Q1 2020 Earnings Call
Ladies and gentlemen, this is the conference operator your conference scheduled to begin momentarily until that time carolines what can be placed on a musical we thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Fortinets first quarter earnings Conference call. At this time, all participants lines Oriental listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
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Please be advised that today's conference is being recorded if you require any further assistance. Please press stars zero I would now like to hand, the conference over to your speaker today. Thank you Peter So Koski Vice President Investor Relations. Please go ahead sorry.
Thank you Michelle good afternoon, everyone. Mrs. Peter Sucharski, Vice President of Andrew That's relations at 40 net I am pleased to welcome everyone to our calls to discuss Fortinets financial results for the first quarter of 2020 secret on today's color can be found 40 minutes founder Chairman in theory, Allen keeps Jensen R.C.R. Chief Financial Officer, if they live call that.
Will be available for reply via web cast on our industrial relations website.
Can will begin our call today by providing a high level perspective on our business keep cool then review our financial an operating results for the first quarter provide some additional details regarding our first quarter performance in some insight into how April performed and provide our guidance for the second quarter of 2020 before opening the call for questions during the recession.
We asked would you. Please keep your questions brief and limit yourself to one question than one follow up question to allow others to participate.
Before is again I like to remind everyone not on today's call, we will be making forward looking statements and these forward looking statements are subject to risk than uncertainties, which could cause actual is all the different materially from those projected.
Please refer to R.S.P.C. filings in particular that risk factors in our most recent form 10 k. in form 10, q. for more information.
Lookingstatements reflect our opinions only as of the data this presentation and we undertake no obligation and specifically disclaim any obligation to update forward looking statements.
Also all references to financial metrics that will make on today's call or non gap unless stated otherwise our gap results and gap to non gap reconciliations is located in earnings press release and in the presentation that accompanies crazy Mark remarks, both of which are on our Investor Relations website.
Lastly, all references the growth you're on a year of of your basis on once noted otherwise I would like to not trying to call over it again. Thank you second Peter and essential to everyone for joint Tudisco completely off first quarter Twentytwenty result.
I would like to thank all employees customers partners supplies worldwide for they'll come movement to manage all response to a covert luncheon pandemic.
We are pleased with a strong first quarter performance billions includes 21% to 606 A. millions.
Driven by solid execution kind across across all three major regions.
Menu you quit 22%.
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I wanted to pull for myself on core firewalls security fabric as to you win and walked from solution.
Each 1% increase the important I revenue and a 24% cuisine service revenue.
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Actively pimple fool myself our competitors.
They take a skilled highly water solution would be a key competitive advantage for 40 minutes.
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40 that he's up important strategic partner specially us company links to efficiently deep point their security budget.
Industry validated walk from home and a secure offering a long veto ice Pew agreement fortigate secure to fabric platform and Hypercloud offering.
The best security with the most cost efficient solution for <unk> across the entire digital infrastructure.
I would not let that kind of <unk>, so close or no kind of first quarter performers guidance.
Thank you again.
Let me first note I would like to join Ken in wholeheartedly thinking our employees and their families and our customers partners and suppliers for their outstanding support in managing our response to the co but covered 19 pandemic.
So that in mind, that's got the first quarter deal with revenue total revenue of 577 million was up 22%.
African cloud segment revenue growth was over 24%.
Watergate network security revenue growth was 21%.
Both are fabric and Fortigate network security segments growth continue to benefit from our secure Estee ran solutions.
The strong first quarter revenue growth once again illustrates the benefit of our diversification across geography customer segments and industry vertical.
The momentum our business has experienced is the result of our strategic internal investments made too.
Broaden our product offerings penetrated dreyfuss security markets.
Expand our global sales force and investing our channel partners.
Product revenue relating percent to $192 million benefiting from strong demand for for to get appliances secure ASCII when offering.
Integrated fabric platform appliance and software solutions.
As well as our embedded in Standalone work from home security solutions.
Or growth rates and industry reports.
Suggest we continue to take market share and both the fire wall and Espy when markets.
Markets, where we have contributed leadership and innovation.
Moving the service revenue.
Service revenue grew 24% to 385 million.
Representing 67% of total revenue.
Over 90% of the service revenue from deferred revenue at the beginning of the quarter. He continues to provide an increase the level of revenue predictability.
Fortiguard security subscription revenue increase 25% to 211 million.
Forticare technical support and other service revenue.
Increased 23% to 173 million.
The mix ship to meet by five to a higher price 24 by some support was six points.
And 24 by some support now represents just over 60% of this mix.
The ship the buildings.
Billings increase 21% to 668 million.
Watergate network security building increased 21% and accounted for 75% of told the buildings.
Fabric and cloud buildings combined increase 32%.
Than by our secure access and our work from home related offerings, including 40 token.
<unk> and 40 client.
Once again, the diversification of our business model by industry vertical is on display in the first quarter, what our top five verticals continuing to account for about two thirds of our total billings.
Service providers, and M.S.S.P.'s, which we believe certainly large portion portion of the F.M.B. market.
Top all verticals with 19% to pull the buildings.
Representing its highest per cent of told the billing in five quarters.
Financial services at a very strong quarter with buildings growth of over 40%.
And represented 14% of told the buildings.
Yeah, the first quarter told deferred revenue increase 26% to 2.2 billion.
Short term deferred revenue increase 24% to 1.2 billion.
Looking at deals by dollar size for deals over 250000 $500000.
Ability value increased 20% to 20% respectively.
The dollar value of deals with a $1 million increased 27%.
Illustrating our continued ability to move up market into the enterprise segment.
Let me back to the income statement.
Slide for gross margin improved 150 basis points to 78.7, 0.7%.
Product gross margin improved 300 basis points to 61.4%.
Product gross margin benefited from over 40% growth in software products and lower indirect costs.
Services gross margin increased 30 basis points to 87.4%.
Operating margin for the first quarter increased 190 basis points to 22.3%.
Benefiting from the improvement in gross margin and lower employee travel expenses related to the shift towards work from home.
During the quarter, we entered into a seven year mutual covenant not to Sue agreement with a competitor related to our patent portfolio.
Return for $50 million cash payment to Florida net.
We recognize the gain a gap game.
$6.8 million $36.8 million as a credits operating expenses.
Will recognize the remainder over the term of the agreement.
We have excluded the 50 million dollar catch received from our free cash flow and the 36.8 million or gain some are non gap margins another results.
Total headcount and the quarter 7448 and increase at 24%.
I mean by increase investments, we made to leverage the positive momentum in our business, while seeing improving attrition rates over the last few quarters.
We do not anticipate any covert 19 were they lay offs for the foreseeable future.
Humorous strong operating income performance income for the first quarter was $104.4 million.
Earnings per diluted share increased 14 cents to 60 cents per do the chair.
On a gap basis, we reported net income of $104 million.
60 cents per diluted share.
Including the patent related gain noted above.
Gap earnings per share would've been 44 cents or an increase of 29%.
Moving to the statement of cash flow summarize on slide seven and eight.
Free cash flow increase 27%.
The $242 million.
Due to the shelter in place orders construction was halted on the new campus building in mid March and resumed this week.
Capital expenditures for the first quarter over $28 million, including $20 million later construction and other real estate activity.
We estimate capital expenditures for the second quarter to between 40 and $50 million.
For all of 2022 between 200 and $220 million.
We expect full your cash taxes to be approximately $40 million.
And our full year non gap tax rate to be 22%.
And the first quarter.
<unk> apportion of our cash investments to repurchase approximately 10 million shares of our Comstock for an aggregate purchase price of approximately $900 million.
At the end the first quarter, the remaining share by caught share buyback authorization plus $693 million.
Lay the buyback activity together with a lower interest rate environment.
Let me offer to modeling insights first.
Full year share account should be 10 million shares lower than previously guided.
Second interest income will likely be insignificant for the remainder of 2020.
Before moving to guidance, we wanted to offer some thoughts and two areas lead a covert 19.
Including staff, so we have taken to contribute.
Certain observations about our business into one hand early q. too.
First.
Sponsored the pandemic, we've taken a number of steps.
Including one substantially increasing our employee trouble math program precluded 19 related donations to a total of $2 million.
And secondly, expanding are free to the public network security expert program on what we call in L.C.
Last week, we further expanded the free and as he program in the first three levels to all eight levels.
And if he is a self paced online security training and certification program.
Making this program free and more advanced.
We hope to narrow the shortage of security skilled workers around the world.
And position people to emerge from covered 19 with new.
Very marketable skills.
In the first week, we had over 50000 registrations from over 5000 different organizations.
And now like to share some observations about our business in Q1 entirely q. too.
We don't anticipate that these observations will continue in future quarters. However.
Right up covert 19, we thought they might be helpful and informative.
Looking at linear already.
Must be linear already for the first quarter was consistent with prior quarters.
At around 50% to the first two months.
While martone already was typical we did see an elevated level of buying during the middle two weeks or the month.
As for April many already.
It was slightly better.
Than our first month performance for any second quarter.
In the last three years.
During the contract Lincoln payment terms.
Two one the average contract length remained flat that 25 months year over year.
An average contractual payment terms increased.
Less than 15%.
In terms of supply chain concerns.
Our product backlog with in line with historical averages.
Our suppliers delivered over 90% of.
Other commitment to us.
Do offer some contacts on the puts and takes into one buildings.
Three of our fabric Cup platform products 40, token 40, authenticator and 40 client.
Benefited from their increase the value in securing organizations employees in the shift towards work from home.
Combined buildings for these three products without $10 million above expectations.
In April we saw these buildings again significantly outperform expectations.
Looking at channel living Tory.
The total balance was flat quarter reporter.
And up slightly year over year.
Which may relate to a small level up early buying by our customers.
Regarding F.T. Lance solutions.
Secure f. he ran building for the quarter.
Hi single digit percentage of total buildings.
April buildings continued this trend.
In the queue to pipeline for security when the strong.
And then looking to customer segments.
R.G. 2000 buildings increased 25%.
S.N.B. buildings as a percentage of total buildings increased slightly.
Renewal rates remain within the guard rails that we provided the analysts day.
And as a percentage of total buildings the world wide retail segment for me, it's one of our top five verticals.
As a percentage of total buildings remained unchanged you over a year.
As our performance indicates we did not see immaterial impacted a covert 19 for the first quarter and the second quarter of starting well.
That said, there's a lot of uncertainty about future economic conditions.
Finally, I like to review our outlook for the second quarter summarized on slide nine which is subject to the disclaimers regarding forward looking information that Peter provided at the beginning of the call.
For the second quarter, we expect.
Billings range of 700 million to 725 million.
Revenue in the range of 590 million to 605 million.
<unk> margin of 77.5, 78.5%.
No gap operating margin of 23, 24%.
Non gap earnings per share of 64 to 66 cents.
Which assumes this year counter between 165 and 167 million.
We expect a non gap tax rate of 22%.
For 2020 due to the increased uncertainty associated with the economic impacts uncovered 19.
We believe the prudent thing to do is to draw or previously issued full your guidance.
Along with Ken Thank our partners customers in the form that team for all their support in hard work.
During these difficult and unique times.
Lastly.
I also like to invite all of you to listen to the management Keno presentations at our virtual accelerate being held on made 12.
You can contact Peter for registration link.
But that I'll have to call back over to Peter.
Thinking Keith Michelle we're ready to do to you and ask you can open up the long term question. Please.
Operator, you there.
Mm.
As a reminder to ask a question you will need to pass star one on your telephone to a child question press the pound key please stand by Bobby compiled roster.
And your first question comes from the Sterling audio from J.P. Morgan.
Yeah. Thanks High guys you met some that's the gym quarter, so april's off to a fast start wondering are you, saying the same products in high demand in April that you did in March and do you think that that demand actually can continue perhaps the back half or is this a temporary but that.
You're saying.
I should.
Yeah pretty similar.
We mentioned.
Yeah, the fabric continue, especially won't won't work for a holiday date.
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Also like 40, <unk> no syndicator 40 token still one of our strong.
Oh I think is the same and also the new pornography introduced boasting that last quarter to eight handwriting and also introduce the 42.
He lost interest.
Yeah, I think so probably we see pretty similar.
Certainly I'd, probably frame a response to to add onto but can send by saying, obviously, we gave them insights in terms of what we were seeing in April.
And it's part of the guidance editing process. She would obviously not me look at what's your month one activity. What are your pipeline look for a month to I'm. One of your pipeline look for look like in month three.
I think you can assume that we've looked at those factors as part of telling the guy in for the second quarter.
Yeah, Oh, so yeah, well not not a feedback is funny, because oh part I have a good reputation it's more cost efficient Mike that's the new one we on no no. So that the last few quarter.
So have average V.P.M. performance and time Foster home I had a more complicated hey come come to any other competitors so by using the sick of company region.
So that's actually a a lot of a company.
Price that you would have a won't call home <unk> no they'd charmed over 90%. So that's a huge be mindful for both hind quarter for office and also <unk> solution. So that's where U.P.N. said Barbara critical for all these under price.
So we see a lot about that great no need file customer Richart, Oh solution compared with the other competitors.
That makes sense and then the one follow up would be you mention 19% of revenue from the M.S.S.P. channel. Yeah, I think investors always worried about that at some be exposure can you give us a sense of what you saw in terms of renewal rates in March and April as well as just the demand pipeline from that segment.
Yeah, not not <unk>.
Area. We also can about that'd be surprised.
Yeah, Oh, although I say M.B. has a percent each applicant is actually quite as one or 2%.
And that's where they grow faster than the average so we'd we'd be kind of do some research probably there's a tool suite reason the first <unk> Oh, well from Oh, you've seen that with security as.
Point few more of our low percentage, probably average about hung up on like huh.
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Most of our small percentage I.S.M.B., a walk phone home had something that will secure solution. So nice word they may take these 10 opportunity to start.
Studying kind of <unk> <unk> I 70, instead ocean.
We also believe you wonder because I <unk> combined means that boasts I see wine on the wife I can also save a lot a cost so more cost efficient. So that's where probably also the chance what <unk> to to also.
Using the new product.
That's a sort of when we do P.D., but if you look in Moscow quarter, we afresh hot that low on first with all the F. model. So from America 80. After the first almost three quarters ago, then the six to ask for the for half we are now.
It's all halpin driving the ice empty I'll walk home solution. So maybe this comes from the fact that contribute X.M.B. actually even grow faster than average.
God. Thank you guys.
Thank you.
And your next question comes from this line as a team up with Bonnie from U.B.S.
Thank you for taking a questions <unk>, maybe just start with you I just on the <unk> <unk> you know I think there's some confusion around how ASCII and conflicts or is created here branch office business. I'm wondering if you can just give us a sense of how ASCII when is it.
<unk> Teddy overall branch out it's like point that you have and as you think about you know the next 12 to 24 minus six branch office architectures do change how do you think that would impact the the lower and it.
You have in your portfolio and I have a follow up for Keith.
Yeah like I said in the square so we have to on the company.
<unk> and also filled with security from Barbecuing and so he's a more cost efficient and and also combining multiple function together.
So that's where the cost must you lot of a lot of value and and and the same hum.
Somehow X.M.B.O. some out of work from home people don't per cent H. Alpha.
Me also hopkins, because although ASCII wants us to a.
<unk> like and then if he was <unk> hi, so so we ought to become a top three and also carota found this one.
Oh, so it's a little bit different offered an audio onto a probably only actually wound function probably double compound security ways has and all the other function inside offering on the same time performance much better because the Oh, a sick has a she would complicate <unk> handle multiple function the same time.
Oh this all contribute both X.M.P. and also what I talked to 40, K. unions shipment Oh grow 30 per cent. That's also the highest why we see in the last few years.
Oh, so probably.
Butter contribute to ask you why not contribute to a walk from Homo S.M.B.
It's pretty pretty countries, you and at least two continues feed hot Yeah April and.
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<unk> and and also try to address and the.
Any any any requirement in front of <unk>.
I quickly both in S.P.Y. and also for the S.N.P. won't fall solution like I say that because we.
Internally I'll I'll just solution part I'll be can react much quicker compared with 100 competitor.
<unk> they have to.
Like I have device you blend into security.
That's gave us a quite somebody advantage compared to other competitors.
The cheaper helpful and keeps just for you appreciate that color on the shipment volume and shifting trends in the quarter and in April.
Already people characterize fresh for us how much as that is maybe put forward activity.
If you can contextualized that with with a pipeline for the rest of the or just want to get a sense that this there was actually rush buying or any accelerated buying activity.
Yeah I. Thank you.
Yeah, I think any quarter, you've got puts and takes and those kind of why we title that section that way yeah. There's some things to come in that maybe you don't work in your in your commit to begin with that.
You weren't expecting and there's some things that the push out and I don't think that the Q1 was really any different than any other way and I think in terms of how we're looking at it.
That regard you know the purpose of providing some commentary about what we saw in April.
To be contradictory to a thought that there was a bunch of pull for from Q2. When did you want because people you know we're happy with people.
Thank you.
Sure next question comes from the line up Brian Ethics with Goldman Sachs.
Hi, Good afternoon. Thank you for taking a question and congratulations on the results are pretty challenging economic times.
I I guess the first question you know maybe for for 10, if I if I.
Heard that right you had some pretty strong financial services buildings growth can any comment on you know growth by vertical where are you saw maybe better strengthen the quarter versus maybe some weakness in our also seemed as though you actually did pretty well I was surprised that the made an entry level range of your how's your product.
<unk> any any change anticipate for the rest of the year in terms of you know product release driven.
Activity versus maybe what might be you know more near term work from home driven expansion type sales.
Yeah, Yeah first the vertical profit keys things like a help that is you see.
Service provider studying pretty strong and a puppy that the fast growing in the last Uh huh.
A few years and also the finance surveys some comments section. It also pretty strong we lived to be week, but it's just a little bit is not not not as.
Yeah.
Q among the top five.
It's probably.
Pretty okay, like especially the behind the price we meet you grow faster than the overall crow like 25% for the top 2000 under price I think going forward.
We do see the new M.P. seven provide a lot of trees for peak on the price I special people for whom they found out suddenly to walk low, especially the V.P.N. need almost.
Compared to before the pet that make.
A lot of components products no onto it anymore. So we cut a lot of requests from found is that I'm depressed I T.
See the advantage off solution, because we celebrated holidays of each yeah, using A.C., which Uh huh average lifespan of performance, so not not actually yet before maybe they need that much VPN banality, sometimes he oh, that's a huge <unk>, which competitive cannot handle so we'll see Barbara <unk>, and that's where where did that.
The probably but he's 20 to 4200 <unk>, but also last quarter draft and also the previous meeting a high end. We also started he pretty strong.
Yeah, I think candidate for a good job recapping that the vertical.
Just to kind of pull them or color on it I think the government vertical which for us as far as the international state and local performed very well, we'd really to call. It out in the script, but it was cold in the top three M.S.S.P.'s, we talked about financial services, we talked about it can't indicated retail was flat if you're over here in terms of his percentage of doing a tech at a pretty good quarter as well, but not enough to get it in the.
Five.
<unk>, that's that's helpful and they just like hit one more quick one on S.D. when I had a lot of questions. This quarter from from a investors just concerned about.
Potential branch office closures to D.C. any did you see any changing the deployment.
You know, we see within the branch office environment due to closures or maybe was it accelerated because of the closures and they'd be better access and networks. As a result, maybe just a little quick color there would be helpful.
Oh.
Yeah.
Oh, we we have would be <unk>, you know tosh deployment and call me. Some I.P. They the language is opportunity to I've quit somebody infrastructure cluttered.
<unk>.
It's yeah, we don't see slow down like really even see since out a salary Elizabeth.
Super helpful. Thank you so much.
Okay.
Turn next question comes from the line of bread Zelnick with credit please.
Excellent. Thank you so much and congratulate you all for the strong momentum and being there for all your constituents. During these crazy times can I've I've got another risky ran question for you one of your competitors recently made an acquisition in the S. He went out of space with plans to leverage their techno.
Oh G.N.S. in branch architecture can you may be just help us by comparing and contrasting your approach to S.D. when and whether one solution is inherently more cost effective or has more efficacy. Thanks.
Yeah, we we already spend like quite a long time people up as keep one like five to 10 years and so far beginning combined athletes of security together.
So can use insecurities, how how S.T. up by a holiday to one function can be tolerated.
That's that's of our different then pulled out a major competitor.
Well can side on the security site, they they have to <unk>, which they have a lot a limitation wondered on on on the performance all combined or <unk> <unk> huge advantage, but continued <unk> Oh. This function is also <unk> we should.
Okay, but <unk> and also much lower.
So not not how we see that benefits caqueta more and more and on the other site.
Part of the total solution wider to cloud wants to talk turned on the outer pod accompanied security I see went to gather definitely have a huge <unk> oil easy to manage a single block solution and the same time, we also bad and some how to call it on holiday.
Computing working together.
Function need to be processed Uh huh.
Sometimes you need to be <unk>. That's also what can well pizza hypochondria approach and also a combined headquartered up <unk> home.
<unk>.
Fabrics, you can grow faster and a lot apart I between a fabric.
Toppled people and then to prove you can't put if it's a quarter of lack of we mention up off quite a 40 Klein all 40 authentication about 40, Paul Kennedy's all relate with a walk home part outside I see shooting, please and and so the family got prone to also.
A lot of format.
Thank you can it makes a lot of San San if I can just follow up with you Keith how are you thinking about your hiring plans in light of the limited visibility you have it actually seems like you're <unk>, you're off to a pretty strong start and Q1.
Yeah, I think the the hiring is then we talked about this in the context.
A couple of the core.
That wasn't as balanced framework profitability in growth that we're executing against we thought coming into 20 2020 that we were going to tilt towards growth.
And we think we saw that was something they're definitely made towards the end of last year and we continue those hiring investments throughout the first quarter of this year. Yeah. I think is supposed to talk to lap some of those hiring higher hiring percentages are gross in Q. trick you for it so that at that point in time will start moving back in mind, what we've seen historically.
Awesome. Thanks, so much guys.
Mmm.
And your next question comes from the line I shall.
From Oppenheimer.
Thank you cut off and then gone congrats on the on going strong performance.
You have very college, you repeat performance over the call for the past few quarters, but I think it's affecting the first quarter.
How about a company that have been recording mix.
Outlook will just stick to the European performance, what I'm doing different or is it also driven by were strong pocket relations in that region.
Yeah, I think the.
I think that when we say Europe also includes are emerging part of the business as well emerging meaning everything from southern Africa through the middle eastern into.
Eastern Europe, I think that that that that latter component has been strong now for many quarters in a row.
And yes, I do think that one it's great execution by that team and I think also to do a very good job of how they.
Somebody to <unk> forced to go to market with that I think if you look at the quarter overall, yeah. We probably saw if you would kind of expect with the pandemic.
Did you ask in the Americas, probably outperformed Europe Continental Europe, a little bit more during the quarter and that's kind of consistent with what we saw with the pandemic.
Got it got it and keep why why we have in.
Growth Montien on football the highest in in.
<unk>.
Huh.
What should be what can we be expecting going forward and at what what what's been driving that's a little bit of an upscale we have seen gross margin specifically for the company.
It's like more clients driven.
Yeah, I think that the guy and still be provided for gross margin is it's good for the quarter I feel comfortable with that I do think that we're benefitting.
As our costs structured changed a little bit with some of our new or products.
And I think that we're partnering perhaps a little more effectively with our channel partners over the last couple of years and then we had in the past.
Okay.
Good job. Thank you.
And your next question comes from the line I've noticed that Frenchie from Morgan Stanley.
Thank you very much for taking my question I want to go back to the discussion on the branch business I think investors are trying to understand what the trajectory looks like for the branches given.
Some exposure to economically sensitive articles like retail so I I know that it's it's probably pretty early but as you look into your pipeline or you anticipating any change in terms of renewal rates for that branch.
And I know that April is shaping up to be pretty well, but what should we expect for the second half of the year.
Yeah. So we didn't guy that the second half of the year and then we don't give a law specifics on renewal rates, but I think I made the comment that what we saw in the first quarter was that renewal rates were but in that band that we provided at the Alastair and I really don't see that changing based upon what I'm, saying I think it's probably you know helpful to kind of cuts in the context of our diversification and.
And it kind of made reference to a just a moment ago when I talked about how the U.S. perform very strongly in Europe, Yeah was probably hit for that pandemic, a little bit harder yeah, you're talking about a company now that's less than 30% of it's business as in the U.S. and there may be a lot of focus on retail headlines in the U.S., but it's probably passing over you know perhaps to recovery that's already started in your.
Grow up and the impact from Latin America, another geography.
Okay that that's very helpful. In just a following up a few Keith I'm I'm wondering if you could just maybe give a little bit more color on some of your underlying assumptions for the key to guide I know April it seems to be pretty healthy. So far but are you sitting not continues to the rest of the corridor or are you expecting.
Challenging close.
Yeah.
Yeah, I think we feel very good about the the business about the products about the strategy that we're executing about the sales teams ability to execute about our ability to support our customers and <unk> ability to support their partners.
And with that in mind, you know I'm I'm looking at the pipeline I'm looking at the slicing and dicing of the pipeline.
I kind of made reference a moment ago I'm looking at different assumptions are different geography is based upon the status of the pandemic in those geography.
We're looking at deal sizes larger deals have typically more or less than smaller deals do as part of our assessment.
We look at whether or not it's a new logo on existing cost them or or renewal. So all those things go go into the mix in terms of setting the guy into the core.
Thank you.
And your next question comes from the line Okay.
From Berkeley.
Hey, guys. Thanks for thanks for taking my questions here, Hey, can maybe maybe first for you a lot of questions on the branch and understandably, so, but maybe even just thinking about the enterprise.
How do you think your enterprise customers are thinking about their V.P.N. strategies longer term and how do you sort of expect for enough to play into that.
I see these.
<unk>.
<unk>.
Like I said before there's a probably less than 10% people walk remotely.
Yeah, no he was locked down probably B.C. over 90% maybe even.
We all can whatever.
Maybe skills, 33% and.
It's all depend on the vertical so vast making these remote access what phone home study more and more important and especially.
What can you to be combined with.
<unk> actually six your home.
<unk> Oh, Hong on whatever the whole house, there and even defined like I went to buy five please hold onto her like different.
The family kind kind kind of manage all these different families.
Not to actually if we see.
It's easy to.
Hi quarter, all your office.
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Some after like like also indicate a par Doc some onder powder.
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[noise] got that's very helpful. Maybe from I follow up for for you Keith.
<unk> or or or maybe it can you comment on on any trends in the 40 garden bundles. As a result of of increased work from home you know I know you talked about some of the trends in four to care with with that nice optic in in customers opting for 24 by seven the curious if you've seen any materials shift and the make up a four to guard subscription.
With the different on those that you have as a result of of of work from home no no.
Not really.
Okay got it very helpful. Thanks, guys.
And your next question comes from the lawn.
<unk>, Oh ones with Piper Sandler.
Yeah.
How can you hear me.
We can.
Okay, sorry about that you mentioned in your prepared remarks, your ability to directly manage supply chain shipping logistics and I'm curious as you look forward towards the second quarter and should you still see strong.
Surging demand around the 40 gate solutions any supply chain concerns are those all relatively put to bed at this time.
I think we.
Good about over the head of manufacturing has some workable.
I guess, so far we don't see any shall we see pretty pretty good yeah. They also <unk> pretty quick not only does supplied Chen but also we manage our own Oh, she meant a sheep logistics and also on support in like so we we not <unk> customer support you and that's also.
It's all these f. I said it takes me so the team. We we can quickly just fly and can kind of making more like.
And and or whatever resistant to any any kind of.
Delphi tool to adopt quickly.
Yeah, I think the Greek and still have spotted a spotter two of you know components that may.
B lined up in Japan, or the Philippines in Malaysia, or something like that on a on an individual components.
But keep in mind part of our business model is looking at are in the toy utterance, which have been less than three recently, so really got me for caring about four months of inventory at any point in time and even at that level. You know there so we weren't at 100% execution.
Backlog was consistent with other quarters, and so probably we're looking at our inventory level and thinking maybe as we go through the next quarter to to move that up just ever so slightly that'd be started transitioning to further guard against this possible whisper pandemic.
I appreciate the color and then just briefly if I may know there's been a lot of discussions around work from home branch office, but where do you guys come down that you're talking to customers I've had that clouds sassy arguments and strategically as people are considering work from home what's kind of been the response of customers is you're looking at your solution versus others.
Oh, Yeah America, I say in a few years ago, we refuse to the sassy the best mauled always ready <unk> service provider.
Today. This morning, we also announced that partnership and N.P.T. West Oh for all these <unk> kind of.
Customer service provider solution for both S.D.Y. and also security and even I'll sell for you to have the technology and but we do believe these clout approached me to be what can be h. in that you don't promise to Kendra. So maybe we have the structure all that.
<unk>.
And also what can be a lot of service provider right now they called a 40 sassy approach is a little bit different than the traditional sassy approach, we should they for what all the traffic what are fun I'm pointing to your device a home and also in the office of the clock. So we believe the better approach for that Saskia with <unk>.
Yeah for the end point out some more phone home your mobile device, maybe make sense to for for the cloud to process, which we have all just solution. When you know all face.
<unk> often traffic holidays, not quite that makes sense is that navarre secure because looking for what is not quite quite a bit and also is yeah quite a lot about network traffic and a much higher latency much snow on the most obvious sassy company, it's pretty interesting anymore Maverick yeah.
<unk> security so when the testing data security there securities, reaching all research all the intention not as good at some Audrey dedicate security company.
We have a few hundred people just don't we all did how did you in research and.
Duties for 20 years, so <unk> phone fancy acuity banter that won't can latency and a better like a cost wise some <unk>.
You have those cavities.
<unk> <unk> <unk> won't be much better than for what Oh, that's office traffic to that the cloud so that that that's where we have 40 Saturday, but it'll it'll be different and also what can be service provider for making a profit model.
<unk> company, they have too much a lot about pop out data center, which making then.
Keeping loosing money I eventually all these the service provider they will have their own kind of <unk> <unk> <unk> <unk> on the on site on you know face will be much more.
Secure and the cost effective.
<unk> right.
Management, Oh mantra all his mobile security solution. So that's why we haven't it'd be different <unk> service provider and also on average both on a child and also on the on problem. It's on the age solution. So I think that's kinda Barbara get feedback from holiday. So boasting the enterprise side in the service provider also you know <unk> I so we'd be.
That's nice won't be the right approach.
Thanks for the color.
<unk>.
I'm sure next question comes from the line Michael target from Raymond James.
Okay. You you you commented that in the quarter you got strong demand for V.P.N. authentication token and point calc really work on Griffin and you were saying those same trends so apart in April.
Oh. That's the question is do you have some feel for where we are in terms of customers getting up to the level of capacity. They indeed in terms of that product is that <unk> to to finish or does it extend further.
Like I said, what are the I.S.M.P. I walk for home to fuel barn, low percentage, probably U.S., maybe around 5% <unk>, we can kind of even more.
More than that so I assume huge potential so what I.S.M.P.L., Oklahoma then.
Quite a little access tool to home for the office suddenly you'd need a huge increase almost <unk> I called her own whatever it offers V.P.N. I need to support all these hum Walter <unk> and then the same time you also need to on this on a secure solution in in a in the in the other side wonderful.
Not a device stifle authenticate or so that's why we see quite strong.
<unk>.
Yeah.
Keith I don't know if you have anything to add to that but my fall question for you is about a payment terms energy commented that duration was about 25 months on end voicing just remind us where it wasn't it that if you have any concern about that shortening and you talk about 15% extension yeah in payment terms again any.
Concern about that in terms of your need to help out customers in the impact of either one of those on cash flow.
Well like I think that the headline would be that no. We have a strong balance sheet and we're certainly going to leverage our balance sheet, what is opportunities to gain market share and you have to support our our customers and our channel partners. There's there's no real doubt about that in my mind, you know I do think that we don't guide to free cash flow, but you know there's probably.
Some adjustment that you want to make to your free cash flow model for the second quarter, because I do think that four nights in a position to help others and I expect us to use our balance sheet to do that on a case by case basis.
Okay. Thanks, guys.
[noise] on your next question comes from the line.
<unk> from city.
Oh, Thanks to questions one I guess for for can just around the low end of the product line look pretty strong I'm wondering how strong of a trend. It was that you saw actual work from home customers, taking low in boxes, and and not being part of what you shift to understanding at 40 client was strong in the token authenticator products and so forth.
Wondering how much that contributed on the appliance side.
I.
I think they both pretty strong.
The 40 come probably even double and Triple watch come from.
Bayes and then the upon the low end.
Wider X.M.B.O. somewhat higher <unk> also pretty strong like if you see the the human human increased 30 per cent most of the country do phone number one <unk>.
I think the trends you like I say it is assumed to.
You got a lot of a under price and and also what they they they see the current what are their competitors apart I can not handle southern Ain't that huge increase L.W.T.N.O. Some other kind of <unk> solution.
And a lot I can trays and so I cheek I also super P. that you try to wonder.
Do the deployment or whatever and the same time, but you also kind of help and support him then and we have this coded zero tosh deployment.
How can put the point.
The French all awesome under no I cornered solution quickly.
We'll meet I'll, just 20 men I don't see the trends snow down yet and.
But even half turned up had I'm me completely do see the <unk> people studying work from home probably will be higher maybe like a few times I compared to before.
Yeah, I think the <unk>.
I think the model so to speak and you'll be more likely to see is that when people start working from home and thought that they're going home and taking a firewall with them I think they're installing 40 clients on your laptop. So that's probably really not going to drive a low in business by itself on the other side of the corporate I.T. organization now they're trying to they need.
Capacity because of things like B.B.N. enough on occasion, and so forth and so you may see the corporate buyers actually moving up if you will in terms of what they're buying but again, it's not firewalls at home.
The other aspect of it as we have any product called the 60 off which has which was a real based on the quarter or just in terms of the volumes that a person did it produced in in in our in our favorite has a little bit different cost structure than its predecessor, so it's giving us a little bit lip on margins.
Yeah, I think is also range.
Yeah.
The 40, <unk>, probably couldn't come load on your laptop all your mobile, but not the only six or one device. So when you work from home you owe it to them, but probably competing with your kids for.
The families and then and also some odder understands you need managed to get or some other appliance <unk>.
Like holidays remote monitoring device I'll just since that's what a 40 games calm him. This barber handy barbiturates. Good solution. So they can manage different the wise from different <unk> secure to why if I took Andrew and some some I'm not sure how how much you. It's a cool place do you mind, but is that still.
Huh.
It's it's ready to put on offers so much function. They can have the whole house.
Managed much better six you're much better compared to one device.
Well not somebody Campbell from home was a it's a much better security and also can some kind of.
Yeah, it's much better than just one device.
And then and it keeps just on the guidance on you know understanding we're seeing lots of companies you know pulled the guidance because of because of the unprecedented times I'm. Just wondering if you're looking your forecast and think about you know 90 days from now what what sort of things are you looking for in your forecast seem to be able to get back to giving annual guide them, specifically, what sort of things are unstable they're sort of.
Too wide of arrange to be able to call at this point that he'll be watching.
Yeah, I I think the like everybody else I think we're our concerns our interests or is there going to be a second wave what's the severity of a second wave going to be what geography is it going to hit and windows are going to get in those geography and really ultimately you know what economy are you trying to provide guidance into and that's just the unknown right now in the second half a year.
Okay. Thank you understandable okay.
And your next question comes from tall.
Some bank of America.
Thanks, <unk> I'm just wondering if you can share some thoughts on overall security budgets and how you think they might trend. This year curious if you're hearing for any customers that they're looking to already cut back.
Maybe in two two or second half.
And then just just a quick follow up for for keys, probably can you just help us think about how much of your S.D. win business is driven by M.S.P.'s and M.S.S.P.'s. Thanks.
I see him from the.
<unk> <unk> <unk> pretty pretty well during this recession by these kinds of different and that's where we also tried to be careful.
It is and Sophie's here in the first quarter also in a probably see pretty.
Pretty good and don't know any mature impact and you've seen smoke I wore cited me feel pretty comfortable but like you say there is a is.
Kinds of different we try to people on careful and.
Yeah, I think in terms of the F.C. when in the N.S.S.P.'s.
Characterize that as being a market that we're very interested in because if they very large market. Obviously, the M.S.S.P.'s I've already come to it with with an incumbent that we're trying to displays but that that opportunity without quantifying that if you will or something that I would say was very focused on internal.
Great. Thanks.
And your next question comes from the line up I met very funny.
<unk>.
Yeah, I'm thankful, particularly question guys have a question a follow up as well I guess the full stuff you visit seem fairly impressive share gains over the last couple of yours I'm wondering how do you think we share getting stock Kabul was the next to yours as we go through a recession effectively I'll be do you think should get some actually accelerate given a T.C.O. proposition that you.
Guys have with enterprises or is that unlikely to happen given no one probably once replaced legacy give at this point.
We probably will continue to lavished <unk> technology products.
Winter leverage we call the S.P., you'll security project Union, 80, which gave a huge <unk> I needed. So P.P. a function, though oh quite quite a profit function and also the fabric approach, which is about 800 started part alcohol, mostly internal develop well can integrate ultimately together.
Not a competitor.
I haven't decided bandage.
And the same kind of more continue tool you maximum it continued to hire him. But also we found out was more easy to hire some high quality people and and what will continue to and the other part also we found we probably have the biggest training program.
<unk> and we started open up all and it's for free and not only we will keep me a few hundred University to train oldest student, but also a lot of what big under price a lot of service provider.
<unk>, Oh study and see.
A huge need for the twin yeah, we actually we found that we we stop.
<unk> every few seconds.
So every few seconds, we got a new on nutrition, so not for the training and and that is a huge benefit because <unk> security space. In this these last year address that you can find me then shortage of training people to help you handle to security. So now it's also the opportunity we found out.
Trying to people and then you can record now so quickly and help with something that's the problem. So maybe.
Huge opportunity to flash based on that the mass mummy made before and also what we continued walking more hot please hold a team and all the <unk> try to try to make it home.
<unk>.
Yeah, I think there's two things that the kids to be making a point to make a reference up and I probably some lives in this way I think you treat things are working our favorite them on one is our fabric products that has continued to expand them is continued to mature and become even more competitive if you well in terms of features and functions with some of the best of breed.
You are seeing more and more customers I suppose that I'm talking to and prospects much more interested now in a platform approach, but enables automation and integration and moving away from a best of breed solution for every aspect of the security I'll platform and then the third aspect of it we are probably moving into an environment would cost effectiveness is a premium.
<unk> in you'd go to market messaging without I mean, if you you can argue that successfully and produce that to deliver that lower costs more cost effective option you can be successful in this market.
That's really helpful guys I mean, Keith equipment for you you talked about average contractual tells me she got the about 15%.
What's the impact of bad and what's the best here for us to read that stayed with.
It's payment terms not not to turn up away from the contract right.
And.
As I mentioned that it was slightly less than 15% increase if you well I would probably think it just want to take a little bit of second looking at what's your Cat's collection assumptions are in your free cash flow model for key too.
Got a thank you.
I would now like to turn the conference back over to Peter <unk>, Vice President Investor Relations.
I think of a shell I'd like to think everyone for joining today's call and extended an invitation to listen to the management keynote presentation that the America's virtual.
Read event on May 12th please contact me for the registration like also for that will be attending the following virtual investor conferences during the second quarter, including D.J.P. Morgan Conference also I may 12th the Bank of America Conference on June 4th and the volume Blair Conference on June 9th presentations for these events will be webcasting links to these wasn't guess are available it will be available on our industrial.
Websites give any follow up questions. Please feel free to contact me, having a great rach everyday thank you very much.
Ladies and gentlemen must include stays conference call. Thank you for participating you may now disconnect.
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