Fortinet Inc (FTNT) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fortinet Q4 2015 earnings financial analysts Q&A conference call.

(Operator Instructions)

I would now like to turn the conference over to Michelle Spolver, please go ahead.

Thank you, Sabrina. And thanks everybody for dialing back in to this Q&A call. If you have questions get yourself into the queue. But before taking the first question, I need to remind everybody that the disclaimer, the cautionary statement and disclaimer I read in the first call, forward-looking statements apply to any forward looking statements in this call as well. With that, we can go ahead and take the first question.

Taz Koujalgi, Deutsche Bank.

Hey, guys. Thanks for taking my question. I might have missed this in the first call. Is there -- can you guys break out how much of contribution from Meru you're expecting in your guide for next year? I don't know if you guys said that on the last call, but I was jumping between calls. Sorry if you guys gave that in the last call.

It's okay. Drew can -- we're not giving it going forward. We talked about the reasons why we're not giving Meru. So it is in -- the business is at a point where it's pretty much fully integrated now. We have our Wi-Fi products that will be coming out in the first half of the year. Their funnel also is dwindling, which we have been talking about for the last two quarters. So after Q4 was the last quarter that we would break out Meru. But the business we're expecting is in our guidance.

That was a question was on Meru? Is that right? I just wanted to make sure. Yes. You can look at their history, of course. But their Q4 to Q1 [down] is pretty severe. Their traditional seasonality. So it's something you might want to take a look at, if you need some help in thinking about that number.

I was doing some math on how much they grew in Q4 2015 versus Q4 2014. I think it is down almost like 50%. So would you expect that kind of decline going forward in 2016 or 2015?

We're not guiding. And, yes, you're right. They were down significantly. But I even say, look at their typical seasonality Q4 to Q1, which even suggests probably more softness.

Also the reason for [acquisition really] offer secure Wi-Fi solutions. So that's probably where we build better some Wi-Fi security function, the FortiGate and also connect the access point with the security gateway. So that's our planned region and we are on target to get all this integrated and launched.

Got it. Thanks for that color. One more follow-up for Drew. Looking at the long-term deferred, the sequential growth seems like it accelerated versus your previous years. I think it's up that percent Q4 or Q3 2015. Any change in duration that would drive that acceleration?

No, I think it is our traditional. Usually, and I think we're not the only one, where it jumps about 1 point in Q4 over the prior quarter, as a percent of whole. I think that is what I have is about 1% more shifting into long term versus short term. There was no delivered approach to that.

We did have one large deal that had a size [one] longer term to it. But other than that, there wasn't anything unusual at all. Again, we don't -- even in that instance we're not pushing term. We just offer it however they want to buy and that's the way they buy. It was not like something pulled in at the end of the quarter or something.

Cool. That is very helpful. Thank you.

Rohit Chopra, Buckingham.

Thanks very much. I had a couple of questions. Drew, you mentioned at the high end of the enterprise, longer sales cycles, and I think you talked a little bit about it being strategic.

But I was wondering if there is any increased competition from incumbents maybe pushing back? Are you seeing anything there which is extending sales cycles, maybe bake-offs, whatever is happening up there? So if you could talk about competition at the high end of the enterprise.

And then, the second question, if you don't mind, I'm trying to get some metrics if you have any around the number of customers who take, let's say, more than one product. Is there anything that you could provide there?

Multiple products.

Yes.

Yes, so let me take the first one. We don't -- at the high end we do really well. As we've said all along, once we get in the door we tend to win. If we go to testing. A lot of our competitors will even -- don't love to test against us.

I think at the strategic side of the equation, it is probably fair what we characterized earlier that -- I think Ken said companies are clearly moving away from the point solutions to the extent that, that drove anybody's business. I think that reactionary piece, perhaps we're through that phase, I don't know. But I do think there is a lot of change in organizations with new people coming in.

They're looking at new strategic approaches, end to end, the ability to connect APT into the endpoint, through the internal segmentation firewall. The cyber security platform that we described and -- very few others can do that. Especially organically which is where we're unique.

And then, Ro, on the other question. We don't have a metric to give out, per se, in terms of growth or percentage of deals. But we did -- this time Ken, in his portion, talked about a number of -- we had a number of large deals that had four or more products -- four or more products included.

The ones that we sort of called out and are often coupled together, it's usually FortiGate, for sure. And then what makes up the APT framework, which would be FortiSandbox, FortiMail, FortiWeb, FortiClient, and then -- or they could add in some Wi-Fi capabilities with FortiAP. But, you can also look at the stat, too, that Drew gave around our CLV -- our customer lifetime value -- and that has increased. That increased from 5 to 6.5 which shows expansion.

Let me pile on a little bit, Rohit. One of the things we feel like we were doing very well is enriching the bundles. We talked about charging more for those -- the price increase from a year ago. And, again, we're coming out with a new enterprise bundle which has both APT and mobile endpoint security in that. That's the idea.

Think about it this way: at some level, you're consolidating these features through an enriched and bundled offering. So, it's somewhat -- the statistic itself is somewhat muted because they're buying multiple products or multiple solutions, if you will, through the bundle.

This is Ken. Also, like I mentioned in my script earlier, we win a few large deal which is like FortiSandbox, FortiGate, working with the FortiWeb web security and also FortiMail email security and also FortiClient endpoint security. This is really the true integration which [whether] the Gateway, FortiGate, and the Sandbox can closely work in -- manage together with the web security, FortiWeb, and the email security, FortiMail, and endpoint security.

It is a different than some other company competitor which they have a sales partnership. Which is a much loose connection between the web security, email security, and some other side. This is the really the true platform integration. And we see it's a huge benefit, especially for a lot of big enterprise. So they want to reduce the vendor -- security vendor, they want to manage, and they also want to have better visibility across different IT infrastructure area.

So, that's where with the Wi-Fi, with the endpoint, together with network side, and also the web email and then the cloud is a very critical, very important for this customer. So that gives us more advantage compared to some other competitor, which only have some like a piece of the solution.

Yes, I appreciate that. I knew it wasn't going to really work, but I was trying to compare another company's metrics, one of your competitors, and maybe there was something around what you could provide.

And the reason I was asking is because everyone is bundling today. There is no real point solutions out there. Everybody we talk to, everyone is bundling something. So I wanted to see what the metric was. But I appreciate the answer, so thanks.

You're welcome.

Gregg Moskowitz, Cowen and Company.

Thank you very much. Good afternoon, guys, and congratulations on a good close to the year. And I apologize if I missed some of this, I've been toggling a bit with multiple earnings. Drew, I heard you say earlier that your factory and the potential for some transition as it relates to the go-to-market changes.

At the same time, your billings guidance was actually, in my view, quite healthy. I just wanted to revisit this for a moment and gauge your confidence level that you have effectively captured any potential transitional issue as it relates to your Q1 in 2016 guidance.

Well, Gregg, I think the two issues we all say are absolutely -- whenever you have transition, change is always something that has to be closely managed and can be challenging. We have accounted for it in our mind.

The other thing we're accounting for -- while you bring it up, we're being somewhat cautious just given the global economic conditions. There is a lot of uncertainty as to what is going on globally, as well. And we tried our best to account for that. We have talked through it pretty closely with all of the people involved in the go-to-market process as well.

I would say this -- managing change is science, art, and trust. And we see the team working well together. We think we have the right team in place of professionals who know how to --know what they're doing strategically and know how to execute change, if you will.

Everybody on the marketing and sales sides has proven track records of doing this. And we have a lot of depth that we're bringing in the Company to do it, with a very proven track history -- track record internationally. Especially across broad markets of EMEA, which is a very complicated area, if you think about all of the markets and market conditions and various routes to market.

And so, we feel pretty good about -- well, again, we believe we're being cautious or taking the right level of cautiousness in the guide. I'm trying to give you some of the background of what's going on, though.

Also this is more like an internal transition with a proven track record that actually was here over 10 years. And that has also given us quite a [boast] that the whole team has seen the performance and see the whole achievement. And that where it has more confidence about some of the change.

Okay. That's incredibly helpful. I appreciate your perspective on that. Just as a follow-up, unrelatedly, where did cash taxes end up for 2015? And what are your expectations for 2016?

Yes, cash taxes I think ended up at $20 million last year. And then this year we're guiding we would say, I think between $25 million and $29 million.

Okay. Terrific.

Million. I'm sorry, Gregg, $25 million to $29 million, just to be clear (laughter).

Absolutely. Thank you.

We're not that tax effective, yet (laughter).

Fair enough. Thank you.

Melissa Gorham, Morgan Stanley.

Great. Thanks for taking my question. I have a question on what we should assume in terms of model impacts as you move to maybe more virtual machines? I know that you mentioned that you're seeing pretty good adoption of VM-based solutions. So, obviously that has a positive impact to gross margins, as you noted. But is there any impact to the top line that you're either seeing today or something that we should anticipate for the future?

Yes. Melissa, the good news is, obviously software has a healthier gross margin. And the tougher part probably in the near term, it dampens a little bit on the revenue side. I don't want to get into an accounting conversation but the accounting is a little different. There is a higher tendency for it to be ratable. Term license, for instance, is always ratable. That tends to show up on the services line for us, in our P&L geography, if you will.

You don't get the same up-front revenue impact that we tend to get from an appliance. I think just because of the way we sell and the wrapping of the bundles and so to speak, the accounting just works a little different. I think that is more of a near-term impact that probably normalizes probably somewhere later in the year, if you will.

Okay. Is that something that is embedded in your guidance for next year?

Absolutely, absolutely. Melissa, yes. We've thought about it.

Okay. And then, just in terms of capital return, you know [it's the] buyback. In terms of thinking about acquisitions you haven't historically been too acquisitive. How do you think about prioritizing investments in internal development, or internal R&D, versus potentially going out and making some acquisitions?

I think we have a pretty strong engineer team based in US and Canada. And that's [how] develop the whole platform we have. That is where we have a more broad part of our solution than the competitors. Like, for us, like the Meru case where there is really [some in] customer base, some in IP, some other would help us to get more market position there.

I think it is on the technology, on the [portal] side I think we are in market position right now. But with the whole market going down, that could have some good deal may surface up. But we just want to keep it open. But also we are very disciplined too. From the Company history you can see we also more careful discipline to do any acquisition and make sure we can not only do an acquisition, but also eventually to integrate and leverage together better. So that's the thinking behind it.

Okay. Great. Thank you.

Saket Kalia, Barclays.

Hi, guys. Thanks for taking round two questions here. First, Drew, you mentioned more focus on the mid-market. And that was something similar that we heard from Check Point this morning, as well. Do you feel that, that part of the market might have lagged the enterprise, in terms of catch-up security spending? Or, why do you think the mid-market is a focus area for a couple of security vendors in 2016?

Well, it would be hard for me to address Check Point's view. But, for us, we have been very successful internationally on the mid-market side. To answer your question head on, I don't think there's any latency in that buying, the -- if you go back to the buying sense post-target, if you will. I don't think that they were buying -- I'm not aware, let's put it that way, that they were buying any less than the large enterprises.

I would still think for -- everyone was out there doing something. For us, it is more of a US-focused issue because we were ramping at the same time. And the first thing we did was ramp sales people. And the sales people, again, tended to focus on the top customers, the top end of the enterprise, because those are where the big wallets are, obviously, and the big need.

We have said this many times, if you were a new rep coming in, you are probably going to call on Microsoft before you call on the software startup down the street, right? We think we've seen a lot of that. And, as we have scaled up, that continued to happen. But I think, over time, the mid-market probably has a stronger blend of marketing, and that's an investment we have made more recently.

Also -- this is Ken. We need to find the right balance in US. [West] would be the local sales management, West would be the vertical space. I think once we (technical difficulty) vertical team a few years ago, they may cover lot of -- too many accounts, some of them really -- we launch without vertical, but really it's more local business there.

So that where is we try to see what's the best way to organize, achieve the right balance among what is the vertical and what is the local. So that is where we started to have some the local sales team, which can be more efficient to cover some of the local middle-sized business which, traditionally in some vertical sales team.

Got it. That's really helpful. Then for my follow up, along the lines of segmentation -- or market segment. Service provider has been a strong area for a couple of quarters now. Obviously, a heritage is stronger [for that].

But more recently, is this a refresh cycle that you think is maybe driving this? Or is this maybe buying to support their own public cloud services? What do you think has been driving the service providers' propensity to spend recently?

I think a little bit both. Like I mentioned a few quarter ago, we starting to see some trend on international on the service provider. With the new infrastructure like 4G LTE and some other. And also address the mobile security on the infrastructure side. And then we also starting gradually to see the US side also starting to ramp up.

But long term, we also feel like the best solution for mobile security is really like a combination. And even more addressing from the care infrastructure compared to the traditionally [sulfur load] on the device. That is where a lot of the care also starting to realize that probably would be a better solution. So without the product technology, we feel we are well positioned for this area to grow in.

And also mobile security, mobile application, also growing very quickly. And that's where we have a much better advantage compared to other competitor in a care space. Which they need more high speed and also more reliable and feature-rich, and easy to manage solution. We have been in playing in our space more than 10 years. That gives us some more advantage there.

Saket, it is Michelle. To expand on that a little bit, too, is that really around our service provider we have a little bit more than roughly half, more than half, on the MSSP side. It is not necessarily refresh, but it really is around expansion. And when we talk a lot about what we hope to do in the enterprise in our land and expansion strategy, we are absolutely doing it in the carrier.

As Ken said, we're in nearly all of the major service providers, we have been for years. And as the MSSP market's growing, their subscriber base grows and they're upgrading their Fortinet gear to support the increased growth. So that, for us, is great. I mean, we've talked last quarter about a gift that keeps on giving. You have these great service provider customers that keep coming back, as their own business grows, to be able to buy more product to support that growth.

That is actually kind of interesting. Some of the playing in the space starting worry about some of the branch office CP since goes away because security sometimes a little bit difficult for some SMB customer to manage. That's where service provider has more advantage.

But, on the other side, still pretty low penetration rate in the SMB space, which have the security -- network security there. So that's where we see a large, strong demand for the service provider, long term, also to help him manage some of the SMB and the mid-enterprise solution.

But on the other side, still pretty low percentage, the customer have the security -- separate network security in the SMP and it's a mid-enterprise. I think it is both on the CP based all the service providers; MSP based we see pretty strong growth.

Very helpful. Thanks a lot.

Sterling Auty, JPMorgan.

Yes, thanks. I'm going to ask a real easy question so Michelle doesn't yell at me this time.

(Laughter). Great. I guess that worked then.

We like it when she yells at you, Sterling.

Exactly. So let's go back to -- I thought historically, when I think about your sales management, I thought traditionally you actually didn't have a Worldwide Head of Sales. I remember when Mike Valentine left to go to Sophos, he was Head of North American. I believe you would mean Pete Head of North American, not Head of Worldwide. And Patrice, per se, obviously coming in from a successful [resell] arrangement and working his way up through Europe, is this the first time you're going to have a Head of Worldwide Sales?

And following on I think it was Gregg's question, people understand you put in the appropriate level of conservatism in the March quarter. What I think they just want to hear, is there going to be suddenly wholesale changes to headcount both in sales management and sales reps? Or is this really about just driving improved efficiency in sales as you take a successful manager out of one region and put him the Head of Global?

Yes, fair question, Sterling. Did you answer the history question?

No.

Somebody else has to answer the history question.

Interesting. When we launch the product in 2002, we launched in three region the same time -- APAC, EMEA, American -- and that was three repeat to cover all three region. And then end up in the early days, it's about [once our] business come from each region, and eventually we consolidated international region under Patrice, and did a great job (inaudible) and grow faster.

And then, this is first time we starting to have the global structure for the [sales] and support. Because we see lot of global account right now. And at the same time, some of the good practice experience process on the international and it's also very helpful to keeping grow in US, especially in the enterprise and mid-enterprise.

And then, Sterling, to get to the question about today and the future. First of all, Patrice has a very strong track record. The work -- the go-to-market model in Europe and Asia has worked really well, internationally, at all levels of the business -- SMB, mid, large enterprise, and carrier. We've even said in the past we were going to try to model that, or bring that into -- import that domestically. And, it looks like the best way to do it is actually have Patrice lead that.

Now, the other piece of it is that marketing was one of the big missing elements, and we talked about productivity. But the way we believe you get there, part of it is go-to-market model and alignment. But there is also awareness, lead gen and training that go along with those things. Those are things that we're very focused on and doing very differently than we were doing six months ago.

Holly Rollo is another piece of this. She came in September as our CMO, and she's been hands-on, very energetic, and working very closely with Patrice. That's a key point. Because when you look [about] change, a lot of the risk is about bringing new people together and new factors along with change. And they're working very well together.

I think bringing people in, internally, having them blend together, work together, is very different than bringing someone in from the outside, where you probably have more risk of -- certainly, in the near term, of getting them to be part of the process or the culture as it works here. And, we've talked through it with them. I mean, they're very active. They're integrated.

That being said, because part of your question, will people change? Look, this Company manages performance as aggressively as any company I've ever seen. And we always do that. So I think, to the extent that you see someone leaving, at least involuntarily, it is going to be more about performance than about some restructuring.

And then, one quick follow-up for you, Ken. The other popular question I've been getting from investors is these internal segmentation firewalls, is it a special firewall product that's different than what you deployed in the data center and around the perimeter? Does it handle rule sets or some other feature functionality different? Or is it just the same product that you deployed in a different manner?

These are different compared with the traditional firewall secured to age. And also in some of the data center. Because they are multi [ployed] they called a switch mode, a transparent mode, and also without all these configure of the other like networking device. Different IP [translation].

And also, you probably difficult to depend on a percent of policy it's more like a monitor with the (inaudible) traffic. And also to a lot of (inaudible) some other like endpoint (inaudible) the email. It is additional (inaudible) beyond the traditional firewall. We don't see people using it to replace the traditional firewall, but it add additional layer protection inside a company.

Traditionally all connect by the network like a switch. Which has no visibility in the application company user level. And that is where internally they need an extra layer of protection. Because there is so many way to bypass the perimeter (inaudible) a mobile device without the [agent base attack].

That is where we feel is additional market and long term could be, lot enterprise can be even bigger. The deployment point will be much more than the traditional Internet connection. So that's where we see is a huge opportunity.

Sterling, it's Michelle. It is not a different model of a product. The sales will come from the high end of our product line. So it is a lot of the 1000 series and 3000 series. The deployment configuration is a bit different, but it's not a different model of a product.

The performance has to be very high because the internal network can be much faster than the Internet connection. That is where we see pretty much is using the high end, which has like a 10 gig, 40 gig, 100 gig, all this performance is because they don't want to slow down the internal network also.

Thanks, guys.

Michael Turits, Raymond James.

I really don't have that many questions. Congratulations on a solid quarter. You mentioned CapEx. I want to make sure that we had the right CapEx guidance for next year. I'm not sure if you reiterated it or not.

I think we said $55 million. I don't know if we even said a number, Michael. But it would be $55 million. We're buying some real estate, quite frankly, is a piece of that, which is most of it. And then, obviously, you have new people coming on board, so you have some ramp-up there. And, ERP, we should finish that thing somewhere in the middle of the year, so.

And then, where do we, obviously [you're not] guiding to 2017, but when you think about 2017, any sense on what kind of a steady state you return to, whether on a dollar basis, or --?

Are you talking about CapEx?

Yes.

That's a bit hard to think about. I'm reluctant to give guidance because I haven't -- I mean, we have some stuff in a long-term model. The ERP goes away, hopefully we're not doing as much. Hopefully we're through most of our real estate cycle by then, too. I can't give you quantitative numbers, Michael, I don't think that would be appropriate. But, qualitatively, that is one way to think about it. Some of the key things we're doing today probably don't recur --

Directionally down. For what it is worth, I have $45 million in my model, am I doing anything crazy?

You know, I don't want to guide on that. I don't want to play numbers with you. But I would say, certainly, I wouldn't think it would go up.

Okay. That's it. Thanks very much.

Yes.

Fatima Boolani, UBS.

Thank you for taking my question. Just a couple. You have now 260,000 customers with the net 9,000 you added this quarter. Probably one of the largest bases of enterprise software. So I'm wondering if you could provide us with a profile of these 9,000 customers you added? I'm trying to get a sense of what these customers are actually buying and if they're a totally greenfield? I'd imagine they're displacement, but I'd love to hear your color on that.

Well, I mean, it's going to be qualitative color.

Sure.

A lot of them are displacement. There are some greenfield opportunities in terms of a brand-new customer that doesn't have any security. But there isn't that many. It would be like a new company starting from scratch. A lot of it is displacement.

If you look at it from a volume, even though SMB is a smaller part of our business, it is a higher-volume business. So a good portion of that would be from SMB and if you go higher in the enterprise, you're going to have more of a contribution, but from fewer customers. We're gaining shares, so clearly it's taking share. A lot of those customers are taking share from others versus greenfield.

And also it is like a based on the [IDC] also is a positive number, three years ago we become a number one on the unit deployment globally. Now we are probably doubled in that number two now. And [there is really] in the leading position, on the number of customers, and that's actually gave us a lot of opportunity, up-sell, cross-sell.

But it is the platform solution is really like from the secure access Wi-Fi to the network side to the cloud and endpoint. So we see a lot of value in the platform. So once we get in, and then it is more easy to expand beyond the initial point.

That's helpful. And maybe a segue into my next question. Just with respect to the channel, certainly the channel is inundated with a lot of vendors on their line card. I was wondering if you can talk about how you're keeping and increasing their mind share? I guess another way to ask it -- are you starting to see the channel now we know the list of vendors that they support or align with? That's providing you some tailwinds in terms of more shelf space, if you will?

We're supporting them I think in two respects. We have more headcount than we had in the past. I got an earlier question about how many customers do we take direct. Everything ends up really going indirect. There is an exception or two, obviously. But just really think of our business as being almost all indirect, through a channel. And so, as we grow, they benefit. That is one thing.

The second piece they were looking for was more coverage on the accounts. And we weren't bringing them in as much as they would probably like to. Maybe I didn't say that right. They want to see us bringing them into accounts. That is how you develop the relationship. And the more people you have, the more relationships we develop, the more relationships we can bring to our partners. Which we're doing. And we're committed to the channel obviously in doing that. And I think that's what they look for, that commitment.

And then finally, marketing. And, marketing was something that we really -- it certainly domestically didn't have much of and I think that is where they're seeing the uptick. We just got through our global partner conference two weeks ago. And we brought new marketing plans to the table that seemed to be very well received.

That's helpful. And a last one --

And a commitment to investment there, by the way -- a strong commitment.

Okay. That's helpful. A couple of model questions if I can quickly sneak them in.

Sneak one more in, Fatima. Just one more. Because we have other people.

Fair enough. With respect to the price increases that you've rolled out, and the new enterprise bundle that you're going to roll out, is it fair to think that this would dampen the product growth rate going forward because you're carving out more of the initial PO onto the balance sheet?

I think there is some of that, for sure. You tend to allocate more in the accounting to the bundle side. It depends on the pricing, as well. I think the general trend on the lines have been more of a shift into the services line, for sure.

That's really helpful, and I appreciate you taking the time. Thank you.

Yes.

Thank you.

Walter Pritchard, Citi.

Hey, guys, it's Jim again. Just two questions here. If you are planning to guide for 23% year over year, and you're growing right now organically 29% and making investments -- not to keep hitting a dead horse here, but is it just the sales change and little bit of backup conservatism? Or, what are we missing here?

Is your question of why are we guiding less than what we just did?

It is just more can I get to more understanding around the guidance here? Given you guys just did organic about 29%, and you're guiding for about 23%.

Well, first of all, even before you get to the change, the economy obviously bears some risk today. So that's one point. The second point is, absolutely there is an organizational change that primarily affects the biggest market in the world. And so that's what we're looking at.

Also you throw marketing into that, some new process and people. And it is early in the year. And also we're coming off of a pretty good year. So there is some larger numbers, and, I think we used the word cautiously optimistic, and we'll stand by that.

Got it. And then, strategically it seems as though you guys are shifting a little bit back towards where your core is, in the mid-enterprise, and away from the high end. I understand that you want to win in the high end, but with the investments going there and whatnot, should we just think about you guys winning more there than the high-end enterprise?

You should think about us winning across the enterprise, across our business. All areas of the business are important to us. We're looking at all the growth opportunities, we're growth focused, looking at all of the growth opportunities in the US. We're more underpenetrated in the mid-market, and that is where we see a big opportunity.

You should look across the business, and also across enterprise. Because we're not taking our eye off the ball or focus. We're not moving away from the top end, we're just broadening our focus because we know there is also an opportunity in the mid-market that we haven't been quite as focused on.

Also the mid-market tend to be more dependent on some of the marketing. Because, compared with the high end, they do a lot of testing evaluation because the buyer pretty technical. And all of the special as in the secure space the mid-market sometime the marketing has some bigger impacts. So with investment in the marketing, we're hoping that mid-market also will steadily improve. I think we did quite well international, both low, mid and high. So the US, with additional marketing and we're hoping the mid-market will grow faster.

Got it. Thanks, guys. Thanks for the time.

Catharine Trebnick, Dougherty.

Thank you for taking my question. I've been on and off the call. So I apologize if I ask a repeat question. On the carrier segment it was nice to see how strong you did.

Are there any particular use cases that are being more deployed more frequently you see in 2016 and 2017? And the reason I'm asking the question, it seems from our carrier check that there's a lot of opportunities to do virtual CPE and how important is your virtual firewalls in that product area? Thank you.

Yes, virtual CPE is helping some of the MSP, the [managed security] service provider. But also we see like the infrastructure, secure infrastructure, and also some big enterprise how to address the mobile security as other part of it. And in the -- I think in the long term, I do believe the service provider will play more [of a role] in a secure space. Because security is starting to get more difficult to manage.

And also with the mobile traffic mostly come from the carrier, as we see like even a few quarter ago from international we see that's a better way to secure the mobile device and application. So that's where we see it will be a pretty healthy market in the service provider care market.

All right. Thank you. And the other one is last summer you released the 400 and the 600, the 900 mid-market series. They're obviously launched through the channel. What kind of traction are you seeing today with that, and who do you usually run up against in your bake-offs with those particular products?

That is the one we consider as the middle range.

Yes.

The two-digit, the low end; three-digit is the middle range; and then the four-digit is the high end. We do see some of the traditional firewall player in there. Because like I say, the internal segmentation mostly deployed using the high end which is very high-speed (technical difficulty) So that's probably more competing with the traditional firewall vendor. And we feel we have a better performance function than -- and then the cost advantage. But with additional marketing, additional lead-gen program for the channel, we feel we keep improving there.

Okay. Thank you. Appreciate you taking my question.

Thank you.

You know what? I'm just going to follow up. I think the question before Catharine was about market segments. And I wanted to add a little color there just to clarify. Because I think there was some confusion about maybe we have been focused on the mid-market, which is not correct. The enterprise team that we had in the US was very much at the top end of the enterprise.

And, again, the way our history works was really starting with carrier, and then SMB. You take the ASIC design and you really have a system on a chip there that works really well by putting it in a box and running it through the SMB space. Those have been traditionally the strong parts, the core -- that's really the core of Fortinet's business, I would say prior to somewhere in 2013 and maybe 2014.

And then the investments we have made in the last couple of years have been in sales people, really. Until somewhere in 2015, when it would be more on marketing, and that would be the latter part of 2015. And then, the way to think about it is, if you look at us traditionally as being carrier and SMB, and what we did extremely well was come down from the top tiers of the enterprise. I would say top 100 enterprise. And we've given statistics on -- I could provide the follow-up. But we're doing extremely well in the top end, the Fortune 100.

Where we feel like we have the broader opportunity is what I call the mid-market, which was somewhere north of the top 100 global enterprises. Either down to probably into the next part of the business and all the way into north of SMB. Think of SMB perhaps as being the smallest 20% of all companies. That's how we think of SMB -- about the smallest 20% of all companies. Everything from there into the Fortune 100, what would be then carried by the new regional sales organization, if you will.

The SMB team, they would cover the channel there, too, so to speak. But the focus with the marketing is going to be more on that mid-market space, large to mid-enterprise, below the top 100 which will be covered globally. Hopefully that clears that up.

Hendi Susanto, Gabelli & Company.

Ken and Drew, Fortinet initiated price increase on its security subscription last year. How should we think about your current penetration level of the price increase and remaining opportunity in 2016?

Well, Hendi, I think it carries forward into our deals going forward. There is no price reduction, so as far as our new deals go, we feel we have been very successful with the change in price there. And, what we're really looking to do is provide richer bundles. And that's the enterprise bundle, which has been out in a limited extent in the past but really going out fully more recently, and that's at a higher price point, includes ATP and mobile security.

So that's the hope is to keep richening the bundle to drive more. But we feel like we have been very successful. There is a shift to buying those subscriptions and services over time. Companies -- with obviously the awareness and focus on security, companies are looking to really bulk up on security and a bundle is a great way to offer them that. And monetize the opportunity, as well.

Drew, if I may revisit that question. I'm wondering how much -- how many customers may have not been exposed to the security subscription because their renewal has not taken place yet?

There would be some. I don't have a percentage for you. But there would be some.

Is it a small portion or is it a --?

I don't have a number.

Okay. And last question for me. The share count estimated for 2016 shows a larger increase compared to recent years. Does that reflect having more resources, more hiring, and more incentives in the highly competitive Silicon Valley job market? Or is there another reason?

I'm sorry. Can you repeat the question?

The share count is higher going forward than it was in the past.

The main thing is they are different than the previous few years is about the same.

It's a higher.

Same.

Same range.

Relatively the same.

Same relative range.

Okay. Thank you.

You're welcome.

John Lucia, JMP Securities.

Thank for taking my questions. My first question is, you guys are seeing some pretty strong growth in the subscription and services revenue. I think in 4Q, subscription and services revenue grew faster than product revenue for the first time in the last two years.

Can you give us a sense for how you expect the split of product revenue versus services revenue to play out over 2016? Are you expecting a higher growth rate in services versus product? Just any clarification there would be good.

Yes, I could do it qualitatively. We don't really guide on the split. But there clearly is more of a shift in buying more subscriptions. I think it is partially a price. It is also the opportunity when people are buying the appliances again. People are bulking up on security. And so, the richer the bundle, the more that you offer, the more people take it up.

There is a slight impact, also, for more software sales which tend to -- they can fall both on the product or services line. But, as I mentioned, I think if it is a shorter-term license or, if there is a deeper carve out on the accounting -- Melissa asked this question earlier -- it can fall to the services line. That is how we do that.

I do think there is a shift more to the services line. And a combination of pricing -- customers just buying more of the bundles. Again, that is the strategy -- keeping, continuing to enrich the bundles and charge more, we continue to play that, and then a little bit of the software.

Would you expect services revenue to go faster than product revenue in 2016?

I couldn't guide on it. All I would say is the problem with the services piece is that it is amortized, right? So it appears in the billings. And it lags in the revenue because it is amortized over time.

Okay. And then my last question is, you guys are still investing in 2016, but the operating margin guidance would suggest that you're lowering your pace of investment pretty significantly in 2016 versus 2015. What gives you the confidence that you can maintain the strong growth rates you've seen over the last year despite a slower pace of investments in 2016?

Well, a lot of the thesis here is we've made some investments in sales headcount and marketing, where we want to see the ROI and productivity gains, and we're hoping to see that. You can also see that we've -- we really have banked a lot of deferred revenue as well, which helps, back to your last question. That is a more profitable line, if you will, of revenue.

So, that's really the blend that we're looking for. We're really trying to drive higher productivity, realize the ROI on some of the investments we've made, and we believe we can do that.

We have been very good at taking out costs. I pointed to some of the Meru costs that I mentioned earlier where, had we not taken some actions there and integrated as well as we did, it could have been up to $13 million dilutive. And we felt very good about our focus on profitability and our ability to execute on that front.

Also, Drew said earlier today it is a little more expensive to [land] computer expense. And we have a market platform and a [richer] product to up sell, cross sell. So that is also helping driving the growth going forward. And also, once the [sales] starting to the ramp up, [the trick] we can see the productivity can go higher.

Okay. Thank you.

Thank you. I would now like to turn the call back to Michelle Spolver for closing remarks.

Thanks, Sabrina. Thanks, everybody, for your time today. I know it was a busy day, with other earnings announcements as well. I also know that we will be engaging with you guys throughout the quarter, whether it be at RSA, [bus tours], conferences, individual meetings. We look forward to that. Thank you so much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.