Ladies and gentlemen, thank you for standing by, and welcome to the Fortinet Q1 twenty twenty one Earnings Announcement Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Peter Salkowski, Vice President, Investor Relations. You may begin, sir.
Thank you, Towanda. Good afternoon, everyone. This is Peter Sogowski, Vice President of Investor Relations at Fortinet. I am pleased to welcome everyone to our call to discuss Fortinet's Financial results for the Q1 of 2021. Speakers on today's call are Ken Zee, Fortinet's Founder, Chairman and CEO and Keith Jensen, our 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 for the Q1 before providing guidance for the Q2 and updating the full year. We will 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 to differ materially from those projected.
Please refer to our SEC filings, in particular, the 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 presentation and we undertake no obligation and specifically disclaim any obligation to update forward looking statements. Also, all references to financial metrics we make on today's call are non GAAP unless stated otherwise. Our GAAP results and GAAP to non GAAP reconciliations are located in the earnings press release and in the presentation that accompany today's remarks, both of which are posted on the Investor Relations website. Lastly, all references to growth are on a year over year basis unless noted otherwise.
I'll now turn the call over to Ken.
Thank you, Peter, and thank you to everyone for joining today's call to review our Q1 2021 results. We are very pleased with our strong first quarter performance. Building increased 27% to 851,000,000 Driven by solid execution across our broad and integrated product and services, Secur SD WAN contributed 14% to Q1 1,000,000,000 Total revenue grew 23 percent to $710,000,000 with product revenue growth of 25%, the Highest quarterly product revenue growth in the last 5 years. With strong business momentum and good visibility, we remain focused on growth. In the Q1, we released FortiOS 7.0, which offered the industry's 1st OS level with tight inclusion of Broad security and network functions, including SASE, SD WAN, Zero Trust network access, CASB and 5 gs capability.
Today, we announced the FortiGate 7121F, the world's fastest next generation firewall and an only firewall With hyperscale 400 gig interface, the 7121FI will 5 gs mobile now operators To secure multiple edges within their infrastructure and enable MSPs to build out scalable security offerings Powered by a new MP7 secondurity process unit, the 7121F delivers security compute routine of 2x 2019x greater than competitive solutions. We continue to see momentum and adoption of our SD WAN, SaaS and Zero Trust Network Access Solutions among the world's largest service providers. Today, we announced British Telecom, A new managed secure SD WAN service powered by Fortinet. In March, Fortinet and AT and T announced The availability of a new managed SaaS solution for enterprise customers. Increasingly, Organizations are consolidating towards a holistic platform approach, delivering integrated and automated security I cover on premise network, endpoint and cloud security edge.
The Fortinet security fabric is a cybersecurity platform organically built On a broad and a deep set of networking and security technology designed to seamlessly operate together. The high profile of security incident that occurred over the past few months along with the pandemic has elevated the need for a broad platform that can secure enterprise entire infrastructure across multiple edge in a Zero Trust environment. We expect companies to increase the percentage of IT spending used for security in an effort to address their cybersecurity needs. Our security driven networking approach is a key growth driver. Additionally, we expect that our significant organic product growth will lead to increased service revenue.
Before turning the call over to Keith, I would like to thank our employees, customers,
Thank you, Ken. And to add to your comment, we should note that billings growth, Product revenue growth and total revenue growth were each at 5 year highs. Okay. Let's start the more detailed Q1 discussion with revenue. Total revenue of $710,000,000 was up 23%, driven by industry leading product revenue growth of 25%.
Automotive growth was broad based across geographies, security fabric products and use cases, illustrating the market acceptance of our integrated Single platform security strategy, customer demand for security across their entire infrastructure and the diversity of our customer base. Product revenue growth was over 30% for both infrastructure and cloud fabric products and all three geographic regions increased 20% or more. Demand for security fabric products was strong across all form factors hardware, software and virtual machines. The growth we experienced for product revenue was not the result of a few large deals, lower backlog or higher channel partner inventory levels. The product revenue growth also enables increases in services billings and future services revenue.
In the first quarter, Service revenue of $470,000,000 was up 22%. Support and related services revenue increased 23% to 214,000,000 Security subscription services revenue increased 21 percent to $255,000,000 benefiting from outsized growth from our cloud provider and SaaS security offerings. Moving to the mix of FortiGate and non FortiGate platform revenue. The FortiGate segment of the Fabric platform saw revenue increase 17%, driven by demand for entry level and high end FortiGate products. High end includes 10 new NP7 powered FortiGates that were introduced in the past year, which includes today's announcement of the 7120F.
These new products now represent approximately 20% of high end FortiGate shipments. Our ASIC driven FortiGates give customers 5 10 times more computing power than firewalls that run on common CPUs. The advanced computing power creates not only speed, but also the capacity to continue to add functionality to our operating system, driving our price for performance advantage. The non FortiGate segment saw revenue grow over 40% and now accounts with 31% of total revenue, up 4 percentage points. The Integrated Securities Fabric Solutions consists of a complete range of form factors and delivery methods, including physical and virtual appliances, Cloud, SaaS and professional 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 the expanding digital attack surface from the data center to the endpoint to the cloud. Given the strong first quarter performance excuse me, revenue performance, we believe our non FortiGate platform It's now on a pace to be a $1,000,000,000 business this year, representing an acceleration of this milestone. Let's turn to revenue by geographies. As summarized on Slide 5, revenue in the Asia Pacific area increased 26%. EMEA revenue increased 25 percent and the Americas posted revenue growth of 20%.
As I mentioned earlier, all three regions experienced product revenue growth of 20% or more. Moving to billings. The Q1 billings were $851,000,000 up 27%. We saw strong growth in both the FortiGate and non FortiGate segments of the Security Fabric platform. The FortiGate segment delivered billings growth of 20%, accounting for 70% of total billings.
As shown on Slide 6, entry level FortiGates posted very strong billings growth in the quarter. The non FortiGate segment accounted for 30% of total billings and delivered billings growth of 50%, Driving a 4 point year over year mix shift to non FortiGate. Taken together, these data points highlight the market acceptance of our of our single integrated security platform strategy. In terms of building growth by geos, APAC outperformed all geos, followed by Europe and the Americas. In the Americas, Canada had a very strong quarter and Latin America rebounded from the pandemic induced slowdown posted billings growth in the mid-twenty percent range.
Moving to billings by customer segments. The small enterprise segment posted solid growth across all geos. 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 international customer segment. At the same time, we saw strong growth in our larger deals. The number of deals over $1,000,000 grew 74% to 66 deals in the Q1.
The pipeline for deals over $1,000,000 looks good for the remainder of the year. As Ken noted, secure SD WAN billings were 14% of total billings. SD WAN is a key functionality in an integrated SaaS solution. Moving to worldwide buildings by industry verticals. With another strong international performance, the worldwide government sector topped all verticals at 19% of total billings and was up 60%.
Service providers and MSSPs accounted for 16% of total billings. The rebound for education accelerated with billings growth of 50%. Retail turned into a solid quarter with billings growth of 21%. Our strong and consistent billings and revenue performance over the past several years is testament to Our geographic and customer diversity, the growing success of the single integrated security platform strategy and our ASIC advantage, which enables a shared operating system Security Fabric platform drives our price or performance advantage, increase the capacity to add features and functions while maintaining price points. Moving back to the income statement.
As shown on Slide 4, total gross margin improved 10 basis points to 78.9%. Product gross margin improved 120 basis points to 62.6%, benefiting from lower direct product costs. The increase in product gross margin offsets the drag in total gross margins from the revenue mix shift driven by the strong product revenue growth And a gross margin FX headwind of about 25 basis points. Operating margin for the Q1 increased 210 basis to 24.5%, benefiting from the strong revenue performance in the quarter. The benefit from lower travel and marketing Program expenses of approximately 100 basis points was more than offset by an operating margin headwind from foreign exchange of about 150 basis points.
To end the quarter with total headcount of 8,615, an increase of 16%. Moving to the statement of cash flow summarized on Slide 78. Free cash flow for the Q1 came in at $264,000,000 up $22,000,000 from the Q1 of 2020 Despite a $24,500,000 year over year increase in CapEx spending, we ended the year with total cash and investments of 3,100,000,000 An increase of $1,500,000,000 The increase includes the proceeds from our $1,000,000,000 investment grade debt issuance during the Q1. The issuance followed our inaugural strong BBB credit ratings. Throughout the pandemic, we have leveraged the strength of our balance sheet a competitive advantage to support our partners and customers as they experience geospecific economic challenges.
As a result, days sales outstanding increased 7 days to 81 days, in line with our expectations and reflecting our earlier decision to provide geographically targeted extended payment terms. Compared to the Q4 of 2020, DSOs in the Q1 of 2021 decreased 6 days as we saw early progress towards returning to pre pandemic payment terms. Inventory turns declined to 2.1 times from 2.5 times, reflecting efforts we took to mitigate supply chain risk, including increasing our inventory levels starting earlier in 2020. We expect extended payment terms and higher inventory balances to be in effect as we move through 2021. Capital expenditures for the Q1 were $52,000,000 including $38,000,000 related to construction and other real estate activity.
We expect to begin moving employees in the new Sunnyvale Campus building in the middle of the year, although the timing will depend on local pandemic protocols and employee safety considerations. We estimate capital expenditures for the Q2 between $30,000,000 $40,000,000 and for all of 2021 to between $150,000,000 $170,000,000 The average contract term in the Q1 was approximately 27 months, up less than 2 months from the Q1 of 2020 and down approximately 1 month from the Q4 of 2020. Secure SD WAN accounted for 15 deals over $1,000,000 versus 4 in the Q1 of 2020 and contributed to the increase in average contract term. As we look forward, Our goal remains to balance growth and profitability. And given the growth opportunities we highlighted during the March Analyst Day and as confirmed in our Q1 results, We have tilted our bias towards growth for at least the next several quarters.
The opportunities we see are supported by a strong pipeline, Increased sales capacity and our development efforts, which include the MP7 chip and our new 40OS7.0 operating system that was recently released. Now I'd like to review our outlook for the Q2 guidance summarized on Slide 9, which This is subject to the disclaimers regarding forward looking information that Peter provided at the beginning of the call. For the Q2, we expect billings in the range of 860 was $880,000,000 within the range of $733,000,000 to 747,000,000 Non GAAP gross margins of 78.5 percent to 79.5 percent non GAAP operating margin of 24.5 percent to 25.5 percent, which includes an expected 100 basis points to 150 basis points headwind from foreign exchange. Non GAAP earnings per share are $0.83 to $0.88 which assumes a share count of between $168,000,000 170,000,000 we expect a non GAAP tax rate of 21%. Before raising our 2021 guidance, I'd like to congratulate every member of the Fortinet team for the truly outstanding start to 2021.
With that, For 2021, we expect billings in the range of $3,685,000,000 to 3,745,000,000 which at the midpoint represents growth of approximately 20 percent. Revenue in the range of $3,080,000,000 to 3,130,000,000 which at the midpoint represents growth of approximately 20%. Total service revenue in the range of $2,020,000,000 to $2,050,000,000 which represents growth of approximately 21% and implies product revenue growth of approximately 17%. 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 the guidance represents a 50 basis point to 100 basis point increase in 2021 operating margin despite an expected headwind from foreign exchange.
Non GAAP earnings per share of $3.65 to $3.80 which assumes a share count between $170,000,000 $172,000,000 and about $0.07 per share impact from the debt issuance. We expect our non GAAP tax rate to be 21%. We expect cash taxes to be approximately $80,000,000 And along with Ken, I'd like to thank our partners, our customers and the Fortinet team for all their support and hard work in these difficult and unique times. And I'll now hand the call back over to Peter to begin the Q and A.
Thank you, Heath. As a reminder, during the Q and A session, we ask that you please limit yourself to one question to allow others to participate. We've got a fairly Large queue today, so I'd like to get through everybody at least once.
Quanda, please open the call for questions.
Thank you. Our first question comes from the line of Rob Owens with Piper Sandler. Your line is open.
Great. And thank you for taking my question. With A lot of other verticals in the media seeing issues with chip shortages and some supply chain issues. Is that starting to sneak into the security market relative To firewall appliance shipments, can you talk a little bit about your potential exposure? Thanks.
I think the chip shortages this is Keith, Rob. I think the chip shortages that you point out is can touch a lot of different industries. I think one thing about Fortinet In addition to having different form factors is these inventory balances that we carry. At 2 times inventory turns, you're looking at basically 6 months of inventory that We're carrying on our balance sheet. I do expect that the supply chain issues will be something particularly related to chips that will be a constant conversation point throughout 2021 And into 2022.
But I think in terms of when we sit down and talk about our expectations for the year, I think we have a fairly good understanding of how to work that in. Thanks, Keith.
Thank you. Our next question comes from the line of Brian Essex with Goldman Sachs. Your line is open.
Great. Thank you and thank you very much for taking the question. Ken, I
was just
wondering Billings commentary, worldwide government up 60%, some really nice acceleration there. And then MSSP and service providers still 16% of total. Maybe if you can talk about, obviously, we know what the secular drivers in MSSP are. How durable is that? Maybe the factors that are driving that acceleration in government spend.
And then maybe talk a little bit about particularly on the service provider side, It doesn't seem as though we're seeing an acceleration from 5 gs and IoT yet. Who are the buyers there? How do you anticipate that, That segment will play out through the rest of the year as you look to work your way through the remainder of the year.
Yes, the carrier and a lot of service provider starting to kind of reshaping There, what the security network offer, whether it was 5 gs SD WAN or the SASE and also supporting work from home kind of So in the early stage, I put it this way. So that's where we're working very closely with all the service provider like the BT we announced today, the AT and T Last month, pretty much all the service provider to support in the now this shifting of the business model. And I'd say it's still Early stage, but we do involve a lot of testing trial. And at the same time, I do believe eventually the Service provider business will go back up to the number 1. It tends to be like a high 20, like if you back 4 or 3 years ago, But it's because it's a new kind of a shifting.
So they are they do have Some work to do and also some big investments we see going forward. So we're working together with them to keeping growing this business right now.
Got it. Very helpful. Thank you.
Thank you. Thank you. Our next question comes from the line of Jonathan Ho with William Blair. Your line is open.
Good afternoon. Congratulations on the strong quarter. I just wanted to get a better sense of what you're seeing in terms of demand for the Sassy and ZTNA oriented products. And are you seeing that pipeline sort of continue to rise, especially as we look at sort of replacements for The traditional VPN connections and other sort of more legacy technologies. Thank you.
Yes. That's the new fast growing market, but also they probably replaced some of the traditional Approach, but some other traditional approach also expand inside campus, inside enterprise, inside the data center. So it's a go through the internal segmentation. On the other side, we do believe whether the SaaS, zerotrans network like we said few years ago, it's the best position Service provider carrier, so we tend to be more working with them, partner with them and also offer kind of more tightly integrated solution Like we said in the FortiOS 7.0 is really integrating to OS level instead of some different vendor using different box even kind of a different infrastructure to do that. So that's actually working much better with a wider service provider with the customer directly.
So that's where we do see there's some fast growing going forward, but it's just part of the whole infrastructure solution will not replace The traditional approach, but also the whole thing's security is more dynamic space. There's a new thing come up and also That all seems also not goes away. So that's why we try to address this new chain at the same time keeping enhance The traditional solution and to supporting the customer in our different vertical, different region.
Thank you.
Thank you. Our next question comes from the line of Ben Bollin with Cleveland Research. Your line is open.
Good evening, Ken, Keats, Peter. Thanks for taking the question.
I I was
hoping you could talk a little bit about how you see customer discussions changing or evolving as they contemplate and start to return So their offices and to work. And then also hoping you could touch on how you view the growth opportunity over time from Completely new customers versus wallet share expansion with your existing customers. Thanks.
The customer is starting to become more and more important, but also they need to cover much broad infrastructure and our edges In fact, it was a traditional 6 year whatever the border or the data in and out of company. So that's more device, more user, More infrastructure need to be covered. So that's it's not a simple refresh. It's really Changing to the whole infrastructure approach and also working together with traditionally like different vendor cover whether they're working on endpoint or some other part of Security, now they're looking for some consolidation and they prefer when to have multiple Cover off a different part of infrastructure working together. So that you can see that the fabric approach we did a few years ago starting doing quite well Almost pretty much every quarter doubled the growth compared to the traditional network security.
But on the network security, we also see very healthy growth. And it's really not just expanding beyond the traditional border security approach, but also Because the ASIC advantage, which increased the security computing power 5 to 10 times compared to the other vendors Overload on the traditional CPU. So that's able to add more function and also kind of increase performance, lower the Cost and also a low carb consumption, more green. So that's actually making this like The product growth, like we said, keeping us keeping better and better. And we do see this whole infrastructure product we're keeping going for the next Probably a few quarters even to a few years and the consolidation will keep growing within the industry.
Yes. Ben, just to continue on with Ken's comments, I think the headline that he's talked about previously is that the back to work really The combination of back to work and as many companies being in a hybrid model that the attack surface now seems to be permanently expanded For many, many companies. In terms of growth and how we see it with new logos and expansion opportunities, Yes, we easily add several 1,000 new customers every quarter. But if you look at the mix of billings, the mix of billings is going to From our installed base of customers, if you will. And I think the simple model to look at is from that initial sale of perhaps a firewall or something else, There's 2 different ways to expand.
1 is finding more and more use cases inside organizations for firewalls and increasing the displacement opportunities. And then the second is, and this is where Ken was going, is the expansion opportunity with those non FortiGate fabric products. And what we're seeing there with that, that mix shift from FortiGates to non FortiGates and now being 30% of our business or 31% of our business, I think it's taking as one affirmation of the strategy and 2, you're seeing it in the numbers.
Thank you.
Thank you. Our next question comes from the line of Tal Lainie with Bank of America. Your line is open.
Hi, guys. I'm going to take you to the basics with my question. Last year was strong and there was some concern that the firewall market is being driven by COVID related demand just because of work from home. And the question is whether you expect any slowdown of demand related to the anniversary of the trends last And the second question is your non FortiGate grew extremely strong again. If you can take us through the basics, What are the products that are growing there?
Just what are the trends and what do you bring to the market? Thanks.
I can take the first part, maybe Keith got the second part. I don't see any slowdown even for The FortiGate side is we're keeping gaining market share, like I said, because there's a fundamental like Technology architecture difference, which with 5 to 10 ton computing power compared to our competitor, We can easily add a function performance and even for work from home, it's more like a one single three d box Can replace like 3, 4 different bots from an upgrade side security side like all these apart and also like managed home WiFi and the traffic there. So that's also a lot of company also starting to do this kind of expand the branch to the home, the home branch or whatever, to meet working standard like a better networking, reliability, security To the home environment, so that's also need to be a solution. That's also one of the reasons we see some of the lower selling keeping grow pretty fast. It's a work for a home actually helping driving some of these wholesale sales.
But also going forward, whether the service providers, some other I have to say most enterprise not even kind of In March of the infrastructure to adopt this more work from home yet, they are still in the early stage. So we do see there's a big potential going forward.
Yes, it's all Keith. Yes, boy, it's a little tough for me to look back at the Q2 of last year and where the billings growth was and the product revenue growth and things that I was getting I didn't feel like I was getting a tailwind from VPN or something like that in the Q2 of last year. That said, I think we're very pleased with how the year continued to play out and the growth numbers that We've provided I don't know that early on in the stages of work from home, but that was something that necessarily Fortinet participated in the same level that maybe some of the other firewall vendors did. And then the second part of your question, you'll be glad to know that Ken and Peter and I sit down every quarter and look at the fab the non I'm trying to find the one that's really distinguishing itself. And we keep coming to the same conclusion each quarter.
It's a riding tide that's lifting all boats. It's not that any one product is really standing out and more so than the other over an extended period of time.
Yes, the color refused. Yes, it's ready because most of the product we develop Finally, from day 1, it's making integrate operate together. So that's probably the key number one reason customers want to buy it is They try to consolidate, make it easy to manage. It's different than some other company when they acquire some part of our company from outside is that take a long More difficult to integrate. So we have internal development from day 1, we can make it working together.
Right. So My question was much more basic. What are the key products that are driving up the growth of non FortiGate? So we know it's SD WAN. What else?
SD WAN actually is a part of FortiGate. So we don't comment SD WAN as a non FortiGate, We have like 20, 30 different product touching all part of the infrastructure. And Like Keith said, it's difficult to point out which one is really yes, it's pretty, pretty like Keith said, the tie rate the
Got it. Thank you.
Thank you. Our next question comes from the line of Sterling Auty with JPMorgan. Your line is open.
Yes, thanks. Hi, guys. Wondering if you could help me better understand the disproportionate improvement that you saw internationally, especially in EMEA relative to the improvement you saw in the U. S?
I think similar like we commented last couple of quarters is follow Like, the pandemic, once since starting to get improving, they also try to think about how to go back over some other Investing infrastructure since we'll be starting to grow. So that's where like APAC, EMEA grow a little bit faster, but U. S. Catch up very quickly.
Thank you. I'll just add on to that, Sterling. I think the Certainly for us that the markets are somewhat different. And maybe that comes into play a little bit. The European, the international part of the market, We are oftentimes you have the number one market share with the incumbent and particularly during the pandemic, I think incumbents had an advantage.
I think in the U. S. Perhaps we're a bit more of a challenger, if you will. And I don't know that a lot of CIOs and CISOs were focused on Firewall refreshes in the Q2 and Q3 of last year and going through competitive dynamics. And I think there's also a bit of the partner ecosystem.
When you're the incumbents, you probably have more mind share with the partners than when you do in the challengers. Now having said all that, as we look forward and we look at our pipeline, particularly with relation to United States, as we go through into the Q2 here and through the rest of the year, I think we're feeling very good about the direction that, that organization is headed.
Yes. We also were keeping invest more into the U. S. For supporting further growth like we did for the PGA sponsorship and
Our next question comes from the line of Gray Powell with BTIG. Your line is open.
Okay, great. Thanks for taking my
question and congratulations on the good numbers. So yes, maybe to follow-up on the Sassy How quickly should we think of billings growth ramping on the 40 Sassy products? And then I don't want to get too aggressive, But could it potentially have a similar ramp to what you saw in 2018 2019 with SD WAN back when that product was just getting started? Yes. Just how should we think about just the overall upsell there?
Thanks.
I also have to say a little bit similar question. We also kind of looking at different market study And also what's the best model to do this with a partner together? I feel maybe similar like SD WAN, but also SD It was a part of the SASE solution and also SASE including some other function there, which we also want to have Like a better integration and better performance and easy to manage. So that's why we take some time Already launched our Sassy and also more closely working with our partner to do that. But The market is definitely growing, but we're also closely watching what's the best way to position ourselves to catch this trend.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Shaul Eyal with Cowen. Your line is open.
Thank you. Good afternoon, gentlemen. Congrats on the strong performance. Keith or Ken, historically, The refresh cycle concept used to provide some disruption at times, I would even say some noise around Specifically Fortinet's business, it would appear that over the past probably 18 months or so, there's less discussion And focus around it. Do you think that Fortinet is gradually shifting away from it?
Orest, that there's so many concurrent internal refresh cycles given the broadening of your platform That it is becoming less of a relevant issue. What's the thinking about it?
I probably have to use some of the term refresh compared to last time. You can see the 20 12, 2013 and that's where is the next gen firewall replacing the traditional firewall VPN, which with And firewall has some intrusion prevention antivirus or the other function there and proxy. But this time it's expanding into a much Broader bigger infrastructure, both go internal inside the company and also go to the outside company, the one side even expand work from home. So it's more kind of expanding and at the same time different part of security also Need to be more working together. So that's from company IT side.
They look at if they can consolidate and Help them to manage and integrate automate will be more important. So that's where like I said, there There's more device, more people connected and like also they do more in the Zero Trust environment. So this time it's a little bit different. That's where making like a very broad integrated approach I feel is more important And at the same time supporting whether the new technology, whether 5 gs SP WAN and also That kind of a service model also will be important, but we also feel once the product get in the customer hand because of the Huge computing power capability. We can also be add additional service and keeping helping customer adopt That is new since they need also working with service provider.
So that's also kind of We're keeping that the business is keeping growing. I think you can probably add some. Yes.
Shaul, I think you and Ken are kind of touching on the same thing, which You made a reference to that. I would say it this way, it's going to get harder and harder I think to discern industry refresh cycles compared to where it was maybe 5 6, 7 years ago. For a number of reasons, one, the firewall vendors are essentially larger. Their footprint is much, much bigger than it was before. Secondly, you have some of us that are showing success in the platform strategy when 30% of your billings are coming from the platform.
Again, to your point, it's going to get a little harder to discern it. And the sheer size, if you will, of the footprint In terms of customers, but also the number of different use cases that are starting to evolve and continue to evolve inside those organizations. I think all that comes together, it's We get murkier and murkier as we go forward to find a refresh cycle. You may have some individual competitors that maybe have very, very large Price points for machines or something like that where they have their own internal refresh cycle that you may see some noise around, but that's certainly not the Fortinet approach to firewall refreshes?
Yes. The putting in other way that the traditional firewall or the way they where they've been deployed is not They also kind of every 5 years probably need to be upgrade to the new model To match networking speed or some other one, but they're also expanding beyond that one and also need to be working in that part of security infrastructure, Put it this way.
Understood. Thank you so much. Well done.
Yes. Thank you.
Thank you. Our next question comes from the line of Adam Tindle with Raymond James. Your line is open.
Okay, thanks. Good afternoon. Maybe one for Keith, you've talked about this being a year to invest for growth, your Q1 results clearly say that's working, billings growth in the high 20s at a scale approaching 1,000,000,000 And doing that with healthy profit is pretty unique. So for my question, I was just wondering at this point if you evaluated Whether to lean even more on growth given the early results that you're seeing. And if you could maybe touch on the logic of why not?
Are there diminishing returns above this level? Is this Something you'd consider reevaluating as the year progresses? Thank you.
Yes. Adam, it sounds like you're listening into some of the conversations that Ken and I have with a Respective points of view, I think. I think, look, we're really pleased with how the business executed in the Q1, putting up 20% percent billings growth and being 11 or 12 points above and then raising the 22%, 3.5 points on the billings line for the year, probably for the quarter. And taking the year up at the same time by about 4 points, I think the level of execution has shown to be very, very high and the level of success with the firewalls And the non FortiGate products have been very, very pleased with what's happening there. I think we'll see how this year plays out.
We felt that there were tailwinds coming into the year for us in a number of different ways, whether it was GDP, whether it was stimulus, whether it was the product suite that we had or our sales team's ability to execute. And let's see how we do as we continue on this trajectory hopefully through the rest of the year.
Thank you. That's fair. And I'd love to be a fly on the wall for those conversations.
Thank you. Our next question comes from the line of Andrew Nowinski with D. A. Davidson. Your line is open.
Great. Thank you and congrats on another great quarter. I wanted to ask about the partnerships with some of the MSPs that you mentioned AT and T and BT. Those have been historically strong partnerships for Zscaler. So I'm wondering, do you think you're eating into Zscaler's mind share at those partners?
Or are they just trying to offer their Maybe another Sassy offering?
Like I said, in the last few years, from some point, we move this together as one of the service provider, could be partner. And but also some of the telecom company, they do have their infrastructure and also some of their customer base, Which we have been working with them for a long, long time. So is that once especially during the pandemic, IT is in High pressure to supporting whether internal or some other need, I think that's where SaaS offers certain more service based approach, Which also kind of adopt by some customer service provider quickly. So that's where we also Leverage all kind of relation with the partner and also our product technology advantage and offer Much tighter integrate SaaS easier trust network solution. It's so Some bigger carrier partners, they like it a lot, I put it this way.
So that's what we're continuing to work with. So I do believe The business in the carrier service provider will be go back to the number one like we are a few years ago, the high 20. That is also have to working closely with a partner. And also some other infrastructure, new infrastructure, I mentioned, whether the SD WAN and the 5 gs or some other like a lot of IoT, OT or even maybe CPG or some other things, I think there's a lot of potential working with all kind of service provider to keeping expanding the security business together.
Yes, it sounds like it. Thanks a lot, Ken.
Thank you. Our next question comes from the line of Ervin Liu with Evercore.
And into large enterprise as a key contributor to growth and share gains. Can you talk about whether this was a factor in your Q1 outperformance? And also, can you also talk about any key differences when selling to large enterprises versus SME, SME customers? For example, the go to market motion and or timetable required to close a deal. So any color here would be helpful.
Thanks.
Yes. I think the try to give a little bit of color
on that in the script and I view the term before that the growth being bookend, if you will, Through the pandemic, you've had quarters where SMB did well. I think we provided some metrics there about large deals, deals over $1,000,000 which we think is a pretty good proxy for The success that we're seeing in the enterprise. I do think also the mid segment is coming online for us a little bit stronger than maybe we saw in 2020. I continue to believe that 2020 was an unusual year, both geographically and across customer segments. In terms of the cadence, in terms of how to sell the enterprise versus SMB, I would say absolutely.
You make a large investment And it plays very well with the channel partners. There's no doubt about that. The MSSPs, the carriers, etcetera. And in those channel partners oftentimes, Distributors play a role in the enterprise, but to be successful there, you absolutely have to have a direct sales force that is helping to bring deals to those channel partners. And I kind of made a comment earlier about incumbency versus challenger.
I think that's perhaps even more important in the geography where you're the challenger And you're trying to get mind share from some of those large key resellers that are linked together with some of the legacy Firewall vendors, I mean, you've really got to partner with them to bring deals to them and convince them of that strategy. And I think we're starting to see that traction take hold for us.
Got it. Thank you.
Thank you. Our next question comes from the line of Fatima Boolani with UBS, your line is open.
Good afternoon. Thank you for taking my questions. Keith, for you. I was hoping you could share some more details around the expectations of the SD WAN mix That you have embedded in your guidance, how should we think about that? And certainly, how are you thinking about it?
And Where are the incremental areas of budgets or dollars and ultimately share gains within SD WAN slash Sassy going to come from between the carrier market as well as the enterprise DIY market?
Yes, I think the hi, Simon, nice to hear from you again. Yes, I think in terms of SD WAN, The way we go about budgeting, we would describe SD WAN, as you've heard us before, SD WAN is a use case for the firewall similar to OT, micro segmentation, 0 Trust and etcetera. And we're not necessarily prone to building our models, if you will, by use cases for the firewalls nor similarly necessarily by products. We do look at our pipeline and we do sanity check that against Gartner projections for growth and things of that nature to make sure that we're in the range, if you will. So I would expect that the other comment I would offer is Ken has been quite clear for setting the goal early on that he wanted SD WAN 5% of billings when we got there and we moved it to 10%, and we got there and now he's moved it to 15%.
So, it's a little bit of food moved my cheese, I guess, with Ken In terms of setting goals for us, but that's fine. We like that. And the I think you really kind of answered your own question in terms of growth investments, Where we spend money, I think the carrier service provider opportunities for both SD WAN and Sassy are key areas for those investments. But I'll Hand it back to Ken.
Yes. We do believe that Q1 will be a bigger long term market, and we want to be the number one. And also like we do see a lot of potential even this work from home, a lot of enterprise try to do a lot of with Probatry to support him, still very small percentage, very early stage to use in the SD WAN. So that's where And also we have huge advantage using our SoC4 chip to support in this like one box solution, Which has about 20 times better performance and much lower cost compared to the 2nd nearest competitor. So that's where it's a huge opportunity with the best technology and working closely with a partner towards keeping growing SD WAN.
So we do see there's a huge potential and we also target to be the number one soon.
Thank you.
Thank you.
Our next question comes from the line of Hamzah Fodderwala with Morgan Stanley. Your line is open.
Hi, guys. Good evening and thank you for taking my question. I was wondering on the core sort of firewalling side, how much of the demand are you Seeing come from use cases around micro segmentation, particularly given some of these recent cyber attacks?
We do have a lot of asking about how to secure internally, whether within a temp as And company are obviously in the data center. But I have to say, security still need much more convenient power to Process to traffic compared to routing switching, my estimate probably like easily 30, 50, even 100 tons more convenient power is needed. That's where We cannot solve that speed issue or some other kind of managed deployment issue. It's still more difficult. That's also the ASIC more advantage like a 5 to 10 times better performance computing power and the cost are lower than another Software on the approach.
So it's a lot of requests, but as I have to say, it's not many solution can meet Because internal, whether within a campus or within a data center, the network speed tend to be Easily 10 to 100 times more faster than the one approach, I mean the one connection. So that's what we're working with Whether the customer or the partner directly and also combine both the WAN security and the LAN security and the main whole infrastructure It's more important, but it's today work from home with what they call the real trust network access. You have to be The whole infrastructure sector, so it's a we see a huge market potential for the internal segmentation inside data center or campus Security, but it's also a challenging job to meet a speed requirement compared to networking and also make sure They can easily deploy and easily managed.
Thank you for the color.
Thank you.
Thank you. Our next question comes from the line of Saket Kalia with Barclays. Your line is open.
Okay, great. Hey, thanks for
taking my question here, guys. Keith, maybe for you, just going back to the non FortiGate part of the business, Do you see any trends in perhaps market segment or geography that is adopting non FortiGate at higher rates? And I only ask that because with the growing enterprise business, with your growing enterprise business that is, I would imagine more of the enterprises would Maybe be more willing to work with multiple specialist vendors. So is the non FortiGate part of the business perhaps more weighted towards the mid market Or perhaps international. And relatedly, just kind of broad brushes, how is that non FortiGate business sort of split between products and services?
Sorry, there's a lot there. Does that make sense?
Yes, there is a lot there. And I'll depending upon my answer, we'll know if it made sense. How's that? Look, I don't think the product service mix between and we've talked about previously, the FortiGate versus non FortiGate, the product service mix is not different In any meaningful way, if you will, when you look at the mix. And again, we're selling solutions, so you're typically bundling that with a firewall sale.
To see the non FortiGate billings growth at that 50% number and seeing the mix of the business, I think may have obviously Makes us very excited. It's actually a little bit counterintuitive in terms of where it sells. For the last several quarters, the Americas has done very, very well with selling the fabric. And I've been on phone calls with very large enterprises They want to know much more about the fabric now that they've become comfortable with the firewall. I probably went into those conversations, Saket, with much the same expectation that you perhaps described, which is Yes, that may be something that plays more to the SMB part of the business or the mid enterprise.
And I do think it does. I do think the enterprise willingness and in the U. S. To see the enterprise willingness To engage on the fabric is probably a sign up a number of things. One is, at the end of the day, everybody's got a budget, and this is more cost effective way to go about doing it.
You can manage your infrastructure much easier perhaps with a single vendor strategy than you might otherwise. And I think the common operating system with it running on or being integrated to OS7 is something that's very exciting. Then you start talking to the vision about a SASE offering that's running on an integrated OS7 system as well. So I gave you a lot there, But to give color to it, I think the long winded response would be, it has not shown to be unique to a size of customer or to a geography.
That makes sense. Thanks, Keith.
Thank you. Our next question comes from the line Keith Bachman with Bank of Montreal. Your line is open.
Thank you very much. I'm going to follow on Saket and I have one question to Keep within Peter's rules, but I'm going to break it into a couple of subparts. On the non FortiGate side as well, I wanted to break it into A, is there Anything over the next 12 months that you look at that you think in particular is interesting or exciting? Keith, is there anything you could break out on attach rates? Where you currently stand on the non FortiGate side to attach rates?
It would seem to me that there's still a hell of a lot of room to run there just if you look at your installed base where some opportunities. And then C, if you think about If you had to partition the non FortiGate into cloud and non cloud, in other words, there's a lot of, I think, the FortiGate Products that are relevant to on premise situations versus cloud. But is there a way to just kind of break it out in percentage dollar wise, 50% of it Aligned to on premise deployments versus 50% is cloud deployments. Is there any way to break that out in the non FortiGate side in particular? Thanks very much.
We are charging by the questions. Thanks as we look forward to you.
Then I'm broke.
I think there was a I'm going to leave the tough question or the fun question for Ken at the end, which is, As you look out over 12 months, what's going to take off in non FortiGate? Nikita, I would probably point you back to if we didn't do it in the Analyst Day in March, we did do it in the Analyst Day in November of 2019, where we gave some breakdown of the fabric products between what we call cloud and what we call infrastructure. And you can Yes. Think of that as being hardware and then I'll kind of help answer your question there. I think when you use the term attach rate, we may use the term penetration rate and by that is Yes.
For a customer that's a firewall vendor, how many as you start looking at your expansion opportunity, Keith, inside these customers, What type of penetration are you seeing and how are you going to market, if you will, and encouraging the sales team and the marketing team To whatever that number is increasing the penetration. And I would say that's something that's really been an area of focus, I would say for us more recently over the last couple of quarters. I think that's really at the moment more of it. We're pleased with it, don't get me wrong. But I think right now that's more of an internal metric that we're using with our sales team and our marketing team and to some extent with our engineering team.
Yes. Yes, great. I think also, I Probably not all the detail, not all the number. So far, the Nano FortiGate almost doubled the FortiGate growth in the last few quarters or few years. So I don't see any change of the trend right now.
But definitely from Customer angle is a we also asked what's the reason that they really need to be more consolidated, make the whole infrastructure, manage working together, all these Which are working quite well with us because we design the product of the non gate working with FortiGate from day 1 and The whole fabric working together to integrate automate on security solution there. So that's where the But also we say there's still small percentage customer has a multiple forecast, do a lot of room to grow and at the same time Yes, there's a new product even come up to working with the FortiGate. So that's where we do see we probably keep the Trend, the non FortiGate will keep and grow faster and probably eventually even the business may be more than FortiGate, maybe within a few years. Okay. Thank you.
Thank you. Our next question comes from the line of Michael Turits with KeyBanc. Your line is open.
Hey, guys. For Ken and Keith, do you see any difference in the type of projects and security you were seeing last year, Primarily for the move to work from home versus this year, when we have work from home as well as back to office. And as part of that, Keith, you mentioned, I think, saying that you are seeing, I think, seeing more willingness to do firewall Replacements this year, is that also part of it?
Yes, last year work from home is more like a patch whatever they And to without changing market infrastructure, this year definitely we think we can redesign infrastructure, whether it'll leverage Like better technology like SD WAN also modular and at the same time making kind of Better solution in a Zero Trust environment is much more secure. And so that's Probably, but it's still in the early stage. We do see a lot of growth potential there. But it's a whole infrastructure Doctor, changing compared to kind of last year to quick like a patch solution.
Yes. Michael, I would add to Ken's comments. I think the headline is whether the tailwinds coming to the year, security is top of mind for many companies right now, so many CIOs and CISOs and whether that's SolarWinds or it's work from home, it was Microsoft's little challenge, it's the ramp up in ransomware. Yes, it's just it's a year I think that a lot of CIOs and CISOs are focused on security for a lot of different reasons. I do think that There was a for us in the U.
S. Market, if you will, and Ken has talked about this before, a little more difficult to say in the middle part of last year, it's kind of the year To get mind share from CIOs and CISOs to have a conversation about how you can save money while improving performance in their firewall. Think those opportunities are starting to appear more in terms of getting out and having customers take their prospects take that meeting, if you will. And I think there's also some of these larger deployments that Go on for well over a year or a couple of years. I think some of those deployments perhaps were a bit stalled, if you will, last year and they're coming back online As we look at 2020 2021.
So just to clarify, larger deployments are starting to come back online. And is that the answer, yes, that People are more willing to talk about displacements of competitors this year than last year?
Is it the answer to which You're asking if I'm seeing that the answer is yes. If you're asking if that's a driver of the business, I would say yes. If you're asking if that's the driver of the business, I don't think so.
No. Just if you're seeing more of it.
Yes. Yes. We are more than expand beyond the traditional deployment and also Like more device, more people and more infrastructure need to be secured.
Thanks guys.
Thank you. Our final question comes from the line of Patrick Colville with Deutsche Bank. Your line is open.
What's squeezing me in? Can I just finish off on a multi parter?
I guess the first one
would be about linearity. Last year, the linearity between 1QQ was kind of unusual. So just help us understand How that might play out in fiscal 2021? And then I guess my kind of second part, if I may, is product revenue this quarter was phenomenal. Baked into guidance, I guess, is that there's a kind of the rest of the year is more like a kind of mid teens growth rate.
Just help us understand, is there
anything that is worth flagging in regards to
the kind
of Performance in the rest of the year versus 1Q? Thank you.
Yes. I think that as you get comfortable with the business model, You understand the difference in product and services and how very predictable that higher margin services revenue is. I think that we did take this as To raise product revenue, the implied product revenue guidance, if you will, when you reverse engineer it after we get the service revenue guidance by about 5 points. And I think that takes you To about 17% in terms of our guidance now for the full year. And we'll see how the year plays out.
I think we feel good about it. In terms of linearity from Q1 to Q2, I would I'll point you to one of our actual results that we had last year in Q1 and Q2 and our actual results in Q1 of this year and our guidance for Q2. That's very clear. Thanks for your time.
Thank you. I would now like to turn the call back over to Peter for closing remarks.
Thank you, Towanda. I'd like to thank everyone for joining the call today. Fortinet will be attending a few conferences in the Q2. We have the J. B.
Morgan Conference on May 25, AllianceBernstein On June 2nd and then Bank of America, June 8th. The event presentations and webcast links are up on our website. Thank you very much. Have a great day and please reach out if