Good day, ladies and gentlemen, and welcome to the Fortinet Q2 2019 Earnings Announcement. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr.
Peter Salkowski, Vice President of Investor Relations. Sir, you may begin.
Thank you, Crystal. Good afternoon, everyone. This is Peter Salkowski, Vice President of Investor Relations Fortinet. I'm pleased to welcome everyone to our call to discuss Fortinet's financial results for the Q2 of 2019. Speakers on today's call are Ken Xie, Fortinet's Founder, Chairman and CEO and Keith Jensen, CFO.
This is a live call that will be available for replay via webcast on our Investor Relations website. Ken will begin our call today by providing a high level perspective on our business. Keith will then review our financial and operating results and conclude by providing our guidance for the Q3 of 2019, and he will provide an update for the full year guidance before opening the call for questions. Before we begin, I'd like to remind everyone that on today's call, we will be making forward looking statements and these forward looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10 ks and Form 10 Q for more information.
All forward looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward looking statements. Also, all references to financial metrics that we make on today's call are non GAAP unless otherwise stated. Our GAAP results and GAAP to non GAAP reconciliation can be found in our earnings press release and in 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 call over to Ken.
Thanks, Peter, and thank you to everyone for joining this call to discuss our Q2 2019 results. We are pleased with our strong billings, revenue, operation margin and cash flow performance during the quarter. Our advanced technology, integrated security fabric architecture, broad cloud offering and secure SD WAN all contributed to a solid market share gain in the quarter. Increased performance from our infrastructure and security and cloud offerings drove total billing growth of 21%, well above the industry average. Non 40 ks billing was 27% of total billing for the quarter.
Revenue was up 18% to $522,000,000 driven by strong service revenue growth. Product revenue growth was consistent with the 14% increase we achieved in the Q1 despite a significant and more difficult earlier year comparison. Today, Fortinet announced 3 new high performance next generation firewalls, the FortiGate 1100E, FortiGate 2200E and FortiGate 3300E, which illustrate our superior technology advantage and enable organization to securely accelerate their on prem to the cloud. Traditional network parameters are solving as a mobile, cloud and IoT technology changes the way people work as well as the volume on the data they needed to secure. Fortinet is a leader in hybrid cloud and edge security.
During the quarter, we announced the addition of Fortiweb cloud, web as a service to our cloud security portfolio offerings. This SaaS solution enable rapid application deployment. Additionally, Fortinet provide 1 of the broadest management as a secure service and the secure as a service offerings. These cloud offerings are easy to implement, easy to integrate, flexible and scalable. The explosion of IoT technologies is accelerating the movement of data and computing power to the edge.
According to Gartner, 70% to 80% of edge data never get to the data center to be processed and within the next 2 years, 40% of large enterprise will integrate edge computing, up from 1% in 2017. The ability to offer security driven networking and at edge with low latency and high performance is critical, especially with the deployment of 5 gs networks. Only Fortinet offers security and networking into a single secured SD WAN solution and our offering is clearly resonated with enterprise customers. During the quarter, the number of customers adopting Fortinet secured SD WAN solution more than doubled from the previous quarter. Going forward, we see 4 drivers of market share growth for Fortinet.
First, our refreshed portfolio of FortiGate with integrated secure WiFi, SD WAN and 5 gs product are leading a transition to security driven networking and continue to gain network security market share. 2nd, Fortinet Security Fabric offer a broad automated and integrated secure solution for end to end protection as operation consolidate towards a fewer security vendors. 3rd, Fortinet provide a broad range of hybrid and multi cloud deployment. And 4th, our OT and IoT security offering with 486 SPU technology continuing to provide a cost and performance advantage versus our competition. I want to thank the Fortinet team and our partners for their ongoing hard work and our customers for their support.
Now I will turn the call over to Keith for a closer look at our Q2 performance and our guidance for the Q3 and 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 Q2 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 billings by product family slide by moving the FortiGate 100 series from the entry level to the mid range product family. FortiGate appliances below the 100 series are desktop appliances.
Mid range FortiGates, including the 100 Series, are higher performing rack mounted appliances. For your benefit, we have provided the product family billing trends under both the old and new approaches. I'd now like to summarize our strong second quarter performance. As Ken mentioned, total revenue of 522,000,000 dollars 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 190,000,000 dollars was up 14% despite a significantly more difficult year earlier comparison, product revenue growth was consistent with the Q1 of 2019. Product revenue benefited from the continued success of the E Series and fabric products. Service revenue grew 21% to 332,000,000 driven by a 24% increase in FortiGuard security subscriptions. FortiCare technical support and other services increased 16% to $149,000,000 As shown in our 2nd 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 represents 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 Q3, we expect similar percentages of service in total revenue to come from our existing deferred revenue balance. Total deferred revenue increased 27 percent to $1,900,000,000 Short term deferred revenue increased 21% to $1,000,000,000 Now turning to billings. Total billings grew 21% to $622,000,000 dollars driven by strong growth from infrastructure fabric, cloud and the secure SD WAN 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 1 month year over year to approximately 27 months. Service Providers, NMSSPs, remain one of our top customer segments, accounting for 15% of total billings. Increasing industry diversification, including strong growth from government and financial service verticals led to a 21% increase in billings. Deals over $1,000,000 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 ks increased 33% to 346 and the number of deals over 500 ks 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 and secure SD WAN continue to provide a strong tailwind to FortiGate product and service buildings growth. Secure SD WAN was a leading contributor in the quarter and included 6 deals in excess of $1,000,000 Non FortiGate product and service billings grew faster than network security billings, driven by strong growth in infrastructure fabric, cloud and secure SD WAN. 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 headcount increased 15% to 6,293. Given our strong operating income performance, GAAP net income was $73,000,000 Moving to the statement of cash flow summarized on Slides 7 and 8.
Free cash flow was $178,000,000 up 36% year over year, resulting in a free cash flow margin of 34%, up 4.50 basis points year over year. The increase reflects strong 2nd quarter billings and collections, continued inventory management and the flow through of the increase in operating profit to net income. Capital expenditures for the 2nd quarter were $17,000,000 We expect Q3 capital expenditures to between $40,000,000 $50,000,000 Given lighter than anticipated construction spending for the first half of the year, our 2019 capital expenditure guidance moves slightly lower to between $110,000,000 $130,000,000 Our internal free cash flow models are in sync with the current street consensus estimate for the full year and reflect increased spending on the new campus building in the second half of the year. In the quarter, we repurchased 470,000 shares of common stock for a total cost of $35,000,000 or an average per share price of approximately $73.50 At the end of the Q2, the remaining share repurchase authorization was $643,000,000 and is set to expire at the end of this year. As I turn to the guidance provided on Slide 9, I'd like to remind everyone that the forward looking disclaimer Peter presented at the start of the call applies to the guidance I'm about to provide.
For the Q3, we expect billings in the range of $600,000,000 to $615,000,000 dollars Revenue in the range of $525,000,000 to $540,000,000 Non GAAP gross margin of 75.5% to 76.5 percent non GAAP operating margin of 23% to 23.5 percent non GAAP earnings per share of $0.55 to $0.57 which assumes a share count of between 177,000,000 179,000,000 We expect a non GAAP tax rate of 24%. For 2019, we expect billings in the range of $2,510,000,000 to 2,540,000,000 dollars Revenue in the range of $2,100,000,000 to 2,120,000,000 total service revenue in the range of $1,340,000,000
to 1,360,000,000
dollars non GAAP gross margin of 75.5 percent to 76.5 percent non GAAP operating margin of 23% to 23.5 percent non GAAP earnings per share of $2.23 to 2 $0.26 which assumes a share of between $177,000,000 $179,000,000 We expect our non GAAP tax rate to be 24%. We expect cash taxes to be between $52,000,000 $54,000,000 Before I turn the call back over to Peter, I'd like to thank our partners, our customers and the Fortinet team for all their support and hard work. I'll now hand the call back over to Peter.
Okay, Keith. Operator, we are ready for the Q and A session, please.
Thank you. And our first question comes from Shaul Eyal from Oppenheimer. Your line is open.
Thank you. Good afternoon, gentlemen. Congrats on the strong performance and the outlook, the improved outlook. So Keith, Ken, clearly some good acceleration on the SP WAN front. You've mentioned 6 deals in excess of $1,000,000 What's driving this healthy demand and acceleration you're seeing?
Can you talk to us about some of the drivers on that front? And I have a follow-up.
Yes. This is Ken. Like I said previously, we believe the infrastructure and we call the security driven networking side kind of more and more important because the border secured enterprise disappearing. So it's all a lot of most of the tech companies internal. So that's where the SD WAN secure all these WAN connection, branch office and together with internal segmentation security starting to get more and more important.
So that's where we see the SD WAN as a market as a whole infrastructure security approach. So that's the vision we have for the last few years and starting building, we call it, security driven networking infrastructure And we see very, very successful for this approach.
Got it. Got it. And I think we picked up 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 thought.
What specific products and services are you pushing within this vertical?
Hey, Shaul, this is Keith. I would probably just step back a tad bit and note that our government vertical includes not only the U. S. 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 would be a little difficult to respond specifically to other products, if you will, in that segment you're speaking to.
Got it. Okay. That's 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, there was that healthy debate again about where we are with firewall refresh and what impact the shift to the cloud is going to have on firewall demand, etcetera. You mentioned the use cases, but I wonder, Ken, if you could just kind of chime in and give us a sense of what do you think the industry growth opportunity looks like for the core firewall and network security moving forward?
I think the industry is in a transition. The traditional refresh of the firewall which you see like 4, 5, 6 years ago, using the next gen firewall UTM replaced the traditional connection based firewall VPN. It's probably only part of the solution now. You need to have the whole infrastructure like from the firewall connect with all these different kind of SD WAN, the Wi Fi, some endpoint and also the web and also the cloud, IoT need to be all kind of considered together. I feel that's the new trend.
And also that's also easy to manage and consolidate all these kind of different solution is starting to get more and more important because the management costs starting to get higher and higher for the security. So that's where we see the appropriate code of whether the infrastructure security or security driven networking is already combined together. So I think it's more important. So that's where the traditional enterprise refresh still going on. And I think it's a compared to a few years ago, we have less market share compared to some of our competitors in enterprise.
So we are not being impact influenced very much about the refresh cycle. But we do see we have a more broad offering and most come from internal developed, which integrate and automate in day 1, which has much better kind of easy to manage compared to some of our competitor come from acquired product. And at the same time, the ASIC SPU give us huge performance advantage, especially when you deploy internally and in the very fast local area network. At the same time, when you have the infrastructure approach and also the other IoT, So that's where the ASIC advantage that we call SPU, security process unit, has also started to get bigger and bigger. At the same time, once we have bigger market share, the cost per chip also starting to get lower.
So the economies scale also starting to play. So that's making our margin keep improving. I think all this will help us to position going forward for the trend. I believe this kind of infrastructure security trend will keep going in the next 10, 20 years, and we are very positioned for that change.
Excellent. And maybe one quick follow-up. The Capital One breach, AWS back in the news, probably for the 1st big high profile breach since maybe the PlayStation hack back a number of years. Do you think this will be the motivating factor to drive virtual firewall adoption in the cloud?
First, I don't think the news impact the Q2 number and happened very recently. At the same time, this definitely makes people more kind of consider security as more important. But on the other side, if you put too much into a single cloud location, that also can be more risky. That's where from time to time I keep saying you need to have a certain balance around the cloud and edge and different application, different data, you need to have a different way and multiple layer to secure it.
It.
Our next question comes from Brad Zelnick from Credit Suisse.
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. Ken, you talked about more opportunities as 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 40 gig appliances ticking down a bit and seeing some other vendors out there with cloud proxies and customers doing local Internet breakouts at the branch office. How, if at all, is this impacting your business? And how is Fortinet helping customers as they think about network transformations?
So I do believe the low end was starting to pick up because we're in the middle of refreshing. So like last quarter we announced the first product FortiGate 100F using the new SoC4. I think going forward there's a few other new product in the low end will come up using the leverage SoC 4, which has a performance probably easily 3x to 5x better than the previous version. So that's where we're helping drive the low end growth. On the cloud side, I do see cloud is really as additional, it's complement to what we offer from the infrastructure and also the edge computing.
It's a part of the solution. So we don't feel cloud will be reduced on premise and also in the edge. And also the Edge, I feel probably even grow faster than the cloud in the next few years because from the deployment from the advantage of the edge compared to cloud, you need to have both solution and cloud already. I probably not using Gartner's They say the edge will eat the cloud. I do believe both of existing, but the edge computing, edge security need to be more emphasis addressed, especially we have advantage using the ASIC chip.
And it's a lot of application because the real time, the latency requirement you had to process since in the edge. And in security, I keep in saying edge is good for the prevention, which need to be real time process and cloud will be good for management and certain storage, which may not have to deal with real time and also could be for detection. But if you want to do the prevention and in line real time protection, Prop 8 has more advantage.
Thank you so much. If I could just add to Tim's commentary just quickly. I wouldn't lose sight of the fact when you're looking at the mix shift, if you will, on our reporting between low, mid and high, which would I think is actually happening there to a large extent is you're seeing the success of the E Series in the mid range product family in some ways causing 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 500E series for several quarters now.
And just to extend that conversation one step further, I would note that when I compare the 500E to its predecessor 500D, it's moving at about 300% or 400% faster than its predecessor did. And so when I look at those types of numbers, I think you're starting to see the success in the mid range really 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 40 gate unit shipment growth was? I didn't catch that.
Yes, I did not, but I can share that it moved in tandem with product revenue growth and that's also consistent with the Q1 of this year, moving in tandem with product revenue growth numbers.
Excellent. Thank you so much for taking the questions, guys.
Thank
you. 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 $1,000,000 deals that you had. It was 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 or as simple as just having a broader portfolio of products now?
Yes, I think, I try to make the effort and this is Keith, I'm sorry. I try to make the effort to note, 1, the contribution from SD WAN, which I think was 6 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're seeing that reflected in those $1,000,000 deals.
Yes. Also one other point I want to add is really the multi product sales, we call the fabric also starting doing better. So that's where you see the non FortiGate starting grow faster than the FortiGate is making the total infrastructure solution. That's also helping make the deal larger.
Okay, got it. And then
just a follow-up. As it relates to EMEA, it looks like your growth may have decelerated a little bit relative to last quarter. But 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 a little bit tough and also the U. K. Has maybe a little bit of uncertainty.
Yes, I think you're spot on with that, Ken. 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 U.
K. Seems to be in the bit of the doldrums, if you will, across industries. And I think we saw that as well.
Great. Thanks. Keep up the good work, guys.
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 give us a sense of what's been successful there and has this helped drive some of the larger enterprise deals?
Ken and I are arguing about who's going to give the good news, I guess. I think we've become we've matured. We're closer to our partners and we're better at getting their insights and feedback about what they're looking forward to be successful. I think we are mature and becoming more operationally focused. You're seeing us make greater and greater use to protect our channel partners of things like deal registration and applying that very broadly.
I think 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're engaging with the channel.
Also, we have a better tool today compared to a few years ago to effectively measure the effectiveness of whether the pipeline or the sales productivity and how each program perform. So that's also helping to drive the better efficient growth.
Got it. And then just to follow-up on the SD WAN questions that have been asked. I mean, I'm just trying to understand, when you look at sort of the SD WAN 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 type of mix are you seeing out there as people start to make this shift in terms of their edge opportunities?
For us, we put SD WAN function inside the FortiGate, product FortiOS function there. So that's where we gave them integrated single box solution, cover both on the security that's even networking all this together and make it more easy to manage. And also this also can tie to like a different application which need to be secured. So that customer like the solution. And also because we have ASIC advantage built in the FortiGate as all the ASIC especially SoC4, the new one, which can have a much better cost performance compared to some other SD WAN solution, which if they're using the general purpose CPU, whether the cost is very high or they don't have additional computing power to do the security or they have to have a multiple box solution.
So that's the advantage is pretty is very, very huge. And once we keep investing in marketing sales coverage in this space, we do believe we'll become a leader in the space.
Jonathan, it's Keith. Keanu, just let me add to that a little bit for more context. Clearly, in terms of form factors for us, it's a FortiGate appliance that's dominating the SD WAN market. And 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 FortiGates. It also drags along with this, a certain amount of fabric products, but it also brings with it about 70% on average of the BOM is a service part of service component of the mix.
Thank you.
Yes, SD WAN also helping increase the percent of service revenue and also match what we call the better security driven networking, how we call infrastructure security better. So that's the it's more like a total solution, also drive some other product sales.
Thank you and congrats on the strong quarter.
Thank you. 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 just to start with you. You mentioned the service provider business, I think was about 15% of billings, one of the top verticals obviously reported in that, very strong 2018. How are you thinking about that vertical here in 2019?
Yes, I think the not going to guide the vertical specifically, of course, but I think that what across the industry we're seeing was a very strong 2018, whether that was because of tax reform or what have you, but the carrier infrastructure seemed to go very, very well in 2018. When you look at 2019, there's probably really 3 components of that business. There's that infrastructure for the carrier. There's also the MSSP and there's also the selling with the carriers. And I think it's the first one that's been a little more challenged across industries in the first half of this year.
You probably couple that with a significant amount of digestion of last year's acquisitions, if you will, of products, also the mergers and consolidations that are going on in the industry this year are probably causing them to give them a little bit of a pause.
Got it. That's helpful. Ken, maybe for you, a lot of success in core network security with SD WAN. Maybe outside of the appliance business, I think some questions were asked earlier just about Capital One and public security. Can you just 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 it? Yes. Our approach for the cloud, public cloud, hybrid cloud is a little bit different than competitor. We have a very broad the broadest offering cover both from the cloud provider and also on the function. So like we have 9 or 10 different function from the traditional FortiGate to the web to the mail to the SIM to all these different application.
And also they can easily move from cloud provider to cloud provider for the enterprise. So this approach gives the flexibility for the enterprise customer to adopt different kind of cloud provider or different function based on their need. And at the same time, so we have all these on premise. And also the other thing, if you want to access the cloud, we also have very strong FortiGate with SSL encryption performance. That's also helping both on the cloud side and also on the edge side.
So that's how this is helping. We see the cloud growth definitely faster than the overall building growth and we still feel that's the cloud is a part of a whole infrastructure security, will continue to keep in driving the growth, but also which also can help in the on premise and the age growth.
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 operating cash flow growth. I wanted to ask 2 questions. The first, Ken, I want to direct towards you and it is a competition question, but along a different 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 Zscaler. Why or why not do you see this as a competitive threat before the net or do you think you can actually in some ways participate in this market through your partnership or directly?
I think we are a little bit more on the partner side because some application can fit into the scaler forward traffic to the cloud or to their whatever service data center. But some other application like you still need to have all these edge device like SD WAN to keeping the traffic forward to the cloud. Basically, they also need to deal with the local traffic. And a lot of also a lot of security issue we see is the infrastructure security internal segmentation that also cannot be addressed by this cloud approach. So I see it's really the mixed infrastructure hybrid solution.
It's much better than just everything go to the cloud. And also from time to time, just like some other service provider want to offer similar service, So we are more behind to supporting this kind of solution and we feel we just play what our advantage is, which can give a much better strong performance as computing power and also the infrastructure, the total fiber solution compared to just a different vendor, they may offer some solution good for certain application or certain deployed scenario. So that's where we kind of each play in charge of the advantage. 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-forty eight growth potential. And 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 NANA FortiGate, we call it infrastructure approach or fabric approach is larger. The issue is that the enterprise facing is management cost is very, very high if all these different piece of infrastructure security not working together. So you need to find a way to consolidate and manage it together, which the 4 d Fabric approach offered us solution. And we design the product working together, automate together from day 1, which is different than some other company dependent optimization or some other approach, which make it more difficult to integrate to automate.
So that's where we see the growth so far in the last few quarters are faster than overall building growth. And at the same time, going forward, we also see this even bigger opportunity and probably keeping growth faster than the overall growth. All right.
Thank you,
Keith. This is Keith again. I would just one quick note I would offer that whether you look at the non FortiGate side or infrastructure fabric, just to share, I mean, the growth rates on both the product, the hardware form factor and the software form factor do indeed outpace, as we noted in the call, FortiGate, but they're also very similar in terms of their 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 Tao. I wanted to ask again about where we're at in this midrange refresh cycle you're seeing. What stage of maturity are we at for the 500E cycle? And then is it natural to think that the 406 100 products just continue that cycle?
Yes, the mid range refresh pretty much down, I have to say. And also, like you said, the new E Series has much better performance. And the 400, 600 also enhanced compared to the 300, 500 is relatively new compared to 300, 500. We do see the performance, the cost price ratio also is better. So that's pretty much there.
And then the next phase move towards the low end. So that's what's coming up. Okay, great. Thank you.
And then
so you're clearly doing well with SD WAN and branch office or campus environments. And then you're also doing well with the MSSPs. 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's the new product we're announcing today, the 1100E, the 2200E, and the 3 100e. And you can see this product is really very powerful and the best fit for the traditional network security like whether internal segmentation or the data center. So we have the best performance, best security function and all integrate together. I think this will drive the future growth a lot.
Okay, great. Thanks.
Thank you. Our next question comes from Fatima Boolani from UBS. Your line is open.
Hi, this is Catherine McCracken on for Fatima. I wanted to go back to SD WAN as a demand driver. One of the questions we had is given that we know FortiGates can be deployed for SD WAN use cases, What extent are you seeing traditional FortiGates being implemented primarily for SD WAN purposes?
Go ahead. It certainly happens. Let's put that one without giving a lot of metrics to it. Peter and I were at a customer meeting a few months ago and that was specifically what was happening.
Yes. But that also helping private additional service supporting revenue. So if they want to enable the SD WAN function for the FortiGate, which they already have. So that also will help us.
Yes. And I'm not saying that's anywhere close to majority, but perhaps it's an outlier, but it can be done and we see the incidence of it being done.
Okay. Got it. And then as a follow-up, on the margin front, in the last couple of quarters, you've mentioned being under indexed on salespeople. And I was just wondering if sales hiring caught up in the quarter and how we should be thinking about sales and marketing expense for the remainder of the year? Thanks.
We improved, still not quite here. We say, it all take time and also when they onboard also needs time to enable ramp up. So that's I see it's sometimes when you invest in certain sales marketing, probably the return take a little bit longer than you launch the new product. So but on the other side, we do see that it's still very important to keeping the investment in marketing ourselves.
Yes. I would supplement Ken's comment, Catherine, by noting that, of course, this 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 Americas, but in the U. S. In particular came through in the second quarter, very high productivity, very high returns, very high growth rate.
So we're very pleased with their performance, including their success in the Global 2,000.
Basically, there's a 2 part. One part really you need to add a headcount. The other part is really try to like unable to sell has a better close rate closing rate. So that's where the training, all these kind of like help them get familiar with product and multiple product solution also very, very important. We also enhance a lot of in 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 Eric Keith 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 5 gs into your outlook for this year and going forward?
It's still very early. I feel at least a few quarters away, you will see anything impact by the 5 gs or helping from the 5 gs. But we do have the product already there. It's also working with service provider to see what's the best way to secure the 5 gs network. And also a lot of other growth actually has come from the OT, IoT, which also leveraged 5 gs.
So that's where I see probably the 5 gs into certain area like healthcare, like a certain industry maybe growth security probably ahead of some other more broad 5 gs approach for consumer in the carrier space.
Got it. That's helpful. And then just separately, could you give us an update on your partnership with Symantec? How much are you going to market together and kind of how has traction been so far?
I think it's a very good approach, I mean, progress there and also that's one of the very important partnership we have to go to market together. I think the few sales starting engaged working together and it's helping both company.
Thank you.
Thank you. Our next question comes from Melissa Franchi from Morgan Stanley. Your line is open.
Hi, this is Hamzah Fodderwala in for Melissa. Thank you for taking my questions. So just on the macro front, you touched on EMEA earlier. You also have about a quarter of your revenue coming from APAC. Any concerns within that region?
Obviously, the trade tensions we had some of the new tariff announcements earlier today and how that could sort of impact growth within the region more broadly. I also noticed you had a recent partnership announcement with Alibaba. So, yes, just any commentary on that would be helpful.
Yes, Hans, it's Keith. Perhaps in reverse order. Yes, we're very pleased with the announcement of the Alibaba announcement that you saw. 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 are still fine with our guidance and we're very fine.
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 Pac area is obviously, it's a very diverse geography covering many countries all the way from Australia, New Zealand up through South Korea, Japan, Taiwan, etcetera.
Got it. And then just on the SD WAN, early momentum, the 6 deals that you mentioned above $1,000,000 So were those bundle deals with the SD WAN use case attached or were those deals primarily led with the SD WAN value proposition?
And that's it for me.
Yes, I think it's more lead by the SD WAN, even some of them not even unable to secure the function to begin with, but they do see the advantage of security capability in the box whenever they need it or turn it down.
Thank you very much.
Thank you.
Thank you. Next question comes from Dan Ives from Wedbush Securities. Your line is open.
Yes, Dan.
Have sales cycles changed on the larger deals? I mean, are they starting to now shorten, given it seems like it's a little more downhill scheme for you guys as you're signing some 7 figure deals?
Yes. I think the enterprise by and large a new enterprise logo, I think the sales cycle is what the sales cycle is. Ken would point out to me that typically there's a fairly robust RFP process that goes out a short list, a proof of concept, testing and so forth. So if you're chasing a new opportunity, this logic and incumbent, I don't really see a change there. To the extent that you're talking about an expansion of an existing enterprise logo, I do think you can see things like some SD WAN opportunities that move faster than perhaps other things and certainly in general an expansion into an existing account moves faster than a new
loco. Thanks.
Thank you. And our next question comes from Patrick Colville from Arete Research. Your line is open.
Thanks for taking my question and congrats on the pretty awesome quarter. Can I just ask about the SD WAN and secure switching piece? It's been a seriously 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, yes, your competitors? Why will Fortinet sustain this healthy momentum?
Yes. I see like I said, it's the industry transition from the traditional like a network security only to more infrastructure we call the also we call it security driven networking. That's where because the border disappeared. So if you only secure the Internet connection in the enterprise no longer enough, you need to go internal, address the segmentation, different data server, all these constraints, also need to make sure the connection to the outside or to the mobile also being secured, whether the Wi Fi or the SD WAN. So that's where we have this approach with our technology from the SPU ASIC chip to the function cover like SD WAN, Wi Fi going forward the 5 gs, it's all kind of working together.
At the same time, the fabric also helping making a total solution multiple layer, total solution works better now. So that's what we see. We see the transition for the industry is more like an infrastructure consolidated fabric approach help us drive this transition going forward compared to some of competitors still whether more in the traditional network security gateway or kind of only address some part of infrastructure or certain application in the cloud. So we feel we have a much better, broader and kind of more advanced approach, not only for this SD WAN, but also going forward with the 5 gs, the IoT, Office security and we see as a huge potential going forward.
Great. And can
I ask
just a quick follow-up? There have been some other earnings like NetApp this evening, for example, missed quite badly and some other kind of on prem vendors have had some bad results. Why is it that the firewall market has remained so healthy? You guys are putting out some great numbers and the guidance implies that momentum stays really strong. Why is it that the spending areas?
Patrick, it's been so different to other on prem spending areas?
Patrick, it's Keith. Look, I think that you got to keep in mind the significant diversification that we have, whether that's across geographies or that's across the fabric products and the firewalls or if it's the identification and taking advantage of new use cases such as SD WAN, OT and such. Perhaps if it was 4 or 5 years ago, you could have a conversation with us about being a point solution with firewall, but this has become a very diversified company.
Great. Thank you for your answer 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 working me in. So, yes, I want to follow-up on the Symantec relationship. At least in the conference circuit, it seems like they're talking up the partnership with Fortinet more and the potential to put Fortinet virtual firewalls into their cloud secure web gateway and how that could help them close the gap against Vscaler. Is that something like is that something that you've 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 billings from the Symantec relationship, but I would not I'm comfortable with my guidance, I'm not calling out Symantec separately or any particular upside to that relationship at this point. I think you've described the use case, if you will, or how the what the go to market cadence is for Symantec and why it makes sense as a business strategy.
Got it. Okay. Thank you.
Thank you.
Thank you. Our next question comes from Ken Talanian from Evercore ISI. Your line is open.
Hi, thanks for taking the question. You mentioned seeing an increase in the percentage of support and services, I think as a result of SD WAN. Are you seeing a broad uptick in support and services in part from a mix shift to richer firewall configurations? And can you help us understand maybe a bit about the magnitude of that?
Yes. This is Keith. I'm sorry, Ken. The I was just trying to describe for people what an SD WAN solution looks like when I mentioned that it's going to run about 70% services when I look at 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 FortiGuard, FortiCare. FortiGuard is doing very, very well. It probably has a number of advantages right now. It's coming off of the company is coming off of a fairly high unit shipment number in 2018, product revenue that attach service contracts to that. You're seeing those services now roll into the income statement that was previously previously deferred, so now you're seeing them happen there.
You're also seeing what I talked about before the mix shift a little bit from low end to mid range. It's been happening for a period of time now. To the extent I'm selling more mid range than I am low end, that will typically attach a higher ASP on the service contracts, getting a little bit more lift from the bundles, a little more lift from standalone security offerings, things of that nature.
Got it. And you described last quarter as rich in renewals. Could you comment on this quarter and just how you're thinking about the remainder of the year?
Yes. I think it's not surprising that for a tech company, Q1 tends to be the logical time that you have a lot of renewals. There's not in Q1, you get Q4. Q2, Q3, you may get some government entities. You're always going to have 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 in the enterprise, etcetera, migrate towards a Q4, Q1 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 Kujalgi 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 like fill out the attach rate? Like how many of your customers are using the fabric products today in the installed base? How much so how much penetration do you have for those products in the installed base and how that's trended in the last quarter?
Yes, not something that we talk about publicly, TAS, 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. Your guidance seems pretty conservative. What are you assuming for duration for next quarter? Anything that's changing that's making your guide pretty fairly conservatively for next quarter?
No, I think the nature of our business is that Q2 to Q3 typically is within 1 or 2 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 put some of the upside from Q2 into the full year guidance. So I think we feel very good about what we're seeing in terms of the quality of our pipeline, etcetera.
Got it. And just
one last one for me. You said that non FortiGate obviously grew faster than FortiGate. Any more color on the cloud piece of the non FortiGate? I know you used to give some metrics in the past, but any more color on how the cloud piece of non FortiGate did this quarter?
Fastest growing element of the fabric. Got it.
That's it for me.
Thank you, guys.
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, Crystal. I'd like to thank everyone for joining the call today and let everyone know that Fortinet will be attending the following investor conferences during the Q3: Oppenheimer on August 7 in Boston We at the Raymond James Conference on August 21 in Chicago. The Dougherty Conference in Minneapolis on September 5. We look forward to seeing many of you over the next several weeks. If you have any questions, please give me a call or send me an email.
Have a great rest of 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.