Good day, ladies and gentlemen, and welcome to the Fortinet First Quarter 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 at Fortinet. I'm pleased to welcome everyone to our call to discuss Fortinet's financial results for the Q1 of 2019. Speakers on today's call are Ken Xie, Fortinet's Founder, Chairman and CEO and Keith Jensen, 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 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 Q2 of 2019 before opening up the call for questions. During the Q and A session, we ask that you please keep your questions brief and limit yourself to one question and one follow-up to allow others to participate. Before we begin, I'd like to remind everyone that on today's call, we will be making forward looking statements and these forward looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected.
Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10 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 are made 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 the presentation that accompany today's remarks, both of which are posted on our Investor Relations website. Lastly, all references to growth are on a year over year basis unless otherwise noted.
I'll now turn the call over to Ken.
Thanks, Peter, and thank you to everyone for joining today's call to discuss our Q1 2019 results. We are pleased with our strong Q1 result. Billings increased 19% to 552,000,000 and revenue was up 18% to 473,000,000 driven by solid growth in service revenue. In April, Fortinet hold its annual Accelerate 2019 Conference. This year's event was a huge success with partner and customer attendance up over 37% from last year.
At Accelerate, Fortinet management described external trend impacting the security landscape and defined how Fortinet is best positioned within this trend for future growth. The internal trial zone has disappeared. As data travel outside the company network to mobile to the edge and to the cloud, security has followed the data flow and applications between networks, device and users. As a result, security and networking are converging into what Fortinet calls security driven networking. We believe this trend is accelerating the security industry move into the 3rd generation of infrastructure network security.
Security requires 10x to 100x more computing power compared to networking for the same network throughput. This requirement makes network security slower and very expensive. Fortinet SPU AC technology delivers 10x the performance of other software approaches, eliminating the performance gap and a lower cost than our competition. At Accelerate, we announced the industry's first SD WAN ASIC, the 40 SPU SoC 4 available in the FortiGate 100F, the next generation firewall. The 100F provide SD WAN functionality and advanced security in a single appliance with high performance.
As organizations consolidate towards few vendors, our security fiber approach with its open API and connected technology is experienced increased adoption by enterprise customers. We continue to grow our ecosystem of more than 57 fabry ready partners to one of the largest in the industry, including a close partnership with Symantec. The explosion of IoT and immersive technology are accelerating the movement of data and computing to the age. According to Gartner, 70% to 80% of each data never gets 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 focused on prevention and at the edge with low latency and high performance is critical, especially with the deployment of 5 gs network.
Fortinet provides the broadest set of security solutions for both the edge and the multi cloud environments. We continue to invest in driving innovation and accelerate. We announced FortiOS 6.2 with more than 300 new innovations. This innovation include enhanced artificial intelligence and machine learning capability for protection from the edge to the network core and across multi cloud environments. In addition to our investment in innovation, we continue to make sales, marketing and channel investment.
We expect the spend on cybersecurity as a percentage of overall IT budget to continue to grow. This increase in spending, coupled with 3 key drivers, positions Fortinet for faster growth than the market over the next few years. First, with a portfolio of integrated secure WiFi, SD WAN and 5 gs product, were leading the transition to the security driven networking. 2nd, Fortinet secondurity factory offers the most broad, automated and integrated security for end to end protection as the organization consolidate towards a few security vendors. And 3rd, our SPU ASIC technology provide us with continued cost and performance competitive advantage.
Our advantage is increased with the recent announcement of new SD WAN ASIC for Forti SPU SoC 4. I want to thank the Fortinet team and our partner 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 Q1 performance and our Q2 of 2019 guidance.
Thank you, Ken. Before I start, I'd like to note except for revenue, all financial figures are non GAAP and growth rates are based on comparisons to the Q1 of 2018 unless otherwise stated. The slide references I make reference to in the presentation are posted on the Investor Relations website. I'd now like to provide a summary of our strong Q1 performance. Total revenue of $473,000,000 was up 18%, driven by strength in EMEA and APAC.
Product revenue of $163,000,000 was up 14%. Growth was driven by a mix shift to the midrange FortiGates and increasing software revenue. Service revenue grew 21% to $310,000,000 and was driven by a 24% increase in FortiGuard security subscriptions to 170,000,000 dollars FortiCare technical support and other services increased 17% to 140,000,000 dollars About 60% of total first quarter revenue was provided by the deferred revenue balance at the beginning of the quarter, providing a high level of revenue predictability. In the Q2, we expect a similar percentage of our total revenue to come from our existing deferred revenue balance. Total deferred revenue increased 26 percent to $1,800,000,000 Short term deferred revenue increased 21% to $991,000,000 Now turning to billings.
Billings grew 19 percent to $552,000,000 benefiting from strong growth in the Japan and APAC regions. Average contract term was flat quarter over quarter and year over year at 25 months. Service Providers and MSSPs remain one of our top customer segments, accounting for 40% of our top 25 deals in the quarter. There were 35 deals over $1,000,000 in the quarter versus 34 in the year ago period. The dollar value of the deal is over $1,000,000 increased 20%.
In the quarter, we closed a 7 figure operational technology focused transaction with an EMEA based power and water utility company. The deal included FortiGates, secure SD WAN capabilities and centralized management functionality, enabling visibility and integration with a customer's OT network. In the Americas, we closed a 7 figure secure SD WAN deal with a major school district. We won this deal due to the ability of our solution to provide direct Internet connectivity to each of the school district's 80,000 students, along with simple management and simple deployment and importantly, integration of our solution with existing third party security technologies. FortiGate products and service billings increased 17% and accounted for 3 quarters of total billings.
Billings for non FortiGate products and services grew faster than FortiGate billings. Benefiting from our strong growth in FortiGate virtual machines and pay as you go billings, private and public cloud billings outpaced Infrastructure Fabric billings. Infrastructure Fabric is still the largest component of non FortiGate offerings and benefited from strong growth in Latin America and APAC. The infrastructure fabric includes hardware, software and attached services. Moving back to the income statement.
1st quarter gross margin improved 50 basis points to 77.2%. Driving the increase in total gross margin, services gross margin improved 130 basis points to 87.1%. Illustrating our commitment to better than industry average revenue growth, headcount for sales and marketing at the end of the quarter was up 16%. Total headcount increased 14% to 6,015. Operating margin increased 270 basis points to 20.4 percent despite a decrease of 125 basis points in the commission benefit associated with last year's change in accounting.
The operating margin improvement reflects the increase in gross margin, gains in operating leverage and increased sales productivity. Given the strong operating income performance, net income was $81,000,000 diluted earnings per share increased 39% to $0.46 Moving to the statement of cash flow summarized on Slides 7 and 8. Free cash flow was $191,000,000 up 49% year over year. The increase reflects seasonally strong Q1 collections, continued inventory management, operating profit expansion that flow through to net income and growing deferred revenue. In the quarter, we repurchased approximately 779,000 shares for a total cost of $56,000,000 for an average per share price of just over $72 At the end of the Q1, the remaining share repurchase authorization was $677,500,000 and is set to expire at the end of this year.
Capital expenditures for the Q1 were $10,000,000 below the low end of our guidance range. Including construction spending, we expected 2nd quarter capital expenditures to be between $25,000,000 $35,000,000 We are maintaining our prior 2019 capital expenditure guidance of between $120,000,000 $140,000,000 dollars 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 Q2, we expect billings in the range of $585,000,000 to $605,000,000 revenue in the range of $505,000,000 to 515,000,000 dollars non GAAP gross margin of 75.5 percent to 76.5 percent non GAAP operating margin of 22 percent to 22.5 percent non GAAP earnings per share of $0.49 to $0.51 which assumes a share count of between $177,000,000 $179,000,000 We expect a non GAAP tax rate of 24%. We are seeing healthy pipeline growth, and we believe we are well positioned to continue to grow faster than the security market in 2019. For 2019, we expect billings in the range of $2,470,100,000 to 2,520,100,000 dollars revenue in the range of $2,070,000,000 to $2,100,000,000 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 22.5 percent to 23.5 percent and non GAAP earnings per share of $2.10 to $2.15 which assumes a share count of between 178,000,000 to 180,000,000.
We expect our non GAAP tax rate to be 24%. We expect cash taxes to be between $53,000,000 $59,000,000 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.
Great. Thank you, Keith. We'd like to open the call for questions, operator, please.
Thank you. And our first question comes from Fatima Boolani from UBS. Your line is open.
Good afternoon. Thank you for taking the questions. Maybe I'll start with you Ken, just around some of the strength you saw in the virtual portfolio that Ken alluded sorry, Keith alluded to in his remarks. I wanted to get your sense of some of the advancements and enhancements you've made on the technical side that you talked about at user event? And how you expect the virtual and Fortive VM business to be additive to the overall product growth trajectory?
And then I have a follow-up for Keith, if I may.
Yes. It's a good question. In the partner conference, we present I present so we need to emphasize both on the virtual cloud and also on the edge side. We do see that the cloud has a pretty good change in growth in the last few years, but also we feel going forward, the edge also starting to add more weight there. So that's where we see we emphasize both.
And also the way we approach the cloud, we are more like horizontal approach, which have multi cloud provider and offer a very broad function, including all the virtual like data center within the enterprise and also the public cloud. So that's a product we see pretty good success And also the customer, enterprise customer like that approach a lot. So it gives them the flexibility to move different function and different application between different cloud provider and also able some different function, both on the promise and also in the cloud in the virtual environment. So that I think that's kind of approach we get a very positive feedback from our customer.
That makes sense. And Keith, a question for you. I wanted to dig into the subscription revenue line item that saw both acceleration year over year as well as off the Q4. And so can you step us through some of the dynamics working there, especially with regards to the type of uptake you're seeing between your UTM bundles and the enterprise bundles? And maybe give us a sense of sort of how much runway is left for those bundles to really be more broadly adopted in the base?
And then also having existing UTM customers graduate to enterprise bundles? That would be super helpful. Thank you.
Okay, sure. So I think in terms of the subscription revenue, if you look at the growth in the short term component of that, we're very pleased to see that short term growth. If you move back a few quarters, you kind of see that it may have hit a low watermark in the middle of 2018. And again, that's kind of coming off of a slower growth year in product revenue in 20 17. I think what you really see there is a continuation of a lagging indicator when you look at the revenue growth as opposed to the billings growth.
To give some color in terms of what we're seeing on the billings side, yes, we continue to see a shift from 8x5 to 24x7 support. That continues to move up incrementally. I believe that still has a significant way to run, I would say several more quarters easily. When I look at the FortiGate bundles, I think the UTM continues to outperform at a very, very high level. We're also seeing more customers coming back and buy from us on an alacarte basis on various security subscriptions, and I think you're seeing some of that coming through on an additive approach as well.
Other comments I would offer about that, when I look at our renewal rate, whether that's for 40 Care or 40 Guard, they're very stable, perhaps even picking up a little bit. So I feel very good about what we're seeing there. When I look at attach rates for the contracts to the appliances, I see very much the same there. That is to say very stable, perhaps a slight uptick in terms of attach rates.
Super helpful. Thank you.
Thank you. And our next question comes from Shaul Eyal from Oppenheimer. Your line is open.
Thank you. Good afternoon, guys. Congrats on the ongoing consistent performance. Ken, like the team, I want to go back to the recent Accelerate 19 event just a few weeks back. You talked about the move into 3rd generation of cybersecurity or security driven networking.
Can you talk to us on how the fabric strategy fits with your customers transitioning into this 3rd generation of cybersecurity? And I have a follow-up.
Yes. Thank you. It's a good question. Because the reason they're starting to have this the infrastructure and security because of the traditional trust border within the company that was disappearing now because the data starting to go to the cloud, to the edge, to the mobile outside and even within the company, also there's so many different ways you can access it outside, whether the Internet or some other things there also bring your own device, bring a lot of things inside the company. So that's where the security is deciding to move inside the company network and also outside the company border there.
So that's what we call it a better fabric approach or infrastructure approach is very different part of infrastructure needs to work together. And the network is still the center of that because multi thread also comes on the network side, but you also have to working with different application and also different part of the cloud and also like within the company also into the internal segmentation, the Wi Fi and also the SD WAN go over the branch. So that's the multiple part infrastructure working together is the key. That's what we call the integrate and automated approach. The key is really how to make all this kind of cover the broad attack surface and also can also make response to all this attack.
And so that's where the integration is rather our key. Without integration, you cannot move to the next stage of automation. But it's an innovation sometimes a little bit difficult across different product line or across different vendor. So that's where the fabric is very tied to all these things together. So among the fabric product, most is really internally innovate and build is really want to make working together from day 1.
So that's what making integration and automation much more effective, more easy compared. But also we have formed some other partner program like with Symantec with their leading endpoint side. So that's where we kind of working together to make sure we can cover more broad attack surface and secure the whole infrastructure. So that's the fabric story behind.
Got it. Thank you for that. And also, at Accelerate, you discussed Fortinet remaining highly focused on channel partners. Maybe a 2 part question here. Any change in contribution from your largest distributors over the course of the past few quarters?
And what is it that Fortinet has been doing to support these distributors near and longer term? Thank you.
Yes. We want to invest more with the partner to channel program because we also realize the security, the service pieces are very important. That's where even the customer bought a product, make sure they can get the best service. A lot of service also goes through our partner. So that's where we want to have a more close relation with our partner and also have a win win, both profit together with the advance of the space together.
So that's where we see like we see the attendance of the salaried upon the customer confidence up 37%. So it's a huge success and we do see the partner, the customers starting more to us compared to some of our competitor kind of sudden limit some of the channel partner program and we see a very strong feedback from our partner to see the advantage of our product and also a better margin we will be starting to share with them.
Yes, this is Keith. I'll just kind of jump in
and echo some of what Ken said. But the partners are very, very important to us. It's a critical part of our business. And it's a way in which that we have access to end users that oftentimes we would not have access to. If you look at the different types of partners that we have, you probably get a little bit different flavor in terms of how we're working together.
At the distributor level, we're really providing them with incentives and trainings for what we call distributor led business. At the SMB level, we're looking for targeting customers and again providing them whether it's financial incentives or training programs that will help enable us to extend our reach further and further into the SMB. I think even that the VARs that are looking to provide MSSP type services and some other companies that are trying to provide private cloud services, you see us making investments in there. But again, overall, as Ken alluded to, the partner program remains very important to us.
Thank you.
Thank you. Our next question comes from Melissa Franchi from Morgan Stanley. Your line is open.
Hi, this is Hamza Fodderwala in for Melissa Franchi. I had a quick question just regarding revenue in the quarter. So I think Keith, you mentioned about just the increasing deferred revenue giving more visibility into the forward outlook. But the revenue did come in below the high end of the guidance range and the product revenue growth slowed down quite a bit versus Q4. So I'm wondering, are you seeing any changes the overall refresh environment or is this more just like a seasonal slowdown in Q1?
Yes, I don't think that the you kind of touched a couple of points. The refresh cycle that's been talked about, you're not going to see that have the same impact on us that it would have on a large enterprise organization. If you go back and look at us in 20 13, 2014, 2015, very strong MFSP, SMB business has probably different renewal rate, a different return rate, different ASPs. If you benchmark that against a traditional enterprise incumbent, I think that's probably more of a discussion point for that particular group of companies. In terms of what you saw in the quarter relative to just I would say that's just normal seasonality for us.
Q1 is an extremely renewal rich quarter, meaning the sales team has to spend a lot of time and energy focusing on renewing customers. That's just kind of the normal contract expiration date. And I think when you see that historically, you've noted or we would note that you get a different bit of a mix shift in our billings between servicesrenewals and products. Got it.
And just a follow-up question, just more housekeeping. You mentioned service provider being 40% of top 25 deals. In terms of just total billings, what was that mix?
The service provider came in at about 19% of our total 18%, excuse me, I am corrected, 18% of total billings.
Okay, got it. Thank you.
Thank you. Our next question comes from Andrew Nowinski from Piper Jaffray. Your line is open.
Great. Thank you for taking the question. So I wanted to ask on the geographic but your growth in Europe has consistently outperformed the other regions and this quarter was no different. Is there any color you can provide regarding the wide disparity in growth rates
in Europe versus the U.
S? I think the S?
I think historically, the European team has just performed extremely well. It's a mature sales team that's worked together for many, many years. The partner program there is very, very stable and continue to work with the same partners over and over again. So we feel very, very good about what we're seeing there. I think if you compare the U.
S. Number, that had a pretty tough compare, I think, year over year. So I wouldn't read too much into that. I do think that there's significant opportunity for us in the U. S, particularly as we push further and further towards the enterprise.
Yes. Also, the enterprise also needed some time to ramp up and also we try to speed up on like go to enterprise and also hiring some more enterprise sales. But the enterprise, you can have some like 6 to 12 months behind when they onboard you some result.
Okay, got it. And then just a follow-up question as it relates to your billings, a very strong performance in Q1, but it looked like the guidance for Q2 was maybe a little bit below consensus. Did any deals get pulled into Q1 that may have boosted Q1?
No, not really. And again, if you look at our mix, you don't see us talking about 8 figure deals. You'll see us talking about 7 figure deals. So it would seem unlikely that we're pulling something in. I would say that overall, I think Q1 came in very much like we expected it to come in.
It was very nice to see the outperformance on the billings line for the quarter. And I would say at this point after a quarter underneath our belt, I think the year is looking very much like we expected it to look like.
Okay, very good. Thank you very much.
Thank you. And our next question comes from Saket Kalia from Barclays Capital. Your line is open.
Hey, guys. Thanks for taking my questions here. Maybe for you, Keith, just to go back to the product and services split and just ask it in a little bit of a different way. I think you mentioned in your prepared remarks that mid range appliances in particular did well in the quarter. Can you just touch on whether that mix had any sort of impact on the year on year compare in product revenue?
Well, I saw the mid range product family steal share, if you will, from both the low end and the high end product. And I think that what you're seeing there, we've talked previously about the success on the E Series product, particularly the 500e. And I think with the introduction of the 400 and the 600, not saying the 46 had a significant impact in the quarter, given their recent introduction, but I expect that the mid range product is going to continue to do very, very well for us. I'm not sure I'd offer much more than that on it.
Got it. That's helpful. Maybe for my follow-up for you, Ken, maybe just a little bit higher level. Obviously, a lot of success with this idea of security driven networking and that SD WAN capability built into FortiOS. So the question is, since you're really consolidating appliances here for customers with SD WAN and the firewall, how do you think about the monetization strategy for that down the road?
It feels like right now it's a nice way to gain share in the network security market. But are there any other thoughts on kind of how the pricing packaging there for SD WAN could potentially change in the future, if at all?
I think just like 10 years ago, when we started to have a Wi Fi built in into the FortiGate, we do see like security networking, most of that kind of go together. And especially like security is more like a top down approach and because security, like I said, need like a 10 to 100 times more computing power to process the same traffic compared to the networking. So it's more easy for the security vendor to like offer some networking function because security box tend to have a much bigger computing power and more room to offer additional function there. But from customer angle also the in the normal security side, no one likes to have a multiple box in there. It's more costly, a lot of latency and difficult to manage.
And that's where the more you can consolidate some function into a single bus, the better. So that's the feedback from customer. And with SD WAN, we also starting to see the service path starting to go up, right? So that's what compared to like a few years ago, the service keeping increase. And that's part of because some function like SD WAN, the customer want to buy additional service and not just the traditional like 8x5, 20 fourseven, but also we offer because the 40 Tier 360 service that's helping customer to monitor the health of their network or their security deployment.
So that service we see starting
to grow very
quickly. And also Keith mentioned the 20 fourseven FortiCare support and service also starting to go very quickly compared to the 8x5. So all these kind of are helping drive additional service, additional margin for us.
Very helpful. Thanks.
Thank you.
Thank you. Our next question comes from Michael Turits from Raymond James. Your line is open.
Hi, this is actually Robert Majic on for Michael today. How are you doing in balancing your focus on improving in
enterprise with maintaining your strength in
SMB, both in direct sales and in the channel?
I think we're starting next from because for enterprise, you need to have the whole structure behind, right, from the marketing side to the sales coverage and then to the post sales supporting. And then also sometimes you may also need some long term investment. So we're starting to prepare this like setting out all this infrastructure be ready. At the same time, setting also get a lot of enterprise salespeople onboard and also the marketing supporting also starting to build out for supporting the enterprise now.
Yes, I think it's a very fair question. We've set out a framework that we're operating within in terms of what our profitability expectations are in the coming years. And within that framework, we're investing, I think, successfully in both our channel MSSP and SMB business and continuing to see what I believe to be very, very strong growth in that region. And then using the excess proceeds, if you will, from the success in that to fund the growth into the enterprise segment of the market. And as Ken talked about, there's many moving parts there.
One thing that we track very closely is what we call account coverage ratios, which is how many accounts are assigned to each individual rep in the enterprise space. And I would say that this is a process that we're going through where we're looking to continually improve that ratio. Looking at those ratios and looking at the pipeline, we continue to believe that it's a work very worthwhile investment to continue to push into the enterprise.
That's really helpful. And just as a follow-up question, maybe just taking a step back here. Last quarter, you expressed some caution around the macro environment. How are you feeling at this point?
Yes, it was January was a little interesting around for various companies. I think January for us as a back of the quarter started off a little bit slower than we would have liked. But after that, I think the quarter hit its stride. At the moment, I don't think we're concerned about government shutdowns or Brexit seems to have been deferred. We'll see what happens between China and the U.
S. But as I commented earlier in the call, at the end of the day, I think Q1 pretty much shapes up like we expected it to, but with a little bit of outperformance on the billings line. And I think with Q1 underneath the belt, we feel good about the rest of the year.
Appreciate it.
Thank you. Our next question comes from Brad Zelnick from Credit Suisse. Your line is open.
Great. Thanks so much for taking the questions. Ken, I paid careful attention to your comments about the 7 figure EMEA based power and water utility win that you had, in particular using FortiGate and your SD WAN product and management capabilities to provide visibility and integration into the customer's OT network. When we think about the OT opportunity, how big do you feel it really is? How much are you investing to go after it?
Do you need specialized product to win in this market?
Yes, that's OT IoT is one of the driving engine, growth engine for us. So our estimate, we can look in the copy brochure, which is a public information in the website. By 2020 2, we'll be a $19,000,000,000 market for the IoT OT security. So we're leading in that space and they do need a different product and also even different function compared to the traditional network security or some other like cloud or infrastructure security. And at the same time, it also needs some investment early enough both on the engineer side, in the go to market strategy, in the sales coverage side also.
But we are very happy to see the progress in engineering, very, very fast. It's one of the fast growing area for us right now and also a lot of lumpers. So the base is still very small, but growth is very, very fast and also a huge potential going forward. It's like probably more than double, triple the size compared to some cloud securities and other space.
Great. That's very helpful. And Keith, just on CapEx, appreciate the comments on 2019. Can you give us any sense of how we should think about the investments going forward into next year? I know it's a bit early.
Yes, that's a bit early.
I think I would offer that we plan to occupy the building on in October of 2020. If we don't occupy the building in October 2020, Ken is going to have a very painful conversation with me.
Thank you. Our next question comes from Tal Liani from Bank of America Merrill Lynch.
This is Dan Bartus on for Tal. Thanks for taking the questions. I'd like to start with a higher level one. So you're doing really well with the network products clearly for a while now. So I'm curious just what other areas do you think you could emerge as more of a leader?
And I'm thinking about endpoint, email, network access control, etcetera. Wondering which adjacent or newer areas could you have provide the most upside surprise potentially in 2019?
I think some areas we prefer the partnership like the partner with Symantec because some space, which they already have their leader there and also has been there for a while. So for that area, we more intend to do a partnership. That's where we have more than 57, we call the 40 February Ready Partner Program and especially our close partnership with Symantec for the endpoint solution. In some other new area, we also try to leverage both internal R and D innovation and also look in the space. Like last year, we have 2 acquisitions more on the technology product side acquisition, not for the NAC side and also for the internal security, maybe internal security approach.
So that's where we look and the whole landscape is where the network security is pretty interesting because you need to grow by keeping innovator and also integrate. It's not like endpoint or some other space. Sometimes you may have a multiple vendor, multiple solution out there existing together. In the network security, most customers can only have a one box in line there to prevent the bad traffic. And then the more function you can integrate will be more helping the customer to really easy to manage, reduce the cost, latency, availability, all these things.
So that's where we feel is innovation in the region is very, very key for us and keeping growing at the same time partner with some other part of infrastructure player is also very, very important for us. And we still try to pin the market share and then also by partner together is also we found out the very, very effective way to have a win win situation.
Great. That makes sense. And then you're gaining share across the entire firewall market, but it looks like the share gains have also been mostly weighted to the campus and branch office, which makes sense with the SD WAN trends. So first, just wondering if you agree that most of the share gains have been weighted to this segment of the market for you guys? And then second, just curious who you view as your main competition for that market because it's kind of a rare combination of firewall and SD WAN that you guys are coming with.
Thanks.
Actually our growth in the Fortune 2000 is much faster than the average and probably faster than all the branch office growth there. So that's where we do keep gaining more share in the big enterprise also. And SD WAN is the one we feel we have more advantage compared to some other, whether SD WAN player or some security player and also the market also grow very, very fast. It's about 50% growth year over year and we are one of the leading provider. So we also setting we also have been doing this for the last few years.
So that's where we are more heavily promoting SD WAN, but also the investment into the enterprise and also some other fabric product also we see very, very fast growth above average. So I think the growth is really driven by multiple front and we do see each of them also give us quite a good potential and advantage over a competitor going forward.
Yes. Thanks, Ken. I'll just add to what you said. I think if you look at the verticals, I would offer that I think very pleased with what I'm seeing with Financial Services. We come out of a history of being very active and engaged in the trading areas of banks and such, and now seeing that move allowing us to move into other segments within that within those institutions.
And I would offer that when I look at the segment of the state, local, international, government, education, those are doing extremely well. There was an earlier comment about OT. I think if you started translating OT into verticals such as transportation, utilities, I think we're seeing some real success there as well.
Great. Thanks, guys.
Thank you. Our next question comes from Rob Owens from KeyBanc Capital Markets. Your line is open.
Hey guys, this is Mike Casado on for Rob Owens. I wanted to circle back on the trends in North America. I know that there was a tough year over year comparison, but since our checks did pick up some weakness in North America, I'm hoping you can speak specifically to execution in the region, at least as compared to your initial expectations.
The hiring of sales is a little bit behind, which we also speed up, add more resource behind to accelerate hiring there. So that's have a little bit impact of North American growth. But I think we have a market product, the program and just somehow if the headcount is behind, that's also difficult to keep improving the productivity and all the other things. So that's where because most of the market tend to be well competitive or hiring there, but we also set to add more resource behind to accelerate hiring there. Other than that, we don't see any big issue there.
We do believe that things will come back quickly.
Sorry. I'm sorry, go ahead. Tim is spot on with that. I think the first area of us in terms of we talked before that we'd like to see our sales hiring move roughly in tandem with our revenue, maybe just a little bit below that. We fell short of that, as you saw in my comments earlier in the presentation.
And I think the key area of focus within that is really to do more things to help within the U. S. Now that said, I would offer I think the U. S. Has done extremely well with the enterprise penetration.
They continue to move in that direction and they're moving very quickly. That does tend to be a little bit lumpier obviously than the SMB and the MSSB business.
That's helpful. And then relative to engagements that do involve OT or IoT, who are you seeing competitively? And what proportion of these engagements are truly greenfield?
I think we do see some smaller player because a lot of our new company view is a new market, a niche market. But for us, we also want to leverage our cumulative technology innovation from other part of our network infrastructure security to get applied into this OT, IoT space. So also kind of working with some other like traditional equipment provider and some other service provider to offer better service in the space. And the space actually needs a lot of different approach, whether the segmentation or some kind of unorganized environment solution is different, but also take some time to invest and also to have a solution to fit in that space. But we do see huge potential, like I mentioned, will be growing to RMB19 1,000,000,000 in the next 3 years.
So we'll be huge potential in the space.
Great. Thank you.
Thank you. Our next question comes from Walter Pritchard from Citi. Your line is open.
Hi, thanks. Two questions on the product side. 1 on the enterprise side, it feels like during 2018 you had talked more confidently about traction in the enterprise and it feels like you hear, Ken, you mentioned you need to ramp up some hiring there. Has there been some attrition or anything that would explain the difference? And then I had a follow-up on the product mix.
Just somehow the security space is pretty hot in last few quarters, the model competition on hiring. We also step up our effort there also because the hiring time is kind of starting hold us on the faster growth in the North America, which we certainly add additional resource. But we feel yes, it's really the hiring actually for us, the growth also kind of we need to have more account coverage to grow faster in North America, but that's also come from the hiring, come from the additional training program and that's where we started to enhance now.
Okay. And then on the I guess on the FortiGate, non FortiGate, can you help us understand either the mix within the product line of FortiGate and non FortiGate? Or remind us what the attach is what's the relative difference of attach of subscription and annuity on FortiGate versus the non FortiGate?
So non FortiGate will include software, will also have software licenses and relative support that's attached to it. There's also product versions of the fabric products and software versions of those products. And then there's also secure access, which is switches and access points. Software obviously has the richest of the margins. Overall, what we're seeing from margins in those in that product suite are very, very comparable with what we see throughout the rest of the company.
I think
the yes, I
think that's it.
And then just Keith on the non FortiGate, I think it was 25% of total billings. Is it safe to say it was more than 25% of product and any color there on how much of product the non FortiGate made up?
I don't have ready color on that. I'm kind of looking around. It wasn't something that stood out to me one way or the other.
A little more, I'm told.
Okay. Thank you.
Thank you. Our next question comes from Patrick Colville from Arete Research. Your line is open.
Thank you for taking my question. Can I ask about the billings? So the quarter billings beat was really healthy, but you haven't really lifted the guide by much for the fiscal year and 2Q is coming very much in line with expectations heading into the quarter. I mean, can you just circle back to that one and just give me some color around why that is?
Yes. I think we feel very good about how the year is shaping up. Do think that we basically took the over performance in the Q1 and put it back on top of the guidance and raised the guidance for the full year. And I think coming off of Q1, that's probably a prudent approach to take the things. Certainly, when we look at the pipeline, the sales coverage, the sales tenure, the key metrics that we're looking at the second half of the year, absent needing to hire some people faster that Ken has talked about, I think we feel very good about how the year is shaping
up. Great. And can I ask Ken a question about firewall as a service? One of your competitors, whose first letter begins with Z is talking very constructively about firewall as a service and the opportunity in that market. What's your take?
You've been in the industry a long time. What's your take on firewall as a service and how that could evolve and how Fortinet maybe could play into that in the future?
Yes. I think for us, like you can see 2 third of the revenue comes on the service. Service is a very, very important part of the offering. And so we do keeping invest more on the service side and also like additional function like SD WAN, that's also driving a lot of additional service revenue for us. So that's where we and also when we go to enterprise, service also very, very important service and important to the enterprise customer.
And so that's where we cannot keep in viewing the service very, very important part. Other than that, any additional things? No. Okay. Operator, next question?
We'll take our next question from Gray Powell from Deutsche Bank. Your line is
open. Great. Thanks for taking the question. Just a couple, if that's okay.
So I was just trying to make sure that
we have a clean comparison on the product revenue side. Was ASC 606 a benefit, a headwind or just neutral to product revenue in Q1? And then how should we think about that dynamic for the remainder of the year? Thanks.
Yes. I think the I think it's pretty much neutral to answer your question. To give you color, both obviously 2018, 2019 are on 606. So the numbers are comparable. If you go back and look at some of our disclosures from the prior periods, you probably saw things related to software that would be recognized a little and some channel inventory in the U.
S. But those components, I believe, are typically less than $5,000,000 and that's kind of where we're at as we continue to move forward.
Got it. And just a quick follow-up. Can you give any color on unit volumes in Q1?
Unit volumes moved very much in tandem with product revenue growth.
Got it. Okay. Thank you very much.
Thank you. Our next question comes from Taz Koujalgi from Guggenheim Partners. Your line is open.
Hey, guys. Thanks for taking my question. I'm not sure if I missed this on the call, but did you guys give the billings growth by different regions?
No. We give revenue growth in the back of the in the investor slide deck, you'll see the revenue growth by regions. Can you have it? I think you guys give that metric every quarter, right,
the billings growth by our region? No, we don't. Okay. And then one more housekeeping question. How was the enterprise growth in the quarter, excluding the service provider vertical?
Enterprise growth, trailing 12 months, 23%, 24% growth.
For this quarter, for Q1?
Currently 12 months number is what we give historically and it was 23%, 24%.
Got it. Great. Thank you.
Thank you. Our next question comes from Ken Talanian from Evercore ISI. Your line is open.
Hi, thanks for taking the question. I was wondering if you could help us understand the market opportunity for your 3 60 protection bundle and how to think about that across customer segments and maybe how to think about the potential uplift to ACV as customers adopt that?
Yes, we started promoting that service about 1 year ago and we do see there's a huge potential especially like some related to the customer need additional help to help check of their deployment or the network function there, security function there. It's ramp up very quickly, but that also need additional service supporting personnel to support in that. We also have been training quickly both on the Fortinet side and also in some of our partner side also. But we do see this is one of the future strong growth area for us and also the service support has much better margin than the product side. We also see it's also helping improving overall margin for us.
And but it's still in the early stage ramp up stage and also we'll be needing to do quite an additional training and support and effort and also promotion base because so far the 8x5, 20 fourseven is already when customer has trouble, they call us, call the supporting line. But this is more like a proactively do the health check and helping customer to prevent anything happen ahead of time. So we get very, very positive feedback from all the customers, especially a lot of enterprise customer. We do see this is can be keeping growing faster than the other part of whether the service and support going forward.
And just as a quick follow-up to that, how should we think about your level of investment and the personnel necessary to support that this year versus you did in 2018?
I think we are I think probably one thing we try to improve in the productivity, you're hiring kind of over hiring try to behind the growth, but also we don't want to do behind too much, which eventually will limit the growth. So it's kind of we want to keep the building, the revenue growth a little bit ahead of hiring, but not by too much.
Yes. And this is Keith.
To build on Ken's comment, if there was a significant labor impact, if you will, from FortiCare 360, it would start appearing in the services gross margin line. And obviously, with the growth that we just reported, we're not seeing that.
Got it. Thanks very much.
Thank you. Our next question comes from Robert Breza from Northland Capital Markets. Your line is open.
Hi. Thanks for taking my questions. But my questions regarding hiring have been answered and asked. Thank
you. Thank you. And our next question comes from Daniel Ives from Wedbush. Your line is open.
Yes, thanks. So I just have a question on large deal flow. I mean, obviously, it continues to be tremendous. Is that a trend that you're expecting in the coming quarter just given the pipeline?
I guess I would probably expand the metric that we gave on the prepared remarks.
I think we talked about
deals over $1,000,000 I should also offer that deals over $500,000 grew at about 35%. And that has been some quarters we get that number, some quarters we don't. But it's been a very consistent area of growth for us on that $500,000 and above range.
And do you think the
success that you're having on large deals is more on the partner side, direct, competitively in terms of just what's driving some of these numbers that continue to defy the haters? Thanks.
It's more comes from our effort to drive enterprise growth. So that's where the lot of like a direct touch and also closely working with partners to help both the partner with like a certain and also the partner like in the we call the fab ready partner like Symantec and all these are helping driving the big enterprise sales, which is a much bigger deal compared to other part.
Great job again. Keep it up. Thanks, guys.
Thank you.
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 you know that Fortinet will be attending the following investor conferences during the Q2. We'll be at the Jefferies Conference May 8th 9th in Beverly Hills, the JPMorgan Conference in Boston on May 14th, the Baird Conference in New York on June 4th, the William Blair Conference in Chicago on June 5th and the Bank of America Conference in San Francisco on June 6th. We look forward to seeing many of you at the over the next several weeks. If you have any follow-up questions, please feel free to give me a call or send me an email.
Have a good 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 great day.