the market, therefore we’re investing with an eye fixed in the direction of disciplined development and positioning ourselves to the associate of alternative for purchasers seeking to consolidate.
You’ll hear extra about this from Dipak however we’re elevating billings and next-generation safety our steerage on the again of power in our software program enterprise and cloud-delivered capabilities and {hardware} pipeline, we’re seeing particular transaction which might be on-track for This fall simply brought about us to shift some forecasted income from Q2 to This fall, whereas sustaining our annual steerage. With all I’ve stated about effectivity and higher operations and the affect we’re now guiding to 21.5% to 22% working margin for fiscal 12 months 2023 moreover we’re additionally rising our cash-flow steerage.
Consolidation continues to be a key theme with our clients. After all, clients aren’t prepared to compromise on high quality and cybersecurity. Given our market management in 13 classes, we’re lucky to be engaged in lots of such conversations. These conversations are driving enterprise, and many shoppers are on a long-term transformation path with us. The variety of offers we closed over $1 million grew almost 20% year-over-year, and the worth of those transactions grew almost 60%. Equally, the variety of greater-than-$5-million offers grew 84% and plenty of greater-than-$10-million offers grew over 140%.
We noticed deal values in these cohorts develop considerably. This continued momentum is crucial to us with the ability to drive platform consolidation. Again and again, we see early millionaire clients turn into an onboarding ramp to assist us drive extra cybersecurity worth to our clients. Nearly all of our $10 million offers contain a number of platforms on an underlying transformation that’s driving vendor consolidation. Let’s check out among the methods we’re driving consolidation.
First, with Zero Belief transformations, we’re serving to clients standardize their equipment and software program firewalls with a broad line of safety subscriptions. A life sciences buyer signed an eight-figure deal to standardize their operations utilizing our next-generation firewalls, VMs and safety subscriptions. In different circumstances, we’re serving to clients undertake SASE and software program firewalls, and consolidate their safety stack throughout our constant set of choices, pushed by hybrid work and securing SaaS apps. A monetary service agency just lately signed an eight determine take care of us, as a result of they wished to rework their community and scale back each operational challenges and value of possession.
They selected us over pure play SASE rivals, due to the breadth of our providing in our complete Zero Belief community. Secondly, trial cloud transformations. We’re utilizing our Prisma Cloud and Prisma Entry capabilities to assist clients undertake hyperscale cloud and Software program as a Service. One other monetary providers agency with a mandate to run over 90% of the apps within the cloud signed a excessive eight-figure deal to standardize in each Prisma Entry and Prisma Cloud. Lastly, in SOC transformations, we’re utilizing our Cortex platform with XSIAM to assist clients remodel their safety operations middle and retool round high-fidelity information sources, AI and automation.
A retail firm began a relationship with us round Unit 42 incident response with an Expanse trial and small XDR deployment. They expanded the connection with a excessive seven-figure deal to standardize on XDR and XSOAR. These strategic buyer relationships and transformations wouldn’t have been attainable with out us constructing a brand new safety business paradigm, a paradigm round fixed innovation. Our success is pushed by investments in innovation and is more and more clear to us that, there’s a flywheel at play right here. This begins with R&D funding, the place now we have the biggest finances of all devoted cybersecurity firms roughly $1 billion in non-GAAP spending on a trailing four-quarter foundation.
That is two to 5 occasions as a lot as our pure-play friends. Our scale additionally permits us to unfold this finances throughout a bigger income base and the shared wants of our three platforms. R&D investments then translate right into a file variety of product releases. Our first half main launch is quantity 35, up 59% from the primary half of final 12 months. A number of the key releases within the first half included our flagship PAN-OS 11.0 Nova, our third superior subscription, Superior Wildfire, our new AI-based SOC platform XSIAM and new modules and updates in Prisma Cloud.
This fixed innovation is inflicting business analysts to take discover. We just lately acquired recognition for management within the cloud-native utility safety platform class, or CNAPP, bringing our complete variety of energetic management recognitions to 13, which compares to 9 a 12 months in the past. All these management positions have helped us develop our NGS ARR at 63%. We nonetheless imagine there’s a giant untapped TAM for a lot of of those providers given the strong adoption of superior software program providers that now we have launched, that are all cloud delivered and us being within the early a part of the SASE cloud life cycle, we really feel assured in our future potential to drive NGS ARR.
Let’s take a deeper take a look at among the highlights. I’ll begin with my private favourite, our community safety enterprise. We launched our first SASE functionality, Prisma Entry, on the finish of fiscal 12 months 2019. Within the first 12 months, we booked lower than $100 million in enterprise. Over the past six quarters, we booked about $1 billion, with our largest deal final quarter being a TCV deal for $40 million for SASE. We now have over 4,000 clients and are rising ARR roughly 50%. In Q2, we noticed a wholesome variety of giant aggressive wins in SASE, and SASE has one in every of our strongest pipelines wanting 12 months out.
Past the highest line traction, we’re additionally seeing enhancing economics within the enterprise. Two years in the past, we confirmed you the way the five-year income from a SASE buyer compares to an equipment buyer. At the moment, SASE was about two occasions increased. Since then, we’ve added extra worth to SASE. We launched autonomous digital expertise administration in FY 2022, adopted by AIOps and SaaS safety posture administration this 12 months. AI has the facility to rework SASE. Our built-in safety providers at the moment are all powered by AI to detect and forestall even zero-day assaults. And we’ll quickly be introducing extra AI-driven functionality to rework the consumer expertise and utilizing the platform.
We now anticipate our five-year income from a SASE buyer to be greater than 2.5 occasions that of an equipment buyer. We’ve additionally seen some enhancements in our SASE gross margins over this era, as now we have scaled to turn into extra environment friendly. Should you go to the opposite aspect of our community safety portfolio, our software program firewall enterprise goes robust. This contains the broadest deployment choices for purchasers, together with VM-Collection and CM collection, which may run of their information facilities or be bought within the cloud marketplaces and the first-to-market built-in cloud next-generation firewall choices for hyperscale clouds.
We’ve the best market share of any firm on this market. We imagine it’s greater than thrice of our any closest competitor. The present macro atmosphere is inflicting extra clients to look at their capex finances. This shift, together with the truth that clients are reworking the info facilities transferring to the cloud, is main extra of them to undertake software program firewalls. In Q2, the variety of offers over $1 million for our software program firewall was almost doubled, and 6 of our prime eight offers in Q2 included software program firewalls in our providing. Shifting onto our cloud safety enterprise. We proceed to make regular progress with Prisma Cloud. Platform enhancements are essential to our development.
We launched the brand new API threat profiling functionality to reinforce our net utility safety module. This functionality helps safety groups assess their API stack floor, assault floor rapidly based mostly on greater than 200 threat elements, together with misconfigurations, publicity to delicate information and entry privileges. This helps groups prioritize essentially the most vital threat and take preventive measures to handle them. We additionally proceed to shift left and deal with securing workloads as they’re developed, fixing our clients’ utility safety channels.
To that finish, we closed the acquisition of Cider, and have introduced their crew underneath frequent management with our cloud code safety crew to assist convey Cider’s CICD safety functionality to our platform. After releasing Cloud Core Safety a year-ago, over 15% of our buyer base has adopted these capabilities. Our cloud core safety clients in Q2 grew 30% over Q1. Our new secret administration module launched in December scans code repos utilized by builders for hard-coded secrets and techniques like passwords and API keys to ensure this info just isn’t uncovered and used as a vector of assault.
We proceed to see these new capabilities and enhancements drive a rise in buyer module adoption. For instance, our clients with two or extra modules grew over 40%, and clients with 4 or extra modules greater than doubled. Credit score consumption of Prisma Cloud elevated 48% year-over-year. This development is being pushed by new buyer additions, clients rising their cloud footprints, and clients consuming extra modules. Whereas there was dialogue on moderation and cloud consumption available in the market, we imagine the comparatively early stage of cloud safety adoption has and can proceed to shelter us from this headwind.
Earlier than I transfer on to Cortex and discuss persevering with indicators of optimism I see in that class, I really feel compelled to take a detour in the direction of AI. Clearly, AI has been on everybody’s thoughts given the continued dialog within the tech business. Most of you understand the story of my arrival with the Palo Alto Networks. I talked about fragmentation and the necessity for an answer there, which now we have talked quite a bit about. I additionally talked about automation and AI. We counted, I used the phrase AI extra time than my first six months in Palo Alto Networks than platform or consolidation.
The challenges you all know is that AI has been a knowledge drawback and continues to be so. Not like client AI, the place we will discuss Sonnets and ChatGPT’s artistic capabilities and the revolution that’s going to drive in search or promoting, its potential to summarize information and proceed to amuse and inform us, the calls for from AI and enterprise are much more exacting and so are the returns. An enterprise AI must be clear. It has to have complete information. And in safety, particularly it must be actual time. So not solely do that you must have the most effective information to create nice safety outcomes, you additionally have to be positioned in line to dam threats.
Let me make a case why with petabytes of information from trillions of occasions, billions of classes, a whole lot of tens of millions of URLs and tens of tens of millions of flies flowing — recordsdata, not flies — flowing by way of our product throughout cloud, community and endpoints every day, we’re finest positioned to ship safety outcomes utilizing AI machine studying. Palo Alto Community’s next-generation firewalls broke by way of the firewall business within the early days due to our potential to then ship next-generation safety.
These providers have been pushed by expansive information assortment capabilities, EAL, or enhanced utility logs. We’ve since utilized that functionality throughout our total community safety stack. We estimate that this community safe information is slightly below half the precious safety information that’s wanted for any AI-driven final result. We’ve over 60,000 clients the place we can assist them use this information. As we conceived with Cortex, we constructed XDR to make sure we collected the most effective endpoint information throughout the business.
We acquired and deployed the biggest safety automation footprint at XSOAR, however we’re not stopping there. We then acquired and built-in Expanse, which checked out vulnerability information from a special and distinctive perspective. These fashioned the elemental constructing blocks for XSIAM. With our management place in automation, analytics and assault floor administration, once more, we’re driving an AI-based SoC transformation. With our 4,500 Cortex clients, we’re capable of convey what we imagine is the subsequent largest set of safety information that’s helpful for AI. We utilized the identical thought and rigor as we constructed Prisma Cloud, integrating information from all hyperscalers, integrating shift-left information from builders.
Slowly and steadily, the Prisma Cloud integration is being constructed on a stronger basis of safety information. Cloud is changing into an more and more essential contributor to AI, and our 2,000 clients will profit from it. We’ve delivered distinctive AI-based outcomes, together with blocking unknown but malicious web sites, command and management area and recordsdata at scale. Additionally, now we have proven in our personal safety operations middle that we will scale back the imply time to detection to seconds and the meantime to reply to minutes.
These are all outcomes that can’t be achieved with out the info now we have and the AI/machine studying experience we apply. Let’s have a look into how we imagine this has made us extra excited and inspired us round XSIAM. In Q2, as a part of the Cortex and XSIAM platform, we launched essential new capabilities, together with SaaS-enabled XSOAR, delivering a cloud-based interface and Expanse energetic assault floor administration permitting our clients to remediate points found utilizing XSIAM.
We launched XSIAM and GA on the finish of Q1. To date, we’ve closed roughly $30 million in enterprise and have a rising pipeline of consumers that need to remodel safety operations of the brand new platform. I believe XSIAM goes to pave the way in which for us to drive AI-driven safety transformation outcomes. We’ll proceed to work laborious with our early clients to drive evolution and success in XSIAM. I’m extraordinarily optimistic, maybe, and cautiously optimistic about XSIAM. Its early relevance, product market match, and with the concurrent dialogue on AI, it makes me hopeful that this could possibly be the quickest ramp of any safety product.
We see our first milestone to attending to $100 million in bookings sooner than Cortex SASE or Prisma Cloud in our portfolio. Earlier than I flip the ground to Dipak, I wish to put all this collectively and discuss the place we’re targeted as we enter the second half of our fiscal 12 months and past. We see a transparent highway map forward of us. We intend to place our head down and execute. Proper now, we’re within the course of of reworking our enterprise to software-based and cloud supply choices.
Our income, which is more and more pushed by our next-generation safety capabilities, is changing into extra recurring in nature, and now we have a possibility to personal a higher share of our clients’ cybersecurity finances. This could enable us to maintain excessive income development for longer. Over the past couple of years, we set in movement a plan to develop our working margin, together with driving scale in our faster-growing companies. Over the past six months, we’ve listened to buyers who’ve inspired us to deal with worthwhile development and speed up incremental leverage in our enterprise, and we made good progress in Q2.
We’re now properly positioned for the second half of the 12 months. We’re appreciably elevating our margin goal for FY 2023 up 200 foundation factors from our prior steerage and 250 foundation factors from our preliminary FY 2023 steerage. We imagine we will proceed to construct on this into fiscal 12 months 2024 and past, placing us three years forward of our profitability targets we supplied at our final Analyst Day in September 2021. As Dipak will describe, we imagine the mixture of sustaining increased prime line development and deal with effectivity units up properly to construct on this base of upper profitability and develop EPS forward of income.
I wish to emphasize that reaching GAAP profitability is a crucial milestone for our firm. In assist of this, we’re actively targeted on managing our stock-based compensation to proceed bringing this down as a % of our income. With that, I’ll flip the ground over to Dipak to take you thru our particulars of our outcomes and steerage, after which we’ll take questions.
Dipak Golechha — Chief Monetary Officer
Thanks, Nikesh, and good afternoon, everybody. For Q2, income of $1.66 billion grew 26%. Product income grew 15%, while complete service income grew 29%, with subscription income rising 32% and assist income rising 25%. Shifting on to geographies. We noticed income development throughout all three areas, with the Americas rising 22%, EMEA up 35%, and JPAC rising 32%. The power of our next-generation safety capabilities continues to drive our outcomes, with NGS ARR of $2.3 billion, rising 63%.
Power was broad-based throughout all three of our platforms community safety, cloud safety and safety operations. We delivered complete billings of $2.03 billion, up 26% and above the excessive finish of our steerage vary. Complete deferred income in Q2 was $7.6 billion, a rise of 39%. Remaining efficiency obligation, or RPO, was $8.8 billion, rising 39%, with present RPO representing about half of our RPO much like current quarters. Our non-GAAP earnings per share was considerably forward of our steerage, and this metric, in addition to our trailing 12 months adjusted free money movement, accelerated.
Non-GAAP EPS of $1.05 grew 81% year-over-year, whereas trailing 12-month adjusted free money movement of $2.7 billion grew 76% year-over-year. Shifting on to the remainder of the monetary highlights. Non-GAAP gross margin of 75.5% was up 150 foundation factors year-over-year, pushed primarily by a rise in our software program combine. On a quarter-over-quarter foundation, we noticed much less stress from incremental prices associated to the availability chain. We’ve made vital progress in driving leverage. That is one thing that we articulated at our Analyst Day in September 2021 and kicked off in fiscal 12 months 2022 and now we have accelerated this in fiscal 12 months 2023 with a deal with worthwhile development as evidenced by our Q2 efficiency.
Our working margin of twenty-two.8% elevated 440 foundation factors year-over-year. This outcome was pushed by enhancing gross margins and a slower degree of headcount additions. We anticipate to see ongoing enhancements in our operational effectivity. And because of this, we’re elevating our fiscal 12 months 2023 working margin steerage. Non-GAAP internet earnings for the second quarter grew 79% to $332 million, or $1.05 per diluted share. Our non-GAAP efficient tax charge was 22%. Delivering fiscal 12 months GAAP profitability is one other milestone in our steadiness of driving development and profitability.
For the quarter, GAAP internet earnings was $84 million or $0.28 per primary share and $0.25 per diluted share. This was our third consecutive quarter of GAAP profitability. And as Nikesh famous, now we have now been worthwhile on a cumulative foundation for the final 4 quarters. We imagine we now meet the factors for inclusion within the S&P 500. Turning now to the steadiness sheet and money movement assertion. We ended Q2 with money equivalents and investments of $6.2 billion.
Our common period — our new contracts elevated barely year-over-year, pushed by offers with strategic clients. It stays at roughly three years, the place it has been traditionally. Q2 money movement from operations was $695 million, with complete adjusted free money movement of $685 million this quarter. Our robust free money movement in Q2 was pushed by elevated working profitability, increased curiosity earnings, and enchancment in billings linearity because of enhancing provide chain situations. Throughout Q2, we repurchased roughly 1.8 million shares on the open market at a mean worth of roughly $139 per share for a complete consideration of $250 million.
As a reminder, our share repurchase program is opportunistic, and we’re dedicated to this methodology of returning money to shareholders over the medium-term. Inventory-based compensation ticked up 20 foundation factors as a % of income sequentially, associated to the issuance of our annual grants and the affect from the Cider acquisition. On a year-over-year foundation, stock-based compensation was down 350 foundation factors as a % of income. Earlier than I get to steerage, I wished to cowl my ideas on working margin.
We’ve continued to drive enhancements within the profitability for our fastest-growing companies as they’ve gained scale. Additionally, during the last six months, now we have developed and executed on detailed plans to speed up our working leverage. This contains elevating the bar across the return on funding we anticipate in addition to remaining prudent in our hiring. We’ve additionally spent plenty of time taking a look at our peer group and learning benchmark information. As we glance in the direction of the second half of the 12 months and into fiscal 12 months 2024, we imagine we will proceed to execute in opposition to our plans and drive increased working margins.
We anticipate that it will translate into us rising our EPS sooner than our income development charges. Now transferring on to steerage. We’re providing steerage for Q3 and in addition This fall to make this specific after which providing up to date annual steerage. You’ll see we’re sustaining our annual income steerage and giving specific steerage for Q3 to This fall based mostly on what we see in our pipeline for product income. For the third quarter of 2023, we anticipate billings to be within the vary of $2.20 billion to $2.25 billion, a rise of twenty-two% to 25%.
We anticipate income to be within the vary of $1.695 billion to $1.725 billion, a rise of twenty-two% to 24%. We anticipate non-GAAP EPS to be within the vary of $0.90 to $0.94, a rise of fifty% to 57%. For the fourth quarter of the 12 months, we anticipate billings to be within the vary of $3.12 billion to $3.17 billion, a rise of 16% to 18%. We anticipate income to be within the vary of $1.937 billion to $1.967 billion, a rise of 25% to 27%. We anticipate non-GAAP EPS to be within the vary of $1.18 to $1.22 per share, a rise of 48% to 53%.
For the fiscal 12 months, we anticipate billings to be within the vary of $9.1 billion to $9.2 billion, a rise of twenty-two% to 23%. We anticipate NGS ARR to be within the vary of $2.75 billion to $2.8 billion, a rise of 45% to 48%. We anticipate income to be within the vary of $6.85 billion to $6.91 billion, a rise of 25% to 26%. We proceed to anticipate product income development within the vary of 10% for the complete fiscal 12 months. For fiscal 12 months 2023, we’re anticipating our working margins to be within the vary of 21.5% to 22%. And we anticipate our non-GAAP EPS to be within the vary of $3.97 to $4.03, a rise of 57% to 60%.
We anticipate our adjusted free money movement margin to be between 36.5% to 37.5% and we anticipate to be GAAP worthwhile every quarter and for the fiscal 12 months 2023. Moreover, please take into account the next modeling factors. We anticipate our non-GAAP tax charge to stay at 22% for Q3 and financial 12 months 2023, topic to the result of future tax laws. For Q3 and This fall, we anticipate internet curiosity earnings — internet curiosity and different earnings of $45 million to $49 million. We anticipate Q3 diluted shares excellent of 321 million to 327 million shares. We anticipate This fall diluted shares excellent of 326 million to 332 million. We anticipate fiscal 12 months 2023 diluted shares excellent of 320 million to 326 million. We anticipate Q3 capital expenditures of $35 million to $40 million, with full 12 months capital expenditures of $165 million to $170 million. With that, I’ll flip the decision again over to Clay for the Q&Part of the decision.
Questions and Solutions:
Operator
Nice. Thanks, Dipak. [Operator Instructions] The primary query shall be from Brian Essex of JPMorgan with Hamza Fodderwala to observe. Brian, you could ask your query.
Brian Essex — JPMorgan — Analyst
Nice. Thanks, Clay and congrats to everybody on some unbelievable outcomes. Actually, actually robust right here. Thanks for taking the query. Possibly Nikesh for you, I simply have a query on SASE. Possibly for those who may dig in a bit of bit to the aggressive dynamics there. Does it actually assist to — I assume, how a lot does it assist the platform to have full end-to-end SASE? I see plenty of non-public distributors constructing out full end-to-end SASE platforms, or is that this extra of a transformational push or perhaps there’s a bit of little bit of each? Thanks.
Nikesh Arora — Chief Government Officer and Chairman
Hey, thanks for the query. Look, the SASE market, I believe historically was a market which was targeted on Web entry. Prospects use that as a proxy-based strategy to onboard Web entry and was fantastic. I believe the pandemic actually flipped the swap, coupled with the entire cloud transformations which might be occurring, our clients, particularly bigger clients, wish to create a primary — first-class citizen of any consumer who’s not sitting within the workplace or within the campus, they usually wish to get to Zero Belief. So, I believe the confluence of Zero Belief, the confluence of the cloud transformation, the confluence to use a full safety stack opened the door for full SASE deployment to community transformations, couple that with the truth that persons are attempting to get away from giant wide- network-type community architectures, SD-WAN sort community.
So, I believe, our confidence on all of this stuff created an actual spurt within the SASE market. We’ve 60-plus thousand clients who use our firewalls. Now, we’re exhibiting them a path emigrate from a firewall-based, campus-based, information center-based structure to a Zero Belief structure, which spans {hardware}, software program, and any sort of distant entry and campus options. So, I believe that’s what’s driving that for us. And while your guys — you’re impatient, your brains transfer sooner than our potential to execute generally, it’s solely been three years. And I believe I may problem anyone out available in the market. Anyone — all people learn the identical Gartner Magic Quadrant on SASE.
I wish to see what number of distributors can declare within the final six quarters, they bought $1 billion SASE, and we simply did a $40 million deal in SASE final quarter. So, I believe that’s our execution, our potential to work with current clients, our continually listening to clients evolving our product is permitting us to get right here. It’s a aggressive market, however I believe we’re down to 2, two and a half distributors on this market who we see at each buyer now.
Operator
All proper. Our subsequent query from Hamza Fodderwala with Morgan Stanley with Fatima to observe. Go forward Hamza.
Hamza Fodderwala — Morgan Stanley — Analyst
Hey good afternoon. Thanks for taking my query. Possibly for Nikesh and Lee Klarich. Simply curious across the early buyer conversations round AI as clients look to automate their safety operations. And to what extent is that aiding the dialog in the direction of consolidation for Palo Alto Networks?
Nikesh Arora — Chief Government Officer and Chairman
That’s an awesome query, Hamza. And I’ve been form of on and off by way of tips on how to mood my enthusiasm for this area. And I used to be on my strategy to India to talk at a convocation, I skilled ChatGPT for the primary time. And I rotated and rewrote my convocation speech saying, that is the most effective factor that occurred to safety, enterprise and to client, as a result of I believe it’s sort of an inflection level, which is massive. Now clearly, that’s a dialog. I’d say, two months in the past, clients weren’t asking us about AI, and now all of them wish to know, are you deploying AI in your safety merchandise? That’s nice. And that’s why we spent a while on the earnings name attempting to elaborate how we’ve been utilizing this for a very long time.
The conversations are round how do I begin making extra sense of my information. I believe the final iteration of utilizing information within the safety business has been extra about, I’d say, offline or reactive information evaluation for essentially the most half. And that is the primary time the shoppers need real-time, proactive, block-the-threat outcomes, which is form of our candy spot, if I could say so. And that dialog is starting to begin. I’ll let you know, on XSIAM, there’s no deal lower than $1 million. I haven’t seen a safety product that we launched within the business which begins off at a minimal worth of $1 million, proper? We’ve completed $30 million of enterprise within the final 12 to 16 weeks, the place our clients — our groups are nonetheless getting educated.
We’re nonetheless getting traction. We nonetheless have, we predict, 70%, 80% of the product builders nonetheless engaged on the remainder of it as we get suggestions from clients. So — and I’m cautiously optimistic. And I believe you will note this pave the way in which for deployment of AI. That is our first outcome-based product. That is the primary time we will stroll in and say, pay attention, I can scale back your imply time to reply, a imply time to detect. In any other case, I’d say, use this, that is actually good, it’s going to save lots of you, however he received’t discover out till one thing occurs. Within the case of XSIAM, I say, I can display effectivity, I can display decrease price of possession for you. So, very hopeful. Don’t get forward of your self. It’s going to take some time. I actually informed you we’d be comfortable if I get $100 million sooner than any of the product. And hopefully, this turns into one other leg of development for Palo Alto to offer us extra sustained prime line over the long-term.
Operator
All proper. Our subsequent query from Fatima Boolani of Citigroup with Brad Zelnick prefer to observe. Go forward.
Fatima Boolani — Citigroup — Analyst
Good afternoon. Thanks for taking my questions. Nikesh, this one’s for you. You have been fairly specific that you’re having life like conversations with clients about fee phrases and extensions and monetary circumstances as a lot of the organizations focus perhaps extra on money movement preservation than they’d prior to now. So perhaps to particularly ask, it’s not very obvious in your numbers that you just’re having these sorts of conversations. So a, how are you managing to avoid plenty of that? And the way is Palo Alto Monetary Providers as a financing car perhaps serving to you drive plenty of these conversations that’s not obvious to us?
Nikesh Arora — Chief Government Officer and Chairman
Good. It means we’re doing an excellent job of managing our money movement margins and ensuring our clients are comfortable. And this very not often do I get to make each shareholders and clients comfortable on the similar time. So it’s a type of moments. Look, on a extra severe observe, sure, you’re proper. We’re having these conversations. And I’d say, Dipak and his crew doing an outstanding job in ensuring that our gross sales groups are supportive when the client is speaking about fee phrases, annual billing plans or particularly utilizing PANFS. So I’m going to go over to Dipak and clarify how he’s strolling the tightrope of creating certain that we’re doing this successfully with our clients. I’ll say, we’re blessed as a result of, as Dipak highlighted, now we have $6.2 billion of money on our steadiness sheet. So now we have the capability to have the ability to do that for our clients. However Dipak?
Dipak Golechha — Chief Monetary Officer
Sure. No, I believe, I’d simply say that, it’s been very selective and really purposeful wanting on the precise buyer interplay. We’ve a complete crew, which might be very skilled at this. We pulled lots of people in with exterior expertise. And it truly is a case-by-case piece right here, however that’s how you retain it like very selective and strategic. And that’s the one time we actually use it.
Operator
All proper. Nice. Our subsequent query is from Brad Zelnick of Deutsche Financial institution, adopted by Tal Liani. Go forward, Brad.
Brad Zelnick — Deutsche Financial institution — Analyst
Nice. Thanks, very a lot, and congrats, Nikesh and crew. Nice, nice job. Nikesh, Palo Alto Networks is way over a {hardware} firm. And that’s.
Nikesh Arora — Chief Government Officer and Chairman
Oh, my God, Brad. You’re reminding me of the assembly we had 4.5 years in the past in my workplace. Go on.
Brad Zelnick — Deutsche Financial institution — Analyst
I’m so glad that I left that impression on you, Nikesh. However I’m nonetheless ready for the odd phrase by the way in which. You possibly can see behind right here. It’s nonetheless — despite the fact that I’m in entrance of the constructing, it’s a bit sparse. However good to see you. So, way over a {hardware} firm at the moment that’s on full show, however you’ve downticked in your business {hardware} development expectations from what you stated final quarter. I imagine final quarter, you stated 5% to eight%. Now you’re saying low to mid-single digit. I don’t know if it’s a fabric distinction, however I observed the distinction. If something, what’s modified in any respect in your market view? How ought to we anticipate your {hardware} enterprise to carry out versus market? And what would you say, Nikesh, to a skeptic that’s maybe skeptical that plenty of the success you see in every little thing else in next-gen is using alongside on — and alternatives created when a gross sales particular person exhibits up and is promoting {hardware}? I assume how a lot of that movement is going on away from {hardware} that we should always recognize? Thanks.
Nikesh Arora — Chief Government Officer and Chairman
So, Brad, I believe it’s essential to grasp, that now we have a really giant put in base. We’ve 62,000 clients who deploy Palo Alto firewalls. And let’s simply say, in my 4.5 years at Palo Alto, I don’t know any buyer has decommissioned us but. So, I believe that the answer of the {hardware} just isn’t being deployed or not getting used just isn’t true. So there may be {hardware} and [indecipherable] clients. Regardless that anyone will not be shopping for {hardware}, plenty of our subscription development, our ELA development, is pushed by the truth that individuals have {hardware}, which they’re extending the software program capabilities on and shopping for extra software program capabilities from us. So it’s not simply {that a} salesperson exhibits up solely to promote {hardware}, they really present as much as deploy extra safety capabilities on the software program entrance.
And couple that within the case of SASE, for those who take a look at our giant pipeline, it’s clearly pushed by a buyer of Palo Alto, who’s a firewall buyer, or a possible SASE buyer who’s saying, pay attention, I do know your safety providers, I do know your Zero Belief insurance policies, I need to have the ability to develop into it and deploy a full end-to-end SASE resolution or a Zero Belief resolution for you. So, I assume I’m attempting to say is that, our success in software program just isn’t hardware-dependent. All I’m highlighting is that I imagine that the market was very confused final 12 months with provide chain. You couldn’t get chips. There have been orders being made. Prospects are getting jittery, saying, I’ve capacities, I’d want extra {hardware}. So a complete bunch of conflation of results that occurred {hardware}.
I’ve continually maintained that {hardware} grows. The business grows at low to mid-single digits. You observed that maybe a slight downtick in my expectations, and that’s most likely truthful. You’re perceptive. However I don’t assume it adjustments the general final result for us as an organization. I do fear about people who find themselves purely hardware-focused, who don’t have the flexibility to place an answer which incorporates software program. I’ll provide you with an instance. A big retailer involves us and say, I’d prefer to deploy a SASE resolution throughout my total retail base. I’d prefer to improve. I wish to do AR, VR for my retailer. I wish to go get extra bandwidth in there.
Technically, there are a number of methods to unravel the issue. What you do is promote firewalls and say, hey, put a much bigger firewall in your retailer. And I can ship SASE as a result of I’ve safety functionality. I can say, put an SD-WAN field in there, go deploy plenty of bandwidth in there, and do a software-based SASE implementation. A, it’s going to be a lot simpler to interchange software program in there, improve software program. I handle that for you. B, it’s safer as a result of you could have essentially the most newest upgraded software program obtainable straight away. Three, it’s scalable, you possibly can enhance your bandwidth requirement and safety necessities over time. And; D, for me, it’s nice as a result of it’s 2.5 occasions extra useful for me to have you ever deploy SASE than put a field, which I’d need to hold sending a truck yearly to attempt form of improve this provide.
Brad Zelnick — Deutsche Financial institution — Analyst
Makes excellent sense to me. Sustain the great work. Thanks.
Nikesh Arora — Chief Government Officer and Chairman
Thanks Brad.
Operator
Nice. Subsequent query from Tal Liani of BofA, adopted by Keith Bachman. Go forward, Tal.
Tal Liani — BofA Securities — Analyst
Because you at the moment are an professional on arc, I wished to point out you my arc, I made it [technical issue].
Operator
Tal?
Tal Liani — BofA Securities — Analyst
I wished to ask you concerning the distinction between income development, billing and deferred income. You elevated the steerage for deferred and billings which might be very, very robust. We see much less of a rise in income. What are the dynamics going ahead?
Nikesh Arora — Chief Government Officer and Chairman
I’m going to let Dipak reply, however I’ll advocate you to attempt Dali. And also you would possibly have the ability to create a parallel poster of our, and we’ll have to determine who did, which one.
Dipak Golechha — Chief Monetary Officer
Yeah. Look, Tal, I believe on the finish of the day, like we’re an enterprise firm. And as you see in our steerage, like now we have a big This fall steerage with plenty of clients sweating belongings, as Nikesh had talked about in our — in his script. I believe, we’re simply attempting to mirror that in our newest forecast, which is what drives the steerage. And so if in case you have individuals sweating belongings, we don’t know precisely what’s going to fall during which quarter, and that’s what drives the income.
Nikesh Arora — Chief Government Officer and Chairman
Yeah. Properly, I believe simply to just be sure you don’t — we don’t combine the forest from the bushes. We’re seeing higher development throughout our enterprise on a TCV foundation throughout our clients. That’s driving the billings development, which clearly then falls into income, each short-term and long-term and deferred. I believe what you’re seeing is the upper mixture of software program in our expectations going ahead, which makes it extra ratable over time. It offers us extra predictability. Therefore, the income seems per expectations, and also you see the software program half, which is sitting in deferred develop sooner.
Dipak Golechha — Chief Monetary Officer
Actually on SASE, that’s the most.
Tal Liani — BofA Securities — Analyst
That is smart.
Operator
All proper. Nice. Thanks. Our subsequent query from Keith Bachman of BMO, adopted by Patrick Colville. Go forward, Keith.
Keith Bachman — BMO Capital Markets — Analyst
Many thanks. Good afternoon, good night. I wished to ask you, Nikesh, about Cortex, if I may, extra broadly, and I’ll break it in two elements. The Cortex journey, the outcomes have been strong, not simply this quarter, however for some time period now. And A, on the aggressive entrance, we’ve been listening to plenty of dialogue from among the main distributors that pricing has turn into way more materials in successful share of the CrowdStrikes or what have you ever. It doesn’t seem that that’s the case in any respect in your outcomes from the expansion charges and the profitability. So I simply wish to hear a bit of bit about pricing. After which extra broadly on B, simply the aggressive dynamics in your outcomes, and also you talked about $100 million sort of run charge on XSIAM, how has the portfolio helped shaping this final result as you look out over the horizon over the subsequent variety of quarters in Cortex?
Nikesh Arora — Chief Government Officer and Chairman
So Keith, that’s an awesome query. And I’m hesitating alone analogy, which I used to be going to offer you, however I don’t assume we should always print that. It’s clear, it’s simply — I don’t wish to put a phrase in opposition to our Cortex enterprise. Before everything, look, I’ve all the time maintained that the chance within the safety market arises when there’s an inflection level. And I believe the endpoint business went by way of an inflection level a couple of years in the past once we noticed the emergence of EDR and XDR gamers. And also you noticed that, I’d say, maybe the normalization of pure endpoint antivirus-type gamers available in the market. And what’s occurred is for those who take a look at the evolution, we’ve gone from a couple of endpoint gamers to many, and also you’re starting to see convergence once more down to 2 or three individuals. And I’d say that we’re one of many three rising XDR distributors the place clients are selecting us.
We’ve the most effective POC outcomes throughout the complete market vis-a-vis different gamers. So I’d say at the moment, for those who’re searching for an XDR final result, there’s probably two or three distributors all the time within the fray are starting to see ourselves to. That was not the case three years in the past. That was not the case two years in the past. So we’re pleased with our place, I believe, one. Two, XDR is a pipeline enterprise as a result of it’s fairly constant to your level about pricing, the deal sizes are fairly constant, they usually’re form of in a variety and you bought to have plenty of offers to your pipeline and get some conversion going from them. Cloud and SASE might be massive. I nonetheless have $40 million cloud deal, $40 million SASE deal. I don’t have $40 million XDR offers. They’re all in the identical swim lane, and you’ll substitute one for the opposite. And we see constant development.
Now the place I believe our secret sauce is kicking in and may kick in is XSIAM solely works with XDR. And what’s attention-grabbing is we’ve seen very early, we’ve had 15 clients of XSIAM within the final 12 weeks, they usually’re all north of $1 million. Very early, we’re seeing clients saying, I’d like XSIAM. And we’re saying, pay attention, you possibly can solely get XSIAM for those who’re going to purchase XDR. So we’re starting to see there’s a pull due to an outcome-based oriented XSIAM. Once more, as I stated to Hamza, don’t get forward of your skids, it is a shift we’re attempting to engender within the business, however we predict that the way in which to drive XDR for us within the long-term goes to be by creating the most effective safety final result within the SoC for the client. However they notice I want good information.
The one method I get good information is to Palo Alto, XDR which permits us to go create the safety outcomes in XSIAM. In order that’s our method. Till then, we’re simply going to maintain our head down, grind on the pipeline, make certain we will win the offers. However for us, we’re headed for the larger worth as a result of I can do plenty of XSIAM enterprise the place I can XDR seed it into my clients. So XDR pricing is much less contentious for me. It’s extra attention-grabbing for me to get the correct buyer in XDR. So that you observed there’s a sure a part of the market we play in. We don’t play within the low to mid-end of the market in XDR. We don’t have 500 buyer — 500 consumer clients. We prefer to get the ten,000, 15,000, the upper finish of the XDR clients as a result of we predict that could be a excessive switch into XSIAM sooner or later. We’ve been doing that persistently for the previous couple of years attempting to construct that base in order and when XSIAM is prepared, we will begin encouraging our clients to evolve from XDR to XSIAM.
Operator
Subsequent is Patrick Colville of Scotiabank, adopted by Matt Hedberg. Go forward, Pat.
Patrick Colville — Scotiabank — Analyst
Hello, guys. Thanks for taking my query. And it’s good to be again. So I wish to ask about margins. So I imply, actually spectacular to see what you guys printed within the margin. I imply, wanting on the numbers for fiscal second quarter. To me, the 2 most essential levers have been the product gross margin and the gross sales and advertising sort of prices that have been moderated. I assume as we take into consideration the rest of the 12 months, how ought to we mannequin out these two levers? So ought to we proceed to anticipate much less incremental stress from provide chain prices on the product GMs? And the way far can this S&M effectivity go?
Nikesh Arora — Chief Government Officer and Chairman
Properly, I believe, Patrick, to start with, is Dipak made your life simpler by supplying you with an working margin steerage for the 12 months. So that you don’t have to fret concerning the element elements. So you possibly can simply take a look at the entire and have a beautiful time. Prevent some modeling at Palo Alto. In order that however, I believe between Dipak and I, we’ve each stated that — I contemplated placing this in our earnings script. I had a gathering with an investor. Dipak and I had a gathering for hours about six months to seven months in the past. And so they took us by way of the brute power of profitability and margins and margin growth and long-term EPS for Palo Alto. And the opposite day, Dipak and I checked out one another and say, you understand what, development is essential, however development — worthwhile development is much more essential.
And I’d say, there’s a collection of applications that Dipak has been working during the last six months, which embody taking a look at gross margin throughout all of our merchandise, taking a look at our spend throughout classes, taking a look at headcount. So it is a sustained program now we have in place. We’re going to reasonable our method by way of it to make it possible for we don’t affect our potential to generate the correct amount of development and correct quantity of worthwhile development. However I believe, the factor I’ll go away you with is that, we’ve given the steerage for the complete 12 months for working margin, the way it’s going to evolve. We expect it’s an excellent place in comparison with the place we have been anticipating to be proper now. And I believe, we’ve additionally given you hope that we don’t imagine that is the top. We imagine we will hold enhancing from right here. So for now, that’s all we’re going to say.
Patrick Colville — Scotiabank — Analyst
All proper. Thanks, a lot.
Operator
All proper. Subsequent, we’ve bought Matt Hedberg of RBC adopted by Jonathan Ho. Go forward, Matt.
Matt Hedberg — RBC Capital Markets — Analyst
Cool. Thanks, guys. Congrats from me as properly. Nikesh, I’ve to return to SASE. I imply the 50% development in ARR off of a giant base is spectacular. And also you guys took a special method this 12 months by way of integrating your core firewall and your SASE gross sales power. Are you able to discuss concerning the strides in these conversations into the opposite form of 50,000 firewall clients that aren’t SASE clients? How does that dialogue go? And if — simply because it seems like such a wedding that makes a lot sense from a cross-sell perspective?
Nikesh Arora — Chief Government Officer and Chairman
Sure. Matt, look, I believe a cheerful firewall buyer is a buyer who at the least has an excellent feeling about Palo Alto. And I believe, in the event that they’ve deployed our safety providers, they’re even higher, as a result of they know the way these safety capabilities work. And now we’re working although every of those clients attempting to work with them on their Zero Belief technique. SASE is mostly a protracted lead time, lengthy dialog, as a result of it’s not simply safety. I believe the half which generally will get misplaced on this — in among the analysts, is that SASE is definitely — you’re taking — say, the firewall, I provide you with a firewall, you run the firewalls in your community, it’s all good. You run your rising product. In SASE, I run your community. I take the visitors out of your laptop computer onto me, on to GCP, and route the visitors for you. So now I’m a part of your mission-critical capabilities. Meaning my community must be robust, my latency must be low, my availability must be excessive. That’s not a standard query safety CoIP firms have been requested.
They’re not used to working networks. That’s why I simply fall off my chair once I hold listening to, there are seven different distributors constructing SASE options. I’m like, sure, good luck, learn to run a community. So there’s no coincidence that we determined that we weren’t going to run the community. We’re going to let AWS and GCP run the community for us, as a result of that’s what they do rather well. And so they have cloud functionality with low latency. So we’ve constructed our SASE stack, which runs now concurrently on GCP and AWS, permitting us to offer you availability, which is increased than these two individually. So we predict in the long run, that’s the correct reply, proper?
Now, clearly, we’re not 11 years outdated in SASE. We’re 3.5 years outdated in SASE. So there are some issues which we’ll get stumped on, as a result of there are options and functionality we have to hold constructing, as a result of there are edge circumstances which had been delivered to the forefront. That’s the place Lee and his crew are doing an outstanding job, persevering with to maintain us on the prime of the form of pyramid of that matter. We’re engaged on some actually thrilling capabilities within the upcoming future. We’ll inform you within the subsequent upcoming quarters. However we really feel excellent about our SASE pipeline, our on ramp. They’re lumpy. They’re giant offers. However there may be product market match, and we’re seeing success.
Operator
All proper. And our subsequent query from Jonathan Ho of William Blair adopted by Saket Kalia. Go forward, Jonathan.
Jonathan Ho — William Blair — Analyst
Congratulations. Simply wished to perhaps begin out, you’ve seen some large giant deal success this quarter. By way of the platform consolidation discussions with clients, what are you seeing? And is there proof of consumers perhaps standardizing on Palo Alto throughout a number of areas? What may drive that form of development over time? Thanks.
Nikesh Arora — Chief Government Officer and Chairman
So William, the explanation we showcased the millionaire clients, the $5 million offers and the $10 million deal slide, is there’s a journey. By the way in which, I’m going to ship you a Palo Alto shirt, so you possibly can at the least put on that on this assembly. You possibly can put on that different one different occasions. However anyway, so yeah, we confirmed you a slide of $1 million and $5 million and $10 million as a result of clients undergo a journey. And it’s very not often you stroll right into a contemporary buyer, and we persuade them to go spend tens of tens of millions of {dollars} and consolidate. So it’s often an evolutionary course of the place we’ve turn into the firewall vendor of alternative. They go along with us on SASE. They’re engaged on cloud. They see the concurrence of cloud and SASE. They’ve XDR. They wish to get to XSIAM. So slowly and steadily, we’re exhibiting them the advantages of consolidation. I’ll let you know, us being leaders in 13 classes helps as a result of the primary time you used the phrase consolidation, the primary response of the CIO or CISO is, wait a minute, I need the most effective stuff. I simply don’t need it as a result of you could have it. Then we are saying, wait a minute, our stuff is the most effective stuff in addition to it really works collectively. So it’s a journey. It’s not one thing that could be a panacea that each buyer is available in and walks in, however our groups at the moment are targeted in the direction of attempting to evolve our clients down that path or throughout that journey, proper? And that’s why we will exit and do a deal. I believe our largest deal this quarter is north of $75 million.
Operator
All proper. Our subsequent query from Saket Kalia of Barclays adopted by Joe Gallo. Go forward, Saket.
Saket Kalia — Barclays — Analyst
Okay. Nice. Hey, guys. Thanks for becoming me in. Numbers converse for themselves, Nikesh. Possibly a query for you. Plenty of pleasure round XSIAM. Some attention-grabbing wins you known as out as properly in your AI part. However perhaps a strategic query for you. As you assume forward, perhaps the subsequent couple of years for XSIAM, how do you assume that, that can have began to disrupt the SIM market, both from a tech or a pricing perspective? And perhaps simply to flip that on its head a bit of bit, is it attainable that instruments like XSIAM perhaps assist develop the SIM market?
Nikesh Arora — Chief Government Officer and Chairman
So I believe, Saket, the SIM market doesn’t have a pricing drawback. It has a worth drawback. I spend some huge cash. I don’t get sufficient worth. And for those who ask among the clients on the market, how do they use the SIM, SIM is used post-breach or post-event to determine what occurred. A SIM just isn’t doing on-the-fly real-time blocking. So when SolarWinds occurs, Log4j occurs, you possibly can go to your SIM and take a look at the place it occurred and work out and hint it again and try to block the entire. What it received’t do for you is cease it mid-flight. And that’s a paradigm shift so far as safety is worried. The one method you are able to do that and cease it mid-flight is analyzing information because it’s being created. So to us, the explanation we name XSIAM not SIM is right here’s our phrases. We watch the info in movement. We watch it coming from the endpoint. We cross correlate mid-flight with firewall information. We go and triage it.
We automate among the alert, among the noise away. And we’re taking a look at like actual incidents between triage already, which aren’t being put in some giant information lake after which working question language in opposition to to see how do I resolve the issue. They’re already doing it within the again finish. Now in fact, with the provision of recent LLMs which might be on the market, which you all I’m certain have been speaking about and coping with of their free time, they do much more helpful issues than write poetry to your spouse. They will really analyze information to let you know what’s anomalous and what’s off sample. And for those who can determine that out, then what do it’s a must to do? You must go forward and remediate it.
How do you remediate it? You bought to be a firewall to remediate a community. You’ve bought to be an endpoint to remediate the endpoint. You bought to be Prisma Cloud, remediate it within the cloud. So I believe what XSIAM goes to do goes to convey real-time functionality within the SOC, or real-time functionality in safety. It’s early days. Once more, I’m going to say — hold repeating, repute doesn’t spoil the prayer, don’t get forward of itself, however that is the place we’re heading. And for those who can image chat ChatGPT 10 years from now, image AI and safety 10 years from now. You’ll not have people attempting to investigate as a result of it’d be too laborious for people to investigate petabytes of information. Already, the info in a company is an excessive amount of for a safety analyst to investigate.
Operator
All proper. Nice. Subsequent query from Joe Gallo of Jefferies, adopted by Ben Bollin of Cleveland. Go forward, Joe.
Joe Gallo — Jefferies — Analyst
Hey, guys. Thanks for the query. Are you able to simply touch upon the execution in cloud safety regardless of the backdrop of hyperscaler development moderation? After which perhaps extra importantly, the place clients are within the journey to cloud safety consolidation? It nonetheless feels just like the Wild West of plenty of disparate merchandise in that class. When does that market merge, which I’d think about advantages to? Thanks.
Nikesh Arora — Chief Government Officer and Chairman
Thanks, Joe. So two fast solutions. One, we’re nonetheless the biggest participant with north of two,000 clients in cloud safety. I don’t know, for those who explicitly known as it out, however our largest cloud safety deal was $40 million this previous quarter. I don’t know another vendor within the cloud safety area who’s doing half of that in 1 / 4 in a single deal. So sure, there are a lot of small gamers on the market, however we’ve seen a little bit of churn available in the market the place some small gamers have sort of been acquired and gone. Does that imply we’ll be the one participant? No, there’ll be different gamers within the medium time period, however we really feel comfy that there are people who find themselves consolidating.
It feels just like the Wild West as a result of clients are nonetheless not totally within the full cloud safety platform mildew. So that they’ve not totally embraced the necessity to have all this stuff related, however I believe it’s a matter of time and a matter of demonstration that it’s going to occur. By way of your query round the place we’re, and we talked about that within the ready remarks round hyperscalers. Keep in mind, the cloud safety market is a couple of billion {dollars}. The hyperscalable market is a whole lot of billions of {dollars}. Now the distinction is while you decide to a hyperscaler, you commit that you just’re going to maneuver, you’re going to transition, you spend some huge cash. And plenty of that stuff sits in deferred income as a result of they aren’t totally deployed, or clients haven’t totally consumed.
Cloud safety applies to stuff that you just devour, proper? Like, for those who haven’t consumed it, otherwise you aren’t able to devour it, they’re not going to be shopping for cloud safety. So I believe now we have a bit of little bit of a spot by way of when individuals decide to after they deploy it, to after they take cloud safety. I simply assume the — that stuff can decelerate for some time, however it’s nonetheless bought — there’s plenty of headroom for us to get from the place we’re. Even, if we bought to all the shoppers who’re in deployment or are deployed, I believe we should always see a gradual continued development for Prisma Cloud. So the market demand, to me, just isn’t the place the problem is. The problem for us or the chance is to go persuade as many shoppers as we will that it is a platform play. You must consolidate throughout a number of modules. You must have stuff discuss to one another on a relentless foundation, in any other case, you find yourself in the identical scenario as you have been in enterprise safety a few years in the past.
Operator
Our final query at the moment is from Ben Bollin of Cleveland Analysis. Go forward, Ben.
Ben Bollin — Cleveland Analysis — Analyst
Good afternoon, everybody. Thanks for taking the query. Nikesh, you’ve talked about some GSI alternatives prior to now. I’m all for the way you see that channel creating? What sort of tail you see there? And the way significant your platform is changing into for these companions? Thanks.
Nikesh Arora — Chief Government Officer and Chairman
Thanks, Ben. I used to say that, a few 12 months in the past that, I’ve had extra CIO conversations in 1 / 4 than I did in a few years. I’d now say that about GSIs. I’d say within the final six months, I’ve had extra GSI conversations than I had within the first 5 years of Palo Alto, or 4 and a half years of Palo Alto, proper? And the reason being GSIs are all for transformation. They’re all for the place they will go right into a buyer and deploy a significantly better safety final result for them. We weren’t related as a firewall firm with SASE, with cloud safety, with now XSIAM, they see an actual alternative to go in and do some transformation for his or her clients. And transformation for them means income to them and means a strong product within the again. I’d say most GSIs are nonetheless early of their journey to construct a full cybersecurity competency throughout the board. And there, they’d reasonably take care of lesser distributors than extra. So, us being leaders in sure classes, performs into our power and our potential to associate with them. I believe you — we’re already, with out particularly calling out offers, there are a lot of offers the place we’re partnered with GSIs, the place they’re the entrance. We work with them to be as half of a bigger transformation mission, and we’re seeing an increasing number of of that.
Operator
With that, we conclude the Q&A portion of our name at the moment. I’ll flip it again over to Nikesh for his last remarks.
Nikesh Arora — Chief Government Officer and Chairman
Look, to start with, I wish to thank all of you for becoming a member of our name. I additionally wish to thank our staff, who work actually laborious in the direction of delivering these outcomes. I’ve to say six months in the past, once we’ve began to see warning indicators, we pivoted laborious. We made certain that our groups bought forward of it, they usually have delivered. So, I wish to thank all of them for his or her contribution. As I stated, that is — it is a difficult macro atmosphere on the market. And the one method we’re going to get by way of this as Palo Alto Networks is to maintain our head down and execute. And that’s what we intend to do. As soon as once more, thanks, guys and see you subsequent quarter.