FTNT - Earnings call transcript Q4 2017

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Operator

Good day, ladies and gentlemen, and welcome to the Fortinet Fourth Quarter 2017 Earnings Announcement. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Peter Salkowski, Vice President of Investor Relations. Please go ahead.

Peter Salkowski

Thank you, Jonathan. everyone. afternoon, Good quarter Salkowski, and Peter our of Relations the Investor to This am Vice pleased Fortinet, fourth for results I Fortinet's to full-year to at XXXX. discuss is financial President and welcome call you Ken today's Jensen, Chairman Keith and Fortinet's on Del Speakers Xie, CFO; Drew Matto, Founder, are call and CAO. CEO; replay our Investor on is live and call webcast a will website. via This be available for Relations our call our by a business. today on Ken will begin high-level providing perspective financial the and with our results, questions. will and guidance conclude with Drew then will operating providing outlook Keith follow before call forward our opening up for [Operator Instructions] a today, calls. we're holding As reminder, two

our For will p.m. Investor hold those at we calls X:XX questions, Pacific call have who a Time. second from will Relations additional website. conference Both webcast be

you could forward-looking subject statements to actual and today's be we the XX-K filings, of factors the reflect to begin, today our call to we metrics our Also, I'd of forward-looking everyone risk are all to and this remind that more will unless that statements are differ in These call any Form on XX-Q only non-GAAP, that our and statements. references from as financial presentation, like projected I'd SEC update particular, Form All opinions recent uncertainties specifically obligation forward-looking statements. for information. undertake otherwise we making cause Before statements. and the stated. and disclaim to no date most in obligation like make that on these forward-looking those Please results refer materially risks remind to we to

found of release on GAAP that today's the and Slides to XX be in earnings our press XX results and remarks. GAAP presentation accompanies through non-GAAP reconciliations Our can

slides important replay turn company. to you website. the call earnings including the call of Ken. our few accompany will for be and other about release information, will also Relations our the today's A available We information over website important now to minutes remarks, refer issued to ago, a that on prepared of press Investor our section our encourage this I

Ken Xie

call quarter XXXX for Thanks today's result. to joining discuss full everyone and our year to fourth

As market than more has opportunities XXXX, we momentum ever. begin Fortinet and

market Our XX%. leadership of revenue demonstrated billing growth strong and again fourth with quarter

full in revenue our grew the drive will Four over four billings, our XX%. business with profitability. grew our in of In year continue competitors the For top excess XXXX, quarters. while market, the Fortinet on billing reported engines than will balanced of faster deliver XXXX, XX%, growth Based XXXX. growth grow to we our any powerful last

with core did to market fully increased SSL new, the by of and in process over Security Fortinet hardware and the to new First, volume of built protection XXXX network is of the Fabric. opportunity XXX-gig and continues for The our business is architecture security offer cloud. today traffic announcement delivers SD-WAN. of advanced industry threat firewall next-generation fastest It the a of massive adoption driven adjacent is as appliance gains. will series we integrated handle provide inspection upon series another XXXX that in displacement market share FortiGate growth The such and

a Second, for Billings we and non-FortiGate adoption. security have begun surface scratch business. the were services Security of just only the to about product of Fabric quarter our

growth. adoption, in of huge and still there's Fabric Security for early stage are We a the opportunity

of Third, security is the our fastest-growing business. cloud part

AWS, making Google cloud Google, all console single, is integrated, for solution now available portfolio including business response that announced management cloud and providers, environments. across on our available environments. major Fortinet expand management Platform, broadest model Cloud applications, and Oracle. cloud threat unified solution across all all our cloud deliver Microsoft, managed visibility automated the multi-cloud through the We security to IBM security and and continue workload the a cloud will with policy, security We of We control, just

fourth are creating the new growth transformation broad In connected we January, OT from IoT Quadrant. security more integrated car in to with XXXX, example as competitor, at our how validation extend In received than Gartner future, industry environments. digital Fortinet to eight CES, for threat an now of and security for and will appears we opportunities. security six the recommendations engine, IoT For the and Labs. And NSS close Magic XXXX, independent of continue protection growth we demonstrated

Fortinet investment, each superior is because these area of strongly lead technology. and of our in positioned vision, to

alone, partners Fortinet also industry XXXX third-party Intel, continue control our solution such new we leaders expand Partner to the providers. XX to including as Fabric-Ready AWS, visibility to of In Fabric welcomed Microsoft. Security and Program,

now Our eco partners. Program stretches to XX Fabric-Ready

continue market two have and of success beyond. are increase other growth XXXX. to security nearest significant through our strong in expand. team combined XXXX. accomplishments and to our of enable made the which the we the proud This According competitors our to customer and appliance to driven and of come. marketing subscription us in rest years forward the monetize in the the XXXX, we our enterprise I for investment team QX key leadership sales functionality base in XXXX and reach space, services made IDC, even look and and greater a Our in Fortinet to more in penetration The driver unit-driven was shipped than we again has to to

Before the served since Fortinet I another review a Keith strong has opportunity. appointment Jensen afternoon the and I Officer, made Drew has departing call share to replacing turn CFO and over this for announced our growth and to our to as business impact that be fourth on has February significantly company's the is would the contributed Finance Interim like of XX. we results, the full-year the as will January and Keith who to Chief quarter effective Drew profitability. XXXX Drew

wish Drew he significant his new we will strong contributions. the We him bench business. to seasoned financial the very of his call deep Drew. and During thank now organization and best grow time here, I and in his support for developed the turn leaders over to a role, a

Drew Del Matto

and you, with team. to at move four I Keith rest as miss honored Thank incredibly over have a excited past Ken, I'll everyone Fortinet been I'm the to rewarding, new Michael have the the of onto taking be and I'm opportunity, for CFO My worked Ken. years and Fortinet Interim role.

to today's results I'm our and Given fourth to hand over announcement, call provide quarter going can review Keith he the guidance. so then

be financial share seen now me fourth which our Slide Let on quarter, can the X. for results

very Fortinet end to XXXX. had a strong

with QX growing revenue XX% ongoing recurring year-over-year. support our year-over-year, support and subscriptions services. the grew reflecting $X.XXX Security increased billion services year-over-year. billings million. up $XXX XX% up For margin-rich security was services to overall to also revenue year-over-year shift Deferred to more XXXX, subscriptions to XX% drive and business million of $XXX business Revenue XX% continued

million margin cash gross We XX%. $XXX flow $X.XX. of increase operating revenue. generated flow XX% were XX% non-GAAP Our an Operating margin Non-GAAP was of was share million, cash was free and of per XX%, earnings or year-over-year. non-GAAP $XXX

XX% XXXX, billion. billion. Revenue to FY $X.XXX billings $X.XXX For to XX% grew grew

Fortinet and non-GAAP million grew business for stock. which generated Our repurchase XXXX. XX.X shares of operating XXXX, cash margin million free over to XXXX was $XXX In $XXX million used flow points XXX in XX.X%, the basis

breakdown our the to over of over This of record had a driven a the quarter, new and XX%. number to while financial six-figure services enterprise the We continues part XXXX. billings on-premise our XX%, represented quarter XX%, of local infrastructure, grew security FortiSandbox. FortiAnalyzer, the with and sizes. their Fortinet the cloud. the government top Security Fabric our over continues provided full successes U.S. and XX deals of represented of at we in company. AWS at including The virtual The in adoption FortiManager, deal to million across for grew by integrated billings with year. customer of their could operations including security Fabric. customer cloud, network and in XXXX, hyperscalers deals, fabric across for unify verticals from in Fortinet offering to a integrated $X solution, FortiGate, implementation quarter strong that driven record security managed of deployment. of at experienced was in fastest-growing adoption the recorded flow seamlessly using our product enterprise quarter a by stretching Multiple and next-generation center Fortinet's Year-over-year, from XX%, good billings at about XX%, single billings Non-FortiGate-related the X education $XXX,XXX be deal deals This previous driver machines, retail deals example fourth our deal a the X% sought XX%. contribute CRM vendor of cloud a $XXX,XXX of The the We FortiSIEM the Among growth grew beating comprehensive hybrid was a our a and In mid-seven-figure provider quarter deals the business. $XXX,XXX centrally area and the over deals is This cloud truly Fortinet service XX business. integrate SaaS, in fourth quarter, Security a X%. network at number

in growth growth engagements five cloud on-demand are all Across and AWS consumption. strong with saw we also and strong through We partners, six-figure seeing Azure.

available we're Google security is Cloud excited on As Ken cloud the very that Platform. now Fortinet mentioned,

the trust and the their expand, to sensitive in that data the Fortinet United level needs demonstrating protect States rest business of to government with the continues security world and Our customers highest most of assets.

threat over government fourth incumbent well industry-leading that agency for highly the high in segmentation an fabric information as This our a European integration, For Fortinet solution its contract. and Fortinet performance, example, customer during handles quarter, of large chose level a capabilities. Fabric Security chose as intelligence confidential

product midrange more and fourth and of Revenue note include for product non-fabric important on of $XXX products solutions. strong It's Slide deals, to and very more entry-level over products range was XX%. the products a including accounted to X. services quarter billings; midrange billings subscriptions, billings High-end fourth XX%; million, XX% high up XX% support in XXXX. for accounted tend quarter product Turning that accounted by to for our total security

Product As you Slide up revenue was year-over-year. by can was driven see services year-over-year revenue growth. revenue X% on performance XX% X,

growth. two mentioned, previously are for product single digit reasons As there significant the revenue

higher-value percentage the support revenue of a recognition being balance for First, periods. mix larger subscriptions sheet and security services to in deferred leads the towards onto shift future

our Second, longer-term to enterprise deals. success continued segment leading is

our sequentially XX increased result, month the months. in contract fourth length quarter average a one As to

our of and Americas XX% and Revenue of As X, you from represented year-over-year. could our basis, grew X XX% from see the geographic grew XX% XX%, Slide revenue And EMEA XX% and billings XX%. grew and business EMEA our business business billings represented from revenue XX% grew APAC year-over-year. grew year-over-year. represented On XX% grew Americas and of a billings the year-over-year. in also APAC from XX%

period, our deferred the longer-term providing a due deferred roll and subscriptions the remains high-margin driving This balance strong Our subsequent gross off revenue margin sheet revenue. into to will business to shift margins. tailwind mix in gross in revenue

During was margin quarter, non-GAAP was the Non-GAAP margin our gross services XX%. was product XX%. gross gross fourth Non-GAAP margin XX%.

gross negatively As I've mentioned product costs quarters, the in in upon shipment. also recognized affects prior hardware are margin as income this statement our

$X.XX revenue. the income deferred on for were was $XXX recognized expenses Additionally, Non-GAAP to associated fourth sheet reduction rolls million due income based per share balance XXX into of quarter, the approximately share when operating million in net during $XX XX% quarter, third million repurchases. this off shares the or shares, without a resulting of X.X COGS. from quarter million non-GAAP $XX the any revenue, diluted million fourth of operating or it's Non-GAAP revenue the

information balance sheet with and was balance $X.XXX billion our the Slides cash X a your and including tax reference ended strong for non-GAAP XX%. on the investments. We rate expected, quarter annualized X As more our sheet, cash review provide flow. in and

excluding purchases, operations growth period DSO added generated quarter XXXX. was margin to of for reference. million, earlier, last fourth flow or of Free an $X.XXX cash of an mentioned On X million Number $XXX million Fortinet grew $XXX your representing quarter from free a increase generated cash cash was Returning cash million. same shareholders of of XX% I XXXX. estate $XXX the in the was adjusted value was XX of billion, hallmark XXXX, an representing from basis, the XX% key days, free XX%. Fortinet As adjusted our days revenue down XX $XXX flow flow $XXX million. deck, Deferred We've over to XXXX, in year. year-over-year. a flow In in the free cash real slide,

an total of with As the quarter. $XXX to shares we XX.X promised $XX.XX. aggressive fourth of of at $XX.XX. We were share we repurchase on million million repurchases used In at prior a million XXXX, our $XXX price of stock average used average price million in shares repurchase to call, Fortinet X.X an

our in remained January million of $XXX approximately share repurchases of XXXX, Board XX, Directors' December of As for through XXXX. authorization

XXXX, Revenue improvement points over basis representing year. gross Non-GAAP For billion, basis XX% XX% $X.XXX was This margin the XXXX. non-GAAP margin is was XXXX. $X.XXX growth over and the we billion. of XXX what for operating grew XX% to XX.X%, XXX an of higher originally full-year than billings representing were guided points

Now, who will Accounting Interim I'd of who to be I to be Jensen May like veteran introduce Officer. named to XXXX is my our CFO departure. everyone Keith finance upon a in Chief XX-year Keith hired Fortinet's

becoming Before DataDirect Officer of Networks my the part Accounting and Officer Chief as a at Keith served Sybase. team, at Accounting and valuable Chief Administrative

over was Before Systems. Network Officer the Financial Keith Chief like turn Keith. With Dorado Sybase, to I'd call of that, to

Keith Jensen

Thank you, Drew.

working the your pleasure past I to first with XX. full-year being Drew, Before well quarter years. I'd can I thank excellent you and our in guidance mentor, was on for and leader, you, It guidance, which to Drew like for endeavor. a friend for very four an of go through the and be now Slide next our like wish seen XXXX, share I'd

all at start the a statements of As this all provided, including of forward-looking reminder, guidance Peter's are to the subject caution call. statements,

seasonality; we non-GAAP Please XXX seasonality; first $XXX our $XXX also of in quarter non-GAAP quarter the operating points benefit to of impacted operating XX.X% XXX, to to range non-GAAP expect earnings expect $X.XX the to the revenue from up note, million, taking margin XX%, of seasonality $X.XX. our adoption to in margins investment basis million, the margin the least continued for $XXX reflecting gross million also by our of a quarter also at at ASC by XX% team. of margin operating For I'd XX%; to range XX% $XXX million in XXXX, of range of and sales of we per note to impacted share the billings first XX.X%.

$X.XXX of representing a expect margin of $X.XXX to to gross range XX%; the our XXXX we of margin XX% in billion basis-point XX.X% original to billion; billion; $X.XXX XX%, billings XXXX, up we an from improvement of For billion to range the in to per year, non-GAAP XXX, basis share also, ASC XXX $X.XXX range and revenue operating tax our benefit non-GAAP for XXX to over the non-GAAP a Note to at adoption operating expect additional points XX.X%; of least of margins guidance. the $X.XX. earnings $X.XX of rate the taking non-GAAP operating XX%; XX.X% XXX at

over to Ken Now, close. to I'll back hand the call

Ken Xie

Fortinet. Thank Finance again, congratulations Interim you, promotion Keith, on your your and Fortinet for contribution to Drew, Chief you to Officer, and outstanding thank

We for support. to and would Fortinet I are our finish and very leadership pleased employee, thank with continued partner, the and to like their Fortinet XXXX industry confidence continue to customer, shareholders with demonstrate. strong that

Peter Salkowski

Tuesday, Cosmopolitan Events. the we Analyst taking on February XX. before call begin can many under and you XXXX on I'd session. be the website, Vegas Operator, registration but available at ready of everybody found presentations we see our to operator, the IR With our Q&A, hope section on will to like A Day Relations we're of start the invite event that, in Q&A to The in place link website Las to the Financial webcast Hotel there. Investor be

Operator

Instructions] [Operator of from from Our first Certainly. the comes question Morgan Stanley. Melissa line Franchi

Your question please.

Melissa Franchi

for luck. Thank you my of to and taking best question. congratulations you Drew,

billings So QX growth. just question a the on

number under-hiring I heads. the just a I are sales space, elongating guided, quarter cycles think, as enterprise as sales you think you of noted well into you in when last headwinds, as including, moving

little worse played quarter And expecting? or So, in expectations. that how there if bit can us perhaps you what to relative out a wondering little came those I'm on the were anything than bit was update in better a you factors just maybe your

Drew Del Matto

Melissa. you, Thank

the be of important talked end of and went issues day. throughout think I versus out not Things saw it turned because quarter, smoothly a last when guided, nice look transactions DSO mean, at QX right carrier days geopolitical the a had pretty, I you about is only we to those America And that's some most of I we we we the think in actually And I at flowed actually was turned smoothly. very talked space, was because Latin it quarter. we to when of if the the high-velocity the it to out end indicators when was say, really flowing one things even the would QX back, the and X concerns with some just And what quarter. look year. and all smoothly. of really interesting quarter about ramp we throughout that's of down the go

Melissa Franchi

you. thank helpful, That’s Okay.

Operator

Thank you.

of line Morgan. next comes the from Our Auty JP Sterling question from

please. question Your

Sterling Auty

I Thanks. initially. to follow on Melissa's question actually up want

large the indicating a on our lot deals? one Were very first market mentioned were It Were with fabric from with of CRM to of deals research probably or they a for large partners usual? in the one that any alternative on time? company. Street types companies direct And more coming of were deal. those people You was change was than deal go there there than follow-on seemed the The channel any the of buying number like them large these through

Drew Del Matto

and to committed very really partners. partners of the everything us. do our almost We through to We're rely channel alongside sell on sell channel

very referenced that deal The successful was a front. CRM that on we're new So, you customer.

And incumbent. truly an that fabric solution. over that won we So, was a

FortiSandbox And implementation Fabric, I variety but it's a own As FortiGate, which FortiAnalyzer, center. other their security managing AWS, from way. Security Fortinet they actually a they're along also centrally using of and Services, of hybrid before, products only cloud Amazon Web FortiManager, mentioned they're bought FortiSIEM, the not and operation

the and in deployment it's an just of security integrated So, with win, on-premise a illustrates fabric enterprise. it's the seamlessly power their great

Sterling Auty

believe you in in us margins it. slides, reflect look might I Got benefit from a footnotes you XXX, that of guidance give on what the the like? of not And impact, the the terms mentioned revenue does it. the but XXX can to Got that sense

Keith Jensen

a terms try Small sell-through, This revenue I the impact the the sell-in We on balance would describe earnings this to to are the we impact revenue. revenue either we previously some way. those with Jensen, in the model but revenue offset amortizing and time, that by largely at insignificant of U.S. it would change Sterling. both revenue deferred as through software were when over adoption that little Sure, in being date. or in of is bit retained in lost recognize Keith licenses we trends

So, that's change net-net, however, larger no will do impact recognize that we item to the a much expect Commissions, that points revenue the We how we in about expense. is XXX to attributable significant. commission for is of benefit basis us. talked

Sterling Auty

Got it. Thank you.

Operator

Thank you.

the comes Gabriela from Our of Borges next question from line Goldman Sachs.

please. question Your

Gabriela Borges

today maybe Great, my catching the is up the Thanks the directional you how feel invest you in year, just and half last to respect good talked you you XXXX, headcount? on for course can do the How your half. about as Ken, second to question. And us bit taking under-hiring whether company in with color afternoon. give plan maybe plan then over a - look we you in hiring out of on little plans? to Thank you. first

Ken Xie

because we solution you. we the QX, up add Thank in the the the capacity, some security fabric solution catch keeping product is We capacity, especially continue sales technology, and sales superior can broadest industry. if have in we hiring to

help will us definitely grow. that to So

some we So, in hiring in QX, quarter. we'll continue this up but keep catch the on we'll capacity. to And continue sales in to invest

Gabriela Borges

helpful. for That's quick And Drew. follow-up

fiscal can billings And XXXX, that, on seeing dynamic duration color give continue guidance billings that mentioned increase? some for should is us ongoing you how With much? where the assumption duration You an there increase. you're to

Keith Jensen

model. you longer-term market, I Drew that Keith be enterprise I to extent to tick and buy through for they continue duration in year. we think This towards the enterprise, continue into Yes, customers even slightly And mix if bit, our as to I'll that in on our move enterprise a shift our continues duration. the obviously, is have the that think, don't have little X, we we X, to push expect up I as X years mind. would in jump To the just the tended contracts, move

Gabriela Borges

helpful. That’s Thank you.

Operator

Thank you.

Our from line question Bank. the Gray Powell comes Deutsche of from next

please. question Your

Gray Powell

questions. Great. the Thanks for taking

six level the So, you over number have couple going the last of changes forward? you I'm your of months? curious, growth growth peers the like then seen product do of decelerating product any over in discounting seen just And see a What years. have Thanks. last of significant is industry level the

Ken Xie

Ken. is This

I also, We good it's think question. very reason. couple probably the don't the of like slowdown And see product growth. a

a Like over appliance performance. - one, product. really new X,XXX SSL industry the a is announced first get keeping much of we firewall the threat with It's fastest The today, we're in the better series protection, inspection. XXX-gig

come keeping, close. We're I none opportunity, So, new that's of competitor opportunity, helping. replacement like said, the what's the

The on think have broad growth. But months. second about a also, the fabric, solution, which product we the term service, X of year XX helping also we the ago, part, quite was longer the I also, average

of push about service product revenue think I QX the That future months. kind like the XX into a percent few of up revenue. is

count don't in, actually, much if see So, that at all. you one slowdown we

growth the I see overall, we think it's also strong in base. new customer product and pretty - still

Drew Del Matto

shipments see this something the on Drew, continue to little that as I think bit. across noted. The grow. to do Yes. And just you broad is unit you Gray, industry, add shift And is a this mix

selling For XxXX bundles we we're support. is within what us, these higher-priced own, seeing more just more were are more and Fortinet, our enterprise growth in

and reappear about back always not we really the then take on that We And supporting appear - speak. a so, balance in on some And profitable shift stream over most time of as time. then revenue discounting, shipped, same. margin-free the geos, was the There's for displacement. competitive any more it's accounting, the and up product in that to sheet shipped, so costs upfront mix all anything do economics units have comes it over end then

of the Asia in parts a Europe, and of really So, of that's it. few extent those we maybe but a in few North saw

Gray Powell

much. Got it. you very Thank

Operator

question from line Kalia the Barclays. next of from Our Saket comes

please. question Your

Saket Kalia

and for thanks my on the congrats Hi move. guys, questions Drew,

Just questions my two quick accounting end. from

Keith, or free. Drew First, feel

about us consumption on-demand changes that You in all in the rec at or going of growth subscription how to works whether appliances. XXX? strong you just terms Could with talked product remind of there and rev virtual

Keith Jensen

I sure see we in continue Not revenue. be our - exactly, our difference the of the certainly recognized any understand how recognize revenue product The don't I the question service over revenue will product but to revenue we or length upfront. service the contract, service

Saket Kalia

of I the was virtual to referring form Well, virtual specifically the kind appliances, so factor? not actually, hardware, but

Ken Xie

The don't virtual they and cloud, on still impact pretty small much feel have percentage. I that.

Keith Jensen

it. No, won't notice you

You in will not see trends. that our

Drew Del Matto

there's just, offset. but new It mouth, goes also that just then I believe pretty for I I words And an year. think the And away. Saket, your away put don't to revenue serve some And in it's the deferred Keith, washes given much accounting.

Keith Jensen

Correct.

but revenue, - to have dollars. small you're model, will some are are that That's licenses QX, that from over subscription year. those licenses lost really about recognized it's... in upfront We some And talking the fairly software the amortization up prior yes, the you in prior currently QX slip you've the net-net in on pick model why but

Drew Del Matto

was There the sheet. Yes. balance software ratable some on

So that goes away.

Saket Kalia

itself, is other my when could And services that is, of we ask being when lap stop we that reacceleration stop makes will. the - deferred laps have space product calibrate better maybe start is see then And product just the do I - maybe sense. effect mix. question you in in kind that why folks we we follow-up, that can kind cards the so seen maybe we've seeing if you the of just just about this richer if same And talked of a as thing. I effect? reason That it. headwind on for perhaps can and the more Got guess competitors because

Drew Del Matto

those services. into enterprise like value Saket, mix or bundles, the been higher-priced there's thing same reality released there's feels through economic economic the bundles, which quarter. it see, since we a trend is being the the ship with year-and-a-half created we And very ago. shift had a here more like nice - that's And XxXX Well

a of continue into customers. the the a part while. there's market. So, get we can shift economics as And quite This penetrate in we enterprise for the continue that continued to

We new higher bundles, by not within but our installed lot going also And we'll grow but not to FortiCare of XXX levels room support enterprise our believe customers, to forward. headroom customers, to even of ways have acquiring base, substantial upselling existing we see look do that. and a only continue just we in at

Saket Kalia

it. Thanks very much, makes That Got sense. guys.

Operator

of Our next from Shaul comes the Eyal Oppenheimer. from question line

Your question please.

Shaul Eyal

afternoon. good that you within sales Ken, and company Peter, Keith; promotion. is primary your you, on congrats, new Congrats, a positioned Drew; to geographies? do Thank congrats, well think leadership, continue leadership from well sales its perspective the execute

Ken Xie

Yes.

very only product I think not in strong built also we technology, strong very team here.

last and unit competitor together. competitor any billing, quarter, two-close also the than the to growth mentioned, reported my can of in our best And has the potential. So, more script, all that's than the you said, we time best few position, billing, keeping combined from on I based see the where are - in strong the grow And like pretty we in these different faster see areas we we growth. shipment

where that's keeping feel good it's we growth. Fortinet So potential

Shaul Eyal

Got it.

level. staying the Ken, on while a topic So maybe and maybe, from higher

completely You're in it? we cloud which thinking What's is topic? about firewalls of the virtual more How probably becoming over? should Is needed hybrid infrastructure, the thinking of taking on be aware arena. to about firewalls your Are ongoing is go? the disappearing? that debate it infrastructure Is gradually what touching way the whether a are

Ken Xie

few whether for connection, my we connection which security, VPN, ago, move firewall, see, generation, - previous mentioned, started UTM, I we network to I years security security. the I just recall at last in the the look of traditional second when started the Like generation we inside we Fortinet company, call to started XX, years, go third to the through moving XX the are firewall. content application next-generation doing a NetScreen, from

So, the like well in years. XX, doing XX that's last,

the right cover deployment second network with with mobile, with the using already network XX% the you longer cloud, IoT, enough, I or all so are close to need generation, the to just whole cover no maybe XX% infrastructure. the security the all now think all but the

security, starting So need the we're including that's network the which, altogether. call the third application, and also like cloud, what access but the generation, is IoT, part, to email web, the the to endpoint, addressing

last is part second become potential. - - third that that are fabric compared difference a It's Fortinet I solution. started generation, the X The they see the about it traditional promoting a to firewall, fabric generation really of the huge years. to we call we the So in not the X replacing

where So but the the the need like be email, still together with to these cloud, the total the cybersecurity, but going tie with with security. a forward. addressable is AP, control, security is with IoT piece with need the security access web, the the with and bigger, endpoint, that's in Network network market together application, working biggest also also to all

Shaul Eyal

you. Thank

Operator

from next Our line comes Citi. Pritchard Walter question from the of

please. question Your

Walter Pritchard

I for Keith. I goals, you could guess necessarily guess, those. didn't Hi. On margin hear confirm - longer-term you I

markets areas understand, which seeing or could fabric, we're how product. us bundled a purchasing and so impacts much security margin the for We Ken these I maybe some And I goals think and then guess you guess, likely question most you on SIEM. fabric some that. XXXX I forth, products just hearing accounting into the impact accounting and then wondering the help of deals? on email very have best-of-breed in like beyond are

the seeing you success are addition fabric a areas deal. into which most wondering, product on the Just

Keith Jensen

Keith. Walter, XX% still is has That yes, targeting XXXX. in we And are not changed. this

Drew Del Matto

XXXX.

Keith Jensen

It's net that The that's by end impacted Drew. would be your into impact growth going with sorry, up services. we and a XXXX, XXXX got that into why a commissions variables It's me, geography. your a mix commission product of It's rate. number are excuse and has where in change XXXX, impacted mix factors go by by by impacted to your number. There's of ton that between it. it,

in again future. targets, to stating obviously out, accretive the And we the whether why it's just project plays our that that it's how number out comfortable we're commission that's far. I that think number we'll and that So, pretty not or difficult to maintain see

Ken Xie

including for the web, and FortiGate the X. the quite with call and the top FortiSwitch. fabric we and network the There's fabric, endpoint the your the FortiSIEM the X well answer a email, actually sandbox To call FortiAP access That's security. we like product WiFi Yes. the we the working FortiClient, have the control together

also I them too that win - different and win issue working together. starting many talking X some most enterprise deal of a lot to mentioned, or we there's not products and do even think really, bigger of like Drew So, Keith Number security the facing

compared the the buying So, money cost they product. is spend management much higher to on

and address that's that fabric tie the forward. mobile, will So only but this issue. in application, remote where will together, IoT this all going also the access, help side, And not all different the the the cloud

enterprise and compared the infrastructure the network using to potential huge the benefit a just to approach also see side. we So, customer fabric this to

like that XX% we So, the faster part like kind mentioned now, a that's why right grow QX. the quarter our it's we - fabric the And about grow but in see faster non-FortiGate business, do of grow FortiGate. than

Drew Del Matto

before I'm just is trying clarify was Yes. And And I'm that XX% XXX. what to Drew. think going was ASC I to saying Walter, here - the Keith it's

It was what turn turn early trying years, he some in to years, around. describe benefit was so, around may may later. you And a get it but in the

with that And the is so, consistent but saying really to pre-ASC is the is XXX, based we past. in were too really early that what Keith, say be, would XX% it's correct? which what

Keith Jensen

Absolutely.

Drew Del Matto

guidance. it And broke that's why when they they out the did

They baseline it. track a the they both and could the bps, was gave in which then If in gave year so did they way XXX the least annual the you quarter, gave QX look I at the numbers. for and you benefit, believe, they guidance two at

Walter Pritchard

Thank you. Great.

Drew Del Matto

welcome. You’re

Operator

you. Thank

line comes Tal from Lynch. Bank Merrill Liani next America the of of Our from question

Your question please.

Tal Liani

guys. Hi

first. one Just clarification

didn't get If then you if still the - the financials, questions, bigger And XXX it. I rule what's I of you discuss quarter. can not about two impact of kind have your on

and is service the The I that, than very cetera? question SD-WAN high-performance, The purpose, it kind of on ask ask it cloud-based of details. security hardware-based is, cloud very you hurting and form. Are I your at simple rather service et hurt on impact getting offerings the and your it way, by is off acceleration, not strength different over your in a someone I Thanks. you're go with all think What to What's not offerings I'll and that and associated in the roots you hurt a higher your I first business asked the the getting with related run this appliance-based? general getting accounts, or and the that migration? in of are level, branch migration? impact - that second into are cloud a And how ask cloud is to one on it appliances - way the without if long back smaller Thanks. services migration focus given

Drew Del Matto

first. goes Accounting

Keith Jensen

revenue impact the we for clarify, see significant revenue of our to XXX, trends. So, portion in no

recognition the the will terms model results of revenue same. look very Our much in

contracts significant at the of our on expense where On and see to impact, we charged and commission side, we time a had hardware sales the previously, services commissions sale.

charge forward, commissions be will you service contracts, final years We'll related extended QX at have portion number of years, would X extended of point. That to Going we be this number I years. deferred an a they number to and the estimate for to call. for continue in expense will to of our a X but amortized hardware, to the over

$XXX on I to them the in too that period about described. push day by going asset that them. at to million related amortized the done You're of that - prior - going going over then to commissions have accounting to be capitalize expenses us But see we balance that our commission certain of time competitors call sheet we're out an capitalizing deferring and already the of put transition are will much some

drag in that the least a net improved have push The benefit and points the of you'll basis a of amortization XXXX. - the deals. So, at XXX XXX in is margin new that of deferral from asset QX about of from effect and is of

Ken Xie

there's the competitors, So, our than own your right? different I all of address our ASIC But building only think chip. things one that, Fortinet two me Let question. before first one, the we're

gave we performance the look better why at best in the lower us So and a plus the that's using network That much cost. our ASIC also and one. security, CPUs FortiGate, are [indiscernible] own you

making Number the like in X also us the shipped. that's So units

the more the have than two combined units in network security shipped we So, space. next competitor

we have, are investing So, level, the the gave into better call also none cost competitor SPU, of much the our and chip we as in the best performance industry.

really, developed Also, so very other most solution, from also one, of working differentiation day No second fabric. is build very broad has them the internally broad we The competitor making growth solution. them we call security together.

So, to together. day making one, competitor of our some it but put together, it solution product, buying different working different keeping try it and build internally we

So, that's other also differentiates from competitor. our us

So, power industry few security for the SD-WAN the a cost. any solutions SD-WAN, to like but now, SD-WAN low your very are there's the They issue. question, right address in current player lack computing

they So, forward. address don't I going computing this AP be like and to be very security believe any to computing SD-WAN need have a security power security to network with all is just integrated part needed. need important integrated

with the advantage cloud, working because computing we do have which our have the SPU compared has SD-WAN huge solution provider advantage advantage, for combined other huge the we all major with So us. where cloud any power Also, that's solution. performance computing ASIC,

see grow We is cloud also, enough. have also not that very We solution. the just best cloud fast. But

the to need the side, the the still network You endpoint side, address side, application side. IoT

we say the growth identify. we of why that's one engine is cloud So

We have X growth engines.

market fabric, that. of base application, bit go cybersecurity, security's cloud, And are month, any now. web has demonstrate our little connected right growing, solution. going still the even a grow the last the then access it email FortiSIEM, secure cover then then CES the and And keeping the see also, part, application, we endpoint, network security beyond in in we the to the that, and potential So, only We IoT but additional just biggest the probably more using don't the in still it's fast, small very great show, the company, addressing forward. car our competitor how really the

potential also huge forward. a that's So, going

Tal Liani

Got it.

Operator

you. Thank

Our the Boolani UBS. next question Fatima of comes from line from

question Your please.

Fatima Boolani

afternoon. you Thank for my Good taking question.

refreshing Keith, Keith. installed the think your in opportunity Just have we that base, size terms about you one of first base. the as for a pretty latent of

portfolio can you your you've as base And in help and has So, a trend to cadence historical the follow-up. quick us refresh seeing expanded fabric the you're of refresh you're and relative messaging, then in seeing and trends? what your invested understand around

Ken Xie

then like opportunity adjacent Yes. the Like displacement and new I mentioned, there's also three opportunity: the and the market SD-WAN.

every X, years, the said, For security need to hardware network the refreshed. X refresh, I like be

speed to last double. network apply XXXX, tend happen in and the like to security XX still need The XXXX we - to routing be the Moore's in network our the cycle in slower XXXx and And be XX somehow discussions the XXX% throughput see because months. Law about XXXx switching. every costly to compared So, more also,

the So, going that's rules, to what's apply continue in apply this forward. continue to

additional the do to lot and a level, or whoever advantage go for lower issue and industry. add the competitor the has for products. the then up many that's the also do. are GPU, And the a some performance refresh, software X, huge this It's and performance not can only the X-to-X-year we like a TPU not happen has So, X cost address is the refresh in function, the other the on cost, space. a the the facing general-purpose just additional compared enterprise can times who separate power we then chip advantage. And We of customer enterprise And It's on X They're talking. some see the with then huge one better on SMB believe most too are a computing customer even every Number in years to advantage a refreshing cycle why for come they together. CPU, different the cost on can working advantage. performance of

in. that's fabric also come the So

to address a web can highest the of a we working other with provide access, all also how and not how cloud, really endpoint, so with of be a a with cost network working together - management. need better switch enterprises, It's is they the of So, it's because the among the security product; with lot together need security, management to deal, cost lot all this - with email, their to security. enterprise lot like see WiFi big still the thing the with

all the have we database our but company, This is partner the broad fabric broad very in only the software program I help working this cloud not So our very We pretty develop the of like it. a kind fabric that's is company, partner, the company address the much also, together. major where all company, the broadest we fabric making networking solution, own partner. mentioned, industry,

morning, announced this have we XX So, Google today, with partner, including we eco a Cloud.

Fatima Boolani

of And That's follow-up guideposts can modest a for should down, about cash you Any through we really with wade help flow? really that some Thank cash been historically think share quick Thank you. coming cash Ken. be if you. helpful? guideposts around rate you the you've helpful, you. how us sort provide that can Keith, taxpayer a and would And and on flow,

Keith Jensen

Yes.

project We million compare XXXX. you free of we on $XX we million cash know, having that, don't in terms paid can As in XXXX, for cash guide paid cash flow, but to taxes, for you $XX said paid million. in taxes $XX

Fatima Boolani

Thank you.

Operator

next Our Talanian from Evercore of line ISI. the comes question Ken from

please. question Your

Ken Talanian

for Thanks question. the guys. taking Hi

I about to expand and to XXX was be from without basis beyond. seeing that that might I And of XXX, driving margins about XXX was talked points the expansion guidance and but believe current change? suggest I XXXX think your wondering impact So, you've less previously what seems

Drew Del Matto

And have Drew. off we Ken, XXX guidance, to when which XXX XXXX was the would XXXX. at the did been is this for time it, XX.X%

So, on we're track.

that's If XX% you pretty that get you up, range, to easily. go XX.XX% think, would in XXX I

Ken Xie

year, especially I behind our Yes. we're a like little last sales. hiring mentioned, Also, the bit

capacity, market if sales share. believe QX. the in keep in can on industry can than QX, we of opportunity, towards we the catch the But fabric starting we market, faster setup That's So, market and product with gaining up. additional add definitely started expanded the end best also, plus grow the we to -

Ken Talanian

much. Thanks very great. Okay,

Operator

Thank you.

As of we to hour. are end coming the the

Brad comes Credit of Our from final the question from line Zelnick Suisse.

Your question please.

Brad Zelnick

of public architecturally, now Thanks much My Fortinet. Drew, virtual clouds if the much And fitting themselves for bit their the Ken. you that else everybody nice Great. with virtual in question public networks? OSI customers me being we is it's covered own congrats, see to about the today. think at how announcement versus major and you've Can how the compares GCP talk product with over the product of and the really expose when that layers for first got lower of stack? public product, clouds virtualized run maybe all about, the using so cloud Ken, in a editions and don't virtual the physical in cloud product

Ken Xie

Yes. It's software, good Forti have question. that. We which accelerate best the do help SPU the also

the provider, of you the have cloud, run to they same where some that's in even cloud a it's security expensive really general-purpose time, to side need cloud, purpose-built, cost, some CPU, I solution So there's feel recognize right? the to the also And certain So the very both they working want lower function also some have chip-level on but the together. - - performance, where accelerate a can flexibility. help like in that's

cloud a on the where approach the to better we fabric, just that's or based is combination advantage approach, we very installation also our where our - basically, the So, on of in which side. security network the side see fabric huge base or cloud the they compared the part, broad like on the is to whether much network space. the feel, in And competitor, huge and play compared traditional, and the

that's of only probably acceleration you fabric if much the together, much but compared cloud, advantage better compare to acceleration CPU running not and - on our of position, on see a ASIC combined the competitor. approach with the and there's do differentiation, You the broad general-purpose

secured do I is mentioned, the the throughput also security provider all SSL cloud addressing mentioned need forward transition now, enterprise is need of can that's They access So, cost announcement. the to user, cloud data, highest-performed of the SSL also That's for also going itself they the the the to even XXX-gig major end the today the needed. cloud specifically facing performance, appliance. because of cloud a it's script, provider and a I in lower address to have all especially, is inspection. the to like And a also encryption it. they're which I why cloud cloud the address provider computing increase like This the part right and believe customer X,XXX a to how like

Brad Zelnick

look that helpful XXX that's if perhaps revenue slide recognition, isn't appreciate one ASC very material impact, deck Keith Thank could and on but any your at or for you, selling me I remind as policy a selling I just Is on If to context. in we to shift about in the that the Drew. if change really at I there slip the the And you Ken, comments under the suggest slide I look go relates can out in there to us it the in into the XXXX or maybe XXX, even makes channel? through into channel think from wonder. there timing And selling your it inventory just what you as benefit sits channel? that, to headwind

Keith Jensen

not inventory the XXX know don't U.S. regard a Historically, in in It's that expect put the to we see - in a significant that of we quarter. due first not would do a amount. to I been change dollar lot X significant to related channel. And

channel. think you see our can statements financial inventory check I the in our and

Drew Del Matto

a but… asking question to Brad's - also basis. I from an if sell-in also impact not think the ask for - he's there's to Brad, you,

Brad Zelnick

the is of though. essence the question that no, No,

a bit only question timing well, billings I small revenue, And As impactful related there's of impact? you sell-in, would to benefit. or go to even is from the does if relate a it as think that it to a also, sell-through

Keith Jensen

offsets I from deferred inventory much quarter channel change. the of amount think offset put revenue in the we of the - to by the the into pretty revenue that much amount lose we due to the revenue it pretty in expect in is U.S. coming the

Drew Del Matto

a not impact. it's material So,

Brad Zelnick

very much. you Thank

Operator

the this like today's any hand you. And to Salkowski I'd conclude program back program. for question-and-answer session Thank further remarks. the Peter does of to

Peter Salkowski

Great. Thank you.

have afternoon. everyone day. we for a at and XXXX I'd do that interest Relations Operator, and this in to earnings hold X:XX The like our call information Pacific call. Q&A dial-in the a quarter on Investor your includes conference second thank As session. fourth to call will good a Fortinet for reminder, Time this website is a

Operator

ladies you, participation Thank thank you. conference. gentlemen, And program. in today's This does the your and for conclude

You may day. now disconnect. Good

Fortinet (FTNT) 7 Feb 182017 Q4 Earnings call transcript