Q3 2020 Fortinet Inc Earnings Call
Thank you Michelle good afternoon, everyone. This is Peter Salkowski, Vice President of Investor Relations at Ford's out I'm pleased to welcome everyone to our call to discuss <unk> financial results for the third quarter of 2020 speakers on todays call are kenzie, Fortinets founder Chairman and CEO and Keith Johnson, our Chief Financial Officer.
Well I've called it will be available for replay via webcast on our Investor Relations website, Ken will begin our call by providing a high level perspective on our business keep and well follow that with a review of our financial and operating results for the third quarter before providing guidance for the fourth quarter of 2020, well then open the call for questions. During the <unk>. We ask that you. Please keep your questions brief and limit here.
The one question and one follow up question to allow others to participate before we get to like to remind everyone that on todays call. We will be making forward looking statements in those forward looking statements are subject to risks and uncertainties, which could cause our actual results to differ materially from those projected.
Please refer to our FTC borrowings in particular.
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 this presentation and we undertake no obligation and specifically disclaim any obligation to update forward looking statements also all references to financial metrics that we make on todays call are non-GAAP unless stated other.
Our GAAP results and GAAP to non-GAAP reconciliations is located in our earnings press release and in the presentation that accompanies todays remarks, both of which are on our Investor Relations website. Lastly, all references to growth are on a year over year basis, unless noted otherwise I'll now turn the call over to Ken.
Thanks Peter.
Thank you to everyone for joining today's call to review all such quarter plenty plenty to result, well.
Well, we're pleased with our third quarter performance building increased 20% to 750 million.
Oh, I see what solution modem Diebold, Yeah, Oh, Yeah, I knew because then almost 13% of total buildings.
Total revenue increased 90% to 651 million was poor not revenue growth accelerating quarter over quarter to 14% and service revenue up 22%.
Recently one of them.
I was the only lender recognized I thought leader in both the late it's gone and magic quadrant for one aging infrastructure undergone a magic quadrant for metal firewalls.
40 minutes 40 gig I see when he's the only organically Peel solution that provides networking security integrated into a single upon that delivers leading protection performance and cost saving for the largest customer base and finds its revenue growth a major player in that space.
The couldn't imagine pandemic, Santa Rita digital transformation.
Welcome Nations has to deal with new comedies to secure the whole infrastructure into view across a markman order.
Right right. So when cloud data Center network branch homepage.
What did that he's helping customers solve this issue so security driven metalworking handled platform approach.
What degree security fabric, which combined now once you know security across the entire connect barman provide protection later on Columbias I'm sure I'll call based on <unk>.
Our recent wouldn't that survey help separate security leaders showed almost 70%.
These trends are concerned about insider threat.
Today, 400 announced a 40 gig 2600.
On the cost level Arnold segmentation and hyper scale data center multi called environment.
Paul by the new one piece fabric security processor, 40 gig 26, and a half offered tied to performance.
Besides secure compute reaching applicants hired don't competition.
Gartner has stated that over the next few years average any mercy of technologies would begin to replace cloud mobile did release all the seven new applies hauled by all need. His 40 hasty guys can you to graduate bits cloud and software based virtual machine could be prosecuted anywhere well able fortinet.
Capitalize on this investment and will fuel our growth going forward.
Before turning the call over to Keith.
Like the SEC employees customers partners worldwide for their continued support to match all respond.
Golden COVID-19 pandemic.
Thank you Kim.
Let's start the third quarter review revenue.
Total revenue of 651 million was up 19%.
Product revenue of 224 million was up 14%.
Benefiting from strong demand for secure ft, when high end Fortigate and cloud solutions.
Service revenue increased 22% to 427 million.
Fortiguard service revenue increased 22% to 235 million.
Forticare service and other revenue increased 21% to 192 million.
The revenue mix you have to meet by five to 24 by seven support was 11 point.
24 by seven now representing over 65% for the mix.
Moving to the mix of Fortigate and non Fortigate revenue.
Fortigate product and service revenue increased 16%.
Non fortigate product and service revenue grew 27%.
By growth from cloud and fabric solutions.
Given the continuing strong growth of our non fortigate or fabric platform, it's worth noting the absolute size of this business.
For example.
During the trailing 12 month period ended September Thirtyth 2020.
Non fortigate products and services totaled $668 million.
An increase of 26.5% when compared to the previous 12 month period.
Revenues in solutions include the complete range of form factors and delivery methods, including physical and virtual appliances.
Cloud SaaS and perpetual software.
Well its posted at non hosted solutions.
Combined with our Fortigate business, we offer our customers the needed range of security solutions and form factors, enabling them to provide security across their entire IP infrastructure.
For the rest of the way in cloud data Center Network branch.
Or even home office said.
Our third quarter performance illustrate the benefits of our diversification across geographies and customer segments and industry verticals.
Looking at revenue by geography as.
As with the second quarter.
Our geographic revenue performance aligned with the economic impact of the pandemic and with it highlighted the geographic diversification of our business.
As summarized on slide five.
Revenues in Asia Pacific increased 27.5%.
As many Asian countries and economies have been able to remain largely open.
Revenue growth for the Americas, 13% continue to reflect the impact of the pandemic.
Especially in Latin America.
As well as a very difficult year over year comparison.
Revenue growth for the Americas in the third quarter of 2019 was.
It was over 24% the highest of all three geographies.
We shipped to billings.
Total billings increased 20% to.
The $750 million.
Looking at billings by solution segment, Fortigate billings increased 16%.
And it kinda for 72% of total billings.
As shown on slide six high end Fortigate posted strong billings growth in the quarter.
Non fortigate billings increased 29% the strong demand for fabric and cloud solutions.
As with revenue or billings performance by geography aligned with the economic impact of the path and depend on it.
The APAC billings outperformed all Geos, followed by Europe, and the Americas, including Latin America.
Now turning to billings by customer segments.
As we experienced in the second quarter, we saw solid growth.
And the SMB and large it large enterprise segments.
Yes, I'd be posted strong growth across all geos.
Illustrating the strength of our channel programs, the solid execution by our channel employees and partners.
And the large diverse makeup of this multi national customer segment.
Moving to worldwide billings by industry vertical our top five verticals continue to account for about two thirds of total billings.
The worldwide government sector top all verticals or 20% of total billings.
And grew at over 40%.
We experienced solid performance internationally and the U.S. at the local levels.
Service providers and Msps accounted for 16% of total billings.
Digital services with 14% of total billings also had a very strong billings growth quarter at 27%.
Education with 9% of total billings rebounded in the third quarter of schools prepare for secure E learning in the fall semester.
Now looking at deals by dollar size we.
We have 48 deals over $1 million in the third quarter.
Compared to 53 deals in the third quarter of 2019, and 30 deals in the third quarter of 2018.
Secure FTP when accounted for seven of the deals over $1 million and while down from eight deals over a million dollars a year ago total.
Total SD Wan billings more than doubled and as Ken mentioned accounted for approximately 13% of total billings.
Moving back to the income statement.
As shown on slide four gross margin improved 130 basis points to 79.5%.
Product gross margin improved 220 basis points to 62.9%.
Product gross margin.
Continued to benefit from the lower direct costs of our newer generation of Fortigate products.
Offset slightly by higher indirect cost.
It's worth noting that for five quarters in a row.
Putting to pandemic quarters call.
Gross margin has been over 60%.
Operating margin for the third quarter increased 90 basis points to 27.4% then.
Then if any from the improvement in gross margin.
He continued lower travel and marketing program expenses related to the shift towards virtual events.
Offset by the addition of new team members.
Total headcount ended the quarter at 8075, but.
23% increase driven by the increased investments we've made to grow our business.
Given the strong operating income performance net income for the third quarter was 145 million and earnings per diluted share increased 21 cents to 88 cents per diluted share.
On a GAAP basis, we reported net income of 123 million.
Or 75 cents per diluted share.
Versus GAAP income of $80 million or 46 cents per diluted share a year ago.
The strong performance this quarter as a result of the diversification of our business.
In the strategic long term investments, we've made to expand our global salesforce to invest in our channel partners.
And to expand our product offerings and provide a truly integrated security platform, enabling automation.
Moving to the statement of cash flow summarized on slides seven and eight.
Free cash flow came in at 186 million.
As we've commented previously we are leveraging the strength of our balance sheet as a competitive advantage to support our partners and our customers as they experience the economic challenges are the pandemic.
As a result.
Average day sales outstanding increased to 76 days up three days sequentially and 13 days year over year.
In line with our expectations and reflecting our decision to provide geographically targeted extended payment plans.
We expect extended we expect extended payment terms and higher inventory balances to be an effect as we move through at least the first half of 2021.
Inventory turns decreased to 2.1 times, because we increased our on hand inventory to mitigate supply chain risk.
Capital expenditures for the third quarter was $35 million, including $26 million related to construction and other real estate activity.
We estimate capital expenditures for the fourth quarter to between 40 and $50 million.
And for all of 2020 to between 130 and 140 million.
The lower full year Capex range is due to utilities and other delays in the construction of our new campus buildings that are pushing more spending to 2021.
Our move in date has moved to mid 2021.
The average contract term for the third quarter was 26 months flat year over year as well as sequentially.
We expect full year cash taxes to be approximately $40 million and our full year non-GAAP tax rate to be 21%.
As we look forward I'd like to review our outlook for the fourth quarter summarized on slide nine.
Which is subject to disclaimers regarding forward looking information to Peter provided at the beginning of the call.
For the fourth quarter.
Billings in the range of 890 million to 920 million.
Revenue in the range of 710 to 730 million.
Non-GAAP gross margin of 78% to 80%.
Non-GAAP operating margin of 27% to 29%.
Non-GAAP earnings per share of 95 to 97 cents, which assumes a share count of between 157 and 159 million.
We expect a non-GAAP tax rate of 21%.
Now having said that based on this fourth quarter guidance, we expect to achieve the rule of 40 for the full year.
Making 2020, the third consecutive year and the ninth year or the last 11 years that we've been able to achieve this milestone.
So along with Ken I'd like to thank our partners, our customers and the fortunate team for their support and hard work during these difficult and unique times.
I'll now hand, the call back over to Peter to begin the QNX.
Operator, please open the call for <unk>.
Ladies and gentlemen, if youd like to ask a question. Please press Star then one on your Touchstone telephone.
Moving yourself from the queue. Please press the pound key.
Our first question comes from Brian Essex of Goldman Sachs. Your line is open.
Hi, good afternoon, and thank you for taking the question and congrats on a nice a nice quarter of results I was wondering maybe if you could touch on what you're seeing in the spending environment I'm, particularly it sounds like you had a really nice quarter of fabric growth in SD when demand. We also picked up you know Phil.
Firewall strengths in the quarter so maybe.
Yeah from the standpoint of what you're hearing from CIO is and what actually I'm surprised you. The most about the demand in the quarter.
Oh, you're probably this is Ken that's good question. We also closely monitor watching the.
The whole scenes changing a space basically so that's where we keep in promoting we call security will now walk in and also that stuff. The concept. We tried to do that the Seacon, we have lost 20 years or.
So you can see the definitely the ASCII when studying.
Come to the network inside and probably in the next thing is can grow over $20 billion. So that's that's will be huge we wanted to be the leader number one in the space I hope target next year.
At the same time, the securities that doesn't zero cost.
Concepts I didnt kind of our popular so need to make a whole new infrastructure learner secure.
And also the walk from home and also studying changing though not liking. The early this year was the pad that we just started and people and the price just trying to see if he can support him Oklahoma.
Now all of you starting to see what's the long term solution.
Well there are some surface space sassy, all some arguably be called the <unk>.
The whole once the new branch. So that's where you have the 40 gig so on a home can manage much broader p. wise can also like a trophy shaping Micah Majesty from priority when he thought vacation different user and same time can secure at home. He puts referred to sometimes you also called out the branch.
Solution.
Yes were managed by five managed router switch off and that will can you comment at all to get into and also even the printer to hold onto a whole class. So das we started to see some even some peak on the price I'll. Some some some oh what can be what the service provider some companies starting off for the probably all the color because this would be caught in the new branch.
They are not only given some kind of a 40 couponing, but also even.
Including the Internet access you couldn't make up bag of Legere 45345, GE Alstom auditing altogether, it's kinda packaged solution and that helped insecurity is a core that when you flip structure security.
That's what we see both kinda approach so we closely working with service provider.
Wedron due to service space Sassy outdoor these are kind of what how you feel stronger security approach, but the new branch homes, the new branch approach.
And second is definitely changing the whole environment.
So the security and the number of security that can deal with the border and easily expense the whole you flip structure and same time.
I'll now walk you also need to be more application.
Baroness makeup based complication like SB, one off some entre piece come back is there sort of encountering CDN provided also signing cutting the security space. So that's what's keeping saying to secure Truman that will consign kind of ramp up quickly.
Got it that's super helpful and maybe just a follow up on that sassy comments any element of pronounced mispronounce. This.
But any initial traction with El Paso opaque.
MSP channel and you know how much progress have you made.
With that relationship so far.
Oh, Yeah, we we acquired Opex last quarter, and we walk into gathered from making the whole solution 40, South. It also will more closely working with a lot of service provider.
Because we do keeping same for the few he has to see the service provider has to best position to offer an auto service. So we have to then and also 40 cases, while the best platform.
They can build whether within there Paul you may extend into the branch all extend to inside the company.
It's a it's a it's a it's a good changing the space.
Got it thank you very much.
<unk>.
Next question comes from the team of Boolani W.P.S. Your line is open.
For taking the question.
I have two for you just looking at your outlook in your billings guidance I wanted to unpack that a little bit and you get your sense, just where you are being a little bit more cautious relative to the performance this quarter and how we should think about what the puts and takes in into the guidance that implies a deceleration from the third quarter performance you just put up and I had a follow up as well.
Sure. So I think that's shown 2020 is shown to be a very interesting year for setting guidance.
Q1 was very very strong Q2 was challenging Q3's announced nice bounce back.
It really a function of watching media reports almost on a daily basis in terms of what's happening with the pandemic.
Whether we what we see happening in the US we can also layer into that the U.S. election.
But also what we're seeing in Europe, and I think you know in.
In the current environment.
I think the guidance does a pretty good job of trying to reflect our current understanding of the pandemic.
Fair enough and then just a bigger picture question for you if I think about the construction of your 2021 margin profile, if I look at Twentytwenty, your head and shoulders above.
Sure the 25% operating margin watermark that you've spoken to historically, so I'm wondering as we think maybe longer term over the next couple of quarters. What are some of the structural versus temporal impacts on the margin trajectory from here.
Considering the pandemic tradeoffs and 60 acceleration you've undertaken on the sales hiring front would love to parse through that with you that the really helpful. Thank you.
Yeah, I think the the kind of start top down on that I think the the product gross margin and probably why we made reference to it in the call being over 60% for I think five quarters in a row. You know there were some periods of time, there was probably a higher fiftys.
We like very much in terms of the structure that we're seeing in terms of our pricing and our cost structure on gross margin.
And even as we continue to do new products hopefully, we'll be successful that that's 60% gross margin number and as you kind of move your way down the income statement I think it's really.
The sales and marketing conversation in terms of spending clearly, we're continuing to get the benefit of not having salespeople travel and not the financial benefit excuse me.
Having salespeople not travel as well as marketing programs being virtual.
And to the extent that the world stays that way, we're going to continue to get that benefit now obviously and I think we've talked previously that we're very committed to use this as an opportunity to bring in more salespeople, we've talked about our head count growth to 23%.
Hopefully that we time this rights such that when those newer salespeople are coming online. They are fully productive will be around the time that they're they're adding to the top line at the same time travel and marketing programs revert to historical norms.
I appreciate the detail. Thank you.
Our next question comes from show of Oppenheimer. Your line is open.
Thank you good afternoon, guys congrats on the solid performance and outlook.
Had a question on the SD Wan opportunity and given the ongoing strength you are seeing.
Have you started to see some displacement opportunities given potential disruption on that one of your competitors smaller competitors in the space could be seen given a consolidating market.
Oh this kinda no.
You see a very strong interest and no.
No competitive come close to what we had so they see the has more than doubled year over year and also we had only one has a magic quadrant. Both my few land phone also within that were far well.
Accomplish the same alpine.
And the same time as Oh, it's a certain percent of the last quarters building bodies that we have a huge consolidation pays a lot of cost when you might able dowell me I'm not quite even come online. So we basically a much bigger a user base how fall, Mike because the Q I see less dilution and also going.
For what I'd say to the walk from a homely telcel walkie, helping driving these letter you treat who wants a new branch or whatever [laughter] at least.
Kind of solution. So we feel we have a market position technology and also the only one beauty internal organically and also how basic salary ALDA portfolio myself averaged about 10 times faster than any other competitors. So that's where we see is a huge opportunity.
And that the market growing 50% year over year, and we grew more than doubled year over year.
Well, keeping gaining market share.
Yeah, So Scott I think Kevin can spot on with that I think as we look forward to the opportunities that were kept referring to is look I think there's still the opportunity in front of us to to help with service providers unpack their existing relationship with their incumbent somebody asked me when side, that's something I think we're very focused on and then as we start to see that ft. Wind is a critical component of solidly in the.
Cloud on ramps, so I think to Kens point that market's going to continue to expand for us.
Got it got it no that's that is super helpful and maybe a question on the Americas performance.
Keith when you isolate.
The mix Latin American performance and strictly focusing on the northern part of the Americas, How would you characterize the performance slightly more in line.
With your internal expectations heading into the quarter.
Yes, I think the U.S., where there's three components to the.
The Americas, Latin America, which is a very difficult place currently and we saw that in the numbers.
We expect a difficult quarter over Latin America, we've certainly got that.
Canada on the other hand has actually done fairly well throughout this is just a different footprint in terms of the pandemic.
To your specific question only to the U.S. I think the U.S. did much better in the third quarter than we did in the second quarter, but clearly I would not say that were at pre pandemic levels for the U.S., there's still opportunity there for us.
Got it. Thank you so much good luck because yeah. Thank you.
Our next question comes from Brad Zelnick of Credit Suisse. Your line is open.
Great. Thanks, so much and congrats on the acceleration in the business. It's great to see my first question for you Ken I wanted to ask about the impact of Fiveg on your business.
It seems we're approaching a tipping point in terms of broader fiveg coverage. So my question is you know how should we think about the benefit to your business and and why you feel that Fortinet is competitively advantaged as we approach this tipping point.
Fiveg, so far I see some will come back to the device then connect with the people that are on the Threeg to Fourg Pos.
The also depend on the vertical industry and we also leading a lot of Oh Gee, how cheesy acuity.
But also like wouldn't work for a home could be also a good back half will fall for this Uh huh.
The one access.
Bodies. So we see a quite a lot of successful case no national right now that seems more they'd be the hat off some of the Fiveg deployment and also working closely with a carrier or service provider.
Like I said in the last quarter earnings.
It's kind of a growing faster than we expected and probably skew almost of our small base, but we do believe.
Next year could be material the fiveg contribute fulfil all growth.
Great to hear thank you and for Keith last quarter, you mentioned, the discounting had picked up for the first time in a couple of quarters. How do you characterize discounting you know in Q3 at this point thanks flat.
Flat consistent with what it was a year ago, nothing nothing to call out sorry.
So I guess the way to give that color I think we felt a little more pressure in the second quarter. We did not feel that same pressure in the third quarter.
Great to hear thank you so much for taking the questions guys. Thanks.
Our next question comes from Saket Kalia of Barclays. Your line is open.
Hey, guys. Thanks for taking my questions here.
Keith maybe maybe first for you a housekeeping question can.
Can you just talk about some slight changes to the to the deferred revenue balance historically, you know I know there's a footnote in the earnings Slide then maybe you could just expand on what the adjustment is and and how that impacted deferred and billings just so that we're all on the same page.
Yeah, we had a little housekeeping to go through with a subset of our 40 care contracts.
Historically and this goes back many years away.
We should probably should've been recognizing revenue a little bit sooner starting the amortization period than we had been so there's a little bit of a pickup.
Quarterly.
Forticare service revenue it ranges, it's very small it ranges from a 10th of a percent to about a half a percent of revenue for any particular period.
When we file the 10-Q there'll be a long footnote the shows every possible period, and so forth, but that's all I was a little bit of housekeeping to pick up some revenue there.
Okay got it so.
So just to be clear the the billings that was reported in the quarter. The 750, you know that really that really wouldn't have it wouldn't have been impacted by sort of that change Brian no no no. Okay got it okay, yes understood. The follow up for you can just on the product side.
Yeah.
I guess as as opaque becomes a bigger part of the offering how do you think about the strength of the Fortigate line that maybe helps differentiate when you're offering a SOFC solution that makes sense.
Yeah, I think 40 Kt so.
So mark important part of a sassy because they are the best firewall as to when and I understand.
The position that we have seen the pop off sometime we can.
Working with service provider.
To to use you 40 k. too.
To be part of their it does serve as their solution. There and same time, we also to beauty. Sometimes you also need to have a kind of a different approach.
Thank God applies can be done in a whole can be in the brands are can be in the within the data center and on the secured I guess west traffic.
So thats, where we see what do you view this as a lot of good platform to keeping expanding the cold winter the whole infrastructure security or security, we've been networking, including both inside a sassy pop all kind of unsecured onto pod structure.
Very helpful. Thanks, guys. Thank.
Thank you.
As a reminder to ask a question. Please press Star then one.
Our next question comes from Sterling Auty.
Of JP Morgan Your line is open.
Hi, guys. This is Matt on for Sterling. Thanks for taking the question.
You know what I wanted to ask a little bit more on on I see when I was wondering if you guys could you know give additional color on what you make of the competitive landscape currently and what you've seen on pricing on that front. Thanks.
Oh, Yeah, we we offer the most at the past pricing performance I would also move function I see when I know to competitors.
I ask you one can see probably a wild fast growing area also while the peak its market potential. So there is a multiple research say would be reached over $20 billion in like a five to 10 years, probably even bigger than the network security.
That's why I was also we want to combine these two Andrew so you'll see the same seem possible offer both so.
So thats, where compared to other competitors, which is only the sulfur approach all sometimes even the two to two lender.
The code to the Universal CPR loading some model upon us so.
So we have this 86 dedicated hardware and in the past like both into the low low me. The high end range can be visiting the pop all go to the home branch all go to movies in the data center inside the cloud.
So that's where we see a huge advantage compared to other competitors and and that also front Comanche cotton magic quadrant from that the growth. We have a we do beauty will be the number one meter in the space.
Yeah, Matt I can spot on with that I think it's probably being a little bit humble because I think really what's going on is because of the basic strategy and what he's built to be able to increase the capacity in the firewall directly each and every year and it's a matter of how you use that capacity different different FC ran vendors have different pricing methods, but for reporting that.
Embedded in the operating system of firewall, we did not charge port separately when you.
Purchase a firewall you receive the sq and functionality.
So I don't really think that certainly we do not see anything in terms of our discounting as we talked about the suggested any sort of change.
Great. That's very helpful. And then just one quick housekeeping question, so going back to this sockets question on on billings, we if we just take the change in deferred on the balance sheet and the revenue.
Seems like Theres, a disconnect to that and what you.
Reported on billings I was wondering if there was anything there to kind of unpack.
I don't think so I mean, it's a pretty darn. Good definition billings was really defined as being revenue plus or minus the change in deferred revenue.
Unless you have an acquisition or something like that.
So should not be a difference there.
Okay. Thanks, guys.
Thank you.
Our next question comes from Andrew Nowinski M.D.A. Davidson Your line is open.
Great. Thank you and congrats on the nice quarter I see you called out strength in high end billings this quarter.
Well, it's actually been very strong for the last three quarters, which is somewhat surprising given that we're in the middle of a pandemic. So can you just provide any more color on what's driving that a consistently strong growth in high end.
There are some really lead to the two to the new entries seven because I'd say is that compared with MPC six are they improving the performance by almost Fivex and also now can process like a 200 gig profit per chip compared to the 40 gig.
And and also more function there. So that's where we started to roll out the new MPS seven base and be some profit on a go to the high end I mean orange.
And the same time, we do see some vertical also helped drive sometime high at like a final sort of raise some common sector, which they're mostly.
Hi, Ken which has a massive impact.
I mean, the key founder.
No I think I would point the 1100 he.
However that excuse me.
Yeah, because it's been out there for about a year now and it's going very very well with performed extremely well in the third quarter and I think it's been ramping up as we expect typically of the high end products.
You also asked do you want to see probably a half of profit probably come from the high end the contribution.
That makes sense. Thank you and then why do you think you saw fewer 1 million dollar deals this quarter given the strength in the high end billings that we've seen.
Yeah, I think it's I think it's a very good question, we came into the quarter looking at the pipeline and actually had a little bit of risk I thought because we've had on a larger mix of larger deals.
And then when we got through the quarter, obviously that.
The mix actually shifted on us a little bit I mean, we've all read reports that maybe.
In general the deals are getting a little bit smaller or what have you and maybe that has something to do with it I really don't have good information in terms of why what ended up I mean, what you get every quarter always differs from the pipeline I don't know why that particular I had different this time.
Yes, but the deal over 500 case increased a lot right now so compared to one years ago Q3.
Last year, if we grow the one years ago, we grow 1 million.
Deal quite a large number so thats, where its more comparison I kinda makes a very good point in fact, if you look at deals over SP when deals over 250000, those were up well over 200% year over year.
That makes sense thanks, guys.
Our next question comes from Hamza Fodderwala of Morgan Stanley. Your line is open.
Hi, guys. This is Calvin Patel on for Hamzah, Congrats on the quarter and thank you for taking my question.
I was wondering if you could first comment a bit more on.
Restorations and how you see that trending in your more recent conversations as we go forward.
Invoice duration was I was that the question, yes. It is we've been right at that.
Despite what may be some other competitors expected to see a year year and a half ago I think we've been very consistent throughout that timeframe. It about 25 26 months.
All right perfect and then just as a follow up if you could comment a bit more on the competitive landscape in firewall. This time not just on the Sq and I'm segment, and if you think that there will be some level of digestion to occur over the next year or not.
Oh, gaining market share quickly or.
In the firewall market.
But also I believe going forward, we will be keeping saying these flow for loan on tonnes almost since beginning of his time company 20 years ago.
So that the new well can we be more six you've driven so instead of the.
And now we'll consulting switching Oh about connectivity has speed they need to be make sure. They can give with application. That's RV sites do you want so application based on the accounting that will came and also they can deal with all the content.
And also use or depressed level thats all security handling so.
So that's where we see probably the traditional.
Whether the traditional.
Network security, which on a secure the border it all the traditional that woke him I'm, probably also needs doing some transfusion challenge.
So the men with security still about $20 billion market probably.
But the traditional networking, maybe 70 $80 billion market, but there probably will be start emerging then translates in change and we feel we typically lead is changing and and that will be a.
So you know market position bunker technology to try to address the new security and networking.
Thank you guys.
Good.
Our next question comes from Rob Owens of Piper Sandler Your line is open.
Hey, guys. This is Justin on for Rob I, just had a quick one on the federal government vertical strength in the quarter, just how that was trending relative to your expectations and maybe if there's anything that we can impact on what drove the strong quarter.
Yes, it's not if you go back and look at the the phrase very closely we're not talking about the us federal we're talking about government, which for US is more international government as well as local governments us that is not a large part of our business.
Got you.
And then also just a quick follow up maybe just on your pipeline relative to where its I'm sitting now relative to last year and how you feel going into fourth quarter, just given it's a it's usually historically your biggest.
Yes, well pipeline is probably the biggest input to the guidance setting process right and there's all kinds of different ways of slicing and dicing and we go through that whether its deal size whether it's.
New logo versus an existing customer, whether it's a new deal versus a renewal deal or what have you.
And I think that clearly that the pipeline supports the guidance.
Got it thank you.
Our next question comes from Patrick called Deutsche Bank. Your line is open.
Hi, there. Thank you for taking my question and congrats on a very impressive quarter can we still see one again. The you know the result, you guys put out was super impressive a doubling of growth in your own yeah Oh.
You know we have been hearing the media.
Checks around some phones kind of closing on rationalizing our branch offices so.
Clearly that hasn't had any effect on your business, but can you just talk me through.
Yeah, and when you put that impacts your customers or anything like that.
It would be great.
Yes, because it's a huge benefit for for what are under pressure I saw some under.
Customer, even including the use of consumer to use United steel assess how I see it cost us probably more than 50% cost saving and also the offer like how.
I guess the devices at the branch office I mean, how often does the Fortigate SD Wan solution.
Sits alongside Attritional router and.
How often is that a replacement of the traditional router.
We only need a one fortigate replace outward out her out a security are there.
Life access controller, our discussion later, it's a single device has a multi function can be price lag of 345 device, including the outer including the.
Hi, Steve plan, including the security Gateway VPN and also to the wife I controller.
And just a clarification of is your point in most cases.
Fortigate as a replacement for those devices.
Replace multiple device altogether and become only the last day there.
Got it. Thank you so much for your time really appreciate it.
Thank you.
Our next question comes from Gray Powell, a big G. Your line is open.
Hi, This is stephan on for Greg Thanks for taking my question.
Piggybacking.
Piggybacking off the last question had to be at the branch office have you seen any meaningful change in demand or mix of growth between the branch office and datacenter firewall.
Yes, that's where you can see sort of vertical where to reach or whatever we still see pretty strong growth I think I believe key's measured maybe grew 40% in Canada.
Yes.
Also the bigger potential is really to homeowners the new branch, so thats were probably even bigger but.
But that's doing early stage because you need to.
How can the home user to manage some of that I know service, but lot of service provider and are working with us but at same time sort.
Certain under price also also try to try to try to do that.
Thanks, and as a follow up can you just talk about the linearity that you saw on in the third quarter. There was some mention of deal delays in the U.S. did those end up landing this quarter.
I think you're talking about deals from Q2, the delays do they come in the third quarter. The answer that we yes, we are and what we saw we were pleased what we saw in July in terms of the start that we got in the quarter.
All right. Thank you.
Our next question comes from Adam Tindle of Raymond James Your line is open.
Hi, This is Alex Frank was on for Adam. Thanks for taking my questions. I just wanted to touch on SDRAM are one more time I was wondering just how important easier a second bake offs. How important is that performance based customers and on SD. When are you finding that it's becoming more of a driving factor in purchasing decisions or do other you know core capabilities and function.
Please come first when our customers making decision.
Yes, basically then like almost acts more computing power, so thats, where they can add a lack of security function managed under like a white fly ash.
Some other device and same high income process trophee much quicker and it can also Mike.
Working with service providers to moderate it make sure is that it's a total infrastructure secure solution.
Would that assume that advantage compared to the other sulfur approach, which they have a lighter limited GPU computing power to too many whether security or SD Wan or some other.
Like the platform, which which county handle single function compared we build these are for the sake of US 40, Alaska and the multi function replace multiple device, so thats, where we see huge advantage.
Okay. Thanks, and then just a follow up you know looking ahead.
More than just few quarters looking kind of a couple of years out.
What kind of rule of 40 margin profile are you targeting.
Focused solely on your top line growth or.
Second we expect to see some margin drop through the bottom line.
Okay.
[laughter], Yeah, I'm managing can very closely even if you need very closely.
Yes, we talked about our mid term range of being we want to have.
25% operating margin right. The strategy remains the same balancing growth and profitability.
We started the year, believing that that we would tilt towards growth.
As most of the year I think the pandemic, obviously impacts the ability to grow in a couple of those quarters, but longer term, we still believe it's a balanced strategy towards.
Balancing profitability and growth we do believe there is an opportunity for growth no doubt about it.
Okay perfect. Thank you guys.
Okay.
Our next question comes from the team number one they have you'd be at your line is open.
Thank you gentlemen for let me back in I wanted to double that on the tailings questions earlier on.
The calculated billings based on your deferred revenue disclosure and.
Disclosed reported revenue.
Some 720 million in the quarter and so I just wanted to appreciate that $30 million Delta between what you have in the press release and in the reported numbers and calculating billings off the balance sheet deferred revenue metrics sure. When you have some housekeeping going on credit and I'll jump in there.
Keith you can have one of three things you're going to have something that's so small you described during the current period you can have something so largely restated the prior period financial statements you can have something in the middle which is called a little arent, where you're going to recast financials. That's with this is that $30 million. When you see the 10-Q will come out of the opening retained earnings back in December.
31 of 2017, I believe it as it is from that point forward that the amortization starts being corrected.
So internally we have the information to for you to actually track right now.
The the billings recalculation of that you need to see Q2's number as recast right and thats not in the in the financials that you have right. So $30 million came out of deferred revenue three years ago for something that's been going on for many many years and the small transaction time in a funny became large enough to correct. The number that we do.
Reported is based upon recast revenue and recast deferred revenue to dawn.
Fair enough. So it is essentially a cumulative impact that we'll see the details for in the filings and that's why I gave the the quick sound bite earlier that the quarterly impact to revenue typically runs.
For each of the quarters that we look that between the 10th of a point that about a half point of revenue. It's a very small item any one quarter.
I understand that's very clear thank you and since I have you kind of question for you I'm just around the ASCII when discussions on.
From a product standpoint, I think there is a debate that's brewing between the same branch architecture versus the stick branch.
Deployment architecture within the sassy paradigm. So I'm wondering how important that is positioned.
In the former showing the same branch arena, if we think about the six branch environment, maybe under potential duress in an increasingly uncertain macro environment and that's it for me. Thank you.
I think both branch can feed into different environment. The Sim brand, sometimes you can sort.
For the mobile mobile device you show.
And that the sick branch also come process. This since locally in a real time not application need not.
So the 40 gig is more like a pop in low cold weather in the home or whatever in the offers are our safe city the pop Anastasio environment.
As you can see how how how they are passed as a coffee within this assay infrastructure that how our 40 gig is the key point autocratic that is processed.
So that's that's also because you think of the vendors. So we have a huge computing power I'd advantage over other other approach, which gave us kind of much better performance also lower cost so thats, where we had the flexibility.
Why don't with our clients and on premise all can be the virtual fit into the cloud LP part of the pop sassy solution. So can you give us the flexibility and also extend beyond some odd are comparing to other payer can do which because even the only limited for the software approach. They can only sit in certain server.
Within a pop up in the data center. So we can extend the I won't go through the age go to the homeland and anecdotal not even that.
Other remote location.
That's also kind of news in my quote on the gone or is ready. So in the in next few years that does work comp on the Gartner research they say that the high agenda immersive technology will reprice in account the mobile so thats, what you see you'd have more computing everywhere in the real time application our merriment so.
Thats, where we develop these that basic and all its a different technology to to working with our different service provider or different kind of vertical space to address this issue, especially the infrastructure keeping changing with Fiveg. The result is that like that that's what he's excited have a more advantage compared to the sulfur out.
Approach.
Very clear thank you so much Kim thank.
Thank you.
Our next question comes from Patrick Colville of Deutsche Bank. Your line is open.
Hey them coping batsmen, hoping back in.
You Shouldnt you letting me ask the question.
How much did the Golan is inclusion of fortunate in the top right corner of the.
C M.
Influence customer decision, making this time a year ago, you guys would just outside of the top right corner and now you all in it and so was that something that.
In your opinion, what changed the dialogue a bit.
Go for two or more our piece.
It's helpful on certain underpriced, we also have broader sector and also the Geo diversity.
As a as a profit now that now that depend on to Mark on the magic quadrant.
But is that.
We also have a lag because most of the new metric.
Magic quadrant on income and up the quarter, it's come up in the September Thirtyth. His last day of the quarter. So I don't think so we don't close FF, yes, [laughter]. So I don't think we can't there's not much going in the in the last day of the quarter in Q3, but is it.
Yes, that's helpful and probably more going forward.
Certainly expect it's going to be helpful tailwind for us going forward, yes.
Great. Thank you so much.
Thank you.
There are no further questions I'd like to turn the call back over to Peter Salkowski for closing remarks. Thank.
Thank you Michelle I'd like to thank everyone for joining todays call fortinet will be attending conferences by the way.
Turning accounts is in the fourth quarter or the.
Credit Suisse Conference is on November 13th as well as December 2nd really John James Conference on December 7th You vs Conference on December eight and the Barclays Conference on December 9th event with presentations will be webcast and the link will be available on our website.
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