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Fortinet Inc (NASDAQ:FTNT)
Q4 2018 Earnings Conference Call
February 6, 2019, 4:30 p.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to the Fortinet fourth quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session and instructions will be given at that time. If anyone should require assistance during the conference, you may press * then 0 on your touchstone telephone. As a reminder, this call is being recorded.

It is now my pleasure to introduce Vice President of Investor Relations, Mr. Peter Salkowski. Please go ahead, sir.

Peter Salkowski -- Vice President of Investor Relations

Thank you. Good afternoon, everyone. This is Peter Salkowski, Vice President of Investor Relations at Fortinet. I'm pleased to welcome everyone to our call to discuss Fortinet's fiscal results for the fourth quarter and full year 2018.

Speakers on today's call are Ken Xie, Fortinet's Founder, Chairman, and CEO, and Keith Jensen, CFO. 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 and conclude by providing our guidance for the first quarter of 2019 and for the full year before opening up the call for questions.

During the Q&A session, we ask that you please keep your questions brief and limit yourself to one question and one follow-up to allow others to participate. Before we begin, I'd like to remind everyone that we will be making forward-looking statements on today's call and that these forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular 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 obligations to update forward-looking statements. Also, our references -- references to financial metrics that we make on the call today are non-GAAP unless otherwise stated. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and in the presentation that accompanies today's remarks, both of which are posted on our investor relations website. Lastly, all references to growth are in a year over year basis unless otherwise noted.

I will now turn the call over to Ken.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Thanks, Peter and thank you everyone for joining this call to discuss our fourth quarter and full year 2018 results. I'm pleased with our strong fourth quarter results. Billings increased 22% to $649 million and revenue was up 22% to $507 million driven by solid growth in both America and EMEA. Our non-GAAP operating margin for the quarter was 26%.

For the full year, billing increased 20% to $2.15 billion and revenue was up 20% to $1.8 billion. Our non-GAAP operating margin increased to 22%. On a GAAP basis, operating income was doubled to $231 million and our GAAP operating margin increased to 13%. Our superior technology and broad security fabric architect contributed to the market share gain in 2018, improved sales, marketing, and continued the investment in our channel, also contributed to our growth.

I called into a recent Gartner survey, 72% of respondents said that security was their top most concern when it comes to one deployment. Fortinet's [inaudible] secure SD-WAN with built-in next generation firewall continued to gain significant traction across geographies and market segment.

In the fourth quarter, Fortinet signed a seven-figure deal with [inaudible], a European retailer with 4,000 stores in 26 countries. We displaced a competitor as a result of our ability to provided integral SD-WAN functionality and security in a single device. Fortinet has received the most reviews of all vendors in the Gartner Peer Insight for SD-WAN and more than double any other vendor. So, we expect strong adoption of a secure SD-WAN offering for the next several years.

During the fourth quarter, Fortinet and Symantec announced a partnership agreement to provide customers with the industry's most comprehensive and robust security solutions across endpoint, network, and cloud environments. Today, we announced the release of a new series as high-performance for the next-generation firewalls. The new E-series, including the Fortigate 3600E, 3400E, 600E, and 400E, which delivers a combination of up to 30 gigameters per second protection and a 34-gigabyte per second SSL inspection performance.

Additionally, the E-series enable [inaudible] to implement intent-based segmentation, providing smooth access control, continuous trough assessment, end-to-end visibility, and automated threat protection. While 2018 may have benefited from the current enterprise product refresh cycle, we expect continued growth over the next few years due to three business drivers. First, our portfolio of integrated secure SD-WAN and 5G products, which position us well to take advantage of the transition to cloud computing.

Second, Fortinet's secure fabric offered the most broad automated and integrated security for end-to-end protection as [inaudible] consolidates toward a single security vendor. Third, our security processor unit, SPU ASIC technology, and a new high-performance E-series product announced today provide us with continuous competitive advantage. Our SPU technology delivers 10x the performance of other software approaches.

Over the next few quarters, we expect to increase our competitive advantage even more with the announcement of a new chip SPU and the network processor SPU chip integrated with new products for both cloud and edge computing.

For 2019, we expect to generate another year of better than market growth, balanced with profitability. We are excited about significant opportunity ahead and we will continue to invest our business while maintaining our goal of 25% operating margin by 2022. I want to thank the Fortinet team, our partners, and their ongoing hard work for our customers for their support.

Now, I will turn the call over to Keith for a closer look at our fourth quarter and full year performance and our first quarter of 2019 guidance.

Keith Jensen -- Chief Financial Officer and Chief Accounting Officer

Thank you, Ken. Before I started, I'd like to note except for revenue, all financial figures are non-GAAP and growth rates are based on comparisons to the prior year period, unless otherwise stated. Slide references I make refer to the presentation posted on our investor relations website.

I'd like to now provide a summary of our solid fourth quarter performance. Total revenue of $507 million was up 22%. Product revenue of $201 million was up 24%. Excluding a net benefit of $7 million from the revenue accounting change, product revenue growth was 19%. Product revenue growth was driven by the new E-series products, software sales, and growth in fabric platform solutions. Service revenue grew 20% to $306 million. FortiGard, our security subscription offering grew 19% to $165 million.

All services, including FortiCare, our traditional support offering, were up 21% to $141 million. FortiCare, which continues to benefit from customers transitioning from 8x5 to 24x7 support was up 20% to $129 million. As our strong revenue growth illustrates, the partial US federal government shutdown as well as concerns raised by Brexit and a slowing Chinese economy had no noticeable impact on our fourth quarter performance.

I would note our government vertical is well-diversified and includes not only the US federal government but also state, local, and international government agencies. Additionally, the UK and China are single countries within similarly diversified EMEA and APAC regions. Before moving on with the fourth quarter results, I'd like to highlight our revenue performance for the year.

Total revenue for the full year grew 20% to $1.8 billion. Product revenue grew 17%. Service revenue grew 23%. Moving over the $1 billion mark for the first time and represented 63% of total revenue. At the end of the year, deferred revenue increased 26% to $1.7 billion. Short-term deferred revenue increased 22%.

Returning to our fourth quarter, billings grew 22% to $649 million, led by 23% growth in the Americas and EMEA. Average contract length decreased by one month to 25 months. Service providers and MSSPs had a seasonally strong fourth quarter at 23% of fourth quarter billings. Service providers and MSSPs represented 11 of our top 25 deals in Q4 and included a seven-figure secure SD-WAN deal that included the customer acquiring over 20 high-end FortiGate products along with a range of other products and services.

Billings to large enterprises, excluding service providers and MSSPs continued to outpace overall business with growth of 26% on a trailing 12-month basis. Illustrating the strength of our enterprise business, the number of deals over $1 million grew to a record 47, beating the previous record of 40 deals set in the fourth quarter of 2017.

In the quarter, we closed a seven-figure transaction with a European global 2000 multinational financial services company to use our FortiGate products to focus on internal segmentation. Also, one of the $1+ million wins last quarter was with a European-based supermarket chain that has 25% of the market share in the Netherlands. The combination of security and SD-WAN functionality into a single form factor drove this competitor displacement.

As part of this transaction, the company purchased hundreds of entry-level FortiGates. Network security billings increased 20% and continued to represent three-quarters of total billings. Billings for non-FortiGate products and services grew slightly faster than our FortiGate billings. The security fabric, which is the largest component of our non-FortiGate offerings benefited from customers recognition of our platform strategy, its value, performance, and integrated security.

The security fabric includes software, secure switches, and other hardware products and services. Secure switches are sold together with FortiGates and related services and represented 2% of total fourth quarter billings. Total cloud billings for our top five public cloud providers continued to experience growth in excess of 100%.

Moving back to the income statement, our fourth quarter gross margin of 75.7% was driven by the 40-basis point improvement and services gross margin to 87.3%. For the full year, gross margin was 76%, up 70 basis points from 2017.

Fourth quarter operating margin increased to 25.8% or up 690 basis points. The operating margin included a 340-basis point benefit from the required commission and revenue accounting changes. Excluding the accounting change benefit, the fourth quarter operating margin would have increased to 22.4% or up 350 basis points.

For the full year, the operating margin was 22.4%. Excluding the accounting change, the operating margin would have improved to 19%. Based on 605 accounting, the three-year trend of normalized annual operating margin improvement starting with 2016 stands at 190 basis points, 210 basis points, and now 180 basis points for 2018.

While improving our operating margin these 580 basis points over the last three years, revenue grew at a three-year compounded annual growth rate of 21%. As Ken mentioned in his prepared remarks, we expect 2019 to be another year of better than market growth, balanced with increasing profitability.

Slides 14 and 15 show a line by line comparison between our non-GAAP results and the non-GAAP result excluding the adoption of the new accounting roles for the fourth quarter and the full year. Total headcount at the end of the year was up 15% to 5,845. Net income for the fourth quarter was $105 million or $0.59 per diluted share, up 84%.

Net income for the full year was $320 million or $1.84 per diluted share, up 77% year over year. On a GAAP basis, we reported full year net income of $332 million or $1.91 per diluted share. The diluted share count for the fourth quarter was $175.8 million. The non-GAAP affected tax rate was 24%.

Moving to the statement of cash flow summarized on slides 10 and 11, free cash flow was $169 million, up 17% year over year. For 2018, free cash flow increased 28% to $586 million. In the quarter, we repurchased 1.3 million shares totaling $92 million. For the full year, we repurchased 3.8 million shares totaling $209 million.

We're outgrowing our Sunnyvale office space and are constructing a second building adjacent to our existing building, which we expect to occupy in the second half of 2020. Including spending on this project, we expect total first quarter capital expenditures to be between $15 million and $20 million and total full year capital expenditures to be between $120 million and $140 million.

As I turn to the guidance provided on slide 13, I'd like to remind everyone that the forward-looking disclaimer Peter presented at the Start of the call applies to the guidance I'm about to provide. For the first quarter, we expect billings in the range of $515 million to $535 million, revenue in the range of $465 million to $475 million, non-GAAP gross margin of 75.5% to 76.5%, non-GAAP operating margin of 18% to 18.5%, non-GAAP earnings per share of $0.37 to $0.39, which assumes a share count of between 176 million and 178 million shares. We expect a non-GAAP tax rate of 24%.

We are closely watching the widely reported concerns of potential softening of global economies. With that said, it is important to note that we are seeing healthy pipeline growth in our business. We believe we are well-positioned to continue to grow faster than the security market in 2019.

For 2019, we expect billings in the range of $2.45 billion to $2.5 billion, revenue in the range of $2.6 billion to $2.1 billion, total service revenue in the range of $1.33 billion to $1.36 billion. Non-GAAP gross margin of 75.5% to 76.5%, non-GAAP operating margin of 22.5% to 23.5%, non-GAAP earnings per share of $2.05 to $2.10, which assumes a share count of between 180 million and 183 million. We expect our non-GAAP tax rate to be 24%. We expect cash taxes to be between $53 million and $59 million.

As this guidance indicates, we remain committed to balancing growth with increasing profitability as we work to achieve our non-GAAP operating margin goal of 25% for 2022. Before I turn the call back over to Peter, we would like to think our partners, customers, and the Fortinet team for all their support and hard work.

I'll now hand the call back over to Peter.

Peter Salkowski -- Vice President of Investor Relations

Thank you. Operator, we're ready to start the Q&A session, please.

Questions and Answers:

Operator

Ladies and gentlemen, if you have a question at this time, please press * then 1 on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key.

Our first question comes from the line of Shaul Eyal with Oppenheimer. Your line is now open.

Shaul Eyal -- Oppenheimer & Company -- Analyst

Good afternoon, guys. Ken or Keith -- the product breadth is undoubtedly noticeable from a channel perspective, whether it's SD-WAN, some 5G-related transactions, the NEC as well as the new E-series products. You guys are moving it in all market direction and all infrastructures. Now, we all view Fortinet as a security company but maybe we should view it as an infrastructure play. How do you think about it?

Ken Xie -- Founder, Chairman and Chief Executive Officer

We still want to focus on ourselves as a security company, especially network security. The security as a percentage of IT spend is still a high percentage because security is addressing the application content, user, device, and region level, which the basic networking cannot address. So, all of this becomes much more important with the 5G, SD-WAN, the data transformation.

What's unique about Fortinet, when we design a security into the infrastructure, like ten years ago, we started to design the Wi-Fi controller within FortiGate and then the SD-WAN controller inside FortiGate, and now going to 5G. You can look at the FortiGate product, which we designed to incorporate some of the infrastructure function, it's very important for the provider in enterprise and then to design in the infrastructure inside of our add-on security later.

That gives us a huge advantage, like when there's a new infrastructure keeping spending, like SD-WAN, going forward to 5G and working closely with service providers. That's the advantage we have. We do think in long-term for what security the infrastructure should be and invest in R&D early.

Shaul Eyal -- Oppenheimer & Company -- Analyst

Maybe one for Keith -- as we think about the channel, the partner strategy, pretty much the same dynamics in recent quarters, recent years? Have you been seeing any change or implementing any change? Thank you for that?

Keith Jensen -- Chief Financial Officer and Chief Accounting Officer

I think I describe the last 6 to 12 months as being one that was more focused on individual segments of the channel, whether that was SMB, MSSP, even the larger parts of the channel. I think programs are probably more tailored now. When I say tailored, more targeted in terms of where we're seeing the performance from our channel partners.

Operator

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

Jonathan Ho -- William Blair -- Analyst

Good afternoon and congratulations. I wanted to start out with some additional color on your SD-WAN-driven deals. Can you talk about what percentage of the new deals are coming influenced by this SD-WAN demand?

Ken Xie -- Founder, Chairman and Chief Executive Officer

Definitely we see the pipeline increase very quickly, different from other SD-WAN players. We design with security, which is the top concern for all the WAN expansion. This is also a strong driver for the future growth in future years, even beyond the refresh from enterprise networking security, which probably will last a few more quarters. For this expanding into 5G will be at least a few more years, keep it growing. We are very uniquely positioned. We saw the benefit from early investment.

Jonathan Ho -- William Blair -- Analyst

With your new intention-based firewall, can you talk a little bit about how that differs from a typical next generation firewall? How does this new firewall fit within the emerging zero-trust models.

Ken Xie -- Founder, Chairman and Chief Executive Officer

The traditional firewall unit deployed on a corporate enterprise edge on the border, so there's trust insights on there, but this intent-based segmentation can deploy wherever the insight enterprise -- next to the server, next to the data center, segment different departments, and also some other devices. This has to be deployed in a high-speed WAN environment, whereas before, the traditional firewall, the ones that connect with the WAN [inaudible]. So, this is really high-speed, easy deployment and also leverage a lot of AI-machine learning to automate all this intrusion, also the internal security issues.

Operator

Our next question comes from the line of Sterling Auty with JP Morgan. Your line is now open.

Sterling Auty -- JP Morgan -- Analyst

So, Ken, I appreciate the commentary around fabric and especially the long opportunity that still in front of you. But my sense is that still the biggest portion of the business quarter in and quarter out at the moment is still kind the core traditional network security. And I'm curious in the enterprise the deals that you're winning, what do you hearing as the main drivers? Is it just a straight outperformance of speeds and feeds? Is it the integration you know, across your portfolio or the breadth of your product offering or some combination thereof?

Ken Xie -- Founder, Chairman and Chief Executive Officer

The speed starting to become more and more important whether with the speed for the whole infrastructure increased 5G or internal segmentation deployment. So that's where we see more and more the mandate. And also, when we also mentioned because the fabric also impose in both some of the switch, some of the Wi-Fi access AP, so that because all of this will be part of the total infrastructure.

The traditional firewall is starting to kind of be replaced we call the third-generation infrastructure security that has to address both the insight enterprise and the cloud, mobile endpoint altogether. So, some of them, we kind of innovate design internally, sometimes we partner with some other partner like Symantec and others to address the whole thing together within the whole industry.

So that's where we see the transition is kind of a different than the part. You have to have a different part of infrastructure working closer together to integrate, to automate together. So that's where, especially the enterprise we start to see some consolidation going on. That's we feel is our other drivers, so we do have the fabric approach both working with our own product and also working with the partner product together.

So, we feel this change will last for a few more years. And because this is different than the last time like four, five years ago replacing the traditional firewall UTM, now it's ready the whole infrastructure needs to be secured altogether.

Keith Jensen -- Chief Financial Officer and Chief Accounting Officer

This is Keith. I would give a little more context on that. I talked to the sales leadership with Ken. In the financial services, you're seeing ROI and speed be at the top of the list. Another one would be retail. I think you're seeing SD-WAN and branches be top of the list.

Operator

As a reminder, ladies and gentlemen, if you have a question, please press * then 1 on your touchstone telephone. That's * then 1. Our next question comes from the line of Fatima Boolani with UBS.

Fatima Boolani -- UBS -- Analyst

Thank you. I have two for Keith. The first one is around your implied product revenue guidance. So, if I did my math right, I'm shaking out maybe a little bit ahead of where we were expecting anyway, I wanted to plug into that and get a sense of what is giving you confidence around that product growth trajectory. As an extension, as we sort of locked some of the tax reform impacts of 2018 as you were lapping some of the specific incentives into your sales capacity that you provided for product growth in '18, to what extent are we lapping that and normalizing those effects in a follow-up as well.

Keith Jensen -- Chief Financial Officer and Chief Accounting Officer

Taking your last point first, I think a comment we made early last year about changing 50 comp plans is probably having an overblown impact of people. It's not doing what people are suggesting it is. But to your original point, I think we look at our pipeline and look at what we're seeing in terms of the business. I don't think there's something that we're seeing as evidence of a slowdown. We feel good about the things coming online as we move through the year, whether that's the new product offerings for the 3400 we talked about, the SD-WAN product and what we're seeing there.

I'll expand on a comment that was made talking to Jonathan a moment ago. When I benchmarked the pipeline growth of SD-WAN against other solutions. The pipeline benchmarks very well against other growth that we see. When I followed up and benchmarked that against the close rate, again, it benchmarks well when we compare it to other parts of the business. I think there are a lot of catalysts as we move through the year.

Fatima Boolani -- UBS -- Analyst

That's really helpful. Just around your service provider business, did that snap back to some of your historically higher level of the proportion of billings, I think you said 23%. But at the same time, we've picked up maybe a more cautious tone from some of your tech peers around data center spending and service provider spending posture. So, what is really driving that momentum for you and how are you bucking that trend that we've picked up negatively from some of your tech peers?

Ken Xie -- Founder, Chairman and Chief Executive Officer

First, I think the service provider will start to play a more important role in the security space, also with the expanding of infrastructure, SD-WAN 5G. So, the next few years will be very strong for service provider keeping spend in their own infrastructure service and also add a security service. It's also interesting. Service provider is the biggest extra for us. We're supporting them from the beginning more than ten years.

We can see that trend going on there as well, really becoming a high percentage. I know a few years ago, whether services moved to the cloud or something, kind of a slowdown of a 5G, whatever, slowed down the service provider spending a little bit. That's probably a very strong driver for the next few years.

We also have all the other service timing and [inaudible] gave us an additional growth driver for the next few years, beyond the enterprise refresh. We design all this, whether SPU technology, the 5G security eventually will benefit the enterprise customer a lot. None of the other competitors have internally developed or integrated as good as we have with this security function and infrastructure function and working with service provider for more than ten years. That's given us confidence for the full year's growth.

Operator

And our next question comes from the line of Andrew Nowinski with Piper Jaffray. Your line is now open.

Andrew Nowinski -- Piper Jaffray -- Analyst

Thank you and congrats on the next quarter. I wanted to ask a question on the service provider segment -- clearly, strong results this quarter. I was trying to determine how sustainable that is going forward and if you could just weave in any update on the competitive landscape on that space, given that Palo Alto recently launched a new appliance targeted at the service provider segment.

Keith Jensen -- Chief Financial Officer and Chief Accounting Officer

I'll kick it off and head to Ken for the hard part. The service provider has been a strong part of our business. It's also one that as a percentage of our business has been fairly lumpy from quarter to quarter. Q4 is typically a good quarter for the service provider part of our business. We're very pleased with the results. In the quarter itself, we have historically done very well with the MSSP part of that business as well as the infrastructure. We saw deals in both parts of that business in the quarter.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Service provider, first, it's a very long sales cycle. You need one to two years to sell into service provider. Also, they need to have an environment, very high-performance and also more reliable environment. Also, it's a very technical buy. It's different than some competitor using the marketing power to influence some of the non-technical buyers in enterprise. That's where we're working with service providers for more than ten years, which is pretty much all the major service providers are our customers and we're working very closely with them, different than some of the competitors.

On the other side, with SD-WAN, with 5G, with the new [inaudible] in infrastructure, there is also a lot of opportunity and security becomes more complex for enterprise and service provider also can provide additional value-added service. That's where we're all behind the service provider, to support in their future growth in the security space.

Like I said, it also could be a lot of edge computing, like where they do the IoT, they need bot the high-end and edge product working together. We have that advantage of that. Also, the product, we mentioned in the earnings call, whether the 5000 and 7000, we have been shaping that product already. So, they need some time to get into the space.

Andrew Nowinski -- Piper Jaffray -- Analyst

Great. Thank you. Maybe from a geographic perspective, you had fairly similar growth across all regions in 2018. As I look at your 2019 outlook, should we expect balanced growth across all regions in 2019?

Keith Jensen -- Chief Financial Officer and Chief Accounting Officer

Yeah. That's how we assign out the quota. We were very pleased with the consistent execution across the geographies in the fourth quarter and different parts of the business. That's how we model the business.

Operator

Our next question comes from the line of Brad Zelnick with Credit Suisse. Your line is now open.

Brad Zelnick -- Credit Suisse -- Analyst

I've got two questions. Service provider was a bright spot this quarter. You called out the opportunity in 5G and edge as an opportunity for you. Can you talk about the demand for your virtual appliance in that market and more broadly. How does the shift to virtual compare to your expectations maybe a year or two ago. What do you think that looks like into the future?

Ken Xie -- Founder, Chairman and Chief Executive Officer

We also have a huge advantage on the virtual. We also have a virtual SPU. That's the architecture we're using with the cloud providers in some virtual environments. So, that's where you can see the cloud and virtual growing quite well. We kind of [inaudible] integration with multiple cloud providers, with a more broad function with other competitors, which gave us more advantage and is also part of the solution. Whether you go to the cloud or virtual, you also need to make sure different application and different cloud providers can work together to help customers solve the issue. That's where we do the integration and also more broad offering compared to some of the competitors. That's where combined the virtual and the physical is the advantage we offer to service providers.

Brad Zelnick -- Credit Suisse -- Analyst

Thank you. Ken, we keep hearing great things about your products from the channel. I feel like everybody likes to focus on some of the public companies in network security. I'd be curious if you can share any observations about some of the other ones that are often times forgotten about, names like SonicWall or WatchGuard. What do you see? Do you believe the lower end of the market or the smaller players out there get consolidated and are you coming across them in the field competitively? Thanks.

Ken Xie -- Founder, Chairman and Chief Executive Officer

There's two parts. The security is a very dynamic environment. I've been in security almost 30 years. You need to keep up the innovation. If some of the companies are too slow on the innovation and cannot follow the trend, the growth will slow down or even have to depend on an acquired company to grow. Then acquired companies are challenged by how this acquired company has integrated with this function, with this product. That's a challenge for big companies.

Some of the other smaller players actually, once they cannot really reach a certain size, the investment, we spend billions of dollars in the Asic technology for the SPU and the economy of scale also working well. That's making some of the smaller competitors have less advantage when security reached higher speed, more broad offering. So, that's where the consolidation also started happening in the space.

I feel some of the smaller competitors started inducing some of the edge there. There's still a lot of new niche markets. The issue is really the niche market can only address some part of enterprise. If they cannot expand and not integrate, they're not improving the performance, they have difficult time to grow beyond $100 million or $1 billion in there. That's where we see some of the long-term companies slower on some of the innovation and also the growth.

Operator

Our next question is from Walter Pritchard with Citi. Your line is now open.

Walter Pritchard -- Citi -- Analyst

Just two questions for Keith -- on the Q1 seasonality, the Q1 seasonality especially on billing seems a little bit light of what it usually is if I look Q4 to Q1. Is the simple explanation there that the strength in Q4 and then I had a follow-up on another metric.

Keith Jensen -- Chief Financial Officer and Chief Accounting Officer

It is the strong performance we had in the fourth quarter, clearly an outperformance.

Walter Pritchard -- Citi -- Analyst

You did talk about, I think, 2% of the revenue was from switches. I don't' know if that was the largest of the non-security products. Maybe you could help us understand the all-in the phones, the cameras, the access point. How much of either product revenue is represented by non-security products?

Keith Jensen -- Chief Financial Officer and Chief Accounting Officer

I think non-FortiGate includes secure fabric, which is the lion's share of what you're talking about, services, training. We actually include phones and cameras and I'm not sure in that particular group. Coming back to what makes up secure access or the secure fabric, switches or products, it's the largest of the products. What you have that remains is 10 to 11, 12 different solutions that we offer in both hardware and software.

One metric I would offer, if you total up all the software billings in secure access, they're much greater than the secure switch billings are. I think when we start talking about our margins, while we're pleased with what secure switches bring to us in terms of the product margin, we understand that it does not attach quite as much service, but it's not the drain on margins some people may think. In that particular product suite I just described, software is much larger than switch is and it's generating a lot more of margin for us.

Ken Xie -- Founder, Chairman and Chief Executive Officer

We don't sell the switch separately. It's basically a FortiGate control, the switch, and it does some isolation segmentation and also some kind of controller function there also. That's where I saw the security function inside the switch working with FortiGate. It is not sold separately. That's together with the web security, email security. So, basically, it has to be sold together instead of sold separately. That's the switch. We don't sell switch separately.

Operator

Thank you. Our next question comes from the line of Michael Berg of JMP Securities. Your line is now open.

Michael Berg -- JMP Securities -- Analyst

Thanks for taking my question. I wanted to ask on the federal piece, looking at the guidance and the entirety of Fiscal 19, what ware you seeing in terms of the pipeline? Are things getting pushed? Are the sales cycles being extended? How can I think about the federal piece of the business given the shutdown?

Keith Jensen -- Chief Financial Officer and Chief Accounting Officer

To frame it up first of all, some time ago we discussed the government vertical. It was probably the second or third-largest vertical, but it includes not only the US federal, but it also includes state, local, and international entities as well. In terms of a direct impact of the shutdown, together with the fact that seven of the nine agencies are funded, given the size of what the federal government is to our business, I'm very unconcerned about it. My concern stems from if we close it down again and it starts becoming a much broader economic issue, then I'd have concerns about it.

Michael Berg -- JMP Securities -- Analyst

Okay. Then a quick follow-up -- how big of a business can I think about Fortinet selling internet of things the core of a data center? We've seen some weakness in peers. How can I think about you guys selling into the data center?

Ken Xie -- Founder, Chairman and Chief Executive Officer

I don't think there's much slowdown in the data center. We're mostly working with service providers offering secure server to their customers. We launched a product like the high-end 6000, 7000 series probably like one to two years ago. Since then, it's ramped up. We have not seen the data centers slow down.

Keith Jensen -- Chief Financial Officer and Chief Accounting Officer

Neither one of us really have any data to suggest there's a slowdown. If you're talking about cloud providers and some of their plans -- regardless, we're not seeing something impacting of our business.

Operator

Thank you. Our next question comes from the line of Daniel Ives with Wedbush Securities. Your line is now open.

Daniel Ives -- Wedbush Securities -- Analyst

A lot of the questions have been asked, but I guess to frame it -- there's a lot of naysayers, including many on the call on your growth and you continue to defy the skeptics. What do you think investors are missing, especially on the large deal side in terms of what you guys are doing where it's competition as well as going forward, the growth opportunity versus some of the noise out there? I'll just frame it from there.

Ken Xie -- Founder, Chairman and Chief Executive Officer

For me, as an engineer, because we do invest in some of the long-term innovation from the SP Asic chip level to some infrastructure and other things and also see how the next five to ten years, we keep improving position and make a difference in a space, so that's where sometimes it could be too technical, could take a long time to explain to some of the investors. Sometimes they complain I go too deep, too technical. That part, I still feel has a lot of value, a lot of potential. We're more focused in the technology, the long-term to make a big impact in the space.

Whether the innovation, the patents we have, like over 600 patents, most of them internal innovation and the new products, the new technology function there -- like I said, we are very good in winning the technical buyer space, whether in the Fortune 100 companies and also the service provider, which is a very technical buyer.

You can see whenever there's an IP testing going on, we're doing quite well, but compared with some of the other competitors on the sales side, we're improving ourselves, but we're also wanting to keep the innovation culture we have and investing into the technology of the product. At the same time, we want to balance the growth with the margin. We want to keep some balance of the growth and the margin. This year will be the 10-year anniversary of the IPO so the valuation has grown more than 10x in the last ten years.

Keith Jensen -- Chief Financial Officer and Chief Accounting Officer

I think clearly, we're executing on a balanced growth approach, adding to the topline, adding to the bottom line. I look at the founders of the company, that plays very well with them. I think people sometimes undersell the experience we have on the technology side with the founders and others about where the product is going over a longer time than looking at longer cycles.

Daniel Ives -- Wedbush Securities -- Analyst

On 5G, especially if you look at where that's going in the next 18-24 months, do you feel like that's a competitive advantage you have, given the technology and where you guys play going forward?

Ken Xie -- Founder, Chairman and Chief Executive Officer

That's where we have to drive the growth for the next few years, even five to ten years because of our high-speed application and how to secure the edge related to IoT and how there is the virtual combined with the physical. Also, 5G is also defined by the SDN, the software-defined networking and the investment we made in the Wi-Fi combined with Wi-Fi controller inside FortiGate and then also SD-WAN controller inside FortiGate.

All this has to be combined together and continue working with service provider with different part of infrastructure to play the 5G and also, even some different verticals and different requirements, different application, whether related to the different IoT or vertical -- it's quite complicated, but also needs a long-term investment like with the philosophy we had with infrastructure together.

That's the 5G that has been there, not just about a few weeks, a few months. Also, combined with the technology that the other part of working with service provider for years, that's where we feel pretty confident about the 5G to help drive for the next five to ten years.

Operator

Thank you. That concludes today's question and answer session. With that, I would like to turn the call back over to Mr. Peter Salkowski with closing remarks.

Peter Salkowski -- Vice President of Investor Relations

Thank you, Andrew. I'd like to thank everybody for joining the call today. Management will be presenting at the following technology conferences during the first quarter. We'll be at the Goldman Sachs conference on February 12th and the Morgan Stanley conference on February 25th. Those conferences are being held in San Francisco. So, we look forward to seeing many of you in the Bay Area. If you have any follow-up questions, feel free to give me a call or send me an email. Have a great rest of your day.

Operator

Ladies and gentlemen, thank you for participating in today's program. You may all disconnect. Everyone, have a wonderful day.

Duration: 64 minutes

Call participants:

Peter Salkowski -- Vice President of Investor Relations

Ken Xie -- Founder, Chairman and Chief Executive Officer

Keith Jensen -- Chief Financial Officer and Chief Accounting Officer

Shaul Eyal -- Oppenheimer & Company -- Analyst

Jonathan Ho -- William Blair -- Analyst

Sterling Auty -- JP Morgan -- Analyst

Fatima Boolani -- UBS -- Analyst

Andrew Nowinski -- Piper Jaffray -- Analyst

Brad Zelnick -- Credit Suisse -- Analyst

Walter Pritchard -- Citi -- Analyst

Michael Berg -- JMP Securities -- Analyst

Daniel Ives -- Wedbush Securities -- Analyst

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