Brian Essex: Got it. That’s really helpful. We’ll keep it to one and keep it efficient, but thank you so much, both of you. Appreciate it.
Operator: Thank you. Our next question will come from the line of Tal Liani with Bank of America.
Tal Liani: Hi, guys. I’ll ask two questions together. It’s easier. CapEx is going up materially next year, this year. What is the outlook for free cash flow margin? What happens to free cash flow this year? Can you actually drill down to the CapEx? What drives the increase? And then what happens to free cash flow margin? The second question I have is on the business. This quarter, billings were supposed to be weak, but they’re very strong. Next quarter, we expected roughly 5%, 6% declines, and that’s what you’re guiding to. So that means maybe there was some pull forward, but kind of in line-is. What happens this quarter that billings is so strong versus expectations? What drove the strength? And why don’t we see it continue into the next quarter? Thanks.
Keith Jensen: You want to take CapEx or deals? Hi, Tal. How are you? Thanks for calling in. On CapEx, I think we’ll continue to build out both things that we need for our engineering team as we look forward, and best places to work and labs and so forth. So I think you’re seeing an element of that. But also our ability to continue to deliver the wide range of hosted solutions. I think those are the things that are driving CapEx. And as we said before, we know that there’s a bias here of making real estate investment decisions with a high as a long-term investor, and with that the ROI over a longer period of time has always been very enticing to us. And I think your second question on the spike that we saw in performance that we’re very pleased with in the fourth quarter, and then what does that translate to in the first quarter, a couple of things.
One is, as we talked about during the call that the comps in the first quarter of 2024 are probably among the most challenging on the billings line and the product revenue line that we think we’re going to see. And then I think also the reentry one doing six eight-figure deals in the fourth quarter and being a record, obviously put a lot of tailwind into that fourth quarter number. We like eight-figure deals, but I don’t know that we’re really in the business of forecasting them each and every quarter as we go forward.
Ken Xie: Also, we kind of own probably a high percentage of some infrastructure, some real estate, and some of our competitors. That actually gave us much lower cost, operation cost going forward, which also will help drive the future growth, especially on a service like a SASE. And that also gives us a better margin long-term.
Tal Liani: And then free cash flow specifically because your stock trades on free cash flow, should we expect free cash flow to go down, or is it — can you offset the increase in CapEx with something else?
Keith Jensen: Well, obviously, there’s a lot of levers that come into free cash flow. I think that where we look at in terms of where the street was for free cash flow in 2024 for the full year, I think that’s in the ballpark at this early stage. We don’t really guide to free cash flow, as you know. But I think the puts and takes, one is CapEx, which is not all that far away from what we saw in 2023. But then you have the operating profits, the buildings throughout, etcetera. You know all the components that go into it.
Tal Liani: Thank you.
Operator: Thank you. Our next question will come from the line of Gabriela Borges with Goldman Sachs.
Gabriela Borges: Good afternoon. Thank you. I’m looking to better understand the SASE dynamics that you’re seeing at the lower end of the market versus the higher end. So maybe any commentary on the S&B part of the SASE pipeline, what you’re seeing in terms of willingness and readiness to convert, what you’re seeing in terms of competition, and what you’re seeing in terms of average deal sizes in terms of uplift when you get a SASE deal versus a regular firewall deal. Thank you.
Ken Xie: S&B is pretty interesting. We do quite well in the SMB market, even for the traditional firewall, bigger than any other competitors. But also SMB has a pretty low percentage of a customer actually using any network security because of whether the management costs or some other people cost, all these kinds of things. So that’s where SASE applied there, definitely helping some SMB customers. But also we see kind of the long-term combined both where to work from home, we’re pretty strong like a couple years ago in the retail branch office solution there, also helping us kind of like doing well in SMB. And also the new product refresh, which leveraged SP5, we’re only half the way, probably towards the second half of this year, we have more product come in using the new SP5.
That’s also keeping a hands-up position there. It’s kind of like I said, it’s a SASE more kind of consumption model. In a current environment, probably it would be more attractive compared to a CapEx model. So that’s where we see both SMB enterprise, they do have some more interest to do this kind of OpEx model. Maybe John Whittle.
John Whittle: I would just say that the success we had in enterprise, this is John Whittle, by the way, with the number of eight-figure deals and having over a half million customers out there, really bodes well both in enterprise and in the SMB market because we’ve got so many customers out there that are testing our product and so many customers that are providing feedback along the way to improve our products that it’s a real testament to the products and gives both enterprises and the SMB comfort in buying our products going forward. And you can kind of put yourself into a customer’s shoes and say, okay, some of the most discerning customers are spending eight figures on these products and services, and we have strength in SMB and upmarket.
I think that bodes really well for kind of the smaller segments of the market and the larger segments of the market going forward. I think that’s a real headline from this quarter in terms of the real success we had with some of the most discerning customers out there.
Gabriela Borges: Thank you for the color.
Operator: Thank you. Our next question will come from the line of Saket Kalia with Barclays.
Saket Kalia: Okay, great. Hey, guys, thanks for taking my questions here and well done. Keith, maybe for you, I just want to talk about the shape of billings a little bit here in 2024. I think at the midpoint for this year, billings is about 2%, give or take at the midpoint. How should we sort of think about the exit rate on billings this year? I know that was something we talked about in prior quarters. I’m not sure if that’s something that we could just revisit. And then maybe relatedly, it was great to get the segment detail, by the way, across the three segments. How are we sort of thinking about the rough growth ranges for those three segments as part of this guide?
Keith Jensen: Yes, I think on the billings trend, if you will, I would go back to our prior conversations about, the backlog created a headwind, if you will, in the first half of the year. And I think you heard some of the tone of that, if you will, right before I gave the guidance this year. And that would suggest that, our expectations are that, billings growth rates should be improving as we move through on a quarterly basis, as we move through the year. I think we probably made it a little bit tougher on the sales team for the fourth quarter of 2024 by having such a strong fourth quarter of 2023. But I think they’re going to do fairly well there. And then, I’m sorry, the second part of the question, Saket was?
