Fortinet Inc (FTNT) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Fortinet Q1, 2011 Earnings Announcement Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder this conference call is being recorded.

I would now like to turn the conference over to your host, Ken Goldman, CFO.

Great and thank you. So good afternoon and thanks all for joining us in this conference call to discuss Fortinet's financial and operating results for the first quarter of 2011. Joining me today are Ken Xie, Founder, President and CEO of Fortinet, and Michelle Spolver, our Vice President of Corporate Communications.

We do have a lot to cover today so I will go through the beginning part relatively quickly in terms of the disclaimer. In terms of the structure, I will begin with a review of the operating results before turning the call over to Ken to provide additional perspectives on the performance of our business. I will then conclude with some thoughts on the outlook for the second quarter and full year '011 before we open the call for questions.

As a reminder, we are holding two calls today. Following this call we will hold a second conference call to provide an opportunity for financial analyst to ask more detailed financial questions. The second call will begin at three-thirty PM Pacific time. It will also be webcast from our Investor Relations' website and is accessible as details of our earnings release.

Before I begin let me read this disclaimer, the Safe Harbor Statement. Please note some of the comments we make today are forward-looking statements including those regarding our financial guidance for second quarter and full year 2011, the impact of currency exchange rates, the momentum of our business, ability to execute and drive growth in coming quarters, ability to continue to gain market share and capture demand from network security solutions worldwide, the impact of regional instability and geographic diversification of our business, the adoption and expansion of the UTM and other security solutions across certain verticals and geographies, momentum with large customers, service providers in high-end deals, our expectation regarding renewal rates, expected growth in our products and service revenues, trends in a global UTM market, trends in our human resources investments, particularly in our sales organization, and the impact from the new FASB revenue recognition rules.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our SEC filings and particularly risk factors as described in our Form 10-K for more information on these risks and uncertainties and on the limitations that apply to our forward-looking statements. Copies of these, of course, can be obtained from the SEC or by visiting Investor Relations section of our website.

All forward-looking statements reflect our opinions only as the date of this presentation and we undertake no obligations to specifically disclaim any obligation to revise a public release results of any revision of these forward-looking statements in light of new information of future events.

Please note we will be discussing certain non-GAAP financial measures on this call. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release in our slides 14/15 of the press page that accompanies today's prepared remarks. Please refer to our website at http\\investor.fortinet.com for important information including our earnings press release issued a few minutes ago, the slides that accompany today's prepared remarks. Replay of this call will also be available on our website. Note that we routinely post important information on our Investor Relations website and we encourage you to make use of that resource.

So, relative to the first quarter, it was a very solid quarter. We exceeded expectations in all of our key financial metrics. It represents a great start to the year and momentum increased as the quarter unfolded and we feel very well positioned for the year, as we can tell right now.

I'll dive into financials in a minute but I did want to bring out for full transparency let me start by discussing two factors that did impact our overall GAAP numbers, which are important to consider when thinking about counting treatment in regards to GAAP/non-GAAP operating results.

The adoption -- first, the adoption of new FASB revenue recognition rules, the main difference we are now able to recognize a portion of revenues from China in demo units as up firm product revenue upon shipment. Up until now we did not have VSOE. That's revenues recognize ratably. Under the new rules we're able to use what they call BESP, our best estimated selling price, where we do not have VSOE. This change further aligns our financial results to free cash flow.

For clarity and transparency the switch from the old to the new revenue recognition rules modestly impacted our results as follows; had no effect on billings, increased revenues by $3.3 million, increased non-GAAP operating income by $2.4 million and operating margin by approximately 2% and increased non-GAAP EPS by $0.02.

Item two, patent settlements; we received a lump sum of $3 million in cash up front with another $3 million to be received quarterly over a three-year period. The [price] expense is being amortized over the corresponding three-year period for GAAP purposes. These amounts are pro forma'd on the income statement in free cash flow.

So, relative Q1, let me refer you to slide number three. Billings increased 34% year-over-year to $106.7 million. Again, no impact on the new revenue rec. rules on billings. Revenues grew 34% as well year-to-year to $93.3 million and were actually comparable to Q4.

Non-GAAP operating margin was 21%. Non-GAAP EPS was $0.17 and the free cash flow was $36.5 million. We achieved stronger, strong and better than expected growth in billings and revenues as a result of investments we've been making on sales infrastructures in the past few quarters, especially expansion of our America sales force and build out of our vertical focus sales team in the U.S., continued market share gains, healthy demand trends in the UTM in overall network security markets.

If I'd now turn to profitability, non-GAAP operating margin was 21%, which is well above our guidance range and well above a 13% reported in the same period last year. Again, I think it's really a great improvement, if you will, in success relative to 13% in Q1 of last year. At the same time we increased investments in our sales and R&D teams during the first quarter, which are consistent with the plans we have been discussing consistently and for example, sales headcount was up 31 and R&D headcount was up 12.

Relative free cash flow at $36.5 million, that was up 75% year-over-year. It does exclude, as I said, the $3 million received from the patent settlement. Cash flow continues to reflect strength in our billings, profitability and working capital management and just for interest if you take the $36.5 million and divide it by shares outstanding you'd get around $0.45 per share.

Our results this quarter were driven by strong performance across most geographies, despite facing certain global macro challenges we're all familiar with. Let me first talk about the Americas.

We had exceptional growth across all the Americas, increase in the billings of 64% year-over-year, experienced strong performance in Canada and the U.S., particularly in the enterprise and service provider segments. We had a breakout quarter, growth quarter, in Latin America where our recently expanded team is now jelling nicely. We continue to see great traction among large enterprises who are increasingly consolidating their security infrastructures. Momentum is building in the healthcare vertical where we closed several large deals this quarter. The retail sector remains strong driven by PCI compliance regulations.

Turning to EMEA, we had solid billings growth of 18% year-over-year. We also believe growth would have been somewhat higher if not for the political unrest in the Middle East, which generally is an excellent market for us. Government vertical in EMEA turned in a solid performance and, as you know, we do have very pronounced seasonality in EMEA.

In terms of Asia Pacific, where Ken just returned, we had good overall performance. Billings increased 18% year-over-year. We had great out performance from Southeast Asia and Korea. Japan earthquake had a mild impact in overall billings and to put this in perspective, Japan has historically counted for approximately one-third of APAC business for us, which translates to the high single-digit range as a percentage of total billings and Japan billings were approximately flattish year-over-year and a reminder that Japan Q1 is the fiscal year end in Japan.

In terms of geographic diversification, it is one of the underlying strengths of our business model and it has allowed us to exceed our targets to fight some of the just mentioned challenges during this quarter.

Let me now turn to the income statement. First, looking at billings, billings were $106.7 million, an increase of $27.3 million or 34% compared to the same period last year and above our guidance range of $95 million to $100 million.

Geographic breakdown of billings growth, Americas, as I noted, was up 64%, EMEA 18% and APAC 18% compared to Q1 of the prior year.

In terms of product segmentation, and you can see this in slide four, we saw sustained momentum in high-end deals, which accounted for 37% of product billings compared to 27% in Q1 of last year and about 34% for all of fiscal year 2010 due to strong performance by service provider and enterprise segments as well as several new introduced products.

In terms of deal size, the number of deals over $100,000 for the first quarter is 111 and that compares to 84 in Q1 of last year. Number of deals over $250,000 was 34 compared to 22 for Q1 of last year. Number of deals over $500,000 was 18 and that compares to 8 in Q1 and actually was even higher than what we saw in Q4 so that's in Q1 we saw a significant up tick in the volume of large enterprise deals greater than $500,000 surpassing Q4.

Let me now turn to revenue. Total revenue is $93.3 million, up 34% year-to-year. As I noted, that includes $3.3 million due to the adoption of new revenue rec. rules. Even without the accounting change, we still handily exceeded the high end of our guidance range of $85 million to $87 million. As I mentioned, expanding and enhancing our sales teams and increased focus on key verticals in emerging markets are driving growth and resulting in key wins. Recently announced products such as our FortiGate, 3040B, FortiGate 3140B and 48AP WiFi appliances are reinforcing our competitive edge in driving market share gains.

The overall spending in the global UTM market continues to improve. The most recent IDC data shows that the UTM market grew 13% approximately 2010 over 2009 and our results show that that type of momentum has continued into 2011 and effectively our growth is more than double the overall market growth.

On charts, slides five and six, I show the geographic split of revenue and you can see business continues to be globally diversified, which remains and has been a long standing important aspect of our business model and it's certainly, as you can tell from the quarter, helps mitigate the negative impact one geographic region, a sub-region may have on our results. And we use the billed to address in terms of the geographic split of revenue.

So, turning to revenue by geography, the Americas saw $35.6 million versus $23.8 million the prior year, increasing 50% year-over-year driven by strong performance and contribution across the America's region, but over achievement in U.S., Canada and Latin America, especially Brazil and Mexico. We had great momentum and anticipate continued build presence in these markets. We saw continued success in service provider and further penetration of large enterprises.

The healthcare and financial services verticals are gaining traction and retail remains strong. Key wins in these regions included; in the U.S. we secured a net new win with a name brand enterprise consumer good supplier, who will be using our FortiGate UTM appliance to protect this remote site in corporate gateway as well as secure and control usage of Internet appliances on its network. We won this deal over Checkpoint, who was the incumbent security provider.

In Canada we won a large deal with a health service provider that serves 3.5 million people in a large Canadian province. Our FortiGate 5140 appliances were deployed in four days tasked to provide protection for 88,000 employees. We consolidated the customer's previous 14 dip in security gateways into two. During the first quarter we completed the first of three phases and expect to benefit from this rollout in the coming quarters. We competed against Checkpoint, Juniper and Cisco and won due the visibility and control provided by UTM solutions.

In Latin America, [Nova Win] was with one of the leading telecommunication providers in the world who has significant presence of our operations in Brazil. This customer needed to offer EMEA's firewall, IPS, the web content filter to one of its most important customers and selected Fortinet for our exceptional performance and ability to meet all the needs of this project with a unified solution. We beat out Juniper, Cisco, McAfee and Sourcefire.

Let me now turn to EMEA. EMEA had $33.6 million in revenues versus $27.1 million the prior year representing a year-over-year increase of 24%. Overall, demand in EMEA remains solid and we continue to gain traction with large enterprises seeking to gain consolidated security and service providers securing their own networks and delivering managed security services to their customers.

We experienced strong performance in Italy and Germany with the instability in the Middle East resulting in somewhat weaker demand in that region. Government sector was strong in EMEA contributing to several significant wins, including one with a government agency who will be using our FortiGate 5000 series products to protect multicast of video streaming traffic passing from a very large deployment of outdoor cameras. Fortinet won this deal based on outstanding performance, as we were the only vendor who can handle the large amount of encrypted traffic with low latency. It turns out we're well positioned for several of these kinds of opportunities.

In terms of Asia Pacific, we saw $24.0 million revenue versus $18.9 million the prior year, increasing 27% year-over-year. Outside of Japan, trends in APAC was solid with strong performance from Southeast Asia, like for example Philippians and Indonesia as well as Korea.

The earthquake in Japan modestly impacted the results in the quarter, where revenues in Japan remain flat, as I noted, compared to the prior year.

One key win in Asia was with a leading mobile telecommunication provider in Korea who required high speed, carrier class security to protect day traffic on its 3G, 4G network, which is growing at a fast rate to the continued doctrine of smart phones and mobile devices. We won this deal the incumbent based upon the security scalability and performance of our high-end FortiGate UTM appliances.

In terms of product revenue, product revenue is $40.2 million, up 48% year-over-year, and you can see this in slide seven for the revenue breakdown between products and services. Product revenue growth would have been 36% without the change to revenue recognition of rules. We experienced growth across the major product segments, especially the high end with sales of our recently introduced enterprise products such as the FortiGate 1240B, 3040B and 3950. This was primarily driven by the large increase in enterprise deals, particularly in the Americas.

Other new products, such as the FortiGate P-22B WiFi appliances also were favorably received by customers and contributed to wins during this quarter. And, as I said, the product revenue includes a $3.3 million due to the accounting change.

Services and revenues of $48.7 million were up 26% compared to $38.6 million a year ago. The combination of longer-term deals to large enterprises and strong renewals continues to improve the visibility in this business. We expect our service revenues to increase over time due to our growing installed base of customers, which drives the increase in our deferred revenue balance. It's really it creates a nice annuity business.

In terms of renewal rates, we continued at the peak rate of Q4 at the mid-70% range, which by the way were up markedly year-over-year. We do see, however, higher renewal rates from our top 25 accounts in the Americas and EMEA, which are in the 80% plus range; whereas Q1 was somewhat impacted by the earthquakes in Japan that delayed some renewals in Japan until Q2.

Our renewal rates are close to what we think is optimal or optimal. Certain customers will upgrade or re-architect their appointed environment over every few years, which we consider a new sale versus a renewal.

In terms of ratable products and services, $4.4 million which is an increase of 0.49% year-over-year, down sequentially. I want to make a comment that this will continue to decline due to our new revenue recognition rules, as we work off this segment of our deferred revenue balance.

In terms of revenue quality, DSOs were 69 days compared to 66 days the prior year and within our overall target of 65 to 75 days and are ready to continue is excellent.

Deferred revenue balance increased to $266 million, up $54.5 million year-over-year by 26% and $13.4 million or 5% versus the fourth quarter.

On headcount, slide eight, you'll see we ended with 1, 389 employees compared to 1,336 in Q4 and 1,246 in 1Q of the prior year. Our hire rate has picked up this past quarter following a ramp in our recruiting efforts over the past few months, as we've been discussing, particularly in sales and more recently in R&D. More steady flow of qualified sales and potential candidates we expect this pace of hiring to continue in the coming quarters. Hiring has been strong in the early part of this quarter.

We continue to grow our headcount on a global basis with approximately 77% of our employees located outside of the U.S. Functionally sales and marketing and R&D account for approximately one-third each although sales headcount is somewhat ahead of R&D now and sales headcount is well balanced across the three main geographies.

Service and support account for approximately 21% with G&A 8% and operations at 2%. In terms of annualized revenue per employee we achieved $274,000 in the first quarter, up 21% from $226,000 in the first quarter last year and really what's occurred here is we grew billings by 34%, grew revenue by 34% and only increased headcount by 11%.

Turning to some of the other ratios on the income statement, our non-GAAP gross margin was 75%, which is above 73% in Q1 of last year but comparable to Q4. Non-GAAP product gross margin was 65% for Q1, which compares to 58% in Q1 of last year.

Sales of our high end products continue to positively impact product margins as they heavily weight mix of high-end sales enterprises had a greater impact of product margins than some of the prior quarters.

Non-GAAP service growth margin was 84%, which is consistent and effectively we expect a non-GAAP gross margin to remain within our target range. In terms of non-GAAP operating expenses, they were $50 million this quarter up 20% year-over-year, which compared to the revenue increase of 34%.

I would note the expenses were up 8% sequentially, which was consistent with our plan and includes such factors as we had our annual merit increase this quarter; we see an increase in vacation accruals due to effectively low Q1 usage, an increase in many U.S. payroll taxes due to the reinstatement. We have 401K and Canadian employer contributions that we now have and we incurred an unfavorable currency impact and of all these factors the one that has the most impact going forward, which I'll discuss, is the FX situation.

As the percentage of revenues total non-GAAP operating expenses during Q1 were 54%, which compares to the 60% for the same period last year, but it was up from 49% during the fourth quarter 2010 due to the above factors.

In terms of non-GAAP R&D expense up 23% year-over-year to $14 million as a percentage of revenues non-GAAP R&D was 15% compared to 16% for Q1 and 13% for Q4 of last year and that's within our range and what is impacting somewhat is the weakened U.S. dollar against the Canadian dollar given our heavy emphasis in Vancouver. We are seeing accelerated hiring in our R&D area, however.

Non-GAAP sales and marketing increased 19% to $30.8 million and as a percentage to revenues during the first quarter new expenses were 33% compared to 37% in the prior year so we are seeing positive leverage in our sales and marketing.

In terms of non-GAAP general administrative expense increased 15% year-over-year to $5.2 million. The change of [averaging] 1Q non-GAAP G&A was 6% compared to 7% in the prior year was seeing even better operating leverage here. This does, by the way, exclude the favorable impact in patent settlement of about $500,000 as we discussed.

In terms of profitability, non-GAAP operating income was $20 million, pretty much even and represented non-GAAP operating margin of 21.5% by 19.6% under the prior revenue recommendation rules compared to $8.9 million and 13% operating margin last year and 25% margin in the fourth quarter of '010. So we showed tremendous leverage in our operating income year-over-year. Expenses as a percentage of revenues declined 6% year-over-year to accomplish this.

Other income increased $0.7 million in the first quarter and it's really due to higher interest income and lower FX losses. Tax rate was 33% -- non-GAAP rate was 33% compared to 35% in the prior year and thus non-GAAP net income was $13.9 million in 1Q compared to $5.8 million in the first quarter of '010.

Non-GAAP diluted earnings per share was $0.17. Accounting changed that approximately $0.02 EPS and even without that we still would have been above our guidance of $0.12 to $0.14 and compares to $0.08 the first quarter 2010.

Diluted shares outstanding were approximately 81 million compared to 75 million the prior year. This increase was attributable to the exercised stock options in the higher value Fortinet stock for the period. As I mentioned, there's a full reconciliation between GAAP and non-GAAP results in our press release and slides 14 and 15 of the presentation accompanying today's remarks.

In terms of summary of GAAP numbers, GAAP net income was $13.6 million compared to $4.2 million in the prior year. Tax expense provision was 25%. GAAP diluted earnings per share was $0.17 compared to $0.06 in the same period last year and fully diluted common shares for the 1Q GAAP were 81 million.

Quickly turning to the balance sheet and cash flow, you can see these charts on slide 10, 11 and 12. In terms of some of the key comments, in terms of cash and equivalents and investments we ended the quarter with $432.7 million in cash, cash equivalents and short- and long-term investments of $5.31 per share for a fully diluted share. $45 million increase from fourth quarter was primarily due to cash generated from operations in addition to excise of stock options during the quarter. Cash generated from operation was $37 million, which excludes $3 million for the patent settlement. This is our 20th consecutive quarter of generating positive cash from operations. In terms of free cash flow during the quarter, it was $36.5 million, which excludes the settlement, up 75% from Q1 of last year.

On the balance sheet, net AR decreased $1.0 million to $71.3 million from $72.3 million in Q4. Again, we saw strong collections for the quarter of $106 million. I talked about DSO of 69 days and aging continued to be current.

Inventory actually for the quarter decreased by $1.4 million to $12.1 million and largely driven by us working off initial stock to support some of the new products we brought on and the products that have been released in the last couple of quarters.

Our net inventory turns remain around four. In terms of working capital, I would add that working capital excludes the balance sheet. In the balance sheet in the long-term assets are reflected $131.1 million in long-term investments. If you include this in working capital, you would find that our working capital would have increased $72 million during Q1.

Net [CPU] remained stable at 7.1, now deferred revenue balance of $266 was up 26% year-over-years and 5% sequentially.

Short-term deferred increased to $175.5 million, up 29% year-over-year and $17.9 million from 4th quarter. Long-term deferred increased to $78.5 million up 18% year-over-year, and however down $4.5 million of 5% from fourth quarter. I would add here that China sales no longer are being recognized ratably and we also saw a slight decrease in the mix of new sales basically in multi -- we do more multi-year contracts toward the end of the year with a high -- with a number of renewals that come up end of the year.

So, to summarize, we had an excellent quarter across the board. We exceeded each of our key metrics in terms of the high end of our guidance. As you can see, we had excessive growth in the Americas and that shows the number of our deals we won as well as number of large deals remaining in our pipeline.

Strong performance demonstrates our ability to execute and the resiliency of our business model. It demonstrates our success in penetrating large enterprises and expanding into new verticals and geographies combined with healthy growth in a global UTM market, which continues to support the momentum we are seeing in our business.

We remain confident in our position for the remainder of the year and I will address when discussing guidance in a moment but let me now turn the call over to Ken, who will provide some additional thoughts in the overall security market and discuss some of the key accomplishments, important developments in the first quarter.

Yes, thank you and thank you to everyone joining us on the call. As Ken Goldman mentioned, Fortinet started 2011 strong with the result exceed our target. I am pleased with the progress of our business. The IT security market remains very strong mainly driven by ongoing security function consolidation of the UTM and the continued release of the managed securities service and the increased network speed and bandwidth intensive application that require faster performing security solutions. So all of these three trends bode well for Fortinet and continue to fuel our business.

So I repeatedly see deals when other competitors do reflect this trend. Fortinet wins because we provide the best performance and the widest brace of security and network functionalities. Why some part is a six figure deal this quarter with a television broadcaster in North America who is deliver high definition program in to the [deliveries] over Ethernet voice on a data network.

They require high speed network and accountant security. So we won the deal based on the best of our UTM portfolio and the long performance after proving that we could scan terabit of traffic in real time. With a highly focus on R&D innovation remain in the core of all what we do. So, as Ken mentioned, in Q1 we delivered new products that have already received good traction in the market and that contribute favorably to our Q1 result, including the FortiGate 3140B is a high performance UTM appliance for the data center and the large enterprise.

That delivers up to 58 gig firewall performance, 10 gig of IPS performance and a 22 gig of VPM performance in our compact two rack unit form factor. This new 30 was FortiDB, FortiGate run out update of the FortiGate 3000 series family joined together with other two part form. The FortiGate 3950, which can deliver 120 gig performance and also the 30 gig 3040B.

During the quarter we also delivered a new firmware, an appliance that advanced our footprint in the warranty space. So the new FortiOS4.3 firm ware had a significant warranty feature including a WiFi controller extension that support automatic provisioning of a wireless access point, multiple authentication measure and a strength in management. These enable a single FortiGate appliance to secure both wired and wireless networks within the enterprise.

We also introduced the FortiAP 22B, which is [old world] wireless access point for the enterprise wide WiFi coverage. The FortiAP 22B extend the FortiAP family of seeing wireless access point enterprise, reach a gain in good traction in the market. The sales of this FortiAP product doubled in Q1 over Q4 of last year.

So, as an example, we win a large deal in the U.S. this quarter with a leading interior design company and home furnishing retailer. The customer was looking to connect and secure more than 150 locations, require PCI compliance. Fortinet won the deal due to our integrated wireless and UTM security and sold more than 300 FortiAP product to this customer.

On the market share, we continue to strengthen our position in a UTM market, extend our leading position over competitors. The latest data from IDC on the security upon tracker showed Fortinet hold its leadership in a UTM market for the 20th consecutive quarter and keeping gaining market share.

In addition, additionally credible third-party continue to validate our technology and secured expertise by certifications and awards. In Q1 we received a common criteria in the area of four part certification for our FortiOS 4.0 Firmware and a range of a middle range and the prize FortiGate appliance. And we also received the 11th consecutive (inaudible) VBSpam award for the FortiMail appliance and a Best Practice Award from Frost Sullivan for our virtual security product line strategy. So, as you all know, Fortinet went ahead of all competitors and was credited for understanding and addressing the need of concurrently secure both virtual and physical network environments through our virtual domain functionality introduced in 2004 as well as our recently introduced FortiGate Virtual Security appliance.

So, in closing, I am pleased with the first quarter result and feel confident in our ability to continue to grow and drive innovation in the market. The trend towards unified threat management solutions is increasing across all sectors and regions and, as the pioneer and the market leader, Fortinet is well positioned to continue to win. Due in part to our reflection of this confidence we announced a two for one stock split in our earnings price release today. Ken Goldman will discuss the details of this as well as our financial outlook for Q2 and the rest of the year.

Now let me turn the call back to Ken Goldman.

And you guys probably already had enough of me already. So, as Ken noted, the decision on the stock split does reflect our optimism going forward and our confidence in Fortinet. The record date is May 9th. The target of the stock distribution date of or on around June 1st and I think most of the details that we have as of now are listed in the press release.

So, in terms of guidance before reviewing let me remind you that the guidance consists of forward-looking statements and thus please keep in mind my earlier comments regarding such statements. And let me clarify that all guidance is pre stock split and based upon the new FASB recognition rules so I am only going to give you one set of numbers here. And we do expect the impact of those rules to have a declining quarterly impact compared to Q1 on an absolute quarterly basis as we continue to work off that segment of our deferred revenue.

So let me begin with the second quarter. We expect billings to be in the range of $109 million to $112 million, which at the midpoint represents growth of 22% year-over-year and that part in that previously provide annual guidance growth of 20%. We expect total revenue -- and by that I just remind you that when the new revenue rec. obviously did not have an impact on billings. Total revenue is expected to be in the range for the second quarter of $95 million to $96 million, which at the midpoint represents year-over-year growth of approximately 25% and higher than our previously provided annual growth that we provide of 16%.

We're keeping gross margins at same, around 74%, which is at the high end of our model. Our non-GAAP operating margin is expected in the range of 19% to 20%. This margin is comparable to our prior guidance and for a couple of reasons. One of them is we're not entirely sure of the exact effect and impact of the new revenue recognition rules in any one quarter and we do have a currency headwind. I guess that's, if you will, given the strong Canadian dollar, so our Canadian dollar and strong euro.

In terms of non-GAAP earnings per share, expect it to be in the range of $0.16 to $0.17, which is based on expected diluted share count in the range of 82 million to 83 million. We do expect the FX rates will have as much as $0.01 impact to our earnings per share this quarter, free cash flow of approximately $25 million plus.

We're looking at tax rate comparable in a pro forma of 33% and a share count marginally up from Q1. Again, everything I am talking about is all pre split.

In terms of updating guidance for the full year, we expect as follows, billings to be in the range of $455 million to $470 million, up from prior guidance of $440 million to $460 million. At the midpoint this puts us approximately 23% growth for the year, again allowing us to gain further market share. This range is higher than our previously provided guidance of 20%. Total revenue to be in the range of $390 million to $400 million, up from $370 million to $385 million and this midpoint growth rate at 22% for the year is higher than our previously provided guidance of 16%.

Gross margin at around 74% and operating margin will be around 20% for the year, both at top end of our target ranges. EPS to be in the range of $0.69 to $0.71, up from $0.62 to $0.64 previously and based on expected weighted diluted share count of approximately 83 million to 84 million. This assumes, as best we know, a $0.06 to $0.07 annual impact, positive impact, from the new revenue rec. rules reduced by a $0.02 impact from foreign currency effects.

Free cash flow, we are comfortable with the high end of our previously guided range of 15% to 25% year-over-year growth or approximately $125 million for the year. And this is cash flow per share is around about $1.50 if you take into account the share count I just gave you of 83 million, 84 million.

Now I would say it's important to note we just started the year as it's beginning to unfold. Based upon the Q1 upside and taking into account the new revenue recognition rules so based on the Q1 upside and the impact of new revenue recognition rules, we have moved up our guidance of for the full year and, as we get further into the year we will update you again in July for the second half and full year.

So let me close before you take your Q and A or we take you to Q and A. In our estimation Fortinet had another excellent quarter and we started the year strong. We grew both billings and revenues over 30%, achieved solid operating margin at 21% and generated a healthy $36 million in free cash flow. We remain excited about the pipeline of business as we enter Q2 in the trends and the global UTM market continue to gain momentum.

Looking ahead we remain committed to strengthening our competitive position with all sized enterprises and growing our market share worldwide to continue product innovation and investments in our global sales organization.

I would also like to thank, because they make it all happen, the employees worldwide for their hard work, our customers who are continuing to choose Fortinet and our shareholders for your continued support.

And, with that, I will turn it to the operator for Q and A.

(Operator Instructions). Our first question is from Rob Owens of Pacific Crest.

This is actually [Kelly McLeod] on for Rob, just wondering how much larger you think you can expand this enterprise opportunity and how we should think about mix as the high, mid and low end offerings throughout the year.

So the question is how much we can expand the offering?

On the prior release, yes.

Just the enterprise opportunity overall, like what we should expect that--?

This is Ken. I think right now we see both enterprise and service providers pretty strong and we also can enhance our channel. Channel is also starting doing quite well now. Probably can go I think it's for me it's kind of difficult to say what's the -- which sector will outperform louder but we see how the switch back to (inaudible) for us.

Yes I think what I would -- you know, I would sort of when I looked at the result, I mean the first thought that comes to mind is geez we did really well. We had a very large growth in our high-end segment. We did well in service provider and enterprises but -- and that continues a focus and that's driven by both sales and product innovation. But, on the other hand, there's a large number of deals that we're looking at in the SMB space and the retail space that frankly are in sort of what you might call the low end products but they're very, very important for us to gain over our share.

So, while we are extremely pleased by the continued increase in the enterprise and frankly in the U.S., that has been a major initiative for us and going forward it's particularly a major initiative, is in the financial services area where we do have work to do. I don't want to -- I'd be remiss to say that we are also very interested in the lower end products and the SMB space and so forth and that's going to be a focus for us as well and we think there are some competitors there that we can gain share from and we're very, very focused on that so we're not going to give exact numbers other than to say we're pleased with the enterprise but I would say all segments are important. We think we can grow in all segments.

Yes and also compared with some larger product security companies, network security companies, we do have a little bit higher percentage in the carrier in those SMB and definitely that's enterprise that's also have a huge room for us to grow in but we are much broad coverage in the sector and also in all regions for us.

Turning to competitive landscape, just wondering has anything changed there and are you seeing customers increasingly adopt UTM devices rather than Best of Breed? Do you feel you're marginalizing some of these Best of Breed providers?

Yes I think the three main competitors for us feel the same; Cisco, Juniper and Checkpoint. I think it's all strong points to the technology, the product and with their hands on the new product and also some additional functions in the 4.3 we do see we constantly win over competitors so I don't think that the whole advantage we have in the product and also on the technology has changed but we just got stronger and stronger.

Great. Thanks a lot.

Keith Weiss, Morgan Stanley.

Thank you, guys and excellent quarter. I was wondering if we could dig into the service provider strength a little bit. And really two related questions; one, in terms of what you're selling to the service provider space is it more for their internal use or are you seeing more increasing demand for the managed service offerings or supporting the managed service offerings or is it both?

And then perhaps relatedly, are there competitors that you're displacing specifically in the service provider space or do you just think that that overall vertical is doing pretty well right now?

First I think it's for most is sold to service providers for their customer use, not for their internal use. Second, in the service provider market we see less competition because the platform we have on the chassis base and also on our [pond] based feeds service for quite a while. We believe we are also of very few vendors have this kind of niche for (inaudible) fitting of telecom space and also the strong performance that we basically have also doing much, much better than competitor.

And also UTM technology fits service provider much better than there's a single function device because that nowadays all the attack is all kind of blended attack and also with the UTM service provider also can turn on different functions based on the constant need using the same box without kind of a huddled struggle between different boxes. So that does all fill factor, makes Fortinet very strong in the service provider space and we also don't see other competitors come close to what we have today.

Excellent and if I could sneak one in for Ken Goldman, it looks like your hiring picked up in the quarter in terms of net adds. Are you happy with your pace of headcount additions? Are you able to find the guys that you need now? Are you happy with sort of your ability to get these guys on board and productive?

I would say for the first time in a while we are really seeing a good pipeline, if I can use that term, of candidates. We are bringing them in and so forth and we had a good start in R&D this particular quarter. We are finding some very good people in sales so you're never totally happy, if you will, but I would say we see better acceptance momentum in our hiring in the last -- toward the end of Q1 and going to Q2, so yes that is definitely picking up in getting some very good people.

Excellent. Thank you, guys.

[Jonathan Hull], William Blair.

Great quarter, guys. Just a quick question on Japan just to lead off; you guys talked about some of the deals that maybe were deferred from Q1 to Q2. Are you seeing a snap back in the booking trends in that region and can you maybe just give us some color on what your expectations are relative to the flat performance in Q1?

I would say this way; in all very candidly I think the folks in Japan did a wonderful job to go through, to do the kind of numbers we did there with -- they do represent a good piece of our business. They had a very nice quarter and so first of all I just want to say I think they did a fabulous job. In terms of Q2, we'll see how it goes. I think it's a little bit unclear. I mean, we are hoping for a solid quarter there. I mean it's still early in the quarter but our guidance takes into account what we think is very doable in Japan but I would say overall they've done a nice job.

Great and just maybe talking a little bit about the accounting change adoption that you guys gave some color on, how many quarters should we expect the deferred to persist for and when you talk about sort of the lower effect quarter over quarter, I mean how should we kind of think about that in terms of our models?

Well, the reality is that we spent all quarter working in the new revenue. It's not as simple as you think when you have tens of thousands of orders, which we really do have here, so it's one of those things that over time it will decline because you are working off your deferred revenue for that segment and all of a sudden you keep on all the new revenues on the new rules so I am guessing it will be still relatively good sized for about seven to eight quarters but it will tend to go down.

Now there are other things. So there are two aspects of it. One is the clear areas where we had no VSOE, if you will, which was on the segments I mentioned. There are other kinds of deals where the new revenue rules give you a different approach to recognizing than the old ways and different ways to carve out and I am not going to get into all that right now so there always may be some differences that would be under the new versus old. The reality is we will break it out this year as we are required to and I am not sure -- I doubt if we would break it out going forward because we will only be doing our revenue internally under the one way after this year.

Great and if I can just sneak one in for Ken Xie, on the application control blade are you seeing that drive an incremental refresh on the firewall demand side or any other applications that may be I guess see more tractions?

I think first the old firewall kind of way outdated and they cannot secure the application or content. That's also the reason I founded Fortinet 10 years ago to try to go to the application, go to the content. Second, we see the application controls just one of the features, one of the function of UTM and that has some definite need a much more broader function than just application control and sometimes even when you can control the application but there's still a lot of like secure hole within the permitted applications.

There also can be viruses by that permitted application. There's also the bad content inside the permitted application so we feel just applicant control alone probably not enough, not secure enough for the customer so the customers definitely need more kind of a consolidated, unified approach to secure their environment. So we see the applications can definitely do better than the traditional firewall function but definitely not enough and also kind of also just a small subset of the total UTM, which provide a much better solution to the customer.

Great. Thank you.

Robert Breza, RBC Capital Markets.

Actually my question was just asked. Thank you.

Philip Rueppel, Wells Fargo Securities.

The particular strength you saw in the enterprise outside of the service providers, are you seeing more of just the sort of standard refresh cycle? Ken, you mentioned that the existing firewall technology is getting dated. Or are you seeing implementation of new architectures where you're actually ripping and replacing existing products?

I see in the service provider space we see some more new deployment and in enterprise is more replacing old firewall.

Okay and in that case, are you seeing -- are you coexisting with, you know, is your entry strategy into the enterprise to coexist with certain elements of the product and then take over over time or are you seeing full on replacements in the enterprise?

For the bigger enterprise they tend to coexist for some time and then gradually take over. For the smaller, middle sized enterprise sometimes they just go replace it.

Great and then from a module perspective your core has always been VPN firewall IPS. Are you seeing any others that are displaying unusual strength and might provide momentum as we move into 2011?

Also the one article function is the anti virus over the network. That's also probably the strongest function. We don't see a lot of competitors have besides viral VPN, IPS. So far we have not seen any other competitor come close to the co function we have for antivirus intrusion firewall VPN plus we also add a WiFi function, which also a lot of enterprise see that as a huge benefit manage toward and WiFi together. I think with the new product and also the new ASIC we feel we have more advantage now compared with some competitors.

Great. That's it for me. Thanks.

Jonathan Ruykhaver, Morgan Keegan.

Congratulations, guys. So my question I guess it's kind of a follow on to the previous question. When you look at the success that you are having, Ken, in the enterprise is the driver there around the need for consolidated functionality you get with the UTM or is it more just a trend in the large enterprise to giganet, gigabit Ethernet, the need for higher performing firewalls?

I feel both because we do see the benefit of the UTM over the traditional solution and also pick up the speed in the enterprise so that they also need a faster part to replace the older appliance there.

Okay so it's a combination of the both. You, Ken Goldman, I believe you mentioned strength in healthcare and also in retail. What are you seeing in the financial services vertical? Are you seeing good competitive wins in that vertical as well?

The -- in some cases yes and other cases we have work to do so I would say the areas we still have work to do is in New York we have a lot of RFTs out. Again, I think this will take us multiple quarters to really see the fruits. We've started adding folks there. We now have a VP of Financial Services and we're adding some folks under her but I would say that will take us a few quarters before I can point to some really significant wins over time there. In the rest of the world we continue to see good wins and so it's not like we haven't had a number of financial service wins because we do but I think we still have some work to do in -- honestly in New York.

Is there some resistance to this value proposition around UTM in those large banks and is it more just the need for pure higher throughput?

No I don't think there's any resistance at all. I think the reality is we're just getting really started with the right people there. We need to get our product into proof of concepts or RFPs, however you want to show it. We need to make sure that we have the various features that they want and then just prove it so no I don't think there's anything unique because we have won very large financial services agreements in many parts of the world so I don't think it's anything unique there other than we just didn't put the resources to bear there as early as we probably in retrospect should have.

Also even some RFPs just focus on single function but the UTM plans FortiGate we can also compete well in the single function, both on the performance and also on the depth of the security in the function results in certification needed. That's can be well, even used as single-function device.

Right exactly. Okay then just last question quickly, the new functionality around managing wireless networks, I think you were going to do some things recently and also some new wireless access points. Can you just comment on what you see around those products and how do you compete in that market against these more established pure plays, like in Aruba Networks?

I think we are not trying to compete with a pure play WiFi. It's more the requirements come from our customers about two years ago if we can have the capability of managing the wired and WiFi infrastructure together so that's what we match easily more benefit for them instead of they have to manage two totally different infrastructures. So that's where the requests come in so we spent about two years to develop the function and in that with all this together with security device, I mean the FortiGate device.

I think the (inaudible) made more easy to deploy into the new infrastructure but for a lot of enterprises they have a mix of a wired and WiFi environment and a lot of that is our current customers that see the huge benefit of companies together instead of a deployed totally new WiFi infrastructure and they need a separate policy, separate way to manage it. It is much more burden for them and so that's the request comes from the customer and they drive us to develop this function to the FortiGate.

Okay, okay good enough. Thank, guys, again and congratulations.

Eric Suppiger, Signal Hill.

A few questions, first on the free cash flow did you maintain your guidance? You said 115 to 125, is that right for the year?

No I said for the year 125 for the year.

125.

What I said is it was 120 -- 115 to 125 so I went to the high end of 125.

Okay you had a pretty good free cash flow this quarter. Can you just talk a little bit about how you would expect that to translate over the course of the year? If you did 40 this quarter it seems like 125 is pretty conservative.

Well, first of all we did 36 this quarter in terms of free cash flow in terms of numbers, you know, in terms of pro forma free cash flow. We'll stick with the 125 for now.

All right in the enterprise who do you think that you're -- of the three other major players, Cisco, Checkpoint and Juniper, who do you think you're taking more share from in light of some of your recent success?

That would probably depend on the region, depend on the sector. It's hard to give the detailed number but we do see some of the networking base company have shown some weakness in the enterprise security because the products are then falling behind and also the function kind of also cannot catch the change. So that's where we've been gaining some more share but it's really dependent on the region and also the sector.

Who did you say? What network company?

We didn't actually say any. You didn't hear anything because we didn't say anything. We don't want to point out. I think that's not a good way to go. I think Ken suggested some of the network security companies we may be gaining on a relatively basis sure.

So in the service provider space Juniper reported weaker results with their SRX platform in the carriers and I think it's been known that they've had some technical issues with the SRX. Has that created any opportunities for you? Is that making a difference?

I think on the margin it's helping us compete.

Okay and then finally on the WiFi can you tell us what kind of contribution you're getting out of the WiFi products at this point?

I think still relatively small, probably immaterial at this point but we do see the growth but it's strong so we doubled from Q4 to Q1.

Yes I mean we've seen good growth there. We don't, just to be clear, we don't break out unique products in terms of percent of revenue and so forth and, as Ken said, they're probably not overall material to our overall results yet but yet the growth was superb quarter-to-quarter.

Could you envision that in a year or two years your access point sales would be material, assuming material is a 5% threshold?

Yes I think it's possible, very possible.

Okay very good. Well, thank you very much. Congratulations.

[Sol Yall], Oppenheimer & Company.

Also congratulations on my end, very, very strong and impressive quarter. Two quick questions on my end, did you guys have any deals above $1 million this quarter?

We did. We don't disclose how many. The only comment I would say is to my knowledge we didn't have real megadeals. In other words we had some deals over $1 million but not multi millions if you will.

Got it.

And we had no one large -- sometimes I think one or two quarters we've talked about a very large deal, our relatively largest deals. We did not have any of those kinds of deals this quarter so where we had a number of deals I think I said 18 over $0.5 million and we had a few over $1 million. None of those what I would call several million dollar deals.

Got it and you talked about the service providers and the enterprise kind of being strong vertical this quarter, any verticals come to your taste that didn't perform as well as you might have thought heading into the first quarter?

No I think -- no I wouldn't say; I think we just talked about the area that we need to still work on, which is certain aspects of financial services but I don't think in general I mean I will tell you. I looked at the Americas and they just had a bang up quarter any which way you want to talk about it. We had a solid quarter in federal for that matter and we think we can do better there still. In Europe we really look at Europe geographically and I think with the exception of one or two geographies going through some issues that I mentioned earlier I think Europe did well. In Asia PAC I think they especially did well and again, even Japan when I look at the absolute number, when you look at how much with the year-end and so forth, how much it represents over Asia PAC they did a wonderful job considering everything for the quarter.

All right. You guys, thank you very much. Congrats again, good job.

Rohit Chopra, Wedbush Securities.

Couple of questions, guys; you talked about Japan and I appreciate the update on the demand side there. Can you talk about the supply chain and if you saw or see anything changing there, if you've scrubbed it? And then, the second question a little bit more from -- I want to understand the channel a little bit. Are you seeing growth in the number of resellers? Is that one of the drivers of growth as well or is it the increase productivity from resellers and partners like what is it down on the ground that's actually driving some of this?

I think the Japan earthquake we don't see much disruption on the supply chain, at least not yet, and I think that so far we're working well with our supply chain. I mean the manufacturers there and then if they have any issue we can quickly act, try to source from alternative source there and we also don't see much of the price impact so far on the component side.

What's the other question?

Maybe you can repeat the other question?

Yes the other question I am just trying to understand where the growth is coming from in the channel so I just want to get a sense, was there a material increase or has there been a material increase in resellers or is it productivity from existing resellers, which is increasing? What's actually happening on the ground?

Okay it's more the existing resellers. I mean we continue to evolve our resellers and from time to time we change our channel of distributors but I don't think in this particular quarter it was any major swing in terms of the number of resellers or so forth.

[Michael Torcas], Raymond James.

Hey guys, this is [James Westman] sitting in for Michael. First question, what were the take rates on application control and other UTM options?

I think, like I -- as I repeated early in the questions, I think the application control is the better solution compared to the outdated old firewall, which is my last company, NetScreen, which started like 17 or 16, 17 years ago, which only focused on the firewall function so about 10 years ago the reason we started Fortinet is really we see the need to secure inter applications and also in accounting style. That's where even in the first year the Fortinet actually called [AppSecure]; it's more meaning application secure company.

But going along for all these last 10 years we see there's a more security need just beyond controlled applications because even the permitted applications, which is the application control tries to manage, still has a lot of dangerous stuff like the virus. There's some bad content and some intrusion embedded inside the permitted application so that's where we see is the full UTM function is really needed instead of just a control sort of application over the access there. So that's we see the benefit and also for our own user, they also the see the huge benefit of enable the full function protection instead of just the term like access of viral function there, which is we see the huge benefit of UTM in the last 10 years.

Great and just one more follow-up, just for the technology, are you seeing any changes to the ASIC chips or any architectures planned in the near future?

We do continue to invest heavily into the ASIC chip because what we see the trend in a secure space once inside it there's more and more functional applications coming to the Internet and then the secured gateway needs to handle more different kinds of functional applications and the ASIC chip is the one way to starting offload some of the functions from the CPU into the chip, which also can perform much faster and also gave the CPU and some other -- handle more new functions, also deliver current functions faster. So that's where ASIC chip is a huge advantage at beyond the CPU so we do use the latest CPU but sometimes using the dedicated chip to help the CPU has a huge performance benefit beyond the CPU to handle itself.

Great. Thank you, Ken.

Alan Weinfeld, [Suffalo].

Great job, guys. Question on the competitor front, do you often sell any of the parts of your suite without the UTM or does the UTM go first and every single thing else always goes with the UTM in all of your enterprise sells?

I think we see 80% to 100% customers buy the box with the UTM function able. That means they also buy the subscription so that's where we update all the signatures and that's needed for the antivirus function, for the intrusion function, so that's still the case. But they do have some kind of a small percentage of customer that may just starting buy the UTM only for one or two functions and when the time comes when needed they start turning on the other function later.

So what percentage of people who buy the UTM is there first one or two functions they buy the IPS because we hear about a lot of noise in the market that is going to grow a really high amount, say 20% over the next three to five years, even more than the UTM market? You're two or three times the UTM market but how hot is your IPS and how often do you, as you said in Brazil, beat a source fire or others that are solely focused on IPS and UTM?

I think for the IPS it's just one of the functions of the UTM and also we do quite well in the IPS function along there but I'd say right now it's still relatively a small percentage of customer just buys the UTM, only use the one single function as new product, 10% - 20%. Why, because customers when they start to see the integrative function, they see the huge benefit of doing the intrusion together with antivirus with the firewall with some other function there.

I think some of the other vendors, they don't quite have the technology like how to do high speed antivirus over the network environment so that's the huge benefit of the Fortinet technology we've developed in the last 10 years and also some other vendors they come from the software approach. Still that's where their performance totally depends on a CPU. That also make them difficult to enable multiple functions because if you enable multiple functions it's competed on the CPU computing power compared to with the FortiASIC you can off load some of the function into the ASIC while having the CPU running some other newer function there. So that's we see the architectural benefit of FortiGate enables us to run the more functioned computers among the competitors.

But I do agree there's a change in the trend because the traditional old firewall like my last company, NetScreen, we developed the old fire function, which can only control the access. It's all dated because today there is every connector Internet or application leveraged to connect to Internet so controlled access is no longer enough. You really need to go to the content application level but in the con application level the bad content, like a virus that's some intrusion it really has to be kind of secured together with some other function. It's more like a kind of drawing force of protection of having a single function just try to fight there.

You've done amazing work in the government to get that EAL-4 common criteria. That's the highest certification you can get in the government. A lot of companies have said we've had trouble selling into the government because of a bunch of reasons, mainly the budget wasn't resolved until an hour before the government shut down. Has that at all had anything to do with your government business or are we to understand that there was continued strength across America in almost every industry?

Yes we have the EAL-4 plus. That's even more difficult than the 4 and on the other side we also have all the -- pretty much all the -- every certification in the market, like we have the Board of the old ICSA and cover all these functions and also for all different other certification third party there. We believe in the secure space the third party validation is kind of a very, very important. Otherwise you depend on customer to try to attach different vendor product out based on the each one that's marketing material is really kind of sometime maybe misleading.

I think it's in the government sector definitely certification is important but also it's a long sell cycle there so that's where some kind of old vendor or one that has been there many years, they may have some more advantage. But we also invest in that area. We also kind of work hard to try to get into some new vertical space, which we are relatively new there.

Okay I think we probably should move on. Thank you.

[Scott Beller], Needham & Company.

I may have missed it earlier in the call but could you remind us of what the percentage of billings was from the enterprise service provider group?

We don't actually give that. You didn't miss it because we don't give it. We don't give that exact percentage. We mentioned that it was strong.

Is it -- well, can you tell us if it's remained consistent quarter-to-quarter or last few quarters?

I would say in the Americas it was probably a little bit higher percentage of the total business.

And on pricing strategies could you tell us down towards the lower range of pricing maybe in the $3,000 to $5,000 area away from the higher end how the competition in pricing has been and the behavior around pricing?

I don't think that pricing has really fundamentally changed. Without saying too much that we haven't really fully deployed it, I think that we may selectively increase some prices in some places but I don't want to say much more than that at this point. But I don't think price competition to win business has changed at all. I mean, I do from time to time you will get auction kind of opportunities in Latin America, which you compete with and so forth but those are more the exception than the rule, as they say. But generally most large deals you win on capability and then you negotiate price, not the other way around.

Dan Cummings, ThinkEquity.

I wanted to ask about the renewal rate. Ken Goldman, you referenced I think an 80% renewal rate at your top 25 accounts.

Yes.

If you could just clarify what you said and how that may be different from recent history and how you're achieving that with behavior incentives, either on the customer side or on the sales side, and then just again about the share split. What's the motivation for that and that's it? Thank you.

Yes on the -- we have not broken that out. We've been focusing on that. I don't know the exact percentages in prior quarters. I don't have that with me but I know that number is up this quarter and so we were pleased with the fact that when -- we break out renewals in a number of different categories, one of which is top 25 and we were extremely pleased to see the focus, the count, if you will, for both EMEA and Americas get the 80% plus in renewals.

And so we're now, we're just seeing really where we're sort of hitting the upper limit of what we can achieve there. As I mentioned, the area, the reason that we didn't -- mainly the reason we didn't see that in APAC is in some areas you don't have the same sense of renewal and in other areas like Japan for obvious reasons they weren't as focused this quarter on doing that.

In terms of the split, I think we look at keeping the price. I mean, when we went public, as you recall, it was $12.5. The stock pretty much was around $15 to $18. I mean I am sort of just giving this from memory right now and then it over a period of a number of months toward late '010 it really went from the low to mid $20s to I guess today around $40-ish or $41, whatever. And so we just think that that $20-ish is -- I don't want to be in the low teens or mid teens anymore but we think that's a better range for shareholders in terms of providing opportunity. We also think it's a better way to provide shares to our employees in terms of options.

And also we also see that as another way to strengthen our recruiting and so that's also helpful.

Interesting.

Yes that was the options there so yes it gives us a little bit -- you know, in some respects you are able to give a higher quantity of options. I know the issue there as well as but a split is a split but be as it may, I mean I think we think that that $20-ish range, $22-ish range is a good place to readjust the stock, if you will, before we see whatever it does.

I think a lot of us are nostalgic for that day when you were trading in the $20s. Thanks a lot.

We don't want to go there the other way. That's too much nostalgia.

Our final question is from Jayson Noland of Robert Baird.

My congratulations also. I wanted to ask about large deals, specifically 18 deals north of $500,000 in Q1 off of 13 in Q4 in a quarter that's not known for large deals. I guess what drove that and was there any concentration by vertical?

Yes we were pleasantly -- honestly, we were pleasantly surprised to see that. I think the biggest thing that drove that is we just had a number of opportunities. I think what we saw, particularly and I said this before, is the quarter we saw acceleration as the quarter went on, particularly in March. It's always a little hard at the beginning of the quarter in January to get yourself readjusted, if you will, from the year end. But it really reflects globally the ability to really penetrate large deals and I think it exemplifies the acceptance of Fortinet, the credibility we have and the ability that on deals that we've been working on for some time, to close those deals.

So, again, I don't want to get too carried away because there probably will be some lumpiness in that reported number going forward, so I don't want to get too hung up on one quarter versus another. But I think over time the trend is we are seeing more deals in which customers are making bigger singular commitments to us.

And no concentration by vertical, Ken?

No I don't think so. I mean, we obviously have service provider but the reality is service provider is not a vertical per se. It's really a channel to many enterprise and SMB customers more than a vertical per se.

Understood. And last question for me, there's--

One more thing is we did -- I did point out though healthcare was relatively strong so that vertical was strong relative to one of the areas I pointed out.

Okay thank you. One of the industry analyst groups is talking about UTM deceleration in calendar '12 off of calendar '11 as a refresh starts to fade and your success doesn't feel like just a refresh but maybe if there's any comment you could make on calendar '11 versus calendar '12 and the UTM refresh taking place?

From our members you definitely don't see any deceleration. We see even acceleration. I think interesting enough in the last few years some of the so called UTM vendors actually they just changed the label from the traditional firewall into the UTM without adding too much the UTM function. That's maybe helped the market grow a little bit but the true UTM player like Fortinet, we are the ones that see the benefit of UTM and also the customer also see the huge benefit of the UTM. So from our side we don't see any slowdown of the UTM starting to kind of dominating the network security space.

Yes I think the media if you go back to where the drivers are. You know, the cloud is a driver, mobility, virtualization, the IT cycle. So I think as long as you are constructive on those themes I think this industry will do just fine and so that's really what's driving our business is really the global enterprise spending, if you will, in IT, cloud becoming much more pervasive.

I do think the -- if you think about the cloud in terms of supporting it by the various security, the service providers, I think that if you talk to any of those they are really early in their cycle and so I think they're just getting warmed up frankly in '011 vis-à-vis their opportunity of business. So I think as long as you are constructive on the Internet, the cloud, mobility, virtualization and IT spending, then I think those are where I would lay out as key drivers for '011 and going into '012 and forward.

Okay thank you, well done.

Thank you. There are no further questions at this time.

Well, thank you all. Actually we took a little bit of time here so there's a little over 30 minutes I think if I've got the right time here, we will be having a call for any of those questions we did not answer, particularly the focus on that call tries to be more one of if, as you have a chance to maybe start any model questions or any further impetus into understanding guidance or so forth or details of our numbers, glad to take them there. Otherwise, thank you very much for being on our call and we look forward to seeing you soon. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Good day.