Fortinet Inc (FTNT) 2014 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to your Fortinet Q3 2014 earnings financial analyst Q&A.

(Operator Instructions)

As a reminder today's conference is being recorded. And now I would like to turn it over to your host, Michelle Spolver.

Think you John and thanks everyone for calling back in for those who were on our prior call. As you all know this session is a way for us to ask -- to answer more additional questions that you might have now that you've had a whole 30 minutes in between calls.

Happy to answer anything we can. With me are Ken and Drew. And just from a disclaimer standpoint just want to call out to please remember that the forward-looking statements that are made during the second call are subject to any cautionary statements made during -- subject to the cautionary statements that I made during the prior call.

So with that I think we do have questions in the queue. So John you can go ahead and take the first question.

We will go with our first question from Michael Turitz from Raymond James.

Hey guys good evening it's James sitting in for Michael again. Drew first question on the sales and marketing hiring I saw that accelerated in 3Q. Were you guys able to meet your targets in hiring for 3Q and are you guys on track for 4Q?

I'd say that's generally correct, yes.

Okay.

I just have to put a qualifier on that. The answer is yes.

You feel like you met for 3Q and you're on track for 4Q? Okay.

We're still doing some building there as we said so yes we're on track.

Okay got it. But it's on track. And then for cash taxes for 2014, I know last quarter you had said you felt they would be $36 million to $37 million for the year. Is that still the case?

Yes they've actually -- we're calling them up a bit. I think we're coming slightly down on CapEx if you will in terms of free cash flow overall. But we actually think the cash taxes paid will be about $42 million this year.

And the reasons are, one there is a jurisdictional shift into higher tax jurisdictions, primarily in the US. And then we're also, probably like other companies out there, feeling the pressure internationally. There are just more aggressive overall international tax environment and so you end up with a few true up's internationally as well.

Okay so you're feeling about $42 million this year. And then if I remember correct for 2015 you guys revert back to the GAAP tax rate for cash taxes. Right? This was just a true up for this year.

Yes, I haven't personally given any remarks about 2015 taxes or cash taxes. So I'm not sure what you're -- I obviously don't have any the guidance there since we're not giving guidance, but I'm not sure where you got that from.

Okay and then on APT maybe for you and Ken on the call I know that FortiSandbox has been out for a couple of quarters now. But it seems like this is the first time you guys have called out some notable wins on the call.

What changed this quarter? Was it your channel relationships selling it better? Was it just a case of being out of the market for longer? Was there a noticeable uptick this quarter and what do you think caused it?

[Q3 is a full quarter we starting] sell and promote FortiSandbox so that's where we see the ramp up pretty quick. So we say we have [loss result] on customer right now. And I think even the product now, it's early this year and also as report come out in I think in early Q2, that time was in very early state of the product ramp up. Now the channel partner, a lot of our own teams adding our trend to sell this product. So we're starting to see the ramp up right now.

And James, I do believe the customers are actually testing the product before they buy. And I think that there is a bit of a ramp-up time really the product's just kind out there Q1 timeframe, I believe. Obviously the NSS labs test is something we use to help customers get comfortable with our product.

But I think they're becoming very smart buyers of this type of technology given all the headline events. APT's and zero-day threats, so I think it just take some time for them to go test it. Which we saw the trials happening in Q2, which is really the first full quarter of opportunity. And we were actually very excited to see the level of closure we saw in Q3.

And when you guys go into the APT deals are you finding that they're with customers that are Greenfield and you're competing against [Fire Eye Netlink] or are they mostly a rip and replace situation?

Is only been again maybe one full quarter little more than that so it's still early. For the most part most of the opportunities have been with the existing customers not all but most. And then we'll see going forward it's still really new.

Great and last question for me. Drew any thoughts on for 4Q cash flow were you think it will come in?

We don't guide on cash flow. We typically give the cash taxes and the CapEx, which I think we've done. I think we said seven in CapEx. Roughly 8 for probably taxes.

Sorry just one more follow-up after that. I noticed that the Q3 cash flow is very strong too. I haven't completely gone through my model, but were there any one timers in there or was that just a result of day-to-day business?

It wasn't a one timer in this Q3 of 2014, but in Q3 2013 we were building up inventory and spent about $15 million in inventory. So that certainly helps from a comp perspective.

The percentage of growth was a low bar.

Great, thank you guys.

Our next question is from Sterling Auty from JPMorgan.

Yes thanks, hi guys. Actually Michelle on that point that you just finished off with, since you're halfway through the product transition can you talk to us about inventory as you migrate the rest of the product line onto the new chip?

Yes, I mean we've guided or talked about in terms of how we forecast around inventory is two turns or better. And we've been doing that.

We have halfway -- we're halfway into the products. We've been working at -- I think our inventory turns were 2.3 so still above the two times. And we're still looking to do that in that manner.

Okay. And then on the mid-range that jumped in the percentage of the billings, I think the 300 and one other series was really mentioned.

Was there any particular region or types of deals or other things that really drove that strength? Just so we can think about how that mix might look as we finish out the year.

The thing is, it's a 300D [and a 500D] and those were announced in July. It wasn't particular to one region. I mean the one thing is, and Sterling you know this by following us for awhile is that the product mix does vary a bit from quarter to quarter. It's just about -- it really is based on the type of deals we do and the models of product customers choose.

One quarter does make a trend so I'm not saying that you can continue to see this, yes or no on that. But the other factor I would say that may have contributed to the growth in the mid-range is we've talked about for the last couple of quarters having a higher focus and investment on enterprise national resellers, especially in the US.

But also large enterprise focused resellers regionally or worldwide. A lot of those are going after mid-range deals so that would be a contributor as well.

Okay and then last question. As you think about over the last couple of years it really felt like when Dell acquired SonicWALL it opened up opportunity in that part of the distribution network. A lot of the classic lower end resellers I think came and really flocked to your solution and maybe one other. And you picked up share et cetera.

It sounds like Dell is recommitting to that area with the SonicWALL solution. Have you seen anything in terms of their strategic moves in the marketplace that would identify that or any changes that you would make in anticipation of that?

No. I mean Ken can answer too. We haven't seen it and that would affect low end. We haven't seen a change or we didn't see a change in Q3.

I think we have a really good run rate business, a strong channel and exactly what you said we were able during the time of that acquisition to strengthen relationships with buyers that carry both products or have buyers that were carrying SonicWALL move over to Fortinet. So no change, nothing significant that we saw in Q3 on the low end.

In the low end, we also see -- we started to get a better and better position because two reasons. One is really the economy of scale.

We have a much bigger scale and also for engineer resource leverage all the technology. So that's actually helping because we've run the same FortiOS across the whole FortiGate from the high end leader into the low end. So that gives us much better on the function and the performance on this kind of thing. And also once we have a larger quantity, also can lower some of the cost.

On the other side we're the only one with leverage the chip technology we called SOC, the system on chip, we're shipping on the second-generation. We're also working on the third-generation right now. That's also [chin to game] there because the other companies still try to put a lot of software into some other small PC server solution compared to what we have from how our chip level [creates a whole] solution.

That actually has a much better advantage and even initial cost is higher of engineering investment, but once we have a large quantity so the average cost doesn't go down. We also have more advantage on the performance on the function side. That's where we feel pretty comfortable we keeping do better in that space.

Got you. Thank you.

And our next question comes from Jayson Noland from Robert Baird. Jayson, please go ahead.

Great. I wanted to ask about verticals. Specifically it looks like retail continues to be lumpy and financial services very strong. First question, is that a function of large financial services placing large orders or is it more broad than that?

No, fair question Jayson. Look I think we're doing fine in financial services for sure. But I think part of it, when you compare it to retail I think part of what's going on there is we're investing more -- clearly more investing more on enterprise in the verticals -- clearly financial services vertical is one.

Retail has been there. It's doing fine, but as a percentage of revenue because revenues going up or the billings are going up I think the actual percent of the mix goes down. Because I really think that's a big piece of what's going on there.

Obviously you can't look at one quarter -- you need to look at it over time and everything. We feel pretty confident in that space as well. We do fine there. But clearly the investments verticals are an investment focus. It wasn't anyone large deal in financial services at all.

Okay. And last question if you can answer this. When you look at the other category so if you back into the balance of revenue that's not listed in the verticals that are provided, there's been a lot of growth the last few quarters in other. And I was wondering if that's a function of tech or something else?

Good question.

Those are the top five verticals. I think the question is what verticals underneath that have been growing outside of the top five. Going back to the type -- the deals that we have spoke about the larger deals this year we have had several in the technology sector. So that could be a factor that's growing.

Jayson, I think that's a really good question. I mean I think we could take a look at that and if we see something significant there we could update obviously investors. On that front.

We're doing fine. I mean intuitively I can tell you from what I see we certainly do well in that IT space. We get the savvy -- we'll stand by the comment that savvy tech buyers in the IT space seem to like our product. We'll take a look at that to see if it's meaningful and provide a follow-up if we think it's meaningful.

We also see some of the education and some of the [quota]. I mentioned in my script Internet 2.0 so that's the 100-gig infrastructure across all top university. It is still in the early state but that also can change in some of the future the way -- where they can connect together.

There is also few -- we mentioned service provider in early stage of their testing some of the new infrastructure to secure the mobile and also the cloud. We see a lot of opportunity leverage the 100-gig interface the terabyte firewall, especially within the data center. So now we're starting to see quite some opportunity and also we're starting to [build some team] to address our market.

Thanks Ken. I appreciate the color.

Our next question comes from Walter Pritchard from Citi. Walter please go ahead.

Hi guys it's actually Jim Fish on for Walter here. It sounds like you guys had a good quarter, so congrats there. Are most of your wins coming at the perimeter or more so within the environment itself in your view?

I think most of the time [some kind of] security whether they are relatively old or slow or some of them need some new function. But we do see the new opportunities where they secure inside, as I mentioned in my script there.

I don't have the breakout of how much from perimeter and how much internally, but internal we see more request. We feel that's a new opportunity because there's a few key features that you have to secure internally. One is related to speed, you only need to match all the internal switches of the speed, which tend to be much higher than the parameter.

Second, is really, when you are deploying, we call it transparent mode. Basically you can drop the box in without changing, reconfigure the infrastructure. That way we feel is a lot of new opportunity because that is unique function and the performance we have.

Okay thanks Ken for that. And then last quarter you guys had highlighted that channel partners were up about 70% year-over-year.

Can you give us directionally where that was in Q3 and why is it that channel partners now are really coming on strong? Is it just the change in comp structure that happened or is it really driven by the new opportunities given the product strength?

Jim, it's Michelle. What we talked about that stat -- it relates to growth of enterprise national resellers in the US. So those are partners like FishNet Accuvant, CompuCom. So it was a select group of partners that was helping in the enterprise.

And really why was it growing was because we placed more of a focus and more investment on those partners. Some examples would be adding a dedicated or couple dedicated account people and helping them do some marketing with marketing funds.

So those would be examples. We didn't give that stat this quarter but I'll tell you that it was similar to what we saw in Q3. So still very good -- sorry Q2 so still very good growth, which is understandable. It's not all of our channel partners in general. It's a subset of channel partners, US partners focused on enterprise business in the US.

Okay great. That was -- understood on that Michelle. And then one final one from me.

I think if a few of the others here have asked about this, but you guys had highlighted that you are halfway through the refresh cycle in FortiGate NP6, just looking out a few quarters if that's already going to be halfway through you're going to have a few quarters of growth here. But if that's can be halfway through where do you guys expect the growth to come from? Is it going to be the new products or what's going to drive that?

Jim and then I'll let Ken expand. Let me take part of it though. Is that you have to remember so we have three ASICs. ASICs tend to drive refresh cycles of products because you get a faster product. And then you also -- we have our operating system which adds functionality and features, but the speed comes from the ASICs.

In the mid-range and high-end line is where the network processor goes. And that's -- our current version is the NP6. So we are about halfway through the models that will utilize the NP6 processors. Some of those -- one of them was just announced last week. The other two were just announced in July. So even early on through that halfway. Plenty of growth still there.

But remember that we really do and if you look historically we're constantly refreshing our products and driving higher performance because of releasing new ASICs. Future growth beyond NP6 will come from the next content processor.

So FortiASIC content processor accelerates content security functions really computationally intention functions like antivirus or IPS. Those are really important to customers. It's a little further out but by the time -- we'll have a continuous innovation that's going to continue to drive our growth. So after NP6 will come our content processor.

Also the refresh sometimes depends on the network interface and CPU some other processor available on the market. So that's where -- we will pace the refresh like a few [porta] a quarter. So that's where I make sure it makes things go smoothly.

At the same time like the product we announced last week leverage 100-gig interface in our appliance space compared to one year ago we announced the 700D. That's the first product used in the 40-gig network interface. That's the technology. That was the area which also enabled us to make a better, faster product. Integrate both the FortiASIC and the new network interface and the new processor, also.

Great. Thanks Michelle and Ken for that long explanation and great quarter guys.

[And also evidently] we have compared to our competitor most of them have the software capability which they can now lead in for the changing whether in the chip level, in the system interface level. So that's where few gives us more advantage and also drive both in the high end and also low end.

Now we start benefiting in the middle, we found a new opportunity where they see inside enterprise That's also replacing some of the switch. In the past, because switch is more [geared to] technology. In the security model, the higher layer, sometimes even to the layer seven. So the new chip and also the new platform will be able to go inside enterprise. That also drive a lot of advantage we have in the enterprise competition.

Okay. You kind of reminded me of another question I wanted to ask. Do you guys disclose what the breakout is between enterprise versus other customers combined?

No.

I think finance service kind of in enterprise.

You're saying do we break out our business by service provider, enterprise, low-end, or SMB and we don't now. The best way to do it if you look at our enterprise businesses if it's growing is to look at large deals.

The other one is to look at the billings mix by products. Understanding that one quarter doesn't necessarily make a trend. Enterprise's will tend to buy the high-end and mid-range type products.

Great. Thanks guys.

The next question comes from Fred Grieb from Nomura.

Hey thanks a lot. Just one question for me. You talked about receiving a tailwind to growth from the product refresh obviously, increased sales and marketing and then the better spending environment, due to a higher focus on security from the recent security breaches?

I'm wondering on that tailwind from the breaches, should we expect this to be consistent through Q4? Or is this spend potentially a bit more discretionary in nature and maybe it shows up as a larger Q4 budget flush something like that? What's your expectation there?

Sure Fred. You 're asking the question I believe let me make sure I have this right. I believe you're asking the question about the tailwind from the overall security headline event environment.

That's exactly right.

Okay. I think most of that takes time to play out. I think somebody asked earlier on the last call kind of be --the pressure there created slowed down or speeded up sales. I think it does both. It prioritizes them at one level.

And we pointed out the census from Lightspeed GMI on our website that talks about 90% of IT --CIOs and CTOs believe the job of keeping their enterprise protected is becoming more challenging. And it also says the [bordering] pressure has jumped almost 1/3 in the last year if you talked to CIOs and CTOs.

So I think it does two things. One obviously security becomes prioritized over other things. Certainly if you're more customer facing through technology because your brand now is at risk and obviously transactions, intellectual property, et cetera. That's kind of the tailwind if you will.

The headwind is that you have now kind of higher level scrutiny. It probably goes up in terms of who's looking at that at a C level. Obviously the CEO of Target who was there year ago is no longer there. I think that puts a different level of scrutiny on it. And also at the Board level. And that's kind of the headwind.

That's kind of a qualitative answer to I think this just continues for some time, is my guess. I don't think this goes away in any one quarter. I think people are revisiting these things.

They tend to be -- some are smaller, but to the extent that they're larger they seem to take longer. And they're getting more scrutiny and Boards meet typically once a quarter. I just think it's going to go on for a while. Sorry for the long-winded answer but I just think qualitatively that's going to exist for a while.

Let me add a little bit. I think the space kind of transitions a little bit because right now like I mentioned there's a mobile device and also a lot of cloud application. So that's where an enterprise service provider so they facing some new challenge.

So instead of secure the border, how to go inside, how to secure data center. And also what kind of infrastructure the service provider can work with enterprise to address all these latest threat there, breach there. Sometimes the new system takes some time to test and on the other side you see the pressure like another breach they needed some protection right away.

I think there are both -- long-term there will be a lot of potential but shorter sometime because where there are certain network solution interface still relatively new. So the technology is relatively new, they need some time to digest. And, but I do believe long-term, this space has a lot of potential.

Also the Company -- the technology innovation will stay ahead. We tend to see some dedicated and ours is a good company tend to do a little bit better compared with some other bigger company, which they have -- whether they're networking or some other combined together.

So that's where we see the space transition sometime pretty quick depend on the Internet application changing. And the one keep up with innovation, eventually will be the winner in this space.

Got you. Maybe I should think of it as basically a slowly building tailwind as there is greater and greater focus on security and more pressure for companies to become more secure?

Yes I think that's why -- and just kind of a final comment and I know we've said in the past or certainly over the past quarter. One thing -- and this is more qualitative, what we're noticing with customers, is that the security part of the organization is becoming more prevalent in the buying process.

I think in the past, it would tend to be the business was more focused on speeds and applications and network capabilities. And then security very much sometimes the role of the CISO would be more on compliance and governance. So it'd be more okay does this check the box on that side.

I think the tables are turning a bit. We're now -- the CISO clearly is at risk. As you can see from the various events. More on the spot. Certainly more exposure to the Board level.

And I think with that becomes more power in the buying process. And that manifests itself into probably much of what we're talking about here and you see more in terms of security being mapped into the architecture as a forethought versus an afterthought almost.

Got you. Thanks a lot guys.

Our next question comes from Melissa Gorham with Morgan Stanley.

Thank you. I have a question on endpoint security. I think Drew you might have called it out as a differentiator for Fortinet and was a little surprised to hear commentary on endpoint, this quarter.

Just wondering if you're seeing a change in customer's purchasing behavior more so than you've see in the past such that the person buying the firewall now also wants to buy endpoint? Or if there's any kind of change in that market dynamic that you're seeing?

Fair question, Melissa. We haven't seen any indication of that.

In terms of --

[You're talking about the endpoint.] Yes, we still see different buyer from that perspective although that being said they are looking at the overall security fabric. So I think people are buying layers of things.

Just to clarify I don't think that Drew said that we are placing a bigger focus on endpoint. I think what he said in his prepared remarks is that we offer a broad portfolio of security solutions from endpoint to core firewall to premier firewall to complementary firewall products. So that was the statement that he made.

I think that's exactly right. Thank you, Michelle. That's exactly right.

Okay. And then just to follow-up question on the FortiGate virtualized appliances on AWS. Just wondering if that is largely net new spending or is it existing customers shifting their licenses on to AWS?

We don't have the data there. I would imagine it's both.

It's absolutely, Melissa, it's both.

Okay great. That's it for me. Thank you.

Our next question comes from Gregg Moskowitz with Cowen and Company.

Thank you very much and good afternoon guys and a very nice job in the Q3. Wanted to follow-up on the internal firewall segmentation opportunity.

Ken without question the penetration rates have to be lower there. But I guess I just wanted to get a sense from you within the enterprise whether it's anecdotal or otherwise? What sort of opportunity you think is ahead of you there?

The technology now is ready to start in security internal of the enterprise now. But security is still much higher cost compared to the regular switch all these kind of [porport] particular secured cost much higher. So that's why it depends on the enterprise, the budget, how important the security. But we do see a lot of new opportunities.

This market potential can be huge also but on the security vendor side they also need to match both the speed and also lower the cost compared to some of the current solution. If we can more successfully do that, that can be a huge opportunity because inside enterprise they no longer consider secure right now compared to in the past they just secure the border. Inside there's all the department, all the server, all the users are treated the same.

That is what we see a lot of opportunity but this concept just starting taking off right now. We see a lot of interest but it is still too early to say how big the finance impact would be. And I think there is some research, come up fresh try to estimate the space but it is still very early.

We do see the importance of the space, which guiding inside enterprise and starting secure different department, different server, different user, different application.

That's very helpful. Thanks for that, Ken. I wanted to ask on that 3810D appliance I don't believe it's GA quite yet. But what sort of RAM do you expect to see for that going forward? Do you think there is a fair amount of pent-up demand for 100-gig ethernet or will that take a while to build?

I think we about three months ago we announced the 501D that also is 100-gig interface. A lot of service providers, lot of data center data requirement but also they take some time to testing. And the sell cycle in this service product, they tend to be longer than other sectors. Because a lot of intensive testing and also the function and how they're working with other devices, it take a long time.

But I feel they must have the 100-gig, otherwise will be not part of the architecture infrastructure there. So that's where we feel is very important. This is the first one in our appliance platform and the 5000 is the first one in the chassis platform. Chassis tend to feed a service provider better and appliance sometimes feed a data center and enterprise better.

So that we feel is quite important and we do put a lot of engineering effort to try to get this one. We will see a lot of interest in the testing and a lot of IP starting using this solution right now.

Okay great. And then a couple of quick ones for Drew. I wanted to ask about FortiSandbox because the 3000 customers is really impressive in a pretty short period of time. But I wanted to confirm are these all paid customers in one capacity or another where they are discreetly paying FortiSandbox?

Yes, Gregg it's Michelle, not Drew. Seeing if I can trick you and think it was Drew. No just to clarify, it's not 3000 customers FortiSandbox. It's basically those 3000 customers were customers that are using our cloud-based APT services which we announced a year and a half ago or a little more than a year and a half ago.

So obviously, we had a bit more ramp up time for that than having 3000 customers in a couple of weeks or a couple months. And they are paying customers, yes.

Terrific. And by the way, you sounded very much like Drew with that --

At the end of a long day.

That's helpful. I guess one last quick one. Was wondering of roughly $35 million or so in CapEx this year inclusive of the Q4 guidance would be in relation to the building in other one-time items?

I think for the most part that's right. Building -- there's always some ongoing CapEx Gregg I don't have the breakout. We're always going to -- right now we're clearly always going to have some CapEx in equipment et cetera. So there's some runway to that. But I think it probably did spike a bit this year for clearly the building on Kifer or in Sunnyvale. And the buildout of that and solar panels that we had.

And the building Drew if I recall correctly was it around $12 million or so? Is that in the ballpark?

I think it was more closer to $15 million, but Gregg we can follow up and get the exact number. I don't recall it off the top of my head.

That's helpful to just have a general sense. Perfect. Thank you guys very much.

The only thing I would also note is we spent a little bit on the ERP. We will be doing that the timing of that -- when you pay for that is a bit optional so we could do -- my sense is we may do just a little bit of that in Q4.

And I think I gave some of the CapEx number of [$7 million] and little bit would be in that. Little bit of that is in the past and we'll probably have to -- not to get too forward but that'll continue for a bit of time here too.

Okay terrific. Thanks.

Our next question comes from Erik Suppiger from JMP.

So one point of clarification. What was the contribution from the education vertical?

8%.

8%. Okay. Do you do much business in Russia/Ukraine or in Iraq where there's been some stability issues?

No.

Okay not much exposure there.

Not really.

Okay. If we look at the model going forward assuming that you continue to get good returns on your investment, should we think of the 16% operating margin as kind of the base level that you would be -- if you continue to invest aggressively is that where we can think of things staying? Or how should we think of your investment from an operating margin perspective?

Well I think certainly for Q4 I think 16% I think we've guided that so that's a good number for that period of time. We think about it longer-term what we're trying to do again is acquire market share and new customers for scale. You get more customers gives you kind of scale to drive more scope in terms of breadth of our products. I think it costs more to acquire customers then to expand and renew.

And so that's the way we think about expanding the margin generally speaking. But I would also say there are some other levers to point out in terms of we know that the longer a sales persons has been on board, the longer their tenure that correlates to higher productivity. Obviously because they have deeper relationships. They obviously get the products better over time, more familiar with the space, et cetera. So it's very valuable over time.

We're very focused on customer lifetime value and the economics around that. And look I would point out that the spend is all on the S&M line. The investments are all on the sales and marketing line.

We've been extremely disciplined on R&D and G&A. We're hiring behind -- or building behind the revenue curve there. I think roughly keeping those areas flat as a percentage of revenue. So we do -- I think that illustrates strong discipline internally from the Company.

We're not getting ahead of ourselves in terms of infrastructure. We do see our investments paying off in sales and marketing. And we've been very disciplined historically in terms of being more margin focused when we wanted to be. And we believe we can do that in the future at the right point in time when the markets indicate that the time to do that.

Let me put it this way. Can you envision a scenario where you would accelerate your investments in sales and marketing from these levels? Is that something that you contemplate or is that not likely?

I mean I think it's hard to answer Erik because we're not providing you guidance into 2015. I know you need to do a model and you need to guess -- I mean I think what we said is that our strategy is working and we'll continue this strategy and we'll do it in a responsible manner.

Okay that's fine. On the linearity front how much shipping did you do in the third month of the quarter? Can you give us a flavor for that? Did that change significantly?

How much shipping did we do --

He's talking about -- you're talking linearity?

You're talking about kind of billings linearity and should -- Yes. Does it change significantly? I think it's changed a bit over the last year. You can see in DSO obviously. But we're -- we just have a more linear process throughout the quarter.

We don't really share the percentages of what we do each month. But I think it's safe to say that we're not as backend loaded is maybe they were-- as Fortinet was a year or two years ago. Not that it's a consistent trend. I don't think that started last quarter. I think Q1 and Q2 both had similar characteristics in terms of improving linearity profiles.

And would you expect that trend to reverse at some point or is that something you think you're going to keep the DSOs down here?

I wish I could tell you yes but it really depends a lot on when customers buy. It would be nice to have a couple more quarters behind us to answer that question because we have a really even last calendar year. So it's kind of hard to say that.

I do think the one thing that tends to favor linearity is just as you could bigger, certainly a channel orientation I think provides more on the linearity front. The larger customer base you have helps because customers are doing follow-on orders, which tend to be more transactional in nature.

And they're doing -- they buy another appliance or two and then even support renewals. The various support and subscription renewals. Those don't really go to the end of the quarter. Those tend to happen during the quarter albeit a lot of them tend to terminate on the end -- on the end -- towards the end of the quarter. But hopefully we certainly hope it continues but that's a hard thing to predict.

Okay. And last question. On the service provider side I'm still a little bit confused. It was the lowest contribution we've seen in some time. But it didn't sound like there was weakness so to speak.

Is the service provider going to bounce back or is it there an evaluations going on? Or how do you look at the service provider performance in the quarter?

Yes, I mean I'll start it and Drew and Ken can follow on to it. There wasn't anything shockingly that should put us -- anything of large concern for us in the service provider space. Overall it did well.

What we're talking about in term -- and part of I think the reason why other vendors are talking about concerns they may have is that because the diversity of our service provider business. And that it is very diverse both geographically and also in terms of the way that products are deployed, MSSP versus internal deployment.

So for us in Q3 looking at Q3 there wasn't any -- or we didn't see any reason or we don't see any reason that we should've been concerned. Going forward I don't know. But we're talking about Q3 at that point the business overall performed well. There's not -- there wasn't anything that we would be concerned about.

Thank you.

Our next question comes from Brent Thill from UBS.

Good afternoon this is Fatima Boolani sitting in for Brent Thill. Thanks for taking my questions. I wanted to clarify your point on APT. So the 3000 customers today are all paying but they're all subscribing to the service and none of these customers have currently deployed the Sandbox appliance? Is that correct?

I can't say whether there wasn't a single one of those 3000 customers that are also deploying the Sandbox. But I would tell you that stat, that 3000 stat is customers, paying customers of our FortiGuard APT service.

I don't know that any of them -- some of them may be using the support of Sandbox as well. I can't tell you whether or not that's for sure.

Fair enough.

Just one point of clarification there. Back to some of the earlier comments. The product actually works if they don't buy the Sandbox, it actually works in our FortiGate appliances, right? So it's a subscription into the box itself, other boxes.

So they may buy the appliance or they may just buy it in an existing Gate, FortiGate, which is an appliance. And so it could go either way.

Okay --

Not to confuse you more but think of it as an add-on to effectively --

We offer it -- we offer the APT in two different ways. One of them is a cloud-based service that goes on to the FortiGate device. Those are obviously the existing customers. And then others, customers who don't want to do APT in the cloud, will buy a standalone appliance and we have the FortiSandbox.

Or it can be a new customer buying FortiGate as well to be clear and buying APT subscription along with it.

Okay so just along those points, just given the strategic priority around zero-day threats and exploits, what sort of revenue uplift are you getting for the APT? And is there a disparity between the revenue uplift you get for APT versus some of your other FortiGuard subscriptions?

No. The APT is similarly priced to our -- for example an IPS or another FortiGuard subscription service.

And customers do sometimes still buy it in a bundle. They may choose to buy a bundle of services which include APT as well. They're still paying for it. We price -- we price our FortiGuard services individually and also as a bundle.

Okay. And to your point about an emphasis on expanding wallet share within your customer base, your 200,000 large. I was wondering if you could help me sort of quantify or provide any proof points on how that trajectory has been?

So maybe in the form of the number of subscriptions attached to each appliance? Has that been trending up? Any color you can provide to demonstrate that you're becoming increasingly strategic to your existing customers?

What I think we can share there is that we look at -- we are looking at who's buying what. What have they purchased historically and follow-on orders and how do we expand. We can safely say that there is a higher correlation as you go up in terms of the size of the customer and the size of their purchase that they tend to buy more.

As we go more in the enterprise we see larger customers. They do tend to buy more over time. And I think it's probably obvious, but I'll say it anyway, obviously if selling the corner grocery store or whatever there's probably a limited amount that they need to buy. But if you're selling into a larger enterprise they're going to have a much broader scale, which makes a much more fertile opportunity to upsell, cross sell, et cetera.

And has the time period between customers coming back to you for more subscriptions off your expansive menu, has that time period been shrinking? They're just more frequently coming back to you?

I don't think we have a great answer. We don't see anything that would indicate that. I think it's one of the things where you probably see it going both ways.

But I can think of analogies of customers who buy one or two and then next quarter come by and buy more. And then I could think who just buy a lot all at once. It's just a hard thing to say.

Okay. And just the last one for me if I could. A housekeeping one. Just wanted to clarify the year on year growth for the billings, by GO. EMEA was obviously very strong at 42 but America's and APAC if you wouldn't mind just clarifying those numbers for me one more time.

Hold on one second.

America 25 and APAC 20.

Yes, 25 America's. APac, 20.

That's it for me. Thank you very much.

You're welcome.

Our next question comes from Jeff Kvaal from Northland.

Thank you. I would like a little similar clarification on the verticals. Those slipped past me during the script part portion of the program.

Verticals was, service provider was 22%, government was 13%, financial services was 10%, education 8%, retail 6%.

And then just getting back to Erik's question earlier, the service provider business was down and similarly the high end portion of billings was down a decent amount. I understand that there isn't anything long-term trajectory that has changed in there, but is there a reason why this quarter just came up a little short? Or is that just the nature of the lumpiness of the order pattern in that portion of the business?

Look I think first of all the Company's growing so the emphasis on the investments is on the enterprise side. So naturally the percentage of revenue coming from carrier is going to be lower simply as other parts of the business grow. That would be the first point to make.

But if you can do it an absolute dollars I think it was about even with last year. A slight increase over last year. I think that's it.

I think on the MSSP front, I think as we shared which is about 2/3s of our carrier business it was certainly fine. We probably saw a bit of a pause on the other side, more internal use is how we would characterize it.

Also on the portal side a little bit we announced a new 5000, the terabyte firewall about two or three months ago. That sector is actually the carrier space. They take a longer time to testing. And they're also in the middle of try to figure out (inaudible) the better structure, infrastructure to secure mobile device [the RT] and upwards of 100-gig.

It's a quite active dynamic space, so we feel pretty comfortable with the leading technology. But we're not as concerned as some other vendor, network vendor, we see as more opportunity going forward.

Okay. That makes sense. Then now that you have had the APT appliance in the market for little bit of time, what value proposition do you think your customers find more appealing, the service or the appliance?

There is some [regulation] change. When some of the country outside the US there are certain requirements you need to have all the important data local, whether it was in enterprise in the country then they cannot quite use a lot of our cloud-based service.

They needed some local device to do. But on the other side we have much bigger deployment base in the FortiGate. And I don't quite have the breakdown but it seems both solutions is a pretty -- we see customer pretty happy about it.

They would essentially be -- you would think they would be about the same revenue run rate over a period of time?

I just don't have a lot of visibility right now. Probably give some more detail going forward.

It is early in it.

Well, I'll ask next quarter and the quarter after perhaps. Thank you.

You're welcome.

I'm showing no questions at the moment.

(Operator Instructions)

I think that probably concludes the Q&A session. And concludes our earnings calls for the day. So thank you again everybody for obviously your attention and participation in these calls.

Drew and I are available through the quarter. We'll be at some conferences as well. Thank you again and have a good night.

Thank you very much.

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