FTNT - Earnings call transcript Q4 2018

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Operator

Good day, ladies and gentlemen, and welcome to the Fortinet Fourth Quarter 2018 Earnings 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. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce, Vice President of Investor Relations, Mr. Salkowski. Peter sir. ahead, go Please

Peter Salkowski

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

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

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

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

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

Ken Xie

and year $XXX quarter I'm everyone the results. solid to results. million today's pleased our by full strong was you to to and both and American Peter revenue for Billings call to driven XXXX fourth fourth $XXX with discuss XX% Thanks, thank up million and increased in growth XX% EMEA. quarter joining

margin operation Our for XX%. non-GAAP was the quarter

billion. $X.XX increased year full to the was billing and For to revenue XX% billion $X.X XX% up

to margin more GAAP non-GAAP basis On increased XX%. our to income to a than Our and operating GAAP operating margin XX%. doubled $XXX operating million increased

According superior growth. architect marketing was to technology their sales, topmost to our come broad gain channel and in the deployment. also recent to respondents The when that Gartner survey, our contributed concern one and a contribute Fabric XX% of to XXXX. continued Security improved it in share investment said market Our security

and deal traction our with ability a market X,XXX and base countries. SD-WAN in secured the as single fourth result geographies a seven-figure integrated signed with Fortinet segment. retailer displaced security functionality building Fortinet SD-WAN quarter, In next Backmine competitor a stores across continued with firewall to significant of gain to and a device. We generation in [ph], European a provide operates XX

for of the reviews other Fortinet SD-WAN the in double more vendors most vendor. our insight the received has in than and Gartner peer

of strong offering next our adoption we for years. So expect the SD-WAN several secure

and a the the the provide up During new release cloud comprehensive customers FortiGate robust which a partnership of delivers series to security environments. XXXE X,XXXE, second quarter, second X,XXXE, per across inspection the industry with and agreement performance announced high Today, of Fortinet to the a XX-gigabit Symantec Firewalls protection new including SSL the FortiGate solutions combination E-series, the and XXXE, Next-Generation XX-gigabits performance. and announced endpoint a per of most and fourth network we

enable E-series the organizations and providing access Segmentation, visibility, Intent-based implement threat Additionally, trough smooth automated to protection. assessment, control, end-to-end continuous

have cycle, may next current we the from growth benefited to over main the product continued refresh enterprise expect due three XXXX few While drivers. years

portfolio our secured which and and SD-WAN XG to well First, products, integrated take edge cloud the transition computing. position advantage of of us to

unit, advantage. security most-broad, automated technology, today, a high announced towards and vendor. Fabric third, Secure single Fortinet's security security SPU, a our Second, protection end-to-end offered E-series nation new our performance for continued the and product provide competitive consolidate with integrated processor And as ASIC us

several of approaches. technology other delivers the SPU XXx Our performance

Over more we of new a and advantage increase with SPU the integrated product chip computing. for new SPU System-on-a-Chip, announcement and expect cloud the processor to few our even competitive edge both next quarters, with the network

For XXXX, growth, year another balanced profitability. generate we expect of with to better-than-market

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

Now, I to fourth call for performance and full and first closer look the XXXX quarter the and our Keith guidance. will year our turn over a quarter of

Keith Jensen

Ken. you, Thank

unless of up to Product Before our I'd financial I for summary solid was of presentation make our based Total quarter like otherwise before revenue, million stated. all was I Relations the like of million are now XX%. revenue posted revenue rates note figures to comparisons the on performance. website $XXX and growth up provide to $XXX except prior-year on a refer fourth Investor Slide start, are I'd non-GAAP period references. XX%.

driven fabric platform XX% revenue was Excluding to million. $XXX sales a net revenue revenue million and growth Service solutions. growth accounting XX%. of from products, the Product new in benefit software $X growth E-series was the revenue grew by product change

grew XX% $XXX FortiCare offering to $XXX including to FortiGuard million. all With traditional subscription XX% security offering services up we're our other million. support our

customers FortiCare which XxX to transitioning from supports XXxX up XX% continues $XXX to from was to benefit million.

our raised but quarter also and by well I performance. only and Brexit slowing Federal noticeable had our note and is concerns government would strong illustrates, diversified well Chinese government as agencies. government impact state, As revenue shutdown growth our local includes not partial economy Federal the U.S. the the government vertical fourth international on U.S. as no

the U.K. single EMEA and similarly APAC diversified Additionally, within are countries regions. China and

with Before moving grew I'd for year. Total to full grew Service highlight revenue revenue the fourth XX%. XX%. billion. quarter for revenue the XX% our the results, revenue year like performance on $X.X Product grew to

Service XX% XX our a growth MSSPs revenue to products record enterprises the Billings XX% XX% XX wins providers with mark the competitor included XX to number drove a million billion. services. decreased transaction contract of financial fourth to European overall to MSSPs Also Moving over trailing plus $X At months. the acquiring XXXX. XX%. first average of XX% Short-term a record XX% of of $XXX year, XX% enterprise quarter represented closed outpace customer deal Billings The a EMEA, of $X.X services factor of we quarter over quarter our displacement. our set XX% more business of with the FortiGate use deferred of the business fourth Americas large supermarket this excluding XX X,XXX of $X to and strong MSSPs led in has deals million secure increased revenue. segmentation. strength million combination with Returning length Service beating multinational month revenue on billion internal and over the providers In single had a products the top share grew providers SD-WAN service than SD-WAN products of with the our for deals XX-month functionality of a to European-based the fourth was the XX grew security quarter seven-figure QX deals FortiGate last and on time and one previous global $X that in represented continued the end company basis XX a along of and seasonally deferred a to fourth into high-end the that increased market seven-figure and total in focus a illustrating in chain and a and at quarter by other to form include billings. to range Netherlands. quarter growth by

FortiGates. this and company for XX% which of Billings total grew products non-FortiGate three customer's is part faster our XXX%. Fabric of component than other of security. products the quarters services from hardware benefited billings. services providers of our transaction, cloud largest Security total The of billings. X% and to Secure and increased entry-level non-FortiGate billings security five platform and switches billings and in together with represent growth the, value of our recognition continued to slightly As and the performance cloud Security top our of billings. software, strategy, secure Network FortiGates continued hundreds purchased FortiGate and Total experience services. fourth quarter for are its switches includes sold excess Fabric of related public integrated represented offerings The

Moving back to income the statement.

of driven was margin by gross point XX XX.X%. quarter XX.X% fourth the margin in gross improvement services to Our basis

For from was points or from basis to XXX changes. XXX up basis revenue XX margin operating year, Fourth included the basis The gross point XX%, points. XX.X% XXXX. margin the a accounting up full margin on increased quarter benefit required operating commission

to fourth XX.X% quarter points. have increased XXX would margin change accounting operating or the the up Excluding benefit, basis

margin the the XX.X%. operating year, was For full

points, with normalized XXX the have improvement would XXX been, annual XXXX on Excluding basis Based of Accounting accounting points would the trend operating basis points at XX%. margin and margin XXX XXX for to stands improved the starting basis XXXX. change, have three-year now operating

basis our the XX%. growth three three-year grew last compounded years, rate improving points revenue these While margin annual operating a over XXX of at

non-GAAP the year line On full me, XX%. per up than X,XXX. $XXX XX% and market year non-GAAP a XX% full his was rules count $X.XX year-over-year. new prepared up of and results diluted line excluding another income a our with to show full up XX%. non-GAAP, reported mentioned between $X.XX the quarter of share, the or for non-GAAP Ken adoption diluted fourth million. diluted our non-GAAP our end was share we was comparison for the million Slides the in year. income we rate for the year The As and quarter $XXX accounting better fourth $X.XX fourth profitability. Total of $XXX expect net to million share. income tax by effective per headcount year share, growth, or Net of diluted The and results at XX GAAP the the was or pardon for was results quarter Net per XXXX million XXX.X be balanced remarks the basis, XX the increasing

cash Moving the $XXX slides and up of XX% statement to flows was flow XX. million, XX Free cash on year-over-year. summarized

repurchased shares, totaling For XX% million. we increased X.X XXXX, free In $XX to $XXX the cash flow million quarter, million.

building, of on existing $XXX between we totaling this to constructing our Including half are total $XXX year outgrowing quarter For X.X the second project, which shares, Sunnyvale spending occupy expect million. million our capital we be repurchased million to we adjacent the second to and $XX million full $XX in $XXX building first and space We're be office year, total expect the million. and between XXXX. expenditures expenditures full capital million, to and

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

of For $XXX in non-GAAP quarter, a million, per to million XX% billings shares. $X.XX XXX range the XX.X%, of the of XXX to expect million non-GAAP count range operating XX.X% $XXX assumes of margin XX.X%, share $X.XX to which the million, and $XXX to share revenue to in non-GAAP million earnings of gross of million first between we margin $XXX

We XX%. of non-GAAP tax rate a expect

in the closely said note market the global important that to of and we watching in are it positioned is business healthy grow reported we than are faster to We growth security believe concerns our softening to pipeline seeing we potential well are that XXXX. of why With economies. continue

million in expect of the to to million total range revenue between XXX range $X,XXX XX.X% margin range per million a million; million. XXX the $X.XX service share XX.X%; million For of non-GAAP share in non-GAAP to to the XXXX, of we $X,XXX XX.X% gross to $X.XX earnings in $X,XXX revenue of of $X,XXX of million; million, billings assumes $X,XXX and XX.X%; of to non-GAAP which operating margin $X,XXX count

We to rate expect be our non-GAAP XX%. tax

We to $XX expect cash be $XX million. taxes between million and

balancing to to committed profitability remain goal XX% we for as margin our of XXXX. operating non-GAAP work we indicates, guidance increasing this with growth achieve As

I'll partner’s, back turn and Fortinet our now thank I call Before all work. over Peter, back to team the the the to call for like to Peter. we support customers and hard hand the

Peter Salkowski

you, Keith. please. ready Operator, the to Q&A Thank we're start session

Operator

first [Operator the Instructions] line Shaul with comes And our question Oppenheimer. Eyal of from

now Your open. line is

Shaul Eyal

so ongoing and you Ken new in product noticeable Congrats E-series all the and the or solid Thank from whether you. Good moving NAC it's Keith, some products, channel the transactions, infrastructures. performance SD-WAN, the on direction as all well and guys. XG-related a guide. breadth afternoon guys are as is market undoubtedly perspective and

place Now becoming maybe we'll should of view more but Fortinet infrastructure an as start of security a thinking pure Fortinet we company, play. as

you level, about think it? Just maybe how do high

Ken Xie

This of ourselves the addressing company, Yeah. keep high focus percentage IT to as content is to percentage We a application the Ken. the increase with cannot because still security. address. which especially user and device want now a security level, in security as But spend the that networking region basic security

design about the years So designed design controller ago unique we inside security. with for our some enterprise. And about when a XX very security, providers can to important together designed SD-WAN at going of forward them later. And we XG basically, in Fortinet, That's SD-WAN the the And Wi-Fi security five important is we add-on like a infrastructure the to And the security then where look also FortiGate. want the more infrastructure service which of all transformation. so years, the four FortiGate. actually inside also what's with for becomes within of function, for the this started we XG within design the ago designed then controller incorporate to and much we lot design wider product, -- very, which infrastructure also you into we data years FortiGate the

keep when edge expanding service So with also security. and that the also the all provider, there's infrastructure new huge closely a cloud advantage going and XG like and like SD-WAN gives a the forward working us widening IoT/OT computing

the security early. what invest in that's R&D and So advantage have. long-term should more think infrastructure for be then do the we we in And starting

Shaul Eyal

the one much the strategy think Got change any for way we Thank same the about you for dynamics partner Thank been we've pretty that or and just you as And recent implementing seeing it. channel, you compensating that. partners seeing have maybe or change? you've it. in quarters, recent Got for been Keith the advisors years been that. any

Keith Jensen

the XX And think performance I resellers was I I tailored leadership I are of months channel are that when our probably say, talk team, whether of programs, partners. parts was focused probably channel the more to on to targeted now, I months last described individual MSSP six that when tailored larger we're being think they the the the of think probably I the segments in channel. more more as from are think I And one programs that even whether where or distributors. terms the seeing SMB, channel

Operator

William comes Thank Ho line our Blair. And you. question from Jonathan the of with next

is Your line now open.

Jonathan Ho

demand? new on this SD-WAN talk some strong results. Hi. your sort start influenced on maybe Good by the congratulations with the I wanted deals. afternoon just SD-WAN and of of you color additional and maybe what percentage driven now to deals coming Can out are about

Ken Xie

we they concern different very last and will few for benefit quarters. growth XG a from we few the But into SD-WAN which are and we don't a just quickly for drivers from few at will that. years with investment. SD-WAN growing design then other expansion. which expanding underpriced same has designed other, only be It But the the have positioned We I early that into this function. strong definitely SD-WAN started the player, security and pipeline for more the increase security see few years, from and this other at for WAN which refresh uniquely see more And time in we know that probably future next a years. keep also even the the the is least network detail beyond top ago have all more we will data

Jonathan Ho

does firewall new models? And zero you it. to from that Got maybe little talk about firewall, And next-generation your emerging this then, the with traditional how how trust bit can new firewall? based within regards differs a fit intention a

Ken Xie

border, the high-speed the But outside unit trust had enterprise on this, there's the to traditional in the the at firewall a be traditional base center, server, department next and data edge firewall, compared next to in whatever just zone which there. this to before corporate do connect other also and device, can LAN segment the next zone to once I to how deployed some inside enterprise trust a, segmentation the WAN, environment Yeah, I connect so and the deploy the intent deployed this there's the the LAN.

So this high-speed, as of of deployment issue security lot come internal security now. a is to learning automate the ready also machine and AI concern which intrusion, also easy [indiscernible] the a majority leverage

it's how E-Series in the high-speed inside move are into to where the environment right addressing this, new response deal automated way. to also that's and how how the So now. enterprise That's with

see a ramp, security, just of infrastructure quite quick security. can quite this we whole So, some big because border ramp kind give the

Operator

Thank you. question And JPMorgan. comes next from the with of Auty Sterling line the

line is now Your open.

Sterling Auty

Hi, guys. thanks. Yeah,

you're around speeds network drivers? offering the still hearing So, that know, appreciate Or in the just know, curious you integration quarter as the kind moment still biggest Ken, my main especially across And and some enterprise product front at of it what winning, the and the outperformance deals Is in traditional you of business the portfolio? commentary the or the the fabric of do thereof? feeds? a the is security. combination breadth still I'm it But your portion you that opportunity the Is your straight is in sense quarter out core and you. I of long that

Ken Xie

XG increased or The for more whole internal with and segmentation important to more become whether speed infrastructure deployment. speed the starting the

mentioned of the some part some had the will this Third both also starting the the impose fabric see So replaced the switch, firewall of more more that address infrastructure in call of enterprise the be all total to and infrastructure. access AP, Wi-Fi also security cloud, mandate. of And that's of because when the endpoint the we also so Generation so And and altogether. because being mobile we traditional kind where both we inside

some internally, other the two industry. we some within other kind to whole together the address partner So we somewhat like thing partner designed and of them Symantec of whole innovate with

than we where that's a is So kind of different the part. see transition the

to integrate, together You have infrastructure of working a have to part different to together. automate closer

the where, going enterprise So do our especially product so the is working some product that's with start feel with other approach own drivers, we our have That’s the consolidation we together. see on. we working to and fabric partner also both

So we -- than infrastructure more different feel with years years. ago four, it’s last now because ready this secured for firewall few the like the whole to be needs is the And change last traditional time UTM, will this firewall a five replacing altogether.

Keith Jensen

Keith. is This

of couple Let me more another at retail. context, ROI you're if I talk look top be just the -- a a when would with to the one the to verticals, of be Ken, think list. I speed seeing add sales you leadership services, in And little in financial

branches that we I off top you're seeing as SD-WAN think in the list.

Sterling Auty

some And quarter popped any if Because kind then quarter, indication and of read Is look guide just a of as wondering linearity in Or DSOs there an that I'm it at well think the through loaded? first bit. if back-end up I the and as looking it? the to more driver the at there's was other here? that I

Keith Jensen

I last being went we after of early day But holidays. finished the to last notice I a purposes, very I No think think and the don't quarter lose in did up XXXX, for the -- -- because from Europe I year the year XXX conversion -- think XXX. comparability

ocean December I on both think throughout working sides the time. of both this are

Sterling Auty

year I seasonality last half sneak then kind traditional laid if XXXX, as the you your of you think the about would one you’ve out points versus business? how you guidance the of in, And it how the first toughest half guidance of the through characterize versus where comparison the would for Okay. could second say are and

Keith Jensen

where and think we XXXX I whether looks a on XXXX that's lot on guidance the in growth. started, that terms whether is top that's the line of the guidance headline like

our we're mentioned pipeline some caution good the certain there's moment. and note we're of the model a things. your we necessarily things think XXXX back to the not to think us, think pipeline, that at original I the model about the in I feel But lot you I of directly the the question, the very come that looking script, relevant of And but like XXXX watching in looks impact. I of a spillover terms for did for timing to know

Operator

of Instructions] Boolani And you. with UBS. from our question Thank the comes next Fatima line [Operator

Your line is now open.

Fatima Boolani

for around you Thank for question. have one revenue the guidance. your afternoon. first the Good taking just product is two I Keith, implied Keith.

where were I'm little did I if we So my anyway. math a ahead out shaking right, expecting maybe bit of

growth that you what we sort as sales the into into I you and get as some an are has So well? what And to sense the of tax around reform normalizing capacity sort wanted a impacts some lapping XXXX and plug -- we your And we of you specific of confidence of growth in product to what given XXXX, trajectory. effects product those lapse as that that? the as maybe of for follow-up lapping that extent provided extension sort of incentives of are

Keith Jensen

think of about changing taking in early to comp an continue first. the a is kind point I've very impact. plans your So we that XX overblown last probably last having made year comment

think the the offer through For of we're at and we look product terms I XXX solutions, of XXXX the a new not that's I about SD-WAN offerings, moment very pipeline, whether very When your comment We coming what when about, were that Jonathan for seeing we're other people the I of people that are product feel growth as a feel what point, that seeing I things seeing offerings something benchmarks I'll we're we doing that we we slowdown. when online to good the to business. But the don't growth, that year, there's we other expand if that talked benchmarks it's we what it original suggesting followed I made you is. And I that's it our about will, think are very growth benchmarks SD-WAN evidence move that out good to the in benchmarked think close the it talking of the against would compared against business. pipeline on rate, ago. parts well again, products was pipeline the other against there. we benchmark and to see. well try the

So I think there's a lot of calluses we move through the year.

Fatima Boolani

That's around really a of your of provider business some snap to historically helpful. level service just back your sort And billings. higher of proportion does that as

data I think spending medium of tone you said same service we up XX%. cautious from tech around the But providers posture. time, spending and some at your peers picked more center

So you for really that sort some it is of Thank And for that are really the that's we've how picked bucking driving up you? me. what negatively tech that from of you. peers? trend momentum And other

Ken Xie

is Ken. This Yeah.

more also the for it’s also a more services provider provider Service service and start play in their a sector of next important that the XG, interesting. a for infrastructure security also expanding few with keeping space. the also be service would service. It's so think biggest years own And -- and add providers, infrastructure us. strong few the in role I expanding First, security more will SD-WAN

very a move security we for already, the that's the suddenly kind like years whether them few next a than supporting few -- yet, the all become all And the know ago, technology, us that But years slowdown SD-WAN, growth we product, the a or this can Because beginning be with competitor new there security. of strong none Eventually more are provider driver sometimes other little or also SPU and whatever the with XX timing XG this high as good enterprise feel ASIC product, all years. few with infrastructure that a customer next provider, providers pretty spending closely percentage. for our enterprise the strong more trend see additional service it whether develop kind driver on lot design probably have for quite all of the benefit internal function we will this are the we will kind I as of for bit. of working is than We of other XG kind the round, there security there and We the slowdown since actually function XX all cloud And so of beyond years. something refresh. good service the or a from years. confidence service going service not also the entire give integrate is

year's confidence So us the good growth. pretty for that a gives next few

Fatima Boolani

Thank That's you. very helpful.

Ken Xie

Thank you.

Operator

Your next question Stanley. the Franchi comes from line Melissa of with Morgan

line now is open. Your

UnidentifiedAnalyst

Hi. This product a had Melissa. asked the quick was I question for a for in is that [indiscernible] on XXXX. revenue guidance to earlier follow-up

mentioned earlier just on on the lapping effects I think were it some extent versus by whatever my math base moderation caution the factors? tariffs be else? general implies or about X% growth. To that macro some or what does Whether the of that reflect China of

Ken Xie

looks I talked I the on it very, whether mean, Yeah, about seeing that's an about case on XXXE latter bringing I very which new XXX, excited the out, plus functionality at which Ken use is new I think SD-WAN the focus pipeline we're well. about the again, think is the just think the that going And the Very the But along. and XXXX than that's products more that very strong. XXXX, looking is midrange former. that family the building talked product I

small. I going we what that larger through of fact have And to over the again, happens in like the we going large government U.S. China's is Brexit the start watch with But things not exit wonder they're into of could whether those kind don't do really those kind here what think they're and quite well. to and the I crash this in or out process geographies, feel economies. exposures of it's spilling any more off

UnidentifiedAnalyst

there it. then pick extent of tariff QX? checks and up did a on spend even of for of the increases. pulling in And customers that some what Got forward or our, price were advance in impact positive some impact, you We negative to was that our

quarter. if I It of wondering any this that me. you And for past So, was notice that's

Ken Xie

Had not small products. heard that very and of the tariffs subset are impact our

surprised I actually, it be incentive prices that expect would see they not So, and so if, other that that for changing even be had we're may here tariff, to if to would around Fortinet but happen happen I I products. didn't it we know be for, would vendors, not

UnidentifiedAnalyst

Got it.

Okay. Thank you.

Operator

next Piper of Andrew the comes with Nowinski question your And from line Jaffray.

open. Your is now line

Andrew Nowinski

quarter. segment. I you and congrats just to service on Great. the provider on nice the Thank question wanted a ask

clearly strong this was could just that going recently the if forward? is results determine competitive of targeted launched guess You the sort provider landscape maybe you trying I that update any a how And weave service new segment? and on in quarter [indiscernible] appliance to given space at just that know, and sustainable I

Keith Jensen

to it been I over provider a quarter-to-quarter. think of service the has always from our one It's kick service business. the business. of part percentage our QX Ken for quarter part lumpy off of I'll as typically business, and very very for a is also been hand a hard strong it's the part. fairly been Yeah, good that provider

very the we're with results. So, pleased

the that that had as we deals we itself, of segment quarter part the the in business, well saw MSSP historically well infrastructure, with in of and in think done both I very quarter. business as

Ken Xie

need to to they using also the nano performance service also technical third and and And so sales our power provider the buy. different than into have environment. have provider reliable high Yeah, tech very to buying cycle years test validation. party also It's to fully the service And and more to I service mean, long, a marketing two of of they also both some himself influence environment some very it's probably enterprise, are, sell be more the but provider. one competitor product first they

the with with the complex like is So years SD-WAN, looking XX the also for the new some within opportunity and And seen additional major provider and function where design provider, out and on flagship service for that's of service product in service together becomes service. enterprise have we but also not provider with the competitors other have actually infrastructure many service very provide much lot more anything they in more with the value-added service come security the progress there's pretty a provider, other get. all them and the customer provider then than with and can close feature years announced working side different a

So the in service that's we are their security in where to a support provider behind space. future growth

other sort And and like so some I be core could I edge a it and a some the of also also high-end we of like do is lot lot it's computing to think relate product for part. of said really IoT expect,

for have the the call both product that edge end and in we together working shipping meaning product been advantage need the XXXX, of they few like also whether And and so the early the years the the mentioned we years of So a we also couple have that product high that. XXXX, already. already

today. the And we position so come they to we -- and in space get with the don't some our many have close time rather see of competitors need

Andrew Nowinski

a growth from across annual XXXX maybe regions then similar And an all you. geographic on basis. thank fairly perspective, in you Great had

And at across balanced so in outlook, look we again XXXX? all growth XXXX as your expect regions should I

Keith Jensen

fourth Yes the that's yes in in how quarter. up I the we’ve business. with of how But the model the very mean sign across different quarter particularly parts pleased We're that's execution business. geographies we consistent the the

Operator

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

now is open. line Your

Brad Zelnick

much on Great, a thanks congrats great two QX so guys. got I've and questions.

and a cases bright can your broadly again First, you. XG about the into edge and key service caught to or for the for you demand quarter. use looks up on And and as you your a spot talk And provider maybe think two one And ago? expectations in do more maybe this opportunity was you the compared to that market virtual was perhaps what shift that like the year how appliance in virtual opportunity future?

Ken Xie

also also a virtue we and call also SPU. have advantage the huge the on virtue Yes, we

also secure we're the need virtual architecture of to needs also a the core some the field together environment. whether edge the a data in time, that's center lot call which At So there. of using they our with or edge the with appliance And then in cloud. kind provider some in same the

provider, is advantage. quite give of called a And There cloud we more more cloud with we kind can function we both us competitor which virtual of a then also moldable integration you that's where solution. So also the with see [indiscernible] the offer, broad -- the well. part the fabric other growing

need or to you -- issue. whether together help where also the that's So solve the to cloud provider you applications and customers virtual, also go sure different to make different working call

better the to compared So and more some we that's of offering integration also competitors. where much broad the do

virtue we is where that's physical combined the service we to the offer provider. is together advantage So the

Brad Zelnick

ultimately public to about actually of That's And great them players you of the some very the from about get likes curious the network forgotten of product see Ken, you security. guard. if you sonic consolidated? the out other any do share ones watch are about you. like market your or believe other feel times keep the that or And I'd wall things on end large channel. across I coming very often everybody Thanks. names be in -- that observations Thank the lower companies like can you in eventually smaller But field And we What competitively? the hearing helpful. are focus some there

Ken Xie

two-part. a There's

the First years. XX dynamic more been almost in environment security security for is

the up innovation. You to need keep

as follow on a companies So trend, some growth even depend to a that innovation always bigger the the cannot the acquired – to will to function, company challenge moderate company. if to for down product. then company existing slow slowed acquired That's the of of growth. the existing this And how challenge be then really or on with company integrate acquired or some have

actually, the of of whether already also sort other billions spend investment for in can once on and in we the well. the like the dollars also scale some economy reached player smaller technology, ASIC SPU the they like size, working So starting

that's start So With more the higher consolidation some so the of security broad has where space. the less less, reach making offering in happening advantage. also also speed, that's competitor smaller

of issue probably So time competitor they're lot market. come play And some age for start smaller losing a the new somewhat the feel new of niche function, every year, there's space, some to there. That's company I up a new the still of of is the a niche and part to the They cannot like of the enterprise. only cannot integrate, But then billion $XXX address expand market really cannot million niche. grow $X performance there. or in some new improve can application, difficult they have beyond new lot

old more feel some the we're on going with companies. companies for the now that's So we some of And see where on probably slower we of these company, growth. innovation some and consolidation of the good looking that also the long-term starting

Brad Zelnick

Great. you you Thank taking guys so much. my Appreciate question.

Operator

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

Your line is now open.

Walter Pritchard

Hi. Thanks. for questions here. Two Keith

it QX strength had light feel is simple what QX the had seasonality the a seems quarter a fourth especially metric? usually it bit look a on strong did little follow-up is if you on the QX then seasonality, like and another And on QX billing QX? I there to a pretty explanation in is of Just

Keith Jensen

strong is the that It outperformance. an Clearly, performance fourth Yeah. just a very had quarter. we

Walter Pritchard

revenue I non-security largest that from Could Maybe maybe of could don’t X%? the the in cameras revenue of Great. talk that's products? and represented other help us things by How And about points the products? know or phones revenue did you non-security you access kind understand any you total to was switches. of much product and of think excluded and if either weren't all-in X% the then the the I is

Keith Jensen

Yeah.

and the are products. secure perhaps coming the what fabric, of share professional phones the But pure service, of that secure and includes to other products. what actually I'm of is training. include talking sure you're non-FortiGate particular secure in kind of cameras think XXXX. I not fabric, which of It piece We things So back the really up access, switches makes that group. largest about. the It's lion also includes

you lot deal product in quite as of to on XX, drain a margin, as have hardware us they're access, think one And when much are. we so secure but while bring terms not some secure remains with XX we the metric, software in billings margins to particular does of much greater in So billing if solutions and part that we also not on at switches a about you up attach it’s that understand looking secure I our generating in is offer it keep in software. you a -- switch switches than is service, different And what software margins it may offer I the larger people we’re total would both that I XX what and And us. pleased mind much than margin start for just product described, more start when talking suite, it's think. and our the all

Ken Xie

Yeah, FortiGate clear also. FortiGate of of and and also sales of some kind FortiSwitch as all well. there want with the basically segmentation resolution the also the control whatever sometimes switch to control I switch together, don't sell record We and function just separately so some

not email separately. So web of And that's part security where with fabric switch some and other, switches the has all the recorded security It's FortiGate, together. but the with and a security, that's the security solution. function sold together inside all working plus

sold sold to together it’s be had separately. So of instead basically

don't So sell switch we ready, separately. that's is the switch

Walter Pritchard

Thanks. Great. Thank you. Thanks, Ken. Okay.

Keith Jensen

Thank you.

Operator

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

is now Your open. line

Gabriela Borges

hiring where you. last for for thinking for assumptions of was the versus for there also for you afternoon or be think Thank about you're how could Good on prioritizing any plans question. internal the pace thanks color force, a Keith, and my year. And for on this of sales hiring color for the for Either earlier hoping adding Keith, bit Ken you on plans channel I headcount? those Great. your would are elaborate I taking helpful. little productivity was really year

Keith Jensen

Sure.

you we particularly into modeling the productivity cautious assumptions, very last will. in the year Productivity team. if of going not start have to productivity, reverse sales sales in Let's I'm order. increases I be the quarter fourth strong had guidance, not, of

way I think appropriate that's it. to about an go So

the the seeing bringing alluded order the the of think our and I think before into as channel as as terms maintain grow of in the in leadership enterprise pace we terms business. in expansion to of revenue channel them the of you're sales investing I salespeople, as finding business, and commercial the of of to I as number. up it's one that growth and experienced to areas of in there this I in hiring, gave bit adding carrier as would enterprise, terms But behind well, well growth the trying to kind perhaps not keep with position segment interest hiring revenue And we've as salespeople places is certainly aligned our the the we're I on of and a investments priorities. we board. the is talked our first we're SMB actually we're number little That's not continue say and earlier MSSP say other is where and where we're continue in targeting and

Gabriela Borges

That's please. very Yes, helpful.

Keith Jensen

the really like Yeah, the the fast we like also, the there. of and the where also level in well, keeping for pipeline of in U.S. seasonal the enterprise, like growing kind think that's influence in with especially And I enterprise we market have us in a see here both one

base, relatively we competitor company come So from a faster we're, keeping are average. we other than about but small and also much volume

I forward. tool think And the the keeping us that's to they so we're investment, all and we for starting working and to for productivity area. return how investing to kind in investments, tracking try also [indiscernible] more better starting, whatever also of efficient pipeline, each visibility going that's different whether be better see gave together have I that how tool for we're So the a

Gabriela Borges

the is the And prepared you. Thank to helpful. That's follow-up referring back remarks.

refresh at a level? environments. I'd XXXX you're love always was you foothold gives So refresh into was drivers I Ken, interesting competitors mentioned piece it customer and because about to the then XXXX interesting a to good refresh company specific you to a understand the your for of Fortinet Thank as how XXXX. going thinking the going in really year you mentioned to end try changes few thought happening of this displace you.

Ken Xie

first it's the enterprise Yeah keep on I -- space. the the mentioning refresh more

small compared faster. other much So competitor grow that relatively we're to in enterprise

different to or we're pieces the traditional the it's together. edge the already But not new replacing firewall different as firewall. it's also with integrate tried also So firewall consolidation -- and refresh, and

in of partners that's also different making bigger it also more So you deal, if what the space. last a broad bit offering the compound under and longer little player have

consolidation So for we this And refresh few we we the product also a maybe above growing feel working then average. also couple together quarters probably because continue market more even that. more and enterprise all a and keep years of doing keep will enterprise space

and it also and also and helping because see that percentage new other the more new beyond us integration also play consolidation next and to role our a think years product of I for the That's XG four mentioned growth that now the on because I us few integrate help refresh drivers the driving. years. infrastructure is service broad new I drivers SD-WAN, side, into the think and the for we chip that's where coming space enterprise more bigger to the SD-WAN the we that the will the On keep we the product all provider service XG will And timing the three the mentioned new feed us product, good to also of SPU fabric out three takes benefit very that design. finally also ASIC And also on since growing also provider that the three these. we in

Gabriela Borges

detail. Thank all you. I the appreciate

Operator

comes with our Byrd next And Securities. question JMP from of the Michael line

Your line is open. now

Michael Byrd

in real I wasn't through that quick question. you know my extended? seeing getting on But the of about in looking impact. the wanted guidance think things pipeline? I quarter sales material are Are the taking given the the at the shutdown? the it being Thanks entirety cycles Federal the a are what pushed? Or piece. business I of for can mentioned ask how the to piece terms Or XXXX, even you of fiscal Federal

Keith Jensen

and as U.S. which but disclose kind it smallest XX, army, probably Federal the the largest include state, part, of to vertical. vertical, It think So all, frame pardon I of government international ago think but probably some third the is well. or the includes I local only government me was the time the was first also not second we Federal -- it into up it this

of concern I’ve close issue to we if becoming unconcerned it. from My much size the were together the our if the is we nine shutdown seven funded the direct start continue it. stands go, given of a terms agencies in to impact this think and business of So concerns very to down thing -- fact about with it economic particular the Federal if government I about broader a Federal than

Michael Byrd

of weakness think the going Okay. data And think a of how center? Fortinet you about big peers. some I I talking in see follow-up, about How center? a core data business can We then the the quick into to guys can

Ken Xie

as because we're the product service launched sell some down. I series the provider customer, provider like anything? centers don't offer their up, and with a like the to data into of both working we think much one starting the slowdown to two probably center. secure XXXX years Keith since But XXXX, seen in And the we high-end then service ago. also ramp infrastructure slow data service service have to mostly not

Keith Jensen

Yeah.

have pausing, any both we’ve of We’re that slowdown. is data us suggests because there really not a neither -- one

seeing and plans we're impacting something about talking something cloud of not or If -- that. providers their it the But like doesn't business. some regardless our you're

Michael Byrd

Okay. That's Great to you know. me. from Thank much. it very

Keith Jensen

Thank you.

Operator

Ives from the of next Securities. Wedbush our And with you. comes question line Thank Daniel

now is open. line Your

Daniel Ives

to frame lot naysayers guess call questions I But a have maybe Thanks. of asked. it, on the Yeah. your there's including I on growth. A of lot many the know been

What the in are the of looking as think deal doing think are the what defy I'll of which it the opportunity competition guys frame you just large out skeptics. there? versus going noise you forward maybe to there. I continue size investors terms well on especially from do missing, You as growth some

Ken Xie

engineer to long-term we to to and do the other SPU years some we invest a see chip next position the XX some ASIC how in innovation try and improving with and also For from like a five space. level things a as in difference infrastructure, other me because may some years keeping make

of the investor. explain could time where some time be take that's a to some long technical, to So too could

some obviously about, I’ve So too technical. time got too they deep talking are

a potential impact But finance has I lot more in focused. of So value some and also focused in big bit feel the a space. a of other competitor more that's make long-term technology, some the into lot a different we're short-term, part the still little more

we and the So market said, And player. I quite also third-party from very patent are over and lot technical some IP assets on we also so is doing from testing keeping have. the And new innovation in other of new also reached like very them the SP company result in But well. the in is have of same which the the compared provider, also sell SP function XXX XX like But see And wherever winning competitor side, on the going that's there buyers But as innovation. we I just other, also a the or most technical time XXX improving of the culture the internal can at testing product innovation some space, the like of whether product. the marketing have the we're patents, the we're XXX, think some you there. other ourselves. invest technology keeping to XXX whether service the we Fortune technology we're and more

there’s So no – margin, we'll balance pushing we at growth then pushing of costs, the lack and also want growth money time that's where without right, money same be. and the with on to CapEx. the keeping And

some and flow balance on the base. keep both the on some want to non-GAAP and in GAAP cash we growth So margin of the

will So this anniversary that's our year so of where from a XX-year shareholder return a lot, IPO. be

will last years. XXx the more in grow the than So evaluation XX

we strategy you looking long of So to that's planned. where sometimes we need forward we of for the to a time see kind some may looking also view back,

Daniel Ives

Sure.

Keith Jensen

them. company, offer experience, that longer with and the growth adding know, balancing investors the the so cycles. founders sometimes And plays is executing that We're long-term over think perhaps the will that. in direction perhaps the very also founders time I top line, to think. right? of adding I think going a line. the we of others technology you and would what I of have balanced at looking I take I market the that think clearly, undersell at with the the to the And the look when side echo the, we're I well of I period experience than where on One, probably think bottom I Ken a that people said XX-day approach,

Daniel Ives

especially just that's months. And if a the XX That's that's at next just the I competitive where forward? especially technology going you I do mean, great. feel XG, clear you on like guys play you XX have and look we given to going advantage where Thanks. mean,

Keith Jensen

Yeah, that's this networking FortiGate Wi-Fi ago the the and why how SDN, Wi-Fi how the for see, you few data center with and years, almost software-defined for high the all physical have to core relate next cloud combined And then to a the core four, to to ago more also five really we also OT the five made speed the growth of related there's so and XG drive with virtual because and to also side secure applied years And started how our investment controller and XX even maybe that. and application to in combined because IoT years this by side. edge secure SDN. then to like also the inside of is a XX the that years kind and

inside FortiGate. So controller SD-WAN

also with to also, different combined different infrastructure So different to not least play need few And just of application, to be complicated, also, you need like there like then all also XG five with a investment. of to vertical. the working years need this the security It has few XG years quite related IoT also with vertical but has weeks a And kind a also for solution. for to out. and designed service also has of some investment requirement we investment even provider like to different design in combined XG. come like to also the to together together a part and It's and also above technology, or had and different together infrastructure different has XX with be and for part really the the at months have up long-term so years something play service continue working take of part other come provider

for where XG the and will we about feel years. five help So that's pretty confident to next drive the probably XX

Daniel Ives

Awesome. Thanks.

Operator

today's Thank session. question-and-answer that you. And concludes

for over Peter Mr. the Salkowski remarks. like So, back to to call I that, closing with would turn

Peter Salkowski

everyone And will XX. management to are the presenting call on joining quarter. being on Thank thank Goldman first Those you, Conference San It know in technology for held Andrew. Conference Morgan today. let during at the the I'd Stanley XX be February the like and conferences will you the Francisco. conferences be February that following Sachs

of seeing look in to forward you the Area. Bay So many we

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

Operator

a Everyone This and does Ladies and day. conference. gentlemen, thank disconnect. all wonderful conclude the you may for today's you participating in have program

Fortinet (FTNT) 6 Feb 192018 Q4 Earnings call transcript