Fortinet Inc (FTNT) 2013 Q2 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good day, ladies and gentlemen, and welcome to your Fortinet Q2 2013 earnings financial analyst Q&A. At this time, all participants will be in a listen-only mode, but later there will be a question-and-answer session and instructions will be given at that time.

  • (Operator Instructions)

  • As a reminder this, conference is being recorded. Now I would like to turn it over to your host, Michelle Spolver.

  • - VP, IR & Communications

  • Hello everyone, again. Thanks again for joining this call. As a reminder, we hold this follow-up call to answer remaining questions that have come in since the last call. Joining me in the room today is Ahmed Rubaie, our COO and CFO, and Ken Xie, our founder and CEO.

  • Before I turn the call over for questions, I want to just remind you that all forward-looking statements made during this call are subject to the disclaimer stated in our earlier call.

  • So with that, operator, we can take our first question.

  • Operator

  • (Operator Instructions)

  • Aaron Schwartz from Jefferies.

  • - Analyst

  • Hi. Thanks for taking the additional questions. One follow-up for me. I apologize if I missed it, but I was wondering if you could just run through the rationale and the thinking on the inventory change.

  • - CFO, COO

  • Yes, sure, Aaron. At the end of the day, in the first quarter, we missed -- part of our revenue miss was being short on product. So not only was that a miss in terms of Q1 numbers, it triggered the question of whether we have the right inventory model based on our current business run rate and where we're going prospectively. We did a deep dive in terms of where a business of our size, our breadth of product SKUs should be and came to the conclusion that the historical turns of 4-plus was probably very difficult to manage going forward. So we took it down to 2 to 3. And part of the logic that, where we have more flexibility than other companies, is the fact that our cash position and cash generation is pretty healthy, and so we traded to make sure that we live healthier from an operational perspective going forward. Therefore, you should expect us to be running at 2 to 3 inventory turns going forward.

  • - Analyst

  • Okay. And then switching, switching to margins, you spent quite a bit of time on the call sort of talking about the reinvestments in the business and also some discipline there. I've gotten a question or two on this, but I know you're not guiding to '14, but is there any reason not to think that you should start to see a little better expansion in the out years, given some of the investments you're making this year?

  • - CFO, COO

  • Well, I think, yes. So I'm glad you gave me the ability to talk beyond just 2014. I think, look, prospectively, we will absolutely endeavor to get margins in line with our top line growth. At the end of the day, what we will not do is stop spending where we think is appropriate and, particularly when we can afford it, at the cost of inhibiting future growth. So at the moment, you're catching us on the downside, where we've taken billings down for the year, but we continue to see a fair bit of opportunity. Admittedly, we were underinvested back in 2010, 2011. We started in 2011. And the business was running at about 20% plus. So now, it's running a little bit lower and it's in our best judgment that it's going to continue to grow, so we're going to continue to invest.

  • All that being said, for the current year, I think the point we were trying to impart on you guys is that relative to our expectations back in April, we slowed the dial down a little bit. We've given you what we think are the new numbers for the next two quarters. And yes, at some point, you should expect us to be disciplined in tying both operating margins and free cash flow to a more congruent level of top line growth. I'm just not A, ready to disclose that at the moment. B, nor do I think we are there factually.

  • - Founder and CEO

  • Also, this is Ken. I think two other points I want to add is, when compared who our competitor, who also like dedicate network security company, one, like I said before, is probably true profit, and almost no growth, which also kind of trap in the model. And also I think in this space, gaining market share is quite important, because it's so fragmented. The other company I think is probably all the growth, but pretty much no profit and also sometimes the spending grow faster than the sales. I think we are in the middle as a better controller and also more lever we can pull, we can justify, to justify the balance among the growth and also the profit and the two best position going forward.

  • And also the second point really, if you look at in the 2011, 2012, we have taken the opportunity to invest in Europe and also EMEA area, and we are starting to see some good return right now because we feel once there's a past environment and some of the competitors started to slowed down and that's the best hand to whether you invest into the team, the channel, and also expanding the market improvement. And then after one to two years and then there's a lot of positive return from the investment. So that's also what we are starting to do in the America here, in the last couple quarters.

  • - Analyst

  • Okay, and last one, if I could squeeze one in here, you guys have an extremely strong balance sheet. Ahmed, I don't know if you have -- I know this is a group decision with the Board and others, but just wondering what your perspective or opinion is on that current capital structure of the Company. Thanks.

  • - CFO, COO

  • Yes, sure. So, it's not lost on me that our cash balance exceeds our revenue guidance for the year. And we need to do something with our cash position. At the moment, and for the foreseeable future, it's all about growing the business. And at the moment, obviously organically. As we look further out, it's too early to make judgments, but one key lever that we could use the cash for is larger scale acquisitions once we are comfortable with our internal execution. And then all the natural capital structure questions that will come up in terms of stock buyback and so on. I just think right now, given where the business is when I walked in, meaning on the back of a missed quarter, changing macro dynamics, getting execution in place, so that we build a better plan for next year, as well as a long-term model that will answer some of your previous questions in terms of financial discipline, profitability, free cash flow, et cetera. It is then and only then that I think we'll be conversant in what we should do more with our cash position. I hope that makes sense to you.

  • - Analyst

  • It does. Terrific. Thanks for the time.

  • - CFO, COO

  • Thank you.

  • Operator

  • Michael Turits from Raymond James.

  • - Analyst

  • If you say anything about life is you always got a new pronunciation of your name every year.

  • - VP, IR & Communications

  • That was a new one, Michael.

  • - CFO, COO

  • Try my name. See how that can be butchered up.

  • - Analyst

  • All right. So that was fun. Anyway, back to my same questions on CapEx and then on a little bit more on carrier. So I just want to really make sure we're clear that the $20 million expense of building, my understanding is $10 million to $12 million is this year. Did you go back Ahmed, and figure how much was in the previous guide? So what's incremental this year and then I also wanted to make sure we knew how much you thought the full incremental impact of the inventory change is on cash this year and then lastly, where we might be on cash tax rate for this year and next. Then I wanted to talk about carrier.

  • - CFO, COO

  • Yes, Michael, with sincere apologies, I did not get a chance. As you know, the break ended up only being a half hour. So I did not -- we can follow up with specific numbers for you, but let me just make sure we're on the same page until we get you the more detail. At the end of the day, yes, your recollection is right in terms of the current year. No, this is a building project and if you've been through building projects, you know things can be up. They can be down.

  • So based on what I know right now, we've made the decision to accelerate, that way we can, number one, get the project done and on time, but number two, get as much of it done in the current year. And that's where my $10 million to $12 million comes in. How much more is that relative to what I thought in April? We'll get you the numbers, but my guess is it's about at least $5 million more than was envisaged back in April.

  • Cash taxes are the same. So whatever Michelle had given you in April to model, I don't think I would change that. But I'll let her preempt me on that and correct me. And then in terms of inventory, we took it up by 10. I think there's another, probably another 10 by the time we get through Q4. Does it all get paid for in the current calendar year? It all depends, because a lot of our contract manufacturers are outside the US and it all depends on the timing of when we do these things. So at the end of the day, you take a combination of all of that. And that's basically the reason for lowering the free cash flow guidance. And of course, not to forget, billings were taken down by $5 million as well.

  • - Analyst

  • Okay, and then separate question, on carriers, so did the carrier business come back this year, this quarter? In the end, I was a little unclear on that. Obviously, it was bad last quarter. And other companies have said it was better and the carriers themselves have come back and at least reiterated guidance for CapEx for the full year. The general take has been the carrier environment is firming a bit.

  • - CFO, COO

  • Yes, I think for us in terms of the migration from Q1 into Q2 and the outlook for Q3, it's pretty much what we talked about in April. It didn't get worse. It didn't get any better. What we did see more of is us getting invited to the table in terms of -- and I think this is congruent with what you're saying. I think carriers now are out of their budgetary, at least having flushed through what they are going to be able to spend on CapEx, et cetera. So they are now starting to think about next steps, like the 4G LTE, which as you know, has been in discussion for a while. It's just getting more of a focus.

  • So what that means for us is in the last quarter, different from Q1, we were invited to more discussions. And as Ken alluded to, to more testing environments and across the world, in the carrier space. So I wouldn't say for us, and I know others have said better. Others have said worse. I think for us, it's status quo for the moment. However, we're encouraged by the notion that we're still at the table, particularly in terms of thought leadership, and remember, as many pointed out on the call, that that is the smaller part of our business with carriers. The bigger part, the sell-through continues to be stable, but not any better, not any worse than what we saw coming out of Q1.

  • The good news, though is, as they are looking out further, the spending is returning. I would still stay more cautious on perhaps my counterparts elsewhere because of the spending behavior hasn't returned to normal levels. And all of that is reflected in, A, my guidance in Q2, having met the guidance or exceeded it in Q2, and also the look-forward guidance I gave you for Q3 and the rest of the year. So I gave you a mouthful there, but I was trying to triangulate multiple things for you.

  • - Analyst

  • No, that's great. My last question on carrier is, in the 4G LTE bake-offs, or proof of concepts, wherever you are, who are the other, who are the other competitors there? And I can't think -- Ken said, but are these the largest spots that I think that you sell? And when do you think that this might turn into revenue? When does this demand turn into dollars?

  • - Founder and CEO

  • It's difficult to say when there will be return of the revenue, but I can say some of the software space, network secured vendor, don't have much solution there, because as a carrier environment, it's more high speed and performance and reliability driven environment, which need a lot of higher expertise and we have been working in that space for many, many years and so that, that's probably what I can say.

  • - Analyst

  • So who do you see competitively? Is it Juniper? Is it Cisco? Who do you see?

  • - Founder and CEO

  • I think for, for -- I think for the carrier, it's quite interesting. They do need a few things, first, the high speed and the reliable solution in the carrier environment. That's where the software network vendor don't quite have much there. And then some of the traditional networking company, they still lack a lot of security function. They still lack the sense in the 4G environment need to handle kind the security, and so that's where we feel we have quite good position in that area. And plus, also a lot of it relate to a certain lack of virtualization, among other things in the high speed environment. I think so far we feel pretty comfortable as the good position to do this worldwide.

  • - Analyst

  • Okay.

  • - CFO, COO

  • So Michael, so that we leave your point with clarity and we don't confuse you or others, at the end of the day, our point on the 4G LTE is not that it is expected revenue in the near term or massive revenue at any point in time or any of the above. The point was more about the fact that we are differentiated innovator in the space. And as these carriers slow down, to your point now, they are returning to normal day business and they are thinking about what they need to do to modernize their mobile networks, we are the first folks getting invited back in to have those discussions. And why, to Ken's point? Because we are the one with the bigger chassis that can handle better reliability, faster performance and can connect the dots on all of those fronts.

  • I would say, however, when you think about the carrier space at large, and again, I'm cognizant of the fact some have said better, some have said worse. I think from us, based on everything I see in the lighthouse, it is pretty steady Eddie. It's not better. It's not worse. We're excited that at least we're part of the forward-thinking innovation as we go forward. Does that help tie it together?

  • - Analyst

  • Yes, of course. Ahmed, thanks a lot, and best of luck and Ken, thanks as always.

  • - CFO, COO

  • You bet.

  • Operator

  • Jayson Noland from Robert Baird.

  • - Analyst

  • Great. Thank you. I guess tied to that same topic with carrier, Ken, with the NP6 coming here in the second half, it seems like it would be tricky to avoid some seasonality, given test cycles that large carriers would want to go through.

  • - Founder and CEO

  • So can you repeat the question? Sorry. I tried to --

  • - Analyst

  • Your new high end ASIC is coming out in the second half of the year. I know you've said you're going to stagger the release. It just seems like it would be logical to assume that carriers would want to go through a longer testing cycle.

  • - Founder and CEO

  • I think some of the MP6 platform will be participating the testing in the later part of this year. I think -- like I said, we rereleased -- the 40 Ip Sec end of last year and then they see the high speed MP6 processor, 6th generation will come out which will be upgrade some of the product including the very high end product. So I think that the MP6, I think the timing is pretty good because even in the early part of the cheaper release, but we already see a huge advantage to leverage this MP6 technology to address is a high speed multifunction mobile environment.

  • - VP, IR & Communications

  • Yes, let me actually add though, too, Jayson, and we've said this sort of in the past is that we haven't historically seen any type of significant pause by customers based on new ASICs. Because we continue to refresh our ASICs, because customers don't necessarily know which products are going to have the new ASICs and when, looking back historically, we really haven't seen any sort of spikes and dips based on new ASICs.

  • - Analyst

  • Is this mostly next year revenue, '14?

  • - VP, IR & Communications

  • Definitely, yes. Yes, we talk about releasing the ASIC later in the year, then we have to work to integrate it into new products. From a revenue standpoint, you would see that in 2014.

  • - Founder and CEO

  • Yes, also like last week we announced that 10 port levy, the IP Sec 2 which we announced probably end of last year. So it takes some time to start in building of the system.

  • - Analyst

  • Understood. Then last question, is this -- is the network processor V6, is that mostly a FortiGate 5000, related ASIC, or is it more broad than that?

  • - Founder and CEO

  • It's more high end. It's also some of the, may also leverage that.

  • - Analyst

  • So beyond just the chassis product?

  • - Founder and CEO

  • Yes.

  • - Analyst

  • Okay. Thank you.

  • - Founder and CEO

  • You're welcome.

  • Operator

  • Nandan Amladi from Deutsche Bank.

  • - Analyst

  • Okay. Thank you. Good afternoon. My question about your comment on the M&A earlier. Cisco is acquiring Source Fire and obviously some of the space seems to be starting to consolidate. What are the areas that you think you might be interested in to round out your portfolio?

  • - CFO, COO

  • Well, I -- let me start and then I'll let Ken calibrate. So at the moment, I think everybody comes with their own DNA. Our DNA at Fortinet to date has been to add technology tuck-ins, technology enhancements, as well as additional engineering and the innovation talent and products that are complementary to what we do and taking our own portfolio forward. They have not been of any scale historically. There is nothing to make of my comment. I was answering in the context of what to do with cash in the future. At the end of the day, we're focused on our own internal execution at the moment. And we will continue looking for small technology enhancements and tuck-ins. So we don't have anything contemplated at the moment. In terms of what space and what product enhancements to look after, I'll let Ken take that. That's -- just to make sure we're not confusing things on the M&A commentary.

  • - Founder and CEO

  • Okay. I think the space we play in is about $8 billion to $10 billion in network security space. And like I said before, I see there's three trends going on. One is really somehow the more is lost after the 40, the speed goes faster and faster, we already see the 40 gig, the 100 gig all starting to come out, and even the 400 gig, is terribly extended already, are already starting in the engineering design process. So with all these higher speeds going on, every 18 to 24 months, you almost double the network speed. Definitely you need a more dedicated high speed appliance, secure gateway to really secure all these network (inaudible), you have to be in line to really stop all the bad things there, so that's where the network gateway security wise cannot be slower than the network speed. Otherwise, you will slow down whole network because network security so far is mostly related to the device, so that's the first trend. Go faster and faster and still follow more slower.

  • The second one we see, the multi functions that are integrated together, and there really isn't any, there's so many different application. There are so many different kind of profits, that can get in, it's difficult to have -- to costly have a multiple box. Each only secure one or two function, one or two kind of traffic, so you see the IDS, IPS integrator, the firewall, or some other, like some other web profits that also integrate together. So that's where some call it app control, some call it the next gen firewall, and also UTM is also the term we use for 10 years. So there's a multi functions that are integrated together with the multiple vendor. I do believe even with Cisco, they bought software, there's a kind of intention to integrate some of the things together.

  • And then the third thing we also see, the function starting to move to higher layer beyond the traditional connection layer, which is firewall use and it's [go to the content, go to application], try to secure the user, secure the application. So there's a lot more to the higher layer. There's also need in additional profit in power beyond the process of network traffic. So all these three trend we feel is, feed us well, because we have a good platform, and also from time to time, we also want to do some acquisition. So far, I think since Company start 13 years ago, I think we acquire a little bit, it's a button company, most acquisition based on some technology, some team, and a certain product, but going forward with our cash, starting our [profit] and dollar, we may kind of open up a little bit more kind of even certain vertical space or certain [cost] space, but we still want to lead in the technology. So that's the long-term Company strategy. But so far, we are pretty confident our engineering team can keep up the changes in the space and also using the best platform technology to address the customer need right now.

  • - Analyst

  • Okay. Thank you.

  • Operator

  • Walter Pritchard from Citi.

  • - Analyst

  • Hi. This is actually Jim Fish, Walter's associate. I just want to say thanks for taking my question.

  • - CFO, COO

  • Sure.

  • - Analyst

  • I think you guys were providing on the call before more on the carriers and you kind of talked about it right here. Can you kind of just go into the growth rates behind some of those verticals if you can, and any commentary on those would be great.

  • - Founder and CEO

  • Let me try some of that. I think about three years ago we started changing the sales and marketing strategy more, tried to target sort of the vertical space compared in the early days, more regional base, CD base, and certain vertical you see the earning release, like education, some of the high end service provider, we are doing well, because I feel they are more like technology, kind of technical focused, so for them, you really involve a lot of testing, a lot of technical evaluation, that's what we tend to do well. In certain areas, certain enterprise markets, some time, certain customer too much depend on sort of marketing message. That's the area we are also keeping improving right now and also want to invest, it will be more going forward. And we also starting to try to engage some other third party testing and make sure we cover all the certification, all the testing, make sure they can see the advantage of technology. So that's where kind of a certain vertical market I believe.

  • Going forward we may have to invest more on the marketing to open, to grow more in certain vertical market because a lot of customer in certain areas, certain vertical, they are more dependent on the marketing message. The other trend I'm starting to see kind of interesting. The MSP area, because secure is starting to become more complicated than some of the enterprise can manage so there tend to be more kind of working together with service provider. So on service provider side, they do need a platform has a flexible multifunction, and also can address multiple customer need, and the same thing, same kind, same park, and also in the virtualized environment, that's where we also have a lot of advantage and even from early days of [virtualization of a co-sign], and also a lot of function we add in, the virtualization we add in, so that's also kind of a change in the vertical space a little bit. Ahmed, you want to add something?

  • - CFO, COO

  • No, I don't think there's anything further to add. I gave you the statistics earlier in my prepared remarks. In terms of service provider, which I think is where you started your question, Jim, it's -- the Q2 delivery was 25%, Q1 was 25%, Q2 last year was 26%, so it's all pretty steady in the same neighborhood. And you got the additional color on other verticals from Ken.

  • - Analyst

  • Okay. Well, thank you. I have one follow-up, though. With EMEA, you guys were talking at points that it was strong, but I believe it was last quarter that you guys were highlighting that parts of EMEA were weak, especially I think it was central. If you could provide any color on that, that would be good. Thank you.

  • - CFO, COO

  • Yes, I don't recall giving specific color. But it may have happened when the Company missed its earnings. Here's how I would look at EMEA, Jim. I would say EMEA has to be looked at on an annualized basis. So one light quarter followed by a strong quarter, and as you know, Q3 with most of Europe on vacation in August, et cetera. So you have to balance all of those things.

  • In terms of the particular strength that we saw, I would say that's our own fruit in this last quarter, in Q2, in terms of execution. Where geographically within Europe, we saw -- we saw some strength out of Germany. Believe it or not, we saw some strength out of Southern Europe, but I'm not ready to call that a trend by any stretch of the imagination. So I put Europe still in the penalty box as a macro. And we're focused on our own investments that we've made to Ken's point, when things went south in Europe, we doubled down and hired better talent and more talent, and so as we're navigating the storms in Europe, like everybody else, no different, we're actually executing better and balancing the full-year equation with a quarter of light Q1, as followed by a strong quarterly Q2, and then you get seasonality into Q3 and so on. And all of that is factored into the numbers we gave out back in April and the numbers we gave out today.

  • - Analyst

  • Great. Thank you.

  • - CFO, COO

  • You bet.

  • Operator

  • Scott Hong from BYGH capital.

  • - Analyst

  • Thanks for taking my call. Can you hear me?

  • - CFO, COO

  • Sure.

  • - Analyst

  • When I look at your slide deck and these FortiGate billings pie chart, the one piece of the pie that stands out both from last quarter and this quarter is the midrange products, the percent of revenue, or percent of FortiGate billings Q2 to year-over-year, and then versus year-to-date full-year 2012. It's the midrange that looks weak. It looks like TELCO rebounded. So when you break down that midrange product growth, what's going on there and is that any sort of sign of new weakness versus last quarter, or what's going on with the midrange?

  • - Founder and CEO

  • This is Ken. I think that's the comparison compared to one year ago, the bigger deal we mentioned about is really the middle range for the multi million dollar.

  • - VP, IR & Communications

  • Yes, and that happened Q2 of last year. We had a deal, Scott, for your benefit, I think I'm not sure if you even knew the story all that well last year. But we did a multi million dollar deal, the largest deal in our history. And it rolled out over several quarters. The biggest contribution of it coming in Q2 of 2012, and it was thousands of midrange products. So that is sort of why that slice of the pie looks different this quarter and it looked different last quarter, on a year-over-year comp.

  • - Analyst

  • So last quarter, was it starting to roll off of that big deal as well?

  • - VP, IR & Communications

  • No. Well, when did it finish? When did that -- a little bit. Yes, it did. A little bit, but not as much as the year prior. The contribution wasn't as much as the year prior. And definitely, we didn't see any of it in this quarter in Q2 and we had a lot in Q2 of 2012.

  • - Analyst

  • Okay, and then just on the cash position, you know, at $20, you could buy back a quarter of your stock outstanding. If you were to preference uses of cash here in your minds, what have you talked about being the preference for cash?

  • - CFO, COO

  • Oh, I think we've been very clear. I think in our minds, it's organic growth, navigating the angles that were thrown at us this year, which is what were thrown at everybody in terms of mixed macro signals. In other words, making sure that we're positioning our sales and marketing dollars, our innovation dollars, as well as the infrastructure support. This business grew pretty quickly, both pre-IPO and post-IPO. So we got to make sure we build the business on the right foundation. And then secondarily, as we tie our shoes better, our ability to potentially look at acquisitions that are a different scale than we have in the past. But that's farther down the path.

  • And then at some point, we will also reexamine -- the math you are doing is correct in terms of where the stock is and what the amount can be. But I think the better part of wisdom right now is we have gained market share in this business. We've climbed up the ladder very quickly. We are in the third leading spot against large, our largest competitors, and we got to keep going and continuing to gain more market share and growing this business. And as part of that, we will also be responsible in terms of looking at things like stock buyback. But it is not in the current year.

  • - Analyst

  • Thanks.

  • - CFO, COO

  • You bet.

  • Operator

  • Melissa Gorham from Morgan Stanley.

  • - Analyst

  • Thanks for taking my question. This is Melissa again for Keith Weiss. I just have a follow up on America's growth. Last quarter you said that you saw some challenges in Latin America. I think you also noted that this quarter as well. Just wondering if you could provide more color on how the growth was in the US relative to the other regions of the Americas.

  • - CFO, COO

  • I think overall, when you think about the Americas, first of all, Latin America is about 20% or so of the Americas total. Second of all, we had -- you just heard the dialogue between Scott and Michelle, a pretty tough comp in terms of Q2 of last year, with not only a very large multi million dollar deal, but in fact it was the largest deal we've ever done as a Company. So there really isn't any more color to give you on the US specifically. I think I've given you color on spending behavior, where the service provider space is, et cetera. What I can supplement is in terms of Latin America, I'm not sure I elaborated too much on that. You're right, in that we signalled that as an issue in the last quarter. I don't think it got any better, nor did it get any worse, and it was factored into my numbers back in April, and it was factored again in my numbers today, and we're hoping to see more execution productivity as the year nears the end and as we build a plan for next year. But the macro continues to be mixed in between what is coming out of Brazil and Mexico. For everybody, not just us.

  • - Analyst

  • Okay. Thank you. And then one other question. Do you have any update on the integration of Coyote Point? And did it contribute any revenue in the quarter?

  • - CFO, COO

  • I think the integration is going very well. It's part of the Company, it did contribute revenue. When we integrate companies, we don't split out financials. So it's a very small acquisition, as you know. So I don't know what revenue it contributed. But I do know it contributed revenue in line with our internal expectations.

  • - Analyst

  • Okay. Thank you.

  • - CFO, COO

  • You bet.

  • Operator

  • Erik Suppiger from JMP Securities.

  • - Analyst

  • Yes, just want to come back to the competitive dynamics.

  • - CFO, COO

  • Sure.

  • - Analyst

  • In the past, you've talked a little bit about Palo Alto seeing them more, what was your perception of them. And then you talked about your service for advanced persistent threats. What kind of attach rate are you getting for that? And how do you perceive your relative position vis-a-vis Fire Eye and Palo Alto and Source Fire? How do you envision your position in the market?

  • - Founder and CEO

  • I think -- it's a little bit more different marketing method than the way to position and I think the few company you mentioned, they probably more try to target some of the, like sort of function sometime behind the firewall, second layer or third layer, and that's where Fortinet is more in the primary firewall, it's a high speed [inland] device, and also with multifunction, sometime even can cover the second layer, third layer can cover. We also starting to address some of the ATP, like I mentioned in my script, which we feel is also kind of important to be integrated as a part of the gateway, and also helping the customer to defend some of the latest, layered attack across some of the behavior-based attack. So that's where, but some different market research firms have different vendor, they may call some different name, but from all point of view it's really the multifunction device starting to have a more dominant area in the network security and also customer study more need to go to the higher layer like I mentioned the industry trend early of the call. And that's also kind of the trend we feel we have the platform to address better than the competitors.

  • - CFO, COO

  • And Erik, maybe what I could do is just supplement what Ken just said, given the fact that I'm still fairly new and have a fresh perspective, although I'm not anywhere near Ken's expertise. He's been a visionary in this space for a number of years. As you know, this is his third company. But I'll give you what I've learned.

  • First of all, from the standpoint of profile and DNA of companies, across this fragmented and increasingly more fragmented space, we're kind of the one in the middle and is, in my judgment, balanced for continued gain of market share, continued growth above market, and I know all of you guys are eager to, for me to put out a long-term model, which we will do next year in terms of what's expected in terms of top line growth and what's the commensurate profitability and free cash flow. But when you look at it, and Ken articulates it every now and then, you've got on the one end Palo Alto networks, and I'm not here to comment, by the way, on specific competitors and I'll never do that. But what I'm telling you is public information. They have spent an enormous amount of money and continue to do so on marketing. We haven't gone that far. Perhaps we should do a little bit more of it. Then you've got other ends, like Check Point, who are equally as solid as we are from a financial perspective, but don't have the same growth levels that we've seen. So I would put us in the middle.

  • And to be honest, in my two hats that I wear here, I'm more focused on the fact that when I speak to technical people at the customer level, our product is differentiated because of its performance, its agility, and the fact that we can integrate more functionality. And so as a result, what we're trying to do is improve on our execution so that we continue to stay ahead of everybody else. In terms of your -- the other angle of your question, are we seeing anything discernibly different in the competitive landscape, I would say Q2, even though I'm not an expert on Q1, but I did enough due diligence walking in, was pretty much the same and similarly as I look at our pipeline in Q3 and the rest of the year. And it's good to have all those folks around at the end of the day. You can't win everything, but I can tell you when the test comes down to performance and capability, we tend to win the game.

  • - Analyst

  • Very good. Thank you.

  • - CFO, COO

  • You bet.

  • Operator

  • (Operator Instructions)

  • Sterling Auty from JPMorgan.

  • - Analyst

  • Yes, thanks. Curious, when you look at the implied guidance for the fourth quarter, how much of that is based on your previous comments in the earlier call about just historical patterns and how much is based on the pipeline? Because I do think that one of the issues investors had coming into the call was some of that sequential jump in the fourth quarter.

  • - CFO, COO

  • Yes, and rightly so, Sterling. I get it. So I think my response is it's blended. In other words, when we looked at the numbers, much like we did in April, by the way, but for the pull-down, at the end of the day it was about studying the pipeline, studying the typical sequential uplift, and also some element of what's going on, not so much that spending behavior has changed, as I stated repeatedly, it hasn't. But at least as some have pointed out on the call, checks are getting released versus getting held back, as was the case in Q1. So I would say all of that put together gives us the ability to look at our Q4 number as a makeup of our full-year number to be reasonable based on everything we know today.

  • - Analyst

  • Okay, and I wanted to circle back to the cash flow guide. Specific to the inventory management, but more from a payables perspective, is there anything different that you're going to be able to do in terms of managing your payables? So what I'm curious about is the net impact to cash flow from this inventory change, might you have some flexibility to influence the cash cycle on the payables side?

  • - CFO, COO

  • Yes, look, the world I live in, Sterling, is if I owe somebody money, I got to pay them and I got to pay them on time. So in terms of anything to be managed, that's not our normal approach. These are long-term contract manufacturers and it's just not the right way to manage business. So I think there's nothing to read into. If something fell into payable, it's just literally timing because that last week, and of course it was my first iteration of that last week of business here at Fortinet, is pretty busy and very active, particularly back in the warehouse. So I think for now, the salient thing to take away is a correction of the turns, lower turns, which means buying more inventory, started doing it in the quarter, and sometimes it's going to flush through payables. Sometimes it's going to be hanging on the balance sheet into the next quarter. When you look at overall this year, to date, we replenished by 10. When it's all said and done, as I said earlier, probably replenish at 20 above normal levels, which keeps us at that average turn of 2 to 3. And then we'll pay them when they are due.

  • - Analyst

  • Okay, and last question, Ken, when you look at some of the ancillary products, I think there was a question on the ADCs and the acquisition, or if you look at database, or if you look at some of the other ancillary, or peripheral products, are any of them of a size that are starting to move the needle? Are they still kind of nice add-ons?

  • - Founder and CEO

  • Not quite move the needle yet. But we do see -- because some of them probably be later in, or integrate in the next version of the FortiOS, we want to try. We want to understand some of the function first. And some of others, we may eventually try to build a dedicated team and try to focus more, but right now, I would say all relatively small.

  • - Analyst

  • Okay. Thank you.

  • Operator

  • Okay. Thank you. And it appears this does conclude our Q&A session. So I would like to turn it back to Ahmed Rubaie for concluding remarks.

  • - CFO, COO

  • Well, thank you all for coming back on the second call and for your questions on both calls. I'm particularly appreciative of the patience you have given me in my first quarter. As you can tell, we're heads-down, working on execution, trying to make the business run on a better foundation for growth and we're very excited about where we are and where we're going, and look forward to seeing all of you during the investor season.

  • Operator

  • Okay. Ladies and gentlemen, this does conclude your conference. You may now disconnect, and have a great day.