Keith Jensen
Chief Financial Officer at Fortinet
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 million was up 33%, driven by industry-leading product revenue growth of 51%. Looking closer to 51% product revenue growth, our highest quarterly product growth rate in 12 years as a public company, we can point to three drivers: First, the convergence of security and networking or what we call security-driven networking; second, 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, 5G 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 zero 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. 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 a 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 CSMA approach is our ASIC-driven FortiGates, which provide on average five 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. 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 nonhosted solutions.
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 attacks is across entities of all sizes, geographies and industries. These three factors: the convergence of security and networking, the adoption of a cybersecurity mesh architecture, and a greater awareness of 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 450 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% and 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 million, up 24%. Support and related services revenue was up 26% to $243 million, while security subscription services revenue was up 22% to $287 million.
Turning to revenue by geos that's 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 billion threshold for the first time in our history. At $1.064 billion, billings were up 42% as enterprises responded to the expanding threat landscape, favoring cost-for-performance leaders and integrated platform for CSMA strategies. This is especially evident across the enterprise segments. For example, in the large enterprise sector, Global 2000 billings were up 52%, with growth accelerating over the last three consecutive quarters. And for the second 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. As shown on Slide 6, entry-level and high-end FortiGates 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 million increased over 70% to 83 deals and saw Secure SD-WAN deals more than double to 19. Average contract term increased three months year-over-year and one month quarter-over-quarter to 29 months. 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 and continue to receive industry accolades.
For the second consecutive year, Fortinet was named the leader in the Gartner Magic Quadrant for WAN Edge Infrastructure and positioned #1 for ability to execute. For Critical Capabilities, Fortinet's SD-WAN ranked first 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%. Moving to worldwide billings by industry verticals. Among the top five verticals, worldwide government grabbed the largest share with a mix of 17% and saw billings growth of 22%. We've made investments to expand our presence and engagement with the government sector. For example, in the U.S., we recently added retired 4-star Admiral Stavridis to our Board of Directors. And yesterday, Fortinet's Federal announced Department of Defense certification approval for an additional 26 Security Fabric solutions. Internationally, we are set to open Fortinet's Federal Government Integration and Innovation Centre in Australia before the end of the year. Utilities, manufacturing, transportation, construction and other verticals that have not consistently been in our top five 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, Fortinet acquired a controlling stake in ALAXALA Networks, a Japan-based networking company, for approximately $64 million. ALAXALA provides high-performance network switches and routers in their local market. The investment increases our total addressable market and reflects our leadership on the convergence of networking and security. Moving back to the income statement. Product gross margin declined 220 basis points to 60.7%, reflecting the consolidation of ALAXALA's results and a 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% due to ALAXALA and costs associated with the expansion of our data center footprint. The 25.8% 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. Headcount increased 20% to 9,700. Moving to the statement of cash flows summarized on Slide seven and 8. Free cash flow was $330 million, 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%. We repurchased approximately 370,000 shares of our common stock for a total cost of $109 million at an average price per share of $2.94.
The Board increased the share repurchase authorization by $1.25 billion and extended the expiration date to February 2023. The remaining repurchase authorization is approximately $2 billion. We ended the quarter with total cash and investments of $3.4 billion. Inventory turns increased to 2.9 times from 2.7 times in the second -- from the second quarter 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 million, including a payment for the new campus building of $13 million. As we noted in our last earnings call, we pivoted our capital expenditure strategy to include building out our facilities and operations infrastructure to support our accelerating growth. We estimate fourth quarter capital expenditures to be between $170 million and $190 million. Investments in our future facilities and operations infrastructure account for the sequential increase in capex. Before providing guidance, I'd like to comment on the supply chain because we 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 fourth quarter 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 customers excellent price-for-performance or value. 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. We view the current situation as a supply challenge, not a demand challenge. Now I'd like to review our outlook for the fourth quarter 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 fourth quarter, we expect billings in the range of $1.165 billion to $1.215 billion; revenue in the range of $940 million to $970 million; 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 million and 170 million. We expect the non-GAAP tax rate of 21%. Based on our very strong third quarter performance and the upside I just provided to the fourth quarter expectations, we are once again raising our 2021 guidance. We expect billings in the range of $4.04 billion to $4.09 billion, which at the midpoint represents growth of approximately 31.5%; revenue in the range of $3.32 billion to $3.35 billion, which at the midpoint represents growth of 28.5%; total service revenue in the range of $2.08 billion to $2.09 billion, which represents growth of 24% and implies a full year product revenue growth of 36%; non-GAAP gross margin of 76.5% to 77.5%; non-GAAP operating margin of 25.5% to 26.5%; non-GAAP earnings per share of $3.85 to $3.95, which assumes a share count of between 167 million and 169 million. We expect our non-GAAP tax rate to be 21%. We expect cash taxes to be approximately $130 million, which includes a $47 million tax payment made in the fourth 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.
I'll now hand the call back over to Peter to begin the Q&A.
