Q2 2019 Earnings Call
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Okay, One John you now.
Thank you.
You would ask us solution more than doubled from the previous quarter.
Going forward, we see four drivers of market share growth for Fortinet.
First I'll refresh portfolio of 40 gate with integrated secure Wi Fi SD Wan and Fiveg product.
Leading the transition to security driven networking and continue to gain network security market share.
Staggered.
Fortinet security fabric offer broad automated and integrated security solution for end to end protection as.
Arbitration consolidate towards a field security vendors.
Third.
Fortinet provide a broad range of hybrid and multi cloud deployment.
And for Us.
Our own TV and LT security offering was 48, six SP, new technology, continuing to provide a cost and performance advantage versus our competition.
I understand the Fortinet team and our partners for their ongoing high work and our customers for their support.
Now I will turn the call over to keys for closer look and our second quarter performance and our guidance for the third quarter and the full year.
Thank you Ken.
Before I start I'd like to note except for revenue financial amounts are non-GAAP and growth rates are based on comparisons to the second quarter of 2018, unless otherwise stated.
The slide references I make refer to the presentation posted on our Investor Relations website.
One quick housekeeping note, we made one modification to the buildings by product family Slide.
By moving the Fortigate 100 series from the entry level to the midrange product family.
Fortigate appliances below the 100 series our desktop appliances.
Midrange fortigate, including the 100 series.
Our higher performing rack mounted appliances.
For your benefit we have provided a product family billing trends under both the old and new approaches.
I would now like to summarize our strong second quarter performance.
As Ken mentioned.
Total revenue of 522 million was up 18%.
Led by service revenue growth of 21%.
On a geographic basis revenue growth was strong for both the Americas and APAC.
Product revenue of $190 million was up 14% to 14%.
Despite a significantly more difficult year earlier comparison.
Product revenue growth was consistent with the first quarter of 2019.
Product revenue benefited from the continued success of the E series and fabric products.
Service revenue grew 21% to $332 million.
Driven by a 24% increase in Fortiguard security subscriptions.
Forticare technical support and other services increased 16% to $149 million.
As shown in our second quarter results service revenue continues to experience strong growth.
Improving margins and offers a high level of predictability.
To illustrate these points I would note.
Service revenue represented 64% of total revenue.
Up over 100 basis points.
Services gross margin was 87.3% up 50 basis points.
Deferred revenue provided approximately 90% of service revenue and 60% of total revenue.
In the third quarter, we expect similar percentages of service and total revenue to come from our existing deferred revenue balance.
Total deferred revenue increased 27% to $1.9 billion.
Short term deferred revenue increased 21% to $1 billion.
Now turning to billings.
Total billings grew 21% to $622 million.
Driven by strong growth from infrastructure fabric cloud.
And the secure SD Lan firewall use case.
On a geographic basis, both the Americas and the international emerging regions had strong quarters.
Consistent with our prior comments regarding duration.
Average contract term increased one month year over year to approximately 27 months.
Service providers NMS Sps remain one of our top customer segments accounted for 15% of total billings.
Increasing industry leaders that diversification.
Including strong growth from government and financial services verticals.
Led to a 21% increase in billings.
Deals over $1 million increased 28% to 46.
The total dollar value of these deals increased 37%.
We are pleased with the geographic and customer diversity, we are seeing in these large deals.
With nearly 40% coming from EMEA and APAC.
And consistent with prior quarters, our largest deal in the quarter was significantly less than 2% of total billings.
Clearly our business is not dependent on a handful of large deals in any given quarter.
The number of deals over 250, K. increased 33% to 346.
And the number of deals over 500, K. increased 30% to 147.
Network security product and service billings increased 19%.
And accounted for 73% of total billings.
New firewall use cases, including operational technology to secure SD Lan.
Continue to provide a strong tailwind to fortigate product to service billings growth.
Secure SD Lan was a leading contributor in the quarter and included six deals in excess of $1 million.
Non fortigate product and service billings grew faster than network security billings.
Driven by strong growth in infrastructure fabric cloud and security win.
Moving back to the income statement.
Gross margin improved 100 basis points to 76.4%.
Product gross margin improved 110 basis points to 57.6%.
Operating margin increased 250 basis points to 23.6%.
Operating expense leverage and the gross margin improvement I, just mentioned easily offset a small decrease in the benefit from the change in commission accounting.
Total head count increased 15% to 6293.
Given our strong operating income performance GAAP net income was $73 million.
Moving to the statement of cash flow summarized on slides seven and eight.
Free cash flow was $178 million up 36% year over year.
Resulting in a free cash flow margin of 34%.
Up 450 basis points year over year.
The increase reflects strong second quarter billings and collections continued inventory management.
And the flow through of the increase in operating profit to net to net income.
Capital expenditures for the second quarter was $17 million.
We expect third quarter capital expenditures to between 40 and $50 million.
Given lighter than anticipated construction spending for the first half of the year.
Our 2019 capital expenditure guidance moved slightly lower to between 110 and $130 million.
Our internal free cash flow models are in sync with the current street consensus estimate for the full year.
And reflects increased spending on the new campus building in the second half of the year.
In the quarter.
We repurchased 470000 shares of common stock.
For a total cost of $35 million.
For an average per share price of approximately $73.50.
At the end of the second quarter, the remaining share repurchase authorization was $643 million.
And the set to expire at the end of this year.
As we turn to the guidance provided on slide nine I'd like to remind everyone that the forward looking disclaimer Peter presented at the start of the call applies to the guys who are about to provide.
For the third quarter, we expect billings in the range of $600 million to $615 million.
Revenue.
In the range of 525 million to $540 million.
non-GAAP gross margin was 75.5% to 76.5%.
non-GAAP operating margin of 23% to 23.5%.
non-GAAP earnings per share the 55 to 57 cents, which assumes a share count of between 177 and $179 million.
We expect non-GAAP tax rate of 24%.
For 2019, we expect billings in the range of $2 billion $510 million.
To $2.540 billion.
Revenue in the range of $2 billion $100 million.
To $2 billion $120 million.
Total service revenue in the range of $1 billion $340 million to $1.360 billion.
non-GAAP gross margin of 35.5% to 76.5%.
non-GAAP operating margin of 23% to 23.5%.
non-GAAP earnings per share of $2.23 to $2.26.
Which assumes a share count of between 177 and $179 million.
We expect non-GAAP tax rate to be 24%.
We expect cash taxes to be between $52 million to $54 million.
Before I turn the call back over to Peter I'd like to thank our partners.
Our customers and the four net team for all their support and hard work.
I'll now hand, the call back over to Peter.
Hey, Keith.
Operator, we are ready for the M&A session. Please.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
And in the interest of time, we do ask that you. Please limit yourself to one question and one follow up and again, ladies and gentlemen that star one to ask a question.
And our first question comes from shallow Yang from Oppenheimer. Your line is open.
Thank you good afternoon, gentlemen, congrats on the strong performance and the outlook improved outlook Silwan Keith can.
Clearly some good acceleration on the SD Lan frontier, you've mentioned six deals in excess of $1 million.
What's driving this healthy demand and an acceleration you're seeing can you talk to us about some of the drivers on that front and I have a follow up.
Andrew This is Ken.
So like I say the previously.
We believe the infrastructure and the Recoded security driven that will consign kind of more and more important because the.
The border security and the press TCEP hereon, so as our.
A lot of our Multek confident of internal.
So thats, where the SD Wan Securities.
When a next Gen branch office and that took managements internal.
Segmentations acuity setting gotten more and more important so thats, where we see there.
A few points of market as a whole infrastructure security approach. So about Nash the vision, we have for the last few years and that study.
During the quarter security driven networking infrastructure and receive out of our successful for this approach.
Got it got it and think we picked up some some solid performance during the quarter.
Within the federal Arena.
Can you provide us with your views on that vertical how you view it down the road expanding second half this year and into 2020, just initial thoughts what specific products and services are you pushing within this vertical.
Yes, Charles this is Keith I would probably just step back a tad better note that our government vertical includes not only the US government, but also international government agencies as well as state and local government agencies.
I think what we saw the growth in the quarter was actually more on the international front than it was domestically so it'll be a little difficult to respond specifically to other products. If you will in that segment you are speaking to.
Got it okay Thats fair enough.
Thank you so much.
Thank you. Our next question comes from Sterling Auty from Jpmorgan. Your line is open.
Thanks, Hi, guys. So through much of this quarter. After the March quarter results. During that help you get paid again about where we are with firewall refresh in what impact the shift to the cloud is going to have firewall demand et cetera, you mentioned the use cases, but I wondered Jan if you could just kind of high level give us a sense what do you think the industry growth the opportunity looks like.
For the core firewall network security moving forward.
Third I think the units trees in the transition.
The traditional refreshed on a firewall, which you see like.
456 years ago.
Using the next Gen firewall UTI and replace the traditional collection base of our VPN.
It's probably only part of the solution now.
You need to have the whole infrastructure like.
From there.
Unlike firewall connect with.
Of this different kind of as the land away Fireeye as some employing and also the lab and ultimate cloud aiotv and need to be.
I'll come to cause you to to Gander fuel that asked a new one new trend and also Thats also easy to manage and.
Consolidate all these kind of different solution.
A starting kind of more and more important because the management cost static at high high end for the security.
So thats, where we are.
We see the approached record a wider infrastructure security, our security and network in Israeli companies together, adding more and more important so thats, where the traditional enterprise refresh.
Skew Coney Island and.
I think it's a contract a few years ago, we have nice market share compared to some of our competitor in enterprise. So we are not.
I've been.
Impact or influence my remarks about the refresh cycle, but we do see we have a more broad offering and most come from internal developed reached integrate and automating day one.
Which has a much better.
And never easy to manage compare to some of our competitor accounts acquired a product.
And the same hand AC ASP Upi about huge performance advantage, especially when you deploy internally and in March fashion local air now walk at the same time.
When you have the infrastructure on a pro and also the other aiotv and so thats, where the Hesik I'd have engaged we co ASP security processor unit and also static had become bigger at the same time once we have dealer market share.
Add to cost per chip also sending had lower soda economies of scale also starting play so thats, making our margin keeping improving.
Thank you all this will help us to.
To position going forward for the trend I believe this.
Kind of infrastructure security trend, we're keeping going in the next 10 20 years and and we have our position for for for that change.
Excellent and maybe one quick follow ups the capital one breach ADW us back in the news product for the first big high profile breach since maybe the Playstation hack back a number of years do you think thats, a bigger motivating factor to drive virtual firewall adoption in the cloud.
Hello.
Hi.
First I feel and hunting for any impact there.
The Q2 number and they say.
The second largest on at the same time.
This definitely make people more kind of.
Consumer security is more important.
But on the other side, if you put a too much into a single cloud location Thats also can be more risky.
That's more a function of time, keeping the same union have sort of imbalance amount in the cloud and age and.
And yet if application different data you need to have a different way and multiple layers of security.
Got it thank you.
Thank you.
Thank you. Our next question comes from Brad Zelnick from Credit Suisse. Your line is open.
Great. Thanks, so much for taking the questions and congrats on a very clean quarter I've got one for Ken and a follow up for Keith can you talked about more opportunities is network architecture and security moves to the edge and I know this means different things to different people, but if I look at the lower end Fortigate appliance is ticking down a bit and seeing some other vendors out there with cloud proxies and customers doing local internet breakouts at the Brent Branch office, how if at all is this impacting your business and how important it helping customers as they think about network transformations.
So I do believe the low end was that in pick up because we are in the meat on refreshing.
So like.
Last quarter, we announced the first product.
Fortigate 100, AFE using the new facility for I think going forward. There is a few Roger.
New product in a low end will come up using the leverage I suppose you for each has pro forma probably easily threex to fivex better than the previous version.
So thats, where we are helping drive the low end growth.
On the cloud side I do see cloud is really as an additional is compliment to what plus we offer.
From the infrastructure and also the eight computing.
It's a part of the solution. So we don't view is cloud will be reduced.
The on premise and also in the age and the and also the age are few probably even grow faster than the cloud in the next few years because.
Frown founder.
The appointment from advantage at age compared of cloud you need to have both solution and cloud already.
And probably will not not using gardeners, they say the age where either cloud add to BT boast of existing but is that the age computing, aged acuity and need to be more more and France has addressed especially we have advantage using the AIC chip and there is a lot application because the room con the latency requirement you add a processes in the age and insecurity acute insane age is good for the prevention, which need to be real time process and the cloud will be good for my management and as certain star reach which may not have too.
Deal with real time, and also could be for detection, but if you wanted to the prevention and in line real time protection product has more advantage.
Thank you so much at all.
If I could just add to extend his commentary just quickly I want to lose sight of the fact that you're looking at the mix shift if you will on our our reporting for our between low mid and high with what I think is actually happening there to a large extent is you're seeing the success of the E series in the in the midrange product family.
In some ways caused a mix shift.
We've talked about the 400 600 that we introduced earlier this year is coming online.
But I've also talked about the 500 E series for several quarters now and just to extend that conversation one step further I would note that when I compare the 582 as predecessor 500, D., it's moving at about three or 400% faster than its predecessor dead. So when I look at those types of numbers I think you're starting to see the success in the mid range really is kind of skew that mix for us.
That makes total sense, Keith and just a quick follow up a housekeeping item that I might have missed in your prepared remarks, but did you tell us what the year on year Fortigate unit shipment growth was.
I didn't I didn't catch that.
Did not but I can share that it moved for the.
Moved in tandem with product revenue growth.
And that's also consistent with the first quarter of this year moving in tandem with product revenue growth numbers.
Excellent. Thank you so much for taking the questions guys.
Thank you.
Our next question comes from Andrew Nowinski from Piper Jaffray. Your line is open.
Hey, great. Thank you and congrats on a nice quarter. So I wanted to ask about the million dollar deals that you had a very strong growth. Just wondering if you could provide any more color on the drivers of that and whether it was higher sales capacity or simply are as simple as just having a broader portfolio of products now.
I think.
I try to make the effort and as Keith I'm sorry.
Trying to make the effort to to note one the contribution from SD Lan, which I think was six of the 46 deals that we saw there.
We do see ourselves getting deeper into our enterprise installed base, which is driving those larger deals and continued progress in the enterprise space. So.
I think as if we've mapped it out some several quarters ago in terms of what our expectations were in terms of moving in that direction I think you've seen that reflected in those million dollar deals.
Yes also one other point I would add is really the multi part our sales have record of Fabry also starting doing better. So thats why we see the non fortigate sat in grow faster than the fortigate as making a total infrastructure solution. That's also helping that makes it the larger.
Okay got it and then just a follow up as it relates to EMEA. It looked like your growth may have decelerated a little bit.
Relative to last quarter.
That is that is consistent with a lot of other vendors and what they reported in EMEA. So just wondering was that just due to the macro in EMEA or were there some other factors there.
Probably the comparison is going to be tough and also the UK has of maybe they'd be uncertainty.
Oh, and yes, I think you're spot on for that can I do think it was a tough compare coming off of last year.
Our EMEA number includes Europe Continental Europe , as well as what we call international emerging which actually performed very very well.
In the quarter, but going back to Europe , Yes, I think what we're sensing there is consistent with the commentary that we've read from other reports if you will.
As Ken noted the UK seems to be in the build the doldrums. If you will across industries and I think we saw that as well.
Great. Thanks keep up the good orders.
Thank you.
Thank you.
Our next question comes from Jonathan Ho from William Blair. Your line is open.
Hi, good afternoon, I'd like to Echo my congratulations as well I just wanted to maybe start out with a little bit of color in terms of your go to market and channel engagement and can you maybe just give us a sense of what's been successful there and has that sort of helps drive some of the larger enterprise deals.
This is Ken I argue about who's going to get the good news I guess.
I think we've become.
Weve matured, we are closer to our partners and we are.
Better getting their insights and feedback about what they are looking forward to be successful.
I think we are maturing becoming more operationally focused.
You are seeing us make greater greater used to protect our channel partners are things like deal registration and applying that very broadly.
Yes, I think we're we're I'm very pleased with the performance.
Of our channel leadership team as well as everybody on our channel team and how they are engaging with the channel.
Also we have.
Better tool today compared to a few years ago to effective measure the effectiveness also weathered a pipeline now the sales productivity.
And how that how each profile perform so thats also helping to drive that.
America.
The better efficient growth.
Got it and then just a follow up on the SD when questions that have been asked I mean im just trying to understand when you look at sort of the SQN opportunities that are out there. My understanding is that people can choose either a cloud solution or maybe a software defined solution or traditional appliance what what type of mix are you seeing out there as people start to make this shift in terms of their their edge opportunities.
A spot for US we reported SQM function inside a 40 Cape Cod are 40, otherwise function there so thats working within the nickel in a single box solution hardware both sound security.
Lastly, when I walk in August for GATR, I'm, making are easy to manage and that also this also can tend to lag a different application which need to be secured.
So thats customer like Lexus illusion and also because we have a.
Pacing at advantage beauty in the <unk>.
The Fortigate as are the basic especially as you'll see for the new one.
Which can have a much better cost performance compared to some other SD Wan solution, which.
They using the general purpose CPQ or what are the cost of our high all the dumb that additional computing power to do to security how they have to have a multiple box solution. So thats. The advantage is a pretty is wherever huge and once we keeping the imagine.
In marketing sales coverage in this space, we do believe we will become a leader in this space.
Yes, Jonathan Keith.
Okay, and just let me add to that a little bit more contacts.
Clearly the in terms of form factors for us as a fortigate appliance, that's dominating the SD Lan market.
And then just a tad bit more on that when you look at it it's fairly evenly spread across low end mid range and high end Fortigate.
It also drags along with it some sort of not a fabric products, but it also brings with it about 70% on average of the bomb is a service part of the service component of the mix.
Thank you Greg.
Yes, the SD Wan also helping.
Increased the percentage of service revenue and also match, our we call. It a better security driven networking optical infrastructure security better. So thats that is more like a total solution also drive some outer part ourselves.
Thank you and congrats on the strong quarter.
Thank you.
Thank you. Our next question comes from Saket Kalia from Barclays. Your line is open.
Hey, guys. Thanks for taking my questions here.
Hey, Keith maybe you maybe just to start with you you mentioned the service provider business I think was about 15% of billings one of top verticals, obviously or not.
Very strong 2018, how are you thinking about that vertical here in 2019.
Yeah, I think the.
Not going to guide the vertical specifically of course, but I think that what.
What across the industry were seeing was a very strong 2018, whether that was because of.
Tax reform or what have you, but the the carrier infrastructure seem to go very very well in 2018.
When you look at 2019, Theres, probably really three components of that business theres that infrastructure for the carrier.
There is also the MSP and there's also the selling with the carriers.
And I think as the first one it's been a little more challenged across industries in the first half of this year.
You probably couple that with a significant amount of well digestion of last year's acquisitions, if you will of products.
But also the mergers and consolidations that are going on in the industry. This year, probably called into the gift, giving a little bit of a pause.
Got it got it that's helpful.
Ken maybe maybe for you a lot of success in core network security with SP, when maybe outside of the appliance business I think some questions were asked earlier just about capital one and public security can you guys talk a little bit about the public cloud security business at Fortinet, and maybe specifically, where you feel the virtual firewall offering is versus competitors versus where you'd like to see us.
Yes, all approach for the cloud public cloud Hypercloud as celebrity from that competitor, we have a var brought on the broadest offering.
Cover both from a cloud provider and also on a function. So lack of we have a nine or 10 different function found the traditional fortigate with the web to the mail to with the same two out is that if our application and also they can easily move from cloud providers of cloud provider.
So for the enterprise.
So this approach gave the.
Flexibility for the enterprise customer to adopt different cannot call provider different function based on their need.
And the same time.
So we have all these alkermes and also the other thing if you want to access the call. We also have our strong fortigate waste as has our encryption performance and that's also helping.
Both on the cloud side and also on that on that.
H. side.
So thats all how these helping obviously the cloud growth definitely faster than the overall food and gross and we still feel that thats the.
Count as a part of a whole infrastructure security will continue keeping driving the gross but also which also kind of hoping there.
The on premise in the age of calls.
Very helpful. Thanks, guys.
Thank you.
Thank you.
Our next question comes from Keith Bachman from Bank of Montreal. Your line is open.
Thank you very much and congratulations on the results, including Keith.
Continued good free operating cash flow growth.
I wanted to ask two questions the first.
Ken I wanted to direct towards you and it is a competition question, but but along a difference.
Metric or different vertical and what I mean by that is you've talked about the cloud, but I specifically wanted to ask you about your views on the competitive threats or opportunities from the offload engines like see scalar why or why or why not do you see this as a competitive threat afforded that or do you think you can actually.
In some ways participate in.
In this market.
Through either partnership or directly.
I think we are maybe more on the partner side.
Because.
Some application can can feed into.
The scalar forward.
The coffee to the cloud out today or whatever service.
Data center.
But by some entre applications like like you still need to have all these.
The HD wise like I say when.
Keeping.
Keeping that traffic for more to the cloud basically they also need to deal with the local traffic.
And a lotta also lot of security should we see that the infrastructure the acuity internal segmentation Thats also cannot be addressed.
By by these cloud approach so I see so it's really the mix.
You construct a hybrid solution is much better than just.
Every single to the cloud.
And also from time to time Transmix amount of service provider.
Offer similar services.
So we are we are more behind to support in this kind of solution and.
That we view.
We we just play it was all advantages, which can give much better.
Strong performance as computing power and also.
The infrastructure to total fiber solution compared with their service different vendor they may offers.
Some solution good for certain application now certainty point scenario.
So thats, where we kind of use to pay.
Hey.
In charge of their mandate, that's probably will be a better way to moving forward.
Makes sense. Thank you for that and then my follow up question is just wanted to get your perspective on how you're thinking about non fortigate growth potential.
In the benchmark could be above at or below.
The growth rate of the company, but how are you thinking about the opportunities associated with the non fortigate.
Helping your portfolio moving forward and that's it for me. Thank you.
Thank you the total addressable market for non Fortigate RB corridor infrastructure approach of Fabry approaches a larger.
He shows is that the right.
And the pricing is a management cost as Marvin Hi, you have all these different piece of.
Infrastructure security now working together, so you need to find a way to consolidate and the mansion together, which the 40 fabric approach offered our solution and that we design the product.
Welcome to Khadra automate to gather from day, one which is different than some other company dependent acquisition also monitor approach, which make it more difficult to how to integrate the automaker.
So thats, what we see that growth so far in the last few quarters or faster than the overall building gross and the same time, so going forward. We also see data.
Even bigger opportunity and.
Pro we're keeping grow faster than the overall growth.
All right. Thank you Ken this is Keith again.
I would just do one quick note I would offer that whether you look at the fab and the non fortigate side or our physical infrastructure fabric.
This to share I mean, the growth rates on both the product the hardware form factor and the software to form factor do indeed, outpaces, we noted in the call.
Fortigate, but they're also very similar in terms of the growth rates.
Both the hardware and the software form factors right right. Okay. Thank you Keith.
Thank you. Our next question comes from Tal Liani from Bank of America Merrill Lynch. Your line is open.
Hey, Thanks, guys. This is Dan Bartus on for Tom I wanted to ask again about where we're at in this mid range refresh cycle, you're seeing what stage of maturity are we at for the 500 E cycle.
And then is it natural to think that the 406 hundred products just continue that cycle.
You had a meets range refresh pardon marched along I have to say on that.
And also that Keysight as the new E series and the much better performance.
And at a 400 600 also enhance compared to the 300 to 500, its a relatively new compared to 300 500, we do see the.
The performance the third at a cost.
Price ratio also.
It's better.
So that that's pretty much there and then the next phase and more towards the.
The low end, so thats were coming up.
Yes.
Okay great.
Thank you.
And then.
So you're clearly doing well with SD Wan branch office or campus environments, and then you're also doing well with the MSS piece. So I'm just curious how is your growth in the more traditional private data center firewall market and what do you think the growth outlook for this sub segment is thanks.
So that said that the new products, we are announcing today. The 1100 20 to 100, Yes Minister Henry and you can see the.
This Paradise Valley.
Our powerful and the best fit for the traditional network security.
Mike I wonder.
The internal segmentation now into the datacenter.
So we have the best performance spastic curative function, then integrate together I think this will drive the future growth alone.
Okay, great. Thanks.
Thank you.
Our next question comes from Septima Baloney from FBR. Your line is open.
Hi, this is catching the cracking on for 15.
I wanted to go back to SD Lan is a demand driver.
One of the questions. They had is given that we know from my gates can be deployed for stealing use cases.
What extent are you seeing tradeshow for decades.
Being implemented primarily for asking land says.
Oh go ahead, it certainly happen yes.
So that we're not getting all our metrics to it.
Peter and I were to customer meeting a few months ago and that was that was specifically what was happening.
Yeah, but that's also helping private Atish you know service supporting revenue so if the the one too.
Hi, Bob.
Hi, Steve function for there.
The fortigate or would they already have so thats also will help us yet and I'm not saying that's anywhere close to a majority it was perhaps as an outlier, but it can be done and we see this as ever being done.
Okay got it.
And then as a follow up on the margin front in the last couple of quarters, you mentioned being under indexed on now.
Salespeople and I was just wondering.
Hi caught up in the quarter and how we should be thinking about sales and marketing expense for the remainder of the year.
Thanks.
We improve.
Still not quite through here.
We appreciate you know as I will take time and also when they onboard also needs time to to enable ramp up.
So thats I see it.
Sometimes when you match in certain sales and marketing.
Probably return take a little longer than you launched a new product.
So that is on our side, we do see the Ace is still very important bookkeeping.
Keeping the matching the marketing ourselves, yes, I would supplement cans comic Catherine by noting that of course, you have baked into our guidance in terms of the hiring rate that we just provided.
And I don't want to overlook what a very strong performance when I mentioned the America for the new apps in particular came up came through.
In the second quarter very high productivity very high returns very high growth rate. So we're very pleased with their for their performance, including their their success in the global 2000.
Yes, basically there's a two part one part and whether you need to add headcount. The other part is really trying to.
Like able to sales has a better close rates close in rate, so thats where to training.
I'll just kind of.
Leg.
Helped and get a family of his part our commodity product solution also were very important. We also have a lot of that area.
Got it thank you.
Thank you.
Thank you. Our next question comes from Michael Turits from Raymond James Your line is open.
Hey, this is Keith on a on for Michael I, just wanted to follow up on an earlier question on service provider and just ask a little bit more specifically, how you may be incorporating fiveg into your outlook for this year and going forward.
It's still early.
Few Andy's a few quarter away you will see any scene.
Impact by the Fiveg.
Fiveg.
But we do have to product ready there is also working with service provider.
To see what's the best way to to secure the Fiveg network and also a lot of other girls actually.
It's come from the OTI, Aiotv, which also leveraged fiveg, so thats where.
I see probably to Fiveg.
Into certain areas like health care or lack of certain industry maybe.
Grow to security probably.
Had on some of our broad fiveg approach for consumers in the carrier space.
Got it that's helpful and then.
Just separately could you give us an update on your on your partnership with Symantec, how much you're going to market together and kind of how has traction been so far.
I think he's a good approach.
Progress there and also Thats, a while they're very important partnership we have to go to market to candor I think the fuel cell stack engaged.
Working together and and there is healthy both company.
Thank you.
Thank you. Our next question comes from Melissa franchisee from Morgan Stanley . Your line is open.
Hi, This is hamza fodderwala in for Melissa. Thank you for taking my questions.
So just on the macro front you touched on EMEA earlier, you also about a quarter of your revenue coming from Asia Pac any concerns within that region. Obviously the trade tensions we had some of the new tariff announcement earlier today.
And how that could sort of impact growth within the region more broadly I also noticed you at a recent partnership announced the Ali Baba So yeah, just any commentary on that would be helpful.
Yes, Hi, it's Keith.
Perhaps in reverse order, yes, we were very pleased the announcement of the baby.
The Alibaba now for that you saw in China by itself has not been a large.
Contributor to our business historically for the last several years.
Regarding tariffs we saw the announcement earlier today.
Did some double checking on that and make sure that we're still fine with our guidance and we're very fine.
You know that's there we do have some production as I mentioned before that's done in China, but the majority is outside of China.
And then I guess the last comment I would offer is that.
For us the Asia, Pat pack areas, obviously, it's a very diverse geography.
Covering many countries all the way from Australia, New Zealand.
True.
South Korea, Japan, Taiwan et cetera.
Got it and then just on the Sq and early momentum that six deals that you mentioned above a million. So were those bundle deals with the S. T win a use case attached or.
Well were those deals primarily led with DST when value proposition.
And that's it for me.
Yes, I think it's more he played a asking when even some of the knowledge even.
Hi, post acute assumption to begin with but they do see a the advantage have a security capability in a box whenever they need it would tell you though.
Thank you very much.
Thank you.
Thank you.
Our next question comes from Dan Ives from Wedbush Securities. Your line is open.
Yes, you have sales cycles change on the larger deals I mean are they starting to now shortened or given it seems like it's a little more Dan Ellis scheme for you guys. How does your sign some seven figure deals.
Yeah, I don't think the enterprise by and large a new enterprise logo I think the sales cycle is what the sales cycle as.
Ken would point out to me that the typically there's a fairly robust.
RFP process that goes out a short list of proof of concept testing and so forth.
So if you're if you're chasing a new opportunity just logic, an incumbent I don't really see a change there.
To the extent that you're talking about an expansion of an end of an existing enterprise logo I do think that you're going to see things like some nasty win opportunities that move faster than than perhaps other things and certainly in general and expansion into an existing account moves faster than new logo.
Thanks.
Thank you.
And our next question comes from Patrick Colville from Alright, Okay Research Your line is open.
Thanks for taking my question and congrats on a pretty fulsome cooler can I just ask about the the wine and secure switching piece, it's been a serious impressive part of your business for the last couple of quarters and I, just wonder kind of in the medium term what do you see as your competitive advantage in that business line versus your competitors why we're fortunate.
Sustain this healthy momentum.
Oh, Yeah I see.
Like I said, it's a it's a the industry transition from a traditional.
Like a network security only two more infrastructure and we called also recall the security driven now working elsewhere.
Because the border. This apparent so if you're honest security and the Internet connection and on the price no longer enough you need local internal.
Address the segmentation that different data server on its kind of chance you also need to make sure the connection to the outside onto the mobile also being secured wandered away have filed I see when.
So thats, where we have a.
This approach resolve.
Technology from the ASP, you ASIC chip to that.
I took a function cover five T y on y fight.
Going forward the Fiveg, that's all kind of working together.
At the same time, the fabry also helping.
Helping making a total solution multiple layers sort of solution works better now.
So thats why we see a and we see the transition for the industry is more like a infrastructure.
Consolidate fabric approach.
Help us drive this up.
This trend you see going forward compared to some of our competitors do a wider.
Well you know traditional network security Gateway, all kind of oney or drive some part of infrastructure I'll start an application in the cloud.
So we feel we have a much better broader.
And and kind of more advanced approach.
Not only for fall for this.
Chris do you want but also going forward with a fiveg the aisle T O V security and then and there is a very busy is a huge.
And your potential going forward.
Great and cost just a quick follow up there've been some other earnings net out this evening for example.
Ms quite badly and some other kind of on Prem.
Vendors have have had some bad results why is it that the fall market has remained so how you guys are putting up great numbers and the guidance implies that momentum stays really strong you know why is it the phone market and security markets being so different on the on Prem.
Spending aries.
Perfect guys keep look I think that.
You've got to keep in mind, the significant diversification that we have.
Whether that's across geographies or thats across the the fabric products in the in the firewalls Orbitz the identification and taking advantage of new use cases, such as SD Lan OTI inside.
Perhaps if it was four or five years ago, you could have a conversation with us about being a point solution with firewalls, but this has become a very diversified company.
Great. Thank you you asked questions and keep up the good work cheers.
Thank you. Our next question comes from Gray Powell from Deutsche Bank. Your line is open.
Great. Thanks for thanks for working in see I wanted to follow up on the other symantec relationships.
At least in my conference circuit, It seems like they're talking up the the partnership with Fortinet more and the potential for net virtual firewalls into their cloud secure web gateway and how can that can help them close the gap against the scale or is that something like is that something that you built into your guidance and is that is there any material uplift that we should be thinking about from that relationship.
We have had some some billings from two symantec relationship, but I would not.
You uncomfortable with my guidance or not calling out symantec separate separately or any particular upside to that relationship at this point I think you've described the use case, if you will or how that what the go to market case is for Symantec and why it makes sense.
As a business strategy.
Got it okay. Thank you.
Q.
Thank you.
Our next question comes from Ken Talanian from Evercore ISI. Your line is open.
Hi, Thanks for taking the question Hey, you mentioned seeing an increase in the percentage of support and services is I think as a result of assay. When are you seeing a broad uptick in support and services in part from mix shift a richer firewall configurations and can you help us understand maybe about a bit about the magnitude of that.
Yes. This is Keith I'm, sorry, Ken the I was just trying to.
Described for people, what an SD Wan solution looks like when I mentioned that it's going to run about 70% services rather than my larger deals in the quarter.
I wasn't trying to go someplace else with that particular comment I can probably talk a little bit about some of the dynamics that are happening in 44 regard 40 care.
40 card is doing very very well.
It's probably has a number of vintages right now its coming off of the company's coming off of.
Fairly high you ship the number in 2018 product revenue that attached service contracts to that Youre seeing those services now roll into.
The income statement that was previously they were previously deferred so now you're seeing them happen. There you also see what I talked about before the mixed shift a little bit from low end to mid range. This has been happening for a period of time now.
To the extent I'm, sorry, sorry, more mid range than I am low end that will typically attach a higher ASP on the service contracts.
Feeling a little bit more lift from the bundles, a little more lift from stem standalone security offerings things of that nature.
Got it and you described last quarter is rich in renewals could you comment on this quarter and just how you're thinking about the remainder of the year.
Yeah.
I think it's not surprising that for a tech company Q1 tends to be a logical time that you have a lot of renewals theres not in Q1 to get Q4.
Q2, Q3, you may get some governmental entities.
You're always going to have remote renewals throughout the year.
But I think over time, you start to see a bit of a migration in terms of those renewals because of co term agreements and enterprise et cetera migrate towards a Q4 Q1.
[noise] timeframe and that's pretty much what we expected and that's what we saw.
Perfect. Thanks very much.
Thank you.
And our next question comes from Taz called jogging from Guggenheim Partners. Your line is open.
Hey, guys. Thanks for taking my question I had a question about the fabric business is there a way to.
Maybe look at the right fit on the attach rate like how many customers are using the fabric products today in the installed base.
How much so how much penetration do you have a lot for those products in the installed base and how that's trended in the last quarter.
Yes, not suddenly we talk about publicly taz in terms of attach rates I will tell you that it continues to steadily trend up.
Got it and then a question on Billings Guide you had a strong billings number this quarter or your guidance seems pretty conservative.
Well what are you assuming for duration for next quarter or anything.
That's changing that's making you guide pretty.
Fairly conservatively for next quarter.
No I think the nature of our business is that Q2 to Q3 typically is within one or two points of each other.
I think we're at that we had a very good Q2, obviously, so you're probably seeing a little bit of that factor into it.
On the full year when you do the math, you'll see that we've we've put some of the upside from Q2 into the full year guidance. So.
Yes, I think we feel very good about what we're seeing in terms of the quality of our pipeline et cetera.
Got it and just one last one from me you said that non Fortigate, obviously grew faster than fortigate any more color on the cloud piece of the non putting it.
I know you usually give us some metrics in the past, but any more color on how the cloud piece of non for you did this quarter.
Best fastest growing element of the now the fabric.
Got it.
That's it for me Thank you guys.
Okay.
Thank you and I am showing no further questions from our phone lines I'd now like to turn the conference back over to Peter Salkowski for any closing remarks.
Thank you Christine I would like to thank everyone for joining the call today, and let everybody know that forward or not we'll be attending the following investor conferences during the third quarter Oppenheimer on August seven in Boston, We at the Raymond James Conference on August 20, Onest in Chicago, The Doherty conference in Minneapolis on September Fiveth, and we look forward to seeing many or the next summer. If you have any questions. Please give me a call. So I mean, you now have a great rest your day. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a wonderful day.