Good day, ladies and gentlemen and welcome to the Third Quarter 2013 Palo Alto Networks Inc. Earnings Conference Call. My name is Taheesha, and I'll be operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Maria Riley, Investor Relations with The Blueshirt Group. Please proceed.

Good afternoon, and thank you for joining us on today's conference call to discuss Palo Alto Networks' fiscal third quarter 2013 financial results. This call is also being broadcast live over the web and can be accessed on the Investor section of the Palo Alto Networks website at investors.paloaltonetworks.com. With me on today's call are Mark McLaughlin, Palo Alto Networks' Chairman, President and Chief Executive Officer and Steffan Tomlinson, Chief Financial Officer. After the market closed today, Palo Alto Networks issued a press release announcing the results for its fiscal third quarter ended April 30, 2013. If you would like a copy of the release, you can access it online at the company's website, or you can call The Blueshirt Group at (415) 217-7722, and we will e-mail you a copy. We would like to remind you that during the course of this conference call, Palo Alto Networks' management will make forward-looking statements including statements regarding continued revenue, growth and overall momentum in the Palo Alto Networks' business, especially as a result of its land, expand and extend strategy; expectations for deals to close in fiscal Q4 or future quarters; our ability to develop innovative and differentiated products ahead of the competition; trends in its business and operating results, including its sales pipeline, customer acquisitions, gross margin, operating margin and non-GAAP expected tax rate; and Palo Alto Networks expected revenue and non-GAAP earnings per share for the fourth quarter of 2013 ending July 30, 2013, as well as CapEx expenditures for fiscal year 2014 ending July 31, 2014. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future, and we undertake no obligation to update these statements after this call. For more detailed description of these risks and uncertainties, please refer to our quarterly report on Form 10-Q/A filed with the SEC on March 5, 2013, 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 Investors section of our website located at investors.paloaltonetworks.com. Now I'd like to introduce Mark McLaughlin, Chairman, President and Chief Executive Officer of Palo Alto Networks. Mark?

Thank you, Maria, and thank you, everyone, for joining us. In our third fiscal quarter, we saw good revenue growth of 54% year-over-year, surpassing $100 million per quarter for the first time in our history despite challenging macroeconomic conditions, particularly in the federal vertical in Europe. During the quarter, we had strong gross margin improvement, achieved non-GAAP EPS of $0.06 per share and grew deferred revenues by 17% sequentially. Also in the third quarter, we continued to demonstrate that we are aggressively capturing market share against all of our competitors and establishing Palo Alto Networks as the global leader in the next-generation enterprise network security. This is the case because while security is not immune to macroeconomic factors, it is increasingly critical to enterprises. Threat landscape is not getting any better and it seems nearly impossible to pick up the paper without reading a story about a criminal organization hacking into ATMs, or possible foreign government-sponsored attempts to steal secrets from large companies. In this environment, our leadership position is driven by our high-value disruptive technology, which we believe provides the highest level of security available in the market. We now have over 12,500 customers using our next-generation security platform, and our customer acquisition has continued for the sixth consecutive quarter at a pace of over 1,000 new customers added during the quarter. In addition to landing new customers, we also continue to grow our revenue with the installed customer base by expanding our device footprint through the enterprise and extending our value to customers with multiple services on the devices. One view of our success in implementing this strategy is the lifetime value of our customers. For example, during the quarter, the lifetime value of our top 25 customers averaged 14.1x their initial purchase. This is up substantially from…

Thank you, Mark, and thank you, all, for joining us today. I'll first review our results for Q3 '13 and then conclude with our outlook for Q4 '13. In Q3, total revenue grew to $101.3 million, an increase of 54.2% year-over-year and 5% sequentially. Looking at our 2 main components of revenue, in Q3, product revenue of $60.8 million grew 39.7% year-over-year and decreased 1.9% sequentially. The sequential decrease was primarily in Europe and in our federal vertical. Services revenue of $40.5 million, which represented 40% of total revenue, grew 82.6% year-over-year and 17.2% sequentially, driven in part by an increase in the attach rates of our subscription services. This growth in services revenue underscores the power of our hybrid revenue model. The geographic mix of revenue was 62% Americas, 23% EMEA, and 15% APAC, with all theaters posting growth on a year-over-year basis. On a sequential basis, Americas and APAC posted solid growth, while EMEA declined by approximately 4% following 2 quarters of 23% sequential growth for both Q1 '13 and Q2 '13. Total non-GAAP gross margin in Q3 was 74.1%, ahead of our target range of 70% to 73%. Non-GAAP gross margin increased 220 basis points year-over-year and 190 basis points sequentially. Putting a finer point on gross margin, Q3 non-GAAP product gross margin was 74.3%, an increase of 70 basis points year-over-year and 90 basis points sequentially. The sequential increase was primarily due to cost reductions and product mix. Our non-GAAP service gross margin was 73.7%, up 510 basis points year-over-year and up 360 basis points sequentially. The sequential increase was primarily due to increasing services as a percentage of total revenue and higher attach rates for our subscription services, as well as leveraging our customer service organization. Having added over 1,000 end customers in the quarter,…

[Operator Instructions] Your first question comes from the line of Greg Dunham from Goldman Sachs.

I guess I wanted to start on the macro and try to get a sense of how much that was an impact on the business. Revenue growth was 54% versus your closest peers that are flattish to down 20% or close to 20% in this quarter. So clearly, a strong outperformance there, but I just want to get a sense of, do you feel that you guys are more sensitive to some of the macro shifts going on in terms of the growth numbers? How much did they play a role in terms of this quarter? And can you talk about the trend in the quarter? You mentioned it was a back-end loaded quarter. Can you talk about how it progressed throughout the quarter and maybe what you've seen thus far this month?

Hi Greg, it's Mark. Let me take those in a couple of parts. So the first thing is, I think there's no doubt that it's a challenging market right now and we're seeing that as our quarter progress, for us, we saw that play out towards the end of the quarter than the beginning of the quarter, as sentiments sort of changed beyond -- I'll call it on a big picture basis. I think you're correct. You noted that other folks have seen this as well and had some underperformance. Despite that, we grew 5% sequentially, 54% year-over-year, so we're pleased with that in light of those macro economic conditions. Particularly for us though, the areas where we saw the impact around that were really in Europe, specifically in Central and Southern Europe, and then in the fed sector, with the continued sequestration. So in those cases, we saw -- in each one of those cases, we saw a few million dollars worth of deals in each one of those sectors getting pushed, deals that we'd be select for, but getting pushed to the right and we saw that occur as the month -- as the quarter played itself out. So I think it's no doubt that it's a tough environment out there. But given all that, we're pretty pleased with where we ended up.

Your next question comes from the line of Brent Thill from UBS.

Just a follow-on federal, just in terms of what you're seeing in the back half of the year, are you getting any more sense in terms of how those budgets are coming together? And just a quick follow-up on Europe, did you believe that's more macro, or is there anything you're seeing from a execution or competitive issue?

Yes, so let me start with the second one, Brent, just big picture. On a competitive basis, we haven't seen any change in the competitive market except us continuing to pull ahead, and I think the results show that, our results relative to everybody else in this sector. We've done very well, particularly in a relative basis, so we're not seeing that at all, not in Europe or anywhere else. On the fed side of it, the sequestration thing is real. This is the first quarter anybody's had to live through that. And on a second half, from a second half of the year basis, I would expect that sequestration would last through at least at the end of the fiscal fed year, which is at the end of October. There's really no reason to believe at this point that that's going to change. I think that will be with us through at least that long.

Your next question comes from the line of Michael Turits from Raymond James. Michael Turits - Raymond James & Associates, Inc., Research Division: Two questions. First, again, when we look at the guide for next quarter, which is a little bit below consensus, what's in that guide in terms of your assumptions regarding both fed and Europe? In other words, is that the source of the lower number there that you continue to expect those to be weak? And also just wondering if you could comment on the deferred, which was actually particularly strong as I calculate your billings all in. I know some of it came from long term but still grew faster than revenues, were there any rev-rec issues where you would declare more than expected?

Michael, so on the -- from the guide perspective, I think we have to assume that the sequestration continues, like I just said, so we'll take that into account. And then on the Europe side, I don't think there's any reason to believe right where we're sitting today that the sentiment over there is going to change in any big picture regard from what we saw, I think, particularly towards the tail end of our quarter. So we're thinking about those 2 things in particular as we look forward. So we're cautiously optimistic. The guide does provide a 5% to 8-point-something% sequential growth and 40% to 45% on a year-over-year basis, but we have taken those things into account as we look forward. I'll let Steffan take the second question.

On the deferred revenue piece, if anything, it underscores the power of our hybrid revenue model. We've been selling lots of subscriptions, the attach rates have been going up. We've had very nice traction with WildFire. And when you look at the mix between short and long-term deferred, short-term deferred revenue grew 14.1% sequentially, long-term deferred revenue grew 20.6% sequentially. And that long-term deferred, there's no rev-rec issue in there, it's just more -- we've seen an uptick in multiyear deals, which is a big vote of confidence from our customer base who are designing us into their networks for a long period of time.

Your next question comes from the line of Jonathan Ho from William Blair. Jonathan Ho - William Blair & Company L.L.C., Research Division: Just wanted to get a better sense of some of the deals that maybe got pushed out. Would you expect those to subsequently get potentially recognized this quarter or do you feel like there's just going to be sort of an increasing rate-captious environment throughout the rest of the year?

That's a good question, Jonathan. So for the deals that we saw that got pushed to the right there in those 2 sectors, our situations where we technically won, the customer wants Palo Alto. So we're confident that ultimately, we're going to get these deals. The win is a little harder to gauge because, like I said, the sentiment hasn't changed. Or if it does change, maybe that helps us. But we would expect it, at some point, we get these deals. But it's just really hard to say whether we get in the fourth quarter, Q1. I just really can't nail that down right now.

Got it. And just in terms of your overall pipeline, are you taking -- with the guidance a more cautious approach or across-the-board, or does this reflect only sort of concerns in the fed and Europe ongoing?

Well, 2 separate things there. So from a pipe perspective, we've got a strong pipe as we come into the fourth quarter. We had a strong pipe coming into the third quarter as well. But we got a nice pipeline as we came into the fourth quarter. I think for us, where we particularly saw things, like we said, was in those sectors -- those 2 places in Europe and the fed space, I think there's a general matter, there's macroeconomic concern. Maybe it's stemming from those 2 sectors, not really sure. But as a general matter, it feels like there's a macro concern. But for us, that's where we particularly saw the impacts.

Your next question comes from the line of Keith Weiss from Morgan Stanley.

This is Melissa Gorham calling in for Keith Weiss. I know that you mentioned federal being weak, but was there any other verticals that came in below expectations? I know some of your peers have cited the service provider segment being sort of weak in the March quarter, and I know that it's relatively smaller for you all. But just wondering if you saw weakness there as well?

Service provider is a much, much smaller vertical for us than a lot of our peers in there, so we saw a little bit of softness there. But it's a rounding error in absolute dollar terms. So I'd say it was consistent with what other people saw, but it's just not nearly as impactful for us as other folks. In other places, we saw really good growth, so like in the -- not in the federal space, but in the state and local government education space, we saw very nice increase sequentially in that space. So it's really, there were puts and takes across all the verticals. But the 2 that we were impactful to us really were the Europe and fed.

Okay, great. And then previously, you've cited an attach rate of 1 -- 1.5 subscriptions per appliance. Was there any change to that in the quarter? And where do you see that going over the next year or so?

The attach rate did increase; we're not giving specific numbers on the attach rate. We're going to be doing that on an annual basis, anchored around our Analyst Day. And at the last Analyst Day, we said it was right around 1.6 for the prior quarter. So you can expect, and I would say, it's a reasonable expectation that as we add more subscription services, like a WildFire, we should be able to see growth in that attach rate.

Your next question comes from the line of Phil Winslow from Credit Suisse.

It's Harris Heyer. I'm calling on behalf of Phil. I was hoping you could comment on the price environment just in general versus the last couple quarters.

We actually haven't seen much change in price environment. The things that we've said in the past is that the competition has been, for quite some time, continues to be aggressive on pricing. That's expected, I think, when we have the, we believe, the superior technology. That's a card that they can play. We've been looking at that for quite some time and have extremely high win rates against all the competition. That hasn't changed, so we didn't see any impact in that.

One other thing, Harris is our product gross margins have increased sequentially. And that demonstrates the value of the differentiated technology that we're bringing to the table.

[Operator Instructions] Your next question comes from the line of Raimo Lenschow from Barclays.

Quick one, if I look at the run rate, it looks a touch lower than we have modeled and potentially what you thought given the reasons you discussed? And will that cause any change in the -- thinking in terms of investment on the build-out of distribution capabilities or the company as a whole?

Ray, the answer the short answer is no. We're taking a very long view here on the business, and our goal has been and we've demonstrated the ability to grow the business way ahead of the market growth and way ahead of any of the competition. So we view this as a market share gain opportunity for us and we intend to be aggressive about that]. You have -- might have a quarter where you have some tough macro conditions and other ones there won't be that way, so we're taking a long approach on that. So we'll continue to invest, we'll invest aggressively. And as long as we're able to post significant market share gains, we'll keep on doing that.

Your next question comes from the line of Rob Owens from Pacific Crest Securities.

Wondering if you can provide some color on just what your renewal rate on these subscriptions have looked like and how that's been trending over the last couple of quarters?

Renewal rates in general have been very robust. From a subscription standpoint, they vary by length of time that the subscription has been out. So WildFire is our newest one obviously, and we just started selling that. But threat prevention in URL filtering have been around the longest. They have the highest attach rates and the renewals on those are very high. We haven't gotten to specifics on what the exact renewal rates are but they're very robust. And then, the renewal rates on maintenance is extremely high. You can't really have -- you can't see the position that we're in -- in customers not renewing their maintenance because you need to have access to the updates and the upgrades that come through on the support side of the house.

So if I -- kind of not the maintenance side but the subscription side, just drilling in a little bit. I mean, is this consistent with where other people would put blade renewals, since you're not giving specific comments? Or is it in excess of some of those kind of industry numbers that we see out there?

I would say it's either consistent or slightly better than what a typical blade renewal would be.

And then number two, with the new facility, I think you said annual operating expenses of $13 million a year, is that an incremental $13 million or was that a total number?

It is a total number. But it is incremental because it's a new facility. And we had flagged that back in October when we let everyone know that we had the facility, that we leased it. So that's not new news, it's just putting a finer point on it for you.

Your next question comes from the line of Gregg Moskowitz from Cowen.

It sounded as though things really did tail off at the end of the quarter. And as we're essentially wrapping up the month of May, just wondering if you had any anecdotal commentary on how this past month has perhaps compared to the month of April. Would you kind of characterize it as status quo or has it sort of gotten a little bit better or a little worse? Just curious if you had any color there.

Gregg, we did see as the last quarter tailed off the sentiment was changing or eroding as the quarter progressed. We thought about that as we looked forward in the guide and from a month of May perspective. May is where we thought it would be right about now, sort of from a linearity perspective, so we're on track with where we thought we'd be and in line with the guide given.

Okay, great. And then Steffan, how many heads did you add in the prior quarter? And going forward, should we still expect roughly 75 to 100 per quarter?

Last quarter, we added 85 heads with a ending headcount of 1,034. And the net additions of 85 are right in line of the range of 75 to 100, which we've been talking about. There could be fluctuations, both on the top end and the bottom end, but as a directional guide that's consistent with what we said before.

Your next question comes from the line of Scott Zeller from Needham & Company. Scott Zeller - Needham & Company, LLC, Research Division: I wanted to ask about the evolution of deals and maybe the size of deals that you're competing for. Is there any change in the field that you're seeing where perhaps there are fewer opportunities that are point around application control, and perhaps they're larger -- sort of like a network security refresh-type project that would be more complex and take a longer cycle. Is this happening in the field?

Generally what we've seen from a deal perspective is the continued realization from customers that the staple inspection technology they've been riding on for a long time just doesn't cut it anymore because of the explosion of applications. So it's really the basis of the application technology we have here and that's driving the continued growth and interest in the company. And as more and more customers realize it -- that that is something they need. So actually, Mark Anderson is sitting right here with me, so I'll turn that over to him to see if he can add any more color on that. Mark?

Thanks, Mark. And Scott, so I'm just amazed continuing what I see from customers in terms of how receptive they are to our technology. We did see some cautious spending, primarily in Europe and certainly saw some projects get pushed in federal. But really I think the worst thing that we saw was large quantity deals. Maybe 8-unit deals were cut down to 4-unit deals. So it cut down our overall PO size, but we really didn't lose any business and I don't think our proposition has ever been stronger than it is today. Scott Zeller - Needham & Company, LLC, Research Division: I guess just a follow-up on that. Are you saying that the average scope of a deal is larger and more complex than previously?

What we're seeing is, is that -- well, there's a number of factors you pay attention to. They're all positive, of course. What we're seeing is, is that we're better known, and generally, and what our value proposition is, we get to see larger deals at first as opposed to smaller deals that build over time. So we get to see bigger deals, we're running bigger deals. And then with our existing customers as well, the repeat buying patterns, as I noted in the top 25, continue at an accelerating pace, which is great, which means our follow-on orders get to be bigger as they rely on us more across their enterprise.

Your next question comes from the line of Aaron Schwartz from Jefferies. Aaron Schwartz - Jefferies & Company, Inc., Research Division: Probably a question for Steffan. But with the deferred revenue outperformance here over the last couple of quarters, I know we talked about this historically, but it does seem like the revenue mix should change a little bit here going forward with the higher mix on services. Is that sort of a fair statement as we build out our models a little further out? And then secondly, with the trend in multiyear deals that you've seen, presumably, there is a pull forward in cash flow there, do you have any sort of directional trend of how cash flow should look next year?

On a higher mix of services going forward, you can see just in terms of how revenues have played out. This quarter, services as a percentage of total revenue was 40%, last quarter, it was 35.8%. I don't expect to see that type of sequential increase in the near term. The fact that we are], call it 5% to 10% penetrated in the largest accounts, we expect to be selling a lot more boxes. And so with that as a dynamic, we should see nice growth in both product and services. But with the subscriptions that we are selling, the attach rates are going up. And directionally, services as a percentage of total revenue, should be increasing, but I would just caution to say, it's not going to be increasing, it shouldn't be increasing at the same rate it did over the last quarter. And as far as future visibility on cash flows is concerned, we are seeing an uptick in the multiyear deals. All of our deals that are multi-year in nature are build upfront, the cash is collected upfront. So that will be a benefit to cash flows. We're not guiding on free cash flow or cash flow from operations, but we certainly should be seeing a benefit to cash flows. How much that is, we're not going to be getting to the specifics. Aaron Schwartz - Jefferies & Company, Inc., Research Division: A quick follow-up, if I could. Are there any concessions in the multiyear deals?

On the multiyear deals, there is a discount for multi-year and that's kind of in line with industry practice.

Your next question comes from the line of Dan Cummins from B. Riley.

I'll actually ask a follow-on to the last question before I get to what I wanted to ask about. I'm curious if the over performance on gross margin -- is that helped at all by being a little bit short in federal or in any large deals in any region in particular?

The over performance on gross margin had very little to do with being off on federal or EMEA. The over performance on gross margin was really driven by the -- both line items. When you look at the product gross margin, we had nice cost reduction and favorable product mix. And on the services side of the house, we had a benefit from higher attach rates and those were the primary drivers as a basket. And it really had nothing to do with being light in federal or Europe.

Okay. I wonder -- maybe it'd be helpful, I think some of us on the call tend to view some of your peers, at least right now in the current era, as maybe 2 or 3 stories. When we look at commercial businesses versus federal business versus global or EMEA business, are you able to tell us a little bit more about your growth rate, your all-in growth rate in commercial markets? And just helping us kind of isolate some of these temporary effects, modeling-wise, I think would be helpful. And also curious if there were any 10% customers for the quarter? I'm struck by -- a lot of companies said, "Well, things got very weak in March." And you had an April quarter, you had DSOs that were very, very high. So I'm just trying to reconcile all that.

Let me try to work through that. So first, the easiest one is there are no 10% customers in the business, so hasn't been, wasn't last quarter. So that's not a factor at all around this.

And does that include federal?

Yes it does. We had mentioned before, no vertical at all represents more than 13% of our business. It's a pretty well-diversified business, right? That's a general statement. The first part of your question, I'd say, specifically, what we saw in, like I said in Central and Southern Europe and then fed as well, in each of those situations, we saw a few to $4 million in each one of those deals that we push out of the quarter. So that is the majority of the impact from where we expected to be to where we landed, and that's not broader than that across the entire market for us. So as I said a little earlier, in the number of verticals, we saw very good sequential growth across verticals. We hadn't broken a lot of those down, not because they're unimportant. Just as I said there's no single vertical that represents more than 13% of the business. So there were puts and takes and a lot of verticals generally, generally strong, generally good quarter except in those 2 places.

Your next question is a follow-up question from Jonathan Ho from William Blair. Jonathan Ho - William Blair & Company L.L.C., Research Division: Just wanted to ask about the linearity of legal expenses. Would you expect the legal expenses to peak around now during the discovery phase? Or should we expect it to move up or move down over the next several quarters?

Thanks, Jonathan. This is Steffan. We expect that legal expenses will increase as we have get closer to trial. So we're largely through the discovery phase and that did come at a cost. But as we've said previously, as you approached trial, which is scheduled for February of next year, legal costs related to Juniper will be increasing.

Your next question comes from the line of Shebly Seyrafi from FBN Securities.

Can you quantify your government or federal exposure? I think in the past, it was around mid-teens percentage of revenue, EMEA is around 23%. So it looks like combined, you're faced with headwinds from segments consisting of basically 40% of revenues. I think this last -- through the end of the October quarter. Can you talk about whether you agree with that, that the October quarter itself is going to have a lot of challenges, particularly related to the U.S. federal? And then, what are the catalysts to look out for over the next few quarters to cover some of these forces you're faced with?

Shebly, its Mark. So I'll take that in 3 parts, if I can. The first part is, just to make sure we're all talking about the same facts and figures, EMEA represents, in the last quarter, 23% of our revenues, so that's Europe, Middle East and Africa. What we're saying from a sales perspective, what we saw in Europe is not that percentage. We saw, like I said, about $3 million or $4 million in -- mixed between Central and Southern Europe from a sales perspective, from weaker than where we thought it would be. So I just want to put that all in context. On the federal side of our business, we said no vertical is more than 13% of our business in total. Fed for us is a high single-digit percentage revenue vertical for us, so put that in the context as well. So all that said, it's nowhere -- what you were saying, it is nowhere near 40% of revenue the way you just described it. The second thing on the sequestration in October, specifically the federal government, they're on a fiscal year that ends in October, so my guess is that we probably wouldn't see anything change in sequestration. I don't see any event that would dictate a change prior to the end of that fiscal year. It could go longer than that, but I think it would go at least until October. And then on the driver side, the drivers for us are generally -- continue to be very positive, meaning customers really like our value proposition, the differentiation of our technology. Security is a really big deal and getting to be a really deal every day of the week when you see constantly stuff going on. And cybersecurity around that all plays to our favor. So I think that the macro trends for us are very, very favorable about what we do for a living and at the time we do it.

And let's not forget, we're growing much faster than the market and our competitors. So we're going to continue that path.

Your next question comes of the line of Gray Powell from Wells Fargo.

Just had a couple here. So how should we think about the market opportunity with WildFire, particularly now that you have an appliance available? And then do you see that product cannibalizing the traditional antivirus market longer term?

So generally -- so look, if we back up for a minute say WildFire is meant to serve the market. It's dealing with detection and prevention of advance persistent threat, which is a very big deal today. And there's a lot of concern about that. So we think that's great, that's good opportunity for us and it's incremental opportunity for us, as people are spending on that, which kind of goes to your second question, which is, it's a little hard to tell where the budgets are coming from in there. They could be coming from antivirus, it could be coming from IPS, some of them could be new budgets. I'm not sure anybody really knows that yet other than that there's a good amount of money being spent on that today. And we're very well-positioned with WildFire, with the cloud service, a private cloud service and now an appliance as well, take after our fair share of that.

Your next question comes from the line of Daniel Ives from FBR. Daniel H. Ives - FBR Capital Markets & Co., Research Division: Look a lot of questions I'm getting from account. I guess I just wanted to basically know, do you think -- I mean that in some of these larger deals, obviously, you guys carved out a great next-gen firewall product. But in some of these larger deals it's tougher as you guys get into some of these sort of end-to-end deals? I mean, is that accurate, not to mischaracterization?

I think that's secure -- network security has been for a long time, and I think it will continue to be well into the future, a fairly discrete line item from a purchase perspective. I know, I mean -- what I'm saying is, I know there are other providers out there that are network providers that have a broader suite of services than we do, because they have networking services and network security services. The buyers of these things don't -- they don't think that way about this. And that is becoming more pronounced with the worst situation with cybersecurity and all these threats. They're coming in our networks. So I think it's a very hard sale, if you're a network service provider, to say, "take my so-so network security product because you're buying my networking gear." They're just different buyers and the level of interest around that is off the charts. You just can't get by with that anymore. You got to buy the best stuff. Daniel H. Ives - FBR Capital Markets & Co., Research Division: Okay then, as a sort of follow-up, do you feel like competitors, such as Check Point, that they have maybe we'll say, a year ago sort of took the eye of the ball from a competition standpoint. But you've seen more fierce competition, some of the bake-offs maybe then you saw a year ago now that they've kind of aggressively focused on this area of the market?

No, I think -- well, a couple of things. The first is just from a technology differentiation standpoint. We've been at this for going on 7 years, so it's not new that we're doing something disruptive and fundamentally different than what everybody else is doing. I think it's also fairly obvious that none of the competition, including Check Point, has done or indicated any desire to be able to compete with us really based on the technology. So when you're in those situations, the things that you do competitively as you tend to be very concerned about keeping your existing customer base, you get very aggressive on pricing. You do things that are really kind of marketing-driven as opposed to technology and value-driven for the customer. And I believe at the end of the day, that doesn't work out for companies. Because like I said a little -- a minute ago Dan, the level of concern and anxiety over security is really high and getting higher and price doesn't get it for you anymore, right? Bundling doesn't get it for you anymore. You better just have the best network security solution to market, and that's what we think we have.

Your next question comes from the line of Catharine Trebnick from Northland Securities.

You -- talking with several of the carriers, it looks like you're ramping up staff for that area. I know that was one area you discussed quite a bit at the Analyst Day. Could you talk about some of the use cases that you would be looking to win at the carriers?

Yes, so we view the carrier market as really like 3 opportunities. One is to sell to the carriers as enterprises, meaning we're protecting their networks. And in that regard, we're doing very well, that's a direct sales effort, it's major account stuff. Mark and his team are very focused on doing that. And some of the investments we're making that space from a people, personnel standpoint are going towards that opportunity. The second opportunity is to have those carriers use our technology; provide them on a managed services basis. That is, 2 angles to that, one is managed services to enterprise, which we're doing well with the number of the carriers on developing technologies -- developing the roll out plans for them to use our technologies, to service enterprises that way. And the second space is the SMB market, which we're not penetrated in with the carriers yet. We believe we will be over time. There are some different products -- software things we need to do there, but that opportunity. And the third one that we view is -- they're large system and integrators in a lot of cases. And some of our largest commercial customers are using some big service providers as their systems integrators. And in those cases, we are working with those service providers because the customer has chosen us for network security. That's allowed us to start relationships with them on large-scale distribution partnerships that, over time, we think can pay dividends for us.

Your next question comes from the line of Jonathan Ruykhaver from Stephens.

So half the customer base uses Palo Alto as the primary firewall. And looking at the 5-year depreciation cycle on a firewall, what that implies from a growth standpoint, is there any concern that greater participation in that cycle potentially prolongs sales cycles and weighs on activity?

Yes, Jonathan, so actually just want to correct those statistics, because we gave some new ones out at Analyst Day, which we said we would do every year. Right now, 60% of our customers or more than 60% of our customers across our whole base are using us as the primary firewall. And the other statistic we updated at the Analyst Day was in our fiscal year '13 so far, 75% of all of our new sales are going to us being the primary firewall. So just want to start with the right numbers. And I'm not sure I understand the actual question though; could you give me that again?

Just that if you look at the network firewall market, it's a single-digit-type growth market and we know that the process around displacing incumbents can be somewhat of a long sales cycle historically. So if you're being baked into more of those potential firewall refresh cycles, does that impact in any way your sales cycles relative to what you've seen historically as we move into the future?

Okay, I got that. So yes, so generally, sale cycles for network security, in particularly the firewall can be decently long because it's a really important piece of technology and you take your time to make a decision on that]. So when we think about the addressable market, it's in the multibillion dollar range, just for firewalls, let alone network security, but that doesn't all happen at once. So there's always refresh cycles going on across this global buying base and every one of those is the opportunity for us to come and compete and win as we have been in those buying cycles. Now once we're in as well, it's very sticky, right? We know how hard it is to throw the incumbent out, and you better have really, really different disruptive technology if you're trying to do that. So once we're in the door, we know how hard it is to take us out and you can kind of get a sense of that as well from the expansion that we've seen across the customer base. So -- and the last thing I mentioned is that our largest customers continue to tell us that, like penetration levels in their accounts are maybe 10% of what we could possibly earn over time inside those accounts. So we're pretty bullish on what the opportunity here is.

We will take our last question from the line of Sterling Auty from JPMorgan. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Mark, you mentioned in your prepared remarks the success of the 3000 series, just curious where you're seeing the adoption, if it's helping you expand your market presence or if it's going into branch offices of existing customers?

It's actually -- it's gone and gone left and right, meaning that the 3000 series is right up the middle for us, so that is something that you probably see more and we are seeing more in the perimeter than you'd see in the branch office or in a data center. And as I think you and I talked about at one point, we'd said at the Analyst Day that we saw an opportunity there to put something in that point in the market which would help us upsell off of the 2000 series for folks who just had higher throughput requirements as throughput needs continue to grow at the perimeter. So that seems to be working very well. Sterling P. Auty - JP Morgan Chase & Co, Research Division: And when you look at the quarter, any segmentation in terms of where you saw the weakness, whether -- I think Mark talked about some of the bigger deals being segmented. But any sense if the weakness as the erosion, as the quarter went on was uniform? Or particular end of the market, meaning larger deals versus smaller customers?

Generally on the larger sets, again we saw just in Europe and particularly Central, Southern Europe and in the fed space, the things that we saw that added up $3 million or $4 million in each one of those across maybe like a dozen deals. So they tended to be larger in nature. I think that's not surprising given the sentiment that was changing over time. Larger purchases would be the ones that either get downsized or pushed to the right.

Ladies and gentlemen, I would now like to turn the conference back over to Mr. Mark McLaughlin for any closing remarks.

Thank you, I appreciate that, operator. I want to thank everybody for taking the time to be with us today and also want to reiterate my appreciation for the hard work of all the Palo Alto team and support of our customers and partners as we continue to revolutionize the enterprise network security market. We look forward to updating you all on our next quarter. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect, have a great day.