Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the fortunate Q3 2019 earnings announcement call. At this time all participants are in listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one.
On your telephone please be advised of today's conference is being recorded if you require any further assistance. Please press star zero I would not only to hand, the call over to your speaker Mr., Peter Salkowski, Vice President of Investor Relations. Please go ahead sorry.
Thank you Shirley good afternoon, and happy Halloween everyone. This is Peter Salkowski, Vice President Investor Relations afford enough I'm pleased to welcome everyone to our call for discuss Fortinets financial results for the third quarter of 2019.
Speakers on todays call or Kenzie, Fortinets, founder, Chairman and CEO and Keith Johnson CFO .
The wife called it will be available for replay via webcast on our Investor Relations website.
And we'll begin our call today, providing high level perspective on our business people, then review, our financial and operating results regarding or guidance for the fourth quarter and update our 2019 guidance before opening the call but to your questions. During the Q in recession. We asked would you. Please keep your questions brief and limit yourself to one question and one follow up to allow others to park.
Is that.
Before we begin to look to remind everyone that on todays call. We were making forward looking statements and these forward looking statements are subject to risks and uncertainties, which could cause actual results could differ materially from those projected.
Please refer to or a SIFI filings in particular the risk factors that are most recent Form 10-K and Form 10-Q , four more information all forward looking statements reflect your opinions only as of the data. This presentation, we undertake no obligation and specifically disclaim any obligation to update forward looking statements.
Also all references to financial metrics that we make on todays call our non-GAAP unless otherwise stated our GAAP results and GAAP to non-GAAP reconciliation is located in our earnings press release and in the presentation that accompanies today's remarks, both of which are posted on our Investor Relations website.
Lastly, all references to growth or on a year over year basis, unless noted otherwise I will now turn the call over to Kevin.
Thanks, Peter and thanks, everyone for joining today's call completely off quarter. Once you mentioned result.
Piece, we saw strong boom in port on the service revenue All commission margin on the free cash flow performance you this quarter.
Contributing plus strong quarterly result, well I did want 40, I suppose you keep in 40 technology.
[noise] liquid security fabric solution.
Right on the mountain called offerings on a significant not box office it QST when solution.
Total revenue was up 21 person 540 million.
Revenue Austin are good at 20% growth.
During the quarter 40 minutes was named a leader for the soon complexity here not gone or magic quadrant.
Well now we'll firewall.
This recommendation when a date hard advantage I have already know enterprise customers.
Two quick to secure even I walk us de lever integrated and ultimate security to home that will come Baramidze.
Good day.
No that release up a new <unk> 40 to 60, yes.
The patent or on the best selling backstop next generation firewall in the industry.
[laughter] language 40 bed I assume.
Thank you.
He both secure anywhere.
[laughter] de lever is security compute region.
Well sweat protection.
Like inspection and the next drinking far more performance for 47 Huh.
That's true every jump on it.
The security companies, reaching compares to pull fullness off all 40 has to be U.S., so sometimes with battery Henderson, who she the same price range equalize Genentech CPQ for networking and security capabilities.
He personnel, one h. solution needs to acuity.
Do you see estimate of one age pull addressable market what increased from 1.3 billion Plenti HM.
One 2 billion plenty plenty suite.
Thank you I just want so who she can you hear me pull from being a corridor.
According to Gartner into second quarter over 29 PM 49, rang the sooner with lots of gross on 11% of I speak about market share.
We've lost market share growth, whether they wouldn't be solutions QST, when it's clearly resonate with enterprise customers.
Traditional announced it could be border hockey smoking Hot mobile no and I can technology change the way people walk.
These has led me to secure.
Each computing record high performance secure networking capability.
Five cheese remote.
Turning to page of providing more putting paying inhibition.
And we see Monday, nobody does he have security solution.
I said either hybrid in a multi called US was age the cumulative fortinet and maybe well for security crews in networking and Bose age and a call security because no one agency and the high performance is a clear competitor advantage.
Going forward, we see four flavors for market share growth will fortinet.
First on refresh and pro forma of food and paid this new 40, I suppose you has a huge security computers reconnect advantage compared with all other competitors.
This for Medicaid will continue to lead the transition to security group and that will Kim and secure I see why adoption.
Well I love, what do you might gain additional market share.
Hi, good wouldn't have security fabric, our loss, how far abroad, Oh, maybe nyquist acoustic promotion.
And protection as cost not consolidated wants a food security vendors.
Third formats broad range of a hybrid commodity cost solution he wants to provide security.
Well on from the club.
I'm force, what did I say, well positioned to either transition Fiveg and I would you see acuity.
I have resolved almost 40 people technology.
Like the huge advantage embedded and liquid security.
No what caused the performance.
On Monday Nonstop acquisition, I'm, I'm, particularly comping on silo.
Daqo Nisha Fortinet security fabric offering.
Fees and I'll lead times.
Maybe detection and response credibility as an endpoint that page data.
I went back to take this opportunity won't come and Santo team who fortinet.
Oh, no one but.
We are celebrate 40 minutes.
History as a public treated the company.
I want to send Fortinet, Kim and all partner for the ongoing pocketbook and all customer for their support.
All contribute to agree to success.
No I would turn the call over two keys for Council know enough said quarter performance and all guidance for the fourth quarter ended for you.
Thank you again.
Let me first note that except for revenue financial amounts, our non-GAAP and growth rates are based on comparisons to the third quarter 2018, unless otherwise stated.
The slide references I make refer to the presentation posted on our Investor Relations website.
I'd now like to provide a summary of our strong third quarter performance as part of the summary, I'll highlight how the diversification in our business by geography customer in industry segments and solutions has contributed to solid growth and consistent execution.
Let's start with revenue.
Total revenue the 548 million was up 21%.
Led by strong revenue growth from our fabric and cloud segment.
Revenue from our largest segment network security was up 19%.
Product revenue growth was 20%.
20% growth represents first.
An acceleration off the 14% growth we achieved in the first half of the year.
Second.
Growth off increasingly more difficult your earlier comparisons as growth accelerated through 2018.
And third a growth rate that we estimate as double the industry growth rate.
Product revenue of 197 million benefited from the segment growth noted a moment ago.
As well as a as growth in both appliance and software solutions.
Given the significance of our historical SMB business and the consistent trend in our renewals.
We believe the impact on our business of an end to industry refresh cycle is muted.
Consistent with Kens earlier comments related to our SD Lan market share.
Both benefited from the market's rapid adoption of our Fortigate based secure SD Lan offering.
Our higher margin service revenue increased 21% to 351 million.
And represented 64% of total revenue.
Up 10 points in four years.
Fortiguard subscription security revenues increased 23% to 193 million.
Forticare technical support and other services revenue increased 19% to 158 million.
Renewal rates remained very consistent with prior periods.
Deferred revenue at the beginning of the third quarter accounted for over 90% of services revenue and 60% of total revenue recognized in the quarter.
For the fourth quarter, we expect the deferred revenue balance to provide a similar level of predictability.
Accounting for similar percentages of service and total revenue.
Total deferred revenue increased 26% to just shy of $2 billion.
Sure term deferred revenue increased 21% to $1.1 billion.
On a geographic basis revenue growth with the Americas accelerated to 24% despite a more difficult year earlier comparison.
EMEA growth accelerated to 21%.
Now turning to billings.
Total billings or 627 million were up 19%.
And benefited from the diversification of our business across geographies customer and industry segments and solutions.
Network security billings, which includes products and services.
Increased 16% and accounted for 74% of total billings.
So this growth for non network security, which includes both products and services.
Outpaced network security billings.
We generated billings and over 80 countries, where their individual buildings were less than 3% of our total billings.
In aggregate. These 80 countries represented nearly 55 zero percent of total billings.
Well, we saw somewhat slower growth in UK and Germany. It was clearly offset by strong growth in several other EMEA countries.
While service providers and Msps remain one of our top segments.
Accounted for 17% of total billings.
We experienced an equivalent contribution from the government segment and a strong contribution from the financial services segment.
Looking now at deal sizes.
Deals over $1 million increased 77% to 53 deals.
Secure SD win was a leading contributor to the increase a number of deals in excess of $1 million.
Accounted for eight deals in the third quarter up from one deal over $1 million last year.
We're pleased to see the geographic diversity and all of our large deals with over 40% of them coming from EMEA and APAC.
The number of deals over 250000 and 500000.
Each increased 26% to 333 and 130 deals respectively.
Average contract term of 26 months was flat year over year and down one month quarter over quarter.
And do offer one final note on diversification since Q1 of 2017.
We have not had a single transaction in the quarter the represented more than 2% of quarterly billings.
Now back to the income statement.
Gross margin improved 170 basis points to 78.2%.
Product gross margin improved 330 basis points to 60.7%.
Product gross margin benefited from an attractive discounting environment deal mix.
Software revenue growth and a stable product transition environment.
Now, while we're very pleased with the product gross margin performance in the third quarter, we expect it to return to more normalized levels in the fourth quarter.
Services gross margin increased 70 basis points to 88%.
Operating margin increased 250 basis points to 26.4%.
Driven by the improvement in gross margin.
Operating expense leverage associated with our strong revenue performance.
Total head count increased 17% to 6590.
Given the strong operating income performance GAAP net income was $80 million up $21 million were 36%.
Moving to the statement of cash flow summarized on slide seven and eight.
Freeze kept free cash flow was $204 million up 29%.
Resulting in a free cash flow margin of 37% up 230 basis points.
The increase reflects strong third quarter billings collections and the flow through the increase in operating profit to net income.
Capital expenditures for the third quarter was $17 million below expectations due to the timing a construction spending.
We expect fourth quarter capital expenditures to be $40 million to $50 million, resulting in a full year capital expenditures of between 90 and $100 million.
In the quarter.
We repurchased approximately 335000 shares of common stock for total cost of over $26 million.
At an average per share price or $70.70.
The third quarter, the remaining share repurchase authorization was 616 million.
As I turn the guys provided on slide nine I'd like to remind everyone of our diversification in our model again by geography, as customer and industry segments and solutions, continuing to provide and contribute to our growth and the consistency and our financial performance.
We will dive deeper into this consistency and visibility and predictability of our financial model at our Investor Day on November 18th.
With that I'd like to remind everyone of the forward looking disclaimer Peter presented at the start of the call as it applies to all forward looking statements, including the guys Im about to provide.
In the fourth quarter, we expect billings in the range of 750 million to 765 million.
Revenue the range of 595 million to 610 million.
non-GAAP gross margin.
The six excuse me of 75.5% to 76.5%.
non-GAAP operating margin of 25.5% to 26%.
non-GAAP earnings per share 69 cents to 71 cents, which assumes a share count of between 176 to 178 million.
We expected non-GAAP tax rate for 24%.
For 2019, we expect building to the range of 2.550 billion to 2.565 billion.
Revenue in the range of 2.135 billion to 2.150 billion.
Total service revenue in the range of 1.355 billion to 1.365 billion.
non-GAAP gross margin was 76.5% to 77%.
non-GAAP operating margin of 20, 424.5%.
non-GAAP earnings per share of $2.39 to $2.41, which assumes the share count of between 175 and 177 million.
We expect our non-GAAP tax rate to be 24%.
Expect cash taxes to between 56 58 million.
Like Ken I'd like to extend a warm welcome to the silo team.
Before I turn the call back over to Peter I'd like to thank our partners our customers before net team for all their support and hard work.
Just because of your dedication and efforts the Fortinet is able to celebrate 10 years as a publicly traded company on November 18.
Then back then you close a day of the market cap of $1 billion.
Today your market cap is over $14 billion nicely done.
Peter back to you.
Hey, good Geek operator, we're ready to open it up for you and equities. Thank you as a reminder to ask a question do you want me to press Star one on your telephone we ask that you. Please limit yourself to one question and one follow up question. You May then returned to the Kim to withdraw your question. Please press the pound.
Please standby, while we compile the culinary roster.
First question comes from Santa member Ronnie with CBS .
Good afternoon. Thank you for taking the question.
I will start with you on you've had a fairly feverish pace of gateway and new Fortigate releases over the course that this year, a you're talking about four to ESP you refreshing through the base. So I'm wondering if you can comment on general S&P trends, how you're managing around cannibalization of Keith.
Given that the extent spectrum at the appliance. This you have and any color you can provide us on a product shipment trends and I do have a follow up as well.
I said of US I hear from you kind of a number of topic them, there I'll try and recall each and every one of them.
I think look I think if you look at our product suite afford to gates, we have about 75 different for decades.
Firewalls that probably compares to some other people that maybe are closer to 15, why that's important to you assign some sort of lifecycle those products and you pretty cut quickly come up with the idea that.
Where we pressuring our products at the pace of probably 810 or 12 year.
It would become fairly good at it and I don't think part of that being good at me is both in terms of how we manage our inventory, but also how we manage that transition with our customers.
I'm not going to comment specifically on asps, but other than to say that I was very pleased with the trend up of asps in the quarter.
And it's been a very consistent upward March and Asps overall, I would attribute some of that to the fabric products, which are driving when I talk about asps total billings for a solution. If you will I think thats contributing to our Sps and I probably missed something else.
No.
That's helpful. Just shifting gears to the secure rescue and traction.
The the eight deals that you called out that were in excess of a million dollars in the quarter I wanted to Peel back the onion on that to get better sense of where the buying audiences here and if you can speak to the competitive dynamics because relative to the one deal you did last year I think that's a pretty significant improvement to just wanted to Peel back on some of the dynamics of the strength there. Thank you.
Maybe I'll, let Ken talked about the competitive dynamics and I can talk just a little bit about who the buyers are first.
So the wind market is tilted more towards the enterprise on us towards the SMB and we see that in our customer mix shift in the SD Wan, but can you also because like I said, 80% and the best customer need as few when the security solution.
So thats, where we had only one.
We have security and I just want to get in the single single box. So thats, that's machine that advantage and also the.
The computing power, we called it you computing region, which gave us huge computing capability. So we can easily add additional function and what influence acuity tie up land that was side.
Just back even ways actually you when a loan portfolio as much better than any other competitor and for them to have a lot of maybe coming in Paul can vary at any function, whether networking security southwest kind of.
Q1 advantage going forward.
Thank you.
Thank you. Our next question comes from Sterling Auty with JP Morgan.
Yes, Thanks, Hi, guys. So at this point can you give us a sense of just how big is as the wind as a percentage of your business.
I'd, probably point to a garden or how to report out I think I'm in the second quarter that noted that our market share was 11% of SD Lan.
And I think our market share a year ago was zero.
I think there's some information there that you can look at.
Okay, and then can you know with with some of these terms SD win and then secured internet access so disease scholars what Palo Altos doing maybe can you just take a minute and help frame for for investors that are asking they're asking me to better under.
Dan what is sq, when actually giving to your customers versus what is kind of the secure internet access that's replacing mpls et cetera, how do they differ in what's your opportunity in both sides of the coin.
It's kind of a little different.
Okay, and then position.
Thank you ask you last relate to the when a transition.
Probably.
Provides much like us software defined most smart in reliable way cost way to excess.
Access that enterprise access the cloud.
So thats where.
Driving nice people adoption equal amount by almost 50%, yes, if we get in the next few years.
Then I think when the weather is kinda Palazzo the here say six your accessible about access some of their.
Cloud or some other pod.
We should we be who can.
Biocon their data so by 2023, so security security.
Cost acuity is about 4 billion dollar market.
Almost acuity, including is a secure sq when it's about 28 billion dollar market seven lager, So thats, where network security steam that big a much bigger top computer overall infrastructure security, So thats, where we had only when we open both Thomas on the cloud side, we do have a seamless solution.
But we are mobile consumer will give me service provider.
I'm kind of.
Thanks, guys I'll kind of what.
Hi, Bob solution and Moultrie, that's a partner on the other side, we do believe when we come to secure driven I walk him how some of your onto change which.
No no great networking and security onto Andrew I C ran like the why if I back five achieved so this is much better solution then also.
Hey, Bill all kind of technology advantage founder ethical security process Union compared to the other security solution more you've seen the general purpose CPG, which has a bar you made it security computing power.
Process boasts the security assumption that will function. So it's a little bit to deepen approach and we do believe all approaches address my speed to market.
Also please a fast growing as fast transition and that we position quite well compared to any other competitors.
Thank you I appreciate that.
Thank you.
Thank you. Your next question comes from Keith Bachman with bank of Montreal.
Hi, Thank you very much Keith I wanted to target this to you.
Your cash flow performance continues to be quite impressive and outpacing revenue growth.
And I just wanted to ask you about how we should be thinking about this over the next year now part of it is your operating margins in the last year have gone up by over 700 basis points and so I was just hoping to distill it down to.
A the operating margin metrics, but and B.
The working capital cycle, how you see that changing and just to alleviate concerns you might have about me asking questions will neutralize this for real estate. So I was just thinking about [laughter] underlying.
[laughter].
Thank you Keith.
Hi up.
You look a free cash flow, yes, real estate does come into play and we expect a fair amount of spending on real estate next next year.
Think of the Alice I think at the Analyst day on November 18, I think the internal conversation here as whether or not what you want to.
Preview.
Not free cash flow, but at least a real estate spending for 2020, excuse me I misspoke a moment ago.
I think the its you've kind of just nail it in terms of we're executing fairly well and the working.
Capital model.
Contract terms are holding fairly firm for us.
How we pay our customer pay our vendors is holding steady from for US. So then it's really just a matter of continuing to manage your inventory continuing to grow your billings and then watching the margin drop through to that to that cash flow number.
I was there any reason just to clarify I mean, it sounds like cash flow continue to outpace revenue growth is at a fair conclusion.
I'm not going to I'm going to pause on getting closer to guiding on free cash flow and if I can.
Okay. Okay, alright, that's it for me. Thank you okay. Thanks Keith.
Thank you. Your next question comes from Saket Kalia with Barclays capital.
Hey, guys. Thanks for taking my questions here.
No I'm sorry, I can just maybe to start start with you obviously a lot of traction in FC when I want to ask a hypothetical question. If you put yourself in the shoes of your network security competitors.
What don't they have that will either slow or prevent their ability to offer bundled ft win and firewalls and I guess from going with that question is is that the is it the custom built a sick processing power that we have here or is it a secret sauce inside the Florida awareness.
Maybe they did just to put upon that the the question is what do you feel like the barrier to entry is with Fortigate nasty when together.
You can muken the today's press release, we announced the 46, yes.
We also introduced the concept, we call security computing and region.
You can see if we have a secure computing power capability, probably like from Forex in some of that like I said prevention pulled back a 47 acts.
I'm now looking ascension concurrent session now as has helped him other other pot, so thats, where we have so much computing power.
Is that because as you have security process Union.
Hello.
Mega generic CPQ and bad news that ASP, which can perform any any whatever new function, we needed, but weve also kind of.
Making a lot of secure computing function when they built into that chip.
That's where banking industry staff, if you have a seven that advantage easily like up close to 100 ton.
Faster and and about the same costs. So that take advantage. We have is ready to computing power in a security function and that will function has enabled us to easily add back I see when functioned.
Functioning the fiveg function and hosting most acutely a function compared our competitor.
Average commercial amendable, CPQ, which we also language that we do you see an 86 cents Todd I would also be Wilson.
It's together so that Matthew competitor has some difficult.
To catch the beauty and should eat a much more effort and seemed.
Yes, we have almost 30%.
Total global unit shipments in home security. So that's also the economy Moscow office, adding play so I feel we've seen few yes, we can comment more than I.
Total unit shipments homeland security space. So that's also will be making any uncompetitive has some people component you don't have you KONI most kind of choppy concluding chip you also need a big investment in the beginning and then once you have a quantity the average constant at a lower so we have investments not almost 20 years ago been companies.
Got it so thats, where all these back almost 20 effort investments that enable us to easily add additional funds in writing the networking security because we'll be seeing mechanism mines in my script is ready.
For the secured important eaten up here.
At least on the enterprise fashion is different totally different than like what happened.
Six seven years ago, not kind of next generation firewall phase intrusion prevention know some moderate.
A fruit generation connection base a firewall solution.
Good morning, no longer there. So can you just internal segmentation can you kind of secured a server that the palm and the data and also you need a sense since June one connection. So thats point last we'll make sure we call the security to the networking also the hybrid approach to secure the whole infrastructure. So we have these kind of.
Thanks, and then preparing the last like a 510 20 years and having a few we are much better positioned than than the competitor, whether the credit to the acquisition, which will be but difficult to integrate and also we've now.
Dedicate ASIC chip until they don't have computing power.
Additional function there so nothing advantage we have from all these long term investment now also the planning we have.
That makes a ton of sense can just maybe maybe for a quick follow up for you Keith Keith I think you talked about strong renewal rates with Florida gardening and Forticare just to make sure to ask can you just talk about attach rates for four to garden sort of care and whether there were any any changes and trends on particular skews that you saw in terms of.
24, seven support or lower or whatever just in terms of different trends for first quarter Forticare.
No I think that good question that renewal rates not only in total were very consistent but also by those two different product lines or service lines was 40 care and Fortiguard.
In terms of the services, we continue to see the Utica.
Bundle of services performed very very well.
And we continue and it's been going on now for a few years continue to see the shift.
To support side from a by five to 24 by seven particularly on on new deals.
Very helpful. Thanks, guys. Thank you.
Thank you. Our next question comes from Melissa Frenchie with Morgan Stanley .
Great. Thanks for taking my question, Ken I wanted to ask about the service provider space in the quarter by my calculation calculating revenue down a little bit year over year. So can you just maybe give us an update on what you're seeing in terms of buying behavior in that segment and then what your expectation is as we close out the year and head into 2020.
I believe well service provider to growing in the we hope you like.
<unk> percent, but lower than the average growth in overall company growth.
Service provider kind of not just wanting that but thank you can look into networking company. They all kind of slowdown.
I believe hedging the transition.
On.
It seems that my guess is service provider business a pool pod.
The keys near to can help that had a more is that why is there any the service provider offered us secured assume it's with your customer the other part as well as service provider secure the on infrastructure. So that the first part service provider to offer superior to the customer side, we don't see any slowdown.
But they do kind of.
Try to see how to deploy some other service like.
This is ken or kind of service leveraged position.
Action their data center to offer some modest service. So we do see that went up pretty quickly.
Well, maybe can have space more competitive and service provider that because they haven't you construct to the on the infrastructure. So they have a huge cost advantage compared with some new player, which they have to build the owned data centers I'll provide a sandwich, which has a huge costs not making them profit above our difficult.
Turning to.
To secure the only infrastructure.
We do see some kind of.
Slowdown.
And whether because they tried to.
Ill make a difference.
Sure ill Fiveg also I'm 100 pod.
We do believe Douglas I did ramp up probably next year, because we do see a lot of a testing valuation.
And we do participate I am not markup.
Mike because if I can also be found that the future infrastructure competitor.
Well, it's I think can spot on I think really looking at two different pieces of it wasn't selling into their infrastructure in the second is the MSP, yes, I think that selling into infrastructure 2018 for a variety of reasons, probably and for many companies was a very good year for people selling into the infrastructure. So 2019 is probably suffering a little bit just by comparisons and then the second piece.
Out of it is the MSP.
Managed security service providers I think we feel very very good about what we're seeing there with our telcos.
Both in the U.S. and internationally.
Okay. That's helpful. And then just one quick follow up.
Like you guys are gaining share just looking at product growth just wondering what the competitive response has been and particularly around pricing and discounting.
We have a much better co too.
Cost of ownership PCU compared I know about competitor.
Okay, that's where we used in these.
A security computing region path to compare.
So easily all costs as a fraction of any how 'bout competitor I have to perform the same.
Seem like security functional support I, so thats, where.
So we don't see.
Back in the next few years maybe.
Any of these datadvantage compared to competitors, usually if anyone to computing Honda.
The costs on a pro forma side and also on the security because we are much more competing policy cable much more security functions in house of go much deeper security functions and how about competitors.
So that's where we you can see the modular keeping keeping improving and for us to grow finest or is running try to have.
So sales coverage more marketing coverage and the same time, Mike working closely together, if it's a partner, but as a customer confidence the change in how you know story and I wondered a fabric approach also true truven networking internal segmentation.
The Fiveg and OTI, how he securities I guess I'm not asking me what can right now.
I think it will benefit both on consummate Honda in the next type of thing yes.
The analysts I would just additive to that as Keith discounting in the quarter was clearly a tailwind for US we're very very pleased where we ended up on the discount expect from year over year.
Great. Thank you.
Thank you. Our next question comes from Tal Liani with Bank of America.
Hey, Thanks, guys. This is Dan Bardas on for tell.
I wanted us to technology questions. The first is your endpoint acquisition did I hear right that it's mainly about adding the MTR capabilities and if so how do you think this may impact your Symantec partnership if at all.
Hi, I think we do have some.
Like our home and point solutions.
You should help us has not.
But all approach is more like a driven by the now what security part, which is 48, which is a part of fabric.
We do have Oman close partnership with Symantec's hadn't seen panel on the go to market strategy. If you also working more closely together. So they do have a much bigger coverage in a lot and the price and then we have a more coverage in the network security. It's a win win partnership I will benefit both company.
Got it makes sense and then kind of related sorry, if I missed it but these SD when deals that you guys are doing are they also typically taking your secure web gateway offering or are they typically pairing it with another vendor and maybe you can talk about how that might change, whether it's a large or midsize enterprise.
Actually.
For the secure web gateway west market a lot of than access all these same how you do need to have these a one connection there so actually helping.
I will impose.
And.
And at the same you've been kind a lot of order.
Mike.
Paying or.
So there because they don't have a.
They don't have to do you myself on the prime is there.
I see the network inside and the cost as a totally different concepts.
The call Canal, replacing that we'll continue to now with sex acts as the cloud.
<unk>.
On the user angle.
Probably need to use in backup Q computers region to measure where you're at a cost now how deep the security they couldn't co and also how the performance of they can cat.
So some forward to date to the cloud.
Not three to also starting to become less secure whiter, you cannot read and quit doing the process before what in.
Cloud costs will secure computing reading too much much.
Much more as compared to.
Some our plans there so thats, where they need to fund the pull to cost of ownership and also post acute angle to address what can architecture approach they have.
But I do believe.
As a bonus.
Well, it's not had their own Canadian huge.
I don't think of that both sides, so I'd kind of.
You try those markets sure, it's a little bit different approach.
Got it thanks very much can.
Thank you. Our next question comes from Michael Turits with Raymond James.
Hi, guys good evening.
Two questions one.
You've mentioned.
Keith a couple of times that you've benefited from from discounting.
Can you talk about.
First of all yet is that across the board has that again and then in the Gateway network segment or is it across the board and what what's driving that because this is typically been a very competitive market worth discounting is strong.
Got it was across the board I think we've got a fair amount of lift out of the Americas on it but I saw it across the board both in terms of geographies and across product offerings of product suites.
I think it really brings home the notion that and Ken alluded to it for a security effectiveness security performance security power for what you're paying for Fortinet solution the versus what you're getting we have a competitive advantage there and so the discounting part of the conversation should I think we saw the quarter hit our competitors are going up against us more hard harder than it hits us.
And then.
Got it was very interesting with what you said about.
Competing or selling into the service providers.
From an MSP perspective and talking about.
Then utilizing a Z scale or as a solution also so is that.
Typically you've been very strong and selling your appliances there is that.
Additive or substitute product for you right now so again see scalar and and how are you competing with that offering.
Then we are more nice supporting a service provider to offer similar solution.
Because of service provider they to open a lot of.
Datacenter connectivity infrastructure and Pos.
The offer little bit different kind of service sweater using the pines house, all securing a data center now they also can comerica hall for certain.
What are the coal coal.
Process the secure data in the datacenter also monitor approach, so thats, where we would be most appointing someone's provider caved in the flexibility what kind of snow base, what kind of away. They want to offer we also potent behind.
To buy from what is a traffic data with yet another process, how they want to process locally.
On the age and leveraged 100 partner like us clean pipe or some other way to approach. So we do offer the montney both solution full service provider depends on the surface provide on the customer need. So that's just my causing scanner tableau server just one one type of survey. Some some has provided often right now.
Great. Thank you guys.
Thank you.
Thank you. Our next question comes from shall I know with Oppenheimer.
Thank you good afternoon Kennametal, Congrats some strong set of results and the guidance for the upcoming quarter.
Keith you are not not to beat a dead horse, but I want to go back to to the gross margin healthy performance this quarter.
You've mentioned several times.
That I just wanted to be back probably to a more normalized range, but on the other hand, the also flag the favorable discounting trending already be a speed it product mix.
Can you drill down slightly more into those components was it the discounting was it the product mix up anything specific that stood out or just a combination.
I have a follow up I think we had critical contribution so the gross margin from the discount but also the deal mix it that came through in the quarter.
He also had.
Some of our products of maturity tend to get cost savings on a per unit cost we saw that trend continued through the quarter.
We also had a little bit benefit on what we would call or indirect product Cogs things like reserves and so forth and overhead all three of those contributed to it in the quarter.
I think one site you can see some menu so apart on their sort of certain computation, whether on the discount in all price competition, but on the other side because we have a huge computing power.
Yes, I suppose you. So we can easily add additional function MCE I see when we enable.
Do you should know service as soon as tend to have a much better margin compared to the product so that will help the other.
Other trend we've seen already so we could have fabry approach. So multi part are starting to gander.
Thats, where the fabric gross much faster than the 40 Cape Cod.
Also making that a sales cost but deal size kind of bigger. So thats also helping improve the margin. So thats, what we do see sometime the nets computation, you'll be competing also did point out pricing, but overall well keep improving the margin by some additional service by additional part outbound altogether.
Got it Guy. This is this is a great color. Thank you for that addition, Kent.
And I want to touch also on when you were up on EMEA still very consistent performance in the region, but are you flagged that I believe boasting UK and Germany. So can you talk to us little bit about some of the dynamics that you have seen there during the quarter.
I think only slightly because we anticipated that we were going to get asked about it.
I would offer that UK and Germany were slightly below the rest of the company in terms of total growth.
But again, given our diversification of business, it's not significant enough to have really any sort of impact on our growth rate.
Fair enough. Thank you so much.
Thank you. Our next question comes from Jonathan Ho with William Blair.
Hi, good afternoon, and congrats on the strong results I just wanted to maybe start out with a little bit of color in terms of the initial reception for some of your I guess it ever U.S. based products like the a was a service and you're maybe you know any commentary you have around cod spending on yeah. The pop.
The cloud.
Well.
Look I think we may offer a little more granularity on in a couple of weeks at the analyst day, but.
Both cloud and fabric are growing more than twice.
Rest of the company in terms of growth period over period.
More about laffer.
Yeah.
Yes, I think she's has a pretty good I think we probably will go for more detail you been resolved some tell us exactly how even on the customer at the present together in there.
Okay.
Stay in the next couple of weeks.
Got it and then you're just as a follow up yeah. One of things that we wanted to understand a little bit better is just the entire SP branch concept, where is your selling more than just SD Wan, but maybe bundling some other products I in conjunction with the core Sq and and Gateway can you maybe talk about how does that you know maybe add to the size of.
The deals or maybe help differentiate fortinet just by being able to offer a lot more capability.
Yes, the branch Libbeys referred to.
To sum branch SMB pot, which they more prefer lag a single box easy to manage and the same time.
Thanks, Dan into the wildfires, a modern now okay area.
So we do see not also.
ROE in two categories as do you want to approach but is.
It's just a subset of how far off the public infrastructure approach should we be hat.
And but we do see.
As the other part provider to fabric and that actually when some other pod.
Is it kind of alike accounts have a nickel secure Cuban that will Kim and that's where we've seen that big enterprise you needed to internal segmentation, but we've seen the branch.
Public cloud to consolidate some kind of different part out different different solution together.
Great. Thank you.
Thank you.
Thank you. My next question comes from Walter Pritchard with Citi.
Hi, Thanks.
I guess two related questions question, a follow up on a on the 26% that was the non network security can you help us understand maybe stack rank product families and especially interested in <unk> ft. When it's on the largest product in that a piece of non network security.
No assay, we have got no real impact on the mix. If you all the business between Fortigate non fortigate if that's the question.
And then in terms of the contributors in the fabric suite of products. It's just the same has been before which is 40 manager fortianalyzer.
As well as our virtual firewalls.
Yes, I see you one functions as a.
Included in the 40 K., that's part of the 40 megawatts function there.
So thats where it up.
So the asking was not that was in the 26%.
It's 100, non us 40 K. pod.
I think I think one problem I see branch, probably will help a little bit.
By the way is always in the 40 gig.
Okay, and then just related to cloud security you mentioned virtual firewalls.
Can you talk about what drove within that cloud category. The performance in the quarter sounds like that was a driver of a of the strength.
Hi, guys. That's that's where we see we have a multi cloud hybrid cloud and also like a bond constitutes an offer.
Broad offering for customer why isn't the use of our passing that on the enterprise or whatever or go to the cloud virtualizing. So it's 90.
The broad offering consistency gave the customer flexibility.
Why do they want to be point, a function on promising that you now pass all they want to deploying the cloud and they can easily move back and forth, but also what interests you meet these some combination you seem to be coda secure computing region. So the cloud offering tend to have a much higher costs.
Compared to I'll pass on Prime is off or not so we have you seen I wonder.
Hi.
You see a similar with approach also might approach.
Thats were backed by someone they probably because cost about one have sort of flexibility or the management usual they may skew towards than not.
But we can use the point health of the comes from or is there you are toys and we offer all these wells college wholesale that multiple crop or why it at all.
On a function we have that we own for almost 10 weaken product you can buy what are.
You can bite of merchandise on the call from 40 gained 40 manage analyzed.
Sandboxing, then that I'm, not saying, there's quite a broad offering we offer to customer [noise].
I split into two to select whatever they want the deployed.
Yeah, I mean, we talked club not leave it with a cloud providers, but it's also private clouds as well that we're providing solutions to.
Okay. Thank you.
Okay.
Thank you. Our next question will come from Gregg Moskowitz with Mizuho.
Okay. Thank you very much and good afternoon, guys getting back to the and silo acquisition can obviously there are many endpoint security vendors out there. It's I was curious if you could elaborate on what Cree to them in particular.
They're all IP quarter fabric Palmer [laughter].
Working together.
Hi, there quite a while and working well together.
Well and also have level our successful go from up market approach just like the same thing we did for the for the 14 Mac.
The company a ball for an hour three data about one years ago. So thats, where now we have a cost of 140.
40 partner 40, Fabry partners, so thats, where probably.
I don't even starting from that angle for it makes you know we kind of what competitive offers.
Okay. That's really helpful. And then I'm just for Keith So as you mentioned, both the Americas in EMEA grew very well this quarter a your revenue growth in Asia Pac, though I think did decelerate and I know that you were facing a tougher compare just wondering if there was anything else that you would call out.
Yeah, I think that I guess, that's going to give us something to work on the fourth quarter is getting Asia Pacific back up to a healthier growth pattern and we saw in the third quarter.
Probably a little bit of hiring a lag to after the first part of the year I think by comparison, we feel very good about the conversation we had at the beginning of the year about needed to get the U.S. and the Americas team focused on hiring and we see the results of that so I think we'll spend little time of day Packer nest next quarter.
Probably the major part of it but also more small part it's also a hapag dependent so.
Let me mobile mobile hand, and then we will have some kinda product transition.
Thats, what some service provider some partner they wait a little bit back when we announced the 60 after today, making available right away, so thats, where well what will happen.
Because the new generation.
We'll have a much better performance than about to save costs.
That's great color, thanks very much.
Okay.
Thank you. My next question comes from Daniel Ives with Wedbush.
Yes things Chris can you talk about government deals are either they start to get larger terms, especially is there's a move to cloud.
On the Securities are you starting to see those changes on the federal terms of Piper.
So we talk about government for our business you keep in mind is international governments and it's some us federal but it also includes when the U.S. side state and local governments.
I wouldn't say, there's anything driving out of the U.S. fed business, thus impacting our business one way or the other in terms of deal sizes.
Okay. Thanks, and can you just talked about just generally like hiring plans from a sales rep perspective like is that something you think it's going to stay steady accelerate.
Yeah, how would you kind of.
From a high level of things about that over the next six to 12 months.
We are improving.
So you can see last quarter Q3, we do addable more headcount.
And.
But there are some reaching certain verticals fuel behind Mega Keys mentioned a pack.
So that's where we're keeping improving there and I think with with mole.
Sales capacity is more marketing have which had beauty we can grow faster.
Thank you.
<unk>.
Thank you. Your next question comes from Brad Zelnick with Credit Suisse.
Hi, Thanks for taking my question. This is Randy <unk> on for Brad.
Ken just a follow up on the end silo acquisition I know you mentioned you had a strong partnership with them and the company has some very interesting technology, but having been around for several years and the price you paid seems to imply they weren't generating a lot revenue or not growing very well or combo of of the two what if anything.
You see I bet, you might be able to do with the technology that maybe the company wasn't able to achieve on a standalone basis.
Hi, good it's pretty interesting.
Quite few all acquisitions of ours similar they have a great technology. They have a great team there, but then they need a much mortgage investment for local market.
So thats, where we kind of a.
These kind of companies so they can leverage.
Oh, Salesforce and also customer base to too quickly.
Help then to improving the Gulf lock is site that same on we also want to make sure we can uniquely well together.
So we don't want to create a too many different different Michael part our approach by Buddy integration and some of our key that's where we most starting from the 40 Fabry partner side first that make sure. We can integrate and then them that's where that that decision we made and that we do believe they have a good part awkward Jim.
Thanks, and then a one for Keith if I could I might've missed it but can you share what unit shipment growth was in the quarter.
We didnt provided but I would say that what we're seeing most recently as it unit shipment growth is moving right in tandem with product revenue growth.
Okay, great. Thanks.
Thank you and your next question will come from Ken Talanian with Evercore ISI.
Hey, Thanks for taking my question. So first I could you give us a sense for that the main drivers for your success in competing in the enterprise segment, and maybe give a sense for how the pipeline has evolved over the past here.
I think there's a multiple and go.
From the technology partner side.
If you all solution part our technology to feed to better for the changing for the trend.
Mike I say that security border disappearing and the price. So if you need to go go inside internal segmentation you also need to expand in Iran, and and also working with some of its provider for the other called approach mobile approach. All this kind of sand and then the fabric I also we cut the whole fabric.
Most of product, we build internally as you integrate automate front. They won its will come up much better compared to some other competitors have to all depend acquisition.
And so that's ready hop in the enterprise.
Overall infrastructure security and also.
You can that the deal.
Mike on larger and also most sticky.
With a customer.
Yeah, I think they tend to the concept can be talking about the security value is clearly at play here with the enterprises, but also as Ken talked about in his prepared remarks.
Being in the Gartner Magic quadrant now for three years in a row is really serve to open up the door and getting us invited to RFP that five years ago, we probably won't even though exist.
And I think we've become pretty good.
And benefit from then following that up with things like NSS labs certifications are recommendations to many s. isn't that I'm sorry.
But you know that third party testing if you will I think once you're in that you have the opportunity you're offering them. These recommendations from third parties together with our security value doesn't do you make a fairly compelling opportunity for us.
So we we kind of ammonia mass you've heard us sales team and also in the marketing approach there and that's also helpful. So is there any out.
Like a.
Additional sales coverage and the more focusing in on enterprise and also we have a better internal to the tracking.
Whether to enterprise account coverage on how the sales productivity and so I think it's all these different part or helping proving enterprise house.
Okay, Great and Yeah earlier, you mentioned that we take a look at the Gartner data with regards to SD Wan and and it sounds like SD. When is essentially included in Florida Gate. So I was wondering if you could give us a sense for how we should think about the accounting for revenue recognition for deals with SD Wan and.
And any kind of framework, we can think about in terms of the uplift that you might see do a deal that that's driven by that requirement.
Always good to have a GAAP conversation to close the call. So [laughter]. Thank you ever that yes that the there's no differently accounted for because you're selling a fortigate appliance.
That has embedded with it a whole bunch of different functionality is one of which assess our do you want as an example, another would be a assay when functionality.
So you recognize the appliance upfront that all the appliances will I should say all the majority appliances attached at a point of care affording guard security subscription with them and so that part of the deal is allocated to deferred revenue in the now and then recognized over time, but you still receive on the 40 gave the appliance you're still recognizing that revenue upfront.
Okay. Thank you.
Thank you sneakers I'm showing no further questions in the queue. At this time I would now like to call. The turn turn the call back over to you for any closing remarks.
Thanks, Jerry I'd like to thank everyone for joining the call today and let you know that 40 that we'll be hosting an analyst day on November 18th as well as attending the following investor conferences during the fourth quarter. We had the RBC conference on November 819th in New York are the Credit Suisse Conference in Scottsdale in December 3rd the Yes Conference in New York on December 10th and the Barclays Conference here in San Francisco.
On December 11 presentations for all of these events will be webcast and a link to those webcast will be available on the Investor Relations website.
On those dates you have any follow up questions regarding the call. Please give me a please contact me and have a great rest of your day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.