Earnings Call Transcript - FTNT Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. And welcome to Fortinet’s Q1 2021 Earnings Announcement Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker for today, Peter Salkowski, Vice President, Investor Relations. You may begin, sir.

Peter Salkowski, Vice President, Investor Relations

Thank you, Rowanda. Good afternoon, everyone. This is Peter Salkowski, Vice President of Investor Relations at Fortinet. I am pleased to welcome everyone to our call to discuss Fortinet's financial results for the first quarter of 2021. Speakers on today's call are Ken Xie, Fortinet's Founder, Chairman, and CEO; and Keith Jensen, our Chief Financial Officer. This is a live call that will be available for replay via webcast on our Investor Relations website. Ken will begin our call today by providing a high-level perspective on our business. Keith will then review our financial and operating results for the first quarter, before providing guidance for the second quarter and updating the full year. We'll then open the call for questions. Before we begin, I'd like to remind everyone that on today's call we will be making forward-looking statements, and these forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected. Please refer to our SEC filings, particularly the risk factors in our most recent Form 10-K and Form 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements. Also, all references to financial metrics that we make on today's call are non-GAAP unless stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations are located in our earnings press release and in the presentation that accompanies today's remarks, both of which are posted on the Investor Relations website. Lastly, all references to growth are on a year-over-year basis unless noted otherwise. I’ll now turn the call over to Ken.

Ken Xie, Founder, Chairman, CEO

Thank you, Peter. And thank you to everyone for joining today's call to review our first quarter 2021 result. We are very pleased with our strong first quarter performance. Billings increased 27% to $851 million, driven by solid execution across a broad and integrated product and services. Secure SD-WAN contributed 14% to first quarter billing. Total revenue grew 23% to $710 million with product revenue growth of 25%, the highest quarterly product revenue growth in the last five years. With strong business momentum and great visibility, we've remained focused on growth. In the first quarter, we released FortiOS7.0, which offered the industry's first OS label with tight integration of a broad security and network functions, including SASE, SD-WAN, Zero-Trust Network Access, CASB, and 5G capability. Today we announced the 40 GIG 71.01 AF, the world’s fastest next-generation firewall, and the only firewall with hyperscale 400 gig interface. The 71.01 AF will help 5G mobile network operators secure multiple edges within their infrastructure and are enabled by MSPs to provide scalable security offerings. Powered by our new MP7 security processing unit, the 71.01 AF delivers security performance that is 2 to 19 times greater than comparative solutions. We continue to see momentum and adoption of our SD-WAN, SASE, and zero-trust network access solution among the world’s largest service providers. Today, we announced Bridges Telecom, a new major secure SD-WAN service powered by Fortinet. In March, Fortinet and AT&T announced the ability of a new managed SASE solution for enterprise customers. Increasingly, organizations are consolidating towards a holistic platform approach, delivering integrated and automated security that covers on-premise networks, endpoints, and cloud secure edges. The Fortinet Security Fabric is a cybersecurity platform, organically built on a broad and extensive set of networking and security technology designed to seamlessly operate together. The high-profile security incidents that occurred over the past few months, along with the pandemic, have elevated the need for a broad platform that can secure enterprises’ entire infrastructure across multiple edges in a zero-trust environment. We expect companies to increase the percentage of IT spending used for security in an effort to address their cybersecurity needs. Our security-driven networking approach is a key growth driver. Additionally, we expect that our significant organic product growth will lead to increased service revenue. Before turning the call over to Keith, I would like to thank our employees, customers, and partners worldwide for their continued support and hard work. Keith?

Keith Jensen, Chief Financial Officer

Thank you, Ken. And to add to your comment, we should note that billings growth, product revenue growth, and total revenue growth were each at five-year highs. Okay, let's start the more detailed Q1 discussion with revenue. Total revenue of $710 million was up 23%, driven by industry-leading product revenue growth of 25%. Auto-driven growth was broad-based across geographies, Security Fabric products, and use cases illustrating the market acceptance of our integrated, single-platform security strategy. Customer demand for security across their entire infrastructure and the diversity of our customer base. Product revenue growth was over 30% for both infrastructure and cloud fabric products. And all three geographic regions increased 20% or more. Demand for security fabric products was strong across all form factors, hardware, software, and virtual machines. The growth we experienced for product revenue was not the result of a few large deals, lower backlog, or higher channel partner inventory levels. The product revenue growth also enables increases in services billings and future services revenue. In the first quarter, service revenue of $470 million was up 22%. Support and related services revenue increased 23% to $214 million. Security subscription services revenue increased 21% to $255 million, benefiting from outsized growth from our cloud provider and SaaS security offerings. Moving to the mix of FortiGate and Non-FortiGate platform revenue, the FortiGate segment of the Fabric platform saw revenue increase 17% driven by demand for entry-level and high-end FortiGate products. High-end includes 10 new NP7 powered FortiGates that were introduced in the past week, which includes today's announcement of the 71.21F. These new products now represent approximately 20% of high-end FortiGate shipments. Our AC-driven FortiGates give customers five to ten times more computing power than firewalls that run on common CPUs. The advanced computing power creates not only speed but also the capacity to continue to add functionality to our operating system, driving our price-for-performance advantage. The Non-FortiGate segment saw revenue grow over 40% and now accounts for 31% of total revenue, up four percentage points. The integrated security fabric solutions consist of a complete range of form factors and delivery methods, including physical and virtual appliances, cloud, SaaS, and professional software, as well as hosted and non-hosted solutions. Together, they provide a range of security solutions and form factors enabling integrated protection for hybrid environments and the expanding digital attack surface from the data center to the endpoint to the cloud. Given the strong first quarter revenue performance, we believe our Non-FortiGate platform is now on pace to be a $1 billion business this year, representing an acceleration of this milestone. Let's turn to revenue by geographies. Revenue in the Asia Pacific area increased 26%; EMEA revenue increased 25%; and Americas posted revenue growth of 20%. As I mentioned earlier, all three regions experienced product revenue growth of 20% or more. Moving to billings. The first quarter billings were $851 million, up 27%. We saw strong growth in both the FortiGate and non-FortiGate segments at the Security Fabric platform. The FortiGate segment delivered billings growth of 20%, accounting for 70% of total billings. Entry-level FortiGate posted very strong billings growth in the quarter. The non-FortiGate segment accounted for 30% of total billings and delivered billings growth of 50%, driving a four-point year-over-year mix shift to non-FortiGate. Taking together, these data points highlight the market acceptance of our single integrated security platform strategy. In terms of billing growth by regions, APAC outperformed all regions followed by Europe, and the Americas. In the Americas, Canada had a very strong quarter and Latin America rebounded from the pandemic-induced slowdown, posting billings growth in the mid-20% range. Moving to billings by customer segments, the small enterprise segment posted solid growth across all geographies. This segment is driven by new customer acquisitions, customer Security Fabric expansions, solid execution by our channel partners, and the large diverse makeup of this international customer segment. At the same time, we saw strong growth in our larger deals. The number of deals of $1 million increased 74% to 66 deals in the first quarter. The pipeline for deals of $1 million looks good for the remainder of the year. As Ken noted, secure SD-WAN billings were 14% of total billings. SD-WAN is a key functionality in an integrated staffing solution. Moving to worldwide billings by industry verticals, there was another strong international performance. The worldwide government sector topped all verticals at 19% of total billings and was up 60%. Service providers and MSSPs accounted for 16% of total billings. The rebound for education accelerated with billing growth of 50%. Retail turned in a solid quarter with billing growth of 21%. Our strong and consistent billings and revenue performance over the past several years is testament to our geographic and customer diversity. The growing success with a single integrated security platform strategy and our ASIC advantage, which enables a shared operating system across the Security Fabric platform drives our price-for-performance advantage, increases the capacity to add features and functions while maintaining price points. Moving back to the income statement, total gross margin improved 10 basis points to 78.9%. Product gross margin improved 120 basis points to 62.6%, benefiting from lower direct product costs. The increase in product gross margin offsets the drag on total gross margins from the revenue mix shift driven by the strong product revenue growth and the gross margin foreign exchange headwind. Operating margin for the first quarter increased 210 basis points to 24.5%, benefiting from the strong revenue performance in the quarter. The benefit from lower travel and marketing program expenses was approximately 100 basis points. It was more than offset by an operating margin headwind from foreign exchange of about 150 basis points. We end the quarter with a total headcount of 8,615, an increase of 16%. Moving to the statement of cash flow, free cash flow for the first quarter came in at $264 million, up $22 million from the first quarter of 2020, despite a $24.5 million year-over-year increase in CapEx spending. We ended the year with total cash and investments of $3.1 billion, an increase of $1.5 billion. The increase includes the proceeds from our $1 billion investment-grade debt issuance during the first quarter. The issuance followed our inaugural strong triple-B credit ratings. Throughout the pandemic, we have leveraged the strength of our balance sheet as a competitive advantage to support our partners and customers as they experienced geo-specific economic challenges. As a result, daily sales outstanding increased seven days to 81 days, in line with our expectations and reflecting our earlier decisions to provide geographically targeted extended payment terms. Compared to the fourth quarter of 2020, DSI was on the first quarter of 2021 decreased six days, as we saw early progress towards returning to pre-pandemic payment terms. Inventory turns declined to 2.1 times from 2.5 times, reflecting the efforts we took to mitigate supply chain risk, including increasing our inventory levels, starting earlier in 2020. We expect extended payment terms and higher inventory balances to be in effect as we move through 2021. Capital expenditures for the first quarter were $52 million, including $38 million related to construction and other real estate activity. We expect to begin moving employees into the new Sunnyvale campus building in the middle of the year, although the timing will depend on local pandemic protocols and employee safety considerations. We estimate capital expenditures for the second quarter to be between $30 million and $40 million and for all of 2021 to be between $150 million and $179 million. The average contract term in the first quarter was approximately 27 months, up less than two months from the first quarter of 2020, and down approximately one month from the fourth quarter of 2020. Secure SD-WAN accounted for 15 deals of $1 million versus four in the first quarter of 2020, and contributed to the increase in average contract term. As we look forward, our goal remains to balance growth and profitability. Given the growth opportunities we highlighted during the March Analyst Day and as confirmed in our first-quarter results, we have tilted our bias towards growth for at least the next several quarters. The opportunities we see are supported by a strong pipeline, increased sales capacity, and our development efforts, which include the NP7 chip and our new FortiOS7.0 operating system that was recently released. Now, I'd like to review our outlook for the second quarter guidance. For the second quarter, we expect billings in the range of $860 to $880 million. Revenue in the range of $733 million to $747 million. Non-GAAP gross margins of 78.5% to 79.5%. Non-GAAP operating margin of 24.5% to 25.5%, which includes an expected 100 basis points to 150 basis points headwind in foreign exchange. Non-GAAP earnings per share of $0.83 to $0.88, which assumes a share count of between $168 million and $170 million. We expect a non-GAAP tax rate of 21%. Before raising our 2021 guidance, I’d like to congratulate every member of the Fortinet team for the truly outstanding start to 2021. For 2021, we expect billings in the range of $3.685 billion to $3.745 billion, which at the mid-point represents growth of approximately 20%. Revenue in the range of $3.080 billion to $3.130 billion, which at the mid-point represents growth of approximately 20%. Total service revenue in the range of $2.020 billion to $2.050 billion, which represents growth of approximately 21% and implies product revenue growth of approximately 17%. Non-GAAP gross margin of 78% to 80%. Non-GAAP operating margin of 25% to 27%. When backing out the 2020 T&E benefit, the midpoint of the guidance represents a 50 to 100 basis point increase in 2021 operating margin, despite an expected headwind from foreign exchange. Non-GAAP earnings per share of $3.65 to $3.80, which assumes a share count of between $170 million and $172 million, with about a $0.07 per share impact from debt issuance. We expect our non-GAAP tax rate to be 21%. We expect cash taxes to be approximately $80 million. And along with Ken, I'd like to thank our partners, our customers, and the Fortinet team for all their support and hard work in these difficult and unique times. Now I'll hand the call back over to Peter to begin the Q&A.

Peter Salkowski, Vice President, Investor Relations

Thank you, Keith. As a reminder, during the Q&A session, we ask that you please limit yourself to one question to allow others to participate; we’ve got a fairly large queue today. I'd like to get through everybody at least once. Towanda, please open the call for questions.

Operator, Operator

Thank you. Our first question comes from the line of Rob Owens with Piper Sandler. Your line is open.

Rob Owens, Analyst

Great. And thank you for taking my question. With one of the other verticals in the media seeing issues with chip shortages and some supply chain issues, is that starting to sneak into the security market relative to firewall point shipments? And can you talk a little bit about your potential exposure? Thanks.

Keith Jensen, Chief Financial Officer

Well, I think the chip shortages – this is Keith, Rob. I think the chip shortages that you pointed out can touch a lot of different industries. One thing about Fortinet, in addition to having different form factors, is the inventory balances that we carry. At two times inventory turns, you're looking at basically six months of inventory that we're carrying on our balance sheet. I do expect that the supply chain issues will be a constant conversation throughout 2021 and into 2022. But I think in terms of when we sit down and talk about our expectations for the year, we have a fairly good understanding of how to work that in.

Rob Owens, Analyst

Thanks, Keith.

Operator, Operator

Thank you. Our next question comes from the line of Brian Essex with Goldman Sachs. Your line is open.

Brian Essex, Analyst

Great. Thank you. And thank you very much for taking the question. Ken, I was just wondering about the billings commentary worldwide government up 60%, some really nice acceleration there, and then MSSP and service providers still accounted for 16% of total. Can you talk about, obviously, we know the secular drivers in MSSP. How durable is that? Maybe the factors that are driving that acceleration in government spend? And then talk a little bit about the service provider side; it doesn't seem as though we're seeing an acceleration from 5G and IoT yet. Who are the buyers there? How do you anticipate that segment will play out through the rest of the year?

Ken Xie, Founder, Chairman, CEO

Yes. Carrier on this is a lot of service providers starting to reshape their security network offerings, whether it's 5G, SD-WAN, or SASE and also supporting work from home kind of still in the early stage. So that's where we are working closely with all the service providers, like the ones we announced today, such as AT&T, and pretty much all the service providers to support them in all these shifts of the business model. I say it's still in the early stage. We do involve a lot of testing and trial. At the same time, I do believe eventually the service provider business will go back up to the number one tier like it has been in the past, potentially in the high-20% range like you saw four or six years ago. But because it's a new shift, they have some work to do, and there will be some big investments we see going forward.

Brian Essex, Analyst

Got it. Very helpful. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Jonathan Ho with William Blair. Your line is open.

Jonathan Ho, Analyst

Good afternoon and congratulations on the strong quarter. I just wanted to get a better sense of what you're seeing in terms of demand for the SASE and ZTNA-oriented products. And are you seeing that pipeline continue to rise, especially as we look at replacements for traditional VPN connections and other more legacy technologies? Thank you.

Ken Xie, Founder, Chairman, CEO

Yes, that is the new fast-growing market, but it will replace the traditional approach; meanwhile, some other traditional approaches also expand. We do believe we entered the SASE zero-trust network area that we comment on a few years ago, and we are best positioned with service provider carriers. So we tend to work closely with them and also offer more tightly integrated solutions. For example, FortiOS7.0 has a very integrated OS network operating seamlessly with different vendor solutions. That's working much better with a wider service provider and directly with customers. So we do see some fast growth going forward, but it's just part of the whole infrastructure solution and now replacing traditional approaches.

Jonathan Ho, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Ben Bollin with Cleveland Research. Your line is open.

Ben Bollin, Analyst

Good evening, Ken, Peter, and Keith. Thanks for taking the question. I was hoping you could talk about how you see customer discussions changing or evolving as they contemplate and start to return to their offices and to work. And then also how you view the growth opportunity over time from completely new customers versus wallet share expansion with your existing customers? Thanks.

Ken Xie, Founder, Chairman, CEO

Customers view security as increasingly important, not only that but also the need to cover a much broader infrastructure and diverse edges rather than just the traditional border or the data in a company. There's now more devices, more users, and more infrastructure that needs to be covered. So it's not a simple refresh; it’s really a complete change in the whole infrastructure approach. Companies are looking for multiple covers of different parts of infrastructure to work together, and you can see the fabric approach we took a few years ago is doing quite well, almost every quarter double the growth compared to traditional network security. That’s where we see more healthy growth moving beyond traditional perimeter security. Our ASIC advantage, which increases secure computing power five to ten times compared to other vendors running software-loaded on standard CPUs, allows us to add more functions and improve performance while reducing costs.

Keith Jensen, Chief Financial Officer

Yes, I would continue on Ken’s comments. The combined dynamics of back to work and many companies operating in hybrid models means that the attack surface is now presumably permanently expanded for many organizations. In terms of growth amongst new logos and expansion opportunities, we easily add several thousand new customers every quarter. However, the mix of billings will come from our installed customer base. The model we look at is: from that initial sale of perhaps a firewall or something else, there are two ways to expand. One is finding more use cases inside organizations for firewalls and increasingly displacement opportunities. The second is the expansion opportunity where those non-FortiGate fabric partner products are growing in adoption. That shifting from FortiGate to non-FortiGate, now being 30% of our business, is a clear affirmation of the strategy and you can see it in the numbers.

Ben Bollin, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Tal Liani with Bank of America. Your line is open.

Tal Liani, Analyst

Hi, guys. I’m going to take you to the basics with my question. Last year was strong, and there was some concern that the firewall market is being driven by COVID-related demand, just because of work-from-home. The question is whether you expect any slowdown of demand related to the anniversary of the trends last year? The second question is your non-FortiGate grew extremely strong again. If you can take us through the basics, what are the products that are growing there? Just what are the trends and what do you bring to the market? Thanks.

Ken Xie, Founder, Chairman, CEO

I do not see any slowdown; even for the FortiGate side. We’re gaining market share because there’s a fundamental technological architecture difference with five to ten times the computing power compared to our competitors, which allows us to easily add functions and performance. Even for work-from-home scenarios, companies are looking for a single solution that replaces three or four different boxes to secure their networks, manage home Wi-Fi, and handle traffic. This includes companies starting to expand the branch to homes called 'home branch' or whatever it may be, to ensure better networking, reliability, and security. Therefore, there’s also a huge amount of upside potential. Yes, there’s potential going forward.

Keith Jensen, Chief Financial Officer

It's a little tough for me to look back at the second quarter of last year and where billings growth was and the product revenue growth during that period. I didn’t feel like I was getting a tailwind from the VPN; that said, we’re very pleased with how the year has continued to play out, and the growth numbers provided. I don’t know whether early on in the work-from-home stage, Fortinet participated to the same level as other firewall vendors. The second part of your question is interesting, Ken, Peter, and I sit down every quarter and look at non-FortiGate products and probably find that the fortunate reality is that it's a rising tide lifting all boats.

Ken Xie, Founder, Chairman, CEO

Overall, most of the components we develop internally from day one are designed to integrate and operate together. That’s a key reason why customers prefer to buy from us—it’s much easier than companies that acquire outside solutions that take time and become more difficult to integrate. We’ve been working on this for years.

Tal Liani, Analyst

Got it. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Sterling Auty with JPMorgan. Your line is open.

Sterling Auty, Analyst

Thanks. Hi, guys. I'm wondering if you could help me better understand the disproportionate improvement you observed internationally, especially in EMEA relative to the improvement you saw in the U.S.?

Ken Xie, Founder, Chairman, CEO

I think similar to what we've discussed in the past few quarters, it's due to the pandemic—once it improves, companies consider how to go back to normal. This trend is strongest across the board; you mentioned infrastructure could be studied across various departments. Similar developments in APAC have outperformed the U.S.

Keith Jensen, Chief Financial Officer

I would add that markets are somewhat different. The incumbents typically have the upper hand during a pandemic, and we tend to be more of a challenger in the U.S. Some CIOs and CTOs did not focus on firewall refreshes last year, and competitive dynamics came into play. Typically, incumbents have more mind share with partners than challengers. However, looking forward, our pipeline in the U.S. is promising.

Ken Xie, Founder, Chairman, CEO

We will keep investing more in the U.S. to support growth, similar to our PGA sponsorship, which should help drive growth here.

Sterling Auty, Analyst

Got it. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Gray Powell with BTIG. Your line is open.

Gray Powell, Analyst

Okay, great. Thanks for taking my question and congratulations on the good numbers. So, to follow up on the SASE side of the business, how quickly should we think of billings growth ramping under the SASE product, and I don't want to get too aggressive, but could it potentially have a similar ramp to what you saw in 2018 and 2019 with SD-WAN back when that product was just getting started? Just how should we think about the overall upsell there? Thanks.

Ken Xie, Founder, Chairman, CEO

I can say that we’ve analyzed market studies and are considering how best to go to market with partners. I feel like the SASE opportunity will grow but is somewhat different, as SD-WAN is part of the SASE solution. We want better integration and performance management, so it will take some time to launch our SASE solution while closely collaborating with partners. The market is growing; we are closely monitoring how to position ourselves to capture that trend.

Gray Powell, Analyst

Okay. Thank you very much.

Operator, Operator

Thank you. Our next question comes from the line of Shaul Eyal with Cowen. Your line is open.

Shaul Eyal, Analyst

Thank you. Good afternoon, gentlemen, congrats on a strong performance. Keith or Ken, historically, the refresh cycle has been disruptive at times, and I would even say some noise around security businesses. It would appear that over the past 18 months, it seems there's less focus on it. Do you think that Fortinet is gradually shifting away from it, or are there so many concurrent refresh cycles that it is becoming less relevant?

Ken Xie, Founder, Chairman, CEO

I hesitate to label any upper refresh cycles compared to last time. The significant shift this time lies in how it's expanding into a much broader infrastructure across the organization and externally. Companies are also changing their infrastructure to adapt to the modern work-from-home standard and ensure better solutions for their employees. We see a lot of potential going forward, as companies adapt, which keeps us growing in a positive direction.

Keith Jensen, Chief Financial Officer

It’s going to get harder to discern industry refresh cycles compared to where it was five or six years ago for number of reasons. The footprint of vendors is larger than it was. In addition, our shared platforms such as non-FortiGate show success, where a significant portion of revenue comes from the platform itself. It’s going to get harder to find separate refresh cycles along with diversified organizations.

Ken Xie, Founder, Chairman, CEO

The traditional firewall is still in place and is not disappearing; every five years, it needs to be updated to ensure performance. However, companies are expanding beyond just view and need to keep security on the infrastructure intact, putting us in a great position.

Shaul Eyal, Analyst

Understood. Thank you so much. Well done.

Operator, Operator

Thank you. Our next question comes from Adam Tindle with Raymond James. Your line is open.

Adam Tindle, Analyst

Okay, thanks. Good afternoon. Maybe one for Keith: you've talked about this being a year to invest for growth. Your Q1 results clearly showcase that's working; billings growth in the high 20s at a scale approaching $1 billion while maintaining healthy profit is unique. So, for my question, could you consider leaning even more on growth given these early results? Could you share the logic of why not or are there diminishing returns above this level? Is this something you would consider reevaluating as the year progresses?

Keith Jensen, Chief Financial Officer

Yes, Adam. I think we’re really pleased with how the business executed in the first quarter, putting up 27% billings growth and raising guidance by 3.5 points for the quarter, while hitting about a four-point increase on guidance for the full year. The level of execution is high, and as we see tailwinds stemming from GDP and stimulus, the product suite, and sales team's execution capabilities, I think we’ll see how the year plays out.

Adam Tindle, Analyst

Thank you. That’s fair enough. I'd love to be a fly on the wall for those conversations.

Operator, Operator

Thank you. Our next question comes from the line of Andrew Nowinski with D.A. Davidson. Your line is open.

Andrew Nowinski, Analyst

Great. Thank you. And congrats on another great quarter. I want to ask about the partnerships with some of the MSPs that you mentioned—AT&T and BT. Those have historically been strong partnerships for Zscaler. So I’m wondering: do you think you are eating into Zscaler’s mind share at those partners? Or are they just trying to offer their customers maybe another SASE offering?

Ken Xie, Founder, Chairman, CEO

In the past few years, we used Zscaler as an example of one of the service providers we could partner with, but also some of the telecom companies have their own infrastructure and customer base, which we’ve been working with for a long time. During the pandemic, IT was under high pressure, therefore, SASE solutions offered a quicker service-based approach, which prompted service providers to quickly adopt many strategies with us. I believe the security business segment will return to previous growth levels.

Andrew Nowinski, Analyst

Yes, it sounds good. Thanks a lot, Ken.

Operator, Operator

Thank you. Our next question comes from the line of Irvin Liu with Evercore. Your line is open.

Irvin Liu, Analyst

Ken, congrats on the great quarter. You previously identified continued expansion into large enterprises as a key contributor to growth in market share. Can you talk about whether this was a factor in your Q1 outperformance? And are there any key differences when selling to large enterprises versus SME or S&D customers, for example, in terms of go-to-market motions and/or the timetables required to close a deal? Any color here will be helpful. Thanks.

Ken Xie, Founder, Chairman, CEO

Yes, our growth remains strong due to both large and small enterprises, with regions across SMBs and even larger customers increasingly seeing success. We've mentioned before that the pandemic had a huge impact on both sectors, and we continue to provide metrics indicating our success with larger deals alongside ending market share growth in the enterprise segment. In terms of cadence when selling to enterprises, having a direct sales force is crucial to drive collaboration with our channel partners, while maintaining a strategic focus on those large key resellers that are linked with legacy firewall vendors.

Irvin Liu, Analyst

Got it. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Fatima Boolani with UBS. Your line is open.

Fatima Boolani, Analyst

Good afternoon, and thank you for taking the questions. Keith, for you, I was hoping you could share some more details around the expectations of the SD-WAN mix that you have embedded in your guidance. How should we think about that? And certainly, how are you thinking about it? And where are the incremental areas of budgets or dollars and ultimately share gains within SD-WAN/SASE going to come from between the carrier market, as well as the enterprise DIY market?

Keith Jensen, Chief Financial Officer

Hi, Fatima. Nice to hear from you again. In terms of SD-WAN, we describe SD-WAN as a use case for the firewalls, and we're not necessarily modeling by use cases for the firewalls, nor necessarily by products. That said, I would expect that. Ken has been quite clear in setting goals early on, he wanted SD-WAN to be 5% of billings; we got there and moved it to 10% and kept pushing towards 15% of billings. The carrier service provider opportunities for both SD-WAN and SASE are key areas for investments.

Ken Xie, Founder, Chairman, CEO

Yes, I believe SD-WAN will be a bigger long-term market, and we want to be number one. Lots of potential remains even as work-from-home situations motivate businesses to seek new models of operations within the SD-WAN space. Our new technologies provide excellent performance and drive cost-efficiency compared to our competition, further enhancing our opportunity to taking the number one spot.

Operator, Operator

Thank you. Our next question comes from Hamza Fodderwala with Morgan Stanley. Your line is open.

Hamza Fodderwala, Analyst

Hi guys, good evening. Thanks for taking my question. I was wondering on the core firewall side, how much of the demand are you seeing around use cases of micro-segmentation, particularly given some of these recent cyberattacks?

Ken Xie, Founder, Chairman, CEO

We do have many inquiries about securing internal environments, whether within our customers and the data center. However, I must say security still requires massive computing power to process the traffic compared to larger solutions; typically, companies need around 3,000 to 5,000 times the computing power. If we cannot solve speed issues with managed deployment, that can present challenges. There are ample requests; yet not many solutions can presently meet those requests as the network speed is often 10 to 100 times faster than more traditional approaches. That's where we work directly with customers and partners.

Hamza Fodderwala, Analyst

Thank you for the color.

Operator, Operator

Thank you. Our final question comes from the line of Saket Kalia with Barclays. Your line is open.

Saket Kalia, Analyst

Okay, great. Hey, thanks for taking my question here, guys. Keith, maybe for you: just going back to the Non-FortiGate part of the business, do you see any trends in perhaps market segment or geography that is adopting Non-FortiGate at higher rates? And I only ask that because with your growing enterprise business, that is, I would imagine more of the enterprises would be willing to work with multiple specialist vendors. So is the Non-FortiGate part of the business perhaps more weighted towards the mid-market or perhaps international?

Keith Jensen, Chief Financial Officer

Yes, there’s a lot to unpack there. In answering your question, I don't think the product/service mix between FortiGate and Non-FortiGate shows any significant differences—we’re mostly bundling solutions now. The Non-FortiGate billings saw a growth rate of 50%, now representing about 31% of our business, which is quite exciting. In our last few quarters, the Americas have done well in selling the Fabric; we’re seeing large enterprises consulting us for the Fabric after being comfortable with their firewalls. We’re pleased to find that willingness, particularly among larger enterprises, although it’s actually a bit counter-intuitive.

Saket Kalia, Analyst

That makes sense. Thanks, Keith.

Operator, Operator

Thank you. Our next question comes from the line of Keith Bachman with Bank of Montreal. Your line is open.

Keith Bachman, Analyst

Thank you very much. I want to follow-on Saket; I have one question, but I want to break it into a couple of sub-parts. On the Non-FortiGate side—(a) is there anything over the next 12 months that you look at and think is particularly interesting or exciting? (b) is there anything you could break out on attach rates, where you currently stand on the non-FortiGate side? It would seem to me there are many opportunities. (c) if you had to partition the Non-FortiGate into cloud versus non-cloud, is there a way to break it out percentage-wise?

Ken Xie, Founder, Chairman, CEO

Yes, you’re asking some great questions. For the PRO, in terms of outlook, I see potential; non-FortiGate could increase toward doubling FortiGate world in the coming years. However, as mentioned earlier, we see the need to consolidate to better manage the complete infrastructure and we’ll pursue growth in that area moving forward as different customer groups search for ease of integration and management.

Keith Jensen, Chief Financial Officer

Great context, Ken. In breaking it down, I'd point back to our past analyst days in March and November for breakdowns of the Fabric products, namely in terms of cloud and infrastructure. I can’t provide exact metrics, but in terms of penetration rates and how we look to increase those customer relationships, that’s certainly a focus for us.

Keith Bachman, Analyst

Okay. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Michael Turits with KeyBanc. Your line is open.

Michael Turits, Analyst

Hey guys. For Ken and Keith, do you see any difference in the type of projects in security that you were seeing last year, primarily related to the move to work-from-home versus this year, or have we moved back to office? And part of that, Keith, I think you mentioned that you are seeing some more willingness to do firewall replacements this year. Would that also be a part of it?

Ken Xie, Founder, Chairman, CEO

This year, work-from-home demands led to needs in redesigning infrastructure as a foundational change rather than a simple patch. As such, we are positioned to deliver solutions to these requirements, with many customers needing to re-evaluate their processes to meet new standards effectively. That's where we can support companies in transitioning to full coverage of their security fabric.

Keith Jensen, Chief Financial Officer

Yes, I agree with Ken here. As CIOs and CISOs have shifted focus onto security for an array of reasons—be it the pandemic, rising cyber-attacks or other stimuli—the demand for comprehensive security is front-and-center and often leads to more willingness to consider firewall replacements compared to last year.

Michael Turits, Analyst

Thanks guys.

Operator, Operator

Thank you. Our final question comes from the line of Patrick Colville with Deutsche Bank. Your line is open.

Patrick Colville, Analyst

Thanks for squeezing me. Can I just finish it off with a multi-part? First one: just about linearity—last year, the linearity between one and two was unusual. Could you help us understand how that might play out in fiscal 2021? My second part is regarding product revenue, which was phenomenal; nonetheless, baked into guidance, it seems to be a mid-teens growth rate in the rest of the year. Please help us understand if there’s anything worth flagging in regards to performance for the rest of the year versus Q1? Thank you.

Keith Jensen, Chief Financial Officer

To address your question on linearity, if you're comfortable with our business model, you can see our predictability there. We did take the opportunity to raise product revenue guidance by about five points, implying approximately 17% product revenue growth guidance for the full year while feeling reasonably confident about that performance. In terms of linearity from Q1 to Q2, we would suggest you consider comparing our preemptive expectations against both direct results from last year in Q1 and Q2, as well as the guidance we’ve provided for Q2.

Patrick Colville, Analyst

That's very clear. Thanks for your time.

Peter Salkowski, Vice President, Investor Relations

Thank you, Rowanda. I'd like to thank everyone for joining the call today. Fortinet will be attending a few conferences in the second quarter. We have the J.P. Morgan Conference on May 25, AllianceBernstein on June 2, and Bank of America on June 8. Presentations and webcasts links are up on our website. Thank you very much. Have a great day and please reach out if you have any other questions.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.