FTNT - Earnings call transcript Q3 2017

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Operator

Good day, ladies and gentlemen, and welcome to the Fortinet Third Quarter Financial Analyst Q&A Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. .

As a reminder, this conference is being recorded. to host like Ms. today's now would introduce for your conference, I Blough, Relations. Investor President Kelly of Vice Ms. Blough, is the call yours.

Kelly Blough

the language Thanks, Sherry. beginning still like that applies would back of in. and Thank you, X: call. everybody to for the call to remind XX at this I read that dialing at I disclosures the cautionary today everyone

I our that again, to We will to moderate pool to entirely Q&A and uncertainties and back you session, risks a are you subject at will more. request, be to back and is call making then questions and the call that forward-looking can outlined turn your statements presentation for in questions. can over and Q&A, ahead dial we in operator for limit time This you so all of try one Operator, those the online. as to go

Operator

Thank you.

Our first Baird. question with comes Jayson Noland from

Jayson A. Noland

to up a the the guess that Thanks. on Fabric, to approach do how I Great. my that's question used come proof-of-concept, a term a today, what's best wanted call or industry, widely there differentiate way across good is, it's so Okay. others? relative you the in to on I follow-up and there? lot do the a Is it's

Ken Xie

Yeah. Ken. This is

the intend it We together Client vendors. next-generation is we the time On product long in have different firewall which when this product. That's FortiWeb started, cover working make the develop product, developed. a other whether working this the more also eight like we UTM – product, it's Mail product, for a FortiGate the since broad firewall, applications in-house where all years the also with than company product, actually product it's to to seven, on – the we're last

well, can integrate the of management. they – So and of also ease kind all these

fastest of in quarter, all this of the which FortiSIEM, have growing one together. manage the we So help also the in also last couple

other are some or one two company they may than products that's that together. working So different have

part, broader, We and the not IoT have networking part, much only also Access the side. and side, but like the endpoint the also WiFi, like the that, cloud

So from internal – make develop is beginning. together the it to tied this working all the together the intent

some integrated than some acquisition different by or that's by company, like other whether product. So mostly

think I we start that's that than the have tightly Fabric better and where much we work So better the feel integrated vendors. other is more

Jayson A. Noland

a something agreement deals, Ken. the volume enterprise just maybe pricing concessions an be quick And offer similar? follow-up or there, for bundles it Is or

Ken Xie

It's Enterprise you'll Right together cross-sell, forward still for now lot FortiGate deal, of together. together, is product, could FortiGate other expand like say sell open but upsell, more to time Enterprise some and we – then that now, the bundle different bundled this we where it's to right may may try the all our first are definitely some all have still eventually so learn into and is even that have in so some but the – more early tied enterprise we stage. Liable were in Yeah, the they be see, leading going all ELA, function. a we to that's to Agreement, working like

Jayson A. Noland

Okay. Thank you.

Ken Xie

you. Thank

Operator

you. Thank

Anne Our from with next Financial. Susquehanna Meisner question comes

Anne M. Meisner

you. Thank Great.

QX rates get also this year's to on and take of product I little XXXX, growth basically wanted I the flat revenue somewhat growth growth. to The a I them So I follow-up flattish if apply bit growth. implied and sort guidance sequential

line could to running revenue, ask in the we'll stay was ask argue Because tell if But better since I it, kind flat? of slack it's grow not know more not maximize not the could guiding volatile it's that's one that's revenue driving the terrible understood? Now of of is the better but how to question it? in going kind sustainable. subscription terms necessarily company? Is services us just be guess products little if guess longer-term? the about better kind how profitable, just I you it think for I'm that happens business you're then just a the growth hoping the sort to to need to of does anyways case, Street, product in you're thinking pick as what the you, I so so way so do of which revenue to maybe sort XXXX, that's the it's you're services let it's and yourself, recurring, you wouldn't really you're And would it is, for right it's about Because thing long up specifically that the if longer-term? quarter. thing is to I probably Can about a the as of message I line thinking the growth

Andrew H. Del Matto

Fair enough, Anne.

mix I it think definitely shift. a what what seeing, you're however, We're you seeing is said. is

They're of we why the buying instance. renewals. landscape, revenue We're want a And a because one growing customers you what non-FortiGate, they you competitive times don't more now be see they're you the deferral you along with just But deals duration. as when more think up But level those off seeing X%. more XxXX content-rich go And they buy product of mix business, revenue deferred of and of and what – things I line And spending couple three-year get from see maybe tend product as XX% revenue two into out, products, or buying competitors we the the for month than happens the customers I I've really the enterprise think that doing end on a happens average increase competitive in same to that revenue. at compounding to thing. together, deferred our higher see they more that longer. mentioned enterprise, XxX As buy service. bundles, higher do they buy of to basis, that's

line. there basically that's what's product so And on the happening

But if routable, so more effect think more to the the I you're day, you will. end just predictable basically becoming on of more the has up saying, it what revenue you're to the line ending that oriented, becomes subscription where harder of speak. at forecast,

Ken Xie

Makes sense. Yeah.

intend the bit calculate We hiring also to have few are little maybe impact. slow way we're a a down The sales But capacity. we product the percentage behind not growth.

So try we already realized but that couple a ago, to time that hiring, some results. starting accelerate see months takes the to also to

growing So with about little side we're that's do But QX. together cautious a keeping where service. product to intend we the bit

Anne M. Meisner

for then provider vertical on guys. service that's of a Okay. follow-up Great. And topic quick conversation you the been

into the you traditional service discussed competition? in market products making I'm to markets again, the cycles Maybe different about provider. can as that anything are providers. well? your evaluate competitors of specifically of what in Are and are of what kind seeing kind seeing terms just of you talking And have service to kind Some also talk market. you're the provider of sales just because lengthening seeing about cloud bigger time not a push speak the there, you're taking other you can customers more in competitively, Maybe

Ken Xie

changes of more us. a last big and or we of account the the traditional team this call Yes. sector with grow more ago compared Service for They team, have realized so like few call ago provider, there's the interest is But product one couple shifting business. in some XX% service starting both. years, together years than service a years The a starting there. two provider team, build provider,

a provider. So combine where with the kind slowed in together if going impact service whether some also that potential, the we call of, to industry provider whether the they but two there. traditional But together, still have have down compared they're investment – some we means That's on you infrastructure, has provider, provider themselves service growth, cloud growth. transition new now. try and some these somehow right position The long-term service big provider (X:XX), healthy the view, is wise, call traditional big then the new change to provider

some of to traditional cloud. service moved provider And the the also

we on. decision reached a of and part the not some not like quite we they testing feel are quite yet, the down yet. is or deployment that's going of But settled see big lot new So

Anne M. Meisner

Okay. you. Great. Thank

Ken Xie

you. Thank

Operator

you. Thank

Our next with question comes Stanley. Melissa Franchi Morgan from

Melissa Franchi

you. Thank

revenue on a the quick product deferral. Just the follow-up the and on discussion

through to line? does subscription, recognized into gets of to you've just past, revenue So, I to is product seen the moving revenue eventually that than have goes Or and the that defer percentage go eventually to clarify, into into the when really it a then subscription is higher do product? product flows want in you subscription, that then and deferred percent value

Andrew H. Del Matto

services and buying Good question, subscriptions. being directly, frank, up this to complicated of is To deals, the your yes, in back right? buying answer mean, business, more, characterization improving it to by they're Melissa. And an be more way they're up, the enterprise in a of all more services, and of getting I question We're subscriptions. just ends

a carved So it re-characterized over product. back gets out, into as services product, Not recognized word and subscriptions – time. and and I use the then

Melissa Franchi

That's you. Okay. Thank perfect.

Andrew H. Del Matto

Yes.

Operator

you. Thank

from Our comes with Raymond Turits next question James. Michael

Michael Turits

Hey, a of guys, couple questions.

housekeeping want then in $XX for I was just a kind year, there? maybe – we're growing next just million on this or from line of million if CapEx. I $XXX and still First wondering to doing so year,

Andrew H. Del Matto

didn't of didn't I I the million Michael, question. hear we're for – We're part line year. this in – second the $XXX

Michael Turits

million growing I and next And $XX it then year, then for that? at have after

Andrew H. Del Matto

the not I next for way we suspect we – getting $XX you're mouth, general year, it's in and of to I guided think put to think but words calls. haven't probably $XX Yes, million the I for of estate million but roughly $XX your $XX years, go there, the million next said estate. of I maybe back real million if real couple of and and Because said CapEx we last

Michael Turits

(XX:XX) Okay. it But then

Andrew H. Del Matto

guided would around to but we out would to million. year, it for rate us people get tend me what's generally ask our – haven't formally That weights be $XX million, about run to again, next get CapEx, I think and $XX that

the think for, then real You a we million million minus little out and XXXX headquarter XXXX. we've as property, estate and know, or plus has, could $XX fill bit, $XX I and the said be

Michael Turits

providers. understand I Ken, mean point convey. were providers and didn't what but traditional then that the opposed were to I you was that's trying to Was just wanted your as to service starting then to carriers, I understand, the assume service – And difference? to you the the about about trying carriers? providers, you talking the more the the Okay. not talking up service you making cloud to cloud you're were I cloud understand. sell But that

Ken Xie

the differently little also We category traditional provider the a service provider. and call bit

to... service think provider do out there's provider, service I it Yeah. one cloud so was the gave count we the they a but That's no the provider starting the line, where far think provider (XX:XX), not traditional traditional I service adjusted on cloud service provider, more the XX% still vertical. provider have there,

Andrew H. Del Matto

in actually there. It's

it if think – a it either I perspective were product routable. or on right? If in it's provider virtual a there, services includes a it from the license, would it's be line, subscription

Ken Xie

can we with Yes, you later. Yes. confirm Okay.

Andrew H. Del Matto

Yes. Yes.

Michael Turits

Okay. And then question. another

if as think you sounds the was got you explained that the that one that business longer high-end sale it years – I'm enterprise it drive really weren't with dynamic you as went would sounds this that of it a then factors wondering, around? enterprise is it large, I a lot enterprise of the time more So something well this rate in time, got is run major ago consistency. complex. through and And the larger couple of tougher you where and deals, were business, seeing and cycles, way but like bigger box that deals, winning same you at good, lumpiness we're the that more those doing getting termed

Andrew H. Del Matto

Again, Fabric you we're more to now everyone, I What is spend, thinking that post-Target a think security was step Ken and I think seeing architecturally. because think complexity back earlier different. it's there about they're mentioned management of because, What now open integrated, buying. well as broad, it's you provides will, Ken the the architecture, lot is seeing said, capabilities. buying, reactionary strategic if more and extremely an and you're resonates

from to then And it I at like or I up all the same harder or with the forecasting they it products. where of more the they think generally Fabric may and time more Fabric, forecast. some example buy a that's because buy gave, if package, becomes becomes of the a a they more from full challenge perspective sales I so And the end think perspective

of is saw some there, that's to due they just macroeconomic become And some us to And it's think bit believe a we're into we a sizable in they on on bit think in Mexico I'm head quarter. ahead get we geographies the size products somewhat what in forecast of architecturally, the said, all some revisit, Asia back, weight more talking myself were as again basically a customer but to but think instance, form did shift hard I this softness of to it, the you some forecasting America, know understand a people become team to a other, explanation. And there of deal of run North actual a they go or to in out did, on may You then telling a guidance drilling the QX and very and that's and street this and upfront, of of that just business, weigh I in blend have basic the there becomes there challenge forecast like the Ken it issues variety and I us. and and especially the some it quarter and believe in QX, think may we when good when to the the call more but to in we and blend to as at but geopolitical into Latin job rate, may really Again, a our issues one we those factors you more they're and they the what for and of here going to know count. we're or said, repeat at we telling trying level. together then was behind going forward on of we Caribbean and look saw business our may

Michael Turits

very Thanks Okay, Ken. Drew, much.

Operator

you. Thank

Our comes JMP. next Erik question from with Suppiger

Erik L. Suppiger

about down factoring you for trends can I in? bumped don't XX% reason know would were fiscal in should of you're likely then that it for has How your similarly, trends anomalistic of Thanks. QX, back give that did think hiring because and there your we reverse year, up you and operating that's XXXX and the you course be Yeah. are Is And XXXX? or want Is guidance guidance but XXXX as to look hiring there to be going of fiscal how QX think it QX. we come go into gross margins down about next over why to in aggressively? XXXX. guidance that? for margin in to terms XX% any we your any Or should

Andrew H. Del Matto

there. So margin. a first And I There I a think, part part is count think bit question there's Erik, two of questions gross to second in that the is is head in ramp. the I related believe

Erik L. Suppiger

Yeah.

Andrew H. Del Matto

of product yet earlier. the interesting And hardware have so upfront, if cost more better we didn't sold recognizing gross one Anne carve-outs actually on goods effectively, and the sheet. were balance margin, Because the onto that things it the cost of we're been have I discussing – we're the deferring is the of the would revenue

you revenue that ends so that And time back margin ratable will. coming if strong, in up recognition, over

sold line, revenue through driving that more is, it and up margin about and I've subscription non-FortiGate of only with higher-margin think to if with rich Fabric's enterprise, product Erik, I extent way on around and one, structurally And higher the subscription because and more the the margin to together, shift goods you that our back taken this all that's that that's mix blend not in Fabric. of but the end of composed – quarter products, to higher some business, more structurally margins services most services shifted. you So then cost coming business is a and of already the

has sure our we we that higher need to And continue we changed, So head believe, on can grow. catch behind. that it's margins, driving count so make part. we again, first that's to the up business and Headcount, structurally we're

that we And so into we're talk get when balancing XXXX. out we'll and guidance about

Erik L. Suppiger

we Or are Ken, just how far plans have XXX? I can over you front? head added the behind the about can think comment, count count? this on head Would XXX though, added liked have think how you to on quarter. you you

Ken Xie

in are two to first probably the supporting making guidance have, we the bit think half XXX the we also that. target we of I And above quarter QX the margin quarter, to add of a probably and but some be that's over than growth will less low. little target, need

in count we that. and it's we but (XX:XX) head to So some hiring. catch We QX QX, keep realized of need up

Erik L. Suppiger

Very Thank good. you.

Kelly Blough

Thanks.

Operator

Thank you.

Our next with Fatima UBS. question comes from Boolani

Fatima Boolani

Thank you.

Just a question margin. gross for you product on the

high products You did essentially of traction gross we margins saw very in were talk the the a the nicely mix sequentially. lot portfolio. to that about the flat the But and you're enterprise, your seeing end skew product

that that's other of any need into line? there is dynamic kind that we consider to going So

Andrew H. Del Matto

Sure.

Fatima Boolani

free And points on you then share any cash follow-up could just modeling with a us? flow and quick

Andrew H. Del Matto

Okay.

So think guidance. I and two heard Fatima, you're Fair I gross talking think margin I flow then questions, cash enough? free product

Fatima Boolani

Thanks. Yes. Correct.

Andrew H. Del Matto

Good.

is the effectively months, a deferral product attempting you of I will, you will, richer content-rich what of to that over with higher bundle and sold, from those is, cost the shifted for services was if the while the if because XxXX services are up services like a is we're of XX content the you that versus from on in we the explain more more that line earlier So re-characterized subscriptions recognized FortiCare more XxX. basically instance. the to being That we revenue to Erik And if services upfront. priced, support that combined line, XX subscriptions end duration, then what onto lines, enterprise duration level will, of And taking longer causes carve-out product and does time line a more with being higher combination subscription. ultimately,

the basis, that's And on at be reflected higher, a if were other deal-by-deal better a margin in line. margins on instance, it at looked just perspective. billings the going really for gross There the really you quarter. it what's would you in on there. looked actually anomalies no if than It so are And

reserves I the some up anything which We revenue ending quarter. product that out grew It's think ordinary of last of on do revenue, on some didn't quarter just we deferred referenced inventory. front really a this in of reflection taking that XX%.

Fatima Boolani

Very free you any collection could that this on out had you. quarter. clear. how very share a Thank just shakes and And quarter color flow strong because cash you directional

Andrew H. Del Matto

because frank conversion there's little we guide timing be of and been to a lot – predict harder is linearity cash focused It a on to What in differences cycle, Fatima. there. we've becomes

I can CapEx. think share I

still at for at year. the expect CapEx $XXX to up We million end

Fatima Boolani

Thank I'll line. in back you. jump

Andrew H. Del Matto

million And Yeah. believe. we spent $XXX to-date I

Operator

Thank you.

question Evercore with next Ken Our from Talanian comes ISI.

Ken Talanian

Hi. was Thanks for methods taking changes your any you you're pipeline? curious, question. have I the made evaluate either using the the to frequency to or

Andrew H. Del Matto

No, Ken.

We it No, any look continue very closely. haven't made to at we changes.

Ken Talanian

follow-up, as for for the expected revenue. balance XQ a sense give shift you us be Okay. of a from there's off how deferred? greater And just much ratable a sheet Can obviously, revenue maybe your of is rolling to ratable

Kelly Blough

don't the I the how line. sheet. ever came I services think much in in-quarter off we've metric, that of it's balance mean, released reflected revenue the

balance percentage. revenue that at product it you an of the reflect look should sort services If quarter, in between individual and

Ken Talanian

All Thank you. right. Okay.

Operator

Thank you.

Our next questions come Research. from Patrick Colville with Arete

Patrick E. Colville

quite Thanks for I've got my one taking easy layout question. first. an

October still revenue markets. product Who taking are right from now, are you guys than XXXX? growing shares You the faster

Ken Xie

first some the share. growth we take our I look probably of think, if this than in year, major building so security any probably and other vendor, faster you half

so the market the... them. range, cannot from I I grow share we below anyone take think name

Andrew H. Del Matto

and be where theme we the the to visibility of I that we're Patrick, can well, end-to-end, that tends playing organic enterprises. really would sells say large integration integration and on get where

variety probably the incumbents, a that and of so could I you could think quite And guess frankly, names. be

Ken Xie

some grow share faster some so from Yeah. will where enterprise take section than And other section, traditional player enterprise the quite there. the that's

Patrick E. Colville

Got it.

then can quick Okay. Sure. And follow-up. I add Thanks. if two

Ken Xie

U.S. can especially region. also have is And to I see you say, U.S. in fast-growing a

we where take that's the of some share from So most player. U.S.

Patrick E. Colville

Got it.

share and the kind the there's up. to have to that the And that basis those Okay. products' from give less the take question guys. less share growth Juniper is investors is nervous I for are one in I guess reasons mean, because of some of Cisco the slowdown of

Ken Xie

Yeah.

their growth. also, U.S. probably slowdown of Some other below the competitor market

some share take there. from also We

Patrick E. Colville

Okay. dollar think And kind increases guys repurchasing? It quick then, share now. (XX:XX). are like of just we the on you more quarter-on-quarter consistently much And about modeling of question amount should repurchases. kind something share the more doing forward, Drew, Is looks that consistent that

Andrew H. Del Matto

is we think call, Well, they the I a to to aggressive billion, repurchases. said more as share And approved $X current the board the approach on up signaling authorization.

million September. $XXX the remaining, as I think we of had, have or end

as far consistent, think And say, aggressive sure. more it's little but for so a I harder as to

Patrick E. Colville

you Thank Great. much. so

Operator

Thank you.

from with Auty JPMorgan. comes question Sterling next Our

Ugam Kamat

in Hey. that Hi, understand for on is guys. actually virtual firewall happens a the physical Kamat you Sterling firewall. difference Auty. wanted a sell This Ugam price I when of to lieu

and you sell of that the into selling for that is physical virtual to and Assume pricing a box, are that, you them, on firewall in going enterprise lieu same a the if an what economics throughput?

Andrew H. Del Matto

where Well, model Ugam, the And virtual to answer of an is the environments seeing we're orientation buying as business cloud pulling the hybrid the whether they're way well a overall is the now variety multi-cloud hardware it's it's that model. products. selling, question it's a the – accretive because because we we're what right

model. economics accretive our And and out so it's the work to

that virtual, business. there's about it The the a that to to is higher-margin it's extent other way think

Ugam Kamat

Okay.

beyond helpful. are and planning more of share do to program, dilution repurchase And the that share that more pretty assuming, are count, do just on you That's than willing secondly, offsets Okay. the share to in to expand repurchases share offset repurchase go in to the or you terms dilution?

Andrew H. Del Matto

of all, are approved share to of what $X billion more you focused repurchases. repurchases. aggressive that. just I on and repeat said, the first the on being share to can up I'll have board And I'll leave we see, Again, it now Right

$XXX remaining. have We million

would basis, focused we if see a of equity dilution, the on on very that comp and are how aspect that profitable I could answer that's the You more you will, we're GAAP question. becoming and

Ugam Kamat

you Thank so much. perfect. Okay,

Operator

Thank you.

Howard from Our with First Analysis. next comes question Smith

Howard S. Smith

on and about, that question. other my being is we head to for continues Or the some high-margin. needs that of of be but not opposite XX%-plus the non-GAAP talked services. the this margin, done and is deferred of the line? you as That to would quarter I I of just Thank Is gross to up incremental side wanted know product taking affect I calculated count grow, kind part that it that follow Yes. services through a come just a adjustment, there coming basis. incrementally profitable very about on the catch-up that what in?

Andrew H. Del Matto

think some is are we're investments but because a I you're managed and – There I Well, things way helps way not There around We've all effectively and just make support but the you on getting the that, basis. scale getting over for instance, the like a costs so driving I a significant probably don't answer, completely benefits think constant time, behind not think time. or like head really in over you we're right about to investments. efficient it's will. managing head that. think some little head think infrastructure are which if efficiencies are on RMAs, on little about little the scale it, need to probably side, become revenue more to a on count better RMA behind bit bit, We're business, on and you're the more count count

services efficiencies the on that you in might not it revenue by you And just though And then it we're business. driving and it's the other people ramp offset line, there, like finding shift a so ways again increasing huge mix benefit. more even by we about, talked offset to hire

Howard S. Smith

it one. Great. you I'll at very much. leave Thank

Operator

Thank you.

from next Barclays Saket with Kalia Our comes question Capital.

Saket Kalia

guys. Thanks for Hey, taking follow-ups my here.

the just the philosophical guidance. got – of I've just of a Drew, question kind on first, So on sort billings got approach.

that your today, (XX:XX) exclude it compared before? we at enterprise sense? on guidance now. If end the year took expected in some down? the stuff, the we're and to pipeline prudent approach to you If you close trimming than billings what pipeline you approach raised that more it this maybe QX, compared QX, gone of has make that of the Or it is Does regional enterprise for rates we

Andrew H. Del Matto

Yeah.

rates? do pipeline need you need close I you – higher think are asking the So as goes or down, if you higher

Saket Kalia

guide Right. Or the maybe are quarter you you assuming fourth rates than in did lower before? close

Andrew H. Del Matto

really. Not

do take one tell I we're to it's off a to macroeconomic as out think company what becomes things. factors is is the our And billing in we're dig all us business, of you the to into fabric, trying a shots. it, on variety the mean it of when Saket, think at sell and said, relying and there, on by we what more geographies issues what exactly just various call I that's the complicated really the any point they're I time. to they're overall, and sales – buy carrier the but broader going force given going in

that issue. And creates as in so that point would really the complexity have we forecasting going I forward. the

Saket Kalia

if I just dumb me, just forgive it. But quick could wanted understand to it's and probably better. then little And a squeeze a a in, bit question. follow-up, Got it. pricing I Got the

Andrew H. Del Matto

Sure.

Saket Kalia

additional think sort customers on we get of accounting, guess of carve-out the getting. are content I I that idea enterprise the

getting the wouldn't higher more, is actually the Or number? a of You maybe is the customer an we X/XX are instead carve-out of be discounting if mentioned so enterprise impacting but that carve-out X/X, that, Could and same carve-out some number? approach just the the help little confusion that number, you the pricing clear about talk bit? of Maybe products... sort about that to of could a

Andrew H. Del Matto

right to the Saket, you question. going to – could I'm to quite didn't ask – trying Sure. – if answer I'm I you

it again? could If ask maybe perhaps you

Saket Kalia

sure. Yeah,

a bit talk the about you situation. in a pricing So can little carve-out

situation So that presumably support, bundle opts deal. or where maybe an in enterprise would be X/XX an customer additive for a enterprise to more content-rich like items a

of a would that we're thinking guess it that right, maybe of same a carve-out the almost about number. be carve-out, I the larger so implies And Am I number. larger carve-outs seeing right? But

Andrew H. Del Matto

two the would on extent on preserve to discount deal, a you the factors. revenue say recurring stream tend about issue. line product some speaking, to But are talk we and think services. Generally to discounting, on factors. not to can the the a going discount the we're always would I if and I two it's be if which subscriptions big there's discounting the lines, want, annuity

think As carving board, up pointed factor to XX where duration. you out that from discount you duration think XX months the And That And impact, gone we've deferred. compounding I to that's the compounds. out, across what's frankly. on the product we quite from more end I be to the going duration tends average

where end of whatever the a out on you up were regardless occurred. carve out, deal, to So and three-year carving you of Xx going discounting

Saket Kalia

Got it. Got much. very it. Thanks That's helpful.

Andrew H. Del Matto

Yeah.

Operator

you. Thank

with Sachs. comes question Borges from Gabriela next Goldman Our

Gabriela Borges

Thank you. Saket's It's for Great. actually, on question, so a follow-up Drew.

of that are larger deals is a a of business. complex, becoming things are they that enterprise mentioned the One of couple more the been pieces has times

that to temporary, I'm that in intelligence forecasting there is business tools be nature structural little maybe something given could that this or in little that rather Given wondering tools medium-term. consistency more or the that forecasting, are drive if internally the ongoing help feels it like seems will more a over ongoing than a

Kelly Blough

of at I tools are say we it's forecasting. disposal. to available what mean, We do think pay know attention our lot to fair I that a

of, for America, there in world. because the the and that out parts Latin feels came In forecasts. your sales executive and this mean of Mexico I the team over like that the team we particular get have things were mentioned, other it We more that point, regular meetings (XX:XX), our things case, forecast were to environment, Drew the Gabriela. with our go example,

Andrew H. Del Matto

down the effectively, the important and understand your getting input, their are relaying of the to our the and story diligent I sales We're and around. from day, explanation Gabriela. getting thing, we're would what the most at And this. on what's end forecast that's take We and really and why, drilling in very getting you. the story all that's the going on commitments team say is

Gabriela Borges

Yeah. That makes sense. Thank you.

Andrew H. Del Matto

welcome. You're

Operator

you. Thank

Our Trebnick Dougherty. from next question comes Catharine with

Catharine Trebnick

you. little color promoted headed channel update versus it, with and Can him. more geographies? a Thank you U.S. Fortinet at where and taking quarter Thanks for my thing back brought it's asked, during One I question, that been if tonight. had had a person noticed just you I versus Asia strategy, the five was been calls you on and channel, we've apologize are other give the

Andrew H. Del Matto

Bove excellent. changed believe came in was business doing at Yes. We detail. We excellent came the fine our in and back. look from there. Nothing's Jon back really is that He employee. an strategy. He Proofpoint,

any think fine. we Jon We we into team, haven't the issues believe a great addition seen and is back there, we're and coming

Catharine Trebnick

right. Thanks. All

Kelly Blough

part second Catharine? Is there to a that,

Andrew H. Del Matto

Yeah.

Catharine Trebnick

Obviously That was working really for. noticed came he you, I No. looking back. for what I was so congratulations. he likes

Andrew H. Del Matto

Thank you.

Operator

Thank you.

& Our next Gabelli comes with from Co. question Susanto Hendi

Hendi Susanto

a margin that to margin down shift gross than of gross the product the In and by amplify trend product year to larger whether revenue. year, Should as trend degree is this it's margin products words, may Drew, view alluded this you we lower gross other road? different grows. down driven last further to this slide

Andrew H. Del Matto

time. look this to ratable last that causes re-characterize a The want is think that's XX.X% blend trend, quarter in back you way XX% on of product this me margin to because gross you revenue over gross excuse some the as the up think as of altogether. shift over quarter will if revenue comes gone I slightly-lower this on way look it several margin line the about really, back higher as to to a – would gross slightly-lower XXXX tandem, come at I – margin will margin, margin about back quarter-end. has it gross a years, gross the them line And QX tend product And, from in

out And some quarter, going bit a of that's So the if what's past with the I line of over look of XX% is quarters. back on. not

Hendi Susanto

of Ken, the regard Fortinet? see your for deals, to with this to question complexity market you see one and as challenges unique less competitors? this your do general applies And you a as enterprise in more Or situation it. that to and do Got predictability

Ken Xie

new need get more trend a just especially force, some enterprise, the for force. to sales sales We

X We are like easily, taking growth, months starting your that's quarter our – probably XX months. salary in margin said, you up. ramp But to the to hiring, can bit so that improve more little where the a invest That's takes about next. or to same quickly, I time

not So are right see (XX:XX) and in probably year, if we'll we we're the that's quarter in or the catching away. result behind the early up,

Hendi Susanto

mouth, I And your situation the it customers the I implies overall. the be it's to some correctly, on market mean in put may sales that driven partially that interpretation? don't if that and force the by but understand words to that so partially is due right

Ken Xie

little and sell compared more a firewall to bit complicated time take more multiple It's training, product. bit sometime a single products. maybe we little more Also more will traditionally

Hendi Susanto

Thank you. Okay.

Ken Xie

you. Thank

Operator

you. Thank

question next Our comes from with Andrew Piper Jaffray. Nowinski

Andrew James Nowinski

All right. Thanks.

income. operating like clearly income flow, flow it'll outpaced forward. line growth cash But going the beyond? operating Do track with Your operating to XXXX you more operating obviously, in you cash think looks and income said operating it closely that's in going XXXX, in grow

Andrew H. Del Matto

things year. a Well, And job part early call cash think our couple it. to you of cycle I good you that really happened. growing, for One, some expansion, think to had if as of said, increasing you conversion but on next a that really also I will. basically we've on focus working that think when Andrew, characterized little We'll And you've margin back, step capital. a continue I done it's have

Andrew James Nowinski

then the large All despite called as the lumpiness continued decline right. to in Fair deals that enough. And DSOs out. well, you

So DSOs for forward? your expectations what going are

Andrew H. Del Matto

focused QX. Well, again conversion a drive Quite saw with little fair, continue, to harder we that that frankly, But what be includes it. see to been one will a happen as in that say even we as be in nice And call cycle, on I cash linearity. we be sales component predict little it'd to it'd that about It's QX. and remain would We on a talk it focused to and more working we've linearity too. but to do. early

Andrew James Nowinski

about see thinking encrypted better two mentioned you upgrading a All you data material I that you of their impact get decryption to into more having coming to seeing now? performance, refresh a given years Ken, started amount cycle the firewalls right. any a center increasing out. Then, SSL Are customers think that's traffic

Ken Xie

Yes.

providers, (XX:XX) costs run SPU, providers, lower difficult I to SSL acceleration. and secured times processor, they very XXX them XXX high to that faster, even after important. treat performance, achieve approach, at can the so our is call encryption for using And acceleration some with times service Some that acceleration XX

So where also opportunity we and business there. see that's some quite from

growth, on the the it's SSL driving e-commerce, the on of web major especially So some definitely based.

Andrew James Nowinski

guys. it. Got Thanks,

Ken Xie

Thank you.

Operator

you. Thank

Suppiger question JMP. with comes Erik from next Our

Erik L. Suppiger

been has Thank you. question asked. My

Operator

you. Thank

with Our next question comes from UBS. Boolani Fatima

Fatima Boolani

for at that you on (XX:XX) you've some historically. Hi. it Back longer-term Drew, a of talked the targets again. about question just

about So, growth XX% this XX% aspiration for billings you're to kind tracking at year, but hit longer-term of mark. the is the

help comments being acceleration that? with you you hiring? the comments well then basis on there, XXX some (XX:XX) operational around basis points of driving operating of help acceleration, behind margin some contrast As expansion? that behind also you So expansion around your being to can to margin? me So understand be towards And billings annum of just points drive input but hiring, XXX efficiencies to help drive the per triangulate on would maybe you your sort as your on of what the

Andrew H. Del Matto

ratable Structurally, enterprise higher margin margin and our where you Sure, more comes and from more due Fatima. you reflects take impact, margin you have really back the time, time is mix revenue, how the – think on lot could a margins revenue the business see talking business in of over gross to deferred driving the pure over we primarily on that then of and that time. and the and I product shift spent some side the upfront

more services cost revenue, benefits a leverage as that a a gross move not flat to on as that's and And we that's it change lines forward business. structural business Also, margin basis the driving. operating scale so but line, and seen tailwind in well. And the it's the you've drives, subscription on you on get the there's completely

that the at count, need up, point catch time. be we to terms would in In this the really question head of and absolutely in balance

Fatima Boolani

Got it. And if I can sneak another one in.

Kelly Blough

Sure.

Fatima Boolani

you've the penetration as with bundles the about level high the as a bundles. enterprise at seen success SMB talked well You

tremendously because sold SMB into you bundle sort base large chance whether carte, if base historically, the and, You proposition, help not buy la what will, or you still security to us of a you enterprise? functionalities a understand can your a of have the it's proportion had

Andrew H. Del Matto

to will, Fatima. We which level support, And then resonating enterprise couple talked we There's we Yeah. continue Then sell higher-priced a focus XxXX if more to the you is developing things, also actually if be as Fabric. seem of bundle. you higher-content continue on there's a XxX. about well higher the One versus selling to very will. of bundles,

on I and and we upsell have would early, plenty process. so characterize to and that We into install We're And cross-sell of that still there. our it move so base. focused it believe way in as there's very go opportunity to

Fatima Boolani

you. Thank

Operator

you. Thank

from Evercore comes with ISI. Ken question Talanian next Our

Ken Talanian

Hey, the for guys. Thanks follow-up.

all investment is by quick there a mean real your question. altered been plans there? correlation at estate I Just Have hiring a plans? your

Andrew H. Del Matto

No.

Ken Talanian

you. Thank Okay.

Andrew H. Del Matto

Yeah.

Operator

Thank you.

Our next question Financial. comes from Susquehanna Anne with Meisner

Anne M. Meisner

time part there be you. I XXX. I which side, Drew, discussed end we've kind for of But don't in recognize update, up be to your for yet, guess. they just the the subscription about components. just follow-up And a you. XXX rec that wondering you require talked of you felt Thank wanted sort And have model everyone's rev security since ratably gave an ton quick of the carve-outs, product recognition I how subject change ask on recognition that's about favorite to of is might and I we're would them as that their the know ASC wasn't think talking going well. that ASC that tied case last appliances kind something if the to other because because vendors you again some being may I'm to of

Andrew H. Del Matto

be we're the it, We're not finding now revenue that still line. we right to case, don't on not significant would but Anne, that obviously a see the we through say impact

Anne M. Meisner

Thanks. Great. Okay.

Andrew H. Del Matto

You're welcome.

Operator

time. management over closing I'm this showing now back like for I further any would the remarks. at to you. turn to questions no Thank call

Kelly Blough

for being you please if any Thank feel free both follow-up have calls you questions, everyone, me. today, Bye-bye. on you. to and again, Thank call

Operator

conference. you for This today's does this program. and gentlemen, in participating thank Ladies conclude

wonderful have and may all a day. disconnect, You

Fortinet (FTNT) 26 Oct 172017 Q3 Earnings call transcript