FTNT - Earnings call transcript Q3 2018

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Operator

Good day, ladies and gentlemen, and welcome to the Fortinet Q3 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 follow at that time.

As a reminder, this conference is being recorded. I would now like to introduce you to your host for today's conference, Peter Salkowski, Vice President of Investor Relations.

begin. may You

Peter Salkowski

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

please yourself During your to the Q&A keep follow others one and allow and to brief for up to questions one session, we participate. question ask that you limit

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

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

XX%. Peter, quarter per to continue Thanks, share up profitability. with and discuss per call share earning third billing margin up were you XXXX GAAP a We our with profitable result, a increased strong everyone today's non-GAAP solid above aim We joining million. for million. results. and XX% as to I'm on Non-GAAP XX%. to Total our revenue of Product XX% third thank $XXX balanced $XXX pleased $X.XX. growth, post or revenue was quarter $X.XX, operating with again to basis market deliver was earning of to

(XX:XX) are offers are beyond due a protection. our broad, to integrated global This Fabric transformation, well security demand security platform refresh advantages. Security increasing cycle. that Fabric for up needs automated opportunity expanding and will and competitive platform The Fabric go strong Security opening and consolidation network experiencing enterprise major digital Security enterprise Today, trend three new We product. for

cloud. FortiCASB, provide and IoT Azure differentiator integration A offers on-premise including Security our innovation, end-to-end providing An on on the cloud decades FortiAnalyzer's. Next-Generation the and of second built the FortiMail, is We of superior available FortiGate our performance broader to price Organically center solution offering Azure. FortiWeb, integrated example solution, platform Fabric in of Fabric now is FortiSandbox, industry. extensive our ground and Security security FortiManager data First, most automation capabilities. two protection offering a provides Firewall, from to from best from up set Fabric both the

and speed Fortinet provide network of a with a is security the SPU, security the which only XXx products. other company build processor, ASIC performance security and that software functionality, integrated

computing. significantly Fortinet's edge both cloud provides result, and better performance product for a security As

recognition third-party in differentiator competitive and extensive have received validation Gartner. and is Fabric the NSS third The we our from Labs Security platform

has Fortinet recommendations nearest double of by Lab NSS the in competitors. more our than nine rating nine number of received categories, out received recommended

Fortinet solution and was Next-Generation only SD-WAN only among XX received the rating group to vendor Firewall that recommendation have both recommended SD-WAN the their three in of received for and a vendors the tests. out

Fortinet's platform now Magic in appeared seven past the Fabric Gartner have XX Quadrant months. solution over

of plays true Our $X.X enterprise SD-WAN XX% distributed utilize Magic role Fortinet Gartner for reach a in purchases as that top billion XXXX, realizing benefit XXXX. $X firewall of in the by one management. five in WAN recognized and quadrant solution up named solutions by was new unified and firewall Edge will leader's to next-generation Gartner's digital was Also, features. the in forecast the state in billion SD-WAN threat is of XXXX, transformation Quadrant. SD-WAN from pivotal network

Fortinet a in our for platform response FortiSIEM enhance threats. this Innovation Fortinet SD-WAN technology patents, the and of announced advantage insider believe In acquisition threat and to the the and Security acquisition patents to third The the market single XXX security week, times provide only firewall existing a both a Last offers through to enterprise in SD-WAN and solution issued Fortinet's our faster strong and and competitors. further growth. mission. solid of a better cloud-based issued capitalize a next-gen machine company. endpoint insider on three quarter, that the position we strengthen milestone Fabric learning, ZoneFox, for nearest is providing detection offering surpassed integrated core SMB. We response functionality Fortinet puts

of GAAP to year-over-year S&P to are our quarter pleased November added going every double-digit a the growth We acknowledgement an XXX since consistent in index, and public be profitability. XXXX

ongoing continue and ahead, of want to opportunity operating and I achieving goal XXXX. their significant at and to work team thank for support. invest, the our partner hard Fortinet about customers for excited we margin XX% while our will our are We their

for fourth turn quarter third our guidance. closer Now, to and I would call at a look the Keith performance over quarter our

Keith F. Jensen

Thank Ken. you,

Fortinet on slide Fabric pleased our that with free are to make results, prior-year start, outpaced and continue outperform refer I the to than In during stated Any market we the posted and remarks the that rates all for flow. We industry the was growth presentation very our in I'm quarter revenue, well strong quarter. prepared on period to like the customers. and as third third Investor expected Relations my with quarter, and based resonate Before we comparisons better new existing to I'd non-GAAP, I are the positioned that is references unless figures operating posted to revenue website. growth except cash the note, margin financial believe are otherwise. security fourth

driving portfolio by We Labs are delivering an recommendations received is that an leadership position. This from NSS Gartner. independent integrated performing Fabric we is product supported and industry high the and claim

the non-GAAP and point as record remain would enterprise our as we We well I our achieve increasing Magic to year Quadrants. Gartner, for as leader above-market Labs the firewall UTM Specifically, profitability, evaluating to NSS to of goal balancing revenue with work XX% nine-for-nine of product a operating as committed in both growth XXXX. margin recommendations, Fortinet full

third quarter our with for starting revenue. results, Now

of the on revenue on accelerated to revenue. Product benefit related $XXX revenue grew shown net to million. required included growth slide XX%, XX% As revenue Product revenue accounting million. million a X, in change to of $X resulting $XXX

Service revenue benefit, this to grew XX% million. accelerated growth Excluding product XX%. to $XXX revenue

increased offering FortiGuard, $X.X was to contract security XX% XX% one traditional to FortiCare, to grew and our and million; increased flat support XX Average subscription $XXX offering, month length billion. months XX% Deferred $XXX grew our to sequentially. revenue million.

growth to Billings for to accounting XX excluding U.S. quarter, APAC the the seven our grew our now service growth Global region Billings customer $XXX our XXXX in provided customers, respectively. billings. Americas, XX-month XX% to of enterprise Turning grew billings basis Each of experienced MSSPs, EMEA up providers strong with million. The a majority and XX%, XX% strong the XX top billings. on XX% and and and XX%. top trailing

new transaction top U.S. to the transaction on the our series will cloud of billings seven-figure deployed products. One the first high-end is FortiGate several our with ASIC-based quarter their our was products XXXX be then in connectivity deployment. These secure FortiGates, their in a of high-end of all-cloud including quarter focused retailer transaction. earlier for large we XX same The with seven-figure highlighted

the associated from three financial increased quarters million that continued also billings slightly another consistent accounting Network again of largest total million-plus these of competitor with over in these billings, call firm integrated with the appeared seven-figure FortiGate billing providers The its offerings, additional performance Security with the multinational as firm and for to consolidating billings MSSPs capabilities. year-over-year. a vertical, XX%. vendors, displace total large deals and security $X more points with very accounting Fortinet deals last of fairly XX. XX%, The business, than increased improve successful a the $X while for internal billings their XX% were $XXX,XXX XX of U.S.-based strength completed Service of our services initially X moving up highlighted After year-over-year, looking providers XX%, U.S. Billings in excess total recognition a our XXX%. with faster Fabric, services over to non-FortiGate Illustrating growth XX%. number five Cloud functionality than XX to is of largest public was of displacement business. lower customers' We decided top ownership. and the Also, the to of deals top large The number mid-enterprise increased costs proof-of-concept, from security our cloud billings. firm, for benefited associated grew value, non-FortiGate a quarter, the their quadruple enterprise which for experience their deals billings as and financial customer quarter. of segmentation continued our coverage. component dollar our grew this in a

income the Moving to statement. back

Including XX we basis margin up margin XX.X%. Our to transition benefit On total XXX with quarter-over-quarter XX.X%. XXX basis, basis change to points, increased required of points Service XX basis XX to was XX%. grew down gross commission Product to expenses level certain were margins the expanded new gross volatility XX.X% margins points operating in product through points accounting, third basis quarter to as a related continue the points gross basis introductions. sequentially. product and a associated

point accounting been operating commission accounting changes, up XXX and operating expenses from basis of would XXX benefit Excluding XX%. revenue commission from the margin points XX.X% change, the the year-over-year. up total our a Including was have required basis benefit

total line financial by rules. new accounting XXX accounting the basis expenses. Excluding shows to margin outpaced operating mostly increased our total expect margin In quarter, basis was XX any operating and be a as of adoption comparison our Slide from benefit points improvement in fourth points. revenue leverage margin benefit non-GAAP we quarter line XXX year-over-year. The operating from our by the results the results driven required between excluding the these about growth the third operating accounting by model, non-GAAP changes, changes

up XX%. points. Non-GAAP expected operating diluted based For be or effective XX% XXX shares quarter the is benefit at was $X.XX million income about rate the XXX.X and third was X,XXX, share, to the Net end full count was the the margin tax per million year, XX%. head basis up $XX year-over-year. for was of quarter third Total on

Moving summarized million. Free cash year-over-year. XX% to cash flow cash and $XXX On was increased on $XXX in expenditures year-to-date free from operations to million, up X, was the $XXX cash XX% up Capital a basis, third flow X% quarter flow $XX million, year-over-year. capital, million. slide were

growth our we we've strong office existing the in Given space outgrow Sunnyvale. will experienced,

capital million As started existing to of related building we on the $X our range million expect office. in adjacent building. we a the $XX expenditures fourth result, a have to this construction quarter, to In

are plan Total capital related to million. fourth expected quarterly between million are and into in to to expenditures $XX of capital be the move to million. the expected range million building to total spending be between Capital $XX XXXX. updates expenditures million $XX quarter plan expenditures be expect $XX provide the building throughout adjacent XXXX. We XXXX $XX $XX We and XXXX for in and to million in to

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

$XXX assumes million, XX%, to count margin margin XX% the million XXX a goods tariffs impact in For non-GAAP expect range million, of of the XX.X% to share million. revenue to cost of XXX to quarter million $XXX earnings operating per range and $XXX sold, of which billings gross between of fourth from including an immaterial and XX.X%, non-GAAP ASC $XXX in on the the of we $X.XX, share $X.XX XXX of benefit of non-GAAP million to

per of margin share million. goods For of sold, ASC and XXX XXX impact tariffs non-GAAP billion, billings XXXX, million non-GAAP operating $X.XXX in of $X.XXX to share XX%, an XX% of earnings non-GAAP billion and the of of a billion, to gross on immaterial and of revenue XXX which assumes to XX.X% $X.XX including expect XX%, benefit $X.XXX in range to of $X.XXX $X.XX, cost the margin between from count to billion we range the

I'd customers, our I Before employees all support the Peter, hand for to and of and the call now to their ZoneFox call family. thank I'd Fortinet Fortinet welcome turn back work. the the the to to back hard like over team Peter. partners, also to our I'll like

Peter Salkowski

to Operator, Q&A, open please. up call we're ready Ok, for Keith. the

Operator

our from is Ho William first Jonathan question from Blair. And

now Your line open. is

Jonathan F. Ho

Security sales the stood Good Hi. the strong congratulations to in maybe give quarter And was terms bit the It maybe separate also, little detail out? wanted start strong related what afternoon, a us just and Fabric retire, Fabric. Can more the you in to the demand. have Fabric? another of with I terms to a on you this for of quarter. maybe quota sounds do force of Security like out elements

Keith F. Jensen

it's Jonathan, Keith. Hi,

Second the the not have question, for Fabric, team. a quota sales do No, separate we first. for

to up beginning look in access the the well see pattern we quarter performed the I continues you in of That shaping family, started that would and product If well. the as a very quarter. points the highlight the switches

the that the also to product during the FortiManager, I of FortiSIEM. well Overall, think add list performed FortiAnalyzer, would very suite quarter. I Fabric

Jonathan F. Ho

at just Excellent. looking And the trends. margin operating then,

I leverage, pretty guided we on that but have third go-forward after want just earlier to way. we're strong know that right you thinking about thinking a margin be about quarter. fourth make year How guys show I in start the a delivering You strong well in guys a operating to investments that quarter should made to that the sure the as basis? some

Keith F. Jensen

go operating very performance margin we're QX Obviously, the for about that in to company on Yeah. through talk line the of and And with we top we're budgeting now the line. not we're right cycle for coming guidance the in in as a really position the pleased year the XXXX. on

from that it that. the to leave growth seeing I with quarter. think to play productivity a Fabric bit into you've third in the comments what and little beyond about as but forces come probably we're pleased just market seen the sales well. We're very other Ken organization, I'll talk

Ken Xie

a Yeah, actually, we saw like strong building growth, XX%.

head little hiring probably that. Our count behind

head So, for growth the and need to growth. healthy top be way together growth count for synched the the long-term line

up catch that's where So, bit. may we little

cycle last side, to see the other going one do still it On two we refresh the on. another Maybe years.

lot this growth, and single advantage another SD-WAN yes, demand. provider. security, we years, is the $X of opportunity, be provide huge In can vendor see are is service SD-WAN We huge also carried enterprise other only that billion see who I be that's we will $X like path, year very billion. believe strong a The We solution, growth. opportunity will both single from for trend a of a years strong SMB mentioned script. in the to And few few this for next the reached very

want we and keep the profitability. the why growth to among that's So, in balance

line. and (XX:XX) we the bottom line both top So,

the margin we going want by the but operating also commitment, growth in XX% in keep to – We also invest forward. XXXX, have

Jonathan F. Ho

Great. Thank you.

Operator

you. Thank

Our from next question is Auty JPMorgan. from Sterling

now is line Your open.

Sterling Auty

Fabric Hi, guys. and talk still number focused I especially Yeah, to get with investors questions thanks. in demand versus the from seeing high-end and the of you're enterprise, center is a all trying how segmentation. success of now, much data the of understand, micro

the just high-end success of enterprise just in around business. particular some So, additional your what's part the maybe color driving in

Ken Xie

if computing. when growing to in data center and Because internal the move the they cloud, once and more the they in the actually cloud risk do additional segmentation well, to We the because see access both data (XX:XX) then also the access, also some in add more cannot whether edge secure there. cloud, it, probably now the data danger need secure risk, you and to

SSL performance XX% ASIC data, actually most issue solution, test security encryption which big So, no important. encryption that's like a the The drop with the but encryption, off since it's throughput. SSL you how to current traffic, drop very, for secure the almost compared have – solution is access have do solution very SSL you with about there other leveraged we the the – no other when traffic network

we what see. that's So,

data for and more cloud internally. some will As move a compared the hybrid to some enterprise, there's – the

data what's balance to what's So, enterprise. of and to data they computing need still amount the go the the – edge, within cloud, what's within

So, we see security enterprise much spending even flat. probably definitely spending, keeping increase some the IT pretty

above It's to believe So, $X trillion XX% and years, next long-term the to like grow years. it's security in XX-plus XX reach or very we XX healthy, the still and that's a growth market. continue total even to the the like next healthy, market, in going very will

Sterling Auty

you. Got Thank it.

Ken Xie

Thank you.

Operator

you. Thank

question next Co. is Oppenheimer Eyal from Our from & Shaul

line now is Your open.

Shaul Eyal

Thank the Ken, you; on Congrats you. Keith. probably Good one afternoon, for beat-and-raise. guys. one for

the around to entire you've been the cycle, back refresh security career Going product your arena. within

about wise? As we're characterize the timing in the you innings, How initial would Thank even you. prior product and cycles; it think maybe and about demand it you midway? current versus think would you cycle, as if

Ken Xie

the by this bit of year, compared few two two-and-a-half, more little a few like probably A this rush maybe end of a quarter longer, cycle three to maybe XXXX-XXXX, last longer, happening years. last

is (XX:XX) of probably platform. the close consider the it. solution together, they are We But difference this middle multiple time to

how the that's cycle next-gen firewall also solution, a automate from to to endpoint, regular can networking the that's together, compared from whether storage cloud, way refreshed to integrate network side, find to piece work-in So, the UTM. this firewall IoT. consider and some need need they they this time, different a the last where the even to side, And the to

network considered of of kind a where whether see the approach kind fabric the really, But similar bigger Wi-Fi have they in like infrastructure, of to kind be past, infrastructure, or also also SD-WAN new compared that's platform we XG, need more we see kind the very with strong the security. that's also the growth So, together picture, side. of some a to

a just we security the a – approach is happening integrate with see of of now, and some like right instead the Fabric infrastructure. designed on or as that kind the more platform of a consider So, total infrastructure add top infrastructure,

Shaul Eyal

Got some to for ASC you maybe the the this XXX. strong trends talk much on through Keith. Thank it's ASC also about whether been linearity lowest Thank And maybe that? Really even for probably so matter about one in have or it. you you experiencing DSO color. quarters. quarter? XXX us Doesn't front; showing Can you. Understood. And

Keith F. Jensen

And came comments. DSO kind I there Yeah. thanks your in unnatural your your – the nice think for think anything Yeah, was to leads of I in. don't that numbers. of And second part really up point. just

kind think the DSO the held you're seeing think good, in in I I commented about being and the its number. of continued quarter linearity indeed earnings month quarter And on think good. I in on kind that it of And quarter. the the first I of it through pace, was last call, the

Shaul Eyal

Understood. you luck. so Thank much. Good

Ken Xie

Thank you.

Operator

Thank you.

is Jaffray. Nowinski from question next from Piper Andrew Our

now is line open. Andrew Your Nowinski...

Ken Xie

Anybody (XX:XX) there?

Operator

Andrew now is line Your Nowinski? open.

Andrew James Nowinski

Yes. Can me? you hear

Operator

hear now. can we you Yes,

Andrew James Nowinski

you. quarter. to replacements. win any Thank than about congrats just onto as I large products clearly nice the on what a Since Well, had, can was right. quadruple the replacement, consolidated customer All us customer want that you color platform? a Fortinet that give firewall the to you more that ask

Keith F. Jensen

roll et I you'll like see, as well. Fabric, from points beyond very the And FortiManager, then FortiAnalyzer, FortiCloud, and often doing firewall it's into are a previously, hardware right of than see the that, a indicated the cetera. typically And suite not, go switches products you when start into right? Yeah, to going you that viewpoint to multiple FortiSIEM, the access more

Andrew James Nowinski

comment the looked have might I'm Okay. on sequentially. out just they large that push to down. QX year-over-year? any it. deals the were then, Did And They like about million-dollar deals deals. down talking a were number into Got maybe caused be down that

Keith F. Jensen

to you I think it off year-over-year, when think I population, by I that from XX. again, XX look was think two at

the those total the to billings to very I segment was large a believe You're of I'm I bit so that get smaller, market, the total dollar going though by the it. of about up value surprised deals. said. see in volatility number pleased little not were Even in billed XX%, that was was I

Andrew James Nowinski

Thanks. it. Congrats. Okay. Got

Keith F. Jensen

Thank you.

Operator

you. Thank

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

line Your now is open.

Keith Frances Bachman

if Thank I you. ask Good questions, to could. I evening. wanted two

First, revenue XX%, for the at year-over-year services quarters. along been humming XX% has growth five

XX%, quarter deceled to a bit, it but deceled growth. of straight the little revenue, product larger its quarter again This number, while really second good

reason so, terms strong just could. back outside follow-up, now? And that a on there deceled anything has an of couple services the wondering, revenue Does of does numbers? portend side? larger for quarters Any I'm was been why that growth of have the to product it I in the if acceleration side? what so And I a it suggest point services Then

Keith F. Jensen

Keith. are it's you? Keith, Hi, Okay. How

Keith Frances Bachman

Great. Thank you.

Keith F. Jensen

Look.

know, pleased I bottom the for or we and think, from quarter and revenue obviously, the margins. we're top manage total the both line, very line the we you the with to results into as guide

that very So, gross line. and services products, including mix of we're up ended pleased where within margin with the we

your to good. we in very was up specific more renewal again. little rates were very a The rates of Attach normally see. think mix ticked at we over good. It looked our XXxX support was, quarter, what up question, very one XxX good versus were I the thing

attach rates, rates. said, renewal I As

it, think part of I is you larger it's So, base as out. a point

I that for hardware. growth, what revenue services. And the really you're a and to a the access we've to mix and this I switches platform And bit top online, point line hardware then mix of a the of mix element higher in came the and think the about Fabric bring something is talked little with key Analyst would on smaller higher Day it of expected in that. as other seeing that points product on it we

to it's and appearing statement. how think Fabric, in the driving from the impact starting the I really of strategy on success you're the it's platform see So, the income

Ken Xie

early is the and the helping to called to configure, Also, some we be also service stage, This forward, to Fabric help Fabric solution new new XxX in helping the a there. XXX, of support ramp-up going SD-WAN. future believe introduced traditional do the including to off then the and still that's and XXxX service the we in deploy will It's FortiCare FortiCare the but Fabric check beyond manage, the support. also trend

though do help this believe is service also will up, see the So, very and early it's ramp the we in this in service quickly very growth. future we needed, stage, even

Keith Frances Bachman

Okay. about And growing for XXXX to operating then my of that target about guys the operating XX% we clarification, giggles other we say to up should ASC margin in of margins XX%, ex XX%. as the – you just year. In base is it is Keith, the just you I have translation pursuant that XXX. isn't And the When let's assume the provided words, ends base being think for think XXXX? benefit about accounting talk

Keith F. Jensen

Yeah, from of that's described product – first moving number, terms you a that comp part at on think it of XXX service in is it's as be the to commitment we're quarter, by – can the the the that looking tracking that come et see, like and to down plans, things XXX can us, way term, ASC it ASC revenue I is, XXX. mix, cetera. the we've quarter around And ASC number reason It's right? impacted and always fourth we're –

ASC the side it's just table, to very keep honest a think I So, our goal. of all on XXX this

Keith Frances Bachman

Okay.

flat, if XX% down, to or as we up the XX%? XXXX, think to So, again reference be expect about point, margins just relative we using operating should

Keith F. Jensen

For XXXX?

Keith Frances Bachman

Yeah.

Keith F. Jensen

our providing model XXXX, going we're that up we've I'm talked offering and what for long-term about to over other than on targeting Yeah. guidance time. before pause

Keith Frances Bachman

Okay.

Keith F. Jensen

that. budgeting Let my me go and through cycle before I process do

Keith Frances Bachman

Thank you. Okay.

Operator

Thank you.

is next Borges Our question from from Gabriela Sachs. Goldman

Your line is now open.

Gabriela Borges

this number some wanted number the follow-up Could seeing the you're to Thank on kind that you. XXXX. opportunities, extent that to in is Once And win? invited comment for Thank Keith. of invited, for the you Global all? what I bid engagements how you if rates of do how Global at you on XXXX that business. you. guess afternoon. changing is win Good of And to I on momentum you're to you're could also history? relative of is volume often the changing upon, comment

Keith F. Jensen

and Hi, pipeline. Gabriela. applies with are say And both lead that the we're positioned with the to fact I the think of the a also very I'm our business in I in Yeah, the growth well Keith. business. we're very How and segmentation in our total, part the indicator. I pipeline, to enterprise. the an direction the into of continue pleased you? is positive important pleased trailing would think SMB XX% the I It's of the SMB think of part And XX-month Global of opportunity expand pipeline XXXX number to very – that the

displace of it. that's terms not In to very incumbent. well, other more wins we're But and we're not losses, pleased always think the with MSSP, doing we're we than carrier – little the opportunities challenging It's a – I we're incumbent. and the when have those

Ken Xie

Also, within focusing of the chain kind And we the by sales into separate some support Global the and or in the XXXX, market of pretty even see the good the the – to focusing XXXX. to it's organization at sales, same time, starting there. invest Global we're starting channel Yes. effort the we of a progress

we healthy. once pretty focus – where have that's see the the So, growth can we

Gabriela Borges

product you Thank Can see helpful. that to you. when to on us want That's help margin gross might follow-up appreciate within Could number the are that year-over-year, Keith, And I Thank for margin. stabilization gross line? on start Or aggregate understand, start upwards? margin. might talk but trend when you specifically gross you. gross that product expanding to margins in

Keith F. Jensen

mix quarter. any impacted think between that's by I'd in can fair products just going the I probably be obviously a Yeah, some question. to and It offer context. you services

the is on I that QX, a in look gross bit product, to track ticks that. and typically driven of on to we're margin to goal, little line. QX, component you to and going improvement expect up the pressure and to kind see that. of growth when And that mix total that which gross by services forward punch the to bit we're of fast gross line XX% puts largely a the a sequentiality, Specifically, think We're the our do margin continue margin component of I line.

Ken Xie

early you like we middle margin also Yeah, see refreshed do of range we same this I Analyst the believe the growth some that year long-term were Day, time there (XX:XX) during the XX%, product. is and at target

drop refresh finish. up the the little gross refresh then once margin bit will back the ramp-up plan, to and come starting During

So, we same, XX% long-term long for keeping still margin still the trends and do see gross target we're the term. the

Gabriela Borges

you. color. Thank appreciate I the

Ken Xie

you Thank

Operator

Thank you.

from UBS. next is Boolani Our from question Fatima

line Your is open. now

Fatima Boolani

start Good maybe afternoon. Thank with you you. for taking the to questions. Keith,

business, math, the service that according to was of Just a provider off quarter. the nice just second acceleration on my

you of sense can underpin the I sort activity behavior And budgeting provider are And strength? anticipating? a what another So, may. is out if look vertical next service in up of that year, follow of you playing actually into we as us what sort give the

Keith F. Jensen

that I our here in the what and Yeah, weigh bit, part business, but MSSPs to think a larger do is been we're and the, Ken I historically of may that's exceedingly provider seeing of service little think that portion want the seeing, really and well. you're

pipeline some you're SD-WAN seeing as SD-WAN customers is that of And that discussion starting is into coming think really conversations growth. well. now drive that I really I starting some to drive business -we've think to had the opportunity part play with as

well. I will a it part be as think XG of

Ken Xie

share get the from some Right. bigger the service provider. Yes. MPLS kind small carrier, That's trying traditional of by relatively SD-WAN some new service being offer used the technologies provider where starting of market a we do see by to

off some time, same other the now. is the at technology So, taking starting XG,

best small, So, service working and offering. this philosophy service kind our and large of provider, and they're into the – the and tool both service security all is product offer with

this forward and Wi-Fi also working other together one see where security quite security, with offered well, strategy had together So, only we we new security things that's with in SD-WAN going some together.

the offer in service all automated and So, year, which investing strategy trend the and follow with comparably kind that's few of to provider to a for provider have buying is vendor catch long-term keeping other some like that's the and the a network for ago long-term when this service the security customer. much lot better invest integrate to they years up solutions, the for the like vendor, company a or compared

Fatima Boolani

couple us helpful. Keith, on you volume. one. shipment a just Last And, That's of color gave some quarters, quick

sort see a update How to there out that's And basis, an we about was the think code. to wanted Thank think extent for you. should hybrid held into it next that from that the migration? XX%-ish of couple it's years Just and looking if of ZIP me. and cloud sustainable we there the as architectures about

Keith F. Jensen

script. that. about on just know sorry words in I consolidating Yeah, my we're

XX%. All up unit quote FortiGate XX% is year-over-year, go but XX%, up I'll I shipment with XX% year-over-year. shipments mean,

Fatima Boolani

you. Thank

Operator

Thank you.

Daniel Our from from Wedbush next is Securities. question Ives

now Your line is open.

Strecker Backe

in Hi. Thanks. is Strecker deployments your Ives inflection question security for field? are on larger with seeing point customers, based Dan Backe and the an This with scale is our conversations you

Ken Xie

to do It's the on trend I dollar it like now. bigger see million do see I I'm customer solution The more Yeah, we still deployment make bigger, kind automate together, some or real the but the say together together deploy. over multiple more study that a solutions not. because early a need quite, deals the see have number sometimes got integrated solutions be – the working can deal too size not get more integrate, to or sure $X flat, multiple a when you to larger deal. that's of you – multiple not integrate, bigger

Keith F. Jensen

Ken again that customer, from appearing and will or of deals with kind just is see like and I they'll spot we these then oftentimes people just I – would would something and QX, remind our large in in buying Yeah, you a some deployments that. single QX on staged enterprises so see be and QX of

one enterprise it's think But comment to of at because individual on that does offer yes, are drive that. it. being deal whether fabric more of sizes, and to because look because quarter I than that's the So or larger it's the a an firewalls number products customer of it's difficult attached the just

Ken Xie

to networking integration it very purchase time to working other difficult these which want they we function the Yeah think work to solution, company, with some don't do together, together. like because believe including SD-WAN have designs partner also some compared huge make always a and integrate product internally of And designs advantage they I for have of fabric also together. and some always we organic take most the

have we advantage. So huge

So we bigger are see do now. bigger and the benefits

Strecker Backe

guys. color, the for Thanks Great.

Ken Xie

you. Thank

Operator

you. Thank

is from next Our Capital question KeyBanc from Owens Rob Markets.

Your line open. is now

Rob Owens

question. Great. taking Thanks for my

mode, you're product What's especially been? the given the are clearly guys the share success like? competitive that in What's You seeing. environment gain response pricing

Ken Xie

have any right We pressure now. price don't

keep we why that's keep is ASIC improving one differentiator because So can – we only the design feel gross the the margin chip. one of are key

we see At the more also ASIC more the there, also they benefit. time, we chip. design the invest more a and time, the working, customer take been X average two-sided lower effect, the in Now, we benefit but average to to whether also chip (XX:XX) that can XX deploy, per see year chip cost long for same (XX:XX) the cost the and can deploy

So been have. far, see to able competitor get space in benefit enough to we none the our early have to of the invest

us number So also once bigger more. have we bigger will see differentiated advantage and benefit pretty Yeah, unit a to market much... the share, we deployment help accelerated and that's keep a

Rob Owens

regard second, quarter the any apologize as the Yeah. in Fed? I success but this seemed it vertical and to if I with in being decent missed had you well. discussion I guess September like around comments, prepared that It –

Keith F. Jensen

which well we've did of the all our U.S. quarter. part is that think with that had I a were government in vertical which little disclosed, I our subset it. business, of vertical, – We Yeah, Fed previously do that total bit is of I U.S. good a of a was And a again quarter. think there pleased think vertical,

Rob Owens

Thanks.

Operator

Thank you.

next Our question from from Melissa is Stanley. Morgan Franchi

is line open. Your now

Melissa Franchi

for Ken or question. my taking for Keith. question Thanks Great. A Okay.

maybe you're in you comment what of Just seeing wondering terms if sales on cycle. could

security demand one broader security healthy with might of rethink refreshes. hand, selling a seems suite it's a Fabric, the very So good But seeing the environment, you're on architecture. that on it you're broader hand, other now and like a the Security require

elongation wondering a just maybe in cycle. bit if sales that's little of the So creating

Ken Xie

good how multiple larger. when consider time little but they I a bit longer see do deal also together, also working the to make can that agree. customer very good be refresh we And together It's the trend take We make a point. very solution, multiple need product cycle. to working point It's ourselves multiple of a it train this as as as and solution. kind product all a for also, have to sell well both fabric partner

Keith F. Jensen

our good enterprise about feel the sales we mean, I quarter, certainly us see success cycle cycles. call Yeah, much the I longer because things the that I that but looking guess for carrier, as we have sales I the elongated the perhaps – was would the channel, think the SMB, do number at further I again, very well building in think don't as in out. and both I dollars, the are pipeline larger issue. term the those

Melissa Franchi

quick Okay. follow-up then Great. just for one Keith. And you,

contract just about How visibility trends bit was contract quarter think – the a how duration we any month. from for up mentioned I one XXXX little year-over-year and You this perspective? that then into QX a duration think should

Keith F. Jensen

contract I year. up think would we fourth probably I and going guide the to, year And think to the throughout term continue that Yeah, would the previously something quarter. normally the tick not that to would on I've that's say, I talked during let's I think expect

Melissa Franchi

it. very Got much. Thank you

Operator

you. Thank

from Gregg from Cowen. is question next Moskowitz Our

now Your open. line is

Gregg Moskowitz

much. Okay. Thank very you

is question Keith. for First you,

FortiGate of just to thinking providing next know about mix for the FortiGate And months but XX a guidance well so? total. This from and we XX% continue around next they be level, or the you're versus yet billings I very should high quarter, grew year, not hover over for non-FortiGate that how

Keith F. Jensen

– look Well, pretty if much last kind back of least, this this year hovered I I in if will. you at that over similar the over think mix,

platform very that are will with certainly as key We and strategy with a point pleased we FortiGate throughout XXXX. our Fabric the continue of

Ken Xie

now with FortiGate, interesting deployment, – the within got some into bit SD-WAN security than infrastructure offer faster solution a The little the non-FortiGate have suddenly we grow we a the FortiGate. which design-in. – But

will in the actually side. help that FortiGate So

are quite far the definitely bring because more a faster this little we on. FortiGate. stickier this customer. so early But with see may see we this overall, changing So bit. and do than sure with what's SD-WAN grow the the the solution stronger multiple But service also will But solution not a there's non-FortiGate it we year, going the it's total additional and make better, customer, making also also they or

Gregg Moskowitz

Okay. That's then Ken, the for we of next product timing about And be ASIC cycle the Fortinet? how helpful. thinking should

Ken Xie

say it's pretty I'd close.

improvement, of the had, year, last I do we quite called, cloud some next It's we close very the camera have working few or About – like improving so product so try like advantage XXx encryption of middle beautifully a a which some what – quarters. also, we last refresh to huge CPX the is more the SSL a a both It's and cloud some the few on on other we deploy think and the within lot. you that's year now. a months every quarter, do the edge. when access, range,

Gregg Moskowitz

Okay. Terrific. Thanks very much.

Ken Xie

Thank you.

Operator

you. Thank

Michael Our from next Raymond Turits question's from Janes.

line now is open. Your

Michael Turits

overall of into would Thanks as from for cycle terms IT XXXX. Turits regarding there people any you. caution economy? buying James. fall-off spending about much. suggest exercise question, Back Hey, is that some see macro some hesitancy in the Are Ken, guys. Michael anything starting in very the a to concern to Raymond you

Ken Xie

is but Yeah, in couple last they IT see concern do we spending don't within Security have security. the months, a still little increase. – keeping is bit the but

XX%. we're more all for market – and got And IT So $X business the also, see together. the because security and security spending POP. believe as the security flat, also, even we the plus keeping connect reach growing the market next important do will like like more XX-plus I why plus doing That's trillion and IoT/OT XX%, will the all a here years additional, clouds

similar like pace spending is You do but see decreasing, keeping not security XX-some in last the years. the overall

Michael Turits

as in Fortinet Okay. move field the in little talk about you ago. the the while I you been market? know specific sales channel and up order can that Thanks. general you you're a And in specific the a that Keith, about be channel? the doing then in had that talked little help indirect things bit are to doing to in as you've Can what incentives in you with about well increases where

Keith F. Jensen

think, I the sales marketing for a team, goes of from the credit the this is Yeah, execution, team to their team. the together support lot and – R&D with boy

you're in products element about So second create sure previously I a I'm the not we comp talked commission asking think we – if but quarter. plan for – specific, that did that's separate

both importantly this beginning U.S. at specifically U.S. responsible ends who's did U.S. for next the results enterprise actually would terms too. the more step did of ecstatic it. in the and the well in those And SMB of and in enterprise is and work was plans, separated business we in say thing plans think well one the of extremely took channel spectrum. quarter did I from and business extremely with how the the on compensation comp with the SMB the we I the I The

in and teams probably just I us – we how before that. I think invest continuing different those lift productivity see us separating continuing – that a we've go expect segments there's in I the from to see don't company, exceedingly well. focus performed market We And talked with as our to and but do in little I got both. these

Michael Turits

Great. much, guys. Thank very you

Operator

Thank you.

next Our Credit from Zelnick from question's Suisse. Brad

gaining Thanks question. I'll really know a you're - Azure great offering open. that you more And to ago taking month Suisse prepared that is and I remarks, about such I the Fabric Firewall to it's gaining example? my result so of embracing Service, I Securities itself, customers include comment that. bit know a so the Zelnick the for your early, Security only is why you and question and Credit Azure mentioned to about offering and great see field fabric of But now Ken, much as actually native expansion around platform the of capabilities message in Excellent. line like or Security well for about maybe as it's which, things in share you announced Azure you it's that can components. hear continue (USA) I'm again, the a on your the versus how it's Alan the say as the your product just – offering; easy Brad Your Fabric see on But product my market sounds my traction. SD-WAN LLC curious but within

Ken Xie

premise I deployed freedom to products think and like customer solution the more cloud. have data has approach the the whether that's hybrid like go or some a our a where application their of we

the Azure, thing. the same For

on the or Oracle, some IBM, also have some on the cloud on whether broadest Google, like other security ASS We cloud. other Azure, offering,

So solution that's on transfer which whether also need broadest, fit the to also to where we the the and the can select how customer flexibility and offering best between – offer best their want on-premise to between cloud. changing

only some infrastructure in to side compared networking that's it's of the or they security some service, So different side. certain more not and focus cloud the application the native provider based which offers of on the

So And where trade tariffs I on spell China more compared Brad LLC about on a aspects in of - the and that of just security, for Thanks. what can Alan more side are layer you might that's the and Securities on certain they're more network so think the Credit this And (USA) tariffs? situation Zelnick like not certain we them, application. us Suisse with results. to publicly, it's appreciate the the layer, a focused competing your color, remarks, talked is have different I Ken. but we're on commented out of on intra-quarter, impact exactly exposure you you Keith, for prepared infrastructure

Keith F. Jensen

much, QX Brad in so on to X in be, LLC significantly less for would headline guys. Zelnick impact, it Excellent. Suisse $XXX,XXX would a and Credit probably be January Alan quarterly - be the it Thanks basis QX, Securities Yeah, will (USA) less COGS. of $XXX,XXX than than date, less, the

Ken Xie

you. Thank

Operator

you. Thank

from ISI. Our Talanian is Ken from Evercore next question

is now line open. Your

Kenneth Talanian

for wondering you Thanks by your the the could enterprise by question. guys. was then separately rank vertical. in I success taking geo if and Hi,

Keith F. Jensen

the that's would detail that the to ago and next really going in the quarter I think is commented of did. of third probably U.S. I'm little where made well business think to a I the segment – pleased a enterprise what they I probably with specific. pause. I really, level the I I'd exceedingly go thought moment getting comments back I did But in the

Kenneth Talanian

not that I visibility some future over you making essentially give guess does invoicing are purchases Are into more folks Okay. mentioned you time. booking, And but you multiple And results? deals?

Keith F. Jensen

that will. pipeline backlog, and question. discussion, closer if on to It just moves that's I'd put rate, as large a sitting still more not closer the close a if you I'm but the

Kenneth Talanian

Great. Thanks. Okay.

Operator

next from is Thank from you, Walter our Prichard Citi. question

Your line is open. now

Walter H. Pritchard

Thanks.

quick feeling budget Can how earlier that Just on and better of is the that much on an of customers the go that's us of with And is you drive of macro-related expectation. your that how help deferred. from a maybe question about understand follow-up be like factor drivers question, much the would terms enterprise? here? higher, to could mix Sounds what in the what a into long-term

Keith F. Jensen

if Yeah, this enterprise at I'm you I sorry. Keith, that what is – think look

the that five-year that fact pattern cases we've enterprise contracts. their – many probably seeing want To If look to market, three that have the We're at and buying contract to I segment noted. I'll closer obviously do want you in more continue three-year talked they're that the expect incumbents going to I terms at to of I to the this are months do the XX more think what and about call would you're extent that to enterprise, in contracts going they're years. as and before, in we success

into So the I the of from, pressure think up lined that's with the where push enterprise. comes it's the success

Walter H. Pritchard

it's so haven't on and SD-WAN endpoint like been fabric It sounds like And products those around those. how and are then could the and switching You wireless, things but forth email? you comment mentioned doing? and

Ken Xie

it's the and a solution, pretty see part growth. a good strong do it's more of similar fabric we growth, growing are Things

Keith F. Jensen

mail and numbers access would in specifically, analyzers. good quick, switches, I quarter. the access analyzer my think, had and switches check I tier Yeah, me a point that very below but let real mail, put I think just right

Ken Xie

with Yeah, and endpoint the for but we ZoneFox also, SIM the in growth. acquisition the the also also also SIM help will and and endpoint have

Walter H. Pritchard

Great. Thank you.

Operator

Thank this turn I Relations the back I'm to President time, Investor no Peter would of Vice showing over further like call you. remarks. to questions. At for Salkowski, closing

Peter Salkowski

and fourth thank Thank be presenting following at Conference the during technology let conferences I'd to know that seeing call forward UBS here you, like on on Francisco the quarter we'll joining of be Gigi. NASDAQ to the for the and you and management X, at everyone the will today December San San a you at conference for London Conference December XX, to look in conferences. We November then Francisco all Barclays. in those back X with

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

Operator

and gentleman, conference. participation today's thank for you Ladies concludes your in the program. This

disconnect. now may You

Peter Salkowski	Fortinet, Inc.
Ken Xie	Fortinet, Inc.
Keith F. Jensen	Fortinet, Inc.
Jonathan F. Ho	William Blair & Co. LLC
Sterling Auty	JPMorgan Securities LLC
Shaul Eyal	Oppenheimer & Co., Inc.
Andrew James Nowinski	Piper Jaffray & Co.
Keith Frances Bachman	BMO Capital Markets (United States)
Gabriela Borges	Goldman Sachs & Co. LLC
Fatima Boolani	UBS Securities LLC
Strecker Backe	Wedbush Securities
Rob Owens	KeyBanc Capital Markets, Inc.
Melissa Franchi	Morgan Stanley & Co. LLC
Gregg Moskowitz	Cowen & Co. LLC
Michael Turits	Raymond James & Associates, Inc.
Brad Alan Zelnick	Credit Suisse Securities (NYSE:USA) LLC
Kenneth Talanian	Evercore ISI
Walter H. Pritchard	Citi Investment Research (Europe)

Fortinet (FTNT) 1 Nov 182018 Q3 Earnings call transcript