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Fortinet Inc (NASDAQ:FTNT)
Q3 2019 Earnings Call
Oct 31, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Fortinet Q3 2019 Earnings Announcement call. [Operator instruction] After the speaker presentation, there will be a question-and-answer session. [Operator Instructions].

I would now like to hand the call over to your speaker, Mr Peter Salkowski, Vice President of Investor Relations. Please go ahead, sir.

Peter M. Salkowski -- Vice President of Investor Relations

Thank you, Sherry [Phonetic]. Good afternoon and Happy Halloween, everyone. This is Peter Salkowski, Vice President of Investor Relations of Fortinet. I am pleased to welcome everyone to our call to discuss Fortinet's financial results for the third 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, providing a high level perspective on our business. Keith will then review our financial and operating results, providing our guidance for the fourth quarter and update our 2019 guidance, before opening the call to your 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 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, 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 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 is located in our earnings press release and in the presentation that accompany today's remarks, both of which are posted on our 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 & Chief Executive Officer

Thanks, Peter, and thank you to everyone for join to this call to review our third quarter 2019 result. We are pleased with our strong pillars port [Phonetic] on the service revenue, operation margin and the free cash flow performance in the third quarter. Contributing to our strong third quarter result, we all advanced 48 PO-driven [Phonetic], FortiGate technology. Integrated Security fiber solution, hybrid and multi-cloud offerings and a significant adoption of our secure SD-WAN solution.

Total revenue was up 21% to $548 million and the quarter revenue accelerated to 20% growth. During the third quarter Fortinet was named the leader for the third consecutive year in the Gartner Magic Quadrant for network firewall. Mutual [Phonetic] condition validate our advantage enable the enterprise customers to create a secure driven network that deliver integrated and automated security to all network environments.

Today, Fortinet announced the release of a new FortiGate 60F, the most popular and the best selling desktop Next Generation Firewall in the industry. We simply have leverage Fortinet SOC4 SPU [Phonetic] that enable secure SD-WAN.

It delivers Security Compute Rating, four-side protection, SSL inspection and the next gen of firewall performance of four times to 47 times faster than industry average price. The Security Compute Rating compares the performance of our Fortinet [Indecipherable] appliance.

The industry average solution in the same price range. We utilized generating CPU for networking and security capabilities. SD personal WAN Egde solution needs security. And IDC estimates the WAN Edge total addressable market would increase from $1.3 billion in 2018 to $5.2 billion by 2023. Our secure SD-WAN solution clearly outperformed in the quarter.

According to Gartner, in the second quarter of 2019, Fortinet's rank was third with faster growth and 11% of SD-WAN market share, this fast market share growth validates that our FortiGate solution with secure SD-WAN is clearly resonate with enterprise customers.

Traditional analysis [Indecipherable] is sovereign as mobile, cloud and IoT technology change the way people work, and the volume of things that they need to secure. Today's computing require high performance secure networking capability, and the 5G roll out are in the early stage of providing mobility innovation. And with demand in [Indecipherable] security solution. As a leader in Hybrid and multi-cloud as well as Edge security, Fortinet ability to offer security-driven networking and those Edge in the car [Phonetic] security with low latency and high performance is the clear competitor advantage.

Going forward, we see four drivers for market share growth for Fortinet. First, our refresh in portfolio of FortiGate with new FortiSPU has a huge Security Compute Rating advantage compared with all other competitors. This FortiGate will continue to lead in the transition to security-driven networking and secure SD-WAN adoption that will allow Fortinet to gain in additional market share.

Second, Fortinet Security Fabric allow us to to offer a broad, also maybe, an integrated secure solution for end-to-end protection as customer consolidate toward a few security vendors. Third, Fortinet's broad range of hybrid and multi-cloud solution enables us to provide security to the cloud, and from the cloud.

And Fourth, Fortinet is well-positioned to lead the transition to 5G and IoT security. As a result, our FortiSPU technology, which provide a huge advantage for embedded and integrated security with much lower cost and faster performance.

On Monday, we announced acquisition of end-point security company, enSilo. The acquisition has set Fortinet Security Fabric offering and strengthened our real-time automated detection and response capability as on endpoint and Edge data. I would like to take this opportunity to welcome the enSilo team to Fortinet.

On November '18 we will celebrate Fortinet's 10-year anniversary as a public traded company. And I want to thank the Fortinet team and our partner for their ongoing hard work and our customers for their support. You have contributed to our great success.

Now I will turn the call over to Keith for closer look on our third quarter performance and our guidance for the fourth quarter, and then full year.

Keith F. Jensen -- Chie Financial Officer

Thank you, Ken. Let me first note that except for revenue, financial amounts are non-GAAP and growth rates are based on comparisons to the third quarter of 2018, unless otherwise stated. The slide references I make refer to the presentation posted on our Investor Relations website.

I'd now like to provide a summary of our strong third quarter performance. As part of the summary, I will highlight how the diversification in our business, by geography, customer and industry segments and solutions, has contributed to solid growth and consistent execution.

Let's start with revenue. Total revenue, with $548 million was up 21% led by strong revenue growth from our Fabric and Cloud segments. Revenue from our largest segment, Network Security was up 19%, product revenue growth was 20%. 20% growth represents, first, an acceleration of the 14% growth we achieved in the first half of the year. Second, growth off increasingly more difficult year earlier comparisons as growth accelerated through 2018. And third, a growth rate that we estimate is double the industry growth rate.

Product revenue of $197 million benefited from the segment growth noted a moment ago, as well as growth in both appliance and software solutions. Given the significance of our historical SMB business and the consistent trend in our renewals, we believe the impact on our business of an industry refresh cycle is muted.

Consistent with Ken's earlier comments related to our SD-WAN market share, growth benefited from the market's rapid adoption of our FortiGate based secure SD-WAN offering. Our higher margin service revenue increased 21% to $351 million and represented 64% of total revenue, up 10 points in four years. FortiGuard subscription, security revenues increased 23% percent to $193 million, while FortiCare technical support and other services revenue increased 19% to $158 million. Renewal rates remained very consistent with prior periods.

Deferred revenue, at the beginning of the third quarter, accounted for over 90% of services revenue and 60% of total revenue recognized in the quarter. For the fourth quarter, we expect the deferred revenue balance to provide a similar level of predictability, accounting for similar percentages of service in total revenue. Total deferred revenue increased 26% to just shy of $2 billion. Short-term deferred revenue increased 21% to $1.1 billion

On a geographic basis, revenue growth for the Americas accelerated to 24% despite a more difficult year earlier comparison. EMEA growth accelerated to 21%. Now turning to billings. Total billings of $627 million were up 19% and benefited from the diversification of our business across geographies, customer and industry segments and solutions. Network security billings, which includes products and services, increased 16% and accounted for 74% of total billings

In this growth [Phonetic] were non-network security, which includes both products and services outpaced network security billings. We generated billings in over 80 countries, where their individual billings were less than 3% of our total billings. In aggregate, these 80 countries represented nearly 50% of total billings.

While we saw somewhat slower growth in the UK and Germany. It was clearly offset by strong growth in several other EMEA countries, while service providers and MSSPs remain one of our top segments, accounting for 17% of total billings, we experienced an equivalent contribution from the government segment and a strong contribution from the financial services segment

Looking now at deal sizes. Deals over $1 million increased 77% to 53 deals. Secure SD-WAN was a leading contributor to the increase in the number of deals in excess of $1 million, accounting for eight deals in the third quarter, up from one deal of over $1 million, last year.

We are pleased to see the geographic diversity in all of our large deals with over 40% of them coming from EMEA and APAC. The number of deals over 250,000 and 500,000, each increased 26% to 333 deals and 130 deals, respectively. Average contract term of 26 months was flat year-over-year and down one month quarter-over-quarter. And to offer one final note on diversification, since Q1 of 2017, we have not had a single transaction in the quarter that represented more than 2% of quarterly billings

Now, back to the income statement. Gross margin improved 170 basis points to 78.2%. Product gross margin improved 330 basis points to 60.7%. Product gross margin benefited from an attractive discounting environment, deal mix, software revenue growth and a stable product transition environment

Now, while we're very pleased with the product gross margin performance in the third quarter, we expect it to return to more normalized levels in the fourth quarter. Services gross margin increased 70 basis points to 88%, operating margin increased 250 basis points to 26.4%, driven by the improvement in gross margin and operating expense leverage associated with our strong revenue performance

Total head count increased 17% to 6,590. Given the strong operating income performance, GAAP net income was $80 million, up $21 million or 36%. Moving to the statement of cash flow, summarized on slide seven and eight. Free cash flow was $204 million, up 29%, resulting in a free cash flow margin of 37%, up 230 basis points

The increase reflects strong third quarter billings, collections and the flow through of the increase in operating profit to net income. Capital expenditures for the third quarter was $17 million below expectations due to the timing of construction spending. We expect fourth quarter capital expenditures to be $40 million to $50 million resulting in a full year capital expenditures of between $90 million and $100 million. In the quarter, we repurchased approximately 335,000 shares of our common stock for a total cost of over $26 million and an average per share price of $78.70, but in that third quarter, the remaining share repurchase authorization was $616 million

As I turn to guidance provided on slide 9, I'd like to remind everyone of our diversification in our model, again by geographies, customer and industry segments and solutions, continuing to provide and contribute to our growth and the consistency in our financial performance. We will dive deeper into this consistency and visibility, and predictability of our financial model, at our Investor Day on November 18.

With that I'd like to remind everyone of the forward-looking disclaimer Peter presented at the start of the call, as it applies to all forward-looking statements, including the guidance I'm about to provide. In the fourth quarter, we expect billings in the range of $750 million to $765 million, revenue in the range of $595 million to $610 million. Non-GAAP gross margin -- of 60 -- excuse me, of 75.5% to 76.5%, non-GAAP operating margin of 25.5% to 26%. Non-GAAP earnings per share of $0.69 to $0.71, which assumes a share count of between 176 million and 178 million.

We expect a non-GAAP tax rate of 24%. For 2019, we expect billings in the range of $2,550 million to $2,565 million. Revenue in the range of $2,135 million to $2,150 million. Total service revenue in the range of $1,355 million to $1,365 million. Non-GAAP gross margin of 76.5% to 77%, non-GAAP operating margin of 24% and 24.5%. Non-GAAP earnings per share of $2.39 to $2.41, which assumes a share count of between $175 million and $177 million

We expect our non-GAAP tax rate to be 24%. We expect cash taxes of between $56 million to $58 million. Like Ken. I'd like to extend a warm welcome to the enSilo team. Before I turn the call back over to Peter, I'd like to thank our partners, our customers, the Fortinet team for all their support and hard work. It's because of your dedication and efforts that Fortinet is able to celebrate 10 years as a publicly traded company on November 18. Ken, back then, you closed a day of the market cap of $1 billion. Today, your market cap is over $14 billion. Nicely done. Peter, back to you.

Peter M. Salkowski -- Vice President of Investor Relations

Thank you, Keith. Operator, we're ready to open it up for Q&A, please.

Operator

(Operator Instructions) Our first question comes from Fatima Boolani with UBS.

Fatima Boolani -- Analyst

Good afternoon. Thank you for taking the question. Keith, I will start with you, you've had a fairly feverish pace of gateway and new FortiGate releases over the course of this year. You're talking about FortiSPU refreshing through the base. So I'm wondering if you can comment on general ASP trend, how you're managing around cannibalization of ASPs given the extent and the spectrum of the appliances you have. And any color you can sort of provide us on product shipment trends, and I do have a follow-up as well.

Keith F. Jensen -- Chie Financial Officer

Hi, Fatima. It's nice to hear from you. Kind of a number of topics in there. I'll try and recall each and every one of them. I think, look, I think if you look at our products suite FortiGates, we have about 75 different FortiGates firewalls, that probably compares some other people that may be are closer to 15. Why that's important you assign some sort of life cycle to those products and you pretty quickly come up with the idea that we're refreshing our products at the pace of probably 8, 10 or 12 a year. I think, we've become fairly good at it. And I don't -- and I think part of that being good at it means both in terms of how we manage our inventory, but also how we manage that transition with our customers. I'm not going to comment specifically on ASPs. But other than to say that I was very pleased with the trend up of ASPs in the quarter, and it's been a very consistent upward margin ASPs, overall. I would attribute some of that to the Fabric products which are driving, when I talk about ASPs, total billings for a solution, if you will.

And I think that's contributing to our ASPs. And I probably missed something else.

Fatima Boolani -- Analyst

That's really helpful. Just shifting gears to the secure SD-WAN traction, the eight deals that you called out that were in excess of $1 million in the quarter. I wanted to peel back the onion on that to get a better sense of who the buying audience is here and if you can speak to the competitive dynamics because relative to the one deal you did last year, I think that's a pretty significant improvement. I just wanted to peel back on some of the dynamics of the strength there. Thank you.

Keith F. Jensen -- Chie Financial Officer

Maybe I'll let Ken talked about the competitive dynamics, and I can talk just a little bit about who the buyers are first. Clearly, the SD-WAN market is tilted more toward the enterprise unless toward the SMB and we see that in our customer mix shift in the SD-WAN. But, Ken?

Ken Xie -- Founder, Chairman & Chief Executive Officer

Yeah, also because like I said 80% under that's customer of new SD-WAN and security solution. So that's where we had only one, kind of, integrated security on SD-WAN to get an even single box. So that's a huge advantage and also the the computing power, we call the Secure Computing Rating, which gave us huge computing capability. So we can easily add additional function, wider form security side of that on our side just like even with the SD-WAN along the pro forma is much better than any other competitor, and for them, they have a large -- very big company -- empower -- can really add any other functions whether novel-gate securities [Phonetic] that give us kind of a huge amount advantage going forward.

Fatima Boolani -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Sterling Auty with JP Morgan.

Sterling Auty -- Analyst

Yeah, thanks. Hi, guys. So at this point. Can you give us a sense of just how big is SD-WAN as a percentage of your business?

Keith F. Jensen -- Chie Financial Officer

I'd probably point to -- Gartner had a report out I think -- in the second quarter. That's noted that our market share was 11% of SD-WAN. And I think our market share, a year ago, was zero, according their report. I think there's some information there that you could look at.

Sterling Auty -- Analyst

Okay and then, Ken, with -- with some of these terms SD-WAN and then secured Internet access, so the Zscalers , what Palo Alto is doing, maybe can you just take a minute and help frame for -- for investors that are asking -- they're asking me to better understand what is SD-WAN actually giving to your customers versus what is kind of the secure internet access that's replacing MPLS etc. How do they differ? And what's your opportunity in both sides of the coin?

Ken Xie -- Founder, Chairman & Chief Executive Officer

It is kind of a little bit different market and a position. Secure SD-WAN is related to the Wan Edge transition that's probably provide much like a software defined, most smart and reliable way, low-cost way to access the enterprise, access the cloud. So that's we're driving SD-WAN adoption, they grow almost 50% year-over-year in the next few years.

And then, I think the whether it is going to pull out of the USA secure access, more about access some of their cloud or some other part, which if you look at the -- by Gartner data, so by 2023, so security -- security -- cloud security is about a $4 billion market. Another security including is the secure SD-WAN is about $28 billion market. So it's seven time larger. So that's where nano security still the -- the big -- a much bigger part compared to overall infrastructure security.

So that's why we had only one. We also posted on -- on the cloud side, we do have a similar solution, but we more prefer working with service provider for some kind of secure access or kind of what, Zscaler type of solution and [Indecipherable] there as a partner. On the other side, we do believe what do we call a secured driven networking now or some other change which like an integrated networking security altogether like SD-WAN, like a Wifi, like the 5G. So this is a much better solution and also enable kind of technology advantage from the -- of Security Process Union, compared to the other security solution more used in a general-purpose CPU, which has a more limited security computing power to process both the security function that will function.

So it's a little bit too deep an approach, and we do believe all approaches addressed must for the market, and also there is a fast growth, fast transition and we position quite well compared to any other competitors.

Sterling Auty -- Analyst

Thank you. I appreciate that.

Ken Xie -- Founder, Chairman & Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Keith Bachman with Bank of Montreal.

Keith Frances Bachman -- Analyst

Hi, thank you very much. Keith, I wanted to target this to you. Your cash flow performance continues to be quite impressive and outpacing revenue growth. And I just wanted to ask you about how we should be thinking about this over the next year. Now, part of it is your operating margins in the last year have gone up by over 700 basis points. And so I was just hoping to distill it down to, A, the operating margin metrics but -- and B, the working capital cycle, how you see that changing, and just to alleviate concerns you might have about me asking questions, we'll neutralize this for real estate. So I was just thinking about the underlying...

Keith F. Jensen -- Chie Financial Officer

Thank you, Keith. When you look at free cash flow. Yes. real estate does come into play and we expect a fair amount of spending on real estate next year. I think at the Analyst Day on November 18. I think the internal conversation here as well, we want to preview, not free cash flow, but at least the real estate spending for 2020, excuse me -- I misspoke a moment ago. But I think that's, you kind of just nailed it in terms of we're executing fairly well in the working -- on the capital model, contract terms are holding fairly firm for us, how we pay our customer or pay our vendors is holding fairly firm for us. So, then it's really just a matter of continuing to manage our inventory, continuing to grow your billings, and then watching the margin drop through to that cash flow number.

Keith Frances Bachman -- Analyst

So is there any reason, just to clarify, I mean it sounds like cash flow can continue to outpace revenue growth, is that a fair conclusion?

Keith F. Jensen -- Chie Financial Officer

I'm not going to -- I'm going to just pause on getting closer to guiding on free cash flow -- if I can.

Keith Frances Bachman -- Analyst

Okay, OK. All right. That's it from me. Thank you.

Keith F. Jensen -- Chie Financial Officer

Okay. Thanks, Keith.

Operator

Thank you. Our next question comes from Saket Kalia with Barclays Capital.

Saket Kalia -- Analyst

Hey, guys. Thanks for taking my questions here. Keith, I'm sorry -- Ken just maybe to start with you, obviously a lot of traction in SD-WAN. I want to ask a hypothetical question. If you put yourself in the shoes of your network security competitors, what don't they have that will either slow or prevent their ability to offer bundled SD-WAN and firewalling. And I guess, where I'm going with that question is, is it the custom built ASIC processing power that we have here or is it a secret sauce inside the FortiOS. Maybe just to put it on that, the question is, what do you feel like the barrier to entry is with FortiGate and SD-WAN, together?

Ken Xie -- Founder, Chairman & Chief Executive Officer

You can look on the today's press release. We announced the FortiGate 60F, and also introduce the concept, we call Security Computing Rating. I mean, you can see we have a secure computing power capability, probably like from four times in some of the, like I said, prevention to make a 47 times for -- for some networking session, concurrent session, [Indecipherable] cloud and other part. So that's why we have so much computing power in this, what we call, SPU, Security Process Union. We do have like a generic CPU embedded inside SPU, which can perform any -- any, whatever new function we need it, but we'd also kind of making a lot of secure computing function, when we built into the chip. That's what by industry standard [Phonetic] here, they have a seven-year advantage easily, like close to 100 time faster and about the same cost.

So that's like advantage we have. And if you want to take the computing power and the security function and other function that enable us to easily add like SD-WAN function, the WiFi function, the 5G function, and also most security function compared to our competitor, they can only leverage to commercial available CPU, which we also leverage that, but we do use an ASIC against [Phonetic] that, and also build some play [Phonetic] in -- it is together. So that I feel if the competitor has some difficult time to catch and a good built chip need a multiple year effort, and same time, in today, we have almost 30% of our total global unit shipment in whole network security.

So that's also the economy of the scale, as I said, in play. So I feel, within few years, we can count more than half of the total unit shipment in the whole network security space. So that also will be making some other competitor have some difficult time, if they don't have the economies of scale to catch-up. Because building chip, you also need a big investment in the beginning. And then once you have a quantitative average, cost can then lower. So we had this investment set almost 20 years ago, when company started. So that's where all these -- back -- almost 20-year effort of investments that enable us to easily add additional functions, whether in the networking or in the security, because what they see lacking in my script is already that the Board has secured [Phonetic], the board would disappear [Phonetic]. So this time, the enterprise fashion is different -- totally different than like what happened, six years, seven years ago. Not kind of like [Indecipherable] firewall, with the intrusion prevention or some other new place that the full generation, connection base of firewall.

So this time, the Board is no longer there. So you need a big internal segmentation. We need a kind of secured a server, the department, the data and also you need to set -- secured a one connection. So that's drive us to make sure we call the security-driven networking and also the Fabric approach to secure the whole infrastructure. So we have this kind of an investment prepared in the last like a 5 years, 10 years, 20 years and we feel we are much better positioned than the competitor, whether they try to do the acquisition, which will be more difficult to integrate, and also result, they have kind of a dedicate ASIC chip, so they don't have computing power to add additional function there.

So now is that advantage that we had from all these long-term investment and also the plan that we have.

Saket Kalia -- Analyst

That makes a ton of sense, Ken. Just maybe for a quick follow-up for you, Keith. Keith, I think you talked about strong renewal rates with FortiGuard and FortiCare. Just to make sure it's asked, can you just talk about the catch rates for FortiGuard and FortiCare, and whether there were any changes in trends on particular SKUs that you saw in terms of 24/7 support or lower or whatever. Just in terms of different trends for FortiGuard or FortiCare?

Keith F. Jensen -- Chie Financial Officer

Yes, no, I think that -- good question. The renewal rates, not only in total, were very consistent, but also by those two different product lines or service lines with FortiCare and FortiGuard. In terms of the services, we continue to see the UTM bundle of services performed very, very well, and we continue and it's been going on now for a few years, continue to see the shift on the support side from 8/5 to 24/7, particularly on new deals.

Saket Kalia -- Analyst

Very helpful. Thanks, guys.

Ken Xie -- Founder, Chairman & Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Melissa Franchi with Morgan Stanley.

Melissa Franchi -- Analyst

Great. Thanks for taking my question. Ken, I wanted to ask about the service provider space in the quarter, by my calc, I am calculating revenue down a little bit year-over-year. So can you just maybe give us an update on what you're seeing in terms of the buying behavior in that segment? And then what your expectation is as we close out the year and head into 2020?

Ken Xie -- Founder, Chairman & Chief Executive Officer

I believe our service provider to grow in year-over-year, probably like close to 10% but slower than the average growth and overall company growth. The service provider kind of not just serve Fortinet, but maybe you can look at the networking company, they all kind of slow down, right.

I believe they're in the transition time. I think the -- like I say, service provider, they're just a two-part, probably Keith there that can help that. Kind of more is that, why is really the service provider offered a security service with your customer. The other part is when a service provider secure their own infrastructure. So the first part, service provider offers are between to the customer side, we don't see any slowdown, but they do kind of try to see how to deploy some other service like Zscaler kind of service, to leverage their position, their collection, their data center to offer some other service.

So we do see that ramp up pretty quickly. So that's we're making that space more competitive, and service provider, because they have infrastructure, they own the infrastructure, so they have a huge cost advantage compared to some new player, which they have to build their own data center. I'll have to buy the bandwidth, which has a huge cost that's making them profit more and more difficult.

And the second part for securing their own infrastructure, not part of how we do see some kind of slowdown, and whether because they try to seek out like a different approach structure of 5G or some other part, but we do believe that will steadily ramp up, probably next year, because we do see a lot of a test evaluation and we do participate in a lot of in like bake-off, and those would be there in the -- the future infrastructure together.

Keith F. Jensen -- Chie Financial Officer

Yes, Melissa, I think Ken's spot on. I think really looking at two different pieces of it. One, they're selling into the infrastructure and the second is the MSSP. Yes, I think that selling into the infrastructure 2018 for a variety of reasons, probably, and for many companies, was a very good year for people selling into the infrastructure.

So 2019 is probably suffering a little bit just by comparisons. And then, the second part of it is the MSSP, the managed security service providers. I think we feel very, very good about what we're seeing there with our telcos, both in the US and internationally.

Melissa Franchi -- Analyst

Okay, that's helpful. And then just one quick follow-up and since it seems like you guys are gaining share, just looking at product growth. Just wondering what the competitive response has been, particularly around pricing and discounting?

Ken Xie -- Founder, Chairman & Chief Executive Officer

We have a much better total cost of ownership, TCO, compared to any of our competitor. You can look and that's where we are using this Security Computing Ratings to compare, you can see easily all costs as a fraction of any other competitor, you know, have to perform the same like security function or support, right.

So that's where -- so we don't see like in the next few years, maybe people have lost any of these advantage compared to competitors, if they really want to compete in on the cost, on the performance side and also on the security, because there are multiple companies in power, OK, with much more security functionality to go much deeper in a security function than any other competitors.

So that's where we -- you can see the margin we're keeping -- keeping improving and for us to grow faster, is really trying to have a like most sales coverage, more marketing coverage and at the same time like working closely together with the partner, with the customer, the sort of the change in the whole industry.

And whether the Fabric approach or security-driven networking, internal segmentation, the 5G and OT -- IoT securities. So there's a lot of in it, we are looking right now. Where [Indecipherable] would benefit both our customer, partner in the next five years to 10 years.

Keith F. Jensen -- Chie Financial Officer

Yes, Melissa, I would just add to this -- to that as Keith. Discounting in the quarter was clearly a tailwind for us. We're very, very pleased where we end up on the discounting spectrum year-over-year.

Melissa Franchi -- Analyst

Great, thank you very much.

Operator

Thank you. Our next question comes from Tal Liani with Bank of America.

Dan Bartus -- Analyst

Hey, thanks, guys. This is Dan Bartus on for Tal. Wanted to ask two technology questions. The first is, your endpoint acquisition, did I hear right that it's mainly about adding the EDR capabilities? And if so, how do you think this may impact your Symantec partnership, if at all?

Ken Xie -- Founder, Chairman & Chief Executive Officer

I think we do have some like our own endpoint solutions or this acquisition will help us enhance that. But our approach is more like driven by the network security part, which is FortiGate, which is a part of Fabric. We still have a lot of close partnership with Symantec. At the same time, on the go-to-market strategy. we're also working more closely together. So they do have a much bigger coverage in a lot of enterprise, and then we have a more coverage in the network security. It's a win-win partnership, that will benefit both company.

Dan Bartus -- Analyst

Got you. Makes sense. And then kind of related, sorry if I missed it, but these SD-WAN deals that you guys are doing, are they also typically taking your Secure Web Gateway offering? Or are they typically pairing it with another vendor? And maybe you can talk about how that might change, whether it's a large or mid-sized enterprise?

Ken Xie -- Founder, Chairman & Chief Executive Officer

Actually for the Secure Web Gateway, would be the last [Indecipherable]. A lot of them to access all this in the same high, you do need to have this one connection there. So actually helping both, and at the same time, you look at a lot of other like play [Phonetic] here. So maybe because the -- they don't have, they don't have the device on the premise there, like I say, the networking side and the cloud sides are totally different concept.

The cloud can now replace the network, they need a network set to access the cloud. At the same time, from the user angle, the company that's using like the Secure Compute Rating to measure, weighted a cost, or how deep the security they can go and also hope that the performance that they can get.

Because sometimes when you forward a data to the cloud, that data also starting to become less secure whether -- you can whether encrypt during the process of forwarding on the cloud, cost for Secure Compute Rating much -- much more as compared to some of our plans there.

So that's where they need to form a total cost of ownership and also total security angle to address, what kind of architecture probably have. But I do believe, there is a both -- both have had their own kind of advantage, at the same time, I don't think that both side that's already kind of, either have retry those market share. It's a little bit different approach.

Dan Bartus -- Analyst

Got it. Thanks very much again.

Operator

Thank you. Our next question comes from Michael Turits with Raymond James.

Michael Turits -- Analyst

Hey guys, good evening. Just two questions. One, you've -- you've mentioned, Keith, a couple of times that you've benefited from discounting. Can you talk about, first of all, is that across the Board, is that again just in the Gateway Network segment or is it across the Board? And what's driving that, because this has typically been a very competitive market where discounting has been strong.

Keith F. Jensen -- Chie Financial Officer

Yes. I think discounting was across the Board. I think we've got a fair amount of lift out of the Americas on it, but I thought across the board, both in terms of geographies and across product offerings or product suites. I think it really brings home the notion that, and Ken alluded to it, for a security effectiveness, security performance, security power for what you're paying for affording a solution versus what you're getting. We have a competitive advantage there. And so the discounting part of the conversation should, and I think, we saw in the quarter, hit our competitors who are going up against us more hard -- harder than it hits us.

Michael Turits -- Analyst

And then Ken, it was very interesting what you said about competing or selling into the service providers apart from an MSSP perspective, and talking about them utilizing Zscaler as a solution also. So is that -- you typically -- you've been very strong in selling your appliances there. Is that a competitive or substitute product for you right now, to selling them Zscaler, and and how are you competing with that offering?

Ken Xie -- Founder, Chairman & Chief Executive Officer

So we are more like a supporting a service provider offer similar solution because a service provider they do own a lot of data center, connectivity, infrastructure, and in the past, they offer a little different kind of service. Whether using the -- our clients also to secure their data center. Now, they also can like offer certain, what are they called, process the secure data in the data center or some other approach. And so, that's where we, if we move support in service provider, give them the flexibility, what kind of a service, what kind of a way they want to offer, we're all supporting behind, whether they forward in the traffic data to their data center in the process, or they were in the process locally, on the Edge and the leverage other partner like us, the Clean Pipe, also, modern way to approach. So we do offer them multiple solution for service provider depend on service provider and the customer need. So that's just like a -- we kind of have a server, just one -- one type of server, one service provider offering, right now.

Michael Turits -- Analyst

Great. Thank you, guys.

Ken Xie -- Founder, Chairman & Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Shaul Eyal with Oppenheimer.

Shaul Eyal -- Analyst

Thank you. Good afternoon, gentlemen. Congrats on a strong set of results and the guidance for the upcoming quarter. Keith, not to beat a dead horse, but I want to go back to the gross margin healthy performance this quarter. You've mentioned several times that it's going to be back probably to a more normalized range. But on the other hand, they also flagged the favorable discounting trending, you know, there be a speed of product mix. Can you drill down slightly more into those components. Was it the discounting, was it the product mix, anything specific that stood out or just a combination? Then I have a follow-up.

Keith F. Jensen -- Chie Financial Officer

I think -- we had clinical contributions for the gross margin from the discount, but also the deal mix that came through in the quarter. We also had, as some of our products have matured, they tend to get cost savings on the per unit cost. We saw that trend continue through the quarter, and we also had a little bit benefit on what we would call our indirect product COGS. Things like reserves and so forth, and overhead. All three of those contributed to it in the quarter.

Ken Xie -- Founder, Chairman & Chief Executive Officer

I think the one side, if you see, sometime, when you sell a partner, there are some certain competition, whether on the discount in our price competition. But on the other side, because we have a huge computing power, as you know, SPU, so we can easily add additional function like SD-WAN which enable additional service. And service tend to have a much better margin compared to the product. So that will help. The other trend we see is really, so we call the Fabric approach. So it's a multi-product selling together and that's where the Fabric grows much faster than the FortiGate part. That's also making the -- the sales cost, the deal size kind of bigger. So that also help improve the margin. So that's what we do see sometime when there's competition, you may compete beyond certain point of pricing. But overall, by keep improving the margin by additional surveys, by additional product bundled together.

Shaul Eyal -- Analyst

Got it, got it. This is great color. Thank you for that addition, Ken. And I want to touch also on Europe, on EMEA. So very consistent performance in the region. But you flagged out, I believe, both the UK and Germany. So can you talk to us a little bit about some of the dynamics that you had seen there during the quarter?

Keith F. Jensen -- Chie Financial Officer

I think only slightly, because we anticipated that we were going to get asked about it. I would offer that UK and Germany were slightly below the rest of the company in terms of total growth. But again, given our diversification of business, it's not significant enough to have really any sort of impact on our growth rate.

Shaul Eyal -- Analyst

Fair enough. Thank you so much.

Operator

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

Jonathan Ho -- Analyst

Hi. Good afternoon and congrats on the strong results. I just wanted to maybe start out with a little bit of color in terms of the initial reception for some of your -- I guess AWS-based products like the WAF-as-a-service. And maybe, any commentary you have around cloud spending on the public cloud?

Keith F. Jensen -- Chie Financial Officer

Look, I think, we may offer a little more granularity on it in a couple of weeks at the Analyst Day, but both cloud and Fabric are growing more than twice the rest of the company in terms of growth, period-over-period. You want to talk more about WAF or --?

Ken Xie -- Founder, Chairman & Chief Executive Officer

Yeah, I think, you've had a pretty good -- so I think we probably will go for more detail like we've done in the results than something else exactly, though, even kind of customer [Phonetic] to present together in the -- in the Analyst Day, in the next couple of weeks.

Jonathan Ho -- Analyst

Got it. And then, just as a follow-up. One of the things that we wanted to understand a little bit better, is just the entire SD branch concept to where you're selling more than just SD-WAN, but maybe bundling some other products in conjunction with the core SDU-end and gateway. Can you maybe talk about how does that, maybe add to the size of the deals or maybe help differentiate Fortinet just by being able to offer a lot more capability?

Ken Xie -- Founder, Chairman & Chief Executive Officer

SD branch would be referred to, to some branch SMD part, which they more prefer like a single box, easily to manage, and the same time, can extend into the WiFi, some other networking area. So we do see that also growing together with SD-WAN approach. But it's, it's just a subset of the total infrastructure approach we -- we have. And -- but we do see like -- is the 100-part whether the Fabric and the SD-WAN, some other part. It's kind of a, like a concept, we call Security Driven Networking, that would within the big enterprise, you need to do internal segmentation, but within a branch, you probably try to consolidate some kind of different product or different solution together.

Jonathan Ho -- Analyst

Great, thank you.

Ken Xie -- Founder, Chairman & Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Walter Pritchard with Citi.

Walter Pritchard -- Analyst

Hi, thanks. I guess two related questions -- question to follow up. On the 26% that was the non-network security. Can you help us understand maybe stack rank product families and especially interested in that if SD-WAN is now the largest product in that piece of non-network security.

Keith F. Jensen -- Chie Financial Officer

No, SD-WANs have no real impact on the mix, if you will, the business between FortiGate and non-FortiGate, if that's the question. And then, in terms of the contributors in the Fabric suite of products. It's the same has been before, which is FortiManager, FortiAnalyzer, as well as our virtual firewalls.

Ken Xie -- Founder, Chairman & Chief Executive Officer

Yeah. The SD-Wan functions is -- is included in the FortiGate as part of the FortiOS function there. So that's where -- so the SD-WAN is more covered within the 26%. As other non-FortiGate part, I think is -- I think one problem, I see, branch probably have a little bit, but SD-WAN is always in the FortiGate.

Walter Pritchard -- Analyst

Okay. And then, just related to cloud security, you mentioned virtual firewalls. Can you talk about what drove within that cloud category the performance in the quarter. It sounds like that was a driver of the strength.

Ken Xie -- Founder, Chairman & Chief Executive Officer

I think, that's where we say we have a multi-cloud, hybrid cloud and also like more cosistent offer, broad offering for customer whether they use it, or price in on the enterprise or whatever, or go to the cloud or virtualize it. So it's very -- the broad offering consistency give the customer flexibility. Whether they want to probably acquire a function on-premise in that, in the appliance or they want to deploy in the cloud, and because if they move it back and forth. But also what's interesting, we did some calculation. You see, we call the Secure Computing Rating. So the cloud often tend to have a much higher cost compared to our -- the plans on-premise, often. Now that we have you see whether in like -- I think, a server that process a model approach and that's where -- but someone, they probably because customers want to have certain flexibility, or the management usually they may see [Indecipherable] in that. But we can use it, pointing out to the customer if their choice and we offer all this broad coverage, also on the multiple call provider or all the function, we have that. We can -- can almost can give them product. You can buy whether appliance, or you can buy the merchandise on the cloud from FortiGate, FortiManager, analyzer, some boxing and the same, There is a quite a broad offer, and we offer to customer [Technical Issues] to select whatever they want to deploy.

Keith F. Jensen -- Chie Financial Officer

Yeah, I mean, we talk cloud, not only there with the cloud providers, but it's also private clouds as well that we're providing solutions to.

Walter Pritchard -- Analyst

Okay, thank you.

Ken Xie -- Founder, Chairman & Chief Executive Officer

Thank you.

Operator

Thank you. Our next question will come from Gregg Moskowitz with Mizuho.

Gregg Moskowitz -- Analyst

Okay, thank you very much, and good afternoon, guys. Getting back to the enSilo acquisition, Ken, obviously there are many endpoint security vendors out there. And so, I was curious if you could elaborate on what drew you to them in particular?

Ken Xie -- Founder, Chairman & Chief Executive Officer

You know, we may all be called the Fiber Partner. Same culture. They've been working together quite a while and working well together. Well, and also have a lot of successful go-to-market approach just like the same thing we did for the FortiNac, the company -- our buffer network that we did about one year ago. So that's where now we have a close of 100 Forti-Partner, Forti-Fiber Partner. So that's where, probably, more need to starting from that angle, as well as make sure we can walk in together.

Gregg Moskowitz -- Analyst

Okay, that's really helpful. And then, just for Keith. So as you mentioned, both the Americas and EMEA grew very well this quarter. Your revenue growth in Asia-PAC, though I think, did decelerate. And I know that you were facing a tougher compare. Just wondering if there was anything else that you would call out?

Keith F. Jensen -- Chie Financial Officer

Yeah, I think that, I guess, that's going to give us something to work on in the fourth quarter. As you know [Phonetic] -- Asia Pacific back to a healthier growth pattern than we saw in the third quarter, probably a little bit of hiring lagged for the first part of the year. I think, by comparison, we feel very good about the conversation we've had at the beginning of the year about needing to get the US and the Americas team focused on hiring and we see the results of that. So I think we'll spend a little time with APAC in the next quarter.

Ken Xie -- Founder, Chairman & Chief Executive Officer

Yeah, they're not the probably the major part of it, but also very small part is also APAC. They tend to sell little more lower-end and then we do have some kind of product transition. That was some service provider, some partner, they wait a little bit like when we announced the six-year as [Phonetic] today, make it available right away. So that's where we're helping because the new generation will -- will have a much better performance and about the same cost.

Gregg Moskowitz -- Analyst

Okay. That's great color. Thanks very much.

Operator

Thank you. Our next question comes from Daniel Ives with Wedbush.

Daniel Ives -- Analyst

Yeah. Thanks. Can you talk about government feels -- are they starting to get larger. In terms of especially, if there's a move to cloud on the securities, are you starting to see those changes on the federal, in terms of pipeline?

Keith F. Jensen -- Chie Financial Officer

So when we talk about government for our business, you keep in mind, it's international governments and it's some US federal, but it also includes from the US side, state and local governments. I wouldn't say that there's anything driving out of the US Fed business that's impacting our business, one way or the other in terms of deal sizes.

Daniel Ives -- Analyst

Okay, thanks. And can you just talk about just generally like hiring plans. From a sales rep perspective like, is that something you think is going to stay steady, accelerate, how would you kind of -- from a high level, think about that over the next six months to 12 months?

Ken Xie -- Founder, Chairman & Chief Executive Officer

We are improving. So you can see, last quarter Q3, we do add about more headcount and -- but there is some region slowed, vertical still behind, like Keith mentioned APAC. So that's why we're keeping improving there, and I think, with -- with more sales capacity, with more marketing coverage we are happy that we can grow faster.

Daniel Ives -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Brad Zelnick with Credit Suisse.

Raymond McDonough -- Analyst

Hi, thanks for taking the question. This is Ray McDonough on for Brad. Ken, just to follow-up on the enSilo acquisition. I know you mentioned you had a strong partnership with them and the company has some very interesting technology, but having been around for several years, and the price you paid seems to imply they weren't generating a lot of revenue or not growing very well, or combo of the two. What if anything, do you see, that you might be able to do with the technology that maybe the company was unable to achieve on a stand-alone basis?

Ken Xie -- Founder, Chairman & Chief Executive Officer

Like I -- it's pretty interesting. Quite a few of our acquisitions are similar. We have a great technology, they have a great team there, but then they need a much more investment for go-to-market. So that's where we kind of a turned in like this kind of company, so they can leverage all our sales force and also our customer base to quickly help them to improve in the go-of-market side, and same time, we also want to make sure we can integrate well together. And so, we don't want to create a too many different micro product [Phonetic] approach, but integration is where we're key. That's where we -- the most starting from the Forti-Fabric partner side first, that make sure we can integrate. And then that's where the decision we made, and we do believe they have a great product, great team.

Raymond McDonough -- Analyst

Thanks. And then one for Keith, if I could. I might have missed it, but can you share what unit shipment growth was in the quarter?

Keith F. Jensen -- Chie Financial Officer

We didn't provide it, but I would say that what we're seeing most recently as a unit shipment growth is moving right in tandem with product revenue growth.

Raymond McDonough -- Analyst

Okay, great, thanks.

Operator

Thank you. And our next question will come from Ken Talanian with Evercore ISI.

Ken Talanian -- Analyst

Hey, thanks for taking my question. So, first, could you give us a sense for the -- the main drivers for your success in competing in the enterprise segment and maybe give us a sense for how the pipeline has evolved over the past year?

Ken Xie -- Founder, Chairman & Chief Executive Officer

I think there is a multiple angle from the technology part our side. We feel all solution part of technology feed better for the change in, for the trend. Like I said that the security border disappeared in enterprise. So you need to go inside that internal segmentation, you also need to expand in the WAN and also working with service provider for the order of called approach [Phonetic], mobile approach, all this kind of thing. And then the Fabric, I also we -- we could -- all Fabric is a -- mostly product we build internally. It's integrated, automated on day one. It's much better compared to some other competitor. They have to all depend on acquisition. And so that's really helped in amortize our infrastructure security, and also making the deal like a larger, and also most sticky with the customer.

Keith F. Jensen -- Chie Financial Officer

Yeah, I think, Ken, the concepts Ken there's talking about, the security value is clearly at play here with the enterprise. There's been also as Ken talked about in his prepared remarks, being in the Gartner Magic Quadrant now for three years in a row, has really served to open up the door in getting us invited to RFPs that five years ago, we probably, needed to know, exist. And I think, we've become fairly good, can benefit from then following that up with things like NSS [Phonetic] Labs certifications, and recommendations. Too many Ss in there, I'm sorry, but that third-party testing, if you will. I think once you're in and you have the opportunity, you're offering them these recommendations from third parties together with our security value, does indeed make a pretty compelling opportunity for us.

Ken Xie -- Founder, Chairman & Chief Executive Officer

Also, we kind of more investing there in the sales team and also the marketing approach there, that's also helpful. So it's really like a additional sales coverage and the more focus in earn-out price, and also we have a better internal total tracking, whether the enterprise account coverage, or the sales productivity. And so, I think, all these different part of our accounting improving enterprise sales.

Ken Talanian -- Analyst

Okay, great. And earlier, you mentioned, that we take a look at the Gartner Data with regards to SD-WAN. It sounds like SD-WAN is essentially included in FortiGate. So I was wondering if you could give us a sense for how we should think about the accounting for revenue recognition for deals with SD-WAN, and any kind of framework we can think about in terms of the uplift that you might see to a deal that's driven by that requirement?

Keith F. Jensen -- Chie Financial Officer

Always good to have a GAAP conversation to close the call. So thank you for that. Yeah, that -- there is no difference in the accounting for it because you're selling a FortiGate appliance that has embedded with it a whole bunch of different functionalities, one of which SSL, would be one as an example, another would be SD-WAN functionality. And so, you recognize the appliance upfront. They -- all the appliances, well I shouldn't say all, the majority of the appliances that cash out of FortiCare, FortiGuard, security subscription with them, and so that part of the deal is allocated to deferred revenue. And then [Indecipherable] -- and then recognized over time. But you still receive on the FortiGate, the appliance, you're still recognizing that revenue upfront.

Ken Talanian -- Analyst

Okay, thank you.

Operator

Thank you. Speakers, I'm showing no further questions in the queue at this time. I would now like to call -- turn the call back over to you for any closing remarks.

Peter M. Salkowski -- Vice President of Investor Relations

Great, thank you, Sherry. I'd like to thank everyone for joining the call today and let you know that Fortinet will be hosting an Analyst Day on November 18 as well as attending the following investor conferences during the fourth quarter. We have the RBC Conference on November 19, in New York. The Credit Suisse Conference in Scottsdale on December 3. The UBS Conference in New York on December 10, and the Barclays Conference here in San Francisco on December 11.

Presentations for all of these events will be webcast and a link to those webcast will be available on the Investor Relations website on those dates. If you have any follow-up questions regarding the call, please give me -- please contact me, and have a great rest of your day.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 62 minutes

Call participants:

Peter M. Salkowski -- Vice President of Investor Relations

Ken Xie -- Founder, Chairman & Chief Executive Officer

Keith F. Jensen -- Chie Financial Officer

Fatima Boolani -- UBS -- Analyst

Sterling Auty -- JP Morgan Chase & Co -- Analyst

Keith Frances Bachman -- BMO Capital Markets Equity Research -- Analyst

Saket Kalia -- Barclays Bank PLC -- Analyst

Melissa Franchi -- Morgan Stanley -- Analyst

Dan Bartus -- Bank of America -- Analyst

Michael Turits -- Raymond James -- Analyst

Shaul Eyal -- Oppenheimer -- Analyst

Jonathan Ho -- William Blair -- Analyst

Walter Pritchard -- Citi -- Analyst

Gregg Moskowitz -- Mizuho -- Analyst

Daniel Ives -- Wedbush Securities -- Analyst

Raymond McDonough -- Credit Suisse -- Analyst

Ken Talanian -- Evercore ISI -- Analyst

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