Q4 2021 Fortinet Inc Earnings Call
Hello, Thank you for standing by and welcome to Fortinet fourth quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that today's conference.
Is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Peter sell Koski, Vice President of Investor Relations. Please go ahead.
Thank you Josh Good afternoon, everyone. This is Peter <unk>, Vice President of Investor Relations at Fortinet I am pleased to welcome everyone to our call to discuss <unk> financial results for the fourth quarter and full year of 2021 speakers on today's call are kenzie, Fortinet founder Chairman and CEO and Keith Jensen, Our Chief Financial Officer. This is a live call that will be available via replay.
Via our website 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 third quarter before providing guidance for the fourth for the full year for the first quarter and full year of next year. We'll then open the call for questions. During the Q&A. We ask that you. Please keep your questions brief and limit yourself to one question to allow others to participate.
Before we begin I would like to remind everyone that on today's call. We 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 refer to our SEC filings in particular, the risk factors in our most recent 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 amongst peds, otherwise our GAAP results and GAAP to non-GAAP reconciliation is located in the earnings press release and in the presentation that accompanies today's remarks, both of which.
Posted on the Investor Relations website, lastly, all references to growth or on a year over year basis, unless noted otherwise I will now turn the call over to Ken.
Peter Thank you for everyone for dialing into this call to review our outstanding fourth quarter full year 2021 resolved for.
For the fourth quarter bookings increased 49% to $1.420 billion.
Unions increased 36% to <unk> 206 million.
Global 2000 billings growth accelerated to over 90%.
One buildings was up 67% accounting for 16% of total clients.
Total revenue growth.
Percent minus 164 million with product revenue up 31%.
Our team navigated well through a challenging supply chain environment to deliver outstanding results for the full year revenue was.
$3 3 billion and the GAAP operating margin was 20%.
We generated a record of a $1 2 billion of free cash flow.
Paul has also changed the comparability of our cap profitability.
Three growth drivers.
Convergence of security and networking.
<unk> consolidation with our security fabric Nash platform.
Hello can you just sort of environment.
Our strong financial results and market share gain.
The mood wolfberry anywhere has rapidly expanded the attack surface, which traditionally with our security from hospital protect.
For domestic kidney people now working approach.
We're just now working loss acuity, including next generation firewall SD Wan.
DTA on Ot to reduce complexity <unk> connecting more user to a robust acuity and performance on our network and speed.
Enterprise solutions are increasingly consolidating to a set of security mass approach.
For domestic cute effective platform delivers unparalleled protection.
So keen to match architecture.
Broad.
And also maybe protection across multiple hedge.
I'm, calling to data center and hybrid cloud environment.
Today, we announced a 40 basis to sell them.
Our latest <unk> next generation firewall Paula.
Including our <unk> SBU two.
<unk> was sustainable high performance convergence of networking and security with new cost edge and core network.
The full Super C.
<unk> computer region offers holbeach, some X better performance.
Competitive offerings.
Fortinet recently stood up amongst 19 now will firewall vendors in Tom a critical capability for now we'll firewall.
We evaluated for their performance across non critical capability.
And then the 40 K solution received although high school Underpriced datacenter distributor enterprise age and <unk>.
<unk> use case and the second highest score in public coffee use case.
Our 40 gig product is the only leader in bundles, Tom the Magic quadrant for now we'll firewall SD Wan.
Over the last several years Fortinet is an industry leading solution has transformed our company into one of the most influential on the fastest growing cyber security leaders.
These additional 12 gross drivers strongly position us to capture market share and the move to the next level of growth.
Before turning the call over to Keith.
To thank our employees customers partners on supplies worldwide for their continued support and hard work.
What essentially like the central operation team for doing a great job supporting Fortinet fast growth keeps.
Thank you Ken and good afternoon, everyone I'll start with a summary of our very strong 2021 performance.
Customer demand was strong and broad based across geographies customer sizes industries.
Use cases, and security solutions, reflecting the three key demand drivers that Ken mentioned convergence of security and networking.
Vendor consolidation on our security fabric mesh platform and the elevated threat environment.
Convergence or security driven networking requires integrated security solutions to be delivered at networking speeds across the company's entire threat landscape of edges, including data centers and points work from anywhere and clouds as well as across multiple use cases, such as secure SD Wan Wi Fi switching.
<unk> and <unk>.
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The networking speed and computing capabilities of our ASIC powered 40 gates can be 5% to 10 times more than competitor firewalls, where they're off the shelf silicon products.
Vendor consolidation is driven by customer focus on security effectiveness performance and cost management.
We deliver vendor consolidation through our security fabric platform and its broad range of products.
Integrated with a single operating system offerings.
<unk> offering increased automation.
As we saw in 2021, we expect strong customer demand fueled by these key drivers to continue.
And turning to our 2021 performance billions.
Billings growth accelerated to 35% or $4 2 billion.
Presenting our highest annual billings growth rate in six years.
Revenue growth also accelerated coming in in $2000 coming in at 29%.
Representing the fourth consecutive year of revenue growth of 20% or more.
And despite the supply chain environment product revenue growth came in at 37% growth.
Our highest annual product revenue growth rate in 10 years.
Driven by strong demand for our fabric and cloud security solutions.
Non 40 gig billings and revenue each exceeded $1 billion for the first time in our history.
Non <unk> billings increased 46% to $1 25 billion.
In non <unk> revenue increased 42% to $1 1 billion.
Gross margin was 77, 5% and operating margin was 26, 2%.
Our GAAP operating margin was 19, 5%, it's one of the highest in the industry.
GAAP profitable as Ken mentioned for 13 consecutive years.
Free cash flow was a record $1 2 billion.
Exceeding $1 billion for the first time in our history.
Free cash flow margin was 36%.
And when adjusted for real estate investments came in at 43%.
Total deferred revenue increased 33% to $3 5 billion.
In short term deferred revenue increased 28% to $1 8 billion.
We are experiencing exceptionally strong demand.
And that exceeds supply that more than historical norms.
As a result, we are expanding our disclosures to include bookings and backlog.
To provide greater visibility into the strength of our business.
Bookings represent the value of all orders received from customers backlog represents the value of all orders received but not fulfill.
When an order is fulfilled we recognize both billings and product revenue.
Turning to Q4 results as noted on slide four.
Bookings were $1 4 billion up 49%.
On a sequential basis backlog increased $122 million due to the very strong demand.
On a year over year basis.
Backlog increased to $150 million to end the year at $162 million.
Breaking down the backlog between product and services.
Approximately 75% relates to future product shipments.
While the remaining 25% relates to various services.
While it's difficult to forecast if an order might be canceled several factors support our view that our backlog is strong and should provide a tailwind of growth later this year and into next year.
Existing customers account for approximately 90% of our backlog.
No single end customer accounts for more than a say a low single digit percentage of backlog.
Many competitors.
Were also impacted by supply chain constraints.
R R.
Our products.
Along with our integrated operating system are not commodities really exchange with offerings from other vendors.
We actively manage our own supply chain and for most most deploy security network solution over one.
One third.
All firewall unit shipments, we are an attractive volume buyer for many suppliers and lastly, our price for performance advantage, maybe difficult for our competition to match that.
Apologize for the sound in the background, we don't know, what's causing it but I'll continue on moving to Q4 billings.
One 3 billion.
They are up 36%, which compares to 49% bookings growth.
Both noted earlier.
Enterprises favorite Fortinet, leading costs with performance and integrated platform.
This is especially evident in the five point increase in the large enterprise billing mix.
Add more color to this we could share.
Global 2000 billings were up over 90%.
Third consecutive quarter of accelerating growth.
The number of deals over $1 million increased 79%.
122 deals breaking the 100 deal threshold for the first time in our history.
We saw a record of four low eight figure transactions in the corner Paul in the Americas.
And lastly.
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But FX.
Yes.
Please remain on the line your conference will resume shortly.
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The main room.
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Yes.
Please remain on the line your conference will resume shortly.
Yes.
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Josh we're back can you hear me.
Yes.
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Yeah, Hey, Hello again, thank you for your Monday noise came back in a new gun magnet again.
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You are connected at this time, Sir you May proceed.
Josh are you there.
Okay.
I mean, a generic enters all right, we're going to we're going to start that keeps going to back up a little bit hopefully you can hear us now and we will start where he kind of left off and go from there for the the interlude there backed up a couple of paragraphs to my best recollection of where the challenge started so and I believe that was around when I was mentioning that we were breaking down our backlog.
Between product and services, approximately 75% relates to product future product shipments, while the remaining 25% relates to various services.
While it's difficult to forecast of an order might be canceled several factors support our view that our backlog is strong and should provide a tailwind for growth later this year and into next year.
Existing customers account for approximately 90% of our backlog.
No single end customer accounts for more than a low single digit percentage of backlog.
Many competitors are also impacted by supply chain constraints.
Our products along with our integrated operating system.
Are not commodities readily exchanged with offerings from other vendors.
We actively manage our own supply chain and has the most deployed network security solution with over one third of all firewall unit shipments.
We are an attractive volume buyer for many suppliers.
And lastly, our price for performance advantage can be difficult for our competition to match.
Moving to Q4 billings that $1 3 billion billings were up 36%.
Which compares to the 49% bookings growth noted earlier.
Enterprises, favoring fortinet, leading costs with performance and integrated platform.
This was especially evident in the five point increase in the large enterprise billings mix.
To add more color to this.
We can share that global 2000 billings were up over 90%.
Third consecutive quarter of accelerating growth.
The number of deals over $1 million increased 79% to 122 deals.
Breaking the 100 plus deal threshold for the first time in our history.
We saw a record of four low figure eight eight figure transactions all in the Americas in the quarter and lastly, secure SD Wan deals over $1 million increased 63% to 26 contributing to SD Wan use case billings growth of 67% and putting SD Wan.
At 16% of total billings.
40 gig billings were up 33% and accounted for 69% of total billings.
As shown on slide 11 high end, Florida Gates posted very strong billings growth.
Non 40 gig billings were up 43% driving a point and a half mix shift to non Florida gate.
Top 10, non Florida gate solutions with growth over 40% included virtual firewalls endpoints and switches.
At the same time, several smaller solutions posted triple digit growth rates.
Consistent with the elevated threat environment.
And the breadth of ransomware and other attacks Ot use case billings were up 70% and accounted for 8% of total billings.
Average contract term was consistent year over year and quarter over quarter at 28 months.
For the third.
<unk> third consecutive quarter, we added approximately 6000 new logos.
Worldwide government buildings grabbed the largest share of the mix at 16%.
Financial services accounted for 14% of billings and billings growth of 63%.
Turning to the manufacturing transportation and utilities construction and other verticals that have not consistently been in our top five remained elevated with billings growth of 40%.
We believe the growth of these verticals as an indication of the broadening nature and greater awareness of the threat landscape.
Which is driving cyber security investments in industries that have historically, perhaps spent a little bit less on security budgets.
Moving over to the income statement.
Revenue growth was 29%.
Product revenue growth was 31%.
Illustrating the impact of backlog on product revenue growth.
If backlog had remained flat quarter over quarter, the product revenue growth would have been as high as the mid sixties.
Service revenue was up 27% to $585 million.
Support and related services revenue was up 31%.
The $275 million, while security subscription services.
We're up 24% to $309 million.
Non Florida gate product and service revenue.
$324 million grew 41% and accounted for approximately 34% of total revenue up three percentage points.
40 gig product and services revenue of $639 million grew 23% and accounted for 66% of total revenue.
Total gross margin of 77, 3%.
It was 180 basis points above the midpoint of our guidance range and up 80 basis points quarter over quarter.
A lower than expected drag from acquisitions and pricing actions taken to offset supplier cost increases contributed to the better than expected total gross margin and product gross margin.
Product gross margin of 62, 1% increased 140 basis points sequentially.
Service gross margin of 87, 1% increased 50 basis points sequentially.
Operating margin of 28, 5% improved 270 basis points sequentially and.
And exceeded the midpoint of our guidance range by 100 basis points.
Better than expected gross margin performance and a slightly less than expected impact from acquisitions contributed to the better than expected operating margin.
Head count increased 24% to 10195.
Moving to the statement of cash flow summarized on slides 12 and 15.
Capital expenditures were $151 million, including 129 million for real estate investments.
Our capital strategy includes increasing our office and warehouse capacity to support our higher levels of growth.
We repurchased one 8 million shares of common stock for a cost of $541 million.
For the year, we repurchased approximately two 6 million shares for a cost of $742 million.
At year end, the remaining share authorization was approximately $1 5 billion and set to expire in February of 2023.
Inventory inventory turns of two seven were flat year over year and on par with two nine times in the prior quarter.
Overall with what we believe was better than market growth for the fourth quarter and full year. We believe we again gained market share.
Supported by strong pipeline growth in the key growth drivers outlined earlier.
We believe we are in the early innings of a sustained high growth period for the cyber security industry and Fortinet drew.
Driven by digital transformation hybrid cloud and the moving of data and security to the edge.
Products, we've created the channel and customer relationships, we've developed and.
And the investments we've made to build a broad and integrated security fabric platform powered by our proprietary Hesik, Florida gates are expected to drive our continued growth and market share gains.
Now I'd like to review our outlook for the first quarter summarized on slide 16, which is subject to the disclaimer regarding forward looking information that Peter provided at the beginning of the call.
For the at least the first half of the year, we expect elevated demand to outpace supply chain capacity increasing backlog.
An increase in backlog is a headwind to billings and revenue growth and provides the interim pressure on margins.
For the first quarter.
Assuming bookings in the range of $1 billion $100 million to $1 billion $150 million, which at the midpoint represents bookings growth of 32% we expect.
Billings in the range of $1.050 billion to $1 billion $90 million, which at the midpoint represents growth of 26%.
Revenue in the range of 865 million to $895 million.
non-GAAP gross margin of 75, 5% to 76, 5%.
non-GAAP operating margin of 19, 5% to 25%.
non-GAAP earnings per share of <unk> 75 to 80.
Which assumes a share count of between 166 and $168 million.
We estimate first quarter capital expenditures to be between 140 $150 million.
We expect a non-GAAP tax rate of 18%.
Before providing our full year 2022 guidance I'd like to congratulate every member of the Fortinet team for the truly outstanding execution in 2021.
The efforts and results have been outstanding.
And this is on top of now several years of consistent predictable performance and improvements in key growth and profitability metrics.
In 2022, we expect a small shift in our seasonality towards the second half of the year by two to three points.
And for the full year, assuming bookings in the range of $5 billion $580 million to $5 billion $680 million.
The midpoint represents growth of 30%.
We expect billings in the range of $5 $400 million to $5 billion $480 million.
Which at the midpoint represents growth of 30%.
Revenue in the range of $4 billion $275 million to $4 billion $325 million, which at the midpoint represents growth of 29%.
Total service revenue in the range of $2 billion $685 million to $2.715 billion.
Which represents growth of approximately 29% and implies full year product revenue implies full year product revenue growth of approximately 27%.
non-GAAP gross margin of 74% to 76% non-GAAP operating margin of 24% to 26%.
non-GAAP earnings per share of $4 85 to $5.
Which assumes a share count of between $169 and 170 $171 million.
We estimate full year capital expenditures to be between 270 and $300 million.
We expect our non-GAAP tax rate to be 18%.
We expect cash taxes to be approximately $210 million.
Lastly, I want to inform everyone that this we will be holding an analyst day on may 10th coinciding with accelerate 2022.
But we expect to update our medium term financial model along.
Along with Ken I'd like to thank our partners customers suppliers and all members of the Fortinet team for all their hard work execution and outstanding success.
I'll now hand, the call back over to Peter.
Thank you Keith.
As a reminder, everyone. Please limit yourself to one question.
I'm there due to the technical delays apologies for all of that.
Great.
Operator can you open it up for Q&A. Please.
Sure. Thank you Sir.
As a reminder to ask a question you would need to press star one on your telephone. So regarding your question. Please press the pound key please standby, while we compile the Q&A roster.
I show our first question comes from the line of Brian Essex from Goldman Sachs. Please go ahead.
Hi, good afternoon, and thank you for taking the question and thank you congratulations on a nice set of results. Thanks, as well for the additional disclosure and I guess, maybe maybe on that point.
Maybe could you help us understand what qualifies as a booking from a timing perspective.
If an order is placed with the with the timing event, maybe nine months from now is that still included in bookings.
And then maybe any other incremental color you can provide us on the supply chain management.
Hi, how are you managing the supply chain.
You mentioned price increases offsetting.
Any incremental supplier costs.
Maybe a view on our the issues abating at all.
Our lead times still consistent with where they were last quarter and any other nuances, we should be aware of like channel partners pre buying inventory, which is one of the things that we've picked up a little bit this quarter. Thank you.
Yes, a lot of.
Good stuff there I don't know it will get through all of it Brian .
Alright.
But keep in mind without question, Yes, now you did really well.
Yes.
Keep in mind, our business model right end users buy from resellers, who buy from distributors, who buy from us So it's not like it.
Large complex.
$50 million solution, that's going to be deployed over time.
When we get orders, it's typically the customers want the product.
I don't know that we would see something like we described at the beginning of the conversation in terms of.
Orders were booking is for us a booking is a distributor sends an order to us.
And they would like to have shipment.
So that counts as a booking and if we ship it.
Becomes one billing and that becomes product revenue and if we don't it becomes backlog.
So it is positive that was sorry, so in terms of supply chain and maybe maybe Ken would offer.
Some additional thoughts on that I do we talked previously I think that we felt that September October and maybe very early in November .
Could turn out to be the low watermark for supply chain challenges at least in terms of what we call the commitments from our contract manufacturers and from our component suppliers.
And I think that to this point has shown to be the case.
We do still from time to time have decommitments, but they're much much smaller.
Then they were back in that timeframe I think the general tone, if you will with our channel where there is components of our contract manufacturers.
Is much much better than it was.
We do like everybody else, we read the reports and we see conversations in commentary around things.
Things like pursue particularly in consumer electronics, where there will be some improvement in auto manufacturing.
Yes, I think we have reason to believe that.
The situation continues excuse me to improve as we move forward at the same time, we're working extremely closely with our suppliers.
Conversations are very high levels and talking about maybe some longer term projects. We may work on together for example.
Making them aware of what our volume of businesses.
And also a bit of.
Typically capital engineering team.
<unk> been going through the process of redesigning and re certifying some of the components and some of the other changes. If you will all of that I think kind of give us a feeling that the second half of this year should see improvement.
Yes.
But all of them.
Compared to most of our competitors.
We handle.
Design manufacture all accretion on the market directly.
And also will have a bigger quantity component competitors.
Better negotiating supplier.
And also the engineering also starting.
And lastly, also studying we detailed some of the product to our southern shortage of components.
Walking wildlings us somewhat <unk>, Tom May take about six months.
That's why we're pretty confident the second half of this year since we'll be improving both because.
Chad South and also some alternative design also.
Yes.
I would say last quarter demand involve are strongly supporting growth 49%.
Even kind of beyond.
Kind of.
Timing.
Some of the shortage.
Oh, we have a much better shape.
<unk> seen that.
In the inventory.
On the supply and also the other question.
Increased inventory in the channel and the distribution of data.
Mark just same as we have in the last few years. So we don't see any increase after.
<unk>.
To sum up the product so thats not the case for us.
Yes.
Brian do such a good job with only answering one question I'm going to jump also in and give some more color on it yes I do.
If somebody orders a product early someplace in the world sure I'm sure that happened.
When we try and look at our own business, we try to identify possibilities of that happening.
The best number we can come up with is something that represents extremely low single digits of our business may have been impacted by that and at the same time you immediately pivot over to look at your pipeline.
And even if that was happening it's certainly not evident in the pipeline. We're extremely pleased with what we're seeing in terms of the pipeline growth.
And then just.
A follow on to <unk> comment about distributor inventory levels again with our model, we do have visibility of inventory within the channel.
And that is that inventory of those inventory levels are actually down a little bit year over year.
So I don't I don't think we're seeing the types of things that maybe you may have some concerns about.
Sure there is more limit pretty much most of the limiting and learn mode.
And.
So the middle and the high end for the K, we do have long enough inventory, even more strong Michael fortinet percent booking growth.
And also we have of our broad product portfolio. So there is a lot of autonomy and product.
Customer.
The channel controls on the same time some of them are re design already working so we will be ready in a few months.
Fantastic color. Thank you.
Okay.
Thank you I show. Our next question comes from the line of <unk> <unk> from Citi. Please go ahead.
Good afternoon. Thank you for taking my question Keith.
So I guess just one for you at the risk of oversimplification.
I know you've given us the bookings growth, you've given us for billings growth and certainly the product gross.
And the guidance for fiscal 'twenty two.
So, let's hold a 49% currency sign bookings, 36% sales growth that you saw this quarter in the 31% in product can you talk us through how that dove.
Dovetailing into your guidance for next year, and frankly, how much of this backlog you're expecting to amortize.
Into your revenue and billings profile over the course of 2022, and that's related to that I understand you've taken some pretty substantial pricing increases for your subscription packages.
For the portfolio I'm curious how much of that is.
Sure.
Contemplated in your guidance across key metrics. Thank you.
Okay.
Got it.
Brian set the standard in Panama following it for any questions.
Questions are will count as one.
It gives us start with the easy one first pricing when we raised prices we've talked about before as we raised prices in August and again in November on our price list keep in mind those get discounted down.
The price because services, whether it's support or security to cash as the pricing attaches to the box so to speak when you raise prices on the appliance Youre also effectively raising prices on the services, but then if you think through revenue recognition, obviously, you'll get some youll get the price increase in revenue.
The product more currently than you will for the services youre going to recognize that over time.
And I think your question.
What are we expecting in terms of.
Backlog in amortization or what have you.
Imagine we've done a fair amount of scenario planning has to go through the year.
And I don't know that there is a one scenario that we would point to as opposed to a combination of scenarios.
I think you can kind of solve for that maybe not on the phone right now with some of the information that we've provided in terms of our expectation for backlog increasing right for the year and so if backlog is increasing for the year I don't think that would be reflective of us bleeding into the income statement backlog that currently exist the components of the backlog will shift but.
Net net it's going up.
Thank you.
Next question comes from the line of <unk> Kidron from Oppenheimer. Please go ahead.
Thanks, guys great numbers.
Had a clarification and a question.
Keith on the on the two point shift in seasonality at the second half is that just tied to supply chain fulfillment I would just want to make sure I got that right and there is no other cause here.
And then Ken maybe you could talk about from a competitive standpoint are you seeing any changes in I wonder if you have.
Any thoughts with respect to checkpoints recent introduction of their lives great firewall, which is extremely.
Price aggressive.
How do you think about that in the market any thoughts there would be great.
Yes, I'll just jump in.
Quickly on the linearity, we just wanted to make sure. We open the door to have the conversation with you guys about how linearity, maybe a little bit different this year than what has been historically for us.
Yes, you can point back to the supply chain on that.
Yes.
So you mentioned two checkpoint earn in this morning.
Perfect. Thank you deal, who mentioned Fortinet and.
So the.
Newest, Florida, probably like 20% profit then was that product.
<unk> hundred <unk>, that's the product.
It is more than two years ago.
I think based on the Moore's law. So every every 18 months and <unk>. So I think the latest priority much faster now so I do see because.
How do we see secure driven networking converging them now Wilkins acuity so the networks.
And then once the <unk> pretty much in all the infrastructure not a secure the border so Randy internally, even much higher speed and that's where the high speed <unk> needed to do the internal segmentation secured a server.
Segment different department that is kind of that kind of sense.
That's where we see quite a strong demand and strong growth with the current restaurant environment, but also we see that with working from anywhere.
You'd have to Coney remotely connected remotely so thats, what our secure SD Wan some <unk>. Some other also C level strong demand.
That's what we see.
We're leading innovation in both space with our own AUC, we saw the secure SD Wan connection.
As of March peak of a total addressable market compared to the traditional network security. So that's where we identify has over.
170 billion transport market for us.
<unk>.
In the next three four years.
Huge potential end market largely now pretty much for all the competitor to compete.
That's going to have to keep hop to keep.
Keep up the change too.
Keeping gaining market share.
Got it very good thanks.
Thank you I show. Our next question comes from the line of Charles <unk> from Cowen. Please go ahead.
Thank you good afternoon, guys. Congrats all behave myself limiting to one question.
Back back to the supply chain Keith I, just want to make sure is that predominantly non 40 gig products or do we have some 40 gig products also included in that entire supply chain discussion. Thank you.
Yes, I think Ken touched upon that a little bit I'll just build it out for the more clarity. If you look at more traditional what we call secured networking products, such as switches and access points Youre looking at probably something in the order of 60% maybe two thirds of the backlog.
With fit into that category and the remainder is in <unk> and then Ken was making sure that we understood that within 40 gates that roughly one third the majority of that is in the entry level or low end for the case, we're not really experiencing the same pressure in the mid range and the high end that we see in the low end.
Thanks Scott.
And on that note operator, just a quick one I just wanted to ask is I know nichol.
The technical difficulties, we had earlier, we'll post the prepared remarks, youre going to see in script and CFO script TDI.
To the IR website as soon as we can after the call.
Next question please.
Thank you. Our next question comes from the line of Ben.
Bolin from Cleveland Research. Please go ahead.
Good evening, everyone. Thank you for taking the question.
Ken or Keith when you think about the elevated demand in placements on the product front.
Can you share any thoughts about how coincident that demand is or leading as it relate to additional fabric traction.
Any thoughts or hooks around.
Number of applications that are being deployed typically with that initial rollout versus what comes later thanks.
We see a lot of the clients, we do per ton internal network because it runs on whether it's high time that we release the research few months ago.
11 times higher on the rest of my part compete away years ago since a deep demand for secure intercompany whole infrastructure and also working from home and we're finding we're also need more.
Most security, especially in a particular those the ones that can be found on his connection so we see the demand environment strong.
So thats where.
And also for some pilots with some other chip manufacturer, even with its own chip.
You have to do some lead time, so thats, where we see the backlog and we're hoping our co pack.
Our normal towards the end of the year.
Yes, I think pipeline how are you.
Jeff's pointing at me so I'll follow up a little bit I think in terms of pull through non Florida gate products.
Maybe I kind of came into conversation a few years ago thinking that that was going to be a more of a commercial and mid enterprise area, where we see the quantity in actuality it seems to kind of move with customer sites. The SMB is somewhat limited as we still see other products attaching in and building that out.
And then the mid enterprise the enterprise and the service providers are very strong buyers of multiple products and I think that why that's relevant as a past affirmation of the platform strategy. I think they are very early on realize the overhead costs of managing point solutions from different vendors can be fairly onerous and that was pretty challenging.
And so it is moving its way through the rest of the customer chain. If you will I think the other thing thats happening more currently now as we've seen we've talked about these other verticals that represent not in the top five but coming to the table and buying security and I think they are very clear with us and conversations that I've had with them.
And Ken as well that they're looking for a total solution and the ability to cobble together.
Series of integrated products into one solution not only does that save them in terms of the initial purchase but also the management costs I do think there is definitely a tailwind in that area.
These important leading global <unk> well over 90%, so it's almost double year over year.
<unk> com demand.
Thank you.
Thank you I show. Our next question comes from the line of Hamzah <unk> from Morgan Stanley . Please go ahead.
Hey, guys. Thanks for taking my question I wanted to ask a question about just the appliance demand more broadly.
Maybe a question for Ken how do you think about the demand for hardware between factors like return to office campus refresh.
Yes.
Data center, what's really driving.
That appliance demand as we go through 2022.
I think the convergence of malware can securely will be low.
One time.
<unk>.
I think during the pandemic after pandemic, you'll see a lot of changing whether the wolfcamp and.
<unk> access, that's where the real cost standalone without <unk> strong demand there and also on the internal they need us to accrue the whole new infrastructure Boston.
Please in the.
Campus now walk through the center.
There are multiple connecting branch office.
So thats, where we see the whole infrastructure need to be secure.
And also.
On the consolidation among different vendor also started to happen tomorrow quickly because like Keith mentioned, the management costs and some are high you still have.
A different vendor for a different part of the surplus of acuity So thats one.
The lender can provide more product integrate automate together.
Definitely has more advantage and the lower amount of total management cost.
Thats, where we see the macro I mentioned, a sweet driver converting network on security.
Consolidation of.
Vendor at the same time.
The strong.
The cyber security threat right now, especially that congrats on where he has a big impact on happiness is all driving that strong growth.
Thank you.
I think one of the things that Ken asked US to go look at was what would product revenue growth have been if we didn't have backlog right and thats that you've kind of who knows when the call at.
To that point, but it was 60% to 65% or 66% product revenue growth. If we had the product will deliver I mean, thats a huge number.
And I think it speaks to that.
The kind of description of this is the demand is extremely high for clients was right now.
Thank you.
I show. Our next question comes from the line of Sterling Auty from Jpmorgan. Please go ahead.
Yeah, Thanks, Hi, guys Keith one for you.
If I'm looking at it correct. If it wasn't further gross margin pressure it looks like operating margins would have expanded nicely in 'twenty, two and I am curious with things like return to office, maybe a pickup in business travel and maybe even wage inflation. How are you able to deliver that kind of underlying.
Expansion in the operating line.
For 2022 versus 2021, I think we're guiding to or I think regarding the basically the 25% at the midpoint.
And I just closed out a year.
Slide 26, so I don't know that Thats up Sterling, if I'm thinking about it.
Gross margin was.
On the operating leverage that's coming through on the operating expenses.
Exactly yes, yes, I think that.
Well you can look at the percentages in terms of what we're spending.
I think sales productivity in the current environment is probably the biggest driver. If you will in terms of the leverage that we get out of this.
Obviously, if you go back 2021.
Not a lot of sales productivity, obviously, probably in 2020.
With Covid very nice sales productivity numbers in 2021 and that we're looking at <unk> almost be honest the price increases will indeed increase sales productivity.
Got it thank you.
Okay. Thank you Sir.
Thank you. Your next question comes from the line of Adam Borg from Stifel. Please go ahead.
Hey, guys. Thanks, so much for taking the question, maybe just an SD Wan, it's great to see the strength continuing.
If you could comment just on I guess first the sustainability of those trends and some years are you seeing that growth coming more from greenfield opportunities or some brownfield displacement. Thanks, so much.
It's pretty broad.
10091, probably.
I see more than half majority of product cost.
Through the middle to high end of the range and the same time.
Another enterprise customer in all studies using leverage on SD Wan.
<unk> has acquired abroad.
Much more beyond that in retail.
Operator next question please.
Thank you Ashley next question comes from the line of Jonathan Ho from William Blair. Please go ahead.
Hi, Good afternoon, and let me Echo my congratulations on the strong quarter I guess, just given that you.
Delivered a quarter that's been particularly strong this year can you give us a bit of a sense of what's happening with the pipeline and maybe what is giving you. The confidence that you can continue to drive that sustained growth for several more years I think you've gone through some of the factors one by one but.
Are you seeing in sort of the immediate term that allows you to continue growing at these rates. Thank you.
Yes, I mean look I can't tell you what if you get more strategic I'll give you very tactical conversation about it and Peter's, making a shameless plug for the analyst day in May and say that we'll talk about that than I am.
Really really pleased with what the pipeline looks like at the moment. We go through our usual we've talked before I think Jonathan of slicing and dicing. It in terms of how much are new customers renewals expansions inside customers, what's the deal size, what's the geography.
<unk>.
I don't want to just loss over some of the numbers that we saw in the enterprise segment in the fourth quarter at the.
Grid, 90% growth.
On the <unk> 2000 for three quarters in a row. The U S did extremely well without getting into a lot of details.
<unk> accelerated for three quarters in a row looking at the at the pipeline and looking at again more enterprise growth is coming we think we have a good position on the F&B.
Love the execution, we have some people in other settings comment upon the maturity of that the sales and marketing execution level is reached now as a company.
So I think the pipeline and our ability to execute.
See why that would change.
And also we have a lot of growth potential.
In our global 2000, so we like we said last year last quarter growing at 9% year over year.
And also listen to <unk> Com you also can upsell cross sell and all the other products. So.
So we do see.
Pipelines are are strong and also we keeping enhancing our marketing team and keeping.
I'll put out last time any harm SaaS capacity, so far somehow some regions somewhat political we still have much less capacity than some of our competitors I assume with additional marketing SaaS capacity, we do see the growth will continue in the next few weeks.
Thank you Ashwin.
Our next question comes from the line of micro terrific from Keybanc. Please go ahead.
Hey, guys.
Thanks, Keith for making the statement advance very high for appliances, I guess I'd just like to re ask <unk> question about the sources of demand for appliances right now, particularly in the context of how strong cloud is and you just had very strong cloud numbers coming in from Amazon as well as other so how should we really understand.
<unk>.
Why so much is being spent in physical boxes right now as opposed to even some of your products that are in the cloud.
A couple of Bajo.
Common Gill mentioned this morning.
No.
Lastly, the most acute in some entrepreneurs.
<unk> total addressable market.
On the cloud securely cover by 'twenty five.
<unk> been in the complaint.
Our total addressable market, including Natwest acuity, converting nonetheless, acuity endpoint I would add to that.
107% being as much a weaker market and the same time there is a lot of innovation going on behalf of secured home infrastructure.
So that's where we see the pass.
Also even the cloud youll need all of this our clients you also need <unk>.
<unk> connection in order to access the cloud.
That's why we see that as a huge market potential in Nevada.
Marketing a lot of growth potential.
Sure.
Thanks, Ken.
Yeah.
Thank you.
I'm showing we have time for one more question coming from Pete <unk> from BMO capital markets. Please go ahead.
Yes, im going to ask a similar question to Michael before your product revenue growth has been 40%, 50% and now the underlying growth this quarter was north of 60%.
Your competitors are also experiencing alright, good product revenue is not nearly the extent that you are.
So it's more than checkpoint thats experiencing demand and its more than the.
What I would characterize as the consolidation when youre, taking share from the likes of Cisco and SD Wan.
And so I'm trying to understand if you thought about the aggregate demand is in the last three quarters have been far exceeded anything thats happened in let's say the last five years.
Between not only yourself, but your.
Three primary competitors Cisco.
And so the question is if traffic is normally one of the key drivers, but what are some other drivers for not just yourself, but for.
The three primary vendors just trying to understand that really I think consistent with some of the other questions about the durability of demand not just for yourself, but for the.
For the industry in general.
Yes.
Sure I do believe they need to secure the whole infrastructure cost you can turn on and also the one connection put our side.
That also.
We see lot of restaurants.
Security inside the company and also.
It all just data center.
Segmentation, we can say for the most acute to slow to deploy it in a high speed environment internally.
And then also.
You can see pretty strong growth.
And I think the overall is a convergence of keeping the non one hour security that's a sweet flavor we came out.
Probably in the analyst day, Peter Keith you mentioned pads, so when public give some more detail some data on some analysis.
What's the how long I do believe this will be put into long term changing the whole space.
Well, we're keeping growth in the next five to 10 years.
And also anything around these.
Our scale and scope of our study and working for us because we have the quantity.
Which.
So kind of helping lower our per chip cost reached non a component there.
We also reported.
Subsequent company design home is a chip and we also leverage any other commercially available, including all the whatever Intel Nvidia GPU and CPU IP orders since we Houston, but we have the unique advantages of our own ASIC chip, which help in cloud one of our high speed low cost that we're seeking a solution.
On the other side the economy, our scope also wolfcamp because we have that are certainly some different product cobre are we call. The fabric now kind of caused the mashed up as you can mesh architecture.
Hopping off sell cross sell last quarters first tumbling over one.
30%.
Sure.
Political comp of 16% and non of 14, 1% and also over $1 billion last year. I also see you have a strong growth faster than the 40 K. So that's also helping to supporting the whole infrastructure security.
Emerging a megawatt in security and.
So Adam sorry that environment.
Peter Thanks, very much for the question Seamus on theater for continuing to plug.
Thank you.
Right.
Yes.
Earlier in the lifecycle of cyber security industry, maybe 10, or 15 years ago, where firewalls had a very specific use and the environment. If you will is more stable.
It may have been at it made it easier to identify refresh cycles that we keep looking for and have not yet seen in the last five years.
And I think thats, perhaps going back to Ken's point.
I think thats because of the environment not stable at all I think the reality is what youre seeing out there right now in terms of use cases in data volume data is all over the place.
And its lots and lots of data, it's just getting more and more and the use cases, I mean five years ago, a lot of things that we're air gap from the away from the Internet arent anymore and now you're seeing is probably what's driving the manufacturing vertical for us.
I just.
I don't know that you can presume that the environment so to speak.
Political interest in it the insurance company's interest interest and its <unk> management teams interest in it.
It is a hot topic of conversation so.
Even if you are due for a refresh cycle in the industry and I don't know that we are I don't think youre going to see that because of what's happening in the world out there.
Okay. Okay.
Okay. Thank you gentlemen.
Thank you.
This concludes our Q&A session at this time I would like to turn the call back over to Peter So koski for any closing comments. Please go ahead.
Thank you again apologies for the technical difficulties today as I said earlier, we are planning to approach the prepared remarks on our website as soon as we can so you can see all the numbers that Keith showed that I think help answer some of the questions with regards to bookings backlog and the sustainable growth in our business I would also like to remind everybody will be at the Morgan Stanley Conference on March 9th an in person conference.
Our first and gosh I don't even know how long.
Fireside chat.
That event and the webcast link for that for the Morgan Stanley Conference will be on our Investor Relations Web site for you all to listen if you have any follow up questions. Please feel free to contact me. Thank you very much for your time again apologies for the technical difficulties and have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect good day.
Sure.
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