Fortinet Inc (FTNT) 2016 Q3 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen, and welcome to the Fortinet third-quarter earnings financial analysis Q&A conference call. (Operator Instructions)

  • I would like to hand the call over to Michelle Spolver.

  • Michelle Spolver - Chief Communications Officer

  • Hi, everybody. Thank you for calling back in. And this time is obviously just a Q&A session. I'll ask again to try and limit your call or questions to one question per analyst.

  • And Ken and Drew in the room with me. The only thing I would add is that the disclaimers and the cautionary language that I read in the first call regarding forward-looking statements applies to this call as well. So with that, we can begin the Q&A.

  • Operator

  • (Operator Instructions) Walter Pritchard, Citi.

  • Walter Pritchard - Analyst

  • Maybe Drew, wondering if you could talk about the percentage of reps that you have that are a season+ in the year, how has that sort of trended over the last couple years? Because you've been adding quite a few reps, and I'd imagine you'd been in that situation, or as close to it for a while. But just wanted to get a color on how that compares.

  • Drew Del Matto - CFO

  • Walter, I don't have the trend in front of me. But what I would say is different this year is I think you're selling into different conditions, and it's a slightly different selling motion because of what the market is requesting today. And the way to think about that, again, goes back to the macro elements, the macro dimensions of consolidation, the adjustment phase, and next gen architectures. And so we're selling a fabric into that model, so it's a slightly different model.

  • And the other piece of it I would remind everyone is that, again, what we talked about what we did in August was really changed a bit of the way we sold in terms of really focusing on more direct people. We've kind of done that over the last year. And I don't mean direct as in -- we're still using the channel, I guess is what I'm trying to say. It's not indirect. But we're doing it with really trying to get more directly mapped relationships which began at the beginning of the year.

  • So it's a slightly different motion into the model. So I would think that the key trend, the key point is really about the 40% that are here less than a year, and that's how I would think about it.

  • Michelle Spolver - Chief Communications Officer

  • Okay, we can take the next question.

  • Operator

  • Tal Liani, BofA Merrill Lynch.

  • Mike Feldman - Analyst

  • This is Mike Feldman on for Tal. Drew, how should we think about the linearity of achieving your longer term operating margin guidance? Do you think that's something we could see -- do you think we could see some maybe bigger step ups near term, or it's just more of a linear trend through 2020?

  • Drew Del Matto - CFO

  • Well, Mike, I think if you're looking, so we maybe fell off here a little bit. So we're going to make it up somewhere. We're sticking to the 2020. We believe we can make it up.

  • It's a little premature to talk about the timing of that. When we look at this and you look at the dimensions of it, we really are talking about productivity, installed base expansion to provide more upsell, more cross sell opportunities.

  • And so what I really want to do is really find the pulse on that productivity going forward, and hopefully we see some of the take. And then I think that will be a more helpful point at which to talk about how exactly this plays out. But again, we're committed to the 2020.

  • I would just remind you -- you made a mention to that as I talked about on the last call -- we're very much about productivity, expansion into installed base, and those two things go hand in hand, obviously.

  • And then a little bit of tailwind on gross margin, which we've been seeing. It's a mixture of continues. Hopefully that will continue. And then we obviously have some other levers we can pull on cost efficiencies. We did a little bit of that last quarter, and those are things we can look at going forward.

  • Mike Feldman - Analyst

  • Okay. And then if I could just add one more. How much of the soft --

  • Michelle Spolver - Chief Communications Officer

  • We can't. Sorry. We've got to keep it to one question. I'm sorry, I'm sorry. Get back in the queue, and if we have time, you can ask it afterwards.

  • Operator

  • Gregg Moskowitz, Cowen and Company.

  • Gregg Moskowitz - Analyst

  • Within your services and other line, Drew, so I know there are some professional services related revenue in there. But can you give us a sense of the approximate split between subscription and maintenance?

  • Drew Del Matto - CFO

  • Subscription --

  • Michelle Spolver - Chief Communications Officer

  • And the services line.

  • Drew Del Matto - CFO

  • Yes, the majority's subscription. What's the pricing on -- do we have the -- Gregg, I was going to help you with the -- do we have our template?

  • Michelle Spolver - Chief Communications Officer

  • No.

  • Drew Del Matto - CFO

  • Or I can help him with the price. Gregg, I'll tell you what; I can follow up -- what we'll do is we'll follow up with the price model because you can see the difference between FortiCare.

  • Ken Xie - Founder, Chairman of the Board, and CEO

  • Also you can see the comparables as a percentage.

  • Drew Del Matto - CFO

  • FortiCare is 15%. I think the UTM bundle --

  • Ken Xie - Founder, Chairman of the Board, and CEO

  • No, the 8x5 is 15%. That's the list price. [20x7] is 25%. The new announced FortiCare C60 35%, all based on the how it is priced, like the FortiGate 60 [DLE]. But like how it is priced globally, so a $650. The FortiGuard bundle, it depends, right?

  • Michelle Spolver - Chief Communications Officer

  • Yes, he's not really asking -- I think you're asking sort of what's the breakdown for services. The majority of it is subscriptions. There's less a minority in support.

  • The other thing is, too, is that a lot of it is bundled, so we do have -- introduced bundles that got bundle in subscription and support. But I think the pricing, obviously, is higher on the subscription part, so it makes it a bigger component of the service.

  • Ken Xie - Founder, Chairman of the Board, and CEO

  • This is close to 70/30. Like 70% FortiGuard, 30% --

  • Drew Del Matto - CFO

  • I'm not sure those are right. Gregg, we'll follow up with the pricing model.

  • Gregg Moskowitz - Analyst

  • Okay, terrific. That's helpful, thanks.

  • Drew Del Matto - CFO

  • That'll help -- I think that'll help inform you a little bit.

  • Gregg Moskowitz - Analyst

  • Great, thank you.

  • Operator

  • Ken Talanian, Evercore ISI.

  • Ken Talanian - Analyst

  • Was wondering, the implied change in your deferred, given the update on 2016 billings and revenue guidance, is a little bit less than the gap before. Are you seeing lower duration deals, or what's the reasoning behind that?

  • Drew Del Matto - CFO

  • I'm sorry, the gap -- I'm not sure I understand the question.

  • Ken Talanian - Analyst

  • The change in deferred, basically, implied by the difference of your billings and revenue guidance.

  • Michelle Spolver - Chief Communications Officer

  • I'm sorry. Just repeat the question one more time. You're saying the change in deferred going forward in Q4?

  • Ken Talanian - Analyst

  • Well, for the full year. So, if you take your range of billings and your range of revenue, presumably the difference between those two is the change in deferred.

  • Michelle Spolver - Chief Communications Officer

  • Right.

  • Ken Talanian - Analyst

  • That amount is less than what you were looking for before. Is there any change in duration, or is that just the mechanics of what you expect for 4Q?

  • Michelle Spolver - Chief Communications Officer

  • Well, the duration remains pretty consistent. The duration had been increasing over the last couple quarters. In the Q3 it was remaining fairly consistent. So it wasn't due to duration. We don't guide or give any type of expectations or guidance regarding a change in deferred for revenue, but I'd say it was probably in line. It wasn't anything that surprised us. It was probably in line with our expectations.

  • Ken Talanian - Analyst

  • Okay, thanks.

  • Operator

  • Rohit Chopra, Buckingham Research.

  • Rohit Chopra - Analyst

  • Question just on the sales force again. So I apologize for this. I know everyone's asking something about this. But Michelle, at the beginning of the year, I think you mentioned that it was a sales force realignment, and you were creating territories and a separate global team, or maybe I got that partially right. And today now you're saying that 40% of the sales force is less than a year. So they're kind of new.

  • So does that mean that you experienced significant turnover when you did this realignment, because obviously you didn't add 40% to your sales force. And given that everyone's new, or 40% of the people are less than a year into this, how did your win rates change?

  • Drew Del Matto - CFO

  • Let me -- why don't I take it. The win rates haven't changed. I think we're looking more, Rohit, at elongated sale cycles. I think the story's more real at, again going back to consolidation, adjusting phase, next gen architectures and things we've been talking about.

  • There's always turnover in sales force. And without giving ours, it's not uncommon to see turnover in the valley certainly north of 10%. And some of that is people coming and going, some of that is where you're managing people out.

  • And that kind of leads into the second point. If you go back to August, we actually did exit some people. And we talked about focusing more on direct relationships, and weighting towards that versus some of the carriers. Some of the carrier people had been here longer, so these would have in the past been part of the rep base. But as we're weighted more direct, some of those people are really coming in from other companies that have a model closer to that, to our newer model. And that's why you end up I think with more of that statistic.

  • Rohit Chopra - Analyst

  • It's still pretty high, right? I mean 40% of your sales force in North America being less than --

  • Michelle Spolver - Chief Communications Officer

  • It's 40% --

  • Drew Del Matto - CFO

  • Less than a year.

  • Michelle Spolver - Chief Communications Officer

  • -- at less than a year. And if you look at it, that less than a year, so if you look at Q4 of last year, we were still doing a lot of hiring in Q4, a lot of hiring in Q1, some hiring in Q2, some hiring in Q3 -- a little less in Q3. So there was -- there's still a big portion of that there's just new people, new hiring based on expanding our sales force, which is something we've been doing for a long time.

  • I don't know that there was a lot of newness that came or turnover that came as a result of the realignment. I think most of it is new hires. And then there is always some turnover, but that's not the majority of it.

  • Rohit Chopra - Analyst

  • Thanks.

  • Operator

  • Erik Suppiger, JMP Securities.

  • Unidentified Participant

  • It's John for Erik again. So with your billings growth slowing from the mid-30s last year to the mid-teens now, I want to understand how you're thinking about your investment strategy in 2017 in particular. My question is, will you be slowing down the pace of investment so that it's line with or lower than revenue growth? Your expense growth is in line with or lower than revenue growth? Or will 2017 be kind of an investment year where expense growth will be higher than revenue growth as you try to recover in North America?

  • Drew Del Matto - CFO

  • John, I think where we are right now, the key indicator for us is to watch the productivity. If we see a -- if we don't see improvement in productivity, it clearly, that's something we're not going to keep investing in certainly people to do that.

  • And we talked about on the marketing side, which is generally non-people focused with people in it, but if you look at the broader piece of it, it's towards events and programs. And that, we talked about reallocating for the most part.

  • Without getting into guidance for next year, the place of potentially relative investment is where we do see pockets of growth where the investments continue to take off. And there seems to be when you do add a body, that you get the appropriate return out over the appropriate period for time. That'd be more internationally right now.

  • And so you could see some more investments, but again, I would dial you back in there and say, look, one, we are -- one, we're still growing. So we do have room.

  • We, until recently, had been on the path of expanding margins. Even if you look at Q3, we feel like we did a pretty good job of making progress along that goal. Had the billings come in towards expectation, it would have been an even better story.

  • And so we feel like we're making progress. We'll watch the productivity. That's the key lever not only for margin expansion, but to tell us when and if, if and when, we should invest more and where.

  • Unidentified Participant

  • I guess another way to ask the question really quickly. Will you progress towards your 20% operating margin target in 2017? Or will 2017 be a setback to that goal, given the execution challenges in Q3 and maybe in the next couple quarters?

  • Michelle Spolver - Chief Communications Officer

  • And we're not providing guidance for 2017. It's a fair question, but in answering that it's providing guidance for 2017. We are, we said we're committed to the 20% operating margins exiting 2020. We know that there is work that we need to do to get there, and we're committed to doing that, but we're not speaking specifically at 2017 as of now.

  • Unidentified Participant

  • Okay, thank you.

  • Operator

  • Bill Choi, Wunderlich.

  • Bill Choi - Analyst

  • So couple questions around larger deals. Could you just first confirm that there wasn't any $1 million deals unlike prior? And when we're thinking about a digestion space for larger customers, larger deals here, given that you could have large distributed enterprises as your customers, what does that look like? Unlike high ASP products and fewer locations you have, maybe lower ASP products in multiple locations. So, is there any way to think about a duration for what a digestion period looks like versus a normal pattern of customers coming back?

  • Drew Del Matto - CFO

  • I'll read to you what I read earlier in terms of deals, just to kind of get back to what we said earlier. And this is directly from the script earlier. Deals over $100,000 grew 27%, deals over $250,000 grew 12%, and deals over $500,000 grew 16%. We had, I would just remind you, growth in large deals during the quarter reflected a tough comparison versus Q3 of last year. 2015, we had a really good quarter.

  • The way to think about Q3 is have you had more large deals, then you would have -- that would have directly impacted the product side of it. I think this is a bit where you're going. If you look forward, what you would look to see, hope to see is a couple of things. One, you want to see continued progress on growing customers. I think you want to see continued progress on growing the deal sizes.

  • But I think it's very important to look at the productivity measure. Because if you look at our people -- and the people we're talking about when we talk about the North American sales force, they're very much directed at the enterprise. And so large deals are a great way to think about that. But you may also go into a customer and not necessarily close a large deal upfront. So that may take some time. And so it's very difficult for us to answer that question, other than to say that what we would hope to see is the productivity to improve over the next quarters. And that ultimately leads to growing the deal sizes at a time.

  • Michelle Spolver - Chief Communications Officer

  • Just to understand the first part of the question, I think you were saying were there one -- just to confirm that there were not $1 million deals. We did have $1 million deals. We don't break out the number, but it was actually -- it's pretty consistent with what we've been seeing. So yes, we did have $1 million deals. As we do more business in the enterprise, and we sell more fabric type approaches, we'll be seeing -- we see more of those deals.

  • Drew Del Matto - CFO

  • But that's over time.

  • Michelle Spolver - Chief Communications Officer

  • Yes, over time.

  • Ken Xie - Founder, Chairman of the Board, and CEO

  • Also for the second part of the question, they do have some strategic planning changing in both enterprise and also service provider. So provider obviously happening in the space. So that's where follow the comps trend and follow the consolidation.

  • They also evaluate some of the -- so the application, many that go to cloud and some maybe to hyper remote. So that's where you see some of the -- quite a lot of this caution right now. So that's where slowdown some of the decisions. We do see security is still the number one IT focus for most enterprise and service provider, and the industry still going to have to provide that.

  • Operator

  • Hendi Susanto, Gabelli & Co.

  • Hendi Susanto - Analyst

  • Drew, you mentioned that your win rates have not changed despite of the lack of productivity of your new sales force. You said the outcome is more of an elongated sales cycle. Going forward, how do you make sure that the lack of productivity will not result in some loss of potential deals?

  • Drew Del Matto - CFO

  • Well, I think it's focusing on some of the things we talked about. I do think focusing on marketing that drives a bigger pipeline, if you will, or bigger funnel is the type of thing which helps I think grow the opportunity, as Ken said. The view is we have great products, we have great technology. The security fabric should sell strategically into the dimensions that we're talking about that are creating the elongated sales cycle.

  • And what we're trying to do is get as many at bats, if you will. And then what you try to do is keep your average, your batting average at or better than what it's been in the past. Again, it's just taking longer to get the deals closed.

  • So the key, back to your question what do you do, I think you continue to try to accelerate the velocity of the inbound deals through marketing lead generation. You do your best to give them tools to close the deals. And you really focus, from a management perspective, intensely to ensure that people are making the progress that you want within the accounts, and getting help where they need to close those deals, facilitate the close of that business.

  • Hendi Susanto - Analyst

  • Thank you, Drew.

  • Drew Del Matto - CFO

  • You're welcome.

  • Operator

  • Saket Kalia, Barclays.

  • Saket Kalia - Analyst

  • Drew, I know the sales cycle's elongated, which presumably took your close rates down. But can you just talk qualitatively about the rate of growth in your pipeline, whether that's changed significantly?

  • Drew Del Matto - CFO

  • Yes, Saket. We generally don't talk about pipeline. It's reflected in our guidance.

  • Saket Kalia - Analyst

  • Okay, well, maybe just a different way of asking it. With the commentary on moderated spending, have you actually seen opportunities that maybe were in the pipeline before actually dry up because of --?

  • Drew Del Matto - CFO

  • No, I don't think so. We don't see much of that. I think, again, I would go back to elongated. I would stick with that word.

  • Saket Kalia - Analyst

  • Okay, got it. Thank you.

  • Michelle Spolver - Chief Communications Officer

  • Going back to what we said, we didn't feel that it was lost deals. We didn't feel -- to our knowledge, there weren't deals that were lost to customers; they were elongated. Whether that comes into Q3 or Q4 -- I'm sorry, Q4 or Q1 or what, we're not sure on all of them, but we didn't feel that the Q3 deals were lost.

  • Saket Kalia - Analyst

  • Great. Thanks, Michelle.

  • Operator

  • Dan Bergstrum, RBC Capital Markets.

  • Dan Bergstrum - Analyst

  • Drew, on the preliminary results call, the topic of discounting on maintenance contracts came up. That was specifically related to Check Point's comments on its second quarter earnings call. And at that time, it sounded like you weren't seeing anything unusual as far as maintenance pricing concessions, but you did mention you were still early in your review process for the quarter. So just curious if you've seen anything here as you've taken a closer look at renewals?

  • Drew Del Matto - CFO

  • Well, we've taken a closer look at our business in general. I would talk about discounting overall, and it has not deteriorated. I could say it absolutely has not deteriorated.

  • Dan Bergstrum - Analyst

  • Okay, thanks.

  • Operator

  • Andrew Nowinski, Piper Jaffray.

  • Andrew Nowinski - Analyst

  • I know you're seeing a shift to subscription, but based on the guidance, it looks like the product revenue growth could be flat/down in Q4. I guess is that accurate? And then what do you think the longer term growth rate of products is given the shift?

  • Drew Del Matto - CFO

  • Well, we don't forecast product growth trend. What -- I think I shared that there is a shift. Let's just talk about the mix shift, and then maybe we can talk about how you revive the product line.

  • I think I shared a number that we know that at least 200 to 300 basis points of new business -- whether it's software, metered model, whatever it is, cloud type offerings, SaaS -- are showing up on the services line and would be akin to new products showing up or something showing up on the product line. There was just a shift in the business over the last year or so.

  • There's probably a little more -- there's also an impact from price increases that show up. And that one's a little harder to measure because you're trying to estimate what an invoice would have been without the price increases. But that translates over time, and we would have seen some of that in the most recent quarter, as well as in past couple quarters.

  • Now, when I go forward, that product growth line is so impacted by larger deals and the penetration into the enterprise. And that's what I need to see. And I think you can take from guidance, what some of the comments that we've already shared, that aside from the mix shift, we're really trying to see our productivity tick up to -- before you could really want to be more aggressive, if you will, on that line. But it's so related to doing the larger deals and driving out appliances. Again, it's an important part of our business, but some of it does now show on the services line.

  • Ken Xie - Founder, Chairman of the Board, and CEO

  • Also that new bundle, which has a more value added on the service side, that's probably also changing some of the percentage mix of our product and service. Whether the enterprise bundle or the new FortiCare [668] service.

  • Andrew Nowinski - Analyst

  • Okay, thanks.

  • Operator

  • Melissa Gorham, Morgan Stanley.

  • Melissa Gorham - Analyst

  • Drew, I was wondering if you could maybe just update us on your [loss scan] capital allocation. So you're buying back shares, you still have a good amount left under the authorization. So how should we think about how you're balancing buybacks versus M&A moving forward?

  • Drew Del Matto - CFO

  • I think through September 30, we -- so the Board has effectively authorized through what they authorized back in January, or a year ago I think in December maybe, and then the most recent quarter. We're up to about a $300 million optimization through December of next year on buyback. Through September 30 we bought back $75 million for the year.

  • You could probably tell from our history that we've been buying back more as the price drops, so to speak, than when the price is up a little higher. So, that strategy has not changed. We think if we find ways -- if we can find ways to scoop value, if we will, we'll continue to do that. Or create value from the buyback program, we'll continue to do that.

  • Now I think on M&A, look, we have north of $1 billion in cash, north of $1.2 billion, almost close to $1.3 billion. So we still, we've done some M&A. Obviously we look at opportunities out there, we continue to do that, look for opportunities that make sense. Those come along, we'll take advantage of them. But nothing on either front has really changed, other than the authorized amount and the fact of the cash supplier.

  • Melissa Gorham - Analyst

  • Got it. Okay, thanks.

  • Operator

  • Gabriela Borges, Goldman Sachs.

  • Gabriela Borges - Analyst

  • I know we talked a lot this evening about the comparison on metrics versus 2014 and 2015, and that was a very strong to moderate environment. I was hoping we could go back a little bit further in time, and maybe you could talk about per activity and the weakness that you're seeing in the carrier vertical and the time it's taking to close deals, and how that compares to maybe the 2012 or 2013 environment. Thanks.

  • Michelle Spolver - Chief Communications Officer

  • Well, 2012/2013, I got to go back that far. I think the length of time, as we talked about before, the deals are -- there's something different that's happening today than was happening in 2012, and it's outside of sort of any type of refresh cycle or anything else.

  • What's happening now is that really, large service providers and large enterprises, some of them are trying to design and think about their next generation network. That was not something that we -- that's not a trend that we saw in 2012 or 2013. So considering that, and I would probably say the deal in the cycles are elongated more than they were then, because it's sort of a dynamic shift that's happening, it bodes well for Fortinet. We're in the discussions. But it means that it takes a lot longer. It's not just a matter of refreshing gear, what they bought how many years ago. It's really in strategic discussions on how they move forward for the future years. So I would probably say that the cycles are longer now than they were four years ago.

  • Gabriela Borges - Analyst

  • That's helpful. Thanks.

  • Operator

  • Michael Turits, Raymond James.

  • Jeremy Benatar - Analyst

  • ?It's Jeremy?Benatar in for Michael. The 4Q billings guidance seasonally stronger at the midpoint, up 23% quarter over quarter versus last year's guide up 22% and 16% the prior two years. I guess given what appears to now be lower visibility, plus execution of macro challenges, what gives you conviction around the seasonally stronger guide?

  • Drew Del Matto - CFO

  • So you're asking a question of seasonality?

  • Jeremy Benatar - Analyst

  • Yes. The guidance seasonality, specifically.

  • Michelle Spolver - Chief Communications Officer

  • I don't -- the guidance is stronger. We basically -- well, we hit 2016 and --

  • Jeremy Benatar - Analyst

  • Yes, you got it up 23% quarter over quarter. And the average for the last 3 years was roughly 18% quarter over quarter. So I'm just wondering --

  • Drew Del Matto - CFO

  • Jeremy, we talk to the sales team. That's something you obviously look at as a factor. But we're more focused on what the sales team's telling us, digging deeper into that, looking at the bottoms up, we do look at the tops down. The comfort we get is based on what they tell us, and then obviously we do a few things to make sure we're being appropriately cautious.

  • Jeremy Benatar - Analyst

  • Got it, okay. Thanks.

  • Operator

  • Taz Koujalgi, Deutsche Bank.

  • Taz Koujalgi - Analyst

  • I have a question about your OpEx and your cost structure. For the kind of OpEx that you reported today, and then I compare that to the OpEx that you would have had in case you had met your original guidance, it's basically the same. So even though you had a shortfall of $30 million in your billings, your OpEx basically did not got down that much.

  • So I'm trying to figure out how much were you able to have in your cost structure, when you see weakens in the quarter, can you not pull back on your OpEx? And what does that mean for OpEx going forward as you see weaker growth going forward? What kind of levers do you think you have to control costs?

  • Drew Del Matto - CFO

  • Well look, I think you can -- one, Taz, I think part of what we were trying to accomplish was if you go back to August again, we exited some people which was a factor. We also did put some cost control programs in place. You can --.

  • And these were longer term things. If you go back earlier in the quarter, we weren't thinking, obviously not thinking you're going to miss. So you're doing things that are structurally changes for the long term which we think will continue to pay off. And not to get into all of them, but some of them are around discretionary spending, which are things like P&E.

  • The other things you do is try to come up with a more -- longer term, you can look at real estate, for instance, where you're doing leases and maybe you buy some of those properties. Again, we have plenty of cash, and so that's something you look at. I think the other thing, obviously headcount and compensation are things that we can look at. It happened with that to make sure that those are appropriate and they peel off.

  • When you look at -- you would had more performance on the billing side, you would have had more commissions, for instance, which would have been somewhat of an offset. It doesn't always depend on the distribution of performance. Largely, when you see a lot of large deals is generally when you get hit on the hard side, because that's where people are really, that's where they really get into their accelerator, so to speak.

  • So we didn't see a lot of that, and so that was helpful in the quarter. It's always hard to predict distribution, but we think we've taken that into account obviously in our near term guidance. And we look at all of those factors. That should give you a sense of the type of things we look to longer term that are structural things that we can do, which should provide a tailwind to margin expansion over time.

  • Taz Koujalgi - Analyst

  • But just to look at these specific quarter numbers, your billings fell short of $30 million from your original target and your OpEx remains the same. So I'm wondering why, to your point that commissions would go down if your billings were weaker, it didn't seem like that happened. Because $30 million shortfall in billings and OpEx basically was the same that you would have had if you had met your original billings target.

  • Michelle Spolver - Chief Communications Officer

  • Sorry, Taz, we're trying to figure this out what we were actually saying. The question is what? You're making a statement, but what is the actual question? So would --?

  • Taz Koujalgi - Analyst

  • Let's say that if you have weaker billings you guys will save on commissions and then there's some -- you save on OpEx there. But I'm just trying to -- I'm looking at my own model, comparing it to the numbers you reported today. Your OpEx would have been $119 million or so based on your original guidance. And your OpEx today also came at $119 million based on $30 million lower billings. So it seems like --

  • Drew Del Matto - CFO

  • Oh, I see what you're saying. You're talking about something in terms of op origin. I think the point is we gained some from gross margin, which probably gets you back. Again, those are still the levers. Taz, those will still be the same lever, without getting into the specific lines. But you obviously pick up a piece of point from gross margin.

  • Taz Koujalgi - Analyst

  • Thank you.

  • Drew Del Matto - CFO

  • Versus the op margin guide. I'd be looking more -- we don't guide on absolute dollars; we guide more on op margin. But we thought -- again, we came in toward the original guidance, so I think we're speaking more to that.

  • Taz Koujalgi - Analyst

  • Okay, got it. Thank you.

  • Drew Del Matto - CFO

  • You're welcome.

  • Operator

  • (Operator Instructions) Ryan Hutchinson, Guggenheim Securities.

  • Ryan Hutchinson - Analyst

  • I want to go back to the service provider piece here. I think you said it was 21% of total. So that's down about 300 to 400 basis points below the average of 24% and close to the low of 19%. Can you just quantify that the dollar impact, what the dollar impact associated with the elongated deals were? And also confirm that none of the deals were lost to competition? That's the first part of this question.

  • Michelle Spolver - Chief Communications Officer

  • We're not going to talk about the size of the deals on a specific basis, so can't give you any specific quantitative number on the first one. We had stated in terms of the deals that were not closed in Q3 that we didn't feel they were lost -- or lost to a competitor.

  • Ryan Hutchinson - Analyst

  • Okay. So none were lost, okay. And then are all of these elongated deals related to the decisions that you reference with respect to these network builds that the service providers are talking about? Or is there anything else in there, meaning any of it related to the sales force issues as well? Just trying to get some color around the sales force dynamics.

  • Michelle Spolver - Chief Communications Officer

  • No, they weren't -- the service provider deals, they weren't tied to sales force execution. I think service provider deals, there's not that many large service providers in the world, so they tend to be --

  • Ryan Hutchinson - Analyst

  • Understood.

  • Michelle Spolver - Chief Communications Officer

  • -- very large customers, sometimes with multiple deals. And so it wasn't tied to anything specific to a sales person or a sales force. Most of them are tied to -- I want to say every single one was tied to a next generation network buildout, but most of them were.

  • Ryan Hutchinson - Analyst

  • Okay. All right. So the enterprise stuff is all the immaturity of the sales force. This is primarily related to network build. And any sense, when talking with the service providers as you go back to them, in terms of the timing? Because having covered service providers stocks for years, this is something that could drag on for quarters and quarters.

  • Michelle Spolver - Chief Communications Officer

  • Yes, of course. Our sales people, definitely have talked to sales, to them about timing. I'm not going to give you the answer on timing. But our sense is some of them could be longer. It depends on how complicated and strategic the situation is. But some of them we're looking at being shorter. A couple of them could be longer.

  • And then to clarify the statement you made about the network buildouts and next generation buildouts. And what we're talking about is more around consolidation, some shifting to cloud, hybrid type of approach. It's not just -- that's actually the case with some of the enterprise deals as well; not just service provider. But the newness in the sales force is more in the enterprise space, not service provider space.

  • Ryan Hutchinson - Analyst

  • Understood. So just to be clear, you're saying related to next gen builds and consolation of the service providers themselves? AT&T and Time Warner, whatever, as an example?

  • Michelle Spolver - Chief Communications Officer

  • Oh, I see what you're saying. No, I --

  • Ryan Hutchinson - Analyst

  • Are you seeing that as well?

  • Michelle Spolver - Chief Communications Officer

  • -- don't see provider on more the next generation builds. They're not really doing a lot of the consolidation. It's the enterprise is doing more of the consolidation plus next generation network buildouts; service provider more on the network buildouts.

  • Ryan Hutchinson - Analyst

  • Okay. And then finally, just can you break that out between US and the rest of the world?

  • Michelle Spolver - Chief Communications Officer

  • On the service provider space?

  • Ryan Hutchinson - Analyst

  • Correct.

  • Michelle Spolver - Chief Communications Officer

  • No, we're not giving that much detail. We talked about more of the impact of the underperformance came from the US, but it's not specific. We're not giving specifics on enterprise versus service provider.

  • Ryan Hutchinson - Analyst

  • Okay. Is it fair to assume just that the breakout that you have, just on a geographic basis, that it's roughly in line with that?

  • Michelle Spolver - Chief Communications Officer

  • The breakout, what do you mean?

  • Drew Del Matto - CFO

  • I think he's talking --

  • Ryan Hutchinson - Analyst

  • Your breakout. Your geographic breakout. (Multiple speakers)

  • Drew Del Matto - CFO

  • -- 21% is the balance with the --

  • Michelle Spolver - Chief Communications Officer

  • Oh, you're asking the same question -- we're not going to go that -- we can't --.

  • Ryan Hutchinson - Analyst

  • Of course I am.

  • Michelle Spolver - Chief Communications Officer

  • Of course you are. We're not providing that much detail. But thanks for asking.

  • Ryan Hutchinson - Analyst

  • Okay. All right, thanks.

  • Operator

  • (Operator Instructions) I'm showing no further questions over the telephone lines. I would like to hand it back to Management.

  • Michelle Spolver - Chief Communications Officer

  • Great, thank you. Thanks, everybody, again for being on the second call. We will be -- probably talk to you during the quarter. We'll be on the road. Actually be on some (inaudible) anyway. But if you have any more questions, you can contact myself or Drew, and thanks for your time.

  • Drew Del Matto - CFO

  • Thank you very much.

  • Operator

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