FTNT - Earnings call transcript Q2 2018

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Operator

Good day, ladies and gentlemen, and welcome to the Fortinet Incorporated Second Quarter 2018 Earnings Announcement Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. of President Vice Salkowski, Investor Relations. Peter

begin. may You

Peter Salkowski

Investor This discuss is on our Thank website. and and President Vice a pleased providing review of welcome call XXXX. replay the CFO. Keith This second results today's Keith that via for by Fortinet. our for Xie, operating begin live you, call Ken will and Good afternoon, to and will for Fortinet's our to our to providing are Tanya. Speakers Peter up on call you financial call of questions. forward quarter will available CEO; a is be webcast am results the high our then Salkowski, Relations outlook today I everyone. by Fortinet's guidance call opening Investor conclude Ken on at Relations financial level Chairman our perspective Founder, Jensen, business. before

aware ask questions During limited brief the your participate. we for have session, to make time Q&A please allow that others of this and we to the for call be you

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

remarks, both to Investor earnings in on posted presentation of our today's our and press non-GAAP be which can Relations results the GAAP that release and GAAP are accompanies Our reconciliations website. found in

unless to call Ken. noted references all basis the will a I year-over-year to otherwise. Lastly, now growth turn are on over

Ken Xie

Peter, results. to accelerate $XXX Thanks, $XXX our of revenue to quarter XX% million. non-GAAP quarter. up to results. second our Billings $X.XX. year-over-year second for earnings call XX.X%. today's joining growth while share earning post share of Non-GAAP I'm and XX% to margin XX% increased with Total discuss pleased $X.XX total the strong on profitable in and We revenue operating to were GAAP quarter thanks basis million, per with was per a was XXXX everyone

cloud for our our refresh We transformation with are FortiASIC security technology and our a to strong experiencing across occurring market Fabric architecture novel cycle most industries. The digital due is Fabric Security contributing competitive global are automated of to advantage demand that gains. and coupled customer Security broad, and the integrated offerings offering share

security continue we from within We deliver security to generation Last application layer multiple and to firewall balanced Google new market above the growth, profitability. Cloud that analytics. to of next of offering announced provide our expect Platform a Web breadth with week

to Additionally, the now across Cloud apply with are enabling instance Fabric Platform policy Click Connectors automation multiple Integration. Google One available on consistent

Azure security of any and vendor offers the of offering broader Cloud, Google platforms. Fortinet security a on now set Microsoft AWS

effectiveness the most delivering SSL In SSL invasions next-generation overall region the testing, security firewall rating Fortinet Labs XX.X%. of past, and FortiGate FortiGate also product thereby the best Europe NSS an recommended XXX% cloud inspection, received secure access. compelling its Ready achieving fifth from performance the blocking achieved in for of

Fortinet only a with quarter almost offering. for supermarket market. that the during around combined of competitive vendors producer a XX% single over opposition has of security This solution, and a grocery continue unique the win global Superunie, seven-figure company. integrated was Fortinet market represent Fortinet traction store win Customer share a marketplace (XX:XX) SD-WAN of provides to a with networking combination a large Dutch SD-WAN X,XXX European-based a SD-WAN in and gain firewall chosen the next-generation significant in their that secure is including against

During the offerings that need Bradford Networks. increased and acquisition quarter, control block and from security enterprise technology the of Fortinet Fortinet with its Fabric device Networks the continuous visibility, integration provide micro-segmentation untrust large threat contain to The access IoT they accessing Bradford of network. with the Security technology with

to the response to to Bradford's positive extremely partner we and introducing been customer Fortinet well has technology as and leveraging look acquisition base, Bradford our as the customers. forward Our with product Bradford customer

security proved solving focused that recent drive them helping development Fortinet need on their remain present Our and transformation. our customer digital

thank ahead about their goal in as for partner we our excited our team that lie towards growth I on while market. work and the are We work to operation above target continue focused this to to our of margin of growing improving the sizable long-term ongoing their total invest XXXX. industry opportunity and achieving would want fuel margin XX% operation customer and remain for Fortinet by support. our addressable significant We hard

Now, Keith I year for performance and our will quarter quarter turn our and the look guidance. on second full a call closer third over to

Keith F. Jensen

Ken. you, Thank

growth based all the are growth otherwise. figures the periods strong market prior-year Before except I outpace for are to revenue bottom and comparisons to better start, drove rates rate we positioned rest I'm results free In than line the revenue, the are believe cash second very year. our and of like I'd quarter, quarter note, on the financial well with market stated strong pleased and to the flow. results second unless for non-GAAP

customers. to new well infrastructure and continue offerings with Fabric existing resonate Our

our We performing delivering industry infrastructure focus and on product innovative have high leadership an due strong a position to Fabric portfolio.

Gartner and as Quadrant from achieving XX% We Ken Labs product Quadrants enterprise balancing by growth claims both Our including by our market the and non-GAAP improving and goal XXXX. profitability committed in margin to firewalls. supported are Leader Magic mentioned, of portfolio independent recommendations and for UTM appearances remain NSS above operating

quarter benefit ASC the grew second Total with a XXX in revenue. Revenue accounting $XXX million. change. our revenue to for $X.X results, the related to starting included quarter XX% Now million

this benefit, XX%. been Excluding revenue growth would have total

expect shipments. accounting licenses. have Product change from revenue million. product to impact growth to revenue $XXX accounting XXXX. relating related a benefit accounting revenue resulting $X.X certain in change the on revenue We accelerated of included no similar the benefit in the Product the a to of remainder software XX%, change from million product was to There for

Excluding product would XX%. the license been a benefit, revenue have growth strong software

million. non-FortiGate XX% growth totaled revenue XX%. increased FortiGate increased and unit products unit continued of shipments combined all XX% Services and and $XXX products, FortiGate shipments at

traditional million FortiGuard, $XXX and subscription security XX% offering $XXX increased increased XX% FortiCare, to our support to offering our million.

Regarding revenue predictability.

deferred in case As our was quarter revenue a the deferred total quarter, Deferred to $X.X XX% come from billion in similar balances. of revenue our percentage contract year-over-year. quarter percentage the increased came In three from existing Long we about as revenue total third increased revenue a to to revenue the average deferred deferred first XX% expect revenue length increased of balances. our total revenue months points existing the two months. and term XX of

see business. six, can slides diversified we a geographically As and you remain five on

XX% experienced EMEA represented Each revenue EMEA, and Americas with from Americas region strong APAC up our XX% and revenue respectively. of the quarter represented the APAC XX% growth XX% Second business. represented and XX%. XX%,

to Billings. now Turning

to quarter XX% Billings $XXX million. Second grew

the customers. change region the of of strong and up Billings. accounting our Consistent majority reminder, As the Americas, growth Billings with experienced and XX%, and no with APAC has impact top Billings XX% XX enterprise Each Billings the strong were our six U.S. on XX XX% customer Americas EMEA respectively. with top a performance,

the sandboxing. Advanced and displacement the the future and chose and increase district. One network performance, school top with district These XXXX large Threat Protection Fortinet's quarter was of Security expenses products, products Billings In a mid-seven Fabric and U.S. figure multiple in a services. included operating metropolitan series to lower products including order competitor

Another a Fabric deal was firm. deal a other products, for with firewall products large winning Security company. integrated a great financial U.S. use two This with over a our a vendor security platform. and multinational services Enterprise significant the We won wanted success whose incumbents case firewall third bank Enterprise

While customer quarters to in the our family. we Slide X product shows the initial expect occur seven-figure additional the Fortinet. by quarter, future was to in mix second billing transitions as Billings seven-figure billings

level and SMB As Enterprise may in not mentioned or the billings we be before, product best our Channel the growth have segments. represent way to

example, often products a enterprise entry-level deploy mid-level For will large a number and network. significant into distributed of their

product is the an this family. be in would customer, high-end the not While included billings Enterprise

providing and XX%. evaluating Cloud from comfortable have second more a Billings growth continue quarters in Billings three product Billings of share believe Billings Billings to non-FortiGate, trailing less XX% With transition should were another that experience customers, XXXX guidance Global carrier, infrastructure experience rates were providers cloud to total for XX%. security our as our offer, accounted if and meaningful I Billings in customer data class. four-quarter of note, Enterprise we slightly Billings slightly to to than by growth such XX% for Non-FortiGate results this we Billings Global Billings accounted growth – point, that quarter and specifically saw than expect Network up away customers, I respectively. quarter of we subset of public Within continue will of of mind, triple-digit top-five and would XX% As up significant Fabric growth. Forbes you XX%. family at excluding and total and cloud our in a average we the find more data we are by our

The security were strength demonstrating providers deals XX%, number accounting of in billings of enterprise over XX%, a MSPs XX% be Regarding the year-over-year. by the in the largest deals and over of companies. XXX,XXX point illustrating deals XX% for of our over growth $X by vertical, business. XXX,XXX, among continue number to business grew million Meanwhile, network vertical, medium-sized Billings, driven one up continued service our up increase

through I'd that mentioned will Moving stated be all remind the I statement, unless non-GAAP you numbers like otherwise. to income

increased expanded XX.X%. mix points gross basis and to as well margin as to Our gross second quarter to points margins transitions. margin geo Product due was to gross Services X.X product points XX XX.X% product down X.X XX.X%.

points to basis XX.X% benefit to Our and and quarter count Net growth the to remains a the strong in uptick XXX mix these number year-over-year the The predictable software benefited points, basis XXX from points the increased XXX the the foreign was head services. deferred revenue total Total items a sales points. of sequentially. second negative non-GAAP Operating accounting XX.X% change. Please the continued referred exchange last XXX for shift adoption accounting earnings on our benefit, of comparison due of deck revenue margin, points or including margin basis million. ASC $XXX and second million Operating of excluding growing our of of was up XXX. higher of by slide in Offsetting the margin of XX results commissions to the Relations and revenue more productivity benefit operating the and gross posted items, operating from $X.X XX%. was in accounting for total benefited to line-by-line margin expenses earlier. Investor commission non-GAAP impact refer basis website the slide up change margin our rest basis a results and quarter coming

quarter XXX benefit revenue. full third second even be linear total the per XXX.X benefit million basis expected from the ASC outstanding. operating commission based about XXX the Net higher The dollar fourth points. is was and expect a on on basis to ASC basis, to of total fairly around or in dollar margin seasonally for income in as $XX benefit be – shares million year XXX $X.XX is ASC share quarter points XXX related quarter We a quarter XXX to

was tax effective As non-GAAP expected, rate the XX%.

capital, flow was operations Free last flow cash consistent flow $XXX cash and million, XXX% to million, year-over-year. $XXX Moving cash up with was from year.

points. the Excluding the in prior free quarter million. $XX second three year, flow real were estate declined purchases cash in expenditures Capital

the and Networks, third expenditures the method Board quarter. to are for $XX approved expenditures the million. estimate approximately for in building acquire million the quarter, spending we repurchased Internet expected the fourth We Bradford to be XXX,XXX $XX XX, between XX,XXX occurring shares XXXX between X.X stock million shares be the Things Fortinet quarter In million, and $XX of $XXX In June shares expected bringing of $XX year-to-date in a be to On July XXXX expect million, first This XXXX of or paid when million approximately start quarter. $XX and security project million. We million. to compares $X.X half the $XXX repurchased repurchase mostly we of $XX cash total offerings. at million. is to term we returning Total this XXXX. and between our for to $XX the second authorization capital end fourth augmenting $XX in for authorization, second stockholders believe a to to IoT good our capital million million to Construction million value bringing increase in site repurchases the to share opportunistically. the are the our shares We share billion of repurchase and to total extended to $X.X expect headquarter of

to presented of disclaimer the the Peter turn I'd everyone about the guidance I'm that forward-looking I guidance, provide. As to start to like call at applies the to remind

of $X.XX, $X.XX Billings margins to benefit XXX million; third XX.X% range count $XXX assumes non-GAAP of XX%; million; million of the in the and of expect margin and For the range share $XXX million to quarter, the to million. XXX to of of XXX, of gross earnings XX%; including to between $XXX million a operating revenue ASC non-GAAP we share non-GAAP in $XXX per which XX%

For and expect $X.XXX XX%; of of share non-GAAP full quarter ASC revenue $X.XXX a year. assumes which of earnings the XXX, non-GAAP in gross million of XX.X% the margin XX% the in $X.XX of to billion; third of $X.XXX XXX the non-GAAP including and guidance Billings a billion; billion operating share margin our between of of contains XX.X%; $X.XXX XXXX benefit $X.XX to year, for and billion the XX to to we range count summary million. per full Slide to XXX range

Peter, Fortinet back including our our now Bradford and to to Peter. hand our support I'd Networks for additions call the team, thank partners, newest the turn back I hard and the to customers their all call from work. Before over I'll like over the

Peter Salkowski

the Thank question-and-answer open you, Keith. session. We're ready, to operator,

that, if So will could Thank be great. that start you. you

Operator

Our question from first of Oppenheimer. comes Shaul Eyal

open. Your line is now

Shaul Eyal

your work that sizable afternoon, us can on Thank a about topic came to frequently XXXX, SD-WAN for chain. prepared in SD-WAN in you that results accelerating field that is you. guys. your I'm without revenue European product mentioned guidance. our Fortinet on seeing there? Congrats supermarket to a talk of out doubt, deal Ken, correlating Fortinet. the SD-WAN, remainder the When you opportunity a an Good remarks and is with it

Ken Xie

with and and Yes. FortiOS, that. this even started years, related We SD-WAN security – vendor technology keeping develop market the vendor together. That's right a company And integrate huge only multiple enhancing now – years in we're making into ago the Fortinet the combining four few FortiGate There solution to box other with further is SD-WAN like compared advantage with core our space. years product the also ago the competitor other five that's there.

the to cost is the very, and the good have full there. very huge (XX:XX:XX) manageability flexibility the security in is that's feedback manage So where saving advantage customer and

for of So huge we customer opportunity us. we more market that's huge showing, in a advantage example lot is have the see it's and the a interest this believe

Shaul Eyal

looks at maybe that Fortinet and attacking perspective way And cloud from Understood. the cloud me, for the the maybe the thing opportunity.

mentioned SSL Labs. will companies Thank predicting I if as the XXXX. the maybe opportunity, I believe also How with XX%, about others we've some of cloud know probably NSS all think the you are encrypted on that look XXXX, I that at that doing Labs, what you. does fits is front? be Fortinet So such by XX% traffic NSS

Ken Xie

the the a cloud. is question Yeah, company this of to starting lot moving because data a great

in we the So key the cloud. to for of cloud, make offer one area access work the secure really function data. the also all deep and broadest how the But

be where, traffic that's like XX% encrypt. need I of XX%, said to So is

is using one encryption testing that be So call and need testing, on especially function to some access, device. test other which mobile nature key SSL the on access most of the really the it encryption, the to that's the where doing firewall

which probably So we technology have one It's average start company. performance developed on other day any we all XXx vendor. FortiASIC, when benefit the compared to the from the from the the we

function. how need impact the is acceleration, use security it's more a heavy on we big to without So function, they security a and computing, do on lot in accelerate, other because performance, the to of CPU a impact believe big function

solution better box testing test, performance Plus, emission It's able compared than XXX% perform, more about any read XXx much more next-gen or firewall the a SSL XX% We don't much the to when change other secure disable a So other drop it's on the for and that's customer. make that's we see other is competitor. performance most performance test efficient the (XX:XX:XX) than from us there. we the cost best secure. vendor, where big cloud on access and the really SSL

we the into benefit that's ASIC technology. from development chip invest the from the So the really early

Shaul Eyal

done. Well much. so you Thank

Ken Xie

you. Thank

Operator

Thank you.

Our UBS. comes of Boolani next question from Fatima

Your line is now open.

Fatima Boolani

Thank about questions. the for talked for One area around if Wi-Fi just I Ken portfolio with in for update the seeing the you follow-up the That's a an wanted are and that side. seeing little on dynamics the terms you in some of you a opportunities traction are bit, taking there, and afternoon. in for you marketplace Keith Ken, of really of Good the so I an competitive some one that there may. haven't respect just to Keith. then product

Ken Xie

be has we a FortiSwitch Wi-Fi FortiGate few recent we think I the the call it huge confirm they grows Fabric we security the that's Actually growing interesting, with multi than can including non-FortiGate fastest among SD-WAN, and ago grow the the like grow FortiGate also just to non-FortiGate talk which that's if secured advantage triple-digit Yes, than years area management, faster like the some what's and we the access compound together. – grow, because XX%. Wi-Fi integrate faster the about believe need

see integrate customer. making customers need Enterprise huge benefit more this and and expect a is the more solution – the So for customers that's

small. Wi-Fi compare other, opportunity, like like relatively are you, some we If still

going only Wi-Fi are the us OS forward, as single can because gave also platform. provider together into that huge a single opportunity and security we So and combine

manage FortiGate security, the AP the together be result with making that's can of manage So the Wi-Fi controller all traffic. also out Wi-Fi

for So a guy. policy that's huge separate Otherwise, for a Fi, for Enterprise. and Wi which Enterprise security we is different benefit have big system have where that management IT two to and burden

So Fabric. of the that's benefit also the

quite and match SD-WAN. we the to surface security broad together the to management the and attack endpoint With the Wi-Fi from Fabric, to to can the to the cross traditional a

especially customers, lot So attractive making the is to (XX:XX:XX) approach more a Fabric of customers. enterprise a

Fatima Boolani

of understand a into the sense. me. That the year baking the sort ton year. going is sort the the some Thank think to the back half makes us Keith, of through that's That's it about of and that as full your to you're of out optimism into with guidance drill and wanted the And you're from help playing I Can guidance you the and assumptions play dynamics guidance? to how you. respect seeing we into

Keith F. Jensen

refresh I on that that cycle in mid-enterprise coming tailwinds think our seeing extremely with going Yeah, we're the side product new E-Series. It's the we're the with are resonating particularly through market. well,

into in look leading second sales and and – those I level the increased to I the the at to and I'm tenure at of continued comfort. by think IT recent deal And seeing group all movement a seeing spending. various things of quarter by that coming we Enterprise CIO the the space. look has that's a execution analysts into tailwind from like productivity. are pipeline, up high as I the the look think pipeline quality a I'm would forward. I at look what marketing look strong surveys some pipeline. the to was we the things movement of of pipeline speak in size very I the quality the

Fatima Boolani

you. Thank

Operator

Goldman our Sachs. comes you. question from Gabriela Thank And of next Borges

Your line now is open.

Gabriela Borges

on benefit or of Maybe little I the afternoon. One could the couple Ken of is, that Keith, higher revenue quarter. get play a the business, on just spend product new a rate you from win Good for ASC-XXX. more wanted comment And little ASP from to on how just time normalized those growth much the how rates number? number year-over-year together in coming up that the XX% two Thanks. is bit. that Either to and did Congratulations for on that percentage Billings comments, on to on things things. end did mix three other a products XX% refresh

Ken Xie

last different last compared longer we integrate pattern. big longer XX no to four months, Yeah, rush-by I is Even the also this XXXX. time time. years us played and to a time customer the not have last really But decision chance also question broad the increase together, The news. than But it's answer XXXX, There's this months like refresh, last that's And average XX about last actually because last deal refresh the evaluation time. It's and for product growth cycle last time It's Enterprise well refresh we see mentioned evaluate. the buying XX%. the take quite to that's years, the a a is making time so well probably first. time. the five long that's and cycle than bigger the over on number, in like better keep also last gave now;

in actually us refresh that's play well cycle. for So this

Keith F. Jensen

is, I'll spot things on revenue Gabriela. on we people change come product question would I play. that is group as think further revenue but focus think our bit comp to a incent add that Ken's a couple couple And to – saw guide we Yeah, we I One just forward. know, maybe it, to of a you in things certainly going I are to them here guidance trying to get that did plans the for small And product I offer a – don't growth. coming the quarter of forward. can just little on, the

at it's small very linearity up month first on. trying we're shape to that mind we again, QX. keep of – in first QX QX But versus when size, I look the quarter, billings QX seeing in of is is data without early I offer the is month the would sample fairly think a along other quality of the the the that point and lines

Gabriela Borges

may. a I That's helpful. And if follow-up

Day model to a XX% number. the talked the we about growth XX% revenue Analyst at On mid-term

end the in when what do that at upper You're right the growth that sustainable and at up How look now when XX%-ish is? I for look number revenue quarter. think guidance I revenue the while? of if at you you Bradford did that Is could you clarify you where just And contribute a Networks the there a up the in quarter? Thank actually much to Keith, you. scenario little could be how did

Keith F. Jensen

the this and in it to questions. next I'll about to throughout quarter. It comfortable model QX February we'd them in model point. that like order. I terms with can benefit we'll I from logical a Networks, employees; was there, offer, in probably QX we obviously the think start from for time Day Analyst see that perform in very would or against And Day six good revenue mid-term to Yeah, I growth, probably the what XX Bradford of in also the take think reverse but would with presented a model you the at project figures long-term for and Analyst Billings the at continue we're year. that of February. talking And

I we're of a think that pleased more we're would growth the online few as like there very, of is Obviously Enterprise very other the to rate. coming see it with seeing and quarters aspect well. what

Gabriela Borges

Thank sense. you. Makes

Operator

you. Thank

comes question next William from of Our Jonathan Ho Blair.

open. Your now line is

Jonathan F. Ho

Hi.

quarter. congratulations on me strong add the my Let

of color maybe the and into Fabric Security it's given important an that differentiator, with the is give chose why some that mentioned breadth more You why maybe partners customers that Fortinet. important other Can an just reason products was us you have? why you integrating

Ken Xie

– the even Enterprise cost because Fabric I we host not early or security different in cost, which think customer automate by a Enterprise is vendor year, especially help there the quite this Analyst total operation many management like an developed report Day too can the lot, different liking together. and I that lower the integrate

years customer broad of So see half in product of the customer. than Like less a Enterprise that's Analyst the and trained trained the is working together, I able sell have said to or people Security developing NSE, especially of will I the the product, we to or – our can develop Expert to the of be up benefit integrate we almost trend multiple double. we the other – I one the for keeping still keep actually you, the compared Day, portfolio over partner which in-house the where number give number Network think on certified in ago

also and the the our more hoping is selling, So partner customer on internal sales fabric own even the or multiple to we'll or selling. And increase we'll once the approach, continue trained the product develop And that force multi-product we that's keep situation it product partner. make side Fabric, bigger, because term bigger. for customer it's a the and both also deal also a the make long and more for add value the win-win sticky our and for multiple

Jonathan F. Ho

seemed particularly the give to Got this then though well pretty Can the in strong, some quarter. of sense all just it. us maybe about EMEA? was region some the to in you what I the looked strength regions Got it. do of And talk strengths quarter. mean it like even EMEA drove the

Keith F. Jensen

I for well think done EMEA us. historically has

pleased some with by not they're getting think I'm shocked do – from their very don't it. execution. I I So GDPR. tailwind I was

opportunities some are some competitive they with think displacements. getting I

the well. very and think them end suite good given are resonating low in product we've that a that now I midrange

Jonathan F. Ho

you. Thank

Operator

you. Thank

Our next question from Sterling of comes Auty JPMorgan.

is now Your open. line

Ugam Kamat

guys. Hey, you contract are given in can Is on the it duration planning to your actually people commission months. increase the in sales compensation Or longer a duration that This for it is Fortinet where something seeing by on their for change are lock your in is plan? two coming time? you up and went they mentioned in contracts Sterling. like the so because Ugam extend for is really accelerators – trying that actually Kamat to remarks customers this prepared Keith, the hitting their,

Keith F. Jensen

Yeah, I think asking the of fair the question. that's way

somebody Is that made you was. the as plans list just of can of contracts. of think on? don't price our nudged the going sorry, well that repeat there else. some that the compensation as some it The changes I on something significant But Sure. we've question? once impact as – beginning our as me in it's I'm and I terms think

you push knows the U.S, say, implementations, very it's gave, look, to the and They think hurry think bank you that. are to the are I if rip sticky example particularly those customer in Enterprise, a the I as in replace. the we natural, into not going be large

product we think I Enterprise, continue see – this before; as to contract see with segment we'll to said growth I've the longer that continue coming as we in terms. So and

Ugam Kamat

one being billings I XX, know put in you I slide but for standard couldn't billings out. that accounting to ASC-XXX the that rate are the the the they are of slide not compared for I you mean rule particular On see, – but level? on any I impact ASC-XXX effect versus And comparing Okay. like presentation on basis, that XXXX. would growth XQ year are XXXX for XXXX full we it you if XXXX; doing a much, that the it on calculated have just accounting on mean, have like, since it did change on and

Keith F. Jensen

accounting no. no No, Billings. has on The impact change

Ugam Kamat

Thank Perfect. you.

Operator

you. Thank

of comes question Bank next of Keith Montreal. Our from Bachman

open. is line now Your

Keith Frances Bachman

the prepared I product I gross margins Good product afternoon. Why I to in question decent wanted My were missed but on it. a Hi. They remarks, hear margins. down? gross didn't just first you anything perhaps amount. ask down were

Keith F. Jensen

on product I Keith. Jensen. gross guide were I on margins think is we notice and that that total total think margins, but This guide you'll we margins Hi, up. don't Keith gross do gross

bit. shift that that product. a We we think both that can change So and met little a our – in you see did mix our expectations, that in the services I saw assume

a And As E-Series the transition, some I earlier, well when are have product extremely doing to with associated alluded in the there costs that. low-end is high-end. in our you

Keith Frances Bachman

on took the product did M&A margins? too a that this Okay. little bit quarter maybe you on gross impact the And

Keith F. Jensen

total was It it software. said, – low-seven as No. was between I figures and hardware split for revenue and

Ken Xie

end some higher when little have the margin. bit also of months, extend also turn, margin. both like XXXX high take evaluation. and software XXXX the series will Yeah, to mentioned, product have tend two high-end the we – year sales turn longer early a Keith the And launched on hardware this the the we The that's service impact the series, cycle, product a like

Keith Frances Bachman

Got Got it. it.

has some deals look the the pushed Okay. start of question And of up flow. at follow year the my today, out. versus been with cash If then we obviously CapEx

or It to real notional amount what actually calendar be estate any, rate CapEx, want Thank or away Is estate And seems like from even it characterization? there call run XXXX? variability $XX then, $XX that in about for year B), think of fair up for just is me. the run A) that's sounds way roundabout real And about million so, the you rate there you. a in will And estate, like million to in now, think that would us it more real is just show just it XXXX.

Keith F. Jensen

data-centric don't lot I a, you changes rate a say not should run – don't tooling company have large products. – if upfront We're think – significant from changes a data building you not – large center-centric costs I in data of see with out it's will centers. quarter-to-quarter. that's our We

are that new drives be you count offices, talking should of aligned I pretty they expand now that longer sort improvements new concern. much of term, Over made, – head see that bumping little magnitude, us around with you think about thing, course open – bit. as leases up you are that of offices you as should the kind there that give But a some to don't the

Keith Frances Bachman

Okay.

year, of about should we – any just real magnitude we order it? on how then And just Okay. be should characterization estate thinking next

Keith F. Jensen

the just because cash don't real free I'm don't pausing guide the flow; estate. we we guide

be that and approvals and slips you and QX project. city back thing construction on forth. we environmental I that. – give issues want get through as you so something generally come the But in The to timeframe speaking, think probably shouldn't shocked the timing with the probably with that to you

being seeing of – in that some all benefit XXXX, things in will Q So assuming up in equal no delays in construction. you're show XXXX

Keith Frances Bachman

Okay. Understood, many thanks.

Ken Xie

than a at made facility have built half benefit the number long-term estate flexibility, certain most for estate pretty on compared we probably us already of the And competitors, site. give dollar is the infrastructure also – wise a us back investment more which and to real the less same especially some and Also, a some already needs, our can it's this R&D, for of percentage much that half give earnings for shareholder contribute – competitor of on to the lease going that's a on company we instance pay or time direct both real back benefit certain for and much and the long-term forward.

Keith Frances Bachman

Thank you. all right. Okay,

Operator

from our Thank comes question next you. And Citi. Walter Pritchard of

Your line open. is now

Jeremy E. Benatar

large hi. can to to anticipate banks talk deployed roughly does a to and guess, large you Benatar booked? your the deal how the guide? year how in I in on I that it into Jeremy referred fully And once remarks. Yeah, be for that full fully Walter. follow-up. then got the I've you factor you several prepared deal is questions have

Keith F. Jensen

yes, Well, an is deployment with disclose value. is I'm part – going could the typically I our offer bad what as the to see the our you of guess input. larger deal But not schedule. it as guidance total in that I enterprises news guidance a But is,

of all you as in bookings so not Billings. a under it get concept the we'll in contract, we it order – really you'll a ship purchase If you of would refer And product quarter. don't it see We expect all a one see to to have and any it.

Jeremy E. Benatar

of wins? business it. landscape It walk then on in sounds and question is in a got had driving then And you Enterprise. the seeing in you're traction enterprise improving. Okay, competitive larger factors any about you just can like talk Can the the through changes some us I

Ken Xie

coverage be in Enterprise less. the a have competitor also investment be reputation the of we compared and the probably good very also product, Yeah, but a market to as less also will sales a

more from it expanding other starting have. channel Enterprise. kind we we some as We focus of on see advantage So

side growth market So Enterprise XX%. compared the the smaller and which Enterprise opportunity also also starting – big invest in do help there's also we maybe base. side, we our the XX competitors, more the it is – marketing growth Is growth. you like, average as But is to can probably see on also see come as on some is last maybe months, from the even

then So forward. for from the level us us, potential think in that's also do growth the as biggest the all I help that the and probably Fabric see combined, and going big a technical enterprise for – this we – message factor there,

performance continuing the especially the leverage and in both invest, the in the also to have, are sales from side Fabric we we in So FortiASIC. technology marketing advantage

So we in Enterprise is the a potential see good growth very going forward.

Keith F. Jensen

Yes, and I would I just Ken's comments. reiterate of that. add two would to

the product and clear of think I the ownership total outstanding performance advantage. us give of cost the

in about competitors. emphasize other we for and normal year we've to just Gartner two are well a think I leadership that some Quadrant, now Magic renewals the the be one, that with timed which pretty were some will market items, actually with going

our have for at we gaining of in the disclose us Global in opportunity with we're what segment certainly of terms think success that drives having see number, seen with recommendations, that's to. we're significant that more but clear there's the also not the think we that. success going penetration we I success offer I there I'm look that the traction and well. would to last buyers numbers The very in segment. XXXX market on are working that NSS referring opportunity So to gaining that – that say the is Labs that Ken And terms – When comment in of that technical I

Ken Xie

product the also working release also timing Yes, well.

So, study also the space. metering over the us Enterprise the some advantage, competitor, end even especially of in now, and also with that give advantage releasing more high additional

Jeremy E. Benatar

Okay. Helpful. Thank you.

Operator

Thank you.

comes Franchi from Melissa Morgan question next Our Stanley. of

open. now is line Your

Hamza Fodderwala

been Hi, changes Enterprise imply there? Fodderwala And landscape branch? does the the at the like the any good, that wondering, for mix just the really going but up low-range the it in refresh metrics is Looks in good there's Melissa This competitive Franchi. a looked Hamza and happening of I'm seems medium-range like appliances is And this most. afternoon. more has there

Keith F. Jensen

points this descriptions a others talking you are that what I approach. we're And – would them future. in buying? emphasize the and our flawed then more and why question And mid-range which And see one about second logical to I discussion that you with buying pie the entire modified are are we know the have again, to family follow-on it's the is who point a We – reflection I by something start like related family – seem product step. products. family speak are, kind attack for interested of the Billings internally and be, at to customers they Enterprise includes the product customers that's too surface, class; would we'd is they would of now I I low-end somewhat of the looking is is think okay, what customer that into having our And purchasing we in Yeah, Keith. growth. a would charts perhaps jumped that's to in to

Ken Xie

touch the partner force we and from driven Also, see sales try bar. a and of what's – channel also the angle or some to what's like direct driven our

that's channel-driven, the – a fit and is think maybe I this space. probably Enterprise that's where we're better the or it's different split we're starting tracking into making

Hamza Fodderwala

that Is Got recent appliances it. largely strong cloud are additive? into base quarters. is it or particularly Billings, in And entirely they of on the selling existing the

Ken Xie

infrastructure additive. digit. And triple five I it's public cloud think grow say top think probably the we I they especially

And a So offer cloud cloud. good in the that's portal very see this function invest keep broad and potential we where without we also, area. in provider the

Hamza Fodderwala

you. Okay, thank

Operator

Thank you.

Our of Gray comes next Deutsche Powell Bank. from question

Your line open. is now

Gray Wilson Powell

thanks. a just Great, if Maybe quick of couple ones okay. that's

how feel see more form level, revenue it pace up? over you virtual as XXXX; growth the industry about see And how of factors of meaningful? the an XXXX do couple appliance do trending versus particularly become then, you years, at you picking that So, in next do

Ken Xie

– the And in Wi-Fi appliance. and virtual think appliances, of need there whether this cloud together. be or the the the or do public appliance think also it the I impact any make I hybrid don't cloud Fabric the top infrastructure to the both even whole add like the security approach in also impact cloud to with will on-premise private because which with of appliance whether cloud with form, SD-WAN, working on they need other, and together. with security, the all some in the

appliance even cloud So in we sales, – sales, this the that's degree which where virtual, huge has impact it's branch helping especially have very we some – all see other – of also office advantage. we the don't

last like I this year or I definitely will will next starting in – year help said, the to couple refresh like think the year the refresh compared cycle cycle the before. help years in

see that's we opportunity So for is us. a good

Gray Wilson Powell

Okay.

Okay. you guys question in to know it anyway. mean, ask on a I'm but And follow-up. this touched then just I I going a prior

So up QX I mean the to jumped growth the revenue issues, X% product out – XX% like in if QX. about looks in I from accounting back

growth? double-digit So increase; just big sustainable product a is little How unusual. kind of

Keith F. Jensen

I math of moment think and Yeah, as – I this one, ago, key news. made it. some the good with that's create for select which we correctly; I to And inside to comp exactly the the some a number group decision changes think tailwind a – done plans, is suggested Keith. The you've makers team seemed

month last think sample strong. this are quarter looked even first again, that's And linearity, I indications I think E-Series I the at then seeing of believe ended that are first the had we for quarter new acceptance of mid-range when and and also low-end, in the would started just in product robust tailwind. I broad would the the month small size given create versus and very a that though the

about I the look we at and XX% you range talked think quarter products. prior non-FortiGate quarters two count – This in XX% and now third that or other is shipments aspects. to the that's we've talked aspect Fabric and the of in about time when shipments is that the then other unit unit this

line seeing product also you're show well up providing revenue So shipments tailwind. the more those Fabric product as in

Gray Wilson Powell

it. Got

helpful. That's very Okay. much. Thank you

Operator

Thank you.

comes of Nowinski Andrew Piper Our next Jaffray. question from

Your open. line is now

Andrew James Nowinski

the for great thanks question. guys, quarter Hey and

You in through securing first, compared security guys of making is around noise to a as questions we've deals I solutions? Fortinet prior about SD-WAN There's partnering competitor and lot how quarter with play in some had providers? guess, the a of second, space leading managed providers. SD-WAN yours a good service SD-WAN is of this the already. talked and go-to-market pure SD-WAN often essentially And having

Ken Xie

which Like I the for the do actually will And of security years. an And deal. been and some of combined lot SD-WAN probably other said, they two see also a when only to opening doing that we infrastructure opportunity. in vendor the SD-WAN give with us new last together leading advantage we opportunity are deployment, through SD-WAN work requirement help some is the that try to

do you going other we also, not we see have to additional that's where combined us. with keeping a can solution big a quite compared thing the number also other for our it's that and some performance network see with a advantage the well only branch also with so performance of And security our flexible thus boost the forward, And and SD-WAN But SD-WAN is there. together. benefit showing making starting inside but much growth competitors. – better And offer the is is FortiASIC,

Andrew James Nowinski

Got the looks here. that horse revenue on based sequentially Keith, of not or product model conservative below declining guidance to implies dead then, kind for did revenue, the product pull-forward And beat Is well quarter? But you it. be like Thanks. X%, here which essentially is about into wanting you to of my any here it a normal kind of have on math seasonality.

Keith F. Jensen

that think and you revenue. it. at at perception Again, a don't differently I Yeah. product we on guide way if might it it bit look little a different to look you have sequentially, But

Operator

question Thank Rob next Owens comes Capital. our you. And from of KeyBanc

now is line Your open.

Rob Owens

your performance customer the quite within you've Great installed right this and acquisition through math refresh spoke while. are numbers, and is now? taking best own to through this seeing skills I strong occurring I seeing you network-wide a or Ken, this base question. E-Series. E-Series earlier where a given from more better my is guess you're you Leveraging And guess, cycle thanks for in Gray's product And, revenue the the seen

Ken Xie

have continue But there. help. other or and I the or a the other the But to do do middle CPU we'll benefit. I the technology. – whether with yet. think It's the performance E-Series industry big new E-Series, us definitely early ASIC, product new better mentioned probably there. this and half the whatever. other to each compared years on around ago, and networking from year side, end new think middle we more better then or five whole some generation, not (XX:XX:XX) few the That's a also refresh I then compared new end some The every last range on with refresh by finish starting or the the only interface And get year four, a high industry-wide half end our this improvement low And rushed cycle some the of high refresh years the the give the (XX:XX:XX).

networking to after the or or whether Now whatever; time need upgraded. or be the they because server, four to is years, the five how the refresh

time, we not lot well up So in the some starting customer. the also that much played the and the open opportunity, in opened at for opportunity But play We especially that's enterprise. a enterprise quite now us up to time. fabric probably enterprise of same with see the last

Rob Owens

in in been the far commissions the had operating has Great. Thanks quarters, from guess, then, last XX of and basis greater for your second, think, I XXX I benefit articulated I on the guidance. the it points. year-over-year if than, couple compare And ASC non-GAAP was margin perspective. ASC rough XXX about anticipated result; And (XX:XX:XX), actually what you down of deferral a basis or

of point? And how that two lift from this secondarily, So was XXX your then, ASC it look basis? at at we as year-over-year is for one, down a targets much Number on year, margin a questions. why the

Keith F. Jensen

Yeah.

And that We probably saw think year-over-year, you throughout you last QX-QX to QX. the was QX that were under-hiring in So margin when I have mind you look at operating and that keep of year. significantly.

comparisons So those tough. a little year-over-year are

went points example, last margin think, the X I up year, quarter-to-quarter one quarter operating for sequentially.

in revenue little I ASC execute revenue point a the pieces. weeks quarter. it benefit One, XXX. to caught to wanted And margin. at comments that that And the was I has that the So each about benefit reflection which Last of me channel QX. a And shipments mind U.S. is of inventory benefit of kept a quarter, We from current take of much of in through what X the target refer in and many back growth growth unit And and think there. every the and a how from tough pretty had that's about to that's time. for no it benefit There QX time talked to hit mentioned that I terms happening two think that. was the by to surprise. licenses, we we have. in certain we software in admit I with lot hardware software I'll I'll

would I will. at out to that So expect change, settle if you no

visibility bit numbers. accounting good I of commissions benefit at complex history XXX that we now, the think is to it. our basis with a probably we're a side, the change? be this ending to points because the Sure, pretty basis that On have of is, little or beginning good we where Did couple undersell quarters a current in the conservative. we belt up in quarter; revenue points, of are XXX the fairly number But these appears under

increases, revenue in slightly declines quarter. As fourth you'll which see that that benefit the

if on follow Happy So to you threw want. a you. lot at

Rob Owens

you. Thank Great.

Operator

question next Brad Suisse. Zelnick our from And of you. Thank comes Credit

real Your what for it and what think line and be taking we But is follow How now – real think - Alan should quarter to the this question I and we earlier appreciate year to quarter. know guys always quarter as was lumpiness look adjusted it's the to I up estate that in expect Brad LLC focused for you down Credit Securities and the cash an on give But Zelnick question. if Really about relates us, I puts numbers you to more estate open. my forward? going going flow, just which if on (USA) and adjust flow year-on-year cash forward. the and Suisse quarter on flow. there's takes might cash even to on we wanted

Keith F. Jensen

Yeah.

since Brad. was when model And then, saw constant. the you in play went in they've $XX was want – back year. if look to When fairly and year-over-year look good range. – level QX came what last been the you at And And to think inventory inventory the comparison adjustment really our that I you at question, I into our million QX say large look at the looked. we

benefit see I So there inventory, myself inventory was kind rates don't million of one-time with of these previously. by about $XX for growth $XX not dropping million. revenue hardware a

Can million, I – look really much up up it little and refresh? of takes probably in payables to and much Credit your How to that's contribution you're it. Cash clearly some noteworthy. sign line just (USA) it But at Alan just that's large of incentivize dogs. that Securities if in saw of follow in product there quarters I at Zelnick much inventory a know of could the with Brad even think But And change, seasonally, puts decelerating not might this a a forth. - parse you How from for catching that years. so QX below it how nicely the of So growth attach stronger But quarter-on-quarter quarter, cats services, higher-margin the least growth $X in the few other and business. through you taxes the item. all something is maybe was and shift look anything If models, wasn't about and services line? couple than to sort year-over-year And product Suisse LLC that benefiting of how I drives services while the we Street services providing is was I Got model last be at QX we more mix the services. maybe and just not it this up. product mix from if it the of with as the sign seems opportunity? last bit wasn't

Keith F. Jensen

number. pretty and XX% provide $X.X FortiCare strong up a It services as between growth. in comments, billion. deferred breaking predictable very both We XX% comes comes year-over-year But said to revenue it of FortiGuard. had revenue line the revenue. again, do is was services very much of down from those deferred And – revenue The I disclosures

opposed that indicator Thank mind off be Alan thing sheet metric Credit to the other deferred, - since a which appreciate is balance you, something we coming would as Suisse in revenue, from Securities more (USA) LLC is Brad a Keith. think billings I to it's lagging services Zelnick growth keep it. that's the I current provide. not

Operator

now would any does Thank like over you. and turn call back remarks. to Peter the this conclude I ladies gentlemen, And session. Salkowski question-and-answer our further to for

Peter Salkowski

New be quarter. you the Conference like the Thank call joining Oppenheimer of and Las in today you, August on at in conferences to technology I'd X, will many at third during and to on on Citibank the for Bank seeing Sonia. everyone the York look Boston thank conferences. be in the September September at XX. following you Conference We'll that let know these X management Deutsche the forward Vegas Conference presenting We

follow-up If of rest Thank Have a give e-mail. your please to great you or any me feel me you. have day. free a send questions, an call

Operator

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

You a may disconnect. all Everyone great have day.

Peter Salkowski	Fortinet, Inc.
Ken Xie	Fortinet, Inc.
Keith F. Jensen	Fortinet, Inc.
Shaul Eyal	Oppenheimer & Co., Inc.
Fatima Boolani	UBS Securities LLC
Gabriela Borges	Goldman Sachs & Co. LLC
Jonathan F. Ho	William Blair & Co. LLC
Ugam Kamat	JPMorgan India Pvt Ltd.
Keith Frances Bachman	BMO Capital Markets (United States)
Jeremy E. Benatar	Citigroup Global Markets, Inc. (Broker)
Hamza Fodderwala	Morgan Stanley & Co. LLC
Gray Wilson Powell	Deutsche Bank Securities, Inc.
Andrew James Nowinski	Piper Jaffray & Co.
Rob Owens	KeyBanc Capital Markets, Inc.
Brad Alan Zelnick	Credit Suisse Securities (NYSE:USA) LLC

Fortinet (FTNT) 1 Aug 182018 Q2 Earnings call transcript