Q4 2020 Fortinet Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Fortinet fourth quarter 'twenty 'twenty earnings announcements at this time all participant lines are in a listen only mode.
After the Speakers' presentation, there'll be a question and answer session cash.
Ask a question during the session you will need to press Star then one on your telephone please.
Be advised that today's conference is being recorded if you acquire any further assistance. Please press Star then zero I would now like the hand accomplish over to your hosts a day predispose Koski Vice President of Investor Relations. Please go ahead.
Thank you Sarah Good afternoon, everyone. This is Peter stuck out to me Vice President of Investor Relations at Fortinet I am pleased to welcome everyone to our call to discuss Fortinet Cisco results for fourth quarter of 2020 speakers on today's call are Ken Xie Fortinet as founder Chairman and CEO and Keith Jensen CFO. This is a live call that will be available for replay via webcast.
On our Investor Relations website Ken.
Ken will begin our call today by providing a high level perspective on our business. Keith will then review our financial and operating results for the fourth quarter, providing guidance for the first quarter of 2020 and the full year well then open the call for questions. During the Q&A session. We ask you. Please keep your questions brief and limit yourself to one question and one follow up question to allow others to participate.
Before we begin I'd like to remind everyone that on today's call will be making forward looking statements and these forward looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. Please review refer to our SEC filings in particular, the risk factors in our most recent form 10-K and form 10-Q for more information all forward.
Statements reflect our opinions only as of the date 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 today's call are non-GAAP unless stated otherwise our GAAP results and GAAP to non-GAAP reconciliation is located in.
Our earnings press release and in the presentation that accompanies today's remarks, both of which are posted on the Investor Relations website. Lastly, all references to growth are on a year over year basis, unless noted otherwise I will now turn the call over to Ken.
Thanks, Peter and thank you to everyone for joining to this call to review our first quarter, our full year 'twenty 'twenty one zone.
Fourth quarter Beauty, Inc was 20% to 961 million all secure SD Wan offering accounted for over 13% of fourth quarter building.
Total revenue, our salaries quarter over quarter to 21% contributing to a total revenue growth of 21% operating.
I'll push and margin benefited from solid revenue performance, we achieved all time company record non-GAAP operating margin of $29 four per cent for the fourth quarter.
Can you bring the many opportunities ahead, we plan to shift our focus more to growth for the at least the next few quarters.
Today, we announced a 40 of our simple Oh with 300, new feature and updates with this release Fortinet is the only leader in cyber security vendor to offer firewall based zero Trust network access I believe in remote access to replace the traditional V. P M.
He is reduce the attack surface, while improving the user experience.
Fortinet is zero Trust network access solution also simplified management by using the same access policy wording.
Off network.
Hi Tech and accretion of our SaaS solution with a 40 or some 0.0 people under price the flexibility they need to enable their workforce to work from home was consistent on the price squeeze to acuity deliberate on premise Oh, no more cloud based SaaS consumption.
For security other surveys.
The 41 simple Uno extend network connectivity and security beyond the one H with reaching five G and algae not improve the weight of the snow will pull flow mice.
Mr Xie unions.
Five G offering.
Completion to achieve secure scalable and highly available that will connectivity anywhere.
The release of 47 point O expand the Fortinet security fabric delivering Michelle.
Michelle will provide broad illiquid.
And ultimately just acuity to any device any application everywhere.
Simple securely interconnect.
Connection point and increasingly organizational consolidation towards a platform approach.
Not just a simple platform for endpoint security cloud security, but a holistic platform that taste immigrated automate all D C area.
Fortinet security fabric is a cyber security platform built on broad and deep set up and that will keep that security technology from I had the point to network to cloud.
Organically build to seamlessly communicate on all put together.
<unk> consolidation resolves to Q3, but net well count approach will be key drivers going forward.
Good day Fortinet was recognized eight Gartner magic quadrant.
40 day product is a leading is a leader in both SD Wan and a next gen firewall magic quadrant.
Continue to experience excellent adoption of our secure SD Wan and expect our unique solution could become a market share leader in a few years.
Yes additional tour growth drivers, we estimate our total addressable market will grow and the annual compound rate of 10% over the next four years to reach 93 billion by 2024.
A recent solar when security incident, and the pandemic calibrated the need for broad integrated and automated platform.
We expect company to release the percentage of biotech spending use was acuity I'll see what to secure their entire infrastructure across multiple age zero Trust environment.
Before turning the call over to Keith and Galactose, Inc. All employees customers and partners worldwide for their continued support from managed our response to the ongoing COVID-19 pandemic Keith.
Again, let's.
Let's start the fourth quarter review with revenue.
Total revenue of $748 million was up 21%.
Product revenue was up 21% service revenue was up 21%.
Product revenue of $288 million saw substantial sequential acceleration in <unk>.
Growth relating from strong demand from fabric and the security fabric platform and four degrees across all form factors hardware software and virtual machine.
While secure SD Wan use cases continued their dramatic growth. The majority of product revenue was driven by the wide range of other operating system capabilities embedded in <unk> and their related use cases.
Service revenue of 460 million benefited from strong demand from fabric and cloud security solutions.
Support and professional services revenue increased 21% to $210 million.
The revenue mix shift from eight 5% to 24 by seven support was 12 points with 24 by seven now representing 66% of the mix.
Security subscription services and cloud provider revenue increased 21% to $249 million.
Moving to the mix of 40 gig and non Florida game revenue.
Network security revenue increased 18% driven by the high end and entry level 40 gig product families.
Non fortinet product and service revenue increased 29%.
By a 34% increase in revenue from fabric and cloud security solutions.
Before continuing with the fourth quarter results I'd like to highlight our 2020 full year revenue performance.
In the midst of a pandemic induced recession.
Total revenue for the year grew 20% to $2 6 billion.
We take great pride in our focus on organic growth in 2020 represents the third consecutive year with revenue growth of 20%.
This consistent performance speaks to our geographic and customer diversity there.
The continued success of the integrated platform strategy.
And our proprietary you took advantage that enables a shared operating system across the platform.
Drives our cost per performance advantage.
<unk> the capacity to add features and functions, while maintaining price points.
Total non <unk> revenue for the year grew over 25% to more than $725 million.
In other words, our fabric cloud and other security products and services on a pace to be a $1 billion business as we exit 2021.
Our non 40 gig and 40 gig products and solutions include the complete range of form factors and delivery methods, including physical and virtual appliances cloud SaaS and perpetual software.
As well as hosted and non hosted solutions.
Together, they provide a range of security solutions and form factors, enabling integrated protection for hybrid environments, and they're expanding digital attack surface and hedges.
Yes.
Pivoting back to our Q4 results, let's turn to revenue by Gilles.
Our geographic revenue performance continued to align with the pandemic economic path and with it highlighted the geographic diversification of our business.
As summarized on slide seven revenue in Asia Pacific increased 23%.
As many Asian countries and economies continued to remain largely open.
EMEA revenue increased 22%.
Eric has posted revenue growth of 20%.
Let's shift to billings total.
Total fourth quarter billings were $961 million.
20%.
40 gig billings increased 16% and accounted for 71% of total billings.
As shown on slide nine high end and entry level 40 games posted strong billings growth from the quarter.
Non 40 gig billings increased 29% to 29% of total billings.
Given by demand for fabric and cloud security solutions.
As with revenue Geo buildings performance aligned with economic path from the pandemic.
In terms of growth APAC billings outperformed all geos, followed by Europe and the Americas.
The Americas reflects the continuing impact of endemic especially in Latin America.
Moving to billings by customer segments.
Enterprise segment posted solid growth across all geos.
Illustrating the strength of our engage channel channel partner program.
This segment is driven by new customer acquisitions.
<unk> security fabric expansions.
I would execution by our channel partners.
And the large diverse makeup this multinational customer segment.
Moving to worldwide billings by industry verticals.
The worldwide government sector top all verticals at 17% of total billings and grew 28% with.
With another strong performance from our international team.
Service providers in NSF fees accounted for 16% of total billings.
Retail accounted for 10% of total billings up two percentage points quarter over quarter.
And education continued to rebound with billings growth up 26% year over year.
Looking now of deals by dollar size, we had 68 deals over $1 million in the fourth quarter compared to 64 deals in the fourth quarter of 2019.
Secure SD Wan accounted for 16 deals over $1 million.
11 deals in the fourth quarter of 2019.
On a full year basis SD Wan accounts for approximately 11% of our total billings and doubled year over year.
Moving back to the income statement.
As shown on slide four gross margin improved 40 basis points to 78, 5%.
The strong 29% quarter over quarter product revenue growth per.
Free to the mix shift from services to product revenue.
The mix shift was a headwind per quarter over quarter gross margin comparisons.
Product gross margin improved 130 basis points to 63, 2%.
Product gross margin continued to benefit from a higher mix of software products and the lower direct costs of our newer generation of 40 gig products.
Operating margin for the fourth quarter increased 210 basis points to 29, 4%.
Benefiting from the gross margin improvement and continued lower travel and marketing program expenses.
Offset by the addition of new sales team members as we continue to prepare for additional growth.
At the end of the year. The total head count was 8238, an increase of 16%.
Moving to the statement of cash flow summarized on slides 10, 11 and 12.
Cash flow from the fourth quarter came in at $264 million.
In the fourth quarter, we repurchased approximately 300000 shares of our common stock for a total cost of $34 million.
For the full year, we repurchased 11 7 million shares for a total cost of $1 1 billion.
At the end of the fourth quarter, the remaining share repurchase authorization was $1 billion.
The authorization is set to expire at the end of February in 2022.
Throughout the pandemic, we have leveraged the strength of our balance sheet is a competitive advantage to support our partners and customers because they experienced geo specific economic challenges.
As a result average days sales outstanding increased eight days to 87 days in line with our expectations and reflecting our decision to provide geographically targeted extended payment plans.
Inventory turns improved to two seven times from two one times in the third quarter and was relatively flat year over year.
We expect extended payment terms and higher inventory balances to be in effect as we move through at least the first half of 2021.
Capital expenditures for the fourth quarter were $32 million, including $22 million related to construction and other real estate activity.
We estimate capital expenditures for the first quarter to between 50 and $60 million and for all of 2021 to be between 150 and $170 million.
2021, Capex projects include expanding our data center footprint and spending that was moved from 2020 due to delays in the new campus building.
The average contract during in the fourth quarter was approximately 28 months up less than two months from the fourth quarter of 2019.
The growth in SD Wan and other large enterprise deals contributed to the increase.
As we look forward I would like to review our outlook for the first quarter and full year 2021 summarized on slide 13, which was filed with the disclaimer regarding forward looking information that Peter provided at the beginning of the call.
For the first quarter we.
We expect billings in the range of 765 million to $780 million.
Revenue in the range of $670 million to $685 million.
Non-GAAP gross margin of 78, 5% to 79, 5%.
Non-GAAP operating margin of $22 five to 23, 5%, reflecting the typical revenue seasonality associated with the first quarter.
Non-GAAP earnings per share of <unk> 70 to 75.
Which assumes a share count of between 167 and $169 million.
We expect the non-GAAP tax rate of 21%.
Before providing our 2021 guidance I'd like to congratulate every member of the Fortinet team for the truly outstanding execution in 2020 in the face of unprecedented challenges and rapidly changing and unpredictable dynamics.
The effort and results have been outstanding.
And this was on top of now several years of consistent predictable performance and continuing improvements in key growth and profitability metrics.
Day, we reported our third consecutive year of total revenue growth of 20%, while increasing our non-GAAP operating margin and average of over 200 basis points a year for the same period.
Our goal remains to balanced growth and profitability within the framework we have provided.
As Ken mentioned, given the many growth opportunities that lie ahead.
Currently planned to tilt our bias within this framework.
More towards growth will at least the next several quarters.
The opportunities we see are supported by a strong pipeline heading into 2021 increase.
Increased sales capacity.
And our development efforts, which include the NP seven chip and our new 40 OS seven Dano operating system.
Yes.
With that from 2021, we expect.
Billings in the range of $3 $560 million to $3 billion 649.
Took the midpoint represents growth of approximately 17%.
Revenue in the range of $3 billion $25 million to $3 billion $75 million, which at the midpoint represents growth of 18%.
Total service revenue to $2 billion $15 million to $2.045 billion.
Which represents growth of approximately 21%.
And appliance product revenue growth of approximately 11%.
And $1 billion in product revenue for 2021 quite a milestone for fortinet.
Non-GAAP gross margin of 78% to 80%.
Non-GAAP operating margin of 25% to 27%.
When backing out the 2020 teeny benefit the midpoint of guidance represents a 50 to 100 basis point increase in operating margin for 2021.
Non-GAAP earnings per share of $3 60 to $3 75.
Which assumes a share count of between 170 and $172 million.
We expect our non-GAAP tax rate to be 21% we.
We expect cash taxes to be approximately $80 million.
Along with Ken I'd like to thank our partners customers and the Fortinet team for all their support and hard work during this difficult and unique times.
I'd also like to offer a special welcome to the <unk> team.
And I'll now hand, the call back over to Peter to begin the Q&A session.
Thank you Keith operator, please open the call for questions.
Thank you.
A reminder to ask a question you will need to press Star then one on your telephone to lift your all your question. Please press the pound King we ask that you limit yourself to one question and one follow up.
Our first question comes from the line of Brian Essex with Goldman Sachs. Your line is now open.
Hi, good afternoon, and thank you for taking the question and congrats on a great set of results.
Yes, maybe.
Ken if I could ask you know you've got a number of different product cycles are ahead of you. This year, you've got NP seven you've already talked about SD Wan, you've got hyperscale penetration and essentially exposure to <unk>.
Could you maybe talk about the contribution from each of those thats embedded in your guidance and what are you seeing currently in the market and what's yet to come.
Uh huh.
I think for MP seven is still in the ramp up stage.
Yes.
Sure.
We continue to build a new hardware platform with NP seven battery for the high end the middle range.
The 40 <unk> is also a growth driver but.
We are in the in the beta three positive right now for this quarter.
Thats, what helping contribute to the addition of growth, especially in the zero trust from chassis environment.
Also sees us infrastructure security later this year.
So far I see the product growth of 21%.
A lot of contribution from whether the SD Wan I'll be constitute driven networking and also in the probably like one to two years ago. When we released the ISO C. Four so less of it towards the low end side after 40 Cade.
<unk> you can see.
Nicely growth over there.
And also the team doing a great job in the sales and marketing.
Other questions, Yes, I think the guidance setting process is not so much about individual products or even in some cases individual use cases, we identified 15 to 20 different use cases for firewalls.
It's more about what we see in terms of market opportunity, what we see in pipeline.
And then maybe by geography or deal opportunity or what have you is some of the key inputs that go into it but I wouldn't really think of it is.
I certainly would not want you to walk away from the conversation thinking that the guidance that we provided is dependent upon some degree of five G. A SaaS fee or something thats above and beyond.
Got it that's helpful and maybe just a quick follow up nice large deal activity certainly more than we picked up in the channel.
Maybe if you could talk a little bit about the competitive dynamics on the large large end of year.
Market scale.
Where youre seeing that business come from how much is displacement and how much is expansion or I guess existing customer opportunity.
Yeah, definitely whether from a customer or a partner they see.
Are you starting to get a much better more competitive and a lot of advantage using the fortinet products.
What are the 40 day language, new AC the new OSP is a much more additional function compared to competitor.
And so that's where lag of increase per GAAP, we have.
Ahead of competitor now and.
Actually helping to drive the us celebrate the product revenue growth.
And on the other side, we have a little bit different approach flow weathered a SaaS E L. Colorado endpoint. So we emphasize that integrate together ultimately together, especially in the OS level. Both us non our competitors have that and also most of these also organically internally developed designed to work towards.
Care to automate together from day one.
That's also different from our competitor.
Alpha acquisition, which are more difficult to integrate and also difficult to match a long time. So we do feel we have a more and more advantage in net in the marketplace right now.
Got it very helpful. Thank you again I appreciate it.
Thank you Brenda.
Thank you. Our next question comes from the line of Shar Eyal with Oppenheimer. Your line is now open.
Thank you good afternoon, guys. Congrats on the ongoing strong execution levels.
I wanted to start with a gross margin related question. So.
Gross margin guidance for 'twenty, one indicates an improvement one to two basis points on average and I'd like to understand whether it is driven by the ongoing shift to more cloud activities I E more subscription services or is it driven by with some improvement.
AC driven strategy.
I think the last part is probably the headline wishes that each successive generation of the ASIC.
Addition to creating more speed more capacity, if you will more throughput. It also creates capacity to consolidate features of the Bom that were previously separate.
Any success with generation.
<unk> shown the benefit of that and I think over the last year or two that we've done a very good job of retaining that cost benefit in terms of the structure.
You can look back and see what's happened with the gross margins on the product gross margin line.
Obviously you do then also get the benefit in total when you add in the two thirds of the business that are services that are coming in at a much more attractive margin. So the combination of those two I think youre working very very well for us as we exit 2020 and move into 2021.
Got it got it thank you for that Keith.
Keith maybe high level on the salt and sunburst breach.
Have you seen any incremental interest starting in mid December may be building into year end, Ken just aside from the typical healthy year end seasonality trends.
Oh.
Probably.
Do see a lot of interest, especially to secure the whole infrastructure, including our supply chain with different third party Ken.
End of <unk>.
Part of all of these sales.
But it's Stu.
I see.
More people studying interest in this area, but it's.
The good news side is probably not change that much yet.
But we do see got it all will probably later this year will be.
This definitely at least security concerns like I mentioned.
The security spending I'm on holiday it spending per well keeping increase.
Understood very helpful. Thank you so much and good luck.
Keith.
Thank you. Our next question comes from the line of Liana <unk> with Bank of America. Your line is now open.
Hi, guys.
Two questions. The first one is Ken in your prepared remarks, you said that this year is going to be.
A year of focus on growth.
What does this mean does it mean that you are going to increase expenses.
And the margin.
Margin increases will moderate can you elaborate on.
The meaning behind your statement that youre going to focus on growth this year and how does it different from previous year for example.
We do see.
What are some investment we've made in the sales and marketing like we said is that we have increased sales capacity and also we're also.
Better visibility will increase the marketing and the same time from the part us on infrastructure side.
Also we're keeping invest especially the organic internal development like building the new infrastructure.
And what address the cloud.
Net will can unemployed and also working with service provider.
So basically we do see that the market itself also studying kind of.
Salary day, especially in some new area.
Ledger, the fit we call secure driven networking, including both SD Wan the <unk> and <unk>.
Half of new infrastructure, but also some kind of a service model leveraging the infrastructure, which will youre keeping your mass volume there so.
So that's why we feel.
So this will give us a much more growth opportunity in both the internally Mike what are the NP 740 Watt standpoint, all is all timing quite well so will help us drive the.
Faster growth.
And does it have any impact.
Yes, Paul I would just add to that that I think the starting to revenue.
Look I think we were very successful throughout 2020, even during the pandemic of.
Maintaining or growing our operating margins very dramatically, but at the same time.
Adding sales capacity and I think when we sat down there to build the guidance out in the plan for 2021 coming into the year with the with the capacity levels that we have together with the increase in tenure that we're seeing as well as the pipeline I think we feel very good about this opportunity to take advantage of the growth and I think we're still I think the margin guidance from <unk>.
Point of 26%.
It is very much within the framework and actually up a little bit.
Got it.
My second question.
Is about the needed investment in infrastructure to accommodate SaaS fee in similar business models.
What is the company doing in order to address it can you just elaborate on what's happening behind the scenes.
Yes, the SaaS.
Profile Fortinet has a different than some other competitor we do one has no COVID-19 automate approach.
And also we had only one in the OS level, both the SaaS and also as the old Trust net access.
So thats, making whether working with Fortinet, all service provider or even customer enterprise himself to be a lot of their own kind of SaaS approach.
<unk> will be much better fit for their own Ken that we'll probably see whether it's GDP or some other requirement.
It's much better secure compared to some other.
Other approach so that's where we feel it will have some investment by somebody <unk> investment like infrastructure.
So what can we saw service provider together.
Got it thank you.
Okay.
Thank you. Our next question comes from the line of Rob Owens with Piper Sandler Your line is now open.
Hi, This is Ben Schmidt on for Rob Thanks for taking my questions.
As much of the attention the space begins to shift towards cloud and SaaS how.
Do you think about your longer term strategy from a remote connectivity perspective.
And what do you think what do you expect for the branch office.
I think for our technology.
Supporting both the <unk> branch in the six branch office approach and also even for the SaaS fee. So we leave the flexibility to enterprise, which they can leverage that.
Vendor or they can leverage their service provider or carrier or they can build himself. So thats why we say we are putting the OS level is much more illiquid automate compared to some other approach, which have some net leverage lenders infrastructure. So for us it's always level integration of SaaS.
To leave a lot of flexibility.
Gradualist customer tool transition, whether they're most service space all of these skills when COVID-19.
Mike.
We closed a secured infrastructure approach.
So that's where we have the flexibility to have customer select their own approach based on our own need at the same time.
We will make the whole infrastructure six year can we say <unk> to secure driven networking with ICU <unk> internal segmentation.
In the data center and the <unk>.
First campus environment.
So that's why we feel even with take a little more time to build these kind of highly illiquid OS level approach, but the result is much better and more advanced than some other loosely.
Yes.
The other approach.
Okay.
And on the growth investment.
Can you guys add just a little bit more too.
How much of the capacity has already been added and how much youre.
You're expecting to add.
I guess, how much more needs to be added for this year and.
Can you remind us what the debt.
Normal ramp time period is for new reps.
Okay.
For the new <unk>, probably a little bit different for each each session with vertical like.
The channel probably within a few months three months timeframe and then the enterprise publicly for Carmax.
Feedback from it may take leg of one to two years that Carryout defense.
We're going to also like us.
She'll.
Based on how the pandemic called other progress going on and also the market.
Market opportunity, there, but I would say.
We do kind of planning tool increased more capacity when we see more opportunity there and try to match that you've matched numbers.
With that I think what are the internal ones.
Debt.
And also the other market opportunities definitely will help US tour, we're keeping driving faster growth.
Got it thanks guys.
Okay.
Thank you. Our next question comes from the line of per team on Bolani with UBS. Your line is now open.
Good afternoon, and thank you for taking the question.
Ken maybe I'll start with you just drilling in Q. Your vertical based performance you talked about the global government vertical with the Yang.
Eric comprising.
Of your billings in the quarter and that some of the highest levels, we've seen and so I'm wondering if you can remind us what your U S public sector exposure is within that.
Government exposure and then more specifically how is fortinet position, both from a product and go to market perspective.
In the U S federal.
Yes, when you start to think about the $10 billion type of security spending protocols from the new by the New administration and then I have a quick follow up for Keith.
Yes.
Common business for Fortinet as a global base is about 17% of our total business for US right now and then.
Compared to like a few weeks ago to share service providers that number one is over 20% nausea.
16%.
For the U S comment, we still see a lot of opportunity and the same thing for the U S market and so we're going to keeping building.
The qimonda and increase capacity and to take this opportunity and debt grow faster or larger.
What's the second question.
Well.
Thank you.
I think we've talked before that the U S that is low single digits of our government business of our business.
And I think we've got that.
Got it very helpful and Keith.
Just sticking to your Americas sound very nice acceleration in <unk> in the Americas Theater.
Against the median uneven geographical performance for the U S. Over the course of 2020. So I'm wondering if you can just put a finer point on the types of things that went right and the types of things.
That really went on in the quarter and the key drivers of the strength, particularly in the Americas and that's it from me. Thank you.
Yes, so I think the.
Good question Pablo other ways different answer if you look at it geographically Latin America continues to be by far the most challenged if you will Canada.
Canada, probably did the best of the three and I will put the U S right in the middle.
Do think that we.
We're very pleased with how the U S has come back the second quarter.
Now that we are pandemic experts about what to expect out of the business and looking at Q1 Q2 from Q4.
It's pretty obvious that we can.
Felt this coming out of the second quarter that Q2 was a low watermark both of the company in total but also for the U S.
You've picked up on since that point theres been a steady progression of lack of a better term recovery in that part of the business.
Thank you.
Operator next question please.
Our next question comes from the line of Brad Zelnick with Credit Suisse. Your line is now open.
Thank you so much and congratulations to the entire Fortinet team on a on a great end to a great year.
My first question for you Ken in your comments, you basically said that you aspire to be the market share leader in SD Wan, which I think is a really important.
Our goal that you have and I just was curious from your perspective, what needs to happen to get there. How do you take share from your two largest competitors that have significant installed base relationships and over what time, Ken can this play out.
I think for US we have a unique advantage of what we build SD Wan with security together and we also leverage <unk> to like increase the concrete empowered lower computing cost a lot. So thats non about competitors have not and also the other to be fleet or their comfort acquisition.
Going forward, they will probably it will be slower on whether the innovation of me the market change dynamic there. So thats, where you can see from the 40 OS endpoint all release, we do keep an increase additional function well.
Whether the SD Wan the <unk> and other part so we do also BD going forward.
Half a majority of the <unk> market will need us to acuity. So it will be if we have a huge advantage. There. So that's where you're going to have a bigger installation base, but the advantage. We have on the part off from a functional from a cost side I think it will be huge and walk about keeping truly in our market share and so far like a year over year.
We almost doubled ICT lumpiness.
To 2019 and the 2020.
Great and maybe just quickly for per Keith Keith.
What are the levers to think about in light of sales head count.
And the plans for this year.
Legacy.
I'm not quite sure I fully understand the question, but maybe I'll give it a shot in that.
To share one data point of coming into this year, if I look at.
Level of sales capacity, we have versus what the.
With the plan is that we're talking about I don't think ive.
This is as well positioned as we have been coming into a year.
To pivot towards this growth model that Kevin debt.
Ken has talked about.
And I think that the pipeline feels very good the 10 year feels very good.
The use cases, the Tam feels very very good to us the new 40 last the NP seven ship, that's coming out the platform the platform advantages from a cost advantage that we have from performance.
I think that we are in a very good position to do to execute this and again, we're maintaining it within the framework that we've talked about previously.
Fantastic. Thank you so much for taking the questions.
Thanks, Brad.
Thank you. Our next question comes from the line of Sterling Auty with Jpmorgan. Your line is now open.
Yeah. Thanks, Hi, guys. Just one question from my side, Ken in your prepared remarks, I think you talked about that the industry is finally raise see customers move to consolidation fewer vendors more of a broad platform approach with that in mind, where would you gauge the fortinet platform and what did.
The areas that you would like to bolster to improve your position moving forward.
You can see the.
Like we call the security fabric has a pretty nice growth almost double compared with a 40 page.
Growth there that's also because the.
Customer want to have all this whole.
A whole infrastructure secure integrated auto makes solution.
So that's where we'll continue to see we're keeping gaining share there. So that's even more from probably like 20 or 30 different products.
And on the other side on the <unk> part, we called a secure driven networking that's weather.
SD Wan five G. Nowadays.
To SaaS.
Other part.
Working closely with service provider carrier, we also see a lot of opportunity within the <unk> side.
So that's where we see so far we are keeping like if the market itself grow like a 10%. We do see we can grow much faster than the market keeping gaining share and.
Both on the <unk> and also on the call of the broth fabric approach wishing evolving post the endpoint in the networking and the cloud all together and all of this integrate together based on the <unk> of some Hunter Hunter connectivity through day two of the <unk>.
Understood. Thank you.
Thank you.
Thank you. Our next question comes from the line of Adam Tindle with Raymond James Your line is now open.
Okay. Thanks, Good afternoon, Ken I, just wanted to start on the focus more on growth comment in how you're investing some of your healthy margin and some sales and marketing initiatives. We also heard a similar message from a competitor yesterday and just thinking about the broader industry implications of that and outside or could maybe make the case that we enter a period of greater industry.
Free competition and pricing pressure as major competitors are investing heavily in sales and marketing certainly it doesn't seem to be the case based.
Based on your full year margin guide so maybe some thoughts on why that scenario does not play out.
Ken can I jump in and answer on your behalf.
I think I'd reference probably a to a company that has a very very different business model.
Whether you are looking at growth rates, where youre looking at product service mix and what have you. So I don't know that that would drive that straight line comparison.
I think the business model that were executing here has been extremely successful.
And I expect it will continue to be so in terms of discounting I think that there.
And I don't like hearing it but were viewed as being the price per performance leader.
Then our pricing is really where oftentimes I think brought into rfps and opportunities to set the milestone that the competitors are forced to react to as opposed to the other way around if you go back and look at the comments that we've offered throughout 2020, even in a pandemic.
More often than not.
Discounting if you will has been a tailwind for us in our ability to execute against it as opposed to a headwind and by that I defined discounting mean, lower discounting pressure in that quarter than the prior period. So.
I don't think we have the concerns that may have been described there.
Okay. That's helpful and maybe just a quick follow up Keith and sorry, a little bit in the weeds on this one but the billings guidance for Q1, it's down about 20% sequentially at the midpoint and typically down low double digits or so mid teens in that range last year at the start of Covid. It was down 17%. So that part of the question is why would.
The sequential decline in billings be worse than the environment. When we entered Covid. During Q1 of last year, you talked about having a strong pipeline supporting the desire to invest maybe just some help with the color on the disconnect between those two items. Thank you.
Yes, I think one which you're we should talk about adjusted tremendous performance from the fourth quarter of 2020.
I know that <unk> fourth quarter 2019 was a good quarter, but Q4 2020 on top of that 19 performance I think that's part of it and this is typically the smallest quarter for us in the year historically, you've seen some sort of shift and thats nothing new from.
<unk> gone from Q4 to Q1, and then you start to see the progression thereafter.
Okay. Thank you very much helpful.
Thank you.
Our next question comes from the line of Keith Bachman with Bank of Montreal. Your line is now open.
Hi, Thank you very much Ken I wanted to ask my first question of you you've talked about five G. Why is that an opportunity who's your customer and whats widest fortinet win in that instance of <unk>.
<unk>, if you could just talk about little bit about <unk>.
When do you think that Youll get some benefits from this.
I think we do see five G connect a lot of device.
To the to the Internet.
Also you can create a lot of <unk>, which we call Theres, a new tech services, a new edge needs to be covered.
So thats, where especially if we walk in with a lot of service provider offer <unk> services to all other enterprise connect all these different day less in the <unk> space.
So thats, what we do see as a huge opportunity and so with our position with a carrier service provider and we do see the <unk> can be one of the driving growth driving factor for us this year and could be material and towards the end of the year.
Is that going forward is also is a huge huge opportunity even secure weather.
Yes.
It's a part of the whole infrastructure assets, which grow above or faster than a lot of other carrier service provider starting to heavily invest meet this area also.
Okay interesting, Okay, and then Keith one for you.
For the guidance of 21, you talked about Capex any other puts and takes you want us to think about.
As it relates to ocs for operating cash flow.
No not really I mean, I made the point about inventory turns came in for us pretty strong in the fourth quarter, but I think that's a direct reflection of the.
The success that we have in the product revenue line in the fourth quarter slowdown from a little bit better than we expected.
I do think during this pandemic era that we will continue to maintain somewhat higher levels of inventory I think that's in our best interest.
And the payment term program I think that.
Every CFO wants to wind that down staff as pops possible in every distributor wants to hold onto it for Dear life. So that'll be an ongoing battle force throughout 2021 other thing.
Okay, well congratulations to the whole team good set of results. Thank you Keith.
Thank you. Our next question comes from the line of Ben Bollin with Cleveland Research. Your line is now open.
Hi, Good afternoon, Ken Keith Peter Thanks for taking the question.
My first question, you've made your aspirations pretty clear in SD Wan.
Could you share with us a little bit about.
Aspirations intention as you move into SaaS in Zero Trust, how you see yourself positioned.
Steve wondering as a part of the SaaS offering what we do is a little bit different than competitor, we build within the 48 40 O S, which also can be offer whether it based on the physical appliance or the virtual.
So for all kind of cloud delivering and that's where the new 40 OS endpoint know.
<unk> flexibility and.
A lot of other part of the infrastructure security service together.
So that's where we'll continue to see SD Wan and.
Keeping growing hopefully by market started probably worth keeping growth I'm, sorry, 40% year over year this year.
<unk>, we're also keeping gaining market share and at the same time.
<unk> other opportunity come up we already offered in the new.
<unk> hundred 40, <unk>, which also could be a pretty good cliff with the addition of growth. So we have.
Could you also talk a little bit about.
How you envision, Florida OS seven rolling out once available how backwards compatible will it be for legacy appliances.
And if you've looked at some of the historical OS refreshes, how long does it take the footprint to rollover as this rolls through the base. Thank you.
Hub.
Ready depend on customer.
Some I have to say the channel probably reacted a little bit faster and then there is on the price and the service provider somehow take a little time, because less some service provider. They also have to supporting some of that.
We do see this eyeball a lot of new opportunity and they also lack these tightly integrated approach wagered ICU and SaaS, we call secure driven networking.
April then to offer additional service additional kind of happiness.
<unk> additional edge, that's why we say you need to protect that different hedge together and the automakers integrate together instead of a.
Have a different product different.
Vendor for each pod, which is difficult to integrate automate so that's where we see the response from like.
There is a lag of 300, new feature an update.
Oh ash to cover quite a broad area.
That's we do see customers, who needed some time to gradually.
Mike train pay Commvault as a new function, but a lot other than they see the huge benefit of this new function and.
That's why we see it as a huge opportunity for us by probably towards the second half of the year, we'll see a lot of benefit of it.
Thank you thank.
Thank you.
Our next question comes from the line of Michael <unk> with Keybanc capital markets.
Line is now open.
Hi, This is Keith on from Michael Thanks for taking the question just one from me Keith It seems like you've got a billings for <unk>, assuming some macro headwinds how does that play out differently than you expected, especially on the product side and in the end did you see deferrals of hardware refreshes in 2020 that might snap snapback in 2021.
Yes, we have such a long product lift I don't think that we really saw deferrals of refreshes.
The asset concept I think.
Yeah.
I don't think Q4 was unusual in terms of what you normally see.
With other years and by that I mean, I think there was probably some element of the typical budget flush falling through I think there was probably some element of salespeople working really hard to hit accelerators.
And I think there was also some element of deals and simply pushed.
I don't think that Ken kind of made a good point earlier build on a little bit I think the solar winds event happened so late in the quarter.
So at least for us and probably from any other security companies. It seems doubtful that that activity really had much impact on the last two weeks of December in the quarter.
I do think Ken me disappointed that its certainly raises awareness of security and events like that unfortunately for the world at large.
Focus on security matters and the importance of it that people are going to suffer becomes open.
So I don't know that.
In terms of learning to be cautious if you will going back to the beginning of your question on the guidance setting I do think there was an element of caution once we can't other second quarter and saw how the pandemic impact close rates and you saw that come through in the guidance setting process in both Q3 and Q4.
Also we see a pretty nice growth in SMB, but overall SMB still have worse murdered low percentage language, whether it and that was secured or cyber security, that's where you couldnt in retail. So that's what you see there is a still have a huge growth opportunity over there.
Great. Thank you both.
Thank you.
Thank you our net.
Question comes from the line of Andrew Nowinski with D. A Davidson your line is now open.
Great. Thank you and congrats on the nice quarter maybe.
Maybe just starting with a high level question. So as we think about the mix of your revenue.
Do you think the solar Wednesday, <unk> will create a positive tailwind force more spending in the firewall market or do you think it will pressure your product growth as customers, perhaps shift spending towards some of your cloud based and subscription solutions.
Is it appropriate to have.
A more integrated and.
And the bigger infrastructure security.
So that's where probably definitely solar winds multiyear kind of come from the network side.
On the other side. They are they are also trying to cover the pet amicus whether it's work from home has a lot of 190 <unk> tried to digitalize given these process, which also increased security need Thats why I say it.
Security spending come down, but overall it spending probably will keep increase this year and Thats also helping drive the.
So no interest just like a few years ago, there was a case, where there <unk> some other things definitely.
The awareness of the importance of cyber security.
Great. Thanks, Ken and then just a follow up.
As we think about the growth phase you're entering here this year and your go to market strategy to drive that growth if.
If you look back over the last few years. Your playbook has certainly been the lead with the firewall I'm just wondering in this new growth phase are you using the same playbook to accelerate their growth or are you seeing.
More deals come to you via your Sim products in your virtual solutions in your other subscriptions and perhaps changing your go to market strategy to drive that growth.
That's a few in the next few years the network security market is still the biggest market also property the fast growing market not just because there's some more connectivity like <unk> and some other work from home, but also that's the center of all of the whole infrastructure security, but also.
Not just network security I don't know you also need to have a network security working closer with endpoint with some other infrastructure cloud or some other part together, that's what we call the integrated <unk> solution.
To respond to any of these are quick change in dynamic industry here.
What is important we can.
Keep the organic growth and we also developed a product from day, one make it integrate automate together.
Liberty different compared to competitor, which weather comp or acquisition or some other targets.
More challenging to integrate and also keep the innovation going forward.
Okay understood. Thank you.
Thank you.
Thank you. Our next question comes from the line of Gray Powell with TB <unk>. Your line is now open.
Alright, great. Thanks for taking the questions and congratulations on the on the good results.
So maybe circling back on the <unk> questions.
In past telecom upgrade cycles, maybe maybe <unk> with too long ago, but looking back at like the <unk> upgrade cycle.
Did that play through to Fortinet, what kind of tailwind did you see then and then how does the <unk> cycle feel in comparison.
Yes.
<unk> is more connect people whether to fund whatever together a five day more connected device.
And that's also the number of connection probably will increase as it may be <unk> in the east.
Because there is a much more devices to be connected and that's also kind of more addressed a lot of industry need what are.
Certain small CD also drive on other what vehicle infrastructure. So that's what we do see a lot of opinions opportunity because so far the network security they'd be more towards the <unk>.
Towards the venous side compared to towards the consumer part.
So we do see a huge opportunity going forward. It's just like Mike a couple of years ago to SD Wan SD Wan can help in travel.
Travel a lot of smart connection with application and dynamic based on application or a different connection there. So that's where the <unk> definitely.
Additional opportunity.
But also bring a lot of risk.
Could it be net zero, which need to be protected and and also service provider, we see a quite important role there.
Probably the best service provider channel organization, among all of the cyber security vendor. There. So we do see a lot of potential in this area.
Understood. Okay. Thank you very much thank.
Thank you.
Thank you.
Our last question will come from the line of Irvin Liu with Evercore ISI. Your line is now open.
Hi, Thanks for letting me on I have one question and one follow up.
First I was wondering if you can perhaps update us on your business mix by customer size, maybe a breakout by enterprise commercial or SMB, and whether you've seen a shift up or down market and how do you see this mix trending through calendar 'twenty one.
Yes, I think we had a slide in our analyst day in November of 2019.
If it gets a little basically answered one third one third and then.
To explain it a little bit of MSP gets allocated between them, but you end up with something that's very very much like that.
Small business small enterprise one third mid one third enterprise one third.
The thing that has been a very pleasant surprise to us throughout 2020, and the pandemic was how well the enterprise or small enterprise segment of the business held up it really did very well.
Got it and from my follow up.
Now one year into the current pandemic and assuming things normalize in the back half of calendar 'twenty. One do you anticipate any changes or shifts in demand or customer buying patterns, assuming a return to normal environment.
I think during the pandemic.
Customer, especially enterprise customers tend to hold on to their current vendor.
Especially in the developed country.
Uh huh.
But it's.
But for us like whether in the in the USA was from Europe country, we're keeping gaining market share. So we do get into a lot of new customer.
Which will probably take them all as are doing a pandemic.
It's difficult to meet people or to certain testing there.
Once it's open and we do see there's more opportunity more window opens for us, especially with the new hardware, new Oss and the new infrastructure.
So thats also lead us to kind of a little bit tours that day.
Cash in the growth for us going forward in the next few quarters at least.
Ken spot on with that I think the.
To quote unquote nice thing about the pandemic is I think we have a lot of understanding about our business from what to expect in pandemic quarters, and I think that all of US here at Fortinet I think throughout.
The country you are looking forward to at some point in time, when Theres herd immunity and vaccine.
And then the other growth drivers kick in and that seems destined to be sometimes towards the second half of this year.
I think we're all very aware of some of those GDP numbers in the year over year swings that we're seeing from negative 3% of positive six or seven what was a pretty dramatic numbers, but I think most people's expectations are that thats really going to come when the economies in the country start opening up further.
Okay.
Alright, Thank you Sir.
We're going to close the call at this point.
As you read in today's press release, I would like to point out to everybody that Fortinet accelerated 2021 virtual conference will be held on March <unk> for the U S. As part of that conference, we'll be doing an analyst day. So you can register there is a link in the press release as well as up on the website to register for investors and analysts. So please do that prior to March 9th if youre interested in attending.
Net debt mourning event. In addition, we'll be hosting an addition to ex hosting accelerate we're also going to be attending the Goldman Sachs Conference next week on February 10th and the Morgan Stanley Conference on March 2nd links to those webcast will be on our website and available on the Investor Relations industrial events page of our industrial options left side. Thank you very much for your time today, if you have any questions. Please.
Feel free to contact me have a great rest of your day.
Yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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