Q1 2022 Fortinet Inc Earnings Call
Okay.
Good day and thank you for attending by welcome to the fourth first quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this 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 Sir.
Thank you Lori and good afternoon, everyone I'm pleased to welcome everyone to our call to discuss <unk> financial results for the first quarter of 2022 speakers on today's call are Ken Xie, Fortinet, founder Chairman and CEO and Keith Jensen, Our Chief Financial Officer. This is a live call that will be available for webcast we will.
He will be available for replay via webcast on the Investor Relations website, Ken will begin our call today by providing a high level perspective on our business. Keith will then follow will then review our financial and operating results for the first quarter before providing guidance for the second quarter and updating the full year. We will then open the call for questions. During the Q&A session. We ask that you. Please keep your questions brief and limit.
Get yourself to one question to allow others to participate before we begin I'd 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 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 on all references to financial metrics that we make on today's call are non-GAAP unless stated otherwise.
Our GAAP results in the GAAP to non-GAAP reconciliation is located in the earnings press release and in the presentation that accompanies today's remarks, both of which are posted on the Investor Relations website, Ken in Keith's prepared remarks today for the earnings call will be posted on the quarterly earnings section of our Investor Relations website immediately following today's call lastly, all references to growth.
On a year over year basis, unless noted otherwise I will now turn the call over to Ken.
Thanks Peter.
Thank you to everyone for joining to this call.
I'll spend the first quarter 2020 to resolve.
Our better than expected fourth quarter results demonstrate the strong demand of our cyber security innovation total revenue growth of 24% driven by drink had revenue growth of 54% total builders increased 26% a strong result reflects new older that more significantly.
Cubic per day.
Offset by an increase in backlog as of <unk>.
<unk> bookings increased 50% year over year to 1.276 billion, which included booking growth for IC, one our 54% global 2000 growth of 61% <unk> growth of 76%.
For the quarter net new backlog was 9% of bookings as we continue to navigate a challenging supply chain environment may be.
Believe that the hybrid networks are here for foreseeable future and Fortinet is pushing the boundaries of what is possible with simulation.
April customer comes to essentially operate in two days elevated threat environment.
Our solid performance on the market share gains are being driven by our effort to make our customers' entire infrastructure amongst acute illiquid.
Zero Trust network.
Looking at acute treatment and then we will approach converged Milwaukee functionality with acuity capability fueled by our powerful for the ASIC ICU to provide the best performance and the Leach functionality.
The new $47 two all source multiple new.
Service across 40.
<unk> 40 cost such as VPN identity.
Boxing.
Device protection for Ot and Iot environment.
Yes, his servers and in Montana.
Fortinet provides one of the <unk> security service offering.
Average up half the cost compare our main competitors.
In addition, we have prioritized, our most organic research and development effort.
<unk> security product into a centralized 40, <unk> fab with possible, which Tom referred to us.
Security Mash architecture.
Today, we announced a new slide 40 paid powered by our 40 <unk> the <unk>.
<unk> thousand 700 F 607 staff deliver high performance converged networking, that's acuity the security computing region of five kind of.
Better performance than competitive offerings.
During the quarter.
We're pleased to reveal two received the Gartner peer insights customer choice award for both.
Infrastructure.
And next generation firewall for three zero.
<unk> positioned fortinet as one of the most influential separately issued a leaders these growth drivers and organic evolution.
Leveraging our growth potential for new level.
Before turning the call over to Keith I would like to thank our employees customers partners and suppliers worldwide for their continued support and hard work.
The collective effort and the trust that will contribute even fortinet strong growth in our market share gains.
Thank you Ken and good afternoon, everyone.
Before adding to ken's comments and going into more detail on our Q1 financial results I'd like to I'd like to briefly discuss our wording change in how we describe our business.
<unk> is now referred to as the core platform and.
And non Florida Gate is now referred to as the platform extension.
This change helps to emphasize the importance of our 40 OS operating system.
40 OS drives our entire security platform across multiple platform extension use cases, including zero Trust access cloud security security operations.
Secured networking.
With that in mind, let's start the more detailed Q1 discussion.
Customer demand was again strong and broad based across geographies customer sizes industries use cases and security solutions.
Reflecting Q3 key demand drivers the elevated threat environment.
Convergence of security and networking.
And customers consolidated and across our platform offerings.
These key growth drivers are contributing to our strong results and accelerating pipeline growth.
In short we believe we are in a period of sustained high growth for the cyber security industry and Fortinet.
Moving to the Q1 financial results total revenue of $955 million was up 34% driven.
Driven by record product revenue growth of 54%.
Taking into account an $80 million sequential increase in product backlog.
Bookings growth was 87%.
Product revenue growth.
Rod based with core platform and platform extension product revenue growth at 50% to 59% respectively.
While we continue to see robust product growth from our SD Wan and the operational technology or Ot.
Core platform product revenue growth was mainly driven by the wide range of other use cases embedded in our operating system.
Service revenue was up 24% to $584 million.
Support and related services.
Was up 26% to $271 million.
While security subscription services revenue was up 23% to $313 million.
To offer one observation about how customers may be responding to the supply chain challenges. We are seeing indications that a subset of customers placed product orders further in advance that may have delayed purchases or registrations other related service contracts.
This together with the timing differences related to product and service revenue recognition creates a lag between product and service revenue growth rates.
We expect quarterly service revenue growth to accelerate throughout the rest of the year.
As summarized on slide six total revenue in the Americas increased 32%.
EMEA revenue increased 25%.
In APAC posted revenue growth of 57%, which includes the contribution from <unk>.
EMEA growth includes the impact of suspending operations in Russia, Nonetheless, EMEA easily exceeded our internal targets.
Looking forward EMEA pipeline growth indicates continued strength in our EMEA business. Despite the situation in eastern Europe , and its potential impact on European economies.
Platform extension revenue grew 49%.
And accounted for 34% of total revenue.
Up three percentage points.
Moving to bookings backlog and billings.
We are experiencing exceptionally strong demand demand that continues to exceed supply by more than historical norms.
<unk> were up 50% to $1 3 billion.
Reflecting exceptional demand and a $116 million quarter over quarter increase in total backlog bring.
Bringing backlog to $278 million.
Larger enterprises continue to favor furnace industry, leading costs with performance advantage.
And they're increasingly more appreciative of our integrated platform strategy.
The platform strategy allows customers to converged networking functionality, the security capabilities and consolidate multiple point products.
The following key metrics illustrate growing demand from enterprise customers.
Global 2000 bookings were up over 60%.
Large enterprise bookings were up over 65%.
Secure SD Wan bookings grew 54%, reflecting the convergence of networking and security as well as the strong economic case.
<unk> bookings were up 76% illustrating the continued response to the elevated threat environment.
As a reminder, backlog is excluded from the current quarter billings and revenue. However, it is expected to provide increased visibility and a top line tailwind in future quarters.
At $1 2 billion billings were up 36%.
Core platform billings were up 30% and accounted for 67% of total billings.
As shown on slide seven.
High end <unk> posted very strong billings growth with the mix shifting six points towards high end appliances.
Platform extension billings were up 50%, 50%.
And it accounted for 33% of total billings.
Up three percentage points.
Average contract term was consistent year over year and down one month sequentially at.
At 27 months.
Moving back to the income statement total gross margin was 74, 4% as the revenue mix tilted five percentage points to product revenue from higher margin services.
Product gross margin of 57, 4% reflects the impact of component the freight cost increases as well as higher less predictable component expedite fee expenses and the impact of consolidating <unk> results.
Service gross margin of 85, 2% was impacted by <unk> costs associated with the expansion of our data center footprint and increased labor costs.
Operating margin of 22%.
Exceeded the midpoint of our guidance range by 200 basis points due to increased sales productivity and efficiencies in other opex areas.
Offsetting the gross margin decline.
Head count increased 26% to 10860.
Moving to the statement of cash flow summarized on slides eight and nine.
Free cash flow was $273 million.
Representing a margin of 29%.
Capital expenditures for the quarter were $123 million, including $93 million of real estate investments.
Adjusted for real estate purchases, our free cash flow margin was 38%.
Our capital expenditure strategy.
<unk> includes investing in cloud and data center infrastructure as well as our office and warehouse capacity to support our higher levels of growth.
We repurchased approximately two 3 million shares of our common stock for a cost of $691 million.
At the end of the quarter the remaining share repurchase authorization was approximately $830 million.
So the authorization set to expire in February 2023.
Inventory turns of three five times, we're up nearly one five times year over year.
Now, let me spend some time reviewing backlog in a bit more detail as I mentioned earlier very strong demand drove a $116 million increase in total backlog to $278 million.
To put this in perspective total backlog at the end of the first quarter was approximately 6% of.
Our trailing 12 months total billings.
We shipped 60% of the Q4 ending hardware backlog in the quarter.
And consistent with prior quarters or prior quarter, 73% of the backlog relates to expected future product shipments.
The remaining 27% relates to various services.
We believe our backlog is very strong and should provide a billings and revenue tailwind to growth in future periods.
And there are several reasons and comments, we make to support our view, including.
Existing customers account for 93% of our backlog.
And no single end customer accounts for more than a low single digit percentage of backlog.
There are 10 deals in backlog, 9% from existing customers with the remaining balance of over $1 million.
That together account for less than 10% of total backlog.
The remaining balance is defined as the original order amount less the partial shipments we've made.
Just 5% of Q4 backlog was canceled in Q1.
Suggesting that double ordering is not a significant contributor to our backlog.
We do not believe that customers are meaningfully pivoting to software form factors from hardware.
The software is frequently a more costly option.
And may require architectural redesign and investment.
And changes in form factors and other equipment beyond just the firewalls.
We believe our competitors are similarly impacted by the supply chain.
And finally more customers are accepting the supply chain challenges in working with us to mitigate the issues by switching products.
Adjusting deployment schedules and accelerate accelerating evaluations of new products.
Similar to others, we are experiencing ongoing supply chain challenges our responses to these challenges include significantly increasing inventory purchase commitments.
Redesigning products.
Qualifying additional suppliers.
And working closely with our suppliers to further enhance our resiliency and mitigate the effects of disruptions.
We expect supply chain constraint to be challenging throughout the remainder of the year.
As a result, we expect component and logistics costs remain elevated and backlog to increase through the course of the year.
As we balance our pricing actions with the opportunity for continued market share gains.
We have pass along most but.
But not all cost increases.
As such we expect ongoing pressure to gross margins.
While the situation is very dynamic we believe we will have access to sufficient inventory to meet our guidance.
The outlook is also subject to the disclaimers regarding forward looking information that Peter provided at the beginning of the call.
For the second quarter, we anticipate bookings in the range of $1 billion $325 million to $1 billion $385 million.
Which at the midpoint represents bookings growth of 40%.
And we expect billings in the range of $1 billion $225 million to.
Two $1.265 billion.
Which at the midpoint represents growth of 30%.
Revenue in the range of $1 billion 5 billion to $1 billion $35 million.
non-GAAP gross margin of 74, 5% to 76%.
non-GAAP operating margin of 22% to 23, 5%.
non-GAAP earnings per share of $1 five to $1 10, which assumes a share count of $165 million to $167 million.
We estimate second quarter capital expenditures to be between 75 and $85 million.
We expect a non-GAAP tax rate of 17%.
For the full year.
We anticipate backlog could approach or possibly exceed $500 million.
And expect billings in the range of $5.500 billion.
To $5 billion $580 million, which at the midpoint represents growth of 32, 5%.
Revenue in the range of $4 billion $350 million to $4 billion $400 million.
Which at the midpoint represents growth of 31%.
This assumes the current supply chain environment remains constrained throughout the year.
Total service revenue in the range of $2 billion $640 million to.
Two $2.700 billion.
Which represents growth of approximately 28%.
Enterprise full year product revenue growth of approximately 36%.
Given our current view of component costs and other supply chain pressures, we expect non-GAAP gross margin of 74% to 76%.
non-GAAP operating margin of 24% to 26%.
non-GAAP earnings per share of $5 to $5 15.
This assumes a share count of between 166 $768 million.
We estimate full year capital expenditures of between 270 and $300 million.
We expect our non-GAAP tax rate to be 17%.
We expect cash taxes to be approximately $260 million.
Lastly, I want to remind everyone that we'll be holding an analyst day on may 10th coinciding with accelerate in 2022.
A link to register for the webcast is located on the events and presentation page of Fortinet since Investor Relations Web site.
And a lot of Ken I'd like to thank our partners customers suppliers and all members of the Fortinet team for all their hard work execution and success.
I'll now turn the call back over to Peter to begin the Q&A.
Thank you Keith as a reminder, in the Q&A session. We ask that you. Please limit yourself to one question to allow others to participate you can always come back into the queue, we're going to test that theory and the first Q&A, we're going to take care operator, we can open the line. Please.
Yes, and as a reminder to ask a question you will need to press star one on your telephone again to ask a question that is star one.
And our first question is from Fatima <unk> from Citi. Your line is open.
Good afternoon, and thank you for taking my question and Keith a question for you is on the product revenue.
Performance.
One of the more standout metrics among others.
You gave us in terms of the top down dynamics that are helping with respect to demand environment.
That environment.
Consolidation activity as it relates to discrete products, but from a bottom up or a micro perspective can you talk to us about the net impact of <unk>.
Rising income.
Lisa is realized in.
In the quarter and if you can speak to linearity in the quarter, if there might potentially have been some acceleration or pull forward of demand that you might have later in the later half of the year. Thank you.
Yes.
I think the color I can offer on that is I think linearity was again strong in the quarter, we've been seeing strong linearity.
For probably four quarters in a row now measuring.
Measuring month, one versus month too.
We did we've talked before about the price increases I think the.
And we've talked previously that after discounting you, probably get 55% or something like that apartment and you get 45% afterwards.
That was probably a little bit optimistic on my part I think is going to get 45% or little more discounting than maybe you anticipated.
Through that process.
And I forgot your third area that you mentioned I didn't write it down I'm, sorry linearity pricing.
Something else.
That's good enough.
Okay.
Thank you. Thank you. Thank you and our next question is from Brian Essex from Goldman Sachs. Your line is open.
Great. Thank you. Thank you very much for taking the question and congrats on the results really impressive acceleration.
Maybe.
Mike one question I'll commit to keeping correctly.
We'd like to know where you are seeing it and you've got some nice traction up market it seems and.
To know how we should think about.
Product as you go up market as well as services the margin involved and maybe if you can hit on lead times as well as Kurt I.
I heard you've done a pretty good job of keeping leap.
Lead times much lower than your peers is that is that winning new business up market substantially.
As you go to market.
Definitely the folding all pushing timber deed environmental good job.
And also the model, we have working with manufacturers what can be.
Our own ASIC chip directly it's also helping so that's where.
Compared to a lot of or do you assume.
So the party alpine supply which has.
While difficult to deal with the current supply chain issue.
So we do see.
Mike we've been pressing somehow Magnum Keith mentioned there is some more strong.
Request for <unk> com.
Also.
We have actually discount probably that these combo data.
Outside of the compared with the service side and he has a certain revenue recognition rules, we cannot discuss too much but also since we have.
Large strong part I'll be using that constitute security computing region. So that's one for the same cost function, our performance and will be five times better than competitors. So we do have a market.
Price empower which come with costs multiple model with all product at the same time and same thing for the service we offer.
Of our process.
Hi.
<unk> better than our competitor.
Probably the only talk about average about half.
Please proceed with all the bondholders' hands.
So thats, where we do have the pricing power both on the product and a service that's worth.
Customer during this time through.
Towards all solution and also get a lot of new case, which our competitors don't have solution like whether the SD Wan logical to or some other part which also clients quite a lot of additional growth for us.
Yes, I, probably offer a little more color to ken's.
Ken's comments, there if I could Brian I think.
If you think about the market, let's take the networking equipment switches and access points I think the constraint exist all around the board if you will.
I don't know that us versus your more traditional networking companies have any more availability in those products than anybody else and when you look at our backlog on that mix seems to certainly.
Court that.
Firewalls, I don't see a lot of customers switching over availability I offered the comment earlier in the script the prepared remarks that 93% of our existing backlog pardon me of our backlog is with existing customers. So there are 77% of new logos information in that number but not in a very big number and if I look at new logos in terms of the one <unk>.
Billings in the accounts that we got from the quarter.
It was very very normal in terms both of the billings and the new logos I think we're about 5500 or so of new logos. So I don't really.
See that if you will to the concern and then.
If I pivot back to Fatima just quickly I think your final question was about pull forward and Thats what type of come up again, but again I think if we were seeing that in light of these tremendous results.
Don't think I sit here and see a pipeline, but with such a significant growth is what we're seeing so I don't really know that I would describe this as any sort of cohort are there customers large enterprises that cumulus and place orders for a longer period deployment schedules, certainly and I think some of the comments in the script cover that.
Great. Thank you.
Right.
Thank you and our next question is from.
<unk> from Barclays. Your line is open.
Okay, Great Hey, guys. Thanks for taking my question here.
Maybe a question for both of you Ken and Keith.
I feel like we've talked a little bit about some of the redesign efforts.
Some of the newer appliance families recently I was wondering if you could just talk about some of those those efforts.
You know that Fortinet has done to maybe help some of those supply chain issues and how helpful. Those changes could be in in terms of fulfilling the demand that youre seeing.
Restarting the <unk>.
And the last year.
We saw the supply distribution you can see the probably announced today, the 40 70 and even the 600 F.
And with most.
Kind of redesign and then some of that also leverage our new Ford ASIC chip.
Not as many helping customers.
Choice fully <unk> some some shortage.
But also in general we have a much broader product both in that we called the cole platform.
<unk> co platform and also the.
The possible extension.
So that's a constant march better toys.
<unk> I'm sure that they can easily stacked with the Max product and.
But still offer a much.
Better solution compared to.
Other competitors, so that's where the route is that actually helping the loss.
<unk>.
To reduce the supply of GMP mutation, we have and also give customers more choice.
Kind of.
While keeping that effort and keeping offer.
Part of our portfolio.
Which we've been doing.
Given the supply chain issue, maybe one last June .
Towards the whole year. This year, it will be definitely were helping us and helping customers.
Very helpful. Thanks.
Thank you.
Thank you and our next question is from Adam Borg from Stifel. Your line is open.
Great and thanks, so much for taking the question.
Keith I am sorry, if I missed it but you know in the past few quarters, you've talked about increasing traction in some of your non traditional vertical.
I was just curious how they performed this go around and assuming you saw continued traction there how you think about making any additional investments to just.
Better capitalize on the opportunity there. Thanks, so much.
Yes, Peter's got me on award limit on the script. So I apologize if that got taken out because I thought it was worthwhile comment but any of that.
Yes, we got more of the same we've been looking at about a three or five point shift to that other group. The other group is everything outside the top five and we got that again in the current quarter.
I think that.
If you look at in that other group. The one vertical that continues to stand out I don't think a surprising when you think about it has been manufacturing and I think that that really speaks to the threat environment.
Ransomware or things of that nature manufacturing is trying desperately to break into the top five of our verticals and getting closer and closer every quarter.
Great. Thanks, so much.
Thank you and our next question is from Jonathan Ho.
From William Blair <unk> Company. Your line is now open.
Sorry about that have yourself on mute, yes. This is John why don't work for Jonathan Thanks for taking my question.
If I heard you correctly. When you mentioned use cases SD Wan annuity you mentioned did you say that the other use cases contributed more to growth or just grew faster.
Hey, Steve the one key person.
Definitely grow faster.
The overall company piece there.
And also.
I think the growth rates are faster, but.
But the total contribution was greater than the other use cases that we're trying to parse there and also the other prices of all had strong also about magazine.
Okay, I just wanted to clarify that.
And that doesn't count is actually my question, but I'll make it easier one for my question R&D spending going forward what are your intentions.
We anticipate any stepped up investment or do you anticipate pretty much typical what you've done in the past.
Thank you.
Yes, we kind of view.
The real estate.
It's kind of accounting for some long term investment.
Starting point.
10, 15 years ago.
Our rental cost probably latter half comparable competitor are similar size. So that's where the 100 million of you seem to haven't yet.
Probably what we're putting up.
Both the real estate and also the R&D.
Our module other investment.
Sorry, I misunderstand as our R&D is not real estate.
Yes, the R&D it definitely will continue to invest in our long term R&D project.
On the <unk>, which we made investment more than plenty he is asking about the huge huge.
Advantage on technology, and also enable us pretty much become the only vendor.
<unk> data converging novel security networking trend off of our high speed to acuity.
Inside the company aligned solution within the data center to drive tremendous growth and also much bad havent called out.
Secure computing region and also the surveys.
Dodge quantity product any point, we can offer the service much cheaper than competitor same so based on that.
That's really to have a huge value add.
Yes, I think from a business model viewpoint, I think we kind of like where we're at with the level of investments that we're making in R&D. It can move by a point or two in a given period.
If you Peel back a little bit and just look at the R&D team.
There's certainly a significant number of engineers and percentages that are that are working on the ASIC and the chips and so forth.
I would also offer that we have more software engineers than we do hardware engineers and I think the reason for that is it goes back to some of the early comments in the text about how important the operating system is to us. The ASIC enables the operating system. They have to they have to work together, but there is a significant investment there and I think also the other places with some of these.
Platform extensions.
<unk>.
We're seeing.
The opportunity there I think.
Make some more discrete investments and maybe mature some of those products along a little bit more.
Suggesting significant changes in total spending, but just giving some insights in terms of where we see spending.
That's very helpful. Thank you very much.
Thank you and our next question is from Michael <unk> from Keybanc. Your line is open.
Hey, guys I was interested in the comments that you made about.
Strength.
Hardware and not seen form factors switchover significantly to software and obviously your product numbers are great.
So can you talk about I know you've done it before but both Keith and can talk about that.
The sources of the hardware slash appliance security demand.
And what's what the sources are and really how sustainable that strong growth should be for how long into the future.
I think you got to be a little bit.
I think the high end, Florida gates, taking six points of market share at a pretty good indicator.
Obviously, the high end for the gates are very much targeted at large enterprises, and I think that dovetails very nicely with some of the growth numbers that we gave on <unk> 2000.
Large enterprises as well.
I still think that Thats, an opportunity for us where we have sometimes not always viewed as being viewed as the incumbent but I think if you look at our.
Progress over the years in the enterprise sector, particularly in the U S, which is maybe a little further to go we're very very pleased with that.
Maybe supplement that in terms of enterprise success, where the metric that we've talked about from time to time in the past.
Maybe three years or four years ago, we talked about in the U S of having.
Account rep ratio of about 65 accounts to one rep.
In the U S and Thats not really an enterprise model and then we made a comment that continuously that we would work to move that number down.
Within the framework with balanced growth and profitability that number today is about 13 or 14 accounts per rep. So.
I don't think it's a coincidence that you are seeing the success in the large enterprise with a larger appliances given the level of investment that we've been able to make in that segment of the market.
So <unk>.
<unk>, Ken how to secure whole infrastructure, especially from the area in the past I'm.
During the high speed on environmental kind of a branch on repo.
Accents.
One of our difficult.
And welcome to acuity, because the speed requirement because of all of these.
Kind of a deep cultural manish.
That's what we see we sell them.
Hey, Ken.
Atlanta, and you mentioned on thoughts on the ESA, we try and enable us to.
At Lids.
Traditional.
And with security cannot soft so that's where we see a huge growth.
In this area.
And the same time, we do keeping promoting recall that convergence and that one's acuity, so thats, where we stand.
Thank you, Dave and powerful insights and also with a new 40, <unk> keeping a high point.
Year.
So we do see more and more security and more security being deployed in the whole infrastructure.
Beyond the traditional network security deployment.
Operator next question please.
And our next question is from Hamzah <unk> from Morgan Stanley . Your line is now open.
Hey, guys. Thank you for taking my question and thanks for all the great detail earlier in the call Keith maybe one for you just.
You attributed the gap in the product and the services growth to customers.
At least a slight uptick in early ordering versus last quarter it sounds like I.
I think that you.
You mentioned that about 60% of the hardware backlog that you had in Q4 was billed in Q1. So in terms of your Q2 Billings guide how do you think about that backlog to billings conversion.
Particularly in Asia, perhaps less certain macro environment, and perhaps a little bit more of an uptick in early ordering.
Yes, I think as it relates to how we think about what the backlog might mean and we've just remind people. We made the switch I think in the middle of the fourth quarter as our sales team to run the business on bookings and then we converted the buildings here, which means working very very close with our manufacturing team and our operations team in terms of what they're seeing in terms of availability and what levers they have to pull.
<unk>.
And with that in mind I think the key now.
A lot more time with operations as part of the forecast and guidance process and I'll deal with the sales team.
And where we've kind of settled out on that is that I get a weekly update from our sales team in terms of what their expectations are backlog are going to be and we'll be doing that every week. This year and I think some of last year.
And he has shown to be shown to be fairly accurate I.
I think what you see right now in the first quarter was very high bookings, which drag along to backlog, but I think that the operations team has done a very good job one thing that we do it now use.
Is this concept of what how much was net backlog increase as a percentage of bookings and that number has hovered right around eight 5% to 9% in the fourth quarter and the first quarter and so when we want to send a sanity check what we're hearing from the operations team. We now have a metric that we didn't have six months ago in terms of a little bit of history.
And we apply that metric to it or does that seem reasonable for all their hard work. When you get done does that seem like a reasonable number and we think it has been.
Thank you.
Thank you and our next question is from Adam Tindle from <unk>.
Raymond James Your line is now open.
Thanks, Good afternoon, Keith I, just wanted to ask a question to try to get to the heart of real time demand and certainly appreciate all the disclosures you've been giving im looking at bookings obviously, it's been strong on a year over year basis, but from Q4 to Q1 sequentially. It was kind of the same level of increases last year and if I heard you correctly you can correct me if I am.
Wrong, but I think your guidance for Q2 bookings implied maybe down a little bit sequentially and Im wondering if thats starting to signal that we're plateauing on incremental growth in demand and returning returning to a new.
Or a more normal orders cadence.
Yes, I think the.
Yes.
Check the numbers Im looking at bookings number in the first quarter. It was about 12 75, and our bookings number in the second quarter that I think we've talked about it being at the midpoint $13 55.
So I don't know that I am seeing a deceleration is that you may be concerned about.
Okay I misheard you on the Q2 guidance I was just looking at from Q4 two.
Q1, and maybe another one to tackle over at it you talked about the seasonality shift left.
Quarter two to three points.
The back half of the year, it looks like that might be a little bit more smooth based on the updated Q2 guidance and full year guidance, maybe just what changed on that expectations for the back half versus now.
I think where we ended up on a full year number.
To all of that.
The analysis that we do I think the raise for the full year was roughly the beat that we had in the first quarter plus the raise that we had in the second quarter.
We send it.
Sanity check that we're looking at our pipeline growth or sales capacity, while we think the price increases are going to deliver some more metrics around the backlog and I want to make sure that we've.
Not getting too far ahead of our ourselves over our skis.
And I think Thats, a pretty good number to be at right now in the current environment.
There remains a lot of uncertainty as you know out there and getting overly bullish on Q3 and Q4 right now I think we'd like to see how this plays out a little bit more.
Understood I'm looking forward to the analyst day, I'm sure Peter will plug it.
Yes.
On that note next question please.
Thank you and our next question is from Andrew Nowinski from Wells Fargo. Your line is now open.
Great. Thank you and congrats on the nice quarter.
Just wanted to ask about your pipeline because this is the second quarter in a row that you've talked about pipeline strength at the end of Q4. I think you said you had a strong pipeline entering 2022 and now you are saying you have an accelerating are you seeing accelerating pipeline growth.
Just wondering if you could put a finer point on that accelerating growth comment and where youre seeing that.
That growth accelerating.
Yes.
Okay.
I think it's pervasive right.
Look at the three different sources of pipeline the way, we talk about the channel the marketing team and the direct sales force.
I think we're pleased with the contribution from all three of them no doubt about that.
We've talked for an extended period of time, a few years about the importance of the channel on the vessels that we make and partner with them and working together on that and I think that.
The channel is holding up their side of the bargain as well.
I think the marketing team.
Give them a ton of credit.
I Love the Fortinet championship events and the continued success for it and how they've now leverage that in other geographies as well.
The direct sales team continues to perform at a very high level you are seeing the numbers.
Obviously to the extent that you were able to continue to add head count like the metric I gave earlier more people are going to drive more pipeline. So I don't know that I would isolate it to any one three a plenty of those one three areas of where it's coming from or even geographically I mean, it's been strong throughout Ken I don't know.
Yes, yeah, both additional investment we made in the month itself and also the structure of the team make it more efficient and drive quite a lot of additional pipeline for us.
Okay got it thank you.
Thank you and our next question is from Ben Bollin from Cleveland Research. Your line is now open.
Thanks, everyone I appreciate you taking the question.
I was hoping you could address a little bit about how you view <unk>.
Service opportunity longer term you suggested.
You're expecting some catch up or acceleration on services through back half based on <unk>.
Backlog lead times procurement, but.
I'm interested in how you think the elevated level of appliance placement this year could influence demand for services, even beyond 2022.
Yes, it's a great question, we do see the surveys will be led by additional growth and additional margin for us going forward.
Especially the new Formula at some point tool, we offered quite a lot of the new service.
And.
Not a service today, we don't touch customer and also on average.
All service cost is about half of our main competitors.
A lot of our loan we can grow the service and improving the margin there so that won't be and also with 100 and call. It a platform extension product upsell.
<unk> cross sell.
We'll also kind of require quite a lot of additional surveys.
<unk> solution there.
That's why we do believe.
The survey.
Q1, you'll see the product revenue were also strong.
But on the.
Other side that the short survey, we also have our strong.
Thats, probably wont be starting combi in later this year and the same time that new additional center, we see launch with <unk>.
<unk> thousand trough.
Cta on identity as a module 100 samples catastrophes, our mantra, we have agreed to PD will be lumpy additional or additional revenue and additional sales additional module for us.
Ben It's Keith and just from a modeling point of view keep in mind that.
Price increases that we had in the second half of last year in the first quarter. This year that we get that lift in product revenue immediately it takes a little longer to see it in our services line because of how the timing of Rev. Rec.
Youre going to start to see.
Between new sales and renewals.
New price points that have been created for the services will start to have an impact and thats part of the acceleration that we talked about.
Great.
Thanks, guys.
Thank you.
Thank you and our next question is from Rob Aman.
Piper Sandler your line is open.
Hey, guys. This is Justin on for Rob I, just wanted to follow up on the Ot topic, you guys have quantified the success in selling into this use case for a couple of quarters now I'm. Just curious how you view the Ot is a driver into 2022 and beyond especially when you consider the explicit federal government guidance and broader spending intentions around protecting critical infrastructure.
Yes, <unk> definitely sees a pigment market going forward.
Probably because SD Wan, which we see pretty strong growth and also so.
So thats one of the key southern catching up as you've been masked.
Okay may be close to.
10% of the women's and the <unk>.
Growth is part of our strong so thats, where we do see a lot of potential.
We also invest a lot in this area to.
To meet the demand.
Got it thanks.
Okay.
Thank you and again, if you would like to ask a question. Please press star one on your telephone and our next question is from Gray Powell from BPI <unk>. Your line is open.
Great. Thanks for taking the questions and congratulations on the on the really strong results.
<unk>.
So yes, I guess I was just hoping to drill in on the SD Wan side.
How should we think about the growth of your SD Wan business. This year with just within the context of guidance or maybe relative to.
The overall company growth and then how do you feel about the convert the competitive environment.
In that category and just your ability to maintain growth at or above market rates. The next few years.
Yes first of all <unk>.
Turning to grow like a solid 40% year over year in.
Probably next five years and because of technology definitely.
Okay. Henry the traffic based on application, obviously is of our benefit for the cause.
Consumer customer.
So for US we offer the only security compound with SD Wan and also leverage only seek to have a huge performance advantage give us some more function.
So thats, where we so far we the SD Wan, we salaries as a part of the platform. The <unk> platform, we don't even try to surveys, but thats also additional compared to all other vendor that will have some kind of service charges will lead through into <unk>. So we do see we have a huge advantage both on the function on the costs in the SD Wan and <unk>.
And we'll continue to be gaining market share, we can feel whether you're keeping growing above the market.
Growth.
But also we feel that this is the part that we call conversions of security and networking together.
So as Steve went more interest on one side, but also will help impact that.
Inside of that inside the company and segmentation in Utah data Center.
And eventually make the whole infrastructure of our secure for the customer.
Understood. That's really helpful. Thank you very much.
Keith.
Thank you and our next question is from <unk> <unk> from Evercore ISI. Your line is open.
Hi, Thanks for the question. So I was surprised to hear that 93% of backlog is from your existing customers, but I was wondering if you can help us parse through some of that strength.
Within your existing customers how much.
This is <unk>.
Dressing the broader growth.
It it workloads and more tax surfaces versus like for like growth in <unk>.
Versus let's just say installed base refresh.
Or is this more you displacing other vendors within your current customer base.
Yes, I can't really quantify it.
Look at it that way.
Good question a good approach if I were to make informed judgments. If you will I think that expansion is by far the largest opportunity for us.
The nature of the business.
And I think the refreshed and the competitive placements are probably fairly close to each other I would imagine for the remainder.
There is.
Refresh for US is we have a very long product suite. So we tend to always have a new product you saw three new products come out we announced today. So there's always some sort of refresh activity in our own product what's going on there.
But.
I would also note that we are consistent.
Consistently getting more at bats, if you will more opportunities with sales for competitive displacement, so I would imagine.
My gut is again refreshingly competitive displacements or probably in a similar neighborhood expansion is the biggest.
But also we have the biggest customer installation base in the industry.
So we have probably close to 40% of total deployed in the industry probably more than the number two number three number fall at Gander.
<unk> was acquired customer base.
Close to 600 solving customer.
Some of them are using.
Fulfilling that solution and part of infrastructure and so now we can see the benefit of that spent on additional infrastructure and also how much are we called fabric of National manager took Andrew So we can see here.
Manav.
<unk> beyond the initial deployment.
Thank you that's helpful.
Thank you.
Thank you and our next question is from Gregg Moskowitz from Mizuho. Your line is open.
Okay. Thank you for taking the question Keith just to follow up on early ordering last quarter. You had estimated that low single digits of your Q4 basis came from product ordered in advance how would you size. This for the Q1 and then just a clarification if I may because obviously the backlog went up very impressively, our switches and access points still about two thirds of your backlog today. Thank you.
I think the backlog is getting closer to 50 50 between networking equipment.
I guess I should call it platform extension because it's been there.
And the firewalls or the core platform I think is kind of balanced out I do think it's low end.
For the gates that are still dominating in the Fortinet space If you will.
I don't remember quantifying early ordering as a percentage if you will.
It's certainly something we've talked about here internally is our way of measuring that I think thats.
Why are we kind of provided Peter is going to give me some coaching here well I think what we said in the fourth quarter last year was that we had we knew of some transactions. A couple of deals that were that we knew were going to be ordered that'd be delivered into 2022 that were ordered in that part of backlog and we.
We are in the backlog in 2021 at the end of the year. It was a few a couple of other 1 million dollar deals is what we're hearing.
Yes.
I think that the constraint if you will on that is more around women's the supply is going to be available.
It's in backlog, we can deliver it as soon as the supply arrives, but thats just more of a function of how we are working with our.
Suppliers than anything else.
That's helpful. Thank you.
Hey, Greg.
Thank you and as there are no further questions on queue do you have any closing remarks.
Thank you Laurie I'd like to thank everyone for joining us on the call today as a reminder, and a plug fortinet will be hosting an analyst day on Tuesday may 10th next week link to register for the webcast can be found on the events and presentations page of the company's Investor Relations website. If you Register now is just a little quicker next Tuesday, you can also register data but.
Again, thank you very much for your time I appreciate the interest in Fortinet, everybody have a great day take care.
Thank you and this concludes today's conference call. Thank you for participating you may now disconnect.
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