Q1 2021 Fortinet Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Fortinet Q1, 2021 earnings announcement call at.
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I'd now like to hand, the conference over to your speaker for today.
Peter Alkyl Peters alkyl Koski, I'm, sorry, Peter Stakhovsky, Vice President Investor Relations you may begin Sir.
Thank you just wanted to good afternoon, everyone. This is Peter talked Gatzke, Vice President of Investor Relations.
I am pleased to welcome everyone to our call to discuss Fortinet financial results for the first quarter of 2021 speakers on today's call are Ken Xie Fortinet as founder Chairman and CEO and Keith Jensen, Our Chief Financial Officer. This is a live call that will be available for replay via webcast on our Investor Relations website, Ken will begin our call today by providing a high level perspective on our business.
Keith will then review our financial and operating results for the first quarter before providing guidance for the second quarter and updating the full year non open the call for questions. During the Q&A session. We ask that you. Please keep your questions brief and limit yourself to one question to allow others to participate.
Ken I would like to remind everyone that on today's call, we will be making forward looking statements on each forward looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected please 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 looking 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 reconciliations are located on the 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 on loan unless.
I noted otherwise I'll now turn the call over to Ken. Thank you Peter and thank you to everyone for joining today's call to review, our first quarter 2021 it resolved.
Yeah, we're pleased with our strong first quarter performance building on increased 27% $851 million driven by solid execution across a broad and integrated product and services.
<unk> SD Wan contribute 40% to first quarter building.
Total revenue growth, 23% to $710 million.
Total revenue growth of 25% the highest quarterly product revenue growth in the last five years.
With strong business momentum and good visibility we remain focused on growth.
In the first quarter, we released 40 or simple no which offered.
First horse LIBOR was tight and accretion of our broth security and that will function in core.
<unk> SaaS SD Wan plus network access cash be in France, you could maybe entity.
Good day, we announced a 40 day seven to 121 assets.
The wood harvest next generation firewall and Hanmi firewall with hyper scale 100 gig interface.
71 point on <unk> mobile now all producers to secure multiple edges within their infrastructure.
I might squeeze to build on Scannable security offerings.
Powered by our new MP <unk> security process unit.
71 point, you want to deliver security computing region to ex COVID-19 exclude her than competitive solutions.
We continue to see momentum and adoption of all SD Wan sassy and they're putting on access solution among the world's largest service providers.
Today, we announced which is kind of come on.
Our new manager secure SD Wan service powered.
How 'bout Fortinet.
On March Fortinet on AT&T announced Dively ability of our new managed SaaS solution for enterprise customers.
Increasingly on completion or consolidate in towards a holistic platform approach delivering integrate and ultimately security cover on.
On this network endpoint and cloud secure edge.
The Fortinet security fabric is established accretive parcel them organically built on a broad and deep set of a networking and the security technology designed to seamlessly operate together.
The high profile security incidents over the past few months along with the pandemic has elevate the need for a broad platform that can secure and a price on target for structure.
Multiple edge Zero Trust environment.
We expect companies to increase the percentage on it spending used for security in our effort to address the cyber security needs.
Our security driven networking approach is a key growth driver.
<unk>, we expect significant organic product growth will lead to increase the service revenue.
Before turning the call over to Keith I would like to thank our employees customers partners worldwide for their continued support on Hautelook.
Thank you Ken and to add to your comment we should note that billings growth product revenue growth and total revenue growth what each at five year highs.
Okay, let's start the more detailed Q1 discussion with revenue total revenue.
$710 million was up 23% driven by industry, leading product revenue growth of 25%.
Product revenue growth was broad based across geographies security fabric project products and use cases.
The market acceptance of our integrated single platform security strategy customer.
Customer demand for security across their entire infrastructure.
And the diversity of our customer base.
Product revenue growth was over 30% for both infrastructure and cloud fabric products in all three geographic regions increased 20% or more.
Demand for security fabric products was strong across all form factors hardware software and virtual machines.
The growth we experienced for product revenue was not the result of a few large deals lower backlogs or higher channel partner inventory levels.
The product revenue growth also enables increases on services billings on future services revenue.
On the first quarter service revenue of $470 million was up 22%.
Support and related services revenue increased 23% to $214 million.
Security subscription services revenue increased 21% to $255 million benefiting from outsized growth from a cloud provider and SaaS security offerings.
Moving to the mix of 48, and non Florida Gate platform revenue.
The 40 gig segment of the fabric platform saw revenue increased 17% driven by demand for entry level and high end floating gate products.
I and includes 10, new NP seven powered 40 games that were introduced in the past.
Which includes today's announcement of the $71 20-F.
These new products now represent approximately 20% of hiring on 40 gig shipments.
Our AC driven 40 gigs give customers, 5% to 10 times more computing power than firewalls that run on common Cpus.
The advanced computing power creates not only speed, but also the capacity to continue to add functionality to our operating system driving our price for performance advantage.
The non Florida gave segments saw revenue grow over 40%.
And now accounts for 31% of total revenue up four percentage points.
The integrated security fabric solutions consist of the complete range of form factors and delivery methods, including physical and virtual appliances cloud SaaS and perpetual software.
As well as hosted a non hosted solutions.
Together, they price provided range of security solutions and form factors, enabling integrated protection for hybrid environments and the expanding digital attack surplus from the data center to the endpoint to the cloud.
Given the strong first quarter performance.
Please go get revenue performance, we believe our non 40 gig platform is now on a pace to be a $1 billion business. This year.
Representing an acceleration of this milestone.
Let's turn to revenue by geographies.
Summarized on slide five.
Revenue in the Asia Pacific area increased 26% EMEA revenue increased 25% debt.
<unk> posted revenue growth of 20%.
As I mentioned earlier, all three regions experienced product revenue growth of 20% or more.
Moving to billings in the first quarter billings were $851 million up 27%.
We saw strong growth on both a 48 and non <unk> segments on our security fabric platform.
The Florida gave segment delivered billings growth of 20% accounting for 70% of total billings.
As shown on slide six entry level, Florida gates posted very strong billings growth in the quarter.
The non Florida gave segment accounted for 30% of total billings and delivered billings growth of 50%.
So having a four point year over year mix shift to non Florida game.
Taken together these data points highlight the market acceptance of our single integrated security platform strategy.
In terms of ability growth by Geos APAC outperformed all geos, followed by Europe and the Americas.
In the Americas, Canada had a very strong quarter.
Latin America rebounded from the pandemic induced slowdown posted billings growth in the mid 20% range.
Moving to billings by customer segments, the small enterprise segment posted solid growth across all geos.
This segment is driven by new customer acquisitions customer security fabric expansions solid execution by our channel partners.
And the large diverse makeup of this international customer segment.
On the same time, we saw strong growth on our larger deals.
The number of deals over $1 million grew 74% to 66 deals in the first quarter.
The pipeline for deals over $1 million looks good for the remainder of the year.
As Ken noted secure SD Wan billings were 14% of total billings.
SD Wan is a key functionality and an integrated SaaS solution.
Moving to worldwide billings by industry verticals.
With another strong international performance.
Worldwide government sector topped all verticals at 19% of total billings and was up 60%.
Service providers on MSR speeds accounted for 16% of total billings.
The rebound for education accelerated with on these growth of 50%.
Retail turned in a solid quarter with billings growth of 21%.
Our strong and consistent billings and revenue performance over the past several years is testament to our geographic and customer diversity.
On the success of a single integrated security platform strategy.
In our ASIC advantage, which enables a share of the operating system across the security fabric platform.
Gives our price performance advantage.
<unk> increased the capacity to add features and functions, while maintaining price points.
Moving back to the income statement.
As shown on slide four total gross margin improved 10 basis points to 78, 9%.
Product gross margin improved 120 basis points to 62, 6% benefiting from lower direct product costs.
The increase in product gross margin offset the drag on total gross margins from the revenue mix shift driven by the strong product revenue growth.
On the gross margin on it and a gross margin FX headwind of about 25 basis points.
Operating margin for the first quarter increased 210 basis points to 24, 5%.
Benefiting from the strong revenue performance in the quarter.
The benefit from lower travel and marketing program expenses of approximately 100 basis points. There was more than offset by an operating margin headwind from foreign exchange of about 150 basis points.
To end the quarter, we ended the quarter with total head count of 8615.
The increase of 16%.
Moving on the statement of cash flow summarized on slides seven and eight.
Free cash flow for the first quarter came in at $264 million.
Up $22 million from the first quarter of 2020.
Despite a $24 $5 million year over year on increases in Capex spending.
We ended the year with total cash and investments of $3 1 billion.
An increase of $1 5 billion.
The increase includes the proceeds from our 1 billion on investment grade debt issuance during the first quarter.
Your issuance followed her inaugural strong triple B credit ratings.
Throughout the pandemic, we have leveraged the strength of our balance sheet is a competitive advantage to support our partners and customers as they experienced geo specific economic challenges.
As a result days sales outstanding increased seven days to 81 days in line with our expectations.
Selecting our earlier decision to provide geographically targeted extended payment terms.
Compared to the fourth quarter of 2020 Dsos on the first quarter of 2021 decreased six days as we saw early progress towards returning to pre pandemic payment terms.
Inventory turns declined to two one times from two five times.
Collecting efforts, we took to mitigate supply chain risks.
Including increasing our inventory levels starting earlier in 2020.
We expect extended payment terms and higher inventory balances to be in effect as we move through 2021.
Capital expenditures for the first quarter was $52 million.
Including $38 million related to construction and other real estate activity.
We expect to begin moving employees on the new suddenly they will hit.
On campus building in the middle of the year, although the timing will depend on local pandemic protocols and employee safety considerations.
We estimate capital expenditures for the second quarter to between 30% and $40 million for all of 2021 to between 150 and $170 million.
The average contract term in the first quarter was approximately 27 months up less than two months from the first quarter of 2020 and down approximately one month from the fourth quarter of 2020.
Secure SD Wan it kind of over 15 deals over $1 million versus four in the first quarter of 2020.
And contributed to the increase in average contract term.
As we look forward.
Our goal remains to balance growth and profitability and given the growth opportunities. We highlighted during the March analyst day.
And as confirmed in our first quarter results.
We have tilted our bias towards growth for at least the next several quarters.
The opportunities we see are supported by a strong pipeline increased sales capacity.
On our development efforts, which include the <unk> seven chip and a new 47 Donahoe operating system that was recently released.
Now I'd like to review our outlook for the second quarter guidance summarized on slide nine which is subject to the disclaimers regarding forward looking information that Peter provided at the beginning of the call.
For the second quarter we.
We expect billings in the range of 860 $880 million.
Revenue in the range of 733 million to $747 million.
Non-GAAP gross margins of 78, 5%, so 79, 5%.
Non-GAAP operating margin was 24, 5% five 5%, which includes an expected 100 to 150 basis points headwind from foreign exchange.
Non-GAAP earnings per share of <unk> 83 to 88.
Which assumes a share count of between 168 and $170 million.
We expect a non-GAAP tax rate of 21%.
Before raising our 2021 guidance likely congratulate every member the Fortinet team for a truly outstanding start to 2021.
With that.
2021 we expect.
I think on the range of $3 billion $685 million to $3.745 billion, which at the midpoint represents growth of approximately 20%.
Revenue in the range of $3 billion $80 million.
The $3 billion $130 million.
Which at the midpoint represents growth of approximately 20%.
Total service revenue in the range of $2 $20 million to $2.050 billion, which.
Which represents growth of approximately 21%.
And appliance product revenue growth of approximately 17%.
Non-GAAP gross margin of 70% to 80%.
Non-GAAP operating margin of 25% to 27%.
When backing out to 2020 TNT benefit the <unk>.
Midpoint of the guidance represents a 50 to 100 basis point increase in 2021 operating margin. Despite an expected headwind from foreign exchange.
Non-GAAP earnings per share of $3.65 or $3 80.
Which assumes a share count of between 170 and 172 million.
On about <unk> <unk> per share impact on the debt issuance.
We expect on non-GAAP tax rate of between 1%, we expect cash taxes to be approximately $80 million.
And along with Ken I'd like to thank our partners our customers on the Fortinet team for all their support and hard work in these difficult and unique times now I'll hand, the call back over to Peter legally Q&A.
Thank you Keith as a reminder, during the Q&A session. We ask you. Please limit yourself to one question to allow others to participate on we've got a fairly large peer today, so I would like to get through everybody at least once.
So on that please open the questions.
Thank you.
Ladies and gentlemen, as a reminder to ask a question you will need to press Star then one on your telephone.
So let's draw your question press the pound Keith.
Our first question comes from the line of Rob Owens.
With Piper Sandler your line is open.
Great and thank you for taking my question with a lot of other verticals in the media is seeing issues with chip shortages and some supply chain issues is that starting to sneak into the security market relative to firewall appliance shipments and can you talk a little bit about your potential exposure. Thanks.
Yes.
Well I think the chip shortages. This is Keith Rob I think the two charts that you pointed out is can touch a lot of different industries I think one thing about fortinet.
In addition to having different form factors as these inventory balances that we carry at two times inventory turns you are looking at basically six months of inventory that we're carrying on our balance sheet.
I do expect that the supply chain issues will be something particularly as relates to chips that will be a constant conversation point throughout 2021 and into 2022, but I think in terms of when we sit down and talk about our expectations for the year I think we have a fairly good understanding of how to work that in.
Thanks Keith.
Thank you.
Our next question comes from the line of Brian <unk>.
With Goldman Sachs. Your line is open.
Great. Thank you and thank you very much for taking the question.
Ken I was just wondering if.
Billings commentary worldwide government up 60% some really nice.
Acceleration, there and then NSP and service providers still 16% of total.
Moving to talk about obviously, we know what the secular drivers in NSP are.
Variable is that maybe the factors that are driving that acceleration in government spend and then maybe talk a little bit about particularly on the service provider side.
It doesn't seem as though we're seeing an acceleration from <unk> and Iot yet.
Who are the buyers there how do you anticipate that that segment will play out through the rest of the year as you look.
As you look to work your way through the remainder of the year.
Yes.
Carrier on the sort of service provider.
Starting with channel reshaping their.
Security and that will offer measure was five <unk> on all of the SaaS fee.
And also supported on won't fall Hong kind of.
Assuming the early stage I put in this way. So that's where we are working more closely with auto service provider on that kind of BT, we announced today to AT&T, we lost cost minus on pretty much all of the service provider.
To support the non this shifting of debt.
Opinions model.
I'd say, it's still early stage of it to involve a lot of testing.
Trial on the same time I do PD eventually the service provider business will go back up to the number one.
And to be like a high 20.
If you back four years ago.
That is.
But is that because there is a new kind.
Kind of shifting.
Good day to have.
Some work to do and also some investments on please see going forward. So we're working together with them to keeping growth thats being thats right now.
Got it very helpful. Thank you.
Thank you.
Our next question comes from the line of Jonathan Ho with William Blair. Your line is open.
Good afternoon, congratulations on the strong quarter I just wanted to on a.
Get a better sense of what youre seeing in terms of demand for the SaaS fee and D. TNA oriented product and have you seen that pipeline sort of continued to rise on especially as we look at sort of replacement for.
On the traditional VPN connections and other sort of more legacy technologies. Thank you.
Yes.
On the new fast growing market, but also the public to replace some of the traditional approach, but some other traditional approach also expand inside campus inside enterprise inside the data center.
So is that culturally the internal segmentation on the other side. We do believe entered a SaaS user Trust me on will likely say it few years ago. It's the best position probably saw the service provider carrier. So we tend to be more working with and partner with them.
And also offer kind of tie to the integrated solution like we said in the 40 <unk> index.
Moving on to OSP level inside that.
Some different vendor using different box, so even kind of a different infrastructure to do that as.
So that's actually working much better with better service provider, it's a customer directly. So that's why we can see there is some fast growing going forward.
It's just part of the whole infrastructure solution.
Non replace the traditional approach but also.
On the wholesale securities, it's Martin that dynamic space and there is a new thing come up and also the debt owed since also not goes away. So that's why we tried to address these debt can you change at the same time keep me on hence.
The traditional solution and to supporting our customers in our different vertical different region.
Thank you.
Okay. Thank you.
Our next question comes from the line of Ben Bolan with Cleveland Research. Your line is open.
Hi, Good evening, Ken Peter Keith Peter Thanks for taking my question.
Bob.
I was hoping you could talk a little bit about how you see customer discussion changing or evolving.
As they contemplate and start to return to their offices into work.
And then also hoping you could touch on how you view the growth opportunity over time.
Completely new customers versus wallet share expansion with existing customers.
The consequent deference to be on security is starting to become more and more important but also the need to cover March for us.
Infrastructure and our hedges instead, because the traditional secure whatever debt the border.
The data.
Company, So thats more device mobile user.
Infrastructure need to be covered so that's it's not a simple refresh Israeli.
Change into the whole infrastructure approach and also working together with our traditional or magnitude from vendor cover what and then working on endpoint on some other part of.
Security and now they are looking for some consolidation.
They prefer one to.
We have multiple.
Copper operating some part of infrastructure working together.
So as you can see that the fabric approach, we obtained a few weeks ago, starting doing quite well and almost pretty much every quarter, a top order growth compared to the the traditional network security, but that was accretive we also see healthy growth and.
It's ready.
Not just expanding beyond the traditional border security output, but also because the ASIC advantage, which increased the secure computing power five to 10 times.
Compared to the other vendor sulfur load on the traditional CPU.
Thats able to add more function and also kind of increase the performance lowered our costs and also on lower power consumption more green, so thats actually making that Mike.
Mike.
Our net growth like we say keeping us keeping to embed on better and that we do see this as a whole infrastructure, we're keeping going for the next probably.
A few quarter, even to a few years and the consolidation of on keeping going.
Industry.
Yes, Ben.
Just to continue on with Ken's comments, you know I think the.
The headline that Heath talked about previously is that the factor work really.
The combination of back to work in as many companies being on a hybrid model that the attack surface now seems to be permanently expanded for many many companies.
In terms of growth and how we see it with new logos.
Expansion opportunities.
We easily add several thousand new customers every quarter.
But if you look at the mix of billings that mix of billings is going to come from our installed base of customers. If you will and I think the simple model to look at is from that initial sale of perhaps a firewall or something else.
There is two different ways to expand one is finding more and more use cases inside organizations for firewalls and increasingly displacement opportunities and then the second is and this is where Ken was going as the expansion opportunity, where those non non Florida gate fabric partner products and.
We're seeing there with that that mix shift from 40 gates to non Florida gates, and now being 30% of our business with 31% of our business. I think is taking is one affirmation of the strategy in two youre seeing it on the numbers.
Thank you.
Thank you.
Our next question comes from the line of <unk> with Bank of America. Your line is open.
I'm going to take you through the basics with my question.
Last year was strong and there was some concern that the fire water market is being driven by COVID-19 driven demand just because of work from home.
On the question is whether you expect any slowdown of.
Demand related to the anniversary of the trends last year.
And the second question is your non 40 K grew extremely strong again.
If you can take us through the basics what are the products that are growing there.
Just what are the trends and what do you bring to the market. Thanks.
Can you the first time, maybe Keith Scott second passion.
I don't see any slowdown even for the <unk> side is we're keeping gaining market share on like I said there is because there is a.
Fundamental.
Mike.
Art architecture difference, which we.
On the comfort and power when compared on a competitor.
We can easily add a function performance and <unk>.
<unk> been for Wolfcamp zone.
It's more like a one single with your boss, Ken can replace lag three or four different box on on Appian SaaS security side leg.
All of this of Hot and also on makeup managed home Wifi and the traffic there.
That's also lot of company also start into this kind of expand brands to the Hong Kong branch on whatever.
Meet walking.
Standard.
A better net wilkin renovated security.
So the whole non environment. So thats also needs to DSS solution. That's also one of the reason we see.
Some of the lowest side on keeping growth pretty fast.
Is that is there.
Volkswagen on actually helping driving some of these political yourselves.
But also going forward, whether it is service provider some 100.
To see amongst enterprise not even.
Not even kind of true.
On your Marcellus infrastructure to adopt it.
Brooks on home yet on the steel in the early stage. So we do see there's a big potential going forward.
Yes, it's all Keith yes.
But it's a little tough for me to look back at the second quarter of last year, and where the billings growth was on the product revenue growth and things that I was getting on and feel like I was getting a tailwind from VPN or something like that in the second quarter of last year.
That said I think we're very pleased with how the year continues to play out in the growth numbers that we've provided I don't know that.
Early on on the stages of work from home, but that was something that necessarily fortinet participated in the at the same level that maybe some of the other firewall they understood and then.
The second part of your question.
You'll be glad to know that Ken and Peter and I sit down every quarter and look at the fab on the non photo gift products and try and find the one that's really distinguishing itself and we keep coming to the same conclusion each quarters.
Rising tide, that's lifting all boats if not the day one product is really standing out more so than the other over an extended period of time.
Yes, John on refuse.
Because most of the product we develop internally from day, one, it's making integrate operating co gander.
So that's probably the key number one reason Kaufman wanted to buy it as is.
Total consolidated make it easier to manage.
It's different than some other companies when they acquire some some part of our company in France on some outside is that take a long time on more difficult to integrate so we have.
If you can tell on develops from day, one and make it working together great.
Great. So my question was a much more basic what are the key products that are driving up the growth. So on 40 gig. So we know it's winter.
SD Wan.
What else.
Steve I think the part of 40 basis points.
So we don't comment is day, one with a non on 40 acre in Paris, we have like 2030 people on product.
Touching on our part of the infrastructure and.
That Keith said, it's difficult to point out which one is.
Is there any.
Yes.
It's pretty pretty tight raised a whole wholesale.
Got it thank you.
Okay.
Thank you.
Our next question comes from the line of Sterling Auty with Jpmorgan. Your line is open.
Yeah. Thanks, Hi, guys wondering if you could help me better understand the disproportionate improvement that you saw internationally, especially in EMEA relative to the improvement you saw on the U S.
I think the similar like we commented on last couple of quarter is a photo.
Mike.
Lastly on standing Kathy improving also try to think about how to go back to work on some under.
You are asking infrastructure since we'll be starting the growth so that's where like a.
APAC EMEA call it'd be fostered by U S cash out rather quickly.
Yes.
Thanks, Ken I'll, just add on for that.
Certainly I think the certainly for us, but the markets are somewhat different.
And maybe that comes into play a little bit the European the international part of the market.
We are oftentimes you'll have the nimble on market share when the incumbent and particularly during the pandemic I think incumbents had an advantage.
I think in this in the U S. Perhaps were a bit more of a challenge or if you will and I don't know that a lot of cio's on site. So those were focused on firewall refreshes in the second quarter and third quarter of last year and going through competitive dynamics.
And I think there's also a bit of the partner ecosystem. When you are.
When you're the incumbent you probably have more mind share with our partners that when you do on the challengers now having said all of that as we look forward and we look at our pipeline, particularly as it relates to the United States as we go through into the second quarter here through the rest of the year I think we're feeling very good about the direction that that organization is headed.
Yes, we also will keeping your math more into the U S for supporting further growth Mike that we did for the PGN sponsored share on some other sands assets will be helping drive the growth in the U S.
Got it thank you.
Thank you.
Our next question comes from the line.
Great power.
Your line is open.
Okay, great. Thanks for taking my question and congratulations on the on the good numbers.
So yes, it's maybe maybe to follow up on the SaaS side of the business.
How quickly should we think of billings growth ramping on the 40 40, SaaS product and then I don't want to get too aggressive, but could it potentially have a similar ramp to what you saw on 2018 and 2019 with SD Wan back with net product was just.
Getting started.
Yes, just how should we think about just the overall upsell there. Thanks.
Uh huh.
Also.
You can see the similar question can you also kind of looking on different market study and also what's the best model to do this with upon on together.
On.
You may be similar like the SD Wan, but is but also actually was a part of the part of a SaaS solution and also SaaS, including some other function, which we also wanted to have.
Hi competitor integration on the better performance and easy to manage.
So that's why we took some time to ready launch on SaaS and also more closely works is once you resolve a partner too.
To do that but it's at the.
A market that's not growing but we also closely watching and what's the best way to position ourself to casualty trend.
Okay.
Very much thank you.
Thank you.
Our next question comes from the line of Shaul Eyal Cohen Your line is open.
Thank you good afternoon, gentlemen, congrats on the strong performance.
Keith.
Ken historically, they're refreshed type of concept.
Just to provide some some disruption at times I would even say some noise around specifically fortinet business.
It would appear that over the past probably 18 months or so.
There's less discussion and focus around debt.
Do you think debt 40th is gradually shifting away from it.
Or is that theres. So many concurrent internal refresh cycle given the broadening of your platform that it is becoming less of a relevant.
Issue whats the thinking about it.
Probably.
If we use them in terms of refresh compared to last time, you can see the quantity.
<unk> 20th searching on.
That's where the next gen firewall on replacing the traditional firewall VPN, which was net gen. One major firewall has some intrusion prevention and anti virus on the other function here on a proxy.
But this time expanding into a much broader vehicle infrastructure.
<unk> internal inside the company and also go to the outside companies on one side of that expense work from home.
So.
Keith small kind of expanding on same ton.
Some part of security also need to be more working together so that thus far on phones on company IQ side they took on.
If they can consolidate and help them to manage and integrate automate will be will be will be important.
So thats where.
Like I said Theres, a theres a multi device multiple people come net data and also what JP Morgan as Joe touched on environment.
So at this.
This time, it's a little bit different and that's we're making make a large broad integrated approach I feel it's more important and same kind of supporting better than new technology, whether it's <unk> in OXXO.
So kind of us there'll be certainly small to also will be will be important but we also feel once the product has been a customer hand, because of the huge computing power capability. We can also will be.
Additional servings and Keith.
Helping customers adopt the debt is new since they need also also working with service provider.
So thats also kind of.
We're keeping the business keeping growth.
Yes, sure. Thank you and Ken on kind of touching on the same thing, which you've made reference to I would say it. This way it is going to get harder and harder I think to discern.
Industry refresh cycles compared to where it was maybe five or six seven years ago for a number of reasons one the firewall vendors simply larger.
Our footprint is much much bigger than it was before secondly, you have some of us showing success on the platform strategy.
30% of your billings are coming from the platform again to your point, it's going to get a little harder to discern it.
And the sheer size if you will.
Our footprint in terms of customers, but also the number of different use cases that are starting to evolve and continue to evolve inside those organizations I think all of that comes together, it's going to get Mercury on Mercury to go forward to find a refresh cycle. You may have some individual competitors that maybe have very very large price points, where machines or something like that where they have their own internal refresh cycle that you may see some noise.
Around but thats really not the Fortinet approached reported firewall refreshes.
Yes, yes, putting another way the traditional firewall.
Are the way they are where they are being deployed is not going away. They also kind of every five years probably need to be up.
With a debt to the new model.
Matching networking speed house on module, one, but they also expanding beyond the hotline and also need to be working with the other part of security infrastructure put in this way.
Understood. Thank you so much well done.
Thank you.
Thank you.
Our next question comes from the line of Adam Tindle with Raymond James Your line is open.
Okay. Thanks, Good afternoon, maybe one for Keith you talked about this being a year to invest for growth to Q1 results clearly say thats working billings growth in the high twenty's debt of scale approaching $1 billion and doing that with healthy profit is pretty unique. So for my question. I was just wondering at this point, if you evaluated whether to lean.
Even more on growth given the result early results that youre seeing and if you could maybe touch on the logic of why not other diminishing returns above this level is this something you'd consider reevaluating as the year progresses. Thank you.
Adam It sounds like Youre listening into some of the conversations that Ken and I have with respect to point of view I think I think look we're really pleased with how the business executed in the first quarter, putting up 20%, 27% billings growth of being 11 to 12 points above and then raising debt.
22%.
Three five points on the billings line for the year, probably for the quarter and then taking the year up at the same time by about four points.
I think the the level of execution is shown to be very very high on the level of success with the firewalls and the non Florida gate products have been.
But we're very very pleased with what's happening there.
I think we will see how this year plays out we felt that there were tailwind coming into the year for us on a number of different ways, whether it was GDP whether were similar whether it was the product suite that we had on our sales team's ability to execute.
And let's see how we do as we continue on this trajectory hopefully through the rest of the year.
Thank you that's fair and I'd love to be a fly on the wall for those conversations.
[laughter].
Thank you.
Our next question comes from the line of Andrew Nowinski with D. A Davidson your line is open.
Great. Thank you and congrats on another great quarter.
I wanted to ask about the partnerships with some of the MSP that you mentioned AT&T and BT.
Those have been historically strong partnerships for Zee scalar so I'm wondering.
Do you think youre eating into these stores mind share at those partners or are they just trying to offer their customers maybe another SaaS offering.
Yes.
Because in the last few years.
For example on them, we will standardize on one of the service provider could be partner.
And.
But also some of the Telecom company day to have their infrastructure and also some on the on our customer base, which we have been working with simple alone on time.
So is that right.
Especially during the pandemic.
On a high pressure to support in.
Whether internal or some other need spin and I think thats, what our SaaS you offer more service based approach.
Which also.
On kind of adopt.
By some cost model. So quickly so that's why we also.
I wish all kind of.
The relation with our partner and also on product technologies on Mondays and offer much tighter agreed.
SaaS Zero Trust network solution.
<unk>.
So that debt.
Some people care component they like it a lot I put in this way.
So thats what were continuing on <unk> on the slide <unk>.
As in the carrier service provider, what we go back to the number one on that.
On a few years ago.
<unk>.
That is also.
Working closely with our partner and also some other infrastructure for.
Software like I mentioned, whether the IC when on a five.
She also monitor.
Non.
Iot Ot or even maybe geos on magazines.
There's a lot of potential what can result, I'll come on service provider, keeping expanding our security business together.
Yeah, It sounds like it thanks, a lot Ken.
Thank you.
Our next question comes from the line of Irwin <unk> with Evercore. Your line is open.
And congrats on the great quarter.
You previously identified continued expansion into large enterprise as a key contributor to growth and share gains can you talk about whether this was a factor in your Q1 outperformance and also can you also talk about any key differences when selling to large enterprises versus SME SMB customers for example that go.
The market motion and or timetable required to close the deal. So any color here will be helpful. Thanks.
Okay.
Success that we're seeing in the enterprise.
I do think also the mid segment is coming on line for us a little bit stronger than maybe we saw in 2020.
And we continue to believe that 2020 was an unusual year, both geographically and across customer segments in terms of the cadence in terms of how to sell the enterprise versus SMB.
I would say absolutely.
You made a large investment.
And it plays very well with the channel partners. There's no doubt about that MSP is the carriers et cetera, and those channel partners oftentimes, particularly distributors play a role on the enterprise, but to be successful. There you absolutely have to have a direct sales force that is helping to bring deals to those channel partners.
And that kind of made a comment earlier about incumbency versus challenger I think that's perhaps even more important in a geography, where you are the challenger and youre trying to get mind share from some of those large key resellers that are.
Linked together.
Some of the legacy firewall vendors I mean, you've really got to partner with them to bring deals to them and convince them of that strategy and I think we're starting to see that traction take hold for us.
Got it thank you.
Thank you.
Our next question comes from the line up for Chemo.
<unk> with UBS Your line is open.
Good afternoon. Thank you for taking my questions.
Keith for you I was hoping you could.
Share some more details around the expectation that the SD Wan net you have embedded in your guidance how should we think about that and certainly how are you thinking about it and.
Where R&D incremental areas of budgets or dollars and ultimately share gains within SD Wan slash sassy going to come from between the carrier market as well as the enterprise DIY market.
Yes, I think the.
Nice to hear from you again.
Yes, I think in terms of SD Wan the way we go about budgeting, we would describe SD Wan as you've heard this before Steve minutes of use case, where the firewall similar to Ot micro segmentation.
Zero Trust and et cetera.
And we're not necessarily prone to.
Building on our models if you will by use cases for the firewall nor similar necessarily buy products. We do look at our pipeline than we do sanity check that against Gardner projections for growth and things of that nature.
To make sure that we are in the range if you will.
So I would expect that the other comment would offer as Ken has been quite clear for setting. The goal early on that he wanted to SD Wan to be 5% of billings. When we got there on you moved it to 10.
And we got there and now it's moved it to 15% so.
It's a little bit of who moved my cheese I guess with Ken.
In terms of setting goals for us, but that's fine because we like that.
And I.
I think you really kind of answered your own question in terms of growth investments where.
Where we spend money I think that carrier service provider opportunities for both SD Wan and SaaS are key areas for those investments, but I'll hand, it back to Ken.
We do believe rescue bond will be bigger.
On a long term market and move on.
On to beat our number one.
And also.
Mike.
We do see a lot of potential even this work from home on a price.
I tried to do on a mono service profile type of supporting <unk>.
<unk> <unk> small percentage of our early stage two using the SD Wan, So thats, where and also we have huge advantage using our <unk> share but to support in this.
Lompoc solution.
Each has about 20 times better performance on.
A much lower cost compared to the second our nearest competitor.
So thats why are you so it's a huge opportunity with the best technology on.
And working closely with our partner to keeping growing nicely. So we do see there's a huge potential.
We also target will be the number one zone.
Yes.
Thank you.
Thank you. Our next question comes from the line of Hamzah firewall with Morgan Stanley. Your line is open.
Hey, guys. Good evening and thank you for taking my question I was wondering on the on the core sort of firewall Inc side.
How much of the demand are you seeing income from use cases around micro segmentation, particularly given some of these recent cyber attacks.
We do have a lot on.
On.
Asking about total security internally, whether it's an on campus.
And company are obviously in the data center, but I have to say securities still need a much more company empower total process to target comparator routing switching my estimate prophylactic use. These 30 5100 ton one company on Pos needed, that's where you.
If we cannot solve.
On a speedy show a loss of module.
They're kind of manage the deployment issue is still more difficult Thats also the assets had some argumentation cycle five to 10 times better performance computing power and on.
Costs on lower debt in the matter.
Sulfur on their approach.
It's.
It's a lot on requests per day to see as non many solution can meet somebody requests because internal wider region on campus offerings in the data center.
Then that will speed tend to be easily 10 to 100 times faster than the one one approach.
On connection.
So thats where were working with.
Murdered the customer or the pond on directly and also combined bolster the one security on the loan security and infrastructure sectors is more important.
With two day Wolf on horn with what they called a zero Trust network access.
You have to be we could hold infrastructure say too please.
We see a huge market potential for the for the internal segmentation inside data Center campus security bodies.
It's also a challenging job to meet the speed requirements compared on networking and also make sure.
Hey, Ken.
Deploy.
Easily managed.
Thank you for the color.
Thank you.
Thank you.
Our next question comes from the line of Kit <unk> with Barclays. Your line is open.
Okay, Great Hey, Thanks for taking my question here guys.
Keith maybe for you just going back to the non <unk> part of the business day.
Do you see any trends and perhaps market segment or geography.
That is adopting non 40 gate and higher rates and I only ask that because with the growing enterprise business with Europe growing enterprise business that is I would imagine more of the enterprises would maybe be more willing to work with multiple specialist vendors. So is the non Florida gave part of the business, perhaps more weighted towards the mid market.
Or perhaps international and Relatedly.
Just kind of broad brushes, how is that non 40 gig business sort of split between product and services sorry, There's a lot there does that makes sense.
Yes, there is a lot there.
Depending up on my answer we will know if it made sense of that.
I don't think the product service mix between moving.
<unk> talked about previously.
Florida gate versus non Fortinet.
Product service mix is not different in any meaningful way. If you will when you look at the mix and again, we're selling solutions. So you've typically bundling that with our firewall sale.
To see the non Florida get billings.
Growth at that 50% number and seeing the mix of the business I think maybe obviously makes us very excited.
It's actually a little bit counterintuitive in terms of where itself.
And for the last several quarters the Americas has done.
Very very well with selling the fabric.
I've been on phone calls with very large enterprises that want to know much more about the fabric now that they've become comfortable with the firewall I probably went into those conversations socket with most of the same expectation that you, perhaps described which is.
That may be something that plays more to the SMB part of the business or the mid enterprise and I do think it does I do think the enterprises' willingness and in the U S to see the enterprise willingness to engage on the fabric is probably a sign of a number of things. One is the end of the day everybody's got a budget.
And this is more cost effective way to go about doing it you can manage your your infrastructure much much easier, perhaps with a single vendor strategy than you might otherwise.
And I think the common operating system running on it will be integrated to OSP seven is something that's very exciting and then you start talking to them division about SaaS offering thats running on an integrated <unk> system as well.
I gave you a lot there but to give color to it I think.
On a weighted response would be it is not shown to be unique to a size of customer or to a geography.
That makes sense, thanks, Ken Thanks, Keith.
Thank you.
Next question comes from the line of Keith Bachman with Bank of Montreal. Your line is open.
Thank you very much I'm going to follow on socket and I have one question to keep within Peter's rules, but I'm going to break it into a couple of sub parts on the non <unk> side as well.
I wanted to break it into a is there anything over the next 12 months that you look at that you think in particular is interesting or exciting.
B Keith is there anything you could breakout on attach rates, where you currently stand on the non 48 side to attach rates.
It would seem to me that there is still a hell of a lot of room to run there just if you look at your installed base, where some opportunities.
And then see if you think about.
If you had to partition the non 40 gate into cloud and non cloud.
In other words, there is a lot of I think the 40 gig products that are relevant to on premise situations versus cloud, but is there a weighted just kind of break it out in percentage.
Otherwise you know 50% of it's aligned to on premise deploy.
Deployments versus 50% as cloud deployment is there any way to break that out in the non <unk> side in particular.
Thanks very much.
We are charging by the question I think as we go forward.
Then on broke.
I think there was a I'm going to leave the tough question or the phone question for Ken at the end, which is as you look out over 12 months, what's going to take off on non Florida gate.
Keith I would probably point you back to if we didn't do it on the analyst day in March we didn't do it in the analyst day in November 19, where we gave some breakdown of the fabric products between what we call cloud and what we call infrastructure and you can.
Think of that as being hardware that will kind of help to answer your question there.
I think when you use the term attach rate we may use the term penetration rate and by that is for a customer that's a firewall vendor how many.
Start looking at your expansion opportunity Keith inside these these customers what type of penetration are you seeing on how are you.
Going to market. If you will on encouraging the sales team on the marketing team to whatever that number is increasing the penetration and I would say that's something that that's really been an area of focus I would say for us more recently over the last couple of quarters and I think that's really at the moment more of it. We're pleased with it don't get me wrong, but I think right now thats more of an internal metric that we're using with our sales.
And our marketing team and to some extent with our engineering team.
Great I think also.
I, probably not till the day you can't ourselves on number so far but non 40 could almost double for the kit growth in the last few.
Quite a few years right. So I don't see any change in the trend right now but.
But definitely.
On cost of on Angola.
Awesome Awesome. What's the reason is why do you need to be on consolidate makes a whole infrastructure managers working together on these kind of things, which are working quite well with us because.
We designed the product ophthalmic and working with 40 day something in one and on.
And then making a whole fabric and walk into cash and to integrate automate on.
Security solution there.
So that's where the.
Also we say theres still small percentage customer has.
Multi before it gets to another on to grow and at the same time.
Yes, there is a new product you can come up to working with a 40 day.
So that's where we do see on pulp.
Keith did trend on non of what's going on which you could grow faster.
Probably eventually even dependence on maybe more than 40, K, maybe we didn't a few years.
Okay. Thank you.
Thank you.
Our next question comes from the line of Michael <unk> with Keybanc. Your line is open.
Hey, guys for carrying Keith do you see any difference in the type of projects and secure that you were seeing last year.
Similarly for the move to work from home pressure. This year, we have worked from home as well as back office and as part of that Keith You mentioned I think saying that you are seeing.
I think share more willingness to do firewall.
Replacements. This year is that also a part of it.
Last year, a work from home is more like a patch whatever the half and two.
Without changing modern infrastructure.
We see a definitely these inc, which is on the infrastructure renter lavish.
Mike.
Technology like SD Wan or some other than the same time.
Making kind of.
Better solution in a zero trust environment is much more secure.
And.
So thats probably still in the early stage.
You'll see a lot of growth potential there.
But as.
It's a whole infrastructure changing compared to.
Kind of last year.
Makeup cash solution.
Yes, Michael I would add to <unk> comments I think the.
I think the headline is without a tailwind coming to your security is top of mind for so many companies right now somebody CIO the size of those on whether that's solar winds or its work on home.
Microsoft's flow challenge is to ramp up and ransomware.
It's a year I think that a lot of CIO is on <unk>.
Focus on security for a lot of different reasons.
Do think that.
There was a.
So that's on the U S market, if you will and Ken talked about this before a little more difficult to say in the middle part of last year as we kind of within the year to get mindshare from <unk> to have a conversation about how you can save money, while improving performance and their firewall I think those opportunities are starting to appear more in terms of getting out and having customers take their prospects take that meeting.
If you will and I think there's also some of these larger deployments that can go on for well over a year or a couple of years I think some of those deployments perhaps were a bit stalled. If you will last year on theyre coming back online as we look at 2020 between 'twenty one.
So just to clarify on larger deployments are starting to come back on line and.
The answer yes.
People are more willing to talk about displacements of <unk>.
Competitors this year than last year.
Is that the answer to which you asked me what I've seen that the answer is yes, if youre asking if thats the driver of the business I would say, yes, if youre asking if thats the driver of the business I don't think so.
Just what youre seeing more.
Yes.
They are moving.
Beyond the traditional deployment and.
And also like a multi why small people in.
Infrastructure need to be secure.
Thanks, guys.
Thank you.
Final question comes from the line of Patrick Colville with Deutsche Bank.
Your line is open.
Squeezing me in.
Kind of just finished off on a multipart.
I guess the first one would be just about linearity last day, the linearity between one and two true.
On unusual so just help us understand.
How that might play out in fiscal 'twenty, one and then I guess my second part if I may is product revenue. This quarter was phenomenal baked into guidance I guess since the.
Kind of the rest of the year, it's more like a kind of mid teens growth rates just help us understand is that.
Is there anything that is worth flagging in regards to kind of.
Performance in the rest of the year Boston <unk>. Thank you.
Yeah, I think that if you get comfortable with the business model.
I understand there are definitely products and services on how very predictable that higher margin services revenue is.
Yes, I think that we did take this as the opportunity to raise product revenue.
The implied product revenue guidance, if you will when you reverse engineer right. After we get the service revenue guidance by about five points on I think that takes you to about 17% in terms of our guidance now for the full year.
And we'll see how the year plays out, but I think we feel good about it in terms of linearity from Q on Q2, I would probably point you to one our actual results that we had last year and Q on Q2, and our actual results in Q1 of this year and our guidance for Q2.
That's very clear thanks for pumps.
Thank you I would now like to turn the call back over to Pedro for closing remarks.
I think it's one that I would like to thank everyone for joining the call today Fortinet will be attending a few conferences on the second quarter with the Jpmorgan Conference on May 21st Alliance Bernstein on June 2nd add on Bank of America, Q&A, and then presentations and webcast links were up on our website. Thank you very much have a great day and please reach out if you have any other questions have a great day. Thank you bye bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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Okay.
Yes.
Sure.
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Hello.