Good day, ladies and gentlemen, welcome to the Fortinet first quarter 2019 earnings announcement. At this time, all participants are on the listen-only mode. Later, we will conduct a question and answer session, instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. 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 first quarter 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 second quarter of 2019 before opening up the call for questions. During the Q&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, 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, particularly the risk factors in our most recent Form 10-K and Form 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, 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 first quarter 2019 result. We are pleased with our strong first quarter result. Billings increased 19% to $552 million, and the revenue was up 18% to $473 million, driven by solid growth in service revenue. In April, Fortinet held its annual Accelerate 19 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 trust 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 third generation of infrastructure network security. Security requires 10 to 100x more computing power compared to networking for the same level of support. This requirement makes network security slower and very expensive. Fortinet SPU ASIC technology delivers 10x the performance of other software approaches, eliminating the performance gap at a lower cost than our competition. At Accelerate, we announced the industry-first SD-WAN ASIC, the FortiSPU SoC4 , 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 Fabric approach with its open API and connected technology is experiencing increased adoption by enterprise customers.
We continue to grow our ecosystem of more than 57 Fabric-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 edge. According to Gartner, 70%-80% of edge data never gets to the data center to be processed, and within the next two 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 deployment of 5G network. Fortinet provides the broadest set of security solutions for both the edge and multi-cloud environments. We continue to invest in driving innovation. At Accelerate, we announced FortiOS 6.2 with more than 300 new innovations.
These innovations 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're continuing 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 three key drivers, positions Fortinet for faster growth than the market over the next few years. First, with a portfolio of integrated secure Wi-Fi, SD-WAN, and 5G product, we are leading a transition to the Security-driven Networking. Second, Fortinet Security Fabric offers the most broad, automated, and integrated security for end-to-end protection as organization consolidate towards a few security vendors. Third, 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, the FortiSPU SoC4. 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 first quarter performance and our second quarter 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 first quarter 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 first quarter performance. Total revenue of $473 million was up 18%, driven by strength in EMEA and APAC. Product revenue of $163 million was up 14%. Growth was driven by a mix shift due to the mid-range FortiGates and increasing software revenue. Service revenue grew 21% to $310 million and was driven by a 24% increase in FortiGuard security subscriptions to $170 million. FortiCare technical support and other services increased 17% to $140 million.
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 second quarter, we expect a similar percentage of our total revenue to come from our existing deferred revenue balance. Total deferred revenue increased 26% to $1.8 billion. Short-term deferred revenue increased 21% to $991 million. Now turning to billings. Billings grew 19% to $552 million, 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 million in the quarter versus 34 in the year ago period.
The dollar value of the deals over $1 million increased 20%. In the quarter, we closed a seven-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 the customer's OT network. In the Americas, we closed a seven-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 services billings increased 17% and accounted for three-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, first 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%, 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 million. Diluted earnings per share increased 39% to $0.46. Moving to the statement of cash flow summarized on slides seven and eight. Free cash flow was $191 million, up 49% year-over-year. The increase reflects seasonally strong first quarter collections, continued inventory management, operating profit expansion that flowed through to net income, and growing deferred revenue. In the quarter, we repurchased approximately 779,000 shares for a total cost of $56 million, for an average per share price of just over $72.
At the end of the first quarter, the remaining share repurchase authorization was $677.5 million and is set to expire at the end of this year. Capital expenditures for the first quarter were $10 million, below the low end of our guidance range. Including construction spending, we expect second quarter capital expenditures to be between $25 million and $35 million. We are maintaining our prior 2019 capital expenditures guidance of between $120 million and $140 million. As I turn to the guidance provided on slide nine, I'd like to remind everyone that the forward-looking disclaimer Peter presented at the start of the call applies to the guidance I'm about to provide. For the second quarter, we expect billings in the range of $585 million-$605 million, revenue in the range of $505 million-$515 million.
Non-GAAP gross margin of 75.5%-76.5%, non-GAAP operating margin of 22%-22.5%, non-GAAP earnings per share of $0.49-$0.51, which assumes a share count of between 177 million and 179 million. 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 million-$2,520 million, revenue in the range of $2,070 million-$2,100 million. Total service revenue in the range of $1,340 million-$1,360 million. Non-GAAP gross margin of 75.5%-76.5%, non-GAAP operating margin of 22.5%-23.5%, and non-GAAP earnings per share of $2.10-$2.15, which assumes a share count of between 178 million and 180 million.
We expect our non-GAAP tax rate to be 24%. We expect cash taxes to be between $53 million and $59 million. 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. Ladies and gentlemen, if you have a question at this time, please press the star followed by the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, to ask a question, please press star and then one now. 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 strengths you saw in the virtual portfolio that 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 the user event and how you expect the virtual and FortiVM business to be additive to the overall product growth trajectory. Then I have a follow-up for Keith, if I may.
Yes, it's a good question. In the partner conference I present, 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 changing growth in the last few years. We feel going forward, edge also starting to add more weight there. That's where we see we need to emphasize both. The way we approach the cloud also, we are more like a horizontal approach, which have multi-cloud provider and also a very broad function, including all the virtual data center within the enterprise and also the public cloud. That's approach we see pretty good success and also the customer, especially enterprise customer, like that approach a lot.
Give them flexibility to move different function and different application between different cloud provider and also enable some different function both on-premise and also in the cloud, in the virtual environment. I think that's approach we get a very positive feedback from our customer.
That makes sense. 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 fourth quarter. 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. I think in terms of the subscription revenue, if you look at the growth and 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 water mark in the middle of 2018. Again, that's kind of coming off of a slower growth year in product revenue in 2017. 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 billing 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 high level. We're also seeing more customers coming back and buy from us on an à la carte basis on various security subscriptions, I think you're seeing some of that coming through in an additive approach as well. Other comments I would offer about that, when I look at our renewal rate, whether that's for FortiCare or FortiGuard, they're very stable, perhaps even ticking up a little bit. 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. 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 third generation of cybersecurity or Security-driven Networking. Can you talk to us on how the fabric strategy fits with your customers transitioning into this third generation of cybersecurity? I have a follow-up.
Thank you. It's a good question. The reason they starting to have this, the infrastructure and the security we call third-gen is because the traditional trust border within the company now was disappearing now because the data starting to go to the cloud, to the edge, to the mobile outside. Even within the company also, there's so many different way you can access it outside. Whether internet or some other things there. Also bring your own device, bring a lot of things inside the company. That's where the security is starting to move inside the company now and also outside the company border there. That's where we call it a Fabric approach or infrastructure approach. It's really different part of a infrastructure need to working together. The network is still the center of that because most threat also come from the network side.
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 to the branch. 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 automate response to all this attack. That's where the integration is very key. Without integration, you cannot move to the next stage of automation. It's an integration sometimes a little bit difficult across different product line or across different vendor. That's where the Fabric is really tied to all these things together.
Among Fabric product, most is really internally innovate and build is really want to make working together from day one. That's what making the integration and automation much more effective, more easy compared. Also we have formed some other partner program, like with Symantec, with their leading endpoint side. That's where we kind of working together to make sure they can cover more broad attack surface and secure the whole infrastructure. That's the Fabric story behind.
Got it. Thank you for that. Also, at Accelerate, you discussed Fortinet remaining highly focused on channel partners. Maybe a two-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 the distributors near and longer term? Thank you.
Yeah, we want to invest more with the partner channel program because we also realize that security, the service piece is very important. That's where even the customer bought the product, make sure they can get the best service. Lot of service also goes through our partner. That's where we want to have a more close relationship with the partner and also have a win-win, both profit together with the advance of the space together. That's where we see the attendance of the salary, the partner customer conference are up 37%. It's a huge success. We do see the partner, the customers that in more drawn to us compared to some of our competitor, kind of sudden limit some of the channel partner program.
We see a very strong feedback from partner to see the advantage of our product and also a better margin we starting share with them.
Yeah, this is Keith. I'll just kind of jump in and echo somewhat Ken said. Look, the partners are 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 at 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. 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. I think, Keith, you mentioned about just the increasing deferred revenue giving more visibility into the forward outlook. 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. I'm wondering, are you seeing any changes in the overall refresh environment, or is this more just like a seasonal slowdown in Q1?
I kind of touched a couple 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 2013, 2014, 2015, very strong MSSP, SMB business, has probably a 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.
I think when you see that, and historically you've noted, or we would note that, you get a different bit of a mix shift in our billings between services, slash renewals and products.
Got it. 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?
Yeah, service provider came in at about 19% of our total. 18%, excuse me. Stand 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. I wanted to ask on the geographic split. 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 historically, the European team it's performed extremely well. It's a mature sales team that's worked together for many years. The partner program there is very stable, and continue to work with the same partners over and over again. We feel 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. 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.
Also the enterprise also need some time to ramp up, also we try to speed up on go to enterprise also hiring some more enterprise sales. The enterprise, you have some six to 12 months behind when they onboard to some result.
Okay. Got it. 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 is maybe a little bit below consensus. Did any deals get pulled into Q1 that may have boosted Q1?
No, not really. 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. It would seem unlikely that I'd be 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. I would say at this point, after a quarter underneath our belt, I think the year is looking very much like we expect it to look like.
Okay. Very good. Thank you very much.
Thank you. 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-over-year compare in product revenue?
I saw the mid-range product family steal share, if you will, from both the low end and the high-end product. I think that what you're seeing there, we've talked previously about the success on the E-Series product, particularly the 500E. I think with the introduction of the 400 and the 600, not saying the four and six 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 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. 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. Are there any other thoughts on 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 security networking more starting, kind of go together. Especially, security is more like a top-down approach, and because security, like I said, need like a 10 to 100 time more computing power to process the same traffic compared to the networking. It's more easy for the security vendor to offer some networking function because security box can have a much bigger computing power and more room to offer additional function there. But from customer angle, also, in the normal security side, no one likes to have multiple box in line there. It's more costly, a lot of latency, and difficult to manage. That's where the more you can consolidate some function into a single box, the better. That's the feedback from customer.
With SD-WAN, we also starting to see the service part starting go up. That's why compared to like a few years ago, the service keeping increase. That's part of because some function like SD-WAN, the customer want to buy additional service. Not just the traditional, like 8 by 5, 24 by 7, but also we offer, we call the FortiCare 360° service. That's helping customer to monitor the health of their network, of their security deployment. That service we see starting going very quickly. Also, Keith mentioned the 24 by 7 FortiCare support and service also starting to go very quickly compared to the 8 by 5. All these kind of 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 Majek for Michael today. How are you doing balancing your focus on improving an enterprise with maintaining your strength in SMB, both in direct sales and in the channel?
I think we're starting like because to support enterprise, you need to have the whole structure behind, right? From the marketing side to the sales coverage and to the post-sales supporting. Sometimes you may also need some long-term investment. We're starting to prepare this, like, starting to get all this infrastructure be ready at same time, and starting also get a lot of enterprise salespeople on board, and also the marketing support and also starting build out for supporting enterprise now.
Yeah, I think that'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. 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 strong growth in that region. Using the excess proceeds, if you will, from the success of that to fund the growth into the enterprise segment of the market. 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. 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 very worthwhile investment to continue to push into the enterprise.
That's really helpful. 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?
Yeah. January was a little interesting around for various companies. I think January for us as a check of the quarter, started off a little bit slower than we would have liked. 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. 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, with a little bit of outperformance on the billings line. 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 growth engine for us. Our estimate, you can look in the copy brochure, which is a public information in the website. By 2022, will be a $19 billion market for the IoT/OT security. 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. 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. We are very happy to see the progress is making there very fast. It's one of the fast-growing area for us right now, and also lot of numbers. The base is very small, but growth is very fast and also huge potential going forward.
It's probably more than double, triple the size compared to some cloud security, some other space.
Great. That's very helpful. 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.
Yeah, that's a bit early. I think I would offer that we plan to occupy the building in October of 2020. If we don't occupy the building in October 2020, Ken's going to have a very painful conversation with me. Okay.
Fair enough. Thanks.
Thank you. Our next question comes from Tal Liani from Bank of America Merrill Lynch.
This is Daniel Bartus on for Tal. Thanks for taking the questions. I'd like to start with a higher level one. You're doing really well with the network products clearly for a while now. I'm curious just what other areas do you think you could emerge as more of a leader? I'm thinking about endpoint, email, network access control, et cetera. Wondering which adjacent or newer areas could you have provide the most upside surprise potentially in 2019?
I think some area 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. For that area, we more intend to do a partnership. That's why we have more than 57, we call the Fortinet Fabric-Ready Partner program, and especially more close partnership with Symantec for the endpoint solution. In some other new area, we also try to more leverage both the internal R&D innovation and also look in the space. Last year, we have two acquisitions more on the technology product side acquisition, not only for the NAC side and also for the new internal security approach. That's where we look and the whole landscape is very Network security is pretty interesting, because you need to grow by keeping innovate 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 a network security, most customer can only have a one box in line there to prevent the bad traffic. The more function you can integrate will be more helping the customer to very easy to manage, reduce the cost, latency, availability, all these things. That's where we feel the innovation, integration is very key for us, and keeping growing at the same time. Partner with some other part of a infrastructure player is also very, very important for us. We still try to gain the market share, and then also by partner together is also we found out is a very, very effective way to have a win-win situation.
Great. That makes sense. 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. First, just wondering if you agree that most of the share gains have been weighted to this segment of the market for you guys. 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 Global 2000 is much faster than the average and probably even faster than all the branch office growth there. That's where we do keeping gaining more share in the big enterprise also. SD-WAN is the one we feel we have more advantage compared to some other, whether SD-WAN player or some security player. The market also grow very fast. It's about 50% growth year-over-year, and we are one of the leading provider. We also have been doing this for the last few years. That's why we are more heavily promoting SD-WAN, but also the investment into the enterprise and also some other Fabric product also we see very fast growth above average.
I think the growth is really driven by multiple front, we do see each of them also give us quite a good potential and advantage over a competitor going forward.
Yeah. Thanks again. 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 allowing us to move into other segments within those institutions. 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. 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 may be behind, which we also speak up, add more resource behind to accelerate hiring there. That's have a little bit impact of North American growth. I think we have a rugged product program, and just somehow if the headcount little bit behind, that's also difficult to keep improving the productivity and all the other things. That's where, because North American tend to be very competitive hiring there, we also start 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.
Yeah. That's helpful, guys.
Sorry.
I'm sorry. Go ahead.
Ken's spot on with that. I think the first area of S, 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 comment earlier in the presentation. I think the key area of focus within that is really to do more things to help within the U.S. 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 MSSP business.
That's helpful. 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 new company view it as a new market, a niche market. For us, we also want to leverage our accumulated technology innovation from other part of our network infrastructure security to get applied into this OT/IoT space. Also kind of working with some other traditional equipment provider and some other service provider to offer better service in the space. The space actually need a lot of different approach, whether the segmentation or some kind of unrecognized environment solution is different, also take some time to invest and also to have a solution to fit in that space. We do see huge potential. Like I mentioned, we'll be growing to $19 billion in the next three years, will 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. One on the enterprise side. It feels like during 2018 you had talked more confidently about traction in the enterprise, it feels like you hear Ken you mention you need to ramp up some hiring there. Has there been some attrition or anything that would explain the difference? I had a follow-up on the product mix.
Just somehow the secure space pretty hard in last few quarter, a lot of 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 starting to add additional resource. We feel, 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. That also come from the hiring, come from the additional training program and that's where we starting to enhance now.
Okay. 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 relative difference of attach of subscription and annuity on FortiGate versus the non-FortiGate?
Non-FortiGate will include software. Software licenses and relative support that attach to it. There's also product versions of the fabric products and software versions of those products. 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 that product suite are very, very comparable with what we see throughout the rest of the company. I think that's it.
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? 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 on total.
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? The quarter billings beat was really healthy, you haven't really lifted the guide by much for the fiscal year, two cues coming very much in line with expectations heading into the quarter. Can you just circle back to that one and just give me some color around why that is?
I think we feel very good about how the year is shaping up. I do think that we basically took the over-performance in the first quarter and put it back on top of the guidance and raised the guidance for the full year. I think, coming off a Q1, that's probably a prudent approach to take to things. Certainly, when we look at the pipeline, the sales coverage, the sales tenure, the key metrics that we're looking at for the second half of the year. Absent needing to hire some people faster, that Ken's talked about, I think we feel very good about how the year is shaping up.
Great. 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. 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?
Yeah, I think for us, like you can see two-third of the revenue comes from the service. Service is a very important part of the offering, and so we do keeping invest more the service side and also like additional function like SD-WAN, that's also driving a lot of additional service revenue for us. Also when you go to enterprise, service also very important, service that's supporting to the enterprise customer. So that's where we kind of keeping viewing the service as well very important part. Other than that, any additional since.
Nope.
Okay.
Thank you.
Operator, next question.
We'll take our next question from Gray Powell from Deutsche Bank. Your line is open.
Thanks for taking the question. Just a couple, if that's okay. 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? How should we think about that dynamic for the remainder of the year? Thanks.
I think it's pretty much neutral to answer your question. If you recall, they're both obviously 2018, 2019 around 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 was being recognized a little faster, and some channel inventory in the U.S. Those components, I believe, are typically less than $5 million, and that's kind of where we're at as we continue to move forward.
Got it. Thank you. 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?
Nope. We give revenue growth in the back of the investor slide deck, you'll see the revenue growth by regions.
Can we have it? I think you guys give that metric every quarter, right? The billings growth by region.
No, that we don't.
Okay. One more housekeeping question. How was the enterprise growth in the quarter, excluding the service provider vertical?
The enterprise growth, trailing 12 months, 23, 24% growth.
For this quarter, for Q1?
Trailing 12 months number is what we give historically, and it was 23%-24%.
Okay. 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 360 Protection Bundle, how to think about that across customer segments, and maybe how to think about the potential uplift to ACV as customers adopt that.
Yeah. We started promoting that service about one years ago, we do see there's a huge potential, especially like some relate to the customer need additional help to health check of their deployment or their network function there, security function there. It ramp up very quickly, that also need additional service supporting personnel to supporting that. We also started training quickly, both on the Fortinet side, also in some of our partner side also. We do seeThis is one of the future strong growth area for us, also the service support has much better margin than the product side. We also see it also can help in improving the overall margin for us.
It's still in the early stage, ramp-up stage, also we need to do quite an additional training and supporting effort and also promotion this, because so far, the eight by five, 24 by seven, so that when customer has trouble, they call us, call the supporting line. This is more like a proactive way, do the health check and helping customer to prevent anything happen ahead of time. We've had very positive feedback from all the customers, especially a lot of enterprise customer. We do see this can be keeping growing faster than other part of whether the service and supporting going forward.
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 what you did in 2018?
One thing we try to improve in the productivity, usually the hiring, kind of over-hiring, try to behind the growth, also we don't want to do behind too much, which eventually will limit the growth. It's kind of a, we want to keep the building, the revenue growth a little bit ahead of hiring, but not by too much.
Yeah, 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. 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. My questions regarding hiring have been answered and asked. Thank you.
Thank you. Our next question comes from Daniel Ives from Wedbush. Your line is open.
Thanks. I just have a question on large deal flow. Obviously it continues to be tremendous. Is that a trend that you're expecting in the coming quarters, 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 million. I should also offer that deals over $500,000 grew at about 35%. Some quarters we get that number, some quarters we don't. It's been a very consistent area of growth for us on that $500,000 and above range.
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 more comes from our effort to drive enterprise growth, so that's where a lot of direct touch and also closely working with partner also help. Both the partner with a certain VA and also the partner like in the, we call the Fabric-Ready Partner, like Symantec, and all these are helping driving the big enterprise sales, which is a much bigger deal compared to the other part.
Well, great job again. Keep it up. Thanks, guys.
Thank you.
Thank you. 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 second quarter. We have the Jefferies Conference May eighth and ninth in Beverly Hills, the JP Morgan 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 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.