Q2 2020 Fortinet Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the 40 <unk> second quarter earnings announcement conference call.
At this time, all participants' lines are in listen only mode with the speakers presentation to be a question and answer session, which ask a question. During this session. We to press star one of your telephone.
Please be advised today's conference is being recorded and if you acquired further assistance. Please press star zero.
I'd now like to hand, the conference over to your Speaker today, Peter Salkowski. Thank you. When please go ahead Sir.
Thank you Chris Good afternoon, everyone. This is Peter Salkowski, Vice President head of Investor Relations at Fortinet and I'm pleased to welcome everyone to our call to discuss watered out its financial results for the first second quarter of 2020.
Speakers on todays call or can you afford that its founder chairman and CEO and Keith Johnson, Our Chief Financial Officer, There's a lot of call that will be available for replay via webcast on our Investor Relations website.
Ken will begin our call today by providing a high level perspective on our business.
To review, our financial and operating results for the second quarter provide some additional details regarding our second quarter performance and some insights into how July performed before providing guidance for the third quarter 2020.
Well then open the call for questions during the Q when they start unaware of Citi. Please keep your questions brief wanted yourself to one question and one follow up question do allow others to participate.
Again, I'd like to remind everyone that on todays call, we will be 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 our assay heap Arlington, particularly the risk factors in our most recent form 10-K and form 10-Q for more information all forward.
Looking statements reflect our opinions only as of the data. This project presentation and we take onto onto on their takes no obligation and specifically disclaims 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.
Reconciliations is located in our earnings press release and in the presentation that accompanies today's works both of which are posted on our Investor Relations website.
Lastly, all references to growth or on a year over year basis, unless otherwise noted I will now turn the call over to Ken.
And thank you to everyone for joining today's call to agree we all second quarter Twentytwenty result.
Yeah. We're piece, we saw solid second quarter performance revenue increased 18% to 616 million. They support all remedy allow the 12% on service revenue up 22%.
So QST, where clem to 12% of a total second quarter buildings. The first time has been over 10%.
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Before turning the call over two keys for a closer look and our second quarter performance I know cadence I.
I would like to pick a move and welcome to over 400 people drawing fortinet during the second quarter.
As one last wall cover the Opex team, who recently joined.
And can sank all employees customers and partners worldwide for their continued to support to manage all response to the ongoing Copa 19 pandemic Keith.
Thank you Ken.
To start the second quarter review with revenue.
Total revenue of $616 million was up 18%.
Driven by non Fortigate product and service revenue growth of 25%.
Non fortigate revenue growth benefited from very strong demand for virtual machines, and our work from home solutions.
Fortigate product and service revenue growth was 16% and benefited from record levels of buildings for our secure FC wind solution.
Two large extent, our second quarter revenue growth together with the backdrop of the co the 19 pandemic.
Affirms the benefits of our diversification.
Across geographies customer segments and industry verticals.
At the same time illustrates the level of revenue predictability in our business model.
Our continued growth in this environment is the result of our strategic internal investments made.
To expand our global Salesforce invest in our channel partners.
And extend our cost for performance advantage as we update our product offerings and penetrates the adjacent security markets.
Product revenue grew 12% to 212 billion.
Susan.
Were 12 million benefiting from strong demand for secure SP, when high end Fortigate and Fortigate virtual machines.
Our work from home solutions continue to provide the tailwind to growth.
Our growth rates and industry reports suggest we continue to take market share in both the firewall and SD Lan markets markets, where we have contributed leadership and innovation.
Moving to service revenue service revenue grew 22% to 404 million.
Representing 66% of total revenue.
Over 90% of service revenue was from deferred revenue at the beginning of the quarter. It continues to support our revenue growth and predictability.
Fortiguard security security subscriptions revenue increased 22% to 223 million.
40 care technical support revenue increased 22% to $181 million.
The revenue mix shift from eight by five support to our higher price 24 by some support was nine points with 24 by some support now representing 64% of the mix.
The shift to billings.
Total billings increased 14% to $711 million.
The total building growth was negatively impacted by approximately two points by training and professional services and other miscellaneous products, which are products not classified as fortigate fabric or cloud.
Earlier this year, we announced our decision to make our network security expert for NFC online training and certification program free to the public.
While this decision resulted in a reduction in training billings and training revenue.
We're very excited about the demand, we're seeing with our NFC training.
As of this week the number of NFC registrations for 2020 is well over 500000.
And the number of NFC certifications issued.
He is up over 200%.
To nearly 200000.
Looking at billings by product segment, Fortigate billings increased 14% and accounted for 73% of total billings.
Fortigate buildings include our secure SD Lan solutions, and as Ken mentioned, a moment ago SD Lan passed over the 10% threshold for the first time ever representing 12% of total billings.
Non fortigate billings also increased 14% with strong demand from our virtual and work from home solutions.
Offset by smaller contributions from switches and access points and as I mentioned building declines for professional services training and other miscellaneous products.
Our geographic performance aligned with a path to the pandemic.
And with that highlight of the geographic diversification of our business APAC being further along outperformed all geos followed by Europe, While North America was impacted more.
Our North America results include the United States, where we saw headwinds from the education and local government verticals with a cover 19 pandemic remains an issue.
By comparison, the retail segment was by far and away the strongest performing us vertical with growth well over 40%.
As we saw the continued expansion of the wind solution.
The U.S. SMB segment provided strong growth.
Illustrating the strength of our us channel programs the remaining opportunity in this market and solid execution by our channel partners in that Fortinet channel team.
Looking more at the Americas, our analysis and discussions with our channel partners. So just a certain transactions were delayed into the second half of this year as these companies focused on their capital structure and other immediate priorities.
Moving now to worldwide billings by industry verticals.
The diversification of our business model was again on display with our top five verticals continue to account for about two thirds of total billings.
Worldwide government sector topped all verticals with 19% of total billings.
Service providers and Msps accounted for 15% of total billings.
Financial services.
With 14% of total billings, so very strong quarter with building growth of 33%.
And despite cobot related concerns the retail vertical posted worldwide billings growth of 27%.
Accounting for 10% of billings as a continued to benefit from SD Lan and the strong give us performance I mentioned a moment ago.
We saw strong strong growth in retail sub verticals, such as drug stores groceries and portions of the wholesale industry.
At the end of the second quarter total deferred revenue increased 24% to $2.3 billion.
Short term deferred revenue increased 24% to 1.3 billion.
Looking now at deals by dollar size, the number of deals over $1 million increased 28% to 59.
Secure SP when accounted for 13 of these deals over $1 million.
This performance illustrates our continued ability to move up market into the enterprise segment and the continued acceptance of our differentiated single unit secure SD when offering.
Let me back to the income statement.
As shown on slide four.
Gross margin improved 260 basis points to 79%.
Product gross margin improved 340 basis points to 61%.
Product gross margin continued to benefit from the lower cost structure of our newer generation of Fortigate products.
And over 40% growth in software products.
Services gross margin increased 120 basis points to 88.5%.
Reflecting the benefit of the 40 care revenue mix shift to 24 by seven support.
Operating margin for the second quarter increased 370 basis points to 27.3%.
Benefiting from the improvement in gross margin and lower employee travel and marketing program expenses related to the shift towards virtual events.
Total headcount ended the quarter, a 7756, an increase of 23%.
Driven by the increase investments we've made to grow our business.
And reflecting a continued decline in sales and other attrition rates.
With our continued growth strong operating margins and free cash flow.
We do not anticipate any covered 19 really layoffs in the foreseeable future.
In fact, we plan to capitalize on our many opportunities, but continue to higher and invest in our balanced growth strategy.
Given the strong operating income performance net income for the second quarter was 135 million.
Our earnings per diluted share increased 24 cents to 82 cents per diluted share.
On a GAAP basis, we reported net income of $112 million or 68 cents per diluted share versus GAAP income of 73 million or 42 cents per diluted share a year ago.
Moving to the statement of cash flow summarized on slide seven and eight.
Free cash flow increased 21.5% to $216 million.
The average contract term in the second quarter continued to be within the range. We provided at the analyst day.
Declining one month year over year to 26 months and moving up one month sequentially.
As we've stated on the first quarter call, we expected to leverage the strength of our balance sheet as a competitive advantage to support our partners and our customers.
Average contractual payment terms increased to 62 days or 17% sequentially.
Inline with our expectations and reflecting our decision to provide geographically targeted extended term payment term plans.
Capital expenditures for the second quarter were 31 million, including 21 million related to construction and other real estate activity.
We estimate the capital expenditures for the third quarter to between 50 and $60 million and for all of 2020 to between 165 and 185 million.
Delays related to the new delays related to the new campus building have moved a portion of the previously expected 2020, capex spending into the first half of 2021.
We expect full year cash taxes to be approximately $40 million and our full year non-GAAP tax rate to be 22%.
For the second quarter, we repurchased approximately 1.4 million shares of our common stock for an aggregate purchase price of approximately 146 million.
In July the board authorized an additional 500 million for our share repurchase authorization and extended the term to February 2022.
As of today, the remaining share buyback authorization is approximately $1 billion.
Before moving to guidance, we wanted to ship one of the offer some additional thoughts related to the ongoing coated 19 pandemic.
We have and we plan to continue leveraging the strength of our balance sheet, which may increase dsos and inventory levels.
The economic and business impact of the pandemic seems inline with the ability of different countries and geographies to reopen and avoid temporary shutdowns and uncertainty.
For example that are strong billings growth in April we saw slower growth as we completed may.
Then followed by a bounce back to strong growth in June and again strong in July.
At the same time, the remaining Q3 pipeline points to a good level improvement in both of us and worldwide.
In the second quarter, our channel partners reported some deals being delayed into the second half of the year.
The concept of delayed not lost two supported by the increases in our pipeline as well as of July selling activity.
Clearly the remains an elevated level of uncertainty about future pandemic give you about future pandemic events and economic conditions.
As we look forward I'd like to review our outlook for the third quarter summarized on slide nine.
Which is subject to disclaimers regarding forward looking information that Peter provided at the beginning of the call.
In the third quarter, we expect billings in the range of 705 million to $730 million.
Revenue in the range of 630 million to 645 million.
Non-GAAP gross margin of 78% to 79%.
Non-GAAP operating margin of 25.5% to 26.5%.
Non-GAAP earnings per share of 76 to 78 cents.
Which assumes a share count of between 168 and $170 million.
We expect to non-GAAP tax rate of 22%.
For 2020 due to the continued uncertainty associated with the economic impact from the covered 19 pandemic, we're not issuing full year guidance at this time.
And finally, along with Ken I'd like to welcome all the team members, who have joined us including the opaque team.
I'd also like to thank our partners customers in the form that team for all their support and hard work. During these difficult in unique times I'll now hand, the call back over to Peter to begin to QNX.
Thank you Keith Chris we'd like to open the line for questions Liz.
Thank you.
And as a reminder, ladies and gentlemen to ask a question you need to press star one of your telephone.
Well Joe Your question. Please press the pound key.
Please stand by we've compiled kuni roster.
And our first question comes from a lot of Rob Owens with Piper Sand. Your line is now.
Great and thank you guys for taking my question. This afternoon I wanted to start on the SD Wan side of things in the success that you're obviously seeing there through the metrics now over 10% of billings, but just what the pipeline looks like have you seen more of a rush given co bid work from home and the opportunity to replace a lot of these solutions relative to.
To branch types of solutions or are you seeing as much of robust demand I guess in that forward. Thanks.
Hi, few buttons on long term benefit for both price and also.
SMB and.
Because it's also lowered.
The cost south.
And that for the Internet the same car.
Second mortgage station and for US also be building Mesa Hesik security to capture.
So they can also have additional secured additional benefit and that and.
Cost much lower compared some other competitors to the market grow about 50% year over year. So we see the bottom potential about a pipeline. We do believe we're keeping gaining market share.
Because health solution is.
Our unique huge advantage compared to other competitors and additional shelf capacity, we added like we had high content of 3%.
Even during the pandemic typically be moved on to train the new salespeople and then they may be leaving more time too.
Two in the new commitments that we do see huge potential going forward.
And then secondarily I guess focus has been focusing on the safi opportunity and some of the dialogue from previous calls maybe could touch on the opaque acquisition with this.
Customer driven was this opportunistic from your perspective offensive or defensive.
We we have this a 40 sassy like I mentioned, even during the last on the earnings call and we do believe it's a part of the whole infrastructure.
Certainly the cloud is able to we ought to have some modest how do you worry about OPEC definitely keep hence these and we'll make in.
We're all more flexible for customer for the partner too.
Total have reached up the product infrastructure, where people and so we do see this is Randy has.
Hi offer we have and that same time.
We do have a broad has offered in both found out platform and also on that.
On the function and also kind of different form our deployment.
Competitors, we see.
Hence our position.
Great. Thank you very much thank you.
Thank you.
Our next question comes from the line of strategic Boolani would you be Sir your line is now open.
Good afternoon. Thank you for taking the questions.
Ken maybe a bigger picture question for you.
The combination of.
Steve Swain adoption and are more durable work from home environment, maybe as giving investors defense.
Perhaps its misplaced.
Getting investors in sense that the traditional enterprise branch office.
If potentially.
At risk from either a refreshed footprint perspective, and a cannibalization perspective. So I'm wondering if you can help us parse through sort of some of the puts and takes says to you what happens to your branch office footprint.
And what some of those misconceptions might be as customers adopt best land and or stay at home more permanently.
In sheltering price situation, and then I have a follow up certain.
I had the underprice also including some branch office, we do see some slowdown in specialty us.
But is on the other side.
If you can kind of par dock.
Which come out like.
I assume Ses will come out of one musical we said in building a par Doc Tech for 100 African six foot half a dozen which has announced the 80 half last week.
So we can see that run poppy, especially in the SMB, including the use as they come up in back over 40% it's above our strong.
International limited unit to be behind on the us to adopt some new products, including some bolstered the low end use you asked this before and also that the high end MP sandwich dining release about 30. This year, so starting standing run pop.
So on that so that's what we see the benefit of the new part outreach easily have a pro forma is like four or five acts better and the same costs, which we you seem to have recall secure computing and reaching.
To benchmark compared with other competitor is issued I'd have engaged so we see a win win we have the new part on a gross tightening come up come come come up one quickly.
After the detaching you've added on top of the product.
On the other side you might also gave the addition of cost benefit to kind of its a new product cost performance benefit.
So thats why hopping driving.
SMB, we see starting grown quite well and also last quarter. After we are not to high end part out like one or two quarterly tendency to the hand also starting from pop leveraged MPS seven.
So thats the trend.
I do believe sometime enterprise typically be more time doing is a pandemic to do some deployment.
But we do see a lot about evaluation going on we do see some order.
Interest, including combined recall security networking together with close to contribute networking.
So to hold infrastructure, that's where the sales probably will more engaging tool to now will contain and also traditionally most out of security and knowledge and that will contain most exciting engaged for categories asset to call to secure driven networking.
So thats, we see the trend going on quite well and and also Mac and cheese measure region by region by so is that it's at apex studying Rob Barbara Quicken over 20% and since the timing kind of left there.
Solution, maybe better recovered it'd be better and then then we also see your public but also going over 10% the new actually be slow.
We do believe later this year next year that questions over waste a new part on line. Please. The addition of sales capacity, we built which will continue to give mass.
What we're seeing bar restaurant potential going forward.
Yes. This is frankly just.
I think Kent has a great job of fuel covering off some of the diversification considerations whether its.
By geography somewhere different geographies may be and also by verticals.
But it's also important to note that SP. When is also a significant component of sassy and also for work from home solutions.
Fair enough and Keith since I have you.
Any comments on the billings performance, specifically this quarter and just double clicking in Q4 to get the billings because that includes both your traditional sort of network security perimeter security and the security ran piece I'm wondering if you can kind of qualitatively talk to you sort of what drove the bus this quarter and how you're thinking about.
The secure STB land versus non secure SD Lan fortigate pipeline for the remainder of the year in what's baked into your Threeq guidance and Thats. It from thank you.
[laughter] fell a lot of topics settlement.
Maybe ill try and if I am I know you do a good job.
Look I think when we look at the pipeline for Q3.
Which is what we've guided to I think we feel very good about the ran opportunity clearly we saw perhaps in the us in the month of May a bit of a pause on maybe some projects that were as we got towards the end of may but clearly as we exited Q2 and we've moved into Q3, we can see that our customers are making plans to continue moving forward with a recipe wind build out.
Alps, and additional opportunities that we've seen in the pipeline.
I made us, let's just say comfortable talking about crossing over that threat, 10% threshold for the first time now we'll see how it actually comes into play.
And I think I've lost track of some of your earlier comments Im sorry.
Fair enough I'll get back in queue. Thanks, so much better.
Thank you and our next question comes from the line.
Scholl EOL with Oppenheimer. Your line is now open.
Yes.
Thank you good afternoon, gentlemen, congrats on the quarter.
Can or can't so you us was the softest swings in this quarter.
Next week will mark the middle of the quarter the third quarter.
Can you talk to us about the performance so far within the US what's the pipeline is looking like.
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We do see some enterprise customer has a.
Good inventory is above the society and just like.
Some larger cloud also multiplatform alpha.
Deployment infrastructure.
So thats, where we make hits us the whole infrastructure security offering and.
The phone or all the amount of covered revenue or whatever do relatively small.
Which may not impact match up with a total total building our revenue there.
But.
Theres, an interest about is and make it.
So customer one has to make sure has some kind of flexibility.
And also brought offering so thats, where we see.
OPEC acquisition cute and what we have on the 40 sassy and also offer more broad.
Both on the part knock on that deployment on the infrastructure side two to two feet customers customer.
Yes, I would add against comment this with pulling back on looking at even maybe little more broadly add to the comments that were made in the prepared remarks, we're very pleased with what we saw in terms of July of selling activity.
And the pipeline build worldwide as well as in the U.S.
Yes, the same time like we say.
We also keep in supporting our partner, including the severance provider that you've been some some big global customer. The also won the building the.
Their own sassy two substance just like the cow sometime to have the private cloud over leveraged property crowd out hypercloud. So it's a similar since we see in here in sassy, which we also supporting the pound on a customer and try to have to version of us assay, which is.
Based on the surface audio trust infrastructure to deploy some a security functions.
Understood.
Thank you so Michael that we'll talk later.
Thank you.
Thank you.
Our next question comes from the line of Sterling Auty with JP Morgan Your line is open.
Yes. Thanks, Hi, guys. You mentioned continued tailwinds from work from home, but we have seen the growth rate and the product side answers certain extent you know the billings ex the adjustments you mentioned start to fade. So I guess my question is do you expect that those trends can continue on for multiple more quarters.
Or do we face further deceleration in the back half as some of the work from home.
Tailwinds fade further.
Oh, we do see the.
Yeah, Hi, Enterprise service provider to high end continue to grow maybe because the new part out as announced earlier this year.
And also some SMB. Some other part also have lot of healthy gross.
And also even some of the part that topic for woolcock continue to grow in.
Like we mentioned the 40 token put our Takeda has some other other products.
So is.
Probably not us losch by like we experienced in some some back in March but is a skew.
Pretty strong BAFTA.
But the whole total network security growth.
Okay, and then one follow up we've heard from multiple companies about accelerating digital transformations.
The digital transformations and shipped to the cloud impact your business either positively or otherwise.
Yeah, we see pretty strong into retail riser east retail the order online the can begin to whatever do they were off some under.
Definitely they have a lot of benefit.
So thats will receive our strong growth in retail.
Probably benefit found that each validation and.
Some larger onto your vertical or even some other region have less sort of similar size and especially weak say.
That's what we call it a six year driven networking into compliance security network into Gander.
And even the south traditionally they are more engaged fees to the security Tim None of these see lotta increased fundamental can Kim.
Partially because I see your wise apart afford to give function, but under partly to see that needs to the networking security to walk into Gander ledger to knock on that one presenter ought to Soc combined together.
It's also a trend there.
So thats, where we bcf quite a quite yet.
Good profit wise combined the secured and that will go into which we we design.
From our beginning.
Not just SD wan, including the wildfire, but thanks for your wife has due to be slow right now because.
Especially enterprise, where I find the office and how many people office hospitality to see another intrinsically that direction and also the fiveg receive our strong.
Countries that ramp up.
Got it thank you.
Thank you.
Thank you.
Our next question comes from the line of Brian Essex with Goldman Sachs. Your line is now.
Hi, good afternoon, and thank you for taking the question Keith I was wondering maybe if you hit a little bit more on billings, maybe a little bit softer than we'd expected in the quarter and then have a nice.
Guidance for for next quarter, maybe some of the dynamics behind that in a particular interested in large steel dynamics, particularly U.S. financial services, where we heard about some weakness in the quarter understand retail is really strong, but maybe maybe a little bit more color on that out my impact elynx.
Yes, I think the financial services strength that we saw in the quarter with outside the U.S., Obviously, New York got hit and or the northeast got hit pretty hard with a pandemic.
In the second quarter, so that financial services growth and that we gave on billings I think it was 33%.
Thats really in international growth number and it kind of speaks to.
The diversification of the business that we've talked before about our diversification the U.S. represents maybe 25% to 30%.
Obviously, our largest country, but not a majority as it is with some other.
Businesses. So we did feel the effect, particularly towards the middle part of the quarter there.
Some of the things were happening in the uncertainty in the us on our total numbers, but we're very pleased with what we saw that said earlier related to Asia Pacific than the rest of world.
Other pod ready, citing Mike.
Second half our last year, we started ramping up the hiring AD sales capacity addition of maga can be Jan and.
And then.
Pardon me actually slowed down some of the.
The new sales.
I mean, because of the mega more productive or whatever I wish to productivity level.
What do you expect kind of same time.
Some of then maybe taking maybe longer ton tool to reach the new customer.
Especially in the U.S., we do hard quite some some sales on the capacity that's actually to pandemic slow since founded a bit batteries the additional hiring.
In addition on new part opposition and be happy to PD.
Less the pet Emmy static at better.
Dredging U.S. happy where CMR strong.
Growth potential.
Got it maybe maybe can you just a quick follow up quickly nice nice kind of cash flow in the quarter better than we thought.
Maybe some of the puts and takes outside of billings and change in deferred that drove that and outlook for the rest of year from particularly on working capital perspective.
Yes, I think there the other part of it as a collections were very strong enough I applaud the collections team.
For the great job that they did working with our our channel partners, who bring to cash in I think were perhaps a little more successful method that we plan, yes, I think when you look at our free cash flow numbers.
Youre going to get from quarter to quarter, a little bit of volatility because we try not to over manage the time of payments and things of that nature.
So it's probably better to look at a couple of quarters strings extreme those together to get to look at terms, but in terms of key drivers. Yes. It's billings. The are you can give something with inventory and payables, but I think the margin part of that.
Really is a large driver that outperformance on the margin line really manifest itself in many ways one of which is in the free cash flow.
Very helpful. Thank you very much.
Thank you.
And our next question comes from the line of Hamza Fodderwala with Morgan Stanley. Your line is now.
Hi, Thank you for taking my question.
I just wanted to dig in a little bit on the comment that you made around.
And some of the.
Sales cycles towards the end the quarter I'm wondering if you know how.
Those deals cycle.
Progress.
Towards late in the queue and Q2.
What if any deals sort of.
Slipped out and in Q3 and whether or not.
Those have been closed so far and July.
Yes Fair Fair question and I think the the thing that we've seen with a pandemic pulled us up a little bit.
If you go to the guidance setting process, obviously us over the pipeline in the new start making certain assumptions about the close rate.
And while we felt good I felt good about what I was seeing an April Nonetheless, we made some adjustments to our expected close rate in the quarter for the second quarter.
And as we got to kind of leading to your question the last the last week or the quarter.
I think we saw perhaps a few more deals that did not get the final signature that we expected to get.
And then if you follow on part of your question is what are we seeing in July and that's why making the point that I think I'm very we're very pleased with what we're seeing in terms of July sales activity. What are you measure it based on growth in the area against our target as well as the pipeline and as well as considering what we might call pandemic related close rates.
Got it.
And follow up question, if I may on the government vertical obviously, that's a big one for you could you comment a little bit about how that grew.
From a year on year perspective, and what you see the pipeline.
Actually with the us federal closed coming up.
So keep in mind, our us federal business that our federal business is.
Our government business, because we have three components it as the U.S. fed it has international government than it has state and local governments.
Say that the performance was.
Was strong across at about 26% growth 25% growth.
But that was not driven by state and local government state local government suffered.
And then the US said part of our business is not a huge part of our business. So you're really looking at while the U.S. had did well we had nice very attractive growth internationally with our government segment.
Got it okay. Thank you.
Huh.
Thank you.
Our next question comes from the line of Brad Zelnick with Credit Suisse. Your line is now.
Excellent. Thanks, so much you know, it's if you guys continue to execute well putting up better results than than your nearest competitors and the diversification of your business is on full display this quarter, which is great to see can you comment at all just in terms of the competitive dynamic that you're seeing out there and maybe anything that you can.
Sure in terms of the pricing.
You know dynamic as well.
Yes, it leads to like a 72% bids come from 40, K., so with the new release off.
Back to days, the high end and most a high impart to.
To support a hyper scale. So we see the pro forma path keeping increase so we are at a much better better.
And seemed high in the in the last few quarters I assume as you for base.
Michael Forensic after 85 to 100 have for the athletes also signing see huge.
I would venture to interest ill gross in the in the field high, especially you can see the SMB they usually by data.
No one I still see pace pardon also growing quite well.
So thats more fun, a part of we see because we keeping the mass loans in this.
AC which has a much better computing power handle secured assumption compared to the Gen. General purpose appeal. So the record 60 countries region come from like a plenty plenty five times better.
To that is probably as like searching on better than the competitor into huge advantage and the Pos additional function like SD Wan some hundred pot. So we see has quite a.
Huge.
Debentures, and mocap compared to the competitor they probably will kick in pushing some software or some other outperform our deployment, which because it did have difficult kind of competing with us into this.
Our clients on some other pace, but for US also we are positioned to too.
We'll have to hone infrastructure solution, not just topline space, but also in the cloud and in that in the software base and then also offer different different kind that the appointment defend the service.
We also see quite up quite good healthy gross front, while not angle and that's where the minn Kota fabric approach to frankly solution revenue. If you will back almost topple compared to 40 K. gross.
So we still see pretty healthy lack of once you've had in an average of fortigate them. They can more easy to expand into the under non fortigate gross.
So not benefit fabric.
Hi advantage fuel keeping.
You can help has to grow faster above average.
Because it's really.
The consolidation just due to new steel was to trend in that Thats true there.
So customer one will reduce the management cost they prefer.
So to some of the vendors, which we started CMO benefit for us.
Because most of product function, we developed in house, which make it integrate and automate upon btwoc compared to some some to monitor competitive keeping optimization is more deeply integrate automate.
So thats, what we see is that.
We continue to get mass long time, both on the part that technology infrastructure side, and we do believe it's a long term game and and so thats where.
So we'll see continued market share and if we can see the cap headed.
Peter adding that we have might advantage right now.
Yes, brass Keith I would continue on with Ken's comments, there a little bit.
In keeping in mind I made reference to it and then in the tax that we're seeing a new cost advantage of all with the new series and we expected to continue with the F series.
I think that the company Ken has been a tremendous job with basic advantage of driving down the cost in subsequent generations of the chip at the same time driving up the performance that gross margin performance that I mentioned earlier in the in the script that actually came with it would just a small headwind with discounting for the first time and you may have been asking a discounted question.
Just kind of as the first time, we've seen that in several quarters.
About a half point, if you will perhaps increase in discounting but that cost structure. This coming with basic advantage that I made reference to was more than enough to outweigh that.
Thank you both so much for the so the very thorough answer is and I would just say that the you know the competitive differentiation of your strategy continues to shine through congrats and thanks for taking my question.
Thank you.
Thank you.
Our next question comes from a lot of Walter Pritchard exceeding your line is now.
Hi, two product questions first just on the I think last quarter, you had some real strength in the remote access things like Authenticators and tokens just curious how that continued into this quarter and then also on the SOFC side. What are you talking about having a integrated south CST when product in the market.
I'll take the first one in very round numbers I would say if I got to.
A benefit of call it very round numbers $10 million in the first quarter I, probably got half that benefit in the second quarter on those three work from home products.
Okay. The sad to SAS, you were offering to the customer to the partner this quarter and is part of RP Kodak.
The fabric 40 sassy solution and.
We do see the the interest both from the existing customer funding new customers and same time, a lot of all service provider partners also barge interest in these and even some global.
Customer they also want to purely on version of Sassy, which we are also supporting them behind.
Great. Thank you.
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Thank you.
Next question comes from the line of Tout leave Liani with Bank of America. Your line is out.
Yes, hi, guys.
My question is more general above the market the data shows that the firewater market has been slowing down.
And tremendously in the last few quarters, six or seven quarters of decline.
What is your experience with the market I'm trying to understand the for your continued growth.
It's a question, though continued share gain.
Or new products that are compensating for firewall weaknesses. So what's your view of the overall market into drivers for firewall demand in the market. Thanks.
The traditional firewall or they are most six you'll recall the border which is position between the internal Norwalk Lan and also the internet.
Not part is like I say, there's a there's.
No longer enough, there's a multiple way you compare Pos that and also a lot of application on lot of it's also go beyond.
The company that what could equal to the cloud of course with some other upon my mobile access.
So thats, where the traditional far what we do see.
The growth slowed down.
That's where we keep expanding beyond that we expense for the when as we call 60, driven that will can last I see when building of the 40 paid and the make it harder when solution and also kind of cloud solution that same time internal they also expand globally internal segmentation, unlike with a smallish with.
Access point now, but also growing MRO and quite strong and so it makes it is we can say not only VP smdcs surge generation network security infrastructure.
Beyond the traditional connection base to women from 40, now because the compound application based.
Security and now it's more like the whole infrastructure security.
Including both the traditional gateway and also go to that.
In the when connection the cost solution and the sassy on a same onco internal.
For the segmentation for the suite for the wildfire is to hold in the past the endpoint now Steve application through some infrastructure security a lease future new trend, which we prepare holidays using a fabric using the AC increase the computing power tool to collect rest and that was speedy show.
We could be good news in the in the in for about 20 years since we found the company.
So we sat and see the big investment we've made whether from a stake for the technology for that part our side for the infrastructure side I sat in more benefit has and that differentiates footing that compared with some other competitors steel relatively.
It's the same approach.
Good early Dave on that one that was securities. So thats, what we see.
Is that.
That gap and I'd advantage, we have reset credit based on preclinical award.
Got it.
And the migration to sassy isn't it I'm going against your core offering.
No. It's a part of the whole infrastructure security and lack of SQM frequency for the sassy Israeli you need to access to analyze so thats, where as few brands I'm honored part do any half a good way to access not so we ability and into the 40 K. and has huge performance and.
And the functionality when page and the same kind of service model leverage the infrastructure, we have a customer base, we have thats where to pack acquisition, keeping a sense they spot.
So thats will be up.
I address some of that.
The new seems to customer customer need and the same kind upon also see how how we can.
Like a working closely with end to two supporting the customer paddock gave than that additional flexibility and no matter, what kind of a formidable security Puma they want.
Great. Thank you.
Okay.
Thank you and as a reminder, ladies and gentlemen to ask a question you need to press star one of your telephone its withdraw your question. Please press the pound key.
And our next question comes from them on Amit Daryanani with Evercore. Your line is now open.
Good afternoon, guys. Thanks for taking my questions.
Well I guess first one yes mentioned a couple of times about sort of Gil just getting pushed out from two into the September quarter.
Any sense you could give in terms of the deal size or the would it goes where you saw this happening.
And I guess, if you didn't have any of these issues what would the June quarter revenue looks like.
[laughter] I don't know, there's there was a common well first of all this.
Deals for us it would be a million dollars right. This did not 10 20 or $30 million deal.
So you're probably looking at some number of those transactions that moves I don't know that it was a common theme.
In terms of.
Verticals, if you will I do think that it was a bit more of a challenge in the us than it was another geography.
On that close rate for the last week of them over the last week for the quarter.
Got it.
And I guess you know.
Last quarter in this when you have talked some amount about perhaps using your financial strength as a way to essentially accelerate your share gains.
Could you just touched what impact.
Got having your free cash flow revenue margins, perhaps sort of sense and get us trying to get a sense of how much you willing to flex your model and what sort of shag enough patients would you have from these.
Dynamic stupid.
Take take on.
Yeah, there's probably three places that you could see at one is looking at the inventory because were.
In this environment, we'd like to keep a little more inventory on hand, and so when you look at the inventory turns.
I think the number is 2.2 in the quarter and that's probably down about one.
So you can do some math, there and quantify it.
You can also look at the second place you would see it is on the extended payment terms.
We provide the metric of what our contractual payment terms, whereas I observe the end of the quarter, which I think was 67 days and Thats up 17%.
The third place so weve.
Can flex a little bit is on discounting and I kind of covered that a moment ago that while discounting in the current economic environment is the fact of life.
And we did have a slight increase in discounting for us it was outweighed by the cut structural difference in our cost structure, which more than outweigh that.
So in terms of flexing our balance sheet in looking at the cash flow model if you will.
Yes, I think to keep those inventory and then looking at the the collections.
And just just one correction on the on the.
Contractual payment terms it was 62 day I'm sorry.
Perfect. Thank you I'm happy on habeas only 62 thanks.
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And this does conclude today's question and answer session I would now let's turn the call back to Peter Salkowski for closing remarks.
Thank you Chris I'd like to thank everyone for joining on today's call Fortinet, we'll be attending the following virtual investor conferences. During the third quarter. We didn't you Oppenheimer Conference next week on August 11th the Citibank Conference on September 9000, Nicollier Securities Conference on September 10th events, then presentations will be webcast and links for these what test will be available on the investor relation.
Now, let's say of afforded that IR site here any follow up questions. Please feel free to contact me other great rested grid I think we might have a good day take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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