Thank you for standing by. Welcome to the Fortinet Q3 2021 Earnings Announcement Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your first speaker for today, Mr. Peter Salkowski, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Eli. 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 financial results for the Q3 of 2021. Speakers on today's call are Ken Xie, 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 providing a high-level perspective of our business. Keith will then follow with the financial and operating results for the Q3 before providing guidance for the Q4 and updating the full year. We'll then open the call for questions. During the Q&A session, we ask that you please keep your questions brief and limit yourself to one question to allow others to participate.
Before we begin, I'd like to remind everyone that on today's call, we will be making forward-looking statements, and these forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular the risk factors in our most recent Form 10-K 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 today on today's call are non-GAAP unless stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations is located in our earnings press release and in the presentation that accompany today's remarks, both of which are posted on the investor relations website.
Lastly, all references to growth are on a year-over-year basis unless noted otherwise. I will now turn the call over to Ken.
Thanks, Peter, and thank you to everyone for joining today's call to review our outstanding Q3 2021 results. Billing increased 42% to $1,064 million, exceeding our $1 billion in quarterly billing for the first time in Fortinet history. Global 2000 billing growth accelerated to over 50%. Total revenue growth 33% to $867 million, with product revenue up 51%, our highest quarterly product revenue growth since going public in November 2009. With very strong business momentum, we remain focused on growth. According to Gartner, the network perimeter is fragmented with many security teams and the tools operating in silos, and integrating best-of-breed solutions only adds to the complexity.
To address this challenge, Gartner is predicting that by 2024, organizations that adopt a cybersecurity mesh architecture will reduce the financial impact of individual security incident by an average of 90%. In a recent report, Gartner called out Fortinet's Security Fabric as a platform that offers cybersecurity mesh architecture approach. Fortinet is helping customers solve the issue of complexity through our Security-Driven Networking and Security Fabric platform approach. Fortinet's unrivaled FortiASIC offers 5-10 times more security computing power. This result in tightly integrated functionality with better performance, lower cost, and power consumption compared with a general CPU. Our organically developed FortiFabric solution, like email, web, and endpoint, together with FortiGate firewall, offers much broader protection, more integration, and better automation than other competitive solutions.
As organizations continue to consolidate towards a platform approach and as network security expand to local and wide area networks, to the work from anywhere environment and to the cloud, Fortinet is strongly positioned to significantly capture market share of a projected total addressable market of more than $174 billion by 2025. We are confident that this trend, together with a relentless focus on organic innovation, will drive better than industry average long-term growth for Fortinet. Work from anywhere is here to stay. The COVID-19 pandemic has greatly expanded the work from anywhere model. According to Gartner, organizations are facing a hybrid future, with 75% of workers saying their expectation for working flexibility has increased. Today, Fortinet announced the industry's most complete solution to enable organizations to secure and connect work from anywhere.
By unifying Fortinet's broad portfolio of zero trust, endpoint, and network security solution within the Fortinet Security Fabric, Fortinet delivers security that follows user whether on the road and home or in the office to provide enterprise-grade protection and productivity. In the 2021 Gartner Magic Quadrant for WAN Edge Infrastructure just announced, Fortinet was once again named a leader, placed highest in the ability to execute and ranked number 1 for remote worker in critical capability. Building on our leadership in SD-WAN, Fortinet and Verizon recently announced the expansion of the Verizon global offering with Fortinet Secure SD-WAN. The solution is designed to provide enterprise and business market customer with a converged networking and security solution in a box to secure and connect work from anywhere. We continue to see momentum and adoption of our secure SD-WAN, 5G-enabled SD-Branch, and cloud-delivered SASE solution among the world's largest service providers.
These service providers, including AT&T, British Telecom, Telefónica, and others we plan to announce in the coming months. Before turning the call over to Keith, I would like to thank our employee, customers, and partners worldwide for their continued support and hard work. Keith?
Thank you, Ken. Okay, let's start the more detailed Q3 discussion with revenue and the drivers for our record-setting product revenue growth. Clearly, demand is strong. Total revenue of $867 million was up 33%, driven by industry-leading product revenue growth of 51%. Looking closer at the 51% product revenue growth, our highest quarterly product growth rate in 12 years as a public company, we can point to three drivers. First, the convergence of security and networking, or what we call Security-Driven Networking. Second, strong customer demand for vendor consolidation on platforms. Third, a heightened awareness of today's elevated threat landscape across a broader set of entities. Fortinet is proud to be an innovative leader in Security-Driven Networking. With the convergence of security and networking functionality incorporated into our broad, integrated, and automated Security Fabric platform.
Our Security-Driven Networking investments in Wi-Fi, switching, WAN, data center cloud, 5G, and OT enable us to provide integrated security at networking speeds from the data center to endpoints and to the cloud. With our secure SD-WAN solution, security at the edges. Today, we announced a unified solution enabling organizations to secure and connect work from anywhere. By unifying our Zero Trust, endpoint, and network security solutions, we can deliver enterprise-grade security services and threat intelligence that seamlessly follows users on the road, at home, and in the office. As for consolidation, customers are increasingly focused on vendor consolidation, automation, and platform strategies that provide a broad, integrated, and single platform approach to security that effectively protect from the wide range of attack vectors. Our Security Fabric platform provides a broad range of security products integrated on a single operating system.
Gartner recently called out Fortinet's Security Fabric as a platform that provides a cybersecurity mesh architecture approach, or CSMA. The cornerstone of Fortinet's CSMA approach is our ASIC-driven FortiGates, which provide on average 5-10 times more computing power than competitors' firewalls running on common CPUs. The greater computing power allows our software engineers to embed additional security functionality and integration into the operating system, enhancing our price for performance advantage. The integration extends across our suite of Security Fabric solutions and consists of the 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 solution. Lastly, turning to awareness. The explosion of ransomware attacks has led to a greater awareness of the need for cybersecurity technologies.
According to the latest Global Threat Landscape Report published by our FortiGuard Labs, the number of unique ransomware detections per week increased more than 10 times from July 2020 to June 2021. The increase in attacks is across entities of all sizes, geographies, and industries. These three factors, the convergence of security and networking, the adoption of a cybersecurity mesh architecture, and a greater awareness of the threat landscape, drove record-setting product revenue growth, contributing to market share gains for Fortinet. The dramatic product revenue growth was broad-based, with FortiGate and non-FortiGate both posting product revenue growth rates of approximately 50% while tilting our current revenue mix 450 basis points from higher-margin services revenue to product revenue. FortiGate product revenues were driven by entry-level and high-end FortiGate product revenue growth of 60% and 57% respectively.
Non-FortiGate product revenue growth was driven by several platform products, including FortiMail, FortiSandbox, FortiSIEM, FortiSwitch, and Virtual Firewalls. Rounding out our revenues, we saw service revenue of $530 million, up 24%. Support and related services revenue was up 26% to $243 million, while security subscription services revenue was up 22% to $287 million. Turning to revenue by geos, as summarized on slide 5, revenue in EMEA increased 33%. In the Americas, revenue increased 29%. In APAC, posted revenue growth of 43%. Moving to billings. Quarterly billings crossed the $1 billion threshold for the first time in our history. At $1.064 billion, billings were up 42% as enterprises responded to the expanding threat landscape, favoring cost for performance leaders in integrated platform or CSMA strategies.
This is especially evident across the enterprise segments. For example, in the large enterprise sector, Global 2000 billings were up 52%, with growth accelerating over the last three consecutive quarters. For the second consecutive quarter, we added over 6,000 new logos across all customer segments. FortiGate billings were up 39% and accounted for 70% of total billings. As shown on slide 6, entry-level and high-end FortiGates posted very strong billings growth. Non-FortiGate billings were up 49%, driving a 1-point billings mix shift to non-FortiGate. The top ten solutions accounted for 68% of non-FortiGate billings and were up 48%. The number of deals over $1 million increased over 70% to 83 deals and saw Secure SD-WAN deals more than double to 19. Average contract term increased 3 months year-over-year and 1 month quarter-over-quarter to 29 months.
The increase in contract term was driven by the significant increase in G 2000 and other large enterprise deals. SD-WAN billings were up 52%, outpacing the company's billings growth and accounted for approximately 14% of total billings and continued to receive industry accolades. For the second consecutive year, Fortinet was named a leader in the Gartner Magic Quadrant for WAN Edge Infrastructure and positioned number one for ability to execute. For critical capabilities, Fortinet SD-WAN ranked first in the small branch WAN, security sensitive, and remote work use cases. Consistent with the elevated threat environment and the breadth of ransomware and other attacks, OT billings were up 77%. Moving to worldwide billings by industry verticals. Among the top five verticals, worldwide government grabbed the largest share with a mix of 17% and saw billings growth of 22%.
We've made investments to expand our presence and engagement with the government sector. For example, in the U.S., where we recently added retired four-star Admiral Stavridis to our board of directors. Yesterday, Fortinet Federal announced Department of Defense certification approval for an additional 26 Security Fabric solutions. Internationally, we are set to open Fortinet's Federal Government Information Innovation Center in Australia before the end of the year. Utilities, manufacturing, transportation, construction, and other verticals that have not consistently been in our top five combined for billings growth of 68%. We believe the growth of these verticals is another indicator of the broadening nature of the threat landscape and is driving security investments in industries that may have shown less affluent security budgets and lower internal labor resource levels.
On August thirty-first, Fortinet acquired a controlling stake in Alaxala Networks, a Japan-based networking company, for approximately $64 million. Alaxala provides high-performance network switches and routers in their local market. The investment increases our total addressable market and reflects our leadership in the convergence of networking and security. Moving back to the income statement, product gross margin declined 220 basis points to 60.7%, reflecting the consolidation of Alaxala's results and a change in our product mix. Product cost increases associated with supply chain constraints were largely offset by our pricing actions. Services gross margins decreased 160 basis points to 86.6% due to Alaxala and costs associated with the expansion of our data center footprint.
The 25.8% operating margin was 30 basis points above the top end of our guidance, despite pressure from lower gross margins and higher marketing expenses, primarily from the Fortinet Championship PGA TOUR event. Headcount increased 20% to 9,700. Moving to the statement of cash flows summarized on slides 7 and 8. Free cash flow was $330 million, representing a margin of 38%. Free cash flow benefited from strong billings growth and good billings linearity. On a year-to-date basis, free cash flow margin was 41.5%. We repurchased approximately 370,000 shares of our common stock for a total cost of $109 million at an average price per share of $2.94.
The board increased the share repurchase authorization by $1.25 billion and extended the expiration date to February 2023. The remaining repurchase authorization is approximately $2 billion. We ended the quarter with total cash and investments of $3.4 billion. Inventory turns increased to 2.9 times from 2.7 times in the Q2 of 2021, reflecting strong product sales in the quarter and some supply chain pressure. DSOs at 63 days returned to pre-pandemic levels. Capital expenditures for the quarter were $69 million, including a payment for the new campus building of $13 million. As we noted in our last earnings call, we've pivoted our capital expenditure strategy to include building out our facilities and operations infrastructure to support our accelerating growth.
We estimate Q4 capital expenditures to between $170 million and $190 million. Investments in our future facilities and operations infrastructure account for the sequential increase in CapEx. Before providing guidance, I'd like to comment on the supply chain. It's been widely publicized that the rapidly changing macroeconomic environment is causing disruption in global supply chains for companies of all sizes and industries. We expect the worldwide supply chain constraints will present evolving challenges in the Q4 and into 2022. The supply chain issues have proven to be extremely dynamic, and I'd like to pause here to acknowledge and thank each member of our operations team for their truly outstanding performance. With regards to pricing, we believe we enter this phase with a hard-earned reputation of being able to provide customers excellent price for performance or value.
We believe we can leverage this reputation to largely offset our increased cost. We believe our pricing actions have been met with understanding by our customers, as evidenced by our Q3 results and strong pipeline growth. We view the current situation as a supply challenge, not a demand challenge. Now I'd like to review our outlook for the Q4, summarized on slide 9, which is subject to disclaimers regarding forward-looking information that Peter provided at the beginning of the call. The following guidance reflects our best effort to estimate the supply chain impact. For the Q4, we expect billings in the range of $1.165 -1.215 billion. Revenue in the range of $940- 970 million. Non-GAAP gross margin of 75%-76%.
Non-GAAP operating margin of 27%-28%, which includes an estimated 200 basis point headwind from acquisitions, foreign exchange, and increased travel and marketing costs. Non-GAAP earnings per share of $1.10-1.15, which assumes a share count of between 168 million and 170 million. We expect a non-GAAP tax rate of 21%. Based on our very strong Q3 performance and the upside I just provided to the Q4 expectations, we are once again raising our 2021 guidance. We expect billings in the range of $4.04 -4.09 billion, which at the midpoint represents growth of approximately 31.5%. Revenue in the range of $3.32 -3.35 billion, which at the midpoint represents growth of 28.5%.
Total service revenue in the range of $2.08 -2.09 billion, which represents growth of 24% and implies full-year product revenue growth of 36%. Non-GAAP gross margin of 76.5%-77.5%. Non-GAAP operating margin of 25.5%-26.5%. Non-GAAP earnings per share of $3.85-3.95, which assumes a share count of between 167 million and 169 million. We expect our non-GAAP tax rate to be 21%. We expect cash taxes to be approximately $130 million, which includes a $47 million tax payment made in the Q4. Along with Ken, I'd like to thank our partners, our customers, and all members of the Fortinet team for all their hard work, execution, and outstanding success.
I'll now hand the call back over to Peter to begin the Q&A.
As a reminder, during the Q&A session, we ask that you please limit yourself to one question to allow others to participate. Eli, please open up the call for Q&A.
Thank you. As a reminder, if you would like to register a question, please press star followed by 1 on your telephone keypad. If your question has been answered and you would like to withdraw your registration, please press the pound key. Now for your first question, we have, Brian Essex from Goldman Sachs. Your line is now open.
Great. Good afternoon. Thank you for taking the question, and congrats on some really nice results this quarter. I guess, Keith, you spent some extra time talking about the supply chain, and it's certainly the most frequent question I've gotten from investors, particularly over the past three weeks. Could you maybe help us understand, you know, what kind of headwind you're quantifying, or accounting for in your Q4 guide, where you might see risk in the supply chain, and then what you might be seeing from peers, particularly where you may be benefiting from having supply where your peers may not have product?
Yeah. Thanks, Brian. I don't know that anybody knows all the answers to the questions that you've kind of articulated at all. I'll give you some color, if you will.
Okay.
You know, I think we saw a little bit of supply chain pressure in the second and the Q3, as I alluded to, but obviously the number is nothing that was terribly noteworthy. I do think the guidance that we've given for the Q4 is appropriately conservative, if you will, in terms of what we see for supply chain or what we would call backlog in the Q4. I think we feel good about the guidance that we've given.
I think if you look at kind of the general tone and what we're hearing from our operations team, I think there was some point some time in the Q3 where you know every day was very dynamic with them with people calling and them having to scramble about component matters and contract manufacturer commitments or what have you. I'm hearing less about that at this point. That's probably very early on. I would also offer that the backlog or supply chain first appears for us in some of the fabric products, the non-FortiGate. I think that'll continue on a little bit into the Q4 and probably also get to the FortiGates to some extent in the Q4 as well.
Getting out to 2022, I think everybody's kind of in the same boat and trying to understand when we're actually gonna see something, if it's a real market improvement, marked improvement. I think we'll probably kind of hold back commenting on that for the next several months until we get closer to providing guidance for the next year.
Yeah, Brian, this is Ken. A few other points I'd on top of what Keith said. I feel we are a little bit better positioned compared to competitors. First, we have the quantity much larger than our competitors, like, we're probably like 3x compared to the Cisco and the Juniper shipment, maybe probably 10x than Palo Alto, some others, which gives us better negotiation power with some of the supply. And also we manage all this more directly compared to our competitors who go through some third party. So that's gives us a better visibility and also can act quicker earlier. Second, we have quite a broad product line, both in the FortiGate and also non-FortiGate.
It's more easy for a customer to really go to the next line of product, have a similar performance and all run in the FortiOS, same FortiOS. It's more easy to using some different product to subsidize some of the product shortage. Also we have a great team operation side. At the same time we have a culture more invest in the long term, both on the inventory, some other things compared to our competitor to meet some. Even like 5, 10, 15 years ago, we tend to keep some more inventory to meet some customer urgent need. That's actually benefit us in this supply chain issue.
Great. Thank you very much. I'll honor Peter's request for just one question and step back in the queue.
Peter, the tyrant.
Next, we have Tal Liani from Bank of America. Your line is now open.
Hey, guys. You're killing me with this one question thing. I wanna focus on the most important part, which is the growth acceleration. Your revenue, your product revenue growth went from 25% to 41% to 51% in the last three quarters, and your billing growth went from 14% to 35% to 42%. This is just a major acceleration. The question is, can you identify the key areas? I know that a lot of areas are growing, but when you look at material areas, meaning the most, the highest contribution to the growth acceleration, what are the key areas? Can you share with us the key areas where you see the highest growth in terms of dollars? Can you also give us an update on SD-WAN specifically? Thanks.
I think you can see both the FortiGate and also non-FortiGate all kind of revenue growth, like 50%. FortiGate is more related to, because, like whether the internal segmentation to protect all these kind of ransomware all go to the WAN, a secure SD-WAN. The non-FortiGate is more tied to the story, the fabric, Fortinet Security Fabric, which is also Gartner starting promoting, they call cybersecurity mesh architecture, which can reduce the financial cost of a single event since by like 90%. I think that this both contribute for the growth like Keith said. Some vendor consolidation. We see some smaller vendors starting kind of get weaker and weaker, so we do see some market share gain here also.
Okay. When you look at 2022, and I know you don't provide guidance, but when you look forward, do you see the same drivers continuing to support growth acceleration? Or how do you deal with these high targets next year?
We do see this trend is not slow down, will last for probably a few years, whether we call Security-Driven Networking or Security Fabric, which really were helping the enterprise or service provider to get better security to the customer, all these things. So far, we don't see anything slow down. We feel we are very well-positioned to keeping gaining market share.
Got it. Thank you.
Yeah. I would just echo what Ken said, Tal, just a little bit. Look, I think the threat landscape is a hot topic of conversation in all quarters of the world it seems right now, and it doesn't seem like that's going to abate anytime soon. I think the need, you know, what Ken and team have built here with providing security at networking speeds is critical. But I think also this platform of what Gartner is now calling the mesh architecture, the cybersecurity mesh architecture, I think consistent with Gartner's other reports about the percentage of companies that are looking for consolidation, I think Ken's commented on that, and how that's going to continue to increase. It certainly seems that those tailwinds are poised to continue to exist as we get into 2022.
Great. Thanks.
All right. Next, we have Shaul Eyal from Cowen. Your line is now open.
Thank you. Congrats on the performance and guidance, guys. Keith, the federal vertical had a good performance. Was it just, you know, typical Q3 government seasonality, or do you see that sustainable going forward, you know, given your recent investments within this vertical?
Keep in mind, for us, the government is a worldwide number when we talk about it, so it includes some U.S. federal, international governments, also state and local governments, et cetera. It has been a very strong vertical of ours for well over a year, if not two years now. I certainly don't see any reason that, you know, just on that basis, that it would slow down. I think if you overlay that with the investments that Ken and team are now making, particularly as it relates to the U.S. federal team, you know, I think there's some opportunities for us to explore and exploit, hopefully, as we move forward.
Thanks.
All right. Next, we have Michael Turits from KeyBanc. Your line is now open.
Hey, guys. Keith, I'd love to drill down on the FortiGate side and really understand, you know, where the purchasing is taking place and, you know, for what? Is it, you know, it's good to see, I would think, that we're modernizing data centers? Or is it data center expansion? Is it displacements? And, you know, again, surprising perhaps considering the move to cloud. Just drill down on the, you know, the physical on-prem/FortiGate side.
I hate to give compliments to my peers, but I think what we're really seeing here is really strong execution from the sales team. I think we came into this conversation feeling that we had a very strong product suite. I think the sales team has done a stellar job, and we talked to them about the same question you just asked me, where is this coming from? You know, I can hear in them the confidence when it comes to displacements. There's certainly no competitor that they're afraid of. I can hear them articulate back the platform strategy, the land and expand strategy. I can see them using some of the tools, and products and technologies that we've invested in them, and they're leveraging them, I think, very successfully.
Well, it was a question going back, I think, that Tal had asked about, and we used this term before, you know, a rising tide lifting all boats, and I think we saw that in the quarter. There wasn't a weak geography. There wasn't a weak product suite. I think everybody performed very strongly.
Yeah. Echoing Keith, we see that the Global 2000 growing over 50%, and also the investment we've made, like, last year, the year before, in some big enterprise, in some service providers starting paying off.
Yeah. I think it's the same question, so hopefully not too, but I'm just trying to figure out, of course, execution and competition doing well that way. Where are we in terms of people just buying stuff to put in data centers when we're really in a cloud mode here? Is it because of a refresh or why are we seeing that investment?
I think it all plays to our, like, long-term ASIC strategy, which adds a lot of performance and, more function, and, at the same time, costs lower and, low power consumption also. That's where the security starting to expand inside a data center, inside a company internal network. Also the WAN side, SD-WAN 5G, we also see a lot of driving from that angle. It's really starting to expand to the whole infrastructure instead of traditionally, just secure internet border. That's have a much bigger total addressable market, sometimes we call Security-Driven Networking. It's really a more expanded market and has a very strong security need.
Thanks, guys.
All right. Next, we have Sterling Auty from JPMorgan. Your line is now open.
Yeah, thanks. Hi, guys. I'm gonna ask my one question as kind of an extension of what Michael was just kinda, you know, talking about. I'm curious, as you look at the growth in the quarter, even if it's qualitative, can you help characterize for us how much of that growth is coming from actual displacement of, you know, solutions, both traditional cybersecurity and networking, versus how much of that growth is coming from existing customers buying additional expansion, so additional products just to build out to handle their growth needs?
I think the metric I would give is 6,000 new logos. You know, I think that I'm gonna go back and say, I mean, the execution was very strong across the board. Was there greater penetration in our installed base of customers? Absolutely. No doubt about it. At the same time, you know, that's two quarters back to back now that we've added 6,000 new logos. I know some of those are small enterprises. We are getting the at-bats that we've always coveted. I think coming with more at-bats, you were seeing stronger execution as well.
Yeah. Also the existing customer keeping expanding their like security infrastructure approach, like adding to the WAN side, SD-WAN 5G, and also expand to the internal segmentation, Wi-Fi security, data center security. That's why I think it's both, but I do see probably maybe more come from the customer keeping expanding their security infrastructure.
Understood. Thank you.
Next, we have Rob Owens from Piper Sandler. Your line is now open.
Yeah. Thanks for taking my question. I guess I'll pivot a little bit from Sterling and ask about G2K specifically and what is driving the strength in G2K billings. Is that product related? Is it just better distribution relationships that are getting you into these accounts? And who do you think share is coming from in this market? Thanks.
I think, like, I would give a general comment in terms of where, who's the market share gainers and who are the market share donors. You know, I don't think there'd be any surprises if I actually mentioned names in terms of who I thought those were. In terms of distribution, I think when you get in, particularly into the U.S. market, with the large enterprise-focused distributors, you know, you've gotta, as a company, invest some time and bring opportunities to them and demonstrate that you have a superior product, a superior offering. I think that the team has done the heavy lifting on that. I do believe that we are getting more momentum, if you will, from those large U.S. distributors that maybe we did not have previously.
I think there's some of that. Then I think we've continued to invest in both the sales and the marketing. We knew all along for several years now that we needed to improve our coverage in terms of the number of accounts that were assigned to reps, and the people that we were bringing in from outside and that maybe had more of an enterprise experience and less of a channel experience, et cetera. I do think that all those things have combined and are demonstrating the success. As you point out, you know, G 2000 growth at over 52% and accelerating for the last three quarters.
Thank you.
Mm-hmm.
All right. Now we have Hamza Fodderwala from Morgan Stanley. Your line is now open.
Hey guys, thanks for taking my question. I'm gonna keep it to one question. Just on the OT side, you talked about that growing 77% this quarter. I think that was the first time you mentioned that product specifically. Just curious, can you give us any rough sense of how material that's becoming to your overall billings and, you know, what's been driving that in more recent quarters?
Yeah, I think it's not as big as SD-WAN, but growing faster. Also I think that it's reached a point, if you will, in terms of size, that we're comfortable, and we think it's worthwhile making sure that we share with people outside the company with those growth levels. If you combine SD-WAN and OT together as a percentage of billings, you're gonna get to something, I think that's over 20% of our total billings.
Thank you.
Mm-hmm.
All right. Next, we have Adam Borg from Stifel. Your line is now open.
Hey, guys, and thanks so much for taking the question. Maybe just for Ken. Back in September, you guys signed a partnership with Linksys around securing work from home environments and segmenting corporate and personal networks. I know one of your competitors also announced a similar idea. How should we think about the idea of securing home networks and effectively the home becoming an extension of a branch office of one and the opportunity to do that as we live in this, you know, work from anywhere world going forward? Thanks so much.
Yeah. We see it's a new market. There's a lot of potential supporting work from anywhere. Yeah, that's where we partner with Linksys and we tried out in this home networking area for quite a while. We do believe it's eventually with all these IoTs and other things connect online, and also a lot of work from home and like school from home, all these kind of things, they all will need a security, which we combine with the network security, well, endpoint security and also the cloud, some other SaaS solution. We do feel it's a big long-term potential.
It's not quite. I mean, the business actually ramp up quickly, but it eventually will contribute more revenue to the company.
Great. Thanks so much.
Thank you.
Next we have Jonathan Ho from William Blair. Your line is now open.
Hi. Good afternoon. Congrats on the strong results. Just wanted to, I guess, understand a little bit better sort of the dynamics around the price increases to your base. Can you give us a sense of maybe the magnitude or impact to the quarter from those increases? Is there potential for that to stick even beyond some of these supply chain challenges? Thank you.
Yeah. We kind of very carefully increase the price based on our cost increase, which also kind of supporting by some of our partner. The same time, because we have much better like performance price ratio and also more function, especially on the FortiGate side. We do feel we have more room to adjust for some of the price. Still customers do like the product. So far we did some price increase, and we'll just offset the cost increase, and we'll get margin back online.
Yeah. I would add to that. I think, Jonathan, one of the metrics that we look at in the Q3 was just our ability to hold the line on the price increases, which were largely effective in August first. I say largely because you have to give notice to your channel partners, which is appropriate. You can imagine, you know, them taking certain actions to get orders in the first month of the quarter, if you will. It gets a little bit distorted that way. But we did look at, you know, our ASPs and wanting to make sure in our discounting that we're not giving back that price increase, if you will. Overall, I think the headline is that we think we were on the direct product line.
I think it was accretive to the margin in the quarter. I emphasize the direct because as volatile as it is, you know, predicting things like exit IPs and sometimes, freight as well, can come into that line. I think overall, when you factor in direct and indirect, we're probably in a wash for the quarter.
Great. Thank you.
Mm-hmm.
All right, next we have Gray Powell from BTIG. Your line is now open.
Okay, great. Thanks for taking the question, and congratulations on the good numbers. Yeah, within your non-FortiGate billings, can you roughly give us a sense as to how much is related to appliances versus software and cloud? You know, how should we think about supply chain issues potentially impacting non-FortiGate in Q4?
Yeah. I think the non-FortiGate mix is something on the order of about, we've talked about this before, something in the order of 30%-40% of that is cloud or software, and the remainder would be a hardware form factor. As I mentioned in the call, I think the first place that we saw supply chain pressure in this Q3 was in non-FortiGate, more specifically around switches and access points.
Got it. Okay. That, that's helpful. Thanks.
Great.
All right, next we have Andrew Nowinski from Wells Fargo. Your line is open.
Great. Thank you, and congrats on a great quarter. I wanted to ask you about the high end. That was certainly better than expected. I think over 37% of your FortiGate sales
which looks like it was the highest level of spend in at least the last two years. Can you just talk about the drivers of the high end, and whether the 5G rollouts and your leadership position in the carrier market might be contributing to that?
Yeah. The big enterprise, the Global 2000, definitely contribute some high-end growth. Also, from the product refresh side, in the last 1-2 years, we also refresh the high-end using the latest ASIC for the NP7, which has a 5 times better performance and more function compared to the previous NP6, which I think the high-end, we probably refresh like 80% of the plans already. That's also we starting to benefit some of the refresh we made in the last 1-2 years.
No, no contribution from the 5G, carrier class customers there. It's more on the enterprise?
There are some contribution from SD-WAN, but it's the 5G is still in the ramp-up stage. I don't see much, but I do see the huge potential.
Super. Thank you.
Thank you.
All right. Next, we have Irvin Liu from Evercore ISI. Your line is now open.
Hi. Thanks for the question. This question's for either Ken or Keith. You had the opportunity to meet with several customers and partners, along with new prospects at your first of its kind security summit that took place at your sponsored PGA Fortinet Championship event. Can you just talk about what you are seeing from a customer traction perspective post the event, and perhaps if the event had, you know, led to a notable uptick in visibility and mind share among customers?
I think the head of marketing asked that question in the last one. It's a good question. I think we'll both have-
Yeah. It's probably one of the biggest marketing investments we have made, but definitely we see very successful results. A lot of customers and a lot of partners really appreciate all this, the Fortinet Championship PGA effort there. Also we're using it as a platform to bring different customers partners all together to share, communicate their experience and also do the training education. We do see this is really helping a lot of the marketing sales effort we have and also generate a lot of new leads, put it this way. It's very successful event.
I would come over the top and completely echo what Ken had to say. I'm shocked at how enthusiastic I am about how that event came out. Whether we look at what we call white space names that we got from, say, S&P 500, the percentage of attendees that were non-customers and that would sit with us, you know, in one-on-one sessions and hear more about our story, and the household names that were there, it was fantastic. I think the branding, you know, what the marketing team pulled together with Silverado Country Club, was extremely successful. I think also it kinda goes back to some of the comments we made earlier in the conversation.
I think it was it really struck Fortinet at the right time in terms of its, call it, its maturity, right? I think that the team here was really in a good position to execute against that. I was in a customer meeting yesterday here in Sunnyvale with a very large company that come to the event, and so it was a follow-up. There have been other very large companies that have come to our EBC events here in Sunnyvale just in the first month and a half after the event. I'm just really impressed with what the guys did. Guys and ladies, excuse me.
Got it. Thanks for the color.
Yep.
Once again, to ask a question, press star one. Next, we have Keith Bachman from BMO. Your line is now open.
Thank you very much. I was wanting to direct this towards Keith. Keith, as you think about the billings guide, what you're suggesting, even at the high end, the billing sequential growth would be about 13%. In the past 2 years, you've grown billing sequentially about 28%. Obviously a little less on the guide. I'm just wondering if you could just give us some color or thoughts around that. In particular, is that a reflection of was there any kind of pull-in that you think about on the billings? Were customers concerned about not getting product? And/or is it reflecting some of the concerns you previously mentioned about are we gonna have enough of the supply chain availability or product availability, I should say, and therefore we might need to tamp down a little bit in Q4?
I had a follow-up, if I could, 'cause Peter told me I'm allowed to ask a follow-up.
He did.
Yeah. Look, I think what you're seeing there is supply chain. I said earlier in the conversation, we've been appropriately conservative, I hope, in terms of how we guided to it. To unpack that just a little bit, you know, we do, you know, with our sales team, and then we manage things on a bookings basis with them, and then we put that up against, you know, the what we have the ability to ship.
If I looked at just the bookings number, and we had a long internal conversation about whether or not that's a metric that we should provide at this time and decided not to, but if we look at just the bookings number, you know, I would say that it's a very strong indicator that the business is extremely healthy, if you will. In terms of customer-
Yeah, yeah.
In terms of customer buying behavior, you know, there's always somebody getting in line early, if you will. They have longer term deployments or what have you. That's not new. Maybe a little bit of it in the Q3, no deals over $10 million. I think the largest deal was probably 7 or 8 or something like that, in the quarter. We have seen in the Q4 things where customers, I'd say they're get in line orders. They've got deployments where our plans are deploying in 2022, and they want to make sure that, you know, they're trying to time, you know, when they're actually going to need the product and when the product is going to be available.
I have seen early in the quarter, a few companies exhibiting that behavior.
Yeah. We're hearing that a little bit from the channel about the lead times because they're getting out. Customers are ordering early and more. It sounds like what you're saying, essentially. You are concerned about maybe the billings number reflects some. You might not be able to meet all shipment demand, and so that's reflected in the quarter. If I'm, I hope I'm not putting words in your mouth.
No, absolutely. Yeah, I think that's very prudent of me to say with the supply chain environment that we're in. I'm not just going to. I can't just take the absolute booking numbers.
Yeah.
I think there's been a-
Okay.
A fair amount of internal work around that, if you will. Now, on the other side, you know, it does give us more predictability as we come into 2022 if this behavior continues than we've had in the past. You know, backlog or bookings has not been something that, you know, Fortinet as a company has really had reason or cause to talk about. I don't know that as of today that we do. As we get further into the Q4 and moving into 2022, that may be something that because of the predictability that it helps with, we may be talking about that next year.
Okay. My second question then is if you just talk a little bit about the non-FortiGate mix, and I know you mentioned it in one of the previous questions, but how do you see that changing over the course of the next couple quarters, if at all? I'm not really talking about a supply chain constraint, but just on demand-related pulls, as customers may look to as they're deploying that incremental 6,000 customers and greater penetration on your existing. Do you see the software side moving up, if you will, in a non-FortiGate component? I will cede the floor. Thank you.
Yeah. That's where the, what do we call Fabric or Mesh, we see pretty strong demand from the customer. They both increase the monthly purchase. Also, the customer adopt with a new multiple product, Fabric or Mesh solution. That's where it's coming to see a lot of strong growth on the non-FortiGate. Also, we started working with the service provider carrier on the SASE and other solution. Eventually it will also benefit as a more broad customer base.
Okay. All right. May, thanks and congratulations for the incredible results.
Thank you.
There are no further questions at this time. That concludes the Q&A session. I will now turn the call back to Peter Salkowski for closing remarks.
Thank you, Eli. I'd like to thank everyone for joining the call today. I know you have a lot of calls this evening. Really appreciate your time. Fortinet will be attending the following investor conferences during the Q4 with the Wells Fargo conference on November 30, the Nasdaq conference on December 1 and 2, the UBS conference on December 7, and the Barclays conference on December 8. The events with presentation will be webcast, and links to the webcast will be available on the investor relations website of Fortinet at investor.fortinet.com. If you have any follow-up questions, please feel free to reach out. Have a good day. Thank you very much for your time. Have a good day.
This concludes today's conference call. Thank you all for participating. You may now disconnect.