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Fortinet Inc (NASDAQ:FTNT)
Q2 2019 Earnings Call
Aug 1, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Fortinet Q2 2019 Earnings Announcement. [Operator Instructions] I would now like to introduce your host for today's conference, Mr Peter Salkowski, Vice President of Investor Relations. Sir, you may begin.

Peter Salkowski -- Vice President of Investor Relations

Thank you, Crystal. 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 financial results for the second quarter of 2019. 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 third quarter of 2019 and he will provide an update for the full-year guidance before opening 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 question to allow others to participate.

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, and 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 otherwise stated. Our GAAP results and GAAP to non-GAAP reconciliation can be found in our earnings press release and in the presentation that accompany 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 will now turn the call over to Ken.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Thanks, Peter, and thank you to everyone for joining this call to discuss our Second Quarter 2019 Results. We are pleased with our strong billings, revenue, operation margin, and cash flow performance during the quarter. Our advanced technology [Indecipherable] fabric architecture for our cloud offering and secure SD-WAN, all contributed to our solid market share gain in the quarter. Increased performance from our infrastructure security and cloud offerings drove total billing growth of 21%, well above the industry average. Non-FortiGate billing were 27% of total billing for the quarter.

Revenue was up 18% to $522 million, driven by strong service revenue growth. Product revenue growth was consistent with the 14% increase we achieved in the first quarter despite a significant and more difficult earlier year comparison. Today, Fortinet announced the three new high performance next-generation firewalls; the FortiGate 1100E, FortiGate 2200E, and FortiGate 3300E which illustrate of superior technology advantage and are able to [Indecipherable] securely accelerate the [Indecipherable] for the cloud. Traditional network parameters are just solving as a mobile cloud and IoT technology changes the way people works, as well as the volume of data they needed to secure. Fortinet is the leader in hybrid cloud and Edge security. During the quarter, we announced the addition of our FortiWeb Cloudweb as a service to our cloud security portfolio offerings. This solution enables rapid application deployment.

Additionally, Fortinet provide one of the broadest management secured as a service offerings. These cloud offerings easy to implement, easy to integrate, flexible and scalable. The explosion of IoT technologies is a center in the movement of data and computing power to the Edge. According to Gartner, 70% to 80% of Edge data never backed with the data center could be processed, and within the next two years, 40% of large enterprise will integrate Edge computing, up from 1% in 2017.

The benefit offers security-driven networking and at Edge with low latency and high performance is critical, especially with the deployment of 5G networks. Only Fortinet offers security and networking into a single secured SD-WAN solution and our offering clearly resonates with enterprise customers. During the quarter, the number of customers adopting Fortinet secured SD-WAN solution more than doubled from the previous quarter.

Going forward, we see four drivers of market share growth for Fortinet. First, our refreshed portfolio of FortiGate with integrated secure WiFi, SD-WAN and 5G products are leading the transition to security-driven networking and continue to gain network security market share. Second, Fortinet security fabric offer our broad, automated and integrated secure solution for end-to-end protection as our relation consolidate toward a fewer security vendors. Third, Fortinet provide a broad range of hybrid and multi-cloud deployment. And fourth, our OT and IoT security offering is fully ASIC SPU technology continue to provide a cost and performance advantage most among competition. I want to thank the Fortinet team and our partners for their ongoing hard work and our customers for their support.

Now I will turn the call over to Keith, for a closer look in our second quarter performance and our guidance for the third quarter and full year.

Keith Jensen -- Chief Financial Officer

Thank you, Ken. Before I start I'd like to note except for revenue financial amounts are non-GAAP and growth rates are based on comparisons to the second quarter of 2018 unless otherwise stated. The slide references I make refer to the presentation posted on our Investor Relations website.

One quick housekeeping note: we made one modification to the billings by our product family Slide by moving the Fortigate 100 Series from the entry level to the mid-range product family. FortiGate appliances below 100 Series are desktop appliances. Mid-range FortiGates, including the 100 Series are higher performing rack-mounted appliances.

For your benefit, we have provided the product family billing trends under both the old and new approaches. I'd now like to summarize our strong second quarter performance. As Ken mentioned, total revenue of $522 million was up 18% led by service revenue growth of 21%. On a geographic basis, revenue growth was strong for both the Americas and APAC. Product revenue of $190 million was up 14% despite a significantly more difficult year-earlier comparison, product revenue growth was consistent with the first quarter of 2019.

Product revenue benefited from the continued success of the E Series and fabric products. Service revenue grew 21% to $332 million driven by a 24% increase FortiGuard security subscriptions. Forticare technical support and other services increased 16%, $149 million. As shown in our second quarter results, service revenue continues to experience strong growth, improving margins and offers a high level of predictability.

To illustrate these points I would note, service revenue represents 64% of total revenue, up over 100 basis points. Services gross margin was 87.3%, up 50 basis points. Deferred revenue provided approximately 90% of service revenue and 60% of total revenue. In the third quarter, we expect similar percentages of service in total revenue to come from our existing deferred revenue balance. Total deferred revenue increased 27% to $1.9 billion. Short-term deferred revenue increased 21% to $1 billion.

Now turning to billings. Total billings grew 21% to $622 million, driven by strong growth from infrastructure fabric, cloud and the secure SD-WAN firewall use case. On a geographic basis both the Americas and the international emerging regions had strong quarters. Consistent with our prior comments regarding duration, average contract term increased one month year-over-year to approximately 27 months. Service providers in MSSPs, remain one of our top customer segments accounting for 15% of the total billings.

Increasing industry diversification including strong growth from government and financial service verticals led to a 21% increase in billings. Deals over $1 million increased 28% to $46, the total dollar value of these deals increased 37%. We are pleased with the geographic and customer diversity we are seeing in these large deals with nearly 40% coming from EMEA and APAC.

And consistent with prior quarters, our largest deal in the quarter was significantly less than 2% of total billings. Clearly, our business is not dependent on a handful of large deals in any given quarter. The number of deals over $250,000 increased 30% to $346 million and the number of deals over $500,000 increased 30% to $147 million. Network security product and service billings increased 19% and accounted for 73% of total billings.

New firewall use cases, including operational technology to secure SD-WAN continue to provide a strong tailwind of FortiGate product to service billings growth. Secure SD-WAN was a leading contributor in the quarter and included six deals in excess of $1 million. Non-FortiGate products and service billings grew faster than network security billings driven by strong growth in infrastructure fabric cloud and secure SD-WAN.

Moving back to the income statement, gross margin improved 100 basis points to 76.4%. Product gross margin improved 110 basis points to 57.6%. Operating margin increased 250 basis points to 23.6%. Operating expense leverage and the gross margin improvement I just mentioned easily offset a small decrease in the benefit from the change in commission accounting. Total headcount increased 15% to 6,293. Given our strong operating income performance, GAAP net income was $73 million.

Moving to the statement of of cash flow summarized on Slide 7 and 8. Free cash flow was $178 million, up 36% year-over-year, resulting in a free cash flow margin of 34%, up 450 basis points year-over-year. The increase reflects strong second quarter billings and collections, continued inventory management and the flow through of the increase in operating profit to net income.

Capital expenditures for the second quarter were $17 million. We expect third quarter capital expenditures of between $40 million and $50 million. Given lighter than anticipated construction spending for the first half of the year, our 2019 capital expenditure guidance moved slightly lower to between $110 million and $130 million.

Our internal free cash flow models are in-sync with the current Street consensus estimate for the full year and reflect increased spending on a new campus building in the second half of the year. In the quarter, we repurchased 470,000 shares of common stock for a total cost of $35 million or an average per share price of approximately $73.50. At the end of the second quarter, the remaining share repurchase authorization was $643 million and is set to expire at the end of this year.

As I turn to the guidance provided on Slide 9, I'd like to remind everyone that the forward-looking disclaimer that Peter presented at the start of the call applies to the guidance I'm about to provide. For the third quarter we expect billings in the range of $600 million to $615 million. Revenue in the range of $525 million to $540 million. Non-GAAP gross margin was 75.5% to 76.5%. Non-GAAP operating margin were 23% to 23.5%. Non-GAAP earnings per share were $0.55 to $0.57, which assumes a share count of between 177 million and 179 million. We expect a non-GAAP tax rate of 24%.

For 2019, we expect billings in the range of $2,510 billion to $2,540 billion. Revenue in the rage of $2,100 billion to $2,120 billion. Total service revenue in the range of $1,340 billion to $1,360 billion. Non-GAAP gross margin of 75.5% to 76.5%. Non-GAAP operating margin of 23% to 23.5%. Non-GAAP earnings per share of $2.23 to $2.26, which assumes a share count of between 177 million and 179 million. We expect the non-GAAP tax rate to be 24%; we expect cash taxes to be between $52 million to $54 million.

Before I turn the call back over to Peter. I'd like to thank our partners, our 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

Thanks Keith. Operator, we are ready for the Q&A session, please.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Shaul Eyal from Oppenheimer. Your line is open.

Shaul Eyal -- Oppenheimer -- Analyst

Thank you. Good afternoon, gentlemen, congrats on the strong performance and improved outlook. So Keith, I'm curious on good acceleration on the SD-WAN front. You've mentioned six deals in excess of $1 million. What's driving this healthy demand and an acceleration you're seeing? Can you talk to us about some of the drivers on that front? And I have a follow-up.

Ken Xie -- Founder, Chairman and Chief Executive Officer

This is Ken. Like I said previously, we believe the infrastructure and we called a security driven network is kind of more important because the border secured under [Indecipherable] most tech company internal. That's where the SD-WAN secure all these WAN connection, branch office and together with the internal segmentation security starting to get more and more important. So that's why we see the SD-WANs of market as a whole infrastructure security approach. That's the reason we have for the last few years and that start in building we call a security-driven networking infrastructure and we see lot of our success for this approach.

Shaul Eyal -- Oppenheimer -- Analyst

Got it. I think we picked up some solid performance during the quarter within the federal arena. Can you provide us with your views on that vertical? How do you view it down the road expanding second half this year and into 2020? Just initial thought what specific products and services are you pushing within this vertical?

Keith Jensen -- Chief Financial Officer

Shaul, this is Keith. I would probably just step back a tadbit of note that, our government vertical includes not only the U.S. government, but also international government agencies, as well as state-local government agencies. I think what we saw to the growth in the quarter was actually more on the international front than it was domestically. So it'll be a little difficult to respond specifically to other products, if you will, in that segment you're speaking to.

Shaul Eyal -- Oppenheimer -- Analyst

Got it. Okay, that's fair enough. Thank you so much.

Operator

Thank you. Our next question comes from Sterling Auty from JP Morgan. Your line is open.

Sterling Auty -- JP Morgan -- Analyst

Thanks. Hi guys. So through much of this quarter, after the March quarter results, there is that healthy debate again about where we are with firewall refresh. What impact would sit for the cloud is going to have on firewall demand etc.? You mentioned the use cases, but I wonder, Ken if you could just kind of chime in and give us a sense, what do you think the industry growth opportunity looks like for the core Firewall network security moving forward?

Ken Xie -- Founder, Chairman and Chief Executive Officer

I think the industries in the transition the traditional refresh of the firewall, which you see like four, five, six years ago, you've seen the [Indecipherable] firewall UTM replaced the traditional connection base for firewall VPN is probably only part of the solution now. You need to have the whole infrastructure like the firewall connect with all these different kind of SD-WAN, the WiFi, and point and also the web and also the cloud IoT you need to be kind of considered together. That's the new trend and also, that's also easy to manage and consolidate all these kind of different solution is starting kind of more and more important because the management cost, I think are high for the security. That's where we see the probably, colder weather, the infrastructure security-driven networking companies together are I think more important. So that's where the traditional and the pressure refresh still going on and I think compared to a few years ago, we have less market share compared with some of our competitor in the enterprise. So we are not being impact-influence very much about the refresh cycle, but we do see we have a more broad offering and most come from internal developed which integrate and automate in day one, which has much better -- kind of easy to manage compared to somewhat competitor come from our acquired product.

At the same front ASIC SPU gave us huge performance advantage especially when [Indecipherable] internally and in the local area network and at the same time when you have the infrastructure approach, and also the other IoT, so that's where the ASIC advantage that we call SPU-Security Process Unit and also start to kind of become bigger and at the same time, once we have a bigger marketing share, the cost per chip also I think are lower. So the economy scale also starting to play, so that's making -- a margin can be improving. All these will help us to position going forward for the trend, I believe this kind of infrastructure security trend will keep going in the next 10-20 years and we are well-positioned for that change.

Sterling Auty -- JP Morgan -- Analyst

Excellent. Maybe one quick follow-up. The Capital One breach AWS back in the news, probably for the first big high-profile breach since maybe the PlayStation hack back a number of years. Do you think this will be the motivating factor to drive virtual firewall adoption in the cloud.

Ken Xie -- Founder, Chairman and Chief Executive Officer

First, I don't think it impact the Q2 number and [Indecipherable] at the same time, it definitely make people more kind of consider security is more important. But on the other side, if you put too much thing into a single cloud location, that also can be more risky. That's where [Indecipherable] you need to have a sort of balance amount of cloud and age and different application, different data, you need to have a different way and multiple layers to secure it.

Sterling Auty -- JP Morgan -- Analyst

Got it. Thank you.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Brad Zelnick from Credit Suisse. Your line is open.

Brad Zelnick -- Credit Suisse -- Analyst

Great, thanks so much for taking the questions and congrats on a very clean quarter. I've got one for Ken and a follow-up for Keith. Ken, you talked about more opportunities as network architecture and security moves to the Edge -- and I know this means different things to different people, but if I look at the lower end FortiGate appliances ticking down a bit and seeing some other vendors out there with cloud proxies and customers doing local internet breakouts at the branch office -- how, if at all, is this impacting your business and how is it Fortinet helping customers as they think about network transformations.

Ken Xie -- Founder, Chairman and Chief Executive Officer

So I do believe the low end was starting to pick up because we're in the mid of refreshing. Last quarter, we announced the first product FortiGate 100F using the new SoC4. I think going forward, there's a few other new product in a low-end will come up using the leverage SoC4 which has a performance probably either that is 3x to 5x better than the previous version. So that's where we're helping drive the lower end growth. On the cloud side, I do see cloud is really additional -- is complement to what we offer from the infrastructure and also the Edge computing is a part of the solution. So we don't view that cloud will be reduced on premise and also in the Edge and also the Edge, I feel probably even grow faster than the cloud in the next few years. Because from the appointment from advantage of Edge compared to cloud, you need to have both solution and the cloud already -- probably not using [Indecipherable] they'd say Edge with either cloud. I do believe both will be existing but the Edge computing, Edge security and it will be more effort as addressed especially we have an advantage using the ASIC chip and it's a lot of application because a real time the latency requirement, you had a process that's in Edge and in security I keep saying Edge is good for the prevention, which you need to be real-time process and the cloud will be good for management and certain star reach, which we may not have to deal with real-time and also could be for detection. But if you want to do the prevention and in-line real-time protection, probably Edge has more advantage.

Keith Jensen -- Chief Financial Officer

If I could just add to Ken's commentary just quickly. I won't lose sight of the fact that you're looking at the mixed shift if will in our reporting between low, mid and high. What I think is actually happening there, to a large extent, is you're seeing the success of the E-Series in the mid-range product family in some ways causing a mixed shift. We've talked about the 400E and 600E that we introduced earlier this year is coming online. But I've also talked about the 500E Series for several quarters now and just to extend that conversation one step further, I would note that when I compare the 500E to its predecessor of 500D, it's moving at about 300% or 400% faster than its predecessor did. And so when I look at those types of numbers, I think you're starting to see the success in the mid-range really is going to skew that mix for us.

Brad Zelnick -- Credit Suisse -- Analyst

That makes total sense case, Keith. And just a quick follow-up, a housekeeping item that I might have missed it in your prepared remarks, but did you tell us what the year-on-year FortiGate unit shipment growth was? I didn't catch that.

Keith Jensen -- Chief Financial Officer

I did not. But I can share that it moved in tandem with product revenue growth and that's also consistent with the first quarter of this year, moving in tandem product revenue growth numbers.

Brad Zelnick -- Credit Suisse -- Analyst

Excellent. Thank you so much for taking the questions, guys.

Keith Jensen -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Andrew Nowinski from Piper Jaffray. Your line is open.

Andrew Nowinski -- Piper Jaffray -- Analyst

Okay, great. Thank you and congrats on a nice quarter, so I wanted to ask about the million-dollar deals that you had a very strong growth. Just wondering if you could provide any more color on the drivers of that and whether it was higher sales capacity are as simple as just having a broader portfolio of products now?

Keith Jensen -- Chief Financial Officer

I think I try to make the -- Andrew, it's Keith. I'm sorry. I'm trying to make the effort to note. One, the contribution from SD-WAN, which I think was 6 of the 46 deals that we saw there. We do see ourselves getting deeper into our enterprise install base which is driving those larger deals and continued progress in the enterprise space. I think if we map it out some several quarters ago in terms of what our expectations were, in terms of moving in that direction, I think that we've seen that reflected in those million-dollar deals.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Yeah, also one other point I want to add is really the [Indecipherable] ourselves have [Indecipherable] started doing better. So that's where you see the non-FortiGate grow faster than the FortiGate as to making a total infrastructure solution. That's also helping, makes a deal larger.

Andrew Nowinski -- Piper Jaffray -- Analyst

Okay, got it. And just a follow-up. As it relates to EMEA, it looks like your growth may have decelerated a little bit relative to last quarter, but that is consistent with a lot of other vendors and what they reported in EMEA. So just wondering, was that just due to the macro in EMEA or were there some other factors there?

Ken Xie -- Founder, Chairman and Chief Executive Officer

Probably the comparison, is a little tough and the UK has a maybe a little bit of uncertainty.

Keith Jensen -- Chief Financial Officer

So I think you're spot on with that, Ken. I do think it was a tough compare coming off of last year. Our EMEA number includes Europe, Continental Europe as well as what we call international merging which actually performed very, very well in the quarter. But going back to Europe, yes, I think what we're sensing there is consistent with the commentary that we've read from other reports, if you will. As Ken noted, the UK seems to be in the bit of a doldrums, if you will, across industries and I think we saw that as well.

Andrew Nowinski -- Piper Jaffray -- Analyst

Great, thanks. Keep up the good work, guys.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Thank you.

Operator

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

Jonathan Ho -- William Blair -- Analyst

Hi, good afternoon. I'd like to echo my congratulations as well. I just wanted to maybe start out with a little bit of color in terms of your go-to-market and channel engagement and can you maybe just give us a sense of what's been successful there, and this sort of help drive some of the larger enterprise deals?

Keith Jensen -- Chief Financial Officer

Ken and I argue about who's going to give the good news, I guess. Well, I think we've become -- we've matured, we're closer to our partners and we are better at getting their insights and feedback about what they're looking forward to be successful. I think we are matured and becoming more operationally focused. You're seeing us make greater and greater use to protect our channel partners of things like deal registration and applying that very broadly. I'm very pleased with the performance of our channel leadership team as well as everybody on our channel team and how they are engaging with the channel.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Also, we have a better tool today compared to a few years ago to effective measure the effect is also whether the pipeline or the sales productivity and how each program perform, so that's also helping to drive that from the better efficient growth.

Jonathan Ho -- William Blair -- Analyst

Got it. And then just a follow-up on the SD-WAN questions that have been asked. I'm just trying to understand when you look at sort of the SD-WAN opportunities that are out there, my understanding is that people can choose either a cloud solution or maybe a software-defined solution or traditional appliance. What type of mix are you seeing out there as people start to make this shift in terms of their Edge opportunities?

Ken Xie -- Founder, Chairman and Chief Executive Officer

For us, we SD-WAN function inside the FortiGate kind of for the FortiOS function there, so that's work in a single-box solution covers both the security. Lastly, [Indecipherable] together, I make it more easy to manage and this also can tie to like a different application, which need to be secure. That's customer, like the solution and also because we have basic advantage built-in the FortiGate as all the ASIC, specially SoC4, the new one, which can have a much better cost performance compared to some other SD-WAN solution which if they're using the general purpose CPU whether the cost are high or they don't -- and you should know computing power to do the security -- or they have to have a multiple box solution. So that's the advantage, it's a pretty -- it's very, very huge and that once we keep in [Indecipherable] marketing sales coverage in this space, we will become a leader in this space.

Keith Jensen -- Chief Financial Officer

Jonathan, this is Keith. Ken, just let me add to that a little bit for more context. Clearly that in terms of form factors for us, it's a FortiGate appliance that's dominating the SD-WAN market and just a tad bit more on that. When you look at it, it's fairly evenly spread across low-end, mid-range and high-end FortiGate, it also drags along with it a certain amount of fabric products, but it also brings with it about 70% on average of the BOM is a service component of the mix.

Jonathan Ho -- William Blair -- Analyst

Thank you.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Yes, SD-WAN and also helping increase the percent of a service revenue and also match -- are we called better security-driven and working [Indecipherable] infrastructure security better, so that's more like a total solution also drive some other part of our sales.

Jonathan Ho -- William Blair -- Analyst

Thank you and congrats on the strong quarter.

Keith Jensen -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Saket Kalia from Barclays. Your line is open.

Saket Kalia -- Barclays -- Analyst

Hey guys, thanks for taking my questions here. Hey, Keith, maybe just to start with you, you mentioned the service provider of business, I think was about 15% of billings, one of the top verticals obviously more than that. Very strong 2018. How are you thinking about that vertical here in 2019?

Keith Jensen -- Chief Financial Officer

Yes, I think -- I'm not going to guide the vertical specifically, of course, but I think that what across the industry we're seeing was a very strong 2018. Whether that was because of tax reform or what have you, but the carrier infrastructure seem to go very, very well in 2018. When you look at 2019, there is probably really three components to that business. There is that infrastructure for the carrier, there is also the NSSP and there's also the selling with the carriers and I think it's the first one that's been a little more challenged across industries in the first half of this year.

You probably, couple that with a significant amount of digestion of last year's acquisitions, if you will, products, but also the mergers and consolidations that are going on in the industry this year are probably giving a little bit of a pause.

Saket Kalia -- Barclays -- Analyst

Got it. That's helpful. Ken, maybe for you. A lot of success in core network security with SD-WAN -- maybe outside of the appliance business, I think some questions were asked earlier just about Capital One and public security. Can you just talk a little bit about the public cloud security business at Fortinet and maybe specifically where you feel the virtual firewall offering is, versus competitors, versus where you'd like to see it?

Ken Xie -- Founder, Chairman and Chief Executive Officer

Our approach for the cloud, public cloud, hybrid cloud is a little bit different than the competitor. We have the broadest offering cover both from a cloud provider and also on the function. So we have a 9 or 10 different function from the the traditional FortiGate, or the web, or the mail, the same to all these different application. And also they can easily move from cloud provider to cloud provider for the enterprise. So this approach gave the flexibility for the enterprise customer to adopt different kind of cloud provider or different function based on their need and at the same time, we have all these are on primary and also the other thing, if you want to access to cloud, we also have our strong FortiGate with SSL encryption performance. That's also helping both on the cloud side and also on the Edge. All these are helping. We see the cloud growth definitely faster than the overall building growth and we still feel that the cloud is a part of a whole infrastructure. Security will continue keeping driving the growth but also, which also kind of helping the on-premise in the Edge growth.

Saket Kalia -- Barclays -- Analyst

Very helpful. Thanks guys.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Thank you.

Operator

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

Keith Bachman -- Bank of Montreal -- Analyst

Thank you very much and congratulations on the results including Keith continued good operating cash flow growth. I wanted to ask 2 questions: the first, Ken, I want to direct toward you and it is a competition question, but along a different form of metric or different vertical and what I mean by that is, you've talked about the cloud, but I specifically want to ask you about your views on the competitive threats or opportunities from the off-load engines like Zscaler. Why or why not do you see this as a competitive threat to Fortinet or do you think you can actually, in some ways, participate in this market through your partnership or directly.

Ken Xie -- Founder, Chairman and Chief Executive Officer

I think we are living more on the partner-side because some application can fit into this scale or forward the traffic to the cloud or to there, whatever service data center. But some other application, you still need to have all these Edge device like SD-WAN to keeping the traffic forward to the cloud. Basically, they also need to deal with the local traffic and a lot of security issue we see with the infrastructure security, internal segmentation, that also cannot be addressed by this cloud approach. It's really the mixed infrastructure, hybrid solution. It's much better than just every single to the cloud and also from time to time just like some other service provider want to offer similar service. So we are more behind to supporting in this kind of solution and that we feel we just play -- it was our advantage is we can give much better strong performance as computing power and also the infrastructure, the total fabric solution compared with different vendor. They may offer some solution, good for certain application, certainty deploy scenario. So that's where this play -- it has an advantage. That's probably would be a better way to moving forward.

Keith Bachman -- Bank of Montreal -- Analyst

Makes sense. Thank you for that. And then my follow-up question is just wanted to get your perspective on how you're thinking about non-FortiGate growth potential and the benchmark could be above at or below the growth rate of the company, but how are you thinking about the opportunities associated with the non-FortiGate helping your portfolio moving forward? And that's it for me, thank you.

Ken Xie -- Founder, Chairman and Chief Executive Officer

The total addressable market for non-FortiGate or we call it a infrastructure approach, of fabric approach is larger. The enterprise phasing as management cost were high. You have all these different piece of infrastructure security now working together. So you need to find a way to consolidate and match it together which the fabric approach offered our solution. And with this on the product working together, automate together from day one, which is different than some other company depend on authorization or some other approach which make it more difficult to integrate, to automate. So that's what we see the growth so far in the last few quarters, are faster than overall building growth and the same time going forward, we also see this as even bigger opportunity and probably will keep in growing faster than overall growth.

Keith Bachman -- Bank of Montreal -- Analyst

All right. Thank you, Ken.

Keith Jensen -- Chief Financial Officer

This is Keith, again. I would do one quick note. I would offer that when you look at the non-FortiGate side or infrastructure, fabric just to share, the growth rates on both the products, the hardware form factor and the software form factor do indeed outpace as we note in the call -- FortiGate, but they're also very similar in terms of their growth rates, both as hardware and the software form factors.

Keith Bachman -- Bank of Montreal -- Analyst

Right. Okay, thank you, Keith.

Operator

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

Daniel Bartus -- Bank of America Merrill Lynch -- Analyst

Thanks, guys. This is Daniel Bartus on for Tal. I wanted to ask again about where we're at in this mid-range refresh cycle you're seeing. What stage of maturity are we are for the 500E cycle? And then is it natural to think that the 400 and 600 products just continue that cycle?

Ken Xie -- Founder, Chairman and Chief Executive Officer

Yes. The mid-range refreshed pretty much down, I have to say, and also like you said, the new series has a much better performance and at the 400, 600 also as compared with 300, 500. It's relatively new compared to 300, 500. We do see the performance that the cost price ratio also is better. That's pretty much there and then the next phase, to move toward the low end. So that what's coming up.

Daniel Bartus -- Bank of America Merrill Lynch -- Analyst

Okay, great.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Thank you.

Daniel Bartus -- Bank of America Merrill Lynch -- Analyst

And then you're clearly doing well with SD-WAN in branch office or campus environments and then you're also doing well at the MSSPs. I'm just curious, how is your growth in the more traditional private data center firewall market and what do you think the growth outlook for this sub-segment is? Thanks.

Ken Xie -- Founder, Chairman and Chief Executive Officer

So that's a new product we are announcing today, the 1100E, the 2200E and the 3300E and you can see this product were powerful and best fit for the traditional network security like whether internal segmentation or the data center. So we have the best performance, best security function and all integrated together, I think this will drive the future growth a lot.

Daniel Bartus -- Bank of America Merrill Lynch -- Analyst

Okay, great, thanks.

Operator

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

Unidentified Participant

Hi, this is Catherine McCracken [Phonetic] on for Fatima. I wanted to go back to SD-WAN as the demand driver. One of the questions we had is given that we know FortiGates can be deployed for SD-WAN use cases. What extent are you seeing in traditional FortiGates being implemented, primarily for SD-WAN purposes?

Keith Jensen -- Chief Financial Officer

It certainly happens. Let's sit that one, we're not giving a lot of metrics to it. Peter and I were at a customer meeting a few months ago and that was specifically what was happening.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Yes. That's also what's helping drive an additional service support in revenue. So if they want to [Indecipherable] function for the FortiGate which they already have, that also will help us.

Keith Jensen -- Chief Financial Officer

Yes. And I'm not saying that's anywhere close to the majority of perhaps as an outlier. But it can be done and we see instances of it being done.

Unidentified Participant

Okay, got it. And then as a follow-up on the margin front. In the last couple of quarters you've mentioned being under-indexed on salespeople and I was just wondering if sales hiring caught up in the quarter and how we should be thinking about sales and marketing expense for the remainder of the year. Thanks.

Ken Xie -- Founder, Chairman and Chief Executive Officer

We yearly improve [Indecipherable]. You know, it will take time and also when they are on board, it also needs time to ramp up. So that's what I see. It's some time when you rush in a certain sales marketing, probably the return take a little bit longer than you launched a new product. But on the other side, we do see it's still very important to keeping to invest in marketing ourselves.

Keith Jensen -- Chief Financial Officer

Yes, I would supplement Ken's comment, Catherine, by noting that of course that's baked into our guidance in terms of the hiring rate that we just provided and I don't want to overlook what a very strong performance when I mentioned the Americas. But in the U.S. in particular came through in the second quarter. Very high productivity, very high returns, very high growth rate. So we're very pleased with their performance including their success in the Global 2000.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Yes. Basically there's two-part. One part you need to add headcount; the other part is really trying to like [Indecipherable] has a better closing rate. So that's where they're training all these kind of a like helping get familiar with the product and multiple product solution, also were very important and we also [Indecipherable] in that area.

Unidentified Participant

Got it. Thank you.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Michael Turits from Raymond James, your line is open.

Eric Heath -- Raymond James -- Analyst

This is Eric Heath on for Michael. I just wanted to follow up on an earlier question on service provider. And just ask a little bit more specifically how you may be incorporating 5G into your outlook for this year in going forward?

Ken Xie -- Founder, Chairman and Chief Executive Officer

It's still a lot early at least a few quarters away we'll see anything impact by the 5G or helping from the 5G. But we do have the product already there. It's also working with service provider to see what's the best way to secure the 5G network and also a lot of other growth actually has come from the OT IoT which also leverage the 5G. That's where -- I see probably 5G into certain area like healthcare, like a certain industry, maybe growth security probably ahead on some of our broad 5G approach for consumer in the care space.

Eric Heath -- Raymond James -- Analyst

Got it. That's helpful and then just separately, could you give us an update on your partnership with Symantec? How much are you going to market together and kind of how has traction been so far?

Ken Xie -- Founder, Chairman and Chief Executive Officer

I think the market approach, a progress there and also, that's one of the very important partnership we have to go to market together. I think the few sales that are engaged working together and it's healthy for both company.

Eric Heath -- Raymond James -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Melissa Franchi from Morgan Stanley, your line is open.

Unidentified Participant

Hi, this is Hamza Farwal [Phonetic] in for Melissa. Thank you for taking my questions. So just on the macro front, you touched on EMEA earlier, you also have about a quarter of your revenue coming from APAC. Any concerns within that region? Obviously, the trade tensions we had with some of the new tariff announcements earlier today and how that could sort of impact growth within the region more broadly? I also notice you had a recent partnership announcement, Alibaba. Just any commentary on that would be helpful.

Keith Jensen -- Chief Financial Officer

Yes, Ham, it's Keith. Perhaps in reverse order. Yes, we are very pleased with the announcement -- the Alibaba announcement that you saw. China by itself has not been a large contributor to our business historically for the last several years. Regarding tariffs, we saw the announcement earlier today. This and double-checking on that, make sure that we are still fine with our guidance and we're very fine. We do have some production as I mentioned before that's done in China but the majority is outside of China. And then I guess the last comment I would offer is that, for us, the Asia-Pac area is obviously is a very diverse geography covering many countries all the way from Australia, New Zealand up through South Korea, Japan, Taiwan, etc..

Unidentified Participant

Got it. And then just on the SD-WAN early momentum. The six deals that you mentioned above $1 million, were those bundle deals with the SD-WAN used case of cash? Or were those deals primarily led with the SD-WAN and value proposition? And that's it for me.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Yes, I think it's more lead by the SD-WAN. Even some of them unable to secure the function to begin with, but I don't see the advantage of a security capability in a box that whenever they need it we'll turn it off.

Unidentified Participant

Thank you very much.

Ken Xie -- Founder, Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Dan Ives from Wedbush Securities. Your line is open.

Dan Ives -- Wedbush Securities -- Analyst

Yes. Have sales cycles changed on the larger deals? I mean are they starting to now shorten, given it seems like it's a little more downhill skiing for you guys? Had you sign some seven-figure deals?

Keith Jensen -- Chief Financial Officer

Yes, I think the enterprise, by and large, a new enterprise logo, I think the sales cycle is what the sales cycle is. Ken would point out to me that typically there's a fairly robust RFP process that goes out, a shortlist, a proof of concept, testing and so forth. So if you're chasing a new opportunity, I don't really see a change there. To the extent that you were talking about an expansion of an existing enterprise logo, I do think you can see things like some SD-WAN opportunities that move faster than perhaps other things and certainly in general an expansion into an existing account that moves faster than a new logo.

Dan Ives -- Wedbush Securities -- Analyst

Thanks.

Operator

Thank you. And our next question comes from Patrick Colville from Arete Research. Your line is open.

Patrick Colville -- Arete Research -- Analyst

Thanks for taking my question and congrats on a pretty awesome quarter. Can I just ask about the SD-WAN and secure switching please. There has been a seriously impressive part of your business for the last couple of quarters and I just wonder kind of in the medium term, what do you see as your competitive advantage in that business line versus your competitors? Why we're fortunate to sustain this healthy momentum?

Ken Xie -- Founder, Chairman and Chief Executive Officer

Like I said, it is the transition from the traditional like a network security only to more infrastructure we call -- also we call a security-driven networking. That's where because the board has disappeared, so if you only secured the internet connection and enterprise no longer enough, you need to go internal, addressed segmentation and different data server -- all these kinds of things. You also need to make sure the connection to the outside out the mobile also has been secured whether to WiFi or the SD-WAN. Sometimes where we have this approach with all technology from the SPU ASIC chip to the function cover like for SD-WAN WiFi, going for the 5G, it's all kind of working together. At the same time the fabric also helping making the total solution -- multiple layer total solution works better now. So that's what we see and we see the transition for the industry is more like an infrastructure consolidate fabric approach that will help us drive this tradition going forward, compared to some our competitors do whether more in the traditional network security gateway -- all kind of address, some part of infrastructure of certain application in the cloud. So we feel we have a much better, broader and kind of more advanced approach not only for this SD-WAN, but also going forward with the 5G, the IoT-OT security and that is where we see is a huge potential going forward.

Patrick Colville -- Arete Research -- Analyst

Great. And can I ask just a quick follow-up? There have been some other earnings like [Indecipherable] this evening for example missed quite badly, and some other kind of on-prem vendors had some bad results. Why is it that the firewall markets has remained so healthy? You guys have put out great numbers and the guidance implies that momentum stays really strong. Why is it that the firewall market and security market has been so different to other on-prem spending areas?

Keith Jensen -- Chief Financial Officer

Patrick, it's Keith, I think that we've got to keep in mind the significant diversification that we have whether that's across geographies, or that's across the fabric products in the firewalls, or if it's the identification and taking advantage of new use cases such as SD-WAN, OT and such. Perhaps if it was four or five years ago you could have a conversation with us about being a point solution with firewalls, but this has become a very diversified company.

Patrick Colville -- Arete Research -- Analyst

Great, thank you for your answer to the questions and keep up the good work. Cheers.

Operator

Thank you. Our next question comes from Gray Powell from Deutsche Bank. Your line is open.

Gray Powell -- Deutsche Bank -- Analyst

Great, thanks for working me in. I want to follow up on the Symantec relationship. At least in my conference circuit, it seems like they're talking up the partnership with Fortinet more and the potential to put Fortinet virtual firewalls into their cloud secure web gateway and how that could help them close the gap against these scaler. Is that something that you've built into your guidance and is there any material uplift that we should be thinking about from that relationship?

Keith Jensen -- Chief Financial Officer

We have had some billings from the Symantec relationship, but I would not -- I'm comfortable with my guidance and I'm not calling out Symantec separately or any particular upside to that relationship at this point. I think you've described the used case, if you will, or what the go-to-market cadence is for Symantec and why it makes sense as a business strategy.

Gray Powell -- Deutsche Bank -- Analyst

Got it, OK. Thank you.

Operator

Thank you. Our next question comes from Ken Talanian from Evercore ISI. Your line is open.

Ken Talanian -- Evercore -- Analyst

Hi. Thanks for taking the question. You mentioned seeing an increase in the percentage of support and services, I think as a result of SD-WAN. Are you seeing a broad uptick in support services in part from a mixed shift to richer firewall configurations and can you help us understand maybe a bit about the magnitude of that?

Keith Jensen -- Chief Financial Officer

Yes, this is Keith. I'm sorry, Ken. I was just trying to describe for people what an SD-WAN solution looks like when I mentioned that it's going to run about 70% services and other than our larger deals in the quarter. I wasn't trying to go someplace else with that particular comment. I can probably talk a little bit about some of the dynamics that are happening in FortiGuard, FortiCare. FortiGuard is doing very, very well. It probably has a number of advantages right now. It's coming off of a fairly high unit shipped in the number of 2018 product revenue that attach service contracts to that. You're seeing those services now roll into the income statement that was previously deferred and now you're seeing them happen there. You will also see what I talked about before, the mixed shift a little bit from low-end to mid-range that's been happening for a period of time now to the extent and certainly more mid-range than I am low-end. That will typically attach a higher ASP on the service contracts, getting a little bit more lift on the bundles, a little more lift from stand-alone security offerings, things of that nature.

Ken Talanian -- Evercore -- Analyst

Got it. And you described last quarter is rich and renewals. Could you comment on this quarter, and just how you're thinking about the remainder of the year?

Keith Jensen -- Chief Financial Officer

Yes, I think it's not surprising that for a tech company, Q1 tends to be the logical time that you have a lot of renewals. There is not in Q1 that you get in Q4. Q2, Q3, you may get some governmental entities, you're always going to have remote renewals throughout the year but I think over time, you start to see a bit of a migration in terms of those renewals, because of co-term agreements in the enterprise, etc., migrate toward a Q4, Q1 time frame and that's pretty much what we expected and that's what we saw.

Ken Talanian -- Evercore -- Analyst

Perfect. Thanks very much.

Operator

Thank you. And our next question comes from Taz Koujalgi from Guggenheim Partners. Your line is open.

Taz Koujalgi -- Guggenheim Partners -- Analyst

Hey guys. Thanks for taking my question. I had a question about the fabric business. Is there a way to maybe look at like the tax rate? Like how many of your customers are using the fiber products today in the install base? How much penetration do you have for those products in the install base and how that's trended in the last quarter?

Keith Jensen -- Chief Financial Officer

Yes, that's not something that we talk about publicly, Taz, in terms of the tax rates, I will tell you that it continues to steadily trend up.

Taz Koujalgi -- Guggenheim Partners -- Analyst

Got it. And then a question on billings guide. You had a strong billings number this quarter. Your guidance seems pretty conservative. What are you assuming for duration for next quarter, anything that's changing that's making your guide pretty fairly conservatively for next quarter?

Keith Jensen -- Chief Financial Officer

No, I think the nature of our business, is the Q2 to Q3 typically is within one or two points of each other. I think we're at that. We had a very good Q2, obviously, so you're probably seeing a little bit of that factor into it. On the full-year. When you do the math, you'll see that we've put some of the upside from Q2 into the full-year guidance. So I think we feel very good about what we're seeing in terms of the quality of our pipeline, etc..

Taz Koujalgi -- Guggenheim Partners -- Analyst

Got it. And just one last one from me. You said non-FortiGate obviously grew faster than FortiGate. Any more color on the cloud piece of the non-FortiGate? I know you use the metrics in the past, but any more color on how the cloud piece of non-FortiGate debt this quarter?

Keith Jensen -- Chief Financial Officer

Fastest growing element of the fabric.

Taz Koujalgi -- Guggenheim Partners -- Analyst

Got it. That's it from me. Thank you, guys.

Operator

Thank you. And I am showing no further questions from our phone lines. I now like to turn the conference back over to Peter Salkowski for any closing remarks.

Peter Salkowski -- Vice President of Investor Relations

Thank you, Crystal. I'd like to thank everyone for joining the call today and let everybody know that Fortinet will be attending the following investor conferences during the 3rd quarter. Oppenheimer on August 7 in Boston, we're at the Raymond James Conference on August 21 in Chicago, the Dougherty Conference in Minneapolis on September 5 and we look forward to seeing many of you over the next several weeks. If you have any questions, please give me a call or send me an email. Have a great rest of your day. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Peter Salkowski -- Vice President of Investor Relations

Ken Xie -- Founder, Chairman and Chief Executive Officer

Keith Jensen -- Chief Financial Officer

Shaul Eyal -- Oppenheimer -- Analyst

Sterling Auty -- JP Morgan -- Analyst

Brad Zelnick -- Credit Suisse -- Analyst

Andrew Nowinski -- Piper Jaffray -- Analyst

Jonathan Ho -- William Blair -- Analyst

Saket Kalia -- Barclays -- Analyst

Keith Bachman -- Bank of Montreal -- Analyst

Daniel Bartus -- Bank of America Merrill Lynch -- Analyst

Unidentified Participant

Eric Heath -- Raymond James -- Analyst

Dan Ives -- Wedbush Securities -- Analyst

Patrick Colville -- Arete Research -- Analyst

Gray Powell -- Deutsche Bank -- Analyst

Ken Talanian -- Evercore -- Analyst

Taz Koujalgi -- Guggenheim Partners -- Analyst

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