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FTNT Fortinet

Participants
Peter Salkowski Vice President-Investor Relations
Ken Xie Founder, Chairman and Chief Executive Officer
Keith Jensen Chief Financial Officer
Brian Essex Goldman Sachs
Rob Owens Piper Sandler
Jonathan Ho William Blair
Ben Bollin Cleveland Research
Tal Liani Bank of America
Sterling Auty JPMorgan
Shaul Eyal Cowen
Gray Powell BTIG
Adam Tindle Raymond James
Andrew Nowinski D.A. Davidson
Irvin Liu Evercore
Fatima Boolani UBS
Hamza Fodderwala Morgan Stanley
Saket Kalia Barclays
Keith Bachman Bank of Montreal
Michael Turits KeyBanc
Patrick Colville Deutsche Bank
Call transcript
Operator

Ladies and gentlemen thank you for standing by. And welcome to the Fortinet’s Q1 2021 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 session. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Peter Salkowski, Vice President, Investor Relations.

You may begin sir.

Peter Salkowski

Thank you, Rowanda. 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 first quarter 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 by providing a high-level perspective on our business. Keith will then review our financial and operating results for the first quarter, before providing guidance for the second quarter and updating the full year. We'll then open the call for questions. [Operator Instructions] 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 on today's call are non-GAAP, unless stated otherwise.

Our GAAP results and GAAP to non-GAAP reconciliations are located in our earnings press release and in the presentation that accompanies today's remarks, both of which are posted on the Investor Relations website.

Lastly, all references to growth are on a year-over-year basis, unless noted otherwise. I’ll now turn the call over to Ken.

Ken Xie

Thank you, Peter. And thank you to everyone for joining today's call to review our first quarter 2021 result.

We are very pleased with our strong first quarter performance. Billings increased 27% to $851 million, driven by solid execution across a broad and integrated product and services. Secure SD-WAN contributed 14% to first quarter billing. Total revenue grew 23% to $710 million with product revenue growth of 25%, the highest quarterly product revenue growth in the last five years. With strong business momentum and great visibility, we've remained focused on growth. In the first quarter, we released FortiOS7.0, which offered the industry first OS label with tight integration of a broad security and network functions, including SASE, SD-WAN, Zero-Trust Network Access, CASB and 5G capability. Today we announced the 40 GIG 71.01 AF, the world’s fastest next-generation firewall, and the only firewall with hyperscale 400 gig interface. The 71.01 AF will help 5G mobile network operators to secure multiple edges within their infrastructure and are enabled by MSPs to be with scalable security offerings. Powered by our new MP7 security process unit, the 71.01 AF delivers security contributing of 2x to 19x greater than comparative solutions.

We continue to see momentum and adoption of our SD-WAN, SASE and zero trust network access solution among the world’s largest service providers. Today, we announced Bridges Telecom, a new major secure SD-WAN service powered by Fortinet. In March Fortinet and AT&T announced the ability of a new managed SASE solution for enterprise customers. Increasingly, organizations are consolidating towards a holistic platform approach, delivering integrated and automate security cover on-premise network, endpoint and cloud secure edge. The Fortinet Security Fabric is a cyber security platform, organically built on a broad and a huge set of networking and security technology designed to seamlessly operate together. The high-profile of security incidence that occurred over the past few months, along with the pandemic, has elevated the need for a broad platform that can secure an enterprise on target 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 cyber security needs.

Our security-driven networking approach, is a key growth driver.

Additionally, we expect that our significant organic product growth will lead to increase the service revenue.

Before turning the call over to Keith, I would like to thank our employees, customers, partners, worldwide for their continued support and hard work. Keith?

Keith Jensen

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 five-year highs.

Okay, let's start the more detailed Q1 discussion with revenue. Total revenue of $710 million was up 23% driven by industry-leading product revenue growth of 25%. Auto-driven 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 million was up 22%. Support and related services revenue increased 23%, to $214 million. Security subscription services revenue increased 21% to $255 million 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 week, which includes today's announcement of the 71.21F. These new products now represent approximately 20% of high-end FortiGate shipments.

Our AC driven FortiGates give customers five to ten 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 for 31% of total revenue up four percentage points. The integrated security 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 – revenue performance, we believe our Non-FortiGate platform is now on a pace to be a $1 billion 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%; and 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 first quarter billings were $851 million, up 27%. We saw strong growth in both the FortiGate and non-FortiGate segments at a Security Fabric platform. The FortiGate segment delivered billings growth of 20%, accounting for 70% of total billings.

As shown on Slide 6, entry-level FortiGate 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 four-point year-over-year mix shift to non-FortiGate. Taking together, these data points highlight the market acceptance of our single integrated security platform strategy.

In terms of billing 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 20% 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 of $1 million, increased 74% to 66 deals in the first quarter. The pipeline for deals of a $1 million looks good for the remainder of the year.

As Ken noted, secure SD-WAN billings were 14% of total billings. SD-WAN as a key functionality and an integrated staffing solution.

Moving to worldwide billings by industry verticals was 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. We've done this growth of 50%. Retail turned into a solid quarter with billing 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 with a single integrated security platform strategy and our ASIC advantage, which enables a shared operating system across the 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 cost. The increase in product gross margin offsets the drag on total gross margins from the revenue mix shift driven by the strong product revenue growth and a gross margin – and the gross margin FX headwind [indiscernible] about 25 basis points. Operating margin for the first quarter increased 210 basis points to 24.5%, benefitting from the strong revenue performance in the quarter. The benefit from lower travel and marketing program expenses are approximately 100 basis points. It was more than offset by an operating margin headwind from foreign exchange of about 150 basis points. To end the quarter – we end the quarter with total head count of 8,615, an increase of 16%.

Moving to the statement of cash flow summarized on Slide 7 and 8. Free cash flow for the first quarter came in at $264 million, up $22 million from the first quarter of 2020, despite a $24.5 million year-over-year increase in CapEx spending. We ended the year with total cash and investments of $3.1 billion, an increase of $1.5 billion. The increase includes the proceeds from our $1 billion investment grade debt issuance during the first quarter. The issuance followed our inaugural strong triple B credit ratings. Throughout the pandemic, we have leveraged the strength of our balance sheet as a competitive advantage to support our partners and customers as they experienced geo-specific economic challenges.

As a result daily sales outstanding increased seven days to 81 days and in line with our expectations and reflecting our earlier decisions to provide geographically targeted extended payment terms. Compared to the fourth quarter of 2020, DSI was on the first quarter of 2021 decreased six 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 the 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 first quarter were $52 million, including $38 million related to construction and other real estate activity.

We expect to begin moving employees and 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 second quarter between $30 million and $40 million for all of 2021 to between 150 and 179. The average contract term in the first quarter was approximately 27 months, up less than two months from the first quarter of 2020, and down approximately one month from the fourth quarter of 2020. Secure SD-WAN accounted for 15 deals of $1 million versus four in the first quarter 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 first quarter 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 NP7 chip and our new FortiOS7.0 operating system that was recently released.

Now I'd like to review our outlook for the second quarter guidance summarized on Slide 9, which is subject to disclaimers regarding forward-looking information that Peter provided at the beginning of the call.

For the second quarter, we expect billings in the range of $860 to $880 million. Revenue in the range of $733 million to $747 million. Non-GAAP gross margins of 78.5% to 79.5%. Non-GAAP operating margin of 24.5% to 25.5%, which includes an expected 100 basis points to 150 basis points headwind in foreign exchange. Non-GAAP earnings per share of $0.83 to $0.88, which assumes a share count of between $168 million and $170 million.

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.

For the 2021 we expect billings in the range of $3.685 billion to $3.745 billion, which at the mid point represents growth of approximately 20%. Revenue in the range of $3.080 billion to $3.130 billion, which at the mid point represents growth of approximately 20%. Total service revenue in the range of $2.020 billion to $2.050 billion, 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&E benefit, the midpoint of the guidance represents a 50 to 100 basis point increase in 2021 operating margin, despite an expected headwind from foreign exchange. Non-GAAP earnings per share of $3.65 or $3.80, which assumes a share count of between $170 million and $172 million and about $0.07 per share impact in debt issuance.

We expect our non-GAAP tax rate to be 21%. [ph] We expect cash taxes to be approximately $80 million. 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.

Now I'll hand the call back over to Peter to begin the Q&A.

Peter Salkowski

Thank you, Keith.

As a reminder, during the Q&A session, we ask that you please limit yourself to one question and others to participate, we've got a fairly large queue today.

So I'd like to get through everybody at least once. Towanda, please open the call for questions.

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Rob Owens with Piper Sandler.

Your line is open.

Rob Owens

Great. And thank you for taking my question. With one of other verticals in the media, seeing issues with chip shortages and some supply chain issues, is that sort of sneak into the security market relative to firewall point shipments. And can you talk a little bit about your potential exposure? Thanks.

Keith Jensen

Well, 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 the inventory balances that we carry, a two times inventory turns, you're looking at basically six 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 points 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.

Rob Owens

Thanks, Keith.

Operator

Thank you.

Our next question comes from the line of Brian Essex with Goldman Sachs.

Your line is open.

Brian Essex

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. May 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 5G and IoT yet. Who are the buyers there? How do you anticipate that segment will play out through the rest of the year as you look your way through the remainder of the year?

Ken Xie

Yes. Carrier on this a lot of service provider starting to now reshaping their – security network offer whether it's 5G, SD-WAN, all of the SASE and also supporting work from home kind of still in the early stage, I put in this way.

So that's where we working very closely with all the service provider like the VG [ph] we announced today, the AT&T we announced last month and pretty much all the service provider to support and then all these shifting of the business model. And I say it's still early stage. 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 one is tend to be like a high 20, like if you go back four, six years ago, but it's a – because it's a new kind of shifting, so they are – they do have some work to do and also some big investment we see going forward.

So we're working together with them to keep growing this business right now.

Brian Essex

Got it. Very helpful. Thank you.

Ken Xie

Thank you.

Operator

Thank you.

Our next question comes from the line of Jonathan Ho with William Blair.

Your line is open.

Jonathan Ho

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 SASE and ZTNA oriented products. And are you seeing that pipeline sort of continued to rise especially as we look at sort of replacements for the traditional VPN connections and other sort of more legacy technologies? Thank you.

Ken Xie

Yes, that is the new fast growing market, but also they probably replace some of the traditional approach, but some other traditional approach also expand inside campus, inside – and probably inside the data center, so that go through the internal segmentation. On other side, we do believe we entered the SASE zero trust network like we said few years ago it's the best position probably saw the service provider carrier.

So we tend to be more working with them, partner with them and also offer kind of more tighter integrated solution like we said in the FortiOS7.0 is very integrate OS network inside of some different vendor using different box, so you can kind of look at different inputs factors to that.

So that's actually working much better with a wider service provider with customer directly.

So that's where we do see there are some fast growing going forward, but it's just part of the whole infrastructure solution will now replace the traditional approach, but also the whole thing’s security is smarter than that dynamic space, there is a new team come up and also the – that alternatives also not goes away.

So that's where we try to address is a new chain and same time keeping at hands the traditional solution and to supporting the customer in all different vertical different region.

Jonathan Ho

Thank you.

Operator

Thank you.

Our next question comes from the line of Ben Bollin with Cleveland Research.

Your line is open.

Ben Bollin

Good evening, Ken, Peter – Keith, Peter. Thanks for taking the question. 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 to 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.

Ken Xie

The customer doesn't view security, become more and more important, but also they need to cover much broad infrastructure and all edges instead of as a traditional secure whatever the border or the data in other 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 a change into the whole infrastructure approach and also working together with traditionally negative from vendor cover, whether now working on end point as a mother part of a security.

Now they're looking for some consolidation and they prefer, when they have multiple cover of 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 and almost pretty much every quarter double the growth compared to the traditional network security. But now what they created, we also see more healthy growth and it’s really not as expanding beyond the traditional border security approach, but also because the ASIC advantage, which increased the secure computing power 5 to 10 times compared to that the other vendors software loaded on the traditional CPU.

So that’s able to add a more function and also kind of increase performance, lower the cost, and also a low car park assumption, more green.

So that that’s actually making that this like the product worlds like we say that keeping us, keeping to better and better. And that we do see this whole infrastructure approach will keeping going for the next, probably a few quarters even to a few years. And the consolidation will keeping going within the industry.

Keith Jensen

Yes, then I would just 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 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 in how we see it with new logos and expansion opportunities, we easily add several thousand new customers every quarter. But if you look at the mix of billings, the mix of billings is going to come from our installed base of customers, if you will. And I think the simple model we’ll look at is, from that initial sale of perhaps a firewall or something else. There’s two different ways to expand. One is finding more and more use cases inside organizations for firewalls and increasingly displacement opportunities. And then the second is, and this is where Ken was going is the expansion opportunity where those non-FortiGate fabric partner products. And we’re seeing there with that that mix shift from FortiGate to non-FortiGate, and now being 30% of our business, 31% of our business.

I think it’s taking as one affirmation of the strategy and two, you’re seeing it in the numbers.

Ben Bollin

Thank you.

Operator

Thank you.

Our next question comes from the line of Tal Liani with Bank of America.

Your line is open.

Tal Liani

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 a 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 year. 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.

Ken Xie

I can take the first part, maybe Keith got second half. I don’t see any slowdown even for the FortiGate side. It is – we’re keeping gain in market share, like I said because there’s a fundamental like a technology architecture difference with 5 to 10 times the computing power compared to our competitor we can easily add a function performance and even for work-from-home is more like a one single with the box and replace like a three, four different box on an helping that security side, like of these apart, and also like manage home Wi-Fi and the traffic there.

So that’s also lot of company also starting to this kind of expand the branch to the home called home branch or whatever to meet working standard like a better networking, reliability, security to the whole environment.

So that’s also need to be the solution. That’s also lot of the reason we see some of the low asset and keeping grow pretty fast. It’s a look for a home actually helping driving some of this point of your sales. But also going forward whether the service provider some other after say most enterprise, not even kind of a change might after infrastructure to adapt is more work-from-home yet. They are still in the early stage.

So we do see there’s a big potential going forward. Yes, that’s all, Keith.

Keith Jensen

Yes. Well, it’s a little tough for me to look back at the second quarter of last year and where their billings growth was and the product revenue grew up and things that I was getting. I didn’t feel like I was getting a tailwind from VPN or something like that in the second quarter of last year. That said I think we’re very pleased with how the year continued to play out and in 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 to the same level of 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 and the non-FortiGate products and try and find the one that's really distinguishing itself. And we keep coming to the same conclusion each quarter. It's a rising tide lifting all boats. If not that any one product is really standing out more so than the other over an extended period of time.

Ken Xie

Yeah, it's really because most of the part that we develop internally from day one, it's making integrate operate together.

So that's probably the key number one reason, customer want to buy is – we tried to consolidate, make it easier to manage. It's different than some other company when they acquire some part of our company from outside is that take a long time and more difficult to integrate.

So we have internally developed from day one. We've been making working together.

Tal Liani

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?

Ken Xie

I see what I think the part of FortiGate.

Tal Liani

Got it. Yes.

Ken Xie

So we don’t comment on non-FortiGate, but is we have like 20, 30 given product, touch all part of the infrastructure and the key said is difficult to point out which one is ready. Yes, it’s a [indiscernible] I read the whole thing.

Tal Liani

Got it. Thank you.

Operator

Thank you.

Our next question comes from the line of Sterling Auty with JPMorgan.

Your line is open.

Sterling Auty

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.?

Ken Xie

I think similar like we comment in the last couple of quarters, it's a photo there like pandemic, once is starting get improving, also try to think about how to go back [indiscernible] mother.

You mentioned infrastructure since we'll be studying across.

So that's where like APAC [indiscernible] it'd be faster by U.S. catch up however quickly.

Keith Jensen

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'll have the number one market share when the incumbent and particularly during the pandemic, I think incumbents have 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 CTOs were focused on firewall refreshes in the second quarter and third quarter of last year and going through a competitive dynamics. And I think there's also a bit of the partner ecosystem. When you're the incumbent, you probably have more mind share with the partners. Then when you do with the challengers.

Now, having said all that as we look forward, and we look at our pipeline, particularly in relation to the United States, as we go to the end of the second quarter here through the rest of the year.

I think we're feeling very good about the direction of that organization is headed.

Ken Xie

Yes, we also will keeping your mass more into the U.S. for supporting further growth like we did for the PGA sponsorship and some things I think will be helping drive the growth in the U.S.

Sterling Auty

Got it. Thank you.

Operator

Thank you.

Our next question comes from the line of Gray Powell with BTIG.

Your line is open.

Gray Powell

Okay, great. Thanks for taking my question and congratulations on the good numbers.

So, yeah, maybe to follow up on the SASE side of the business. How quickly should we think of billings growth ramping under 40 SASE product, and then I don't want to get too aggressive, but could it potentially have a similar ramp to what you saw in 2018 and 2019 with SD-WAN back when that product was just getting started? Just how should we think about – just the overall upsell there. Thanks.

Ken Xie

I also, I can say a little bit similar question.

We also kind of look 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 it's – but also SD-WAN is a part of the – part of a SASE solution and also SASE including some other function there, which we also want to have a like a better integration and better performance and that you need to manage.

So that's where we take some time to launch our SASE and also more closely working with partner to do that. But it's a – the market definitely growing, but we also closely watching and what's the best way to position ourselves to catch the trend.

Gray Powell

Okay. Thank you very much.

Ken Xie

Thank you.

Operator

Thank you.

Our next question comes from the line of Shaul Eyal with Cowen .

Your line is open.

Shaul Eyal

Thank you. Good afternoon, gentlemen, congrats on a strong performance. Keith or Ken historically the refresh cycle concert used to provide some disruption at times. I would even say some noise around specifically for in its 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 or is that there's so many concurrent internal refresh cycle given the broadening of your platform, that it is becoming less of a relevant issue? What's the thinking about it?

Ken Xie

I probably hesitate to use some upper refresh compared to last time, you can see that 2012, 2013. And that's where it's the major firewall replacing the traditional firewall VPN, which was [indiscernible] firewall has them intrusion prevention, and anti-virus all the other functions. They're a proxy. But this time it's expanding into a much broader, bigger infrastructure both internal inside the company, and also go to the outside company that one side even expand work from home.

So it's more kind of expanding and same kind of different part of security also need to be more working together.

So that's from company IT side, they look – if they can consolidate and help them to manage and integrate, automate will be more important.

So that's where like I said, there's a multi-wise, more people connected and like a [indiscernible] it's a little bit different and that's where making – make a large, broad integrated approach, I feel is more important and same kind of supporting that than you technology that what are five GSP when, and also kind of, they be service model also would be, would be important, but we also feel once the product at, in the customer hand because the huge computing power to liquidity, we can also be add additional servers and keeping helping customers adopt the nuisance they need, and also be a service provider.

So that that's also kind of keeping that the biggest – keeping growing in general.

Keith Jensen

I think you and Ken are kind of touching on same thing with, even in reference to, I would say it this way, it's going to get harder and harder.

I think to discern industry refresh cycles, it compared to where it was maybe five or six, seven years ago for a number of reasons. One, the firewall vendors are simply larger. Their footprint is much, much bigger than it was before.

Secondly, you have some of us sort of showing success on 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 as the footprint in terms of customers, but also the number of different used cases that are starting to evolve and continue to evolve inside those organizations.

I think all that comes together, it's going to get murkier and murkier ready to go forward, to find a refresh cycle.

You may have some individual competitors that maybe have very, very large price points or machines or something like that, where they have their own internal refresh cycle that you may see some noise around, but that's really not the Florida approach for firewall refreshes.

Ken Xie

The traditional firewall all the way they are rarely being deployed. It's not going away. They also kind of, every five years probably need to be updated to the new motto to match and that working speed as a modern one, but they also expanding beyond that one and also need to be walking, not out of a security infrastructure, putting this way.

Shaul Eyal

Understood. Thank you so much. Well done.

Ken Xie

Yeah. Thank you.

Operator

Thank you.

Our next question comes from Adam Tindle with Raymond. James.

Your line is open.

Adam Tindle

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 high 20s at a scale approaching $1 billion 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 would consider reevaluating as the year progresses? Thank you.

Keith Jensen

Yes, Adam, it sounds like you are listening in to some of the conversations that Ken and I have with our respective point of view, I think.

I think we're really pleased with how the business executed in the first quarter, putting up 27% billings growth and being 11 to 12 points above, and then raising the 22%, 3.5 points on the billings line for the year, probably for the quarter and then taking the year up at the same time by about four points, I think, the level of execution is shown to be very, very high. And the level of success with the firewalls and the Non-FortiGate products have been – we’re 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 at 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.

Adam Tindle

Thank you. That's fair enough. I'd love to be a fly on the wall for those conversations.

Operator

Thank you.

Our next question comes from the line of Andrew Nowinski with D.A. Davidson.

Your line is open.

Andrew Nowinski

Great. Thank you. And congrats on another great quarter. I want to ask about the partnerships with some of the MSPs that you mentioned AT&T and BT. Those have been historically strong partnerships for Zscaler.

So, I'm wondering do you think you are eating into these Zscaler’s mind share at those partners or are they just trying to offer their customers maybe another SASE offering?

Ken Xie

Let us say, in the last few years for some point we used Zscaler as one of the service providers could be partnered. But also, some of the telecom companies, 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, once, especially during the pandemic, IT has been in a high pressure to supporting whether internal or some other need being interesting. That’s where SASE offers sort of more service-based approach which also kind of adopt based on [indiscernible] service provider quickly.

So that's where we also leverage all kinds of relation with the partner and also our product technology, and vendors and offer much tighter, integrated SASE across network solution.

Some bigger telecom partner they like it a lot, I put in this way.

So that's why we're continuing to work with them.

So I do believe the business in the carrier service provider, when we go back to the number one like a few years ago, the high 20 that also have to work in closely with a partner and also some other infrastructure, a new infrastructure, I can mention whether the SD-WAN and the 5G or some other mode of IoT OT or even may be SIPG, or some other thing.

I think there's a lot of potential which will result, how can a service provider do keep expanding the security business together.

Andrew Nowinski

Yes, it sounds good. Thanks a lot, Ken.

Operator

Thank you.

Our next question comes from the line of Irvin Liu with Evercore.

Your line is open.

Irvin Liu

Ken congrats on the great quarter.

You previously identified, continued expansion into large enterprise as a key contributor to growth in 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, S&D customers, for example, the go-to-market motion and/or timetable required to close a deal? So, any color here, will be helpful. Thanks.

Ken Xie

Yes, I think we try to give a little bit of color on that in the script, and I've used the term before that the growth being bookend if you will. Through the pandemic, you have quarters where SMB did well. And I think we provided some metrics there about large deals, deals over $1 million, 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. And we 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, et cetera. And in those channel partners oftentimes, particularly 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 than 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 with that strategy. And I think we're starting to see that track and take hold for us.

Irvin Liu

Got it. Thank you.

Operator

Thank you.

Our next question comes from the line of Fatima Boolani with UBS.

Your line is open

Fatima Boolani

Good afternoon. And thank you for taking the 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/SASE going to come from between the carrier market, as well as the enterprise DIY market?

Keith Jensen

Yes, I think – hi Fatima, nice to hear from you again.

I think in terms of SD-WAN, the way we go to our budget and we would describe SD-WAN as you heard us before, SD-WAN is a use case for the firewalls, similar to OT micro-segmentation, zero trust, et cetera. And we're not necessarily prone to building our models, if you will, by used cases for the firewalls, nor similarly necessarily by products. We do look at our pipeline and we do sanity check against Gardner 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 to be 5% of billings. And we got there and he moved it to 10%. And we got there and now he has moved it to 15%.

So, it's a little bit of movement cheese, I guess for Ken, in terms of setting goals for us. But that's fine. We like that. And I think you really kind of answered your own question in terms of growth investments. Where we would spend money, I think, that carrier service provider opportunities for both SD-WAN and SASE are key areas for those investments. But I'll hand it back to Ken.

Ken Xie

Yes, I do believe SD-WAN 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 lot of enterprise had to do a lot of service provide [indiscernible], still where small percentage were early stage to using the SD-WAN.

So that's where – and also, we have huge advantage using our SoC4 chip to supporting this like one-box solution which has about 20 times better performance and a much lower cost compared to the second nearest competitor.

So that's where is there 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 are also trying to be the number one soon.

Operator

Thank you.

Our next question comes from the line of Hamza Fodderwala with Morgan Stanley.

Your line is open.

Hamza Fodderwala

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 used cases around micro-segmentation, particularly given some of these recent cyberattacks?

Ken Xie

We do have a lot of asking about how to secure internally whether within ourselves and company are obviously in the data center. But I have to say security still need a maximum company in power to process the traffic compared to large solution. My estimate probably usually it’s 3,000 5,000 ton more company power needed. That's where so if we cannot solve that speed issue was a major other kind of a managed deployment, you show is still more difficult. That's also the AC takes more advantage may be five to ten times better performance computing power and then pass lower than other software-only approach.

So, it's a lot of requests, but I have to say, it's not many solutions can need summer requests, because internal, whether with in 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 where we are working with the customer or the partner directly. And also combined both the WAN security, and the LAN security and the whole infrastructure security is more important. But with today work-from-home with the Zero-Trust Network Access you have to be, make the whole infrastructure secure.

So, I see a huge market potential for the internal segmentation inside data center of campus security, but it’s also a challenging job to meet a speed requirement, compared networking and also make sure it can easily be deployed and easily managed.

Hamza Fodderwala

Thank you for the color.

Ken Xie

Thank you.

Operator

Thank you.

Our next question comes from the line of Saket Kalia with Barclays.

Your line is open.

Saket Kalia

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 Non-FortiGate part of the business, perhaps more weighted towards the mid-market or perhaps international? And relatedly, just kind of broad brush is how is that Non-FortiGate business sort of split between products and services? Sorry, there's a lot there. Does that make sense?

Keith Jensen

Yes, there is a lot there. And answering no from me makes sense. How is that? Look I don't think the product service mix between – we would look about this and talking 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 cell. To see the Non-FortiGate billings, growth at that 50% number and seeing that the mix of the business, I think, obviously makes us very excited. It's actually a little bit counter-intuitive in terms of where itself.

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 that want to know much more about the Fabric.

Now that they've become comfortable with the firewall. I probably went into those conversations socket with much of the same expectation that you perhaps described, which is, that may be something that plays more to the SMB part of the business side of big enterprise. And I do think it does. I do think the enterprise willingness and in the U.S. you see the enterprise willingness to engage on the Fabric was probably a sign of a number of things. One is, at the end of the day, everybody has got a budget and this is a 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 running on it or being integrated to OS/7 is something that's very exciting. And 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 is not shown to be unique to a size of customer or to a geography.

Saket Kalia

That makes sense. Thanks, Keith.

Operator

Thank you.

Our net question comes from the line of Keith Bachman with Bank of Montreal.

Your line is open.

Keith Bachman

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 sub parts.

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? b) Keith, is there anything you could breakout 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 had to partition the non-FortiGate into cloud and non-cloud in other words, there's a lot of, I think, FortiGate products that are relevant to on-premise situations versus cloud, but there's a way to just kind of break it out in percentage dollar wise, 50% of it's 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.

Ken Xie

Yes, charging by the question, I think, I am going to look forward to you.

Keith Jensen

Then I'm broke.

I think there was – I'm going to lead that the tough question or the fun question for Ken at the end which is, if you look out over 12 months, what's going to take off in non-FortiGate. Keith, I would probably point you back to if we didn't do it in Analyst Day in March, we didn't do it in the Analyst Day in November 19, where we gave some breakdown of the Fabric products between what we call cloud and what we call infrastructure. And you can think of that as being hardware to me help answer your question there.

I think when you use the term attach rate, we may use the term penetration rate.

Keith Bachman

Yes.

Keith Jensen

And by that is, for a customer that's a firewall vendor, how many – or 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. And I think that's really at the moment more of 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.

Ken Xie

Yes, great.

I think also I probably not go to detail outside of number so far the non-FortiGate almost doubled FortiGate world in the last few years or so. I don't see any changing of the trend right now. But definitely from customer end goal it’s a – they also asked what's the reason they really need to be more consolidate, make the whole infrastructure managers working together, all this kind of things, which are working quite well with us because we design the product. [Indiscernible] we are working 40 gig from day one. And then making a whole fabric working together to integrate, automate, all the security solution there.

So that's where the – but also we see there's still small percentage customer has [indiscernible] to grow and the same time there's a new productivity coming up to working with 40 gig.

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, maybe more than 40 gig, maybe in a few years.

Keith Bachman

Okay. Thank you.

Operator

Thank you.

Our next question comes from the line of Michael Turits with KeyBanc.

Your line is open.

Michael Turits

Hey guys.

For Ken and Keith do you see any difference in the type of projects, in security that you were seeing last year, primarily for the move to work-from-home versus this year, or we've worked 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, some more willingness to do firewall replacements this year. Is that also a part of it?

Ken Xie

Yes, last year work-from-home is more like a patch, whatever they have. And without changing much of infrastructure this is definitely thinking, redesigning infrastructure where to leverage make a better technology like SD-WAN or some other, and at the same time making kind of a better solution in a zero-trust environment that’s much more secure.

So that's probably – but still in the early stage. We do see a lot of our gross potential there. But it's whole infrastructure changing compared to kind of last year, quicker like a patch solution.

Keith Jensen

Yes, Michael, I would add to Ken's comments.

I think the headline is whether the tailwinds coming to your security is top of mind for so many companies right now, so many CIOs and SIOs and whether that's solo wins, or it's work-from-home it was Microsoft, a little challenge is to ramp up a ransomware. It's just – it's a year, I think, that a lot of CIOs and SIOs are focused on security for a lot of different reasons. I do think that there was – 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 a year to get mind share from CIOs and SIOs to have a conversation about how you can save money while improving performance in their firewall.

I 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 can 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 are coming back online as we look at 2021.

Michael Turits

So just to clarify, larger deployments are starting to come back online.

And so is that the answer that people are more willing to talk about displacements of competitors this year than last year?

Keith Jensen

Is it the answer to which – are you asking if I'm seeing that the answer is yes, or you’re asking if that's the driver of the business, I would say yes; if you're asking if that's be driver of the business, I don't think so.

Michael Turits

No, just if you see more.

Keith Jensen

Yes.

Ken Xie

Yes, there are more spend beyond the traditional deployment. And also like a more device, multiple and more infrastructure need to be secure.

Michael Turits

Thanks guys.

Operator

Thank you.

Our final question comes from the line of Patrick Colville with Deutsche Bank.

Your line is open.

Patrick Colville

Thanks for squeezing me. Can I just kind of just finish it off on a multi-part? I guess the first one would be just about linearity. Last year, the linearity between one and two is a 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, there's a kind of the rest of the year is more like a kind of mid-teens growth rates.

Just to help us understand, is anything that is worth flagging in regards to the kind of performance in the rest of the year versus 1Q? Thank you.

Keith Jensen

Yes, I think that, if you get comfortable with the business model, you understand the product and services and how very predictable that higher margin services revenue is.

I think that we did take this as the opportunity to raise product revenue. We implied product revenue guidance, if you will, when you reverse engineer after we give the service revenue guidance by about five 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 probably 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.

Patrick Colville

That's very clear. Thanks for your time.

Operator

Thank you. I will now like to turn the call back over to Peter for closing remarks.

Peter Salkowski

Thank you, Rowanda. I like to thank everyone for joining the call today.

Fortinet will be attending a few conferences in the second quarter, we have the J.P. Morgan Conference on May 25, Alliancebernstein on June 2, and Bank of America is June 8. Presentations and webcasts links are up on our website. Thank you very much. Have a great day. And please reach out if you have any other questions. Have a great day. Thank you. Bye-bye.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

You may now disconnect.