Tapestry Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2021

There are 13 speakers on the call.

Operator

Thank you for standing by. Welcome to the Fortinet Third Quarter 2021 Earnings Announcement Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker for today, Mr. Peter Szarkowski, Vice President of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Eli. Good afternoon, everyone. This is Peter Szarkowski, Vice Speakers on today's call are Ken Xie, Fortinet's Founder, Chairman and CEO and Keith Jensen, our Chief Financial Officer. This is a live call that will be available for replay via webcast on our Investor Relations website. Ken will begin our call today providing a high level perspective of our business.

Speaker 1

Keith will then follow with the financial and operating results For the Q3 before providing guidance for the Q4 and updating the full year. We'll then open the call for questions. During the Q and A session, we ask that you please Before we begin, I'd like to remind everyone that on today's call, we will be making forward looking statements and these 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 ks and Form 10 Q for more information. All forward looking statements reflect our opinions only as of the date of presentation, and we undertake no obligation and specifically disclaim any obligation to update forward looking statements.

Speaker 1

Also, our references to financial metrics that we make On today's call are non GAAP unless stated otherwise. Our GAAP results and GAAP to non GAAP reconciliations is located in our earnings press release and the presentation that accompany today's remarks, both of which are posted on the Investor Relations website. Lastly, all references to growth are on a year over year basis unless noted otherwise. I will now turn the

Speaker 2

call over to Ken. Thanks, Peter, and thank you to everyone for joining today's call to review our Expanding Q3 2021 results. Billing increased 42 percent to $1,064,000,000 exceeding our $1,000,000,000 in quarterly billing for the Global G2000 billion growth accelerated to over 50%, total revenue growth 33% to $867,000,000 with product revenue up 51%, our highest quarterly product revenue growth since going public in November With very strong business momentum, we remain focused on growth. According to Gartner, The Nagle parameter is fragmented with many security team and the tools operating in silos and integration best of breed solution only adds To address this challenge, Gartner is predicting that by 2024, organizations that adopt Our cybersecurity mesh architecture will reduce the financial impact of individual security incident by an average of 90%. In a recent report, Government Code.

Speaker 2

Fortinet's security fabric as a platform that offers cybersecurity mesh architecture approach. Fortinet is helping customers solve the issue of complexity through our security driven networking and security fabric platform approach. Fortinet's unrivaled 4,008, 6 offers 5 to 10 times more security computing power. This result in tightly integrated Our organically developed FortiFabri solution like email, web and endpoint together with Forti's firewall offers much broader protection, More integration and better automation than other competitive solutions. As organizations continue to consolidate towards a platform approach And as network security expands to local and wide area network to the work from anywhere environment and to the cloud, Fortinet is strongly positioned to significantly capture market share of our projected total We are confident that this trend together with a relentless Focus on organic innovation will drive better than industry average long term growth for Fortinet.

Speaker 2

Work from anywhere is here to stay. The COVID-nineteen pandemic has greatly expanded the work from anywhere model. According to Gartner, organizations are facing a hybrid future with 75% of workers saying their expectation for working Today, Fortinet announced the industry's most complete solution to enable organization to secure and Connect work from anywhere by unifying Fortinet's broad portfolio of a Zero Trust endpoint and a network security solution Within the Fortinet security fabric, Fortinet delivers security that follows user whether on the road and home are in office to provide enterprise grade protection and productivity. In the 2021 Ghana Magic Highest in the ability to execute and ranked number 1 for remote worker in critical capability. Building on our leadership in SD WAN, Fortinet and Verizon recently announced the expansion of the Verizon Global offering with Fortinet Secure IC WAN.

Speaker 2

The solution is designed to provide enterprise and the business market customer with a converged networking and security solution in a box To secure and connect Wolfram Anywhere, we continue to see momentum and adoption of our secure SD WAN, 5 gs on EIBOT SD branch and the cloud delivered SaaS solution among the world's largest service providers. These service providers, including AT and T, which is Telecom, Telefonica and others we plan to announce in the coming months. Before turning the call over to Keith, I would like to thank our employees, customers and partners worldwide for their continued support and hard work.

Speaker 3

Thank you, Ken. Okay, let's start the more detailed Q3 discussion with revenue and the drivers for our record setting product revenue growth. Clearly, demand is strong. Total revenue of $867,000,000 was up 33%, Driven by industry leading product revenue growth of 51%. Looking closer at the 51% product revenue growth, our highest quarterly product growth rate In 12 years as a public company, we can point to 3 drivers.

Speaker 3

1st, the convergence of security and networking or what we call security driven networking 2nd, strong customer demand for vendor consolidation on platforms. And third, a heightened awareness of today's elevated threat landscape across a broader set of entities. Fortinet is proud to be an innovative leader in security driven networking With the convergence of security and networking functionality incorporated into our broad integrated and automated security fabric platform, Our security driven networking investments in Wi Fi, switching, WAN, data center cloud, 5 gs and OT enable us to provide integrated security at networking speeds From the data center to endpoints and to the cloud and with our secure SD WAN solution, security at the edges. Today, we announced a unified solution enabling organizations to secure and connect work from anywhere. By unifying our 0 Trust, Endpoint and Network Security Solutions, we can deliver enterprise grade security services and threat intelligence that seamlessly follows Users on the road, at home and in the office.

Speaker 3

As for consolidation, customers are increasingly focused on vendor consolidation, Automation and platform strategies that provide a broad integrated and single platform approach to security That effectively protects from the wide range of attack vectors. Our Security Fabric platform provides a broad range of security products Integrated on a single operating system. Gartner recently called out Fortinet Security Fabric as a platform to provide The Cybersecurity Mesh Architecture Approach or CSMA. The cornerstone of Fortinet's CSMA approach is our ASIC driven FortiGates, which provide on average 5 to 10 times more computing power than competitors' firewalls running on common CPUs. The greater computing power allows our software engineers to embed additional security functionality and integration into the operating system, enhancing our price for performance advantage.

Speaker 3

The integration extends across our suite of security fabric solutions and consists of a complete range of form factors and delivery methods, including Physical and virtual appliances, cloud, SaaS and perpetual software as well as hosted and non hosted solution. And lastly, turning to awareness. The explosion of ransomware attacks has led to a greater awareness of the need for cybersecurity technologies. According to the latest Global Threat Landscape report published by our FortiGuard Labs, the number of unique ransomware detections per week increased more than 10 times from July of 2020 to June of 2021. The increase in the taxes across entities of all sizes, Geographies and Industries.

Speaker 3

These three factors, the convergence of security and networking, the adoption of a cybersecurity mesh architecture And a greater awareness of the threat landscape drove record setting product revenue growth contributing to market share gains for Fortinet. The dramatic product revenue growth was broad based with FortiGate and non FortiGate both posting product revenue growth rates of approximately 50%, While tilting our current revenue mix, 4.50 basis points from higher margin services revenue to product revenue. FortiGate product revenues were driven by entry level and high end FortiGate product revenue growth of 60% 57%, respectively. Non FortiGate product revenue growth was driven by several platform products, including Mail, SandBox, SIM, switches and virtual firewalls. Rounding out our revenues, we saw service revenue of $530,000,000 up 24%.

Speaker 3

Support and related services revenue was up 26% to $243,000,000 while security subscription services revenue It was up 22% to $287,000,000 Turning to revenue by GEOs. As summarized on Slide 5, Revenue in EMEA increased 33%. In the Americas, revenue increased 29% and APAC posted revenue growth of 43%. Moving to billings. Quarterly billings crossed the $1,000,000,000 threshold for the first time in our history.

Speaker 3

At $1,064,000,000 billings were up 42% as enterprises responded to the expanding threat landscape, Favoring costs for performance leaders and integrated platform or CSMA strategies. This is especially evident across the enterprise segments. For example, in the large enterprise sector, Global 2,000 billings were up 52% with growth accelerating over the last 3 consecutive quarters. And for the 2nd consecutive quarter, we added over 6,000 new logos across all customer segments. FortiGate billings were up 39% and accounted for 70% of total billings.

Speaker 3

As shown on slide 6, entry level and high end FortiGate Posted very strong billings growth. Non FortiGate billings were up 49%, driving a 1 point billings mix shift to non FortiGate. The top 10 solutions accounted for 68% of non FortiGate billings and were up 48%. The number of deals over $1,000,000 increased over 70% to 83 deals and saw secure FD WAN deals more than doubled to 19. Average contract term increased 3 months year over year and 1 month quarter over quarter to 29 months.

Speaker 3

The increase in contract term was driven by the significant increase in G2000 and other large enterprise deals. SD WAN billings were up 52%, outpacing the company's billings growth and accounted for approximately 14% of total billings We continue to receive industry accolades. For the 2nd consecutive year, Fortinet was named a leader in the Gardner Magic Quadrant for WAN Edge Infrastructure And positioned number 1 for ability to execute. For critical capabilities, Fortinet's SD WAN ranked 1st in the small branch WAN, Security sensitive and remote work use cases. And consistent with the elevated threat environment And the breadth of ransomware and other attacks, OT billings were up 77%.

Speaker 3

Moving to worldwide billings by industry verticals. Among the top 5 verticals, worldwide government grabbed the largest share with a mix of 17% and saw building growth of 22%. We've made investments to expand our presence and engagement with the government sector. For example, in the U. S, where we recently added retired 4 star admiral Stavridis To our Board of Directors, and yesterday, Fortinet Federal announced Department of Defense Certification approval for an additional 26 secondurity fabric solutions.

Speaker 3

Internationally, we are set to open Fortinet's Federal Government Integration Innovation Center in Australia before the end of the year. Utilities, manufacturing, transportation, construction and other verticals have not consistently been in our top 5, combined for billings growth of 68%. We believe the growth of these verticals is another indicator of the broadening nature of the threat landscape And is driving security investments in industries that may have shown less affluent security budgets and lower internal labor resource levels. On August 31, Fornett acquired a controlling stake in Alexala Networks, a Japan based networking company for approximately $64,000,000 Alexa provides high performance network switches and routers in their local market. The investment increases our total addressable market reflects our leadership on the convergence of networking and security.

Speaker 3

Moving back to the income statement. Product gross margin declined 220 basis points 60.7%, reflecting the consolidation of Alexo's results and the change in our product mix. Product cost increases associated with supply chain constraints were largely offset by our pricing actions. Services gross margins decreased 150 basis points to 86.6 percent due to Alexa and costs associated with the expansion of our data center footprint. The 25.8 percent operating margin was 30 basis points above the top end of our guidance, despite pressure from lower gross margins and higher marketing expenses, primarily from the Fortinet Championship PGA Tour event.

Speaker 3

Headcount increased 20% to 9,700. Moving to the statement of cash flow summarized on Slides 7 and 8. Free cash flow was $330,000,000 representing a margin of 38%. Free cash flow benefited from strong billings growth and good billings linearity. On a year to date basis, free cash flow margin was 41.5%.

Speaker 3

We repurchased approximately 370,000 shares of our common stock for a total cost of $109,000,000 at an average price per share of $2.94 The Board increased the share repurchase authorization by 1,250,000,000 and extended the expiration date for February 2023. The remaining repurchase authorization is approximately $2,000,000,000 We ended the quarter with total cash and investments of $3,400,000,000 Inventory turns increased to 2.9 times from 2.7 times for the Q2 of 2021, reflecting strong product sales in the quarter and some supply chain pressure. DSOs at 63 days returned to pre pandemic levels. Capital expenditures for the quarter were $69,000,000 including a payment for the new campus building of $13,000,000 As we noted in our last earnings call, we've pivoted our capital expenditure strategy to include building out our facilities and operations infrastructure to support our accelerating growth. We estimate 4th Capital expenditures to between $170,000,000 $190,000,000 investments in our future facilities and operations infrastructure Account for the sequential increase in CapEx.

Speaker 3

Before providing guidance, I'd like to comment on the supply chain, because we're widely publicized That the rapidly changing macroeconomic environment is causing disruption in global supply chains for companies of all sizes and industries. We expect the worldwide supply chain constraints will present evolving challenges in the Q4 and into 2022. The supply chain issues have proven to be extremely dynamic and I'd like to pause here to acknowledge and thank each member of our operations team for their truly outstanding performance. With regards to pricing, we believe we entered this phase with a hard earned reputation of being able to provide We believe we can leverage this reputation to largely offset our increased cost. We believe our pricing actions have been met with understanding by our customers as evidenced by our Q3 results and strong pipeline growth.

Speaker 3

We view the current situation as a supply challenge, not a demand challenge. Now I'd like to review our outlook for the Q4 summarized on Slide 9, which is subject to disclaimers regarding forward looking information that Peter provided at the beginning of the call. The following guidance reflects our best effort to estimate the supply chain impact. For the Q4, we expect billings in the range of $1,165,000,000 to 1,215,000,000 Revenue in the range of $940,000,000 to $970,000,000 non GAAP gross margin of 75% to 76%, Non GAAP operating margin of 27% to 28%, which includes an estimated 200 basis point headwind from acquisitions, foreign exchange and increased travel and marketing costs. Non GAAP earnings per share of $1.10 to $1.15 which assumes a share count of between 168 $170,000,000 We expect a non GAAP tax rate of 21%.

Speaker 3

Based on our very strong third quarter performance And the upside I just provided to the Q4 expectations, we are once again raising our 2021 guidance. We expect billings in the range of $4,040,000,000 to $4,090,000,000 which at the midpoint represents growth of approximately 31.5 percent Revenue in the range of $3,320,000,000 to $3,350,000,000 which at a midpoint represents growth of 28.5 percent. Total service revenue in the range of $2,080,000,000 to $2,090,000,000 which represents growth of 24% And Applied's full year product revenue growth of 36 percent non GAAP gross margin of 76.5 percent to 77.5 percent Non GAAP operating margin of 25.5 percent to 26.5 percent non GAAP earnings per share of $3.85 to $3.95 which assumes a share count of between $167,000,000 $169,000,000 We expect our non GAAP tax rate to be 21%. We expect cash taxes to be approximately $130,000,000 which includes a $47,000,000 tax payment made in the 4th quarter. Along with Ken, I'd like to thank our partners, our customers and all members of the Fortinet team for all their hard work, execution and outstanding success.

Speaker 3

I'll now hand the call back over to Peter to begin the Q and A.

Speaker 4

As a

Speaker 1

reminder, during the Q and A section, we ask that you please limit yourself to one question to allow others to participate. Eli, please open up the call for Q and A.

Operator

Thank you. And now for your first question, we have Brian Essex from Goldman Sachs. Your line is now open.

Speaker 5

Great. Good afternoon. Thank you for taking the question and congrats on some really nice results this quarter. I guess, Keith, You spent some extra time talking about the supply chain and it's certainly the most frequent question I've gotten from investors, particularly over the past 3 weeks. So Could you maybe help us understand what kind of headwind you're quantifying or accounting for in your 4Q guide?

Speaker 5

Where you might See risk in the supply chain and then what you might be seeing from peers, particularly where you may be benefiting from having supply where your peers may not have product?

Speaker 3

Thanks, Ryan. And I don't know that anybody knows all the answers to the questions that you kind of articulated at all. I'll give you some color if you will. I think we saw a little bit of supply chain pressure in the second and the third quarter that I alluded to, but obviously the number is nothing that It was terribly noteworthy. I do think the guidance that we've given for the Q4 is appropriately conservative, if you will, in terms of what we see supply chain or what we would call backlog in the Q4.

Speaker 3

I think we feel good about the guidance that we've given. I think the if you look at kind of the general Tone and what we're hearing from our operations team, I think there is some time in the Q3 where Every day was very dynamic with them, with people calling and then having to scramble about component matters and contract manufacturer commitments or what have you. I'm hearing less about that at this point. That's probably very early on. I would also offer that the backlog Our supply chain first appears for us in some of the fabric products, the non FortiGate.

Speaker 3

And I think that will continue on a little bit into the 4th quarter And probably also get to the FortiGates to some extent in the Q4 as well. Getting out to 2022, I think everybody is kind of in the same boat to understand when we're actually going to see something. If it's a real market improvement, marked improvement. And I think we'll probably kind of hold back commenting on that the next several months until we get closer to providing guidance for the next year.

Speaker 2

Yes. Brian, this is Ken. A few other points to add on top of what he said. I feel we are a little bit better positioned compared to competitor. First is where we have The quantity is much larger than our competitor like we're probably like 3x Compared to the Cisco and Unishen, maybe probably 10x than Polato some other, which give us better negotiation power with some of the supply.

Speaker 2

And also we manage all these more directly compared to our competitor, Mogul, through some third party. So that gives us a better visibility and also can act 2nd, we have quite a broad product line, both in the FortiKs and also non FortiKs. It's more easy for customer To better go to the next line of product have a similar performance and then all running the FortiOS, same FortiOS. So it's more easy to use in some different product to subsidize some of the product shortage. And also we have Great team, operation side.

Speaker 2

At the same time, we have a culture more invest in the long term, both on the Even in trade some other things compared to our competitor to me some even like 5, 10, 15 years ago, We tend to keep some more inventory to meet some customer urgent needs. So that's actually been for that in this supply chain issue.

Speaker 5

Great. Thank you very much. And I'll honor Peter's request for just one question and step back in the queue.

Operator

Next we have Tal Liani From Bank of America, your line is now open.

Speaker 6

Hi guys, you're killing me with this one question thing. I want to focus on the most important part, which is the growth acceleration. Your revenue your product revenue growth went from 25% 41 to 51 in the last three quarters and your billing growth went from 14 to 35 to 42. This is just a major acceleration. The question is, can you identify the key areas?

Speaker 6

I know that a lot of areas are growing, but when you look at material Areas meaning that the most the highest contribution to the growth acceleration. What are the key areas? Can you share with us the key areas where you see the highest The growth in terms of dollars and can you also give us an update on SD WAN specifically? Thanks.

Speaker 2

I think you can see both the 40 ks and also non 40 ks all kind of revenue growth at 50%. 40 ks is more related to because like whether the internal segmentation to protect all these Kind of right somewhere I'll go to the WAN, I'll stick to SD WAN. And also the non FortiGate is more tied to the story, the fabric, Security Fabric, which is also garnered, starting promoting the core cybersecurity mesh architecture, which can reduce the financial Cost of a single event since by like 90%. I think that this both contribute for the growth like Keith said. And also some vendor consolidation, we see some smaller vendors starting kind of weaker and weaker.

Speaker 2

So we do see some market share gain here also.

Speaker 6

Okay. And when you look at 2022, and I know you don't provide guidance, but when you look forward, Do you see the same drivers continuing to support growth acceleration or How do you deal with these high targets next year?

Speaker 2

We do see this trend is not Slow down will last for probably a few years, whether we call security driven networking or security fabric, which really will help in the enterprise or service provider to get better security To the customer all these things, so far we don't see anything slow down. We feel we are well positioned to keeping gaining market share.

Speaker 7

Got it.

Speaker 4

Thank you. Yes.

Speaker 3

I would just echo what Ken said, Paul, in a little bit. I think the thresen landscape is a hot topic of in all quarters of the world it seems right now, and it doesn't seem like that's going to abate anytime soon. I think the need, With Ken and the team have built here with providing security and networking speeds is critical. But I think also this platform of what Gartner is now The mesh architecture, the cybersecurity mesh architecture, I think consistent with Gartner's other reports about The percentage of companies that are looking for consolidation, I think Ken has commented on that and how that's going to continue to increase. It certainly seems that those tailwinds Are poised to continue to exist as we get into 2022.

Speaker 6

Great. Thanks.

Operator

All right. Next we have Shaul Eyal from Cowen. Your line is now open. Thank you. Congrats on the performance and guidance guys.

Operator

Keith, the federal vertical had a good performance. Was it just typical Q3 government seasonality? Or do you see that sustainable as sustainable going forward given your recent investments within this vertical?

Speaker 3

Yes. So keep in mind for us, the government is a worldwide number when we talk about that includes some U. S. Federal, international governments, also state and local governments, etcetera. It has been a very strong vertical of ours For well over a year, if not 2 years now.

Speaker 3

And I certainly don't see any reason that just on that basis that it would slow down. And I think if you overlay that with the investments that Ken and team are now making, particularly as it relates to the U. S. Federal team, I think there's some opportunities for us to

Operator

Next, we have Michael Turits from KeyBanc. Your line is now open.

Speaker 8

Hey, guys. Keith, I'd like to drill down on the FortiGate side and really understand where the purchasing is taking place and for what is It's good to see, I would think that we're modernizing data centers, are the data center expansion, Is it displacements? And again, surprising perhaps considering the move to cloud. So just drill down the physical on prem FortiGate side.

Speaker 3

I think what we're and I hate to give compliments to my peers, but I think what we're really seeing here is really strong execution from the sales team. Think we came into this conversation feeling that we had a very strong product suite. But I think the sales team has done a stellar job and we talked to them about same question you just asked me, where is this coming from? I can hear in them the confidence when it comes to displacements. There's certainly no competitor that they're afraid of.

Speaker 3

I can hear them articulate back the platform strategy, the land and expand strategy. I can see them using some of the tools And products and technologies that we've invested in, invested in them and they're leveraging them, I think, very successfully. So It was a question going back, I think, that Tal had asked about, and we used this term before, a rising tide lifting all boats. And I think we saw that in the quarter. There wasn't a weak Geography, there wasn't a weak product suite.

Speaker 3

I think everybody performed very strongly.

Speaker 2

Yes. Echo, Keith, is that the Global 2000 Growing over 50% and also the investment we made like last year the year before in some big enterprise and some service providers starting paying

Speaker 8

Yes, I think it's the same question. So hopefully not too, but I'm just trying to figure out, of course, execution and competition doing well that way. But where are we in terms of people buying stuff to put in data centers when we're really in a cloud mode here? Is it because of a refresher, Why are we seeing that investment?

Speaker 2

I think it's all played to our like long term ASIC strategy, which Add a lot of performance and more function and at the same time cost lower and low cost of power consumption also. That's where the security setting expand inside the data center, inside the company internal network And also the one side, I see 5 gs, we also see a lot of driving from that angle. So it's really starting to expand for the whole Structure instead of traditionally just secure Internet border. So that's how the much bigger total addressable market, sometimes we call security driven networking, but It's really a more expanded market and has a very strong security need.

Speaker 8

Thanks guys.

Operator

All right. Next we have Sterling Auty from JPMorgan. Your line is now open.

Speaker 1

Yes. Thanks. Hi, guys. So I'm going to That's my one question. It's kind of an extension of what Michael was just kind of talking about.

Speaker 1

I'm curious as you look at the growth in the quarter, Even if it's qualitative, can you help characterize for us how much of that growth is coming from actual displacement of Solutions, both traditional cybersecurity and networking versus how much of that growth is coming from Existing customers buying additional expansion, so additional products just to build out to handle their growth needs.

Speaker 3

I think the metric I would give is 6,000 new logos. So I think that I'm going to go back and say, I mean, the very significant, the execution was very strong across the board. Did we was there penetration greater penetration in our installed base of customers? Absolutely. No doubt about it.

Speaker 3

But at the same time, that's 2 quarters back to back now that we've added 6,000 new logos. And I know some of those are small enterprises, But we are getting the at bats that we've always coveted. And I think coming with more at bats, I think you were seeing stronger execution as well.

Speaker 2

Yes. Also the existing customer keeping expanding their like a security infrastructure approach Like adding to the one side, SD WAN 5 gs and also expense of the internal Segmentation of Wi Fi security, data center security. So that's why I think it's both, but I do see probably a little bit more come from the customer Keeping expanding their security infrastructure.

Speaker 1

Understood. Thank you.

Operator

Next we have Rob Owens from Piper Sandler. Your line is now open.

Speaker 9

Yes. Thanks for taking my question. I guess I'll pivot a little bit from Sterling and ask about G2K specifically and what is driving the strength in G2K billings, is that product related? Is it just better distribution relationships that are getting you into these accounts? And Who do you think share is coming from in this market?

Speaker 9

Thanks.

Speaker 3

I think the I would The general comment in terms of where who's the market share gainers and who are the market share donors, I don't think there'd be any surprises if I actually demand your names in terms of who I thought those were. In terms of distribution, I think when you get in particularly into the U. S. Market, with a large enterprise focused distributors, You've got to as a company, you've got to invest some time and bring opportunities to them and demonstrate that you have a superior product, a pure offering. And I think that the team has done the heavy lifting on that.

Speaker 3

And I do believe that we are getting More momentum, if you will, from those large U. S. Distributors that maybe we did not have previously. So I think there's some of that. And then I think we've continued to invest In both the sales and the marketing, we knew all along for several years now that we needed to improve our coverage in terms of the number of accounts that were assigned to reps And the people that we're bringing in from outside that maybe had more of an enterprise experience and less of a channel experience, etcetera.

Speaker 3

So I do think that all those things have combined and Demonstrating the success, as you point out, G2000 growth at over 52% and accelerating for the last three quarters.

Speaker 9

Thank you.

Operator

All right. Now we have Hamzah Fudiwala from Morgan Stanley. Your line is now open.

Speaker 7

Hey guys, thanks for taking my question. I'm going to keep it to one question. But just on the OT side, You talked about that growing 77% this quarter. I think that was the first time you mentioned that product specifically. Just curious, can you give us any rough sense of how material that's becoming to your overall billings and what's been driving that in more recent quarters?

Speaker 3

Yes, I think it's not as big as SD WAN, but growing faster. But also I don't think we're I think that it's reached a point, if you will, in terms of size that we're comfortable and we think it's worthwhile making sure that we share with people outside the company with those growth levels. If you combine SD WAN and OT together as a percentage of billings, you're going to get to something I think that's over 20% of our total billings.

Speaker 10

Thank you.

Operator

Next we have Adam Moore from Stifel. Your line is now open.

Speaker 4

Hey guys and thanks so much for taking the question. Maybe just for Ken, so back in September, you guys signed a partnership with Linksys around securing work from home environments and Segmenting Corporate and Personal Networks. And I know one of your competitors also announced a similar idea. So how should we think about the idea of securing home networks And effectively the home becoming extension of a branch office of 1 and the opportunity to do that as we live in this work from anywhere world going forward. Thanks so much.

Speaker 2

Yes, VVC is a new market. There's a lot of potential supporting work from anywhere. That's where we partner with Linksys and which has done in the home networking area for quite a while. And we do believe it's eventually a lot of that without this IoT, some other things connect online and also a lot of work from home and Like school from home, all these kind of things, they all will need a security, which we combine with the network security, well, endpoint security And also the cloud and other SaaS solution. So we do feel it's a big long term potential.

Speaker 2

It's not quite I mean the business actually ramp up quickly, but it eventually will contribute more revenue to the company.

Speaker 4

Great. Thanks so much.

Speaker 2

Thank you.

Operator

And next we have Jonathan Ho from William Blair. Your line is now open.

Speaker 11

Hi, good afternoon. Congrats on the strong results. Just wanted to, I guess, understand a little bit better sort of the dynamics around the price increases to your base. Can you give us a sense of maybe the magnitude or impact to the quarter from those increases? And is there potential for that to stick even beyond some of these supply chain challenges?

Speaker 11

Thank you.

Speaker 2

Yes, we kind of more carefully increase the price Based on our cost increase, which also kind of supporting by some of our partner and At the same time, because we have much better like performance price ratio and also more functions, especially on the FortiGate side. So we do feel we have more room to address some of the price and still customers do like the product. So, so far we did some price increase and we'll just offset the cost increase and we'll get margin back online.

Speaker 3

Yes, I would add to that. I think, Jonathan, one of the metrics that we look at in the Q3 was just our ability to Hold the line of the price increases, which were largely effective in August on August 1. I say largely because you have to give notice to your channel partners, which is appropriate. And you can imagine then taking certain actions to get orders in the 1st month of the quarter, if you will. So it gets a little bit distorted that way.

Speaker 3

But we do look at our ASPs And wanting to make sure in our discounting that we're not giving back that price increase, if you will. And overall, I think that the headline is that we think we were On the direct product line, I think it was accretive to the margin in the quarter. And I emphasize the direct because as volatile as it is, Predicting things like expedite fees and sometimes freight as well can come into that line. So I think overall, when you factor in direct and indirect, we're probably in a wash for the quarter.

Speaker 11

Great. Thank you.

Operator

Next we have a Gray Powell from BTIG. Your line is now open.

Speaker 1

So yes, within your non FortiGate billings, can you roughly give us a sense as to how much is related to appliances versus software and cloud? And then how should we think about supply chain issues potentially impacting non FortiGate in Q4?

Speaker 3

Yes, I think the non FortiGate mix is something on the order of about We've talked about this before, something in the order of 30% to 40% of that is cloud or software, and the remainder would be a hardware form factor. As I mentioned in the call, I think the first place that we saw supply chain pressure in this Q3 Was in non FortiGate, more specifically around switches and access points. Got it. Okay. That's helpful.

Speaker 3

Thanks.

Operator

All right. Next we have Andrew Nowinski from Wells Fargo. Your line is open.

Speaker 12

Great. Thank you and congrats on a great quarter. I want to ask about the high end. That was certainly better than expected. I think over 37% of your FortiGate sales, which looks like it was the highest level of spend in at least the last 2 years.

Speaker 11

Can you just talk about

Speaker 12

the drivers of the high end and whether the 5 gs rollouts in your leadership position in the carrier market might be contributing to that?

Speaker 2

Yes, the big enterprise, the Global 2000 definitely contributes some high end growth and also On the product refresh side, in the last 1 to 2 years, we also refreshed the high end using the latest ASIC for the MP7, which has a 5 times better performance and more function compared to the previous MP6, which I think the high end we probably We refreshed like maybe 80% of the points already, so that's also we started to benefit some of the refresh we made in the last 1 to 2 years.

Speaker 12

No contributions from the 5 gs carrier class customers there, it was more on the enterprise?

Speaker 2

There are some contribution from SD WAN, but it's the 5 gs is still in the ramp up I don't see much, but I do see the huge potential.

Speaker 5

Super. Thank you.

Speaker 2

Thank you.

Operator

Next we have Ervin Lu from Evercore ISI. Your line is now open.

Speaker 10

Hi, thanks for the question. This question is for either Ken or Keith. You have the opportunity to meet with several customers and partners What you are seeing from a customer traction perspective post the event and perhaps if the event had led to a notable uptick in visibility And mind share among customers.

Speaker 3

I think the Head of Marketing asked that question.

Speaker 7

But it's a good question.

Speaker 3

I think we'll both have a question.

Speaker 2

Yes, it's probably the one of the biggest marketing investment we have been made, But definitely we see Barbour's successful result. A lot of customer and a lot of partner really appreciate all this The fully the champion PGA effort there and also we use it as a platform to bring different Customer partner all together to share, communicate their experience and also to the training education. So we do see this is really Helping a lot of the marketing sales effort we have and also generate a lot of new leads, put it this way, is a very successful event.

Speaker 3

Yes, I would come over the top and completely echo and what Ken had to say. I'm shocked with how enthusiastic I am about how that event Came out, whether we look at what we call white space names that we got from, say, S and P 500, The percentage of attendees that were non customers and they would sit with us in 1 on 1 sessions and hear more about our story and the household names that were there, it was fantastic. I think the branding, what the marketing team pulled together with Silverado Country Club, was extremely successful. And I think also it kind of goes back to some of the comments we made earlier in the conversation. I think it was it really struck Fortinet at the right time in terms of its Call it, it's maturity, right?

Speaker 3

I think that the team here was really in a good position to execute against that. I was in a Customer meeting yesterday here in Sunnyvale with a very large company that come to the event, and so it was a follow-up. And there have been other very large companies that have come to our EBC events here in Sunnyvale just in the 1st month and a half after the event. I'm just really impressed with what the guys did

Operator

Next we have Keith Bachman from BMO. Your line is now open.

Speaker 12

Thank you very much. I was wanted to direct this towards Keith. Keith, as you think about the billings guide, What you're suggesting even at the high end, the billing sequential growth would be about 13%. In the past 2 years, you've grown billing sequentially about 28%. Obviously a little less on the guidance.

Speaker 12

I'm just wondering if you could just give us some color or thoughts around that. And in particular, Is that a reflection of was there any kind of pull in that you think about on the billings where customers concerned about not getting product? And or is it reflecting Some of the concerns you previously mentioned about are we going to have enough of the supply chain availability or product availability, I should say, And therefore, we might need to tamp down a little bit in Q4. And then I had a follow-up if I could, because Peter told me I'm allowed to ask a follow-up.

Speaker 1

Again.

Speaker 3

Yes. Look, I think what you're seeing there is And as I said earlier in the conversation that I think they we've been appropriately conservative, I hope, in terms of how we guided to it. To unpack that just a little bit, we do with our sales team and then we manage things on a bookings basis with them And then we put that up against what we have the ability to ship. If I looked at just the bookings number and we had a long internal conversation about whether or not that's a metric that we should provide Time and decided not to. But if we look at just the bookings number, I would say that it's a very strong indicator that the business is extremely healthy, if you will.

Speaker 3

In terms of customer buying behavior, there's always somebody getting in line early, if you will. They have longer term deployments or what have you. That's not new and maybe a little bit of it in the Q3. No deals over $10,000,000 I think the largest deal was probably $7,000,000 or $8,000,000 or something like that in the quarter. We have seen in the Q4 things where customers, I'd say, they're getting line orders.

Speaker 3

They've got deployments where Our plans are deploying in 2022 and they want to make sure that they're trying to time when they're actually going to need the product and when the product So I have seen early in the quarter, a few companies exhibiting that behavior.

Speaker 12

Yes. We're hearing that a little bit from the channel about the lead times Because they're getting out, customers are ordering early and more. But it sounds like what you're saying is essentially you are concerned about maybe the billings number reflects some. You might not be able to make all shipment demand and so that's reflected in the quarter from hope I'm not putting words in your mouth.

Speaker 3

No, absolutely.

Speaker 1

I think

Speaker 3

that would be yes, I think it's very prudent to me to say With the supply chain environment that we're in, I'm not just going to take the I can't just take the absolute booking number. That's going to shift. So I think there's been a fair amount of internal work around that, if you will. Now on the other side, it does give us more predictability as we come into 2022 as this behavior continues than we've had in the past. Backlog or bookings has not been something that Fortis as a company has really had reason or cause to talk about.

Speaker 3

And I don't know that as of today that we do, but as we get Further into the Q4 and then moving into 2022, that may be something that because of the predictability that it helps with, We may be talking about that next year.

Speaker 12

Okay. And Peter, Peter, sanction second question then is if you just talk a little bit about the non FortiGate mix, know you mentioned that in one of the previous questions, but how do you see that changing over the course of the next couple of quarters, if at all? And I'm not really talking about a supply chain constraint, But just on demand related pools, as customers may look as they're deploying that incremental 6,000 customers And greater penetration on your existing, do you see the software side moving up, if you will, in the non FortiGate component? And then I will see the floor. Thank you.

Speaker 2

Yes. That's what we call fabric or mesh, we see pretty strong demand from the customer and We both increased the monthly purchase also the customer adopted it's a new multiple product Fabry on mesh solution. So that was continuing to see our strong growth on the NANA 40 ks. And Also we started working with the service provider carrier on the SaaS and other solution eventually will also benefit from a broad customer base.

Speaker 12

Okay. All right. Many thanks and congratulations for the incredible results.

Speaker 2

Thank you.

Operator

And there are no further questions at this time. That concludes the Q and A session. I will now turn the call back to Peter Solkoski for closing remarks.

Speaker 1

Thank you, Eli. I'd like to thank everyone for joining the call today. I know you have a lot of calls this evening. Really appreciate your time. Fortinet will be attending the following investor conferences during the Q4 with the Wells Fargo Conference on November 30, the NASDAQ Conference on December 1 and 2, The UBS Conference on December 7 and the Barclays Conference on December 8.

Speaker 1

The events with presentations will be webcast and links to the webcast will be available on the Investor Relations website fortinetinvestor.com. If you have any follow-up questions, please feel free to reach out. Have a good day. Thank you very much for your time. Have a good day.

Operator

And this concludes today's conference call. Thank you all for participating. You may now disconnect.

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Tapestry Q3 2021
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