Ladies and gentlemen, thank you for standing by, and welcome to the Fortinet 4th Quarter 2020 Earnings Announcement. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Peter Salkowski, Vice President of Investor Relations.
Please go ahead.
Thank you, Sarah. Good afternoon, everyone. This is Peter Salkowski, Vice President of Investor Relations at Fortinet. I am pleased to welcome everyone to our call to discuss Fortinet's Fiscal results for Q4 of 2020. Speakers on today's call are Ken Xie, Fortinet's Founder, Chairman and CEO and Keith Jensen, CFO.
This is a live call that will be available for replay via webcast on our Investor Relations website. Ken will begin our call today by providing a high level perspective On our business, Keith will then review our financial and operating results for the Q4, providing guidance for the Q1 of 2020 and the full year. We'll then open the call for questions. Before we begin, I'd like to remind everyone that on today's call, we will be making forward looking statements, and these forward looking statements are subject to risks and uncertainties, which could cause actual results Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10 ks and Form 10 Q for more information. All forward looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward looking statements.
Also, all references to financial metrics that we make on today's call are non GAAP unless stated otherwise. Our GAAP to results and GAAP to non GAAP reconciliations is located in our earnings press release and in the presentation that accompanies today's remarks, both of which are posted on the Investor Relations website. Lastly, all references to growth are on a year over year basis unless noted otherwise. I will now turn the call over to Ken.
Thanks, Peter, and thank you to everyone for joining today's call to review our Q1 and full year 2020 results. 4th quarter billings increased 20 percent to $961,000,000 Our secure SD WAN offering accounted for over 13% of 4th quarter billings. Product revenue accelerated quarter over quarter to 21%, contributing to a total revenue growth of 21%. Our operating margin benefits from solid revenue performance. We achieved an all time company record non GAAP operating margin 29.4 percent for the 4th quarter.
Given the many opportunities ahead, we plan to shift our focus more to growth for the and list the next few quarters. Today, we announced the FortiOS 7.0 with 300 new features and updates. With this release, Fortinet is the only leading cybersecurity vendor to offer firewall based Zero Trust network access, enabling remote access This reduced our tech service while improving the user experience. Fortinet's Zero Trust Network Access Solution also simplify management by using the same access policy whether on or off network. Title integration of our SaaS solution with the FortiOS 7.0 give enterprise the flexibility they need To enable their workforce to work from home with consistent enterprise grade security delivered on premise, Now, my cloud based SaaS consumption for security as a service.
The FortiOS 7.0 extends network connectivity and security beyond the 1H with innovation in 5 gs and LTE that Through the wireless network performance and increased resilience, our 5 gs offering enable organization to achieve secure, Scalable and highly available network connectivity anywhere. The release of FortiOne 7.0 Expand the Fortinet Security Fabric delivering on our mission to provide broad, integrated and automated security to any device, towards a platform approach and not just a separate platform for endpoint, network security or cloud security, But a holistic platform that is integrated, automate across all these areas. The Fortinet Security Fabric is a cybersecurity platform built on Broad and a deep set of networking and security technology from endpoint to network to cloud, organically built To seamlessly communicate and operate together, this consolidation with our secure driven networking approach will be key drivers going forward. Today Fortinet is recognized in 8 Gartner Magic Quadrant. Our FortiGate product is a leading is a leader in both SD WAN and the next gen firewall Magic Quadrant.
We continue to experience excellent adoption of Secure SD WAN and expect our unique solution to become the market share leader within a few years. In addition to our growth drivers, we estimate our total addressable market will grow at an annual compound rate of 10% over the next 4 years to reach $93,000,000,000 by 2024. The recent SolarWinds security incident And the pandemic elevated the need for a broad, integrated and automated platform, and we expect company to raise The percentage of IT spending used for security as they work to secure their entire infrastructure across multiple edge in a zero trust environment. Before turning the call over to Keith, I would like to thank our employees, customers and partners worldwide for their continued support to manage our response to the ongoing COVID-nineteen pandemic. Keith?
Thank you, Ken. Let's start the 4th quarter review with revenue. Total revenue of $748,000,000 was up 21%. Product revenue was up 21%. Service revenue was up 21%.
Product revenue of 288,000,000 Saw substantial sequential acceleration in growth relating from strong demand for security fabric platform And FortiGates across all form factors hardware, software and virtual machine. While secure SD WAN use cases continued their dramatic growth, The majority of product revenue was driven by the wide range of other operating system capabilities embedded in FortiGates and their related use cases. Service revenue of $460,000,000 benefited from strong demand for fabric and cloud security solutions. Support and professional services revenue increased 21 percent to $210,000,000 The revenue mix shift from 8x5 to 24x7 support was 12 points with 20 fourseven now representing 66% of the mix. Security subscription services and cloud provider revenue increased 21% to 249,000,000 Moving to the mix of FortiGate and non FortiGate revenue.
Network security revenue increased 18%, driven by the high end and entry level FortiGate product families. Non FortiGate product and service revenue increased 29%, driven by a 34% increase in revenue for fabric and cloud security solutions. Before continuing with the 4th quarter results, I'd like to highlight our 2020 full year revenue performance. In the midst of a pandemic induced recession, Total revenue for the year grew 20 percent to $2,600,000,000 We take great pride in our focus on organic growth And 2020 represents the 3rd consecutive year with revenue growth of 20%. This consistent performance speaks to Our geographic and customer diversity, the continued success of the integrated platform strategy And our proprietary ASIC advantage that enables a shared operating system across the platform, drives our cost for performance advantage, Increase the capacity to add features and functions while maintaining price points.
Total non FortiGate revenue for the year grew over 25 percent to more than $725,000,000 In other words, our fabric cloud and other security products and services FortiGate products and solutions include a complete range of form factors and delivery methods, including physical and virtual appliances, cloud, SaaS and perpetual software, as well as hosted and non hosted solutions. Together, they provide a range of security solutions and form factors, Enabling integrated protection for hybrid environments and their expanding digital attack surface and edges. Moving back to our Q4 results, let's turn to revenue by geo. Our geographic revenue performance continued to align with the pandemic's economic path and with it highlighted the geographic diversification of our business. As summarized on Slide 7, revenue in Asia Pacific increased 23% As many Asian countries and economies continue to remain largely open.
EMEA revenue increased 22% And the Americas posted revenue growth of 20%. Let's shift to billings. Total 4th quarter billings were $961,000,000 Up 20%. FortiGate billings increased 16% and accounted for 71% of total billings. As shown on Slide 9, high end and entry level FortiGates posted strong billings growth in the quarter.
Non FortiGate billings increased to 29% of total billings, driven by demand for fabric and cloud security solutions. As with revenue, GEO Billings performance aligns with the economic path of the pandemic. In terms of growth, APAC Billings outperformed all GEOs followed by Europe and the Americas. The Americas reflect the continuing impact of the pandemic, especially in Latin America. Moving to Buildings by Customer segment.
The Small Enterprise segment posted solid growth across all geos, Illustrating the strength of our Engage channel partner program, this segment is driven by new customer acquisitions, Customer security fabric expansions, solid execution by our channel partners and the large diverse makeup of this multinational customer segment. Moving to worldwide billings by industry verticals. The worldwide government sector topped all verticals at 17% of total billings And grew 28% with another strong performance from our international team. Service Providers and MSSPs fees accounted for 16% of total billings. Retail accounted for 10% of total billings, up 2 percentage points quarter over quarter.
And education continued to rebound with billings growth up 26% year over year. Looking now at deals by dollar size, We had 68 deals over $1,000,000 in the 4th quarter compared to 64 deals in the Q4 of 2019. Secure SD WAN accounted for 16 deals over $1,000,000 versus 11 deals in the Q4 of 2019. On a full year basis, SD WAN accounted for approximately 11% of our total billings and doubled year over year. Moving back to the income statement.
As shown on Slide 4, gross margin improved 40 basis points to 78.5%. The strong 29% Quarter over quarter product revenue growth created a mix shift from services to product revenue. The mix shift was a headwind for quarter over quarter gross margin comparisons. Product gross margin improved 130 basis points to 63.2%. Product gross margin continued to benefit from a higher mix of software products and the lower direct costs of our newer generation of FortiGate products.
Operating margin for the 4th quarter increased 210 basis points to 29.4 percent benefiting from the gross margin improvement and continued lower travel and marketing program expenses, offset by the addition of new sales team members as we continue to prepare for additional growth. At the end of the year, the total headcount was 8,238, an increase of 16%. Moving to the statement of cash flow summarized on Slides 10, 11 and 12. Cash flow for the Q4 came in at 264,000,000 In the Q4, we repurchased approximately 300,000 shares of our common stock for a total cost of $34,000,000 For the full year, we repurchased 11,700,000 shares for a total cost of 1,100,000,000 At the end of the Q4, the remaining share repurchase authorization was $1,000,000,000 with the authorization set to expire at the end of February in 2022. Throughout the pandemic, we have leveraged the strength of our balance sheet as a competitive advantage to support our partners and customers as they experience geo specific economic challenges.
As a result, average days sales outstanding increased 8 days to 87 days, in line with our expectations and reflecting our decision to provide geographically targeted extended payment plans. Inventory turns improved to 2.7 times from 2.1 times in the 3rd quarter and was relatively flat year over year. We expect extended payment terms and higher inventory balances to be in effect as we move through at least the first half of twenty twenty one. Capital expenditures for the Q4 were $32,000,000 including $22,000,000 related to construction and other real estate activity. We estimate capital expenditures for the Q1 to between $50,000,000 $60,000,000 And for all of 2021 to be between $150,000,000 $170,000,000 2021 CapEx projects include expanding our data center footprint and spending that was moved from 2020 due to delays in the new campus building.
The average contract term in the Q4 was approximately 28 months, Up less than 2 months from the Q4 of 2019, the growth in SD WAN and other large enterprise deals contributed to the increase. As we look forward, I'd like to review our outlook for the Q1 and full year 2021 summarized on Slide 13, which is subject to disclaimers regarding forward looking information Peter provided at the beginning of the call. For the Q1, we expect billings in the range of $765,000,000 to $780,000,000 revenue in the range of $670,000,000 to 685,000,000 Non GAAP gross margin of 78.5 percent to 79.5 percent non GAAP operating margin of 22.5 to 23.5%, reflecting the typical revenue seasonality associated with the Q1. Non GAAP earnings per share of $0.70 to $0.75 which assumes a share count of between $167,000,000 $169,000,000 We expect a non GAAP tax rate of 21%. Before providing our 2021 guidance, I'd like to congratulate every member of the Fortinet team for the truly outstanding execution in 2020 In the face of unprecedented challenges and rapidly changing and unpredictable dynamics, the effort and results have been outstanding.
And this is on top of now several years of consistent predictable performance and continuing improvements in key growth and profitability metrics. Today, we reported our 3rd consecutive year of total revenue growth of 20%, while increasing our non GAAP operating margin, an average of over 200 basis points a year for the same period. Our goal remains to balance growth and profitability within the framework we have provided. As Ken mentioned, given the many growth opportunities that lie ahead, we currently plan to tilt our bias within this framework More towards growth for at least the next several quarters. The opportunities we see are supported by a strong pipeline heading into 2021, Increased sales capacity and our development efforts, which include the MP7 chip and our new FortiOS 7.0 operating system.
With that, for 2021, we expect billings in the range of $3,560,000,000 to 3,640,000,000 which at the midpoint represents growth of approximately 17 percent revenue in the range of $3,025,000,000 to 3,075,000,000 which at the midpoint represents growth of 18%. Total service revenue range of $2,015,000,000
to $2,045,000,000
which represents growth of approximately 21% and implies product revenue growth of approximately 11% and $1,000,000,000 in product revenue for 2021, quite the milestone for Fortinet. Non GAAP gross margin of 78% to 80%, Non GAAP operating margin of 25% to 27%. When backing out the 2020 T and E benefit, The midpoint of guidance represents a 50 to 100 basis point increase in operating margin for 2021. Non GAAP earnings per share of $3.60 to $3.75 which assumes a share count of between $170,000,000 $172,000,000 We expect our non GAAP tax rate to be 21%. We expect cash taxes to be approximately $80,000,000 Along with Ken, I'd like to thank our partners, customers and the Fortinet team for all their support and hard work during these difficult and unique times.
I'd also like to offer a special welcome to the Panopto team. And I'll now hand the call back over to Peter to begin the Q and A session.
Thank you, Keith. Operator, please open the call for questions.
Thank you. Our first question comes from the line of Brian Essex with Goldman Sachs. Your line is now open.
Hi, good afternoon. Thank you for taking the question and congrats on a great set of results. Maybe, Ken, if I could ask, you've got a number of different product cycles Ahead of you this year, you've got NP7, you've already talked about SD WAN, you've got hyperscale penetration and potentially exposure to 5 gs. Can you maybe talk about the contribution from each of those that's embedded in your guidance and what are you seeing currently in the market and what's yet to come?
I think for MP7, it's still in the ramp up stage. We continue to build new hardware platform using MP7, especially for the high end and middle range. The Forti OS7.0 is also a growth driver, but we are in the beta-three process right now this quarter. That will help contribute to the additional growth, especially in the Zero Trust and SaaS environment And also this infrastructure security later this year. But it's so far, I see the product growth, like a 21% is a lot of contribution from whether the SD WAN or we call security driven networking.
And also in the Probably like 1 or 2 years ago when we released the SoC 4, so that's a little bit towards the low end side of the FortiGate, Which you can see nicely growth over there and also the team doing great job in the sales and marketing. Thank you, Agar. James?
Yes. I think the guidance setting process is not so much about individual products or even in some cases individual use cases. We identified 15 or 20 different use cases for firewalls. It's more about what we see in terms of market opportunity, what we see in pipeline That maybe by geography or deal opportunity or what have you as some of the key inputs that go into it. But I wouldn't really think of it as I certainly would not want you to walk away from the conversation thinking that the guidance that we provided is dependent upon some degree of 5 gs or SASE or something that's above and beyond.
Got it. That's helpful. Maybe just a quick follow-up. Nice large deal activity, certainly more than we picked up in the channel. Maybe if you could talk a little bit about the competitive dynamics on the large end of your market scale, Where you're seeing that business come from?
How much is displacement? And how much is expansion of, I guess, existing customer opportunity?
Yes, definitely, a question from our customer, our partner, they see we're starting to get a Much better, more competitive and a lot of advantage using the Fortinet product, whether the FortiGate leverage new ASIC, the new OS with Much more additional function compared to competitor. So that's where like increase the gap we have Ahead of competitor now. And that's actually helping to drive the accelerate the product revenue growth. And On the other side, we have a little bit different approach for whether the SaaS or cloud or endpoint. So we more emphasize is to integrate Together, automate together, especially in the OS level, though that's none of our competitors have that.
And also most of this also organically Cardinal developed designed to work together, automate together from day 1. That's also different from competitor come from Acquisition which is more difficult to integrate and also difficult to manage long term. So we do feel we have a more and more advantage in the marketplace right now.
Got it. Very helpful. Thank you again. I appreciate it.
Thank you, Brian.
Thank you. Our Next question comes from the line of Shahriar Iel with Oppenheimer. Your line is now open.
Thank you. Good afternoon, guys. Congrats on the ongoing strong execution levels. I want to start with a gross margin related question. So Gross margin guidance for 'twenty one indicates an improvement, 1 to 2 basis points on average.
And I'd like to And whether it is driven by the ongoing shift to more cloud activities, I. E, more subscription services or is it driven by some improvement with your ASIC driven strategy.
Yes. I think the last part is probably the headline, which is that the success of generation of the ASIC, In addition to creating more speed, more capacity, if you will, more throughput, it also creates capacity to consolidate features of the BOM that were previously separate. Any success of Generation has shown the benefit of that. And I think over the last year or 2 that we've done a very good job of retaining That cost benefit in terms of the structure, you can look back and see what's happened with the gross margins and the product gross margin line. Obviously, you do then also get the benefit In total, when you add in the 2 thirds of the business that are services that are coming at a much more attractive margin.
So the combination of those 2, I think you're working very, very well for us as we exit 2020 and move into 2021.
Got it. Thank you for that, Keith, maybe high level on the SART and SUNBURSE breach. Have you seen any incremental interest Starting in mid December, maybe building into year end, again, just aside from the typical healthy year end seasonality trends?
I'd say probably we do see
a lot
of need interest especially To secure a whole infrastructure, including a supply chain with all different third party kind of Poured out all these things. But it's still I'd say it's definitely more people starting interest in this area, but it's The business side is probably not changed that much yet. But we do see going forward, Probably later this year will be because this definitely with security concern. Like I mentioned, the security spending amount, our IT spending will
Thank you. Our next question comes from the line of Tal Liani with Bank of America. Your line is now open.
Hi, guys. I have Two questions. The first one is Ken, in your prepared remarks, you said that this year is going to be a year of focus on growth. What does it mean? Does it mean that you're going to increase expenses and the margin increase This will moderate.
Can you elaborate on the meaning behind your statement that you're going to focus on growth this year? And how does it differ from previous year, for example?
We do see like whether some investment we made in the sales and marketing like we said as We have increased sales capacity and also we also have a better visibility, we increased the marketing. And at the same time, from the product, from infrastructure We also will keep in invest, especially the organic internal development like building the new infrastructure And I'd like to address the cloud, the networking endpoint and also working with service provider. So basically, we do see the market itself also starting kind of accelerating, especially in some new area, We'll do the we call security driven networking, including both SD WAN and the 5 gs, and that's have the new infrastructure, But also some kind of a service model leverage the infrastructure, which we will keep in investment in there. So that's where we feel So this will give us a much more growth opportunity and both internally like whether the MP7 or the 40.7.0 As our timing quite well, so it will help us drive the faster growth.
And does this have any impact
Yes, thanks, Paul. I'll just add to that. I think the sorry to interrupt you. Look, I think we were very successful throughout 2020, even during the pandemic of Maintaining and growing our operating margins very dramatically, but at the same time adding sales capacity. And I think when we sat down to build the guidance out in For 2021, coming into the year with the capacity levels that we have together with the increase in tenure that we're seeing as well as the pipeline, I think we feel very good about this opportunity to take advantage of the growth.
And I think we're still I think the margin guidance of midpoint of 26% It's very much within the framework and actually up a little bit.
Got it. My second question It's about the needed investment in infrastructure to accommodate Sassy and similar business models. What is the company doing in order to address it? Can you just elaborate on what's happening behind the scene?
Yes, the SASE Approach on Fortinet is different than some other competitor. We do want to have a more integrated automate approach. And also we've built only 1 in the OS level, both the SASE and also Zero Trust network access. So that's making whether working with Fortinet or service provider or even our customer enterprise themselves to develop their own kind of SASE approach, which will be much better fit for their own kind of privacy, whether it's GDPR, some other requirement. It's much better, secure compared to some other approach.
So that's where we feel we do have some investment, but some of the investments like infrastructure, we're also working with our service provider together. Got it. Thank you.
Thank you. Our next question comes from the line of Rob Owens with Piper Sandler. Your line is now open.
Hi, this is Ben Schmidt on for Rob. Thanks for taking my questions. As much of the attention in the space It begins to shift towards cloud and SaaS. How do you think about your longer term strategy from a remote connectivity perspective? And what do you think and what do you expect for the branch office?
I think for All technology we can support in both the same branch and the 6 branch office approach and also even for the SaaS D, So we leave the flexibility to enterprise, which they can whether leverage the vendor or they can leverage their service provider or carrier They can build themselves. So that's what we say. We put in the OS level is much more integrated automated compared to some other approach, We have to leverage vendor infrastructure. So for us, like this OS level integration of Sassy do leave a lot of And gradually, it's for the customer to transition whether they're more service based or they still want to like have a, We call secured infrastructure approach. So that's where we have the flexibility to have customer select their own approach based on our need.
At the same time, We'll make the whole infrastructure secure like we say, we do the security driven networking with SD WAN 5 gs, our internal segmentation, Whether in the data center or with the enterprise conference environment. So that's where we feel even we take a little bit more time to build this kind of Hi, they integrate OS level approach, but the result is much better and more advanced than some other loosely Not to approach.
Okay. And on the growth investment, Can you guys add just a little bit more to how much of the capacity has already been added and how much You're expecting to add, I guess, how much more needs to be added for this year? And can you remind us what The normal ramp time period is for new reps?
For the new rep, probably a little bit different for each second vertical, like the channel probably within a few months, like 3 months Time frame and then the enterprise probably like this to format. Some people can't make take like 1 to 2 years like carry out the scenes. So we're going to also like a different deal. I think based on how the pandemic, how the other progress going and also the market Market opportunity there. But I'd say we do kind of planning to Increase more capacity when we see more opportunity there and try to match the investment With the I think whether the internal like new product and also the market opportunities will definitely help us to
Thank you. Our next question comes from the line of Fatima Boolani with UBS. Your line is now open.
Good afternoon. Thank you for taking the questions. Ken, maybe I'll start with you. Just drilling into your vertical based performance, You talked about the global government vertical being comprising a 5th of your billings in the quarter and that's some of the highest levels we've seen. And so I'm wondering if you can remind us what your U.
S. Public sector exposure is within that government exposure. And then, more specifically, how is Fortinet positioned both from a product and go to market perspective In the U. S. Federal, especially as we sort of think about the $10,000,000,000 cybersecurity spending protocol from the new Biden administration.
And then I have a quick follow-up for Keith.
Yes. The common business for Fortinet is global based. It's about 17% of our total business for us right now. And compared to like a few years ago, the And same thing for the U. S.
Market. And so we're going to keep in building the team and increase Capacity and to take this opportunity and grow faster, larger. What's the second question,
I think we've talked before that the U. S. Fed is low single digits of our government business of our business. I think we sound a bit better at that.
Got you. Very helpful. Keith, just sticking to Americas, We saw a very nice acceleration in 4Q in the Americas theater and against what was maybe an uneven geographical For the U. S. Over the course of 2020, so I'm wondering if you can just put a finer point on the types of things that went right and the types of things that really went on in the quarter and the key drivers of the strength particularly in Americas?
And that's it for me. Thank you.
Yes. So I think good question, but in a lot of ways, different answer. If you look at it geographically, Latin America continues to be by far the most challenged, if you will. Canada probably did the best of the 3, and I would put the U. S.
Right in the middle. I do think that We're very pleased with how the U. S. Has come back. The Q2, now that we all are pandemic experts about what to expect out of the business, we're looking at Q1, Q2, Q3, It's pretty obvious that and we kind of felt this coming out of the Q2 that Q2 was a low watermark, both for the company in total, but also for the U.
S. I think you've picked up on since that point, there's been a steady progression of, for lack of a better term, recovery in that part of the business.
Thank you. Operator, next question please.
Our next question comes from the line of Brad Zelnick with Credit Suisse. Your line is now open.
Thank you so much and congratulations to the entire Fortinet team on a great end to a great year. My first question for you, Ken, in your comments, you basically said that you aspire to be the market share leader and SD WAN, which I think is a really important goal that you have. And I just was curious from your perspective, what needs to happen to get there? How do you take share from your 2 largest competitors that have significant installed base relationships? And over what time can this play out?
I think, for us, we have a unique advantage of we build SD WAN with security together, And we also leverage ASIC to like increase computing power, load computing cost a lot. So that's none of our competitors have not. And also the other 2 They'll come from acquisition. That's where going forward, they'll probably will be slower on whether the innovation of the market change dynamic there. So that's what we can see from the FortiOS 7.0 release, we do keep increased additional function, whether the SD WAN, the 5 gs and other So we do also believe going forward like half or majority of the SD WAN market will need a security.
So we'll be we have a huge advantage there. So that's where even they have a bigger installation base, but the advantage we have from the product, from the function, from the cost side, I think it will be huge and what kind of us keeping through in the market share. And so far like year over year, we almost doubled SD WAN business Compared to the 2019 in 2020.
Great. And maybe just quickly for Keith. Keith, What are the levers to think about in light of sales headcount and the plans for this year?
So, Larry, it's a big role. I'm not
quite sure I fully understand
the question, but maybe I'll give it a shot in that To share one data point, coming into this year, if I look at the level of sales capacity we have versus What the plan is that we're talking about. I don't think I've this is as well positioned as we have been coming into a year To pivot towards this growth model that Ken has talked about. And I think that the pipeline feels very good, the tenure feels very good, The use cases, the TAM feels very, very good to us. The new FortiOS, the MP7 chip that's coming out, the platform advantage, The cost advantage that we have for performance, I think that we are in a very good position to execute this. And again, we're maintaining it Within the framework that we've talked about previously.
Fantastic. Thank you so much for taking the questions.
Thanks, Brent.
Thank you. Our next question comes from the line of Sterling Auty with JPMorgan. Your line is now open.
Yes, thanks. Hi, guys. Just one question from my side. Ken, in your prepared remarks, I think you talked about that the industry has finally raised to see customers Move to consolidation on fewer vendors, more of a broad platform approach. With that in mind, Where would you gauge the Fortinet platform?
And what are the areas that you would like to bolster to improve your position moving forward?
You can see the like we call the security fabric has a Pretty nice growth, almost double compared to the 40 gig growth there. That's also because customer want to have all this The whole infrastructure secured integrated automate solution. So that's where we'll continue to see We'll keep gaining share there. So that's involving probably like 20, 30 different product. And on the other side, On the FortiGate part, we call it security driven networking, that's whether the SD WAN, the 5 gs and now with integrated SASE and some other Working closely with service provider carrier, we also see a lot of opportunity within the FortiGate side.
So that's where we see So far, we are keeping like if the market itself grow like 10%, we do see we can grow much faster than the market keeping gaining share and Both on the FortiGate and also on the, we call it, the broad fabric approach, which is involving both the endpoint and the networking and the cloud all together. And all this integrate together based on the FortiOS and some other connectivity related to the FortiOS.
Understood. Thank you.
Thank you.
Thank you. Our next question comes from the line of Adam Tindle with Raymond James. Your line is now open.
Okay. Thanks. Good afternoon. Ken, I just wanted to start on the focus more on growth comment and how you're Investing some of your healthy margin in some sales and marketing initiatives. We also heard a similar message from a competitor yesterday.
And just thinking about the broader industry An outsider could maybe make the case that we enter a period of greater industry competition and pricing pressure As major competitors are investing heavily in sales and marketing, certainly doesn't seem to be the case based on your full year margin guide. So maybe some thoughts on why that scenario does not play out.
Ken, can I jump in and answer on your behalf for a little bit? I think the reference probably is to a company that has a very, very different business model, whether you're looking at growth rates or you're looking at product service mix or what have you. So I don't know that, that would Draw that straight line comparison. I think the business model that we're executing here has been extremely successful, and I expect it will continue to be so. In terms of discounting, I think that there's days that I don't like hearing it, but we're viewed as being the price for performance leader, That our pricing is really, we're oftentimes, I think, brought into RFPs and opportunities to set the milestone that the competitors are forced to react 2 as opposed to the other way around.
If you go back and look at the comments that we've offered throughout 2020, even in a pandemic, More often than not, discounting, if you will, has been a tailwind for us in our ability to execute against it as opposed to a headwind. And by that, I define discounting, meaning Lower discounting pressure in that quarter than the prior period. So I don't think we have the concerns that may have been described there.
Okay. That's Helpful. Maybe just a quick follow-up, Keith, and sorry, a little bit in the weeds on this one. But the billings guidance for Q1, it's down about 20% sequentially at the midpoint and Typically down low double digits or so mid teens in that range. Last year at the start of COVID, it was down 17%.
So Part of the question is why would the sequential decline in billings be worse than the environment when we entered COVID during Q1 of last year? You talked about Having a strong pipeline supporting the desire to invest, maybe just some help with the color on the disconnect between those two items. Thank you.
Yes. I think one which you're we should talk about is just a tremendous performance in the Q4 of 2020. I know that Q4 of 2019 was a good quarter, but Q4 2020 on top of that 2019 performance, I think is part of it. And now this is typically the smallest quarter for us in the year. Historically, you've seen some sort of shift and it's nothing new And from going from Q4 to Q1 and then you start to see the progression thereafter.
Okay. Thank you very much. Helpful.
Thank you. Our next question comes from the line of Keith Bachman with Bank of Montreal. Your line is now open.
Hi, thank you very much. Ken, I wanted to ask my first question of you. You've talked about 5 gs. Why is that an opportunity? Who's your customer?
And what's why does Fortinet win in that instance of the deployment of 5 gs. And if you could just talk a little bit about when do you think that you'll get some benefits from this?
I think we do see 5 gs connect a lot of device to the Internet, Which also increased a lot of security risk. We call there's a new attack service or new edge need to be covered. So that's where especially we're working with a lot of service provider offered a 5 gs service to a lot of enterprise and So that's we do see is a huge opportunity. And so with our position with the And we do see the 5 gs can be one of the driving growth driving factor for us this year and it could be Cheerio towards the end of the year. Yes, it's going forward is also is a huge opportunity even secure whether Yes, it's a part of the whole infrastructure, which grow very, very fast and a lot of our carrier service providers starting to have investment in this area also.
Okay, interesting. Okay. And then Keith, one for you. For the guidance of 'twenty one, you talked about CapEx, any other puts and takes you want us to think about as it relates to OCF or operating cash flow?
No, not really. I mean, I made the point about inventory. The turns came in for us pretty strong in the Q4, but I think that's a direct reflection of The success that we had on the product revenue line in the 4th quarter, so that was probably a little bit better than we expected. I do think during this pandemic era that we'll continue to maintain somewhat higher I think that's in our best interest. The extended payment term program, I think that every CFO wants to wind that down as fast as possible, Possible and every distributor wants to hold on to it for dear life.
So that will be an ongoing battle for us throughout 2021, I think.
Okay. Well, congratulations to the whole team. Good set of results. Thank you.
Thank you.
Thank you. Our next question comes from the line of Ben Bollin with Cleveland Research. Your line is now
open. Good afternoon, Ken, Keith, Peter. Thanks for taking the question. My first question, you've made your aspirations pretty clear in SD WAN. Could you share with us a little bit about aspirations, intentions as you move into Sassy and 0 Trust, how you see yourself positioned?
SD WAN is a part of the SASE offering. What we do is a little bit different than competitor. We build within the FortiGate .:] Which also can be offered whether based on the physical appliance or the virtual software or kind of cloud Delivering and that's where the new FortiOne 7.0 give all this flexibility and connect a lot of other part of infrastructure For security service together, so that's where we'll continue to see SD WAN and keeping growing probably by market side, it probably was We're going to grow like 30%, 40% year over year this year. We do believe we're also keeping gaining market share. And at the same time, The 5 gs is the other opportunity come up.
We already offered in the new FortiOS 7.0, which also could be a pretty good drive for
Could you also talk a little bit about How you envision FortiOS 7 rolling out once available? How backwards compatible will it be for legacy appliances? And if you've looked at some of the historical OS refreshes, how long does it take the footprint to roll over
as this rolls through the base? Thank you.
It's really depend on customer. Some I have to say, The channel probably react a little bit faster and then there's enterprise, then the service providers sometimes take a little bit time Because some service provider, they also have to support in some of that. But we do see this enable a lot of new opportunity. And they also like this tightly integrated approach, whether the SD WAN SaaS, we call it security driven networking, Which do enable them to offer the additional service, additional kind of a business and protect additional edge. That's what we say.
You need to protect all different edge together and automate integrate together instead of having different product, different Kind of a vendor for each part, which is difficult to integrate automate. So that's where we see the response from There's like a 300 new feature and update in this OS to cover quite a broad area And that we do see customer do need some time to gradually make a trend pickup all this new function. But a lot of them, they see the huge benefit of this new function, and that's what we see is a huge opportunity But probably towards the second half of the year, we'll see a lot of benefit of it.
Thank you.
Thank you.
Our next question comes from the line of Michael Turits with KeyBanc Capital Markets. Your line is now open.
Hi. This is Eric Keith on for Michael. Thanks for taking the question. Just one for me. Keith, it seemed like you guided billings for 4Q assuming some macro headwinds.
How did that play out differently than you expected, especially on the product side? And in the end, did you see deferrals of hardware refreshes in 2020 that might snap back in 2021?
Yes, I don't we have such a long product list. I don't think that we really saw deferrals of refreshes, The Swati asset concept, I think the any I don't think Q4 was unusual in terms of what you normally see With other years, and by that, I mean, I think there was probably some element of the typical budget flush flowing through. I think there was probably some element of salespeople working really hard to hit accelerators. And I think there was also some element of deals that simply pushed. I don't think that Ken kind of made a good point earlier to build on a little bit.
Yes, I think the SolarWinds event happened so late in the quarter, at least for us and probably for many other security companies. It seems doubtful that, That activity really had much impact on the last 2 weeks of December in the quarter. I do think, Ken, at this point, that it certainly raises Awareness of security and events like that, unfortunately, for the world at large, create Focus on security matters and the importance of it that people are going to suffer because of it. So I don't know that In terms of learning to be cautious, if you will, going back to your beginning of your question and guidance setting, I do think there was an element Once we came out of the 2nd quarter and saw how the pandemic impact close rates and you saw that come through in the guidance setting process in both Q3 and Q4.
Also, we see a pretty nice growth in SMB, but overall, the SMB still have very low percentage Language, whether the network security or cybersecurity, that's where including retail. So that's where we see there's still have a huge growth opportunity over there.
Great. Thank you both.
Thank you.
Thank you. Our next question comes from the line of Andrew Nowinski with D. A. Davidson.
Great. Thank you and congrats on the nice quarter. Maybe just starting with a high level question. So as we think about the mix of your revenue, Do you think the SolarWinds attack will create a positive tailwind for more spending in the firewall market? Or do you think it will pressure your product growth As customers perhaps shift spending towards some of your cloud based and subscription solutions?
I said probably they would drive to have a more integrate and bigger infrastructure security. So that's where probably yes, definitely it's a SolarWinds more like kind of come from the network side. On other side, they are also trying to I'd like to cover what the pandemic is, right, it's work from home. There's a lot of other like the business trying to digitalize during this process, Which also increased the security need. That's why I say the security spending count on the overall IT spending probably Keep increasing this year and that's what's also helping drive the slowing just like few years ago, there's a Case weather target and some other things definitely raised awareness of the importance of cybersecurity.
Great. Thanks, Ken. And then just a follow-up. As we think about the growth phase you're entering here this year and your go to market strategy to drive that growth, If you look back over the last few years, your playbook has certainly been the lead with the firewall. I'm just wondering in this new growth phase, Are you using the same playbook to accelerate your growth or are you seeing more deals come to you via your SIEM products and your virtual solutions and your other subscriptions and perhaps Changing your go to market strategy to drive that growth?
That's a few in the next few years, the network Security market is still the biggest market, also probably the fast growing market, not just because there's more connectivity like 5 gs, SD WAN and some other Work from home, but also that's the center of the whole infrastructure security. But also you cannot just To network security only, you also need to have network security working closely with endpoint, with some other infrastructure, cloud, some other part together. That's what we The integrated automated solution to respond to any of these quick changing dynamic industry here. That's where it's important. We keep the organic growth and we also keep develop the product on day 1 to make it integrate, automate together.
It's a little bit different compared to the competitor, which whether it comes from acquisition or some other part, it's more challenging To integrate and also keep the innovation going forward.
Okay, understood. Thank you.
Thank you.
Thank you. Our next question comes from the line of Gray Powell with BTIG. Your line is now open.
All right, great. Thanks for taking the questions and congratulations on the good results. So maybe circling back On the 5 gs questions, in past telecom upgrade cycles, maybe 3 gs was too long ago, but looking back at like the 4 gs upgrade cycle, How did that play through to Fortinet? What kind of tailwinds did you see then? And then how does the 5 gs cycle feel in comparison?
Yes. Compared to 3 gs, 4 gs is more connect people, whether the phone whatever together, the 5 gs is more connected to the device. And that's also the number of connection probably will increase, I think, maybe 10x at least, because there's much more device to be Connecting and that's also kind of more address a lot of industry need, whether certain smart city or auto driver or a lot of a bigger infrastructure. So that's we do see a lot of business opportunity because so far the network security, they've been more towards the B2B, towards the business side compared to towards the consumer part. Thus, we do see huge opportunity going forward.
It's just like a couple of years ago to SD WAN, right? So SD WAN can help in I drive a lot of smart connection with application and more dynamic based on application have a different connection there. So that's where the 5 gs definitely have a lot of additional opportunity, but also bring a lot of risk To the business there, which need to be protected. And also service provider, we see play quite an important role there, which is we have Probably the best service provider care regulation among all the cybersecurity vendor there. So we do see a lot of potential in this area.
Understood. Okay. Thank you very much.
Thank you.
Thank you. Our last question will come from the line of Ervin Liu with Evercore ISI. Your line is now open.
Hi, thanks for letting me on. I have one question and one follow-up. First, I was wondering if you can perhaps update us on your business mix by customer size, maybe a breakout by enterprise, commercial or SMB And whether you've seen a shift up or down market and how do you see this mix trending through calendar 2021?
Yes, I think we had a slide in our Analyst Day in November of 2019 that you get a It basically answers onethree, onethree, onethree. And then to explain it, a little bit of MSSP gets allocated between them. But you end up with something that's very, very much like that Small Business, Small Enterprise, 1 third, Mid, 1 third, Enterprise, 1 third. I think the thing that has been a very pleasant surprise to us Throughout 2020 in the pandemic was how well the enterprise the small enterprise segment of the business held up. It really did very well.
Got it. And for my follow-up, we're now 1 year into the current pandemic. And assuming things normalize in the back half of calendar 'twenty one, do you anticipate any changes or shifts in demand or customer buying patterns Assuming a return to normal environment.
I think during the pandemic, The customers, especially enterprise customers tend to hold on to the current vendor, especially in the developed country. And But it's for us, like whether in the U. S. Or some U. S.
Country, we are keeping gaining market share. So we do get into a lot of New customer, which will probably take more effort during the pandemic, because it's difficult to meet people or do certain testing there. Once it's open, we do see there's more opportunity, more window open for us, especially with the new hardware, new OS and the new infrastructure. So that's also lead us to kind of a little bit towards the investing in the growth for us going forward in the next few quarters at least.
Yes, I think Ken is spot on with that. I think the nice thing about the pandemic is I think we have a lot of understanding about our business and what to expect In pandemic quarters. And I think that all of us here at Fortinet and I think throughout the country are looking forward At some point in time, when there's herd immunity, there's vaccine, and then the other growth drivers kick in, and that seems destined to be sometime towards 2nd half of this year. I think we're all very aware of some of those GDP numbers in the year over year swings that we're seeing from negative 3% to positive 6% or 7%. Those are pretty dramatic numbers, but I think most people's expectation are that's really going to come when the economies and the countries start opening up further.
Thank you, Sarah. We're We're going to close the call at this point. As you read in today's press release, I'd like to point out to everybody that Fortinet's Accelerate 2021 Virtual Conference will be held on March 9 For the U. S, as part of that conference, we'll be doing an Analyst Day. So you can register.
There's a link in the press release as well as up on the website To register for investors and analysts, so please do that prior to March 9, if you're interested in attending that morning event. In addition, we'll be hosting in addition to hosting Accelerate, we're also going to be attending the Goldman Sachs Conference next week on February 10th and the Morgan Stanley Conference on March 2. Links to those webcasts will be on our website and available on the Investor Relations Investor Events page of our Investor Relations website. You very much for your time today. If you have any questions, please feel free to contact me.
Have a great rest of your day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.