Fortinet Inc (FTNT) Q4 2020 Earnings Call Transcript

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Fortinet Inc (FTNT 0.23%)
Q4 2020 Earnings Call
Feb 4, 2021, 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 Fourth Quarter 2020 Earnings Announcement. [Operator Instructions]

I would now like to hand the conference over to your host today, Peter Salkowski, Vice President of Investor Relations. Please go ahead.

Peter Salkowski -- Vice President, Investor Relations

Thank you, Sarah. Good afternoon, everyone. This is Peter Salkowski, Vice President of Investor Relations at Fortinet. I am pleased to welcome everyone to our call to discuss Fortinet's fiscal results for the fourth quarter of 2020. Speakers on today's call are Ken Xie, Fortinet's Founder, Chairman and CEO; and Keith Jensen, our 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 for the fourth quarter, providing guidance for the first quarter of 2020 and the full year. We'll then open the call for questions. [Operator Instructions]

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 review -- 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 stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations is located in our earnings press release and in the presentation that accompanies today's remarks, both of which are posted on the Investor Relations website. Lastly, all references to growth are on a year-over-year basis, unless noted otherwise.

I will now turn the call over to Ken.

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Thanks, Peter and thank you to everyone for joining today's call to review our fourth quarter and full year 2020 result. Fourth quarter billing increased 20% to $961 million. Our secure SD-WAN offering accounted for over 13% of fourth quarter billing. Product revenue accelerated quarter-over-quarter to 21%, contributing to our total revenue growth of 21%.

Operating margin benefit from solid revenue performance. We achieved a all-time company record non-GAAP operating margin of 29.4% for the fourth quarter. Given the many opportunities ahead, we plan to shift our focus more to growth for the at least next few quarters. Today, we announced the FortiOS7.0 with 300 new feature and update. With this release Fortinet is the only leading cybersecurity vendor to offer firewall based zero trust network access enabling remote access to replace the traditional VPN. This reduced our tech service, while improving the user experience. Fortinet's zero trust network access solution also simplify management by using the same access policy whether on or off-network.

Tighter integration of our SaaS solution with FortiOS7.0 give enterprise the flexibility they need to enable their workforce to work from home with consistent enterprise grade security delivered on premise all now while cloud-based SaaS is a consumption for security as a service. The FortiOS7.0 extend network connectivity and security beyond the WAN edge with innovation in 5G and LTE now improved allow this network performance an increased resilience of 5G offering enable organization to achieve secure, scalable and highly available network connectivity anywhere. The release of Forti0S7.0 expand the Fortinet Security Fabric delivering on our mission to provide broad, integrated and automated security to any device, any application everywhere.

Cybersecurity is an inflection point and increasingly organization are consolidating toward a platform approach and not just a separate platform for endpoint network security or cloud security, but a holistic platform that is integrated automated across all this area. The Fortinet Security Fabric is a cybersecurity platform build on broad and deep set of networking and security technology for endpoint to network to cloud, organically build to seamlessly communicate and operate together. These consolidation with our security driven networking approach will be key drivers going forward.

Today Fortinet is recognized in 8 Gartner Magic Quadrant, our FortiGate product is a leading -- is a leader in both SD WAN and next-gen firewall Magic Quadrant. We continue to experience excellent adoption of secure SD WAN and expect our unique solution to become market share leader within a few years.

In addition to our growth drivers, we estimate our total addressable market will grow at an annual compound rate of 10% over the next four years to reach $93 billion by 2024. The recent SolarWinds security incident and the pandemic elevate the need for broad integrated and Automic platform and we expect company to raise the percentage of IT spending used for security as they work to secure their entire infrastructure across multiple edge in a zero trust environment.

Before turning the call over to Keith, I would like to thank our employees, customers and partners worldwide for their continued support to manage our response to the ongoing COVID-19 pandemic. Keith?

Keith Jensen -- Chief Financial Officer

Thank you, Ken. Let's start the fourth quarter review with revenue. Total revenue of $748 million was up 21%. Product revenue was up 21%. Service revenue was up 21%. Product revenue of $288 million saw a substantial sequential acceleration and growth relating from strong demand for fabric and Security Fabric platform and FortiGate across all form factors hardware, software and virtual machine.

While secure SD WAN use cases continued their dramatic growth, the majority of product revenue was driven by the wide range of other operating system capabilities embedded in FortiGate and their related use cases. Service revenue of $460 million benefited from strong demand for fabric and cloud security solutions. Support and professional services revenue increased 21% to $210 million. The revenue mix shift from 8 by 5 to 24 by 7 support was 12 points, with 24 by 7 now representing 66% of the mix. Security subscription services and cloud provider revenue increased 21% to $249 million.

Moving to the mix of FortiGate and non-FortiGate revenue, network security revenue increased 18% driven by the high-end and entry level FortiGate product families. Non-FortiGate product and service revenue increased 29%, driven by a 34% increase in revenue for fabric and cloud security solutions. Before continuing with the fourth quarter results, I'd like to highlight our 2020 full-year revenue performance.

In the midst of a pandemic induced recession, total revenue for the year grew 20% to $2.6 billion. We take great pride in our focus on organic growth and 2020 represents the third consecutive year with revenue growth of 20%. This consistent performance speaks to our geographic and customer diversity, the continued success of the integrated platform strategy and our proprietary ASIC advantage that enable the shared operating system across the platform, guides cost per performance advantage, increase the capacity to add features and functions, while maintaining price points.

Total non-FortiGate revenue for the year grew over 25% to more than $725 million. In other words, our fabric cloud and other security products and services are on a pace to be a $1 billion business as we exit 2021. Our non-FortiGate and FortiGate products solutions include a complete range of form factors and delivery methods, including physical and virtual appliances, cloud, SaaS and perpetual software as well as hosted and non-hosted solutions. Together they provide a range of security solutions and form factors enabling integrated protection for hybrid environments and their expanding digital attack surface and edges.

Turning back to our Q4 results, let's turn to revenue by geo. Our geographic revenue performance continue to align with the pandemic's economic path and with it highlighted the geographic diversification of our business. As summarized on Slide 7, revenue Asia Pacific increased 23% as many Asian countries and economies continue to remain largely open. EMEA revenue increased 22% and the Americas posted revenue growth of 20%. Let's shift to billings. Total fourth quarter billings were $961 million, up 20%. FortiGate billings increased 16% and accounted for 71% of total billings.

As shown on Slide 9, high end an entry-level FortiGate posted strong billings growth for the quarter. Non-FortiGate billings increased to 29% of total billings, driven by demand for fabric and cloud security solutions. As with revenue, geo billings performance aligned with economic path of the pandemic. In terms of growth, APAC billings outperformed all geos followed by Europe and the Americas. The Americas reflect a continuing impact of endemic, especially in Latin America.

Moving to billings by customer segments. The small Enterprise segment posted solid growth across all geos, illustrating the strength of our engage channel partner program. This segment is driven by new customer acquisitions, customer security fabric expansions, solid execution by our channel partners and the large, diverse makeup this multinational customer segment.

Moving to worldwide billings by industry verticals. The worldwide government sector top all verticals at 17% of total billings and grew 28% with another strong performance from our international team. Service providers and MSSPs accounted for 16% of total billings. Retail accounted for 10% of total billings, up 2 percentage points quarter-over-quarter. And education continue to rebound with billings growth up 26% year-over-year.

Looking now at deal by dollar size we had 68 deals over $1 million in the fourth quarter compared to 64 deals in the fourth quarter of 2019. Secure SD WAN accounted for 16 deals over $1 million versus 11 deals in the fourth quarter of 2019. On a full year basis, SD WAN accounted for approximately 11% of our total billings and doubled year-over-year.

Moving back to the income statement as shown on Slide 4, gross margin improved 40 basis points to 78.5%. The strong 29% quarter-over-quarter product revenue growth created a mix shift from services to product revenue. The mix shift was a headwind for quarter-over-quarter gross margin comparisons. Product gross margin improved 130 basis points to 63.2%. Product gross margin continue to benefit from a higher mix of software products and the lower direct cost of our newer generation of FortiGate products.

Operating margin for the fourth quarter increased 210 basis points to 29.4%, benefiting from the gross margin improvement and continued lower travel and marketing program expenses offset by the addition of new sales team members as we continue to prepare for additional growth. By the end of the year, the total headcount was 8,238, an increase of 16%.

Moving to the statement of cash flows summarized on slides 10, 11 and 12. Cash flow for the fourth quarter came in at $264 million. In the fourth quarter, we repurchased approximately 300,000 shares of our common stock for a total cost of $34 million. For the full year, we repurchased 11.7 million shares for a total cost of $1.1 billion. At the end of the fourth quarter, the remaining share repurchase authorization was $1 billion, with the authorization set to expire at the end of February in 2022. Throughout the pandemic, we have leveraged the strength of our balance sheet as a competitive advantage to support our partners and customers as they experience geo-specific economic challenges.

As a result, average day sales outstanding increased eight days to 87 days, in line with our expectations and reflecting our decision to provide geographically targeted extended payment plans. Inventory turns improved to 2.7 times from 2.1 times in the third quarter and was relatively flat year-over-year. We expect extended payment terms and higher inventory balances to be in effect as we move through at least the first half of 2021.

Capital expenditures for the fourth quarter were $32 million, including $22 million related to construction and other real estate activity. We estimate capital expenditures for the first quarter of between $50 million and $60 million and for all of 2021 to be between $150 million and $170 million. 2021 capex projects include expanding our data center footprint and spending that was moved from 2020 due to delays in the new campus building. The average contract term in the fourth quarter was approximately 28 months, up less than two months from the fourth quarter of 2019. The growth in SD-WAN and other large enterprise deals contributed to the increase.

As we look forward, I'd like to review our outlook for the first quarter and full year 2021, summarized on Slide 13 which is subject to disclaimers regarding forward-looking information that Peter provided at the beginning of the call. For the first quarter, we expect billings in the range of $765 million to $780 million. Revenue in the range of $670 million to $685 million. Non-GAAP gross margin of 78.5% to 79.5%. Non-GAAP operating margin of 22.5% to 23.5%, reflecting the typical revenue seasonality associated with the first quarter. Non-GAAP earnings per share of $0.70 to $0.75, which assumes a share count of between 167 million and 169 million. We expect the non-GAAP tax rate of 21%.

Before providing our 2021 guidance, I'd like to congratulate every member of the Fortinet team for the truly outstanding execution in 2020. In the face of unprecedented challenges and rapidly changing and unpredictable dynamics, the effort and results have been outstanding. And this is on top of now several years of consistent predictable performance and continuing improvements in key growth and profitability metrics.

Today, we report our third consecutive year of total revenue growth of 20%, while increasing our non-GAAP operating margin, an average of over 200 basis points a year for the same period. Our goal remains to balance growth and profitability within the framework we have provided. As Ken mentioned, given the many growth opportunities that lie ahead, we currently plan to tilt our bias within this framework more toward growth for at least the next several quarters. The opportunities we see are supported by a strong pipeline heading into 2021, increased sales capacity and our development efforts, which include the NP7 chip and our new FortiOS7.0 operating system.

With that, for 2021 we expect billings in the range of $3.560 billion to $3.640 billion, which at the midpoint represents growth of approximately 17%. Revenue in the range of $3.025 billion to $3.075 billion which at the midpoint represents growth of 18%. Total service revenue in the range of $2.015 billion $2.045 billion, which represents growth of approximately 21% and implies product revenue growth of approximately 11% and $1 billion in product revenue for 2021, quite the milestone for Fortinet.

Non-GAAP gross margin of 78% to 80%, non-GAAP operating margin of 25% to 27%. When backing out the 2020 T&E bad debt, the midpoint of guidance represents a 50 to 100 basis point increase in operating margin for 2021. Non-GAAP earnings per share of $3.60 for $3.75, which assumes a share count of between $170 million and $172 million. We expect our non-GAAP tax rate to be 21%. We expect cash taxes to be approximately $80 million.

Along with Ken. I'd like to thank our partners, customers and the Fortinet team for all their support and hard work during these difficult and unique times. I'd also like to offer a special welcome to the PenOp's [Phonetic] team. And I'll now hand the call back over to Peter to begin the Q&A session.

Peter Salkowski -- Vice President, Investor Relations

Thank you, Keith. Operator, please open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Brian Essex with Goldman Sachs. Your line is now open.

Brian Essex -- Goldman Sachs -- Analyst

Hi, good afternoon, and thank you for taking the question and congrats on a great set of results. Maybe, Ken, if I could ask, you've got a number of different product cycles ahead of you this year. You've got NP7, you've already talked about SD-WAN, you've got hyperscale penetration and potential exposure to 5G. Can you maybe talk about the contribution from each of those that's embedded in your guidance and what are you seeing currently in the market and what's yet to come?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

I think for NP7, is still in the ramp up stage. We continue to build new hardware platform with NP7, especially for the high-end and middle range. The FortiOS 7.0 is also a growth driver, but we are in the beta three process for an output [Phonetic] this quarter. That's will help in contribute to the additional growth, especially in the zero-trust setting environment and also the infrastructure security later this year, but it's -- so far, I see that the product grows like a 21%, it's a lot of contribution from whether the SD-WAN or because security-driven networking and also in the -- probably like one to two years ago when we released the SoC4, so that's a little bit toward the low end side of the FortiGate, which you can see nicely growth over there, and also the team doing great job in the sales and marketing.

Brian Essex -- Goldman Sachs -- Analyst

And the other exchange.

Keith Jensen -- Chief Financial Officer

Yeah, I think the guidance setting process is not so much on individual products or even in some cases individual use cases. We identify 15 or 20 different use cases for firewalls. It's more about what we see in terms of market opportunity, what we see in pipeline. Then maybe by geography or deal opportunity or what have you is some of the key inputs that go into it. But I wouldn't really think of it is -- I certainly would not want you to walk away from the conversation thinking that the guidance that we provided is dependent upon some degree of 5G or SaaS or something that's above and beyond.

Brian Essex -- Goldman Sachs -- Analyst

Got it, that's helpful. And maybe just a quick follow-up. Nice large deal activity, certainly more than we picked up in the channel. Maybe if you could talk a little bit about the competitive dynamics on the large end of your market scale. Where you're seeing that business come from? How much is displacement and how much is expansion of I guess existing customer opportunity?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Yeah, definitely whether from our customer or our partner, they see starting to get a much better, more competitive and lot of advantage, using the Fortinet product, whether the FortiGate leverage new ASIC, the new OS with much more additional function compared to competitor. So that's where like increased the gap, we have been ahead of competitor now and that's likely helping to drive, to accelerate the product revenue growth. And on the other side, we have a little bit different approach for whether the SaaS or Cloud endpoint. So we more emphasize is integrate together automate together, especially in the OS level, that's none of our competitors have that. And also most of this also organically internally developed, designed to work together, automate together from day one. And that's also different from competitor come from acquisition, which are more difficult to integrate and also difficult to manage long-term. So we do feel we have a more advantage in the marketplace right now.

Brian Essex -- Goldman Sachs -- Analyst

Got it. Very helpful. Thank you again. I appreciate it.

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Thank you, Brian.

Operator

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

Shaul Eyal -- Oppenheimer -- Analyst

Thank you. Good afternoon, guys. Congrats on the ongoing strong execution levels. I want to start with a gross margin related questions. So gross margins guidance for '21 indicates an improvement, one to two basis points on average. And I would like to understand whether it is driven by the ongoing shift to more Cloud activities i.e. more subscription services or is it driven by some improvement with your ASIC driven strategy?

Keith Jensen -- Chief Financial Officer

Yeah, I think the last part is probably the headline, which is that each successive generation of the ASIC, in addition to creating more speed, more capacity, if you will more throughput. It also creates capacity to consolidate features of the bomb that were previously separate. Any successive generation has shown the benefit of that, and I think over the last year or two we've done a very good job of retaining that cost-benefit in terms of the structure. You can look back and see what's happened with the gross margins, on the product gross margin line.

Obviously, you do then also get the benefit in total when you add in the two-third of the business that are services, that are coming in at a much more attractive margins. So the combination of those two, I think are working very, very well for us as we exit 2020 and move into 2021.

Shaul Eyal -- Oppenheimer -- Analyst

Got it, got it. Thank you for that, Keith. And maybe high level on the Sunburst breach. Have you seen any incremental interest starting in mid-December, may be building into year end. Again, just aside from the typical healthy year end seasonality trends?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

I'd say probably, I do see a lot of leader interest, especially to secure a whole infrastructure, including the supply chain with all different third party kind of a product or all the sense [Phonetic], but it's still -- I think it's definitely more people starting interest in this area, but the business side has probably not change that much yet. But we do see...

Shaul Eyal -- Oppenheimer -- Analyst

Got it.

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Going forward probably later this year will be -- because it's definitely with security concern, like I mentioned. The security spending among all IT spending probably will keep increase.

Shaul Eyal -- Oppenheimer -- Analyst

Understood, very helpful. Thank you so much and good luck.

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Thank you.

Operator

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

Tal Liani -- Bank of America -- Analyst

Hi, guys. I have two questions. The first one is, Ken, in your prepared remarks, you said that this year is going to be a year of focus on growth. What does it mean? Does it mean that you're going to increase expenses and the margin increases would moderate. Can you elaborate on the meaning behind your statement that you're going to focus on growth this year? And how is it different from previous year for example?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

We do see like whether some investment we made in sales and marketing. Like we say, that we have increased sales capacity and also -- we also have better visibility with increased marketing and at the same time on the product, on infrastructure side, we also will keeping invest, especially organic internal development like building the new infrastructure and where to address the cloud, the networking endpoint and also working with service provider.

So basically, we do see -- the market itself also starting kind of accelerating especially in some new area whether the security-driven networking including both SD-WAN and 5G and thus have the new infrastructure, but also some kind of a service model, leverage the infrastructure, which we will keeping invest more in there. So, that's why we feel -- so this will give us a much more growth opportunities and both internally like whether the NP7 or the FortiOS 7.0 is all timing quite well. So will help us drive the faster growth.

Tal Liani -- Bank of America -- Analyst

And does it have any impact on...

Keith Jensen -- Chief Financial Officer

I will just -- I'm sorry, I'd just add to that. I think the -- sorry to interrupt you. I think we were very successful throughout 2020 even during the pandemic of maintaining our -- and growing our operating margins very dramatically, but at the same time, adding sales capacity. I think when we sat down to build the guidance out and the plan for 2021, coming into the year with a capacity levels that we have together with the increase in tenure that we're seeing, as well as the pipeline. I think we feel very good about this opportunity to take advantage of the growth and I think we're still -- I think the margin guidance the midpoint of 26% is very much within the framework and actually up a little bit.

Tal Liani -- Bank of America -- Analyst

Got it. My second question is about the needed investment in infrastructure to accommodate SASE and similar business models. What is the company doing in order to address it? Can you just elaborate on what's happening behind the scene?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Yeah, the SASE approach from Fortinet is different than other competitor. We do want to have a more integrated automated approach, and also we did only one in the OS level, both the SASE and also zero-trust network access. So that's making whether working with Fortinet or a service provider or even across enterprise themselves to develop their own kind of SASE approach, which will be much better fit for their own kind of privacy, whether GDPR or some other requirement. It's much better secure compared to some other approach. So that's where we feel we do have some investment, but some investment like infrastructure, we are also working with our service provider together.

Tal Liani -- Bank of America -- Analyst

Got it, thank you.

Operator

Thank you. Our next question come from the line of Rob Owens with Piper Sandler. Your line is now open.

Ben Schmitt -- Piper Sandler -- Analyst

Hi, this is Ben Schmitt on for Rob. Thanks for taking my questions. As much of the attention in the space begins to shift toward cloud and SASE, how do you think about your longer-term strategy from a remote connectivity perspective? And what do you think -- and what do you expect for the branch office?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

I think for our technology, we can support in both the thin branch and the SIC branch office approach and also even for the SASE, so we leave the flexibility to enterprise, which they can whether leverage the vendor or they can leverage service provider or carrier or they can build himself. So that's why we say we put in the OS level is much integrated automated compared to some other approach which have to leverage lender's infrastructure.

So for us, like this OS level integration of SASE do leave a lot of flexibility and gradually for customer to transition, whether they're more service space or they still want to like have a secured infrastructure approach [Technical Issues] and safety at the same time will make the whole infrastructure secure, like we say whether the secure-driven networking is active on 5G, or internal segmentation, whether in the data center or with their enterprise campus environment.

So that's why we feel even we take a little bit more time to build these kind of a highly integrated OS level approach, but the result is much better and more advanced than some other loosely -- other approach.

Ben Schmitt -- Piper Sandler -- Analyst

Okay. And on the growth investment, can you guys add just a little bit more to how much of the capacity has already been added, and how much you're expecting to add? I guess, how much more needs to be added for this year? And can you remind us what the normal ramp time period is for new reps?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

For the new rep, probably a little bit different for each second vertical like the channel probably within a few months, like three months time frame and then the enterprise probably likely six to twelve months. Some people kind of may take like one to two years they carry audition. So we are going to also -- like different geo, I think based on how the pandemic, how the other progress is going and also the market opportunity there. But I say we do kind of planning to increase more capacity, when we see more opportunity there and try match the investment with -- I think whether the internal like new product and also the market opportunities definitely will help us to keep driving the faster growth.

Ben Schmitt -- Piper Sandler -- Analyst

Thanks, guys.

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Thank you.

Operator

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

Fatima Boolani -- UBS -- Analyst

Good afternoon. Thank you for taking the questions. Ken, maybe I'll start with you. Just drilling into your vertical based performance. You talked about the global government vertical being -- comprising a fifth of your billings in the quarter and that some of the highest levels we've seen. And so I'm wondering if you can remind us what your U.S. public sector exposure is within that government exposure? And then more specifically, how is Fortinet positioned, both from a product and go-to-market perspective in the U.S. federal, especially as we sort of think about the $10 billion cybersecurity spending protocol from the new Biden administration? And then I've a quick follow-up for Keith.

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Yeah, the common business for Fortinet as a global base is about 17% of our total business for us right now. And compared to like a few years ago the care service providers the number one is over 20%. Now they're like 16%. So, the U.S. government, we still see a lot opportunity and same thing for the U.S. market. And so we're going to keep building the team and increase capacity and to take this opportunity and grow faster, larger. What's the second question?

Keith Jensen -- Chief Financial Officer

I think we've talked before that the U.S. Fed is low-single digits of our government business -- of our business. I think we felt it about that.

Fatima Boolani -- UBS -- Analyst

Got you. Very helpful. Keith, just sticking to Americas. We saw very nice acceleration in Q4 in the the Americas theater against what was maybe an uneven geographical performance for the U.S. over the course of 2020. So I'm wondering if you can just put a finer point on the types of things that went right and the types of things that really went on in the quarter, and the key drivers of the strength, particularly in Americas? And that's it for me. Thank you.

Keith Bachman -- BMO Capital Markets -- Analyst

Yeah. So I think good question. But a lot of ways, different answer typically practically geographically it used to be by far the most challenged, if you will. Canada probably did the best of the three, and I would put the U.S. right in the middle. I do think that we're very pleased with how the U.S. has come back. The second quarter, now that we are pandemic experts about what to expect out of the business and looking at Q1 and Q2, Q3, Q4, it's pretty obvious that -- and we kind of felt this coming out of the second quarter. The Q2 was a low watermark, both for the company in total, but also for the U.S. I think you've picked up on since that point, there has been a steady progression of lack of a better term recovery in that part of the business.

Fatima Boolani -- UBS -- Analyst

Thank you.

Peter Salkowski -- Vice President, Investor Relations

Operator, next question please.

Operator

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

Brad Zelnick -- Credit Suisse -- Analyst

Thank you so much and congratulations to the entire Fortinet team on a great end to a great year. My first question for you, Ken, in your comments, you basically said that you aspire to be the market share leader in SD-WAN, which I think is a really important goal that you have. And I just was curious from your perspective, what needs to happen to get there? How do you take share from your two largest competitors that have significant installed base relationships and over what time can this play out?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

I think for us, we have a unique advantage of we build SD-WAN with security together and we also leverage ASIC to like increase computing power, lower the computing cost a lot. So that's none of our competitor have done and also the other two big leader, they come from acquisition. That's where going forward they probably will be slower on whether innovation or -- I mean the market change dynamic there. So that's why you can see from the FortiOS 7.0 release, we do keep increase additional function whether the SD-WAN, the 5G and other parts.

So we do also believe going forward like half or majority of the SD-WAN market will need security. So will be -- we have huge advantage there. So that's where even they did installation base the advantage we have from a product, from the function, from the cost side, I think will be huge and what will have us keeping through in the market share. And so far, like year-on-year like we almost doubled SD-WAN business compared to 2019 in 2020.

Brad Zelnick -- Credit Suisse -- Analyst

Great. And maybe just quickly for Keith. Keith, what are the levers to think about in light of sales headcount and the plans for this year?

Keith Jensen -- Chief Financial Officer

I'm not quite sure I fully understand the question, but maybe I'll give it a shot at that to share one data point. Coming into this year, if I look at the level of sales capacity we have versus what the plan is that we're talking about, I don't think I have -- this is as well positioned as we have been coming into a year to pivot toward this growth model that Ken has talked about. And I think that the pipeline feels very good, the tenure feels very good. The use cases, the TAM feels very, very good to us. The new FortiOS, the NP7 chip is coming out, the platform advantage, the cost advantage that we have, the performance. I think that we are in a very good position to execute this. And again we're maintaining it within the framework that we've talked about previously.

Brad Zelnick -- Credit Suisse -- Analyst

Fantastic, thank you so much for taking the questions.

Keith Jensen -- Chief Financial Officer

Thanks, Brad.

Operator

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

Sterling Auty -- J.P. Morgan -- Analyst

Yeah, thanks. Hi, guys. Just one question from my side. Ken, in your prepared remarks, I think you talked about that the industry is finally where you customers move to consolidation, fewer vendors, more of a broad platform approach. With that in mind, where would you gauge the Fortinet platform and what are the areas that you would like to bolster to improve your position moving forward?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Yeah. As you can see the -- like we call the security fabric has a pretty nice growth, almost double compared to the FortiGate growth there. That's also because customers want to have all these whole infrastructure secured integrated automated solution. So that's where we will continue to see -- we'll keep gaining share there. So that's involving probably like 20-30 different product. And on the other side, on the FortiGate part, we call it security-driven networking that's whether the SD-WAN, the 5G, and now these integrated SASE and some other part working closely with service provider carrier, we also see a lot of opportunity within the FortiGate side.

So that's where we see -- so far we are keeping like if the market itself grow like a 10%, we do see we can grow much faster than the market, keep gaining share and both on the FortiGate and also on the -- we call the broad fabric approach which involving both the endpoint and the networking and the cloud all together, and all this integrate together based on the FortiOS and some other connectivity related to the FortiOS.

Sterling Auty -- J.P. Morgan -- Analyst

Understood. Thank you.

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question come from the line of Adam Tindle with Raymond James. Your line is now open.

Adam Tindle -- Raymond James -- Analyst

Good afternoon. Ken, I just wanted to start on and focus more on growth comment and how you're investing some of your healthy margin and some sales and marketing initiatives. We also heard a similar message from a competitor yesterday and just thinking about the broader industry implications of that. An outsider could maybe make the case that we enter a period of greater industry competition and pricing pressure as major competitors are investing heavily in sales and marketing. Certainly doesn't seem to be the case based on your full year margin guide. So maybe some thoughts on why that scenario does not play out?

Keith Jensen -- Chief Financial Officer

Ken, can I jump in and answer on your behalf rather. I think the reference probably is to the company it has a very, very different business model. Whether you're looking at growth rates or you're looking at product service mix or what have you. So I don't know that I would draw that straight-line comparison. I think the business model that we're executing here has been extremely successful, and I expect it will continue to be so.

In terms of discounting, I think that those days that I don't like hearing it, but we're viewed as being the price for performance leader, that our pricing is really -- we're often times I think brought into RFPs and opportunities to set the milestone that the competitors are forced to react to, as opposed to the other way around. If you go back and look at the comments that we've offered throughout 2020 even in a pandemic, more often than not discounting if you will, has been a tailwind for us and our ability to execute against it as opposed to a headwind. By that I define discounting mean lower discounting pressure in that quarter than the prior period. So I don't think we have the concerns that may have been described there.

Adam Tindle -- Raymond James -- Analyst

Okay, that's helpful. And maybe just a quick follow-up, Keith, and sorry, a little bit in the weeds on this one, but the billings guidance for Q1, it's down about 20% sequentially at the midpoint and typically down low-double digits or so mid-teens in that range. Last year at the start of COVID it was down 17%. So part of the question is why would the sequential decline in billings be worse than the environment when we entered COVID during Q1 of last year? You talked about having a strong pipeline, supporting the desire to invest. Maybe just some help with the color on the disconnect between those two items? Thank you.

Keith Jensen -- Chief Financial Officer

Yeah. I think one which you're talking about is just a tremendous performance in the fourth quarter of 2020. I know that fourth quarter 2019 was a good quarter. But Q4 2020, on top of that '19 performance, I think as part of it. And this is typically the smallest quarter for us in the year, historically, you've seen some sort of shift and that's nothing new. And from -- going from Q4 to Q1 and then you start to see the progression thereafter.

Adam Tindle -- Raymond James -- Analyst

Okay. Thank you very much. Helpful.

Operator

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

Keith Bachman -- BMO Capital Markets -- Analyst

Hi. Thank you very much. Ken, I wanted to ask my first question of you, you've talked about 5G, why is that an opportunity? Who is your customer and what's -- why does Fortinet win in that instance of the deployment of 5G? And if you could just talk a little bit about when do you think that you'll get some benefits from this?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

I think we do see 5G connect a lot of device to the Internet, which also includes a lot of security risk we call there is a new attack service or new ads need to be covered. So that's where especially we working with a lot of service provider for the 5G services to a lot of enterprise and connect all these different devices in the OT IoT space. So that we do see is a huge opportunity and so with our position, with the carrier service provider and we do see the 5G can be one of the driving -- growth driver factor for us this year and it could be material toward end of the year. Yeah, is that going forward is also -- it's a huge, huge opportunity even secure whether -- yeah, the whole -- it's part of the whole infrastructure and switch grow moreover fast and a lot of our carrier service providers starting to have a investment in this area also.

Keith Bachman -- BMO Capital Markets -- Analyst

Okay, interesting. Okay. And then Keith one for you. For the guidance of '21, you talked about capex. Any other puts and takes you want us to think about as it relates to OCF or operating cash flow?

Keith Jensen -- Chief Financial Officer

No, not really. I mean, I made the point about inventory, the turns came in for us pretty strong in the fourth quarter, but I think that's a direct reflection of the success that we have in the product revenue line in the fourth quarter. So that was probably better than we expected. I do think during this pandemic era that we'll continue to maintain a somewhat higher levels of inventory. I think that's in our best interest. This extended payment term program, I think that every CFO wants to wanting that down as fast as possible and every distributor wants to hold on to it for dealer life. So that will be an ongoing battle for us throughout 2021 I think.

Keith Bachman -- BMO Capital Markets -- Analyst

Okay. Well, congratulations to the whole team. Good set of results. Thank you.

Keith Jensen -- Chief Financial Officer

Thank you.

Operator

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

Ben Bollin -- Cleveland Research -- Analyst

Good afternoon, Ken, Keith, Peter. Thanks for taking the question. My first question, you've made your aspirations pretty clear in SD-WAN, could you share with us a little bit about aspirations, intentions as you move into SASE in zero-trust, how you see yourself positioned?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

SD-WAN is a part of the SASE offering. What we do is a little bit different than competitor we build within the FortiGate, FortiOS, which also can be offer whether it based on the physical appliance or the virtue software or kind of cloud delivering and that's where the new FortiOS 7.0 give all this flexibility and connect a lot of other part of infrastructure and security service together. So that's where we'll continue to see SD-WAN and keeping growing probably -- by market started probably worth keeping grow like 30%, 40% year-over-year this year.

We do believe we're also keeping gaining market share and at the same time, the 5G is another opportunity come out. We already offered in the new FortiOS 7.0, which also could be a pretty good drive for the additional growth that we have.

Ben Bollin -- Cleveland Research -- Analyst

Could you also talk a little bit about how you envision FortiOS 7 rolling out once available, how backward compatible will it be for legacy appliances? And if you've looked at some of the historical OS refreshes, how long does it take the footprint to roll over as this rolls through the base? Thank you.

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

It's really depend on customer. Some I have to say the channel probably react little bit faster and then there is enterprise then the service provider, sometimes take a little time because some service provider they also have to support in some of that, but we do see this [Indecipherable] a lot of new opportunity. And they also like these that tightly integrate approach whether SD-WAN or SASE which goes security driven networking which through are able then to offer additional service, additional kind of business and protect additional edge, that's why we say you need to protect all different edge together and automate integrate together instead of having different product, different kind of a vendor for each part, which is difficult in liquid automate.

So that's where we see the third response from like there is like 300 new feature and update in this OS to cover quite a broad area and that's we do see customer do need some time to gradually like a trend pickup all this new function, but a lot of them they see the huge benefit of this new function and that's where we see is a huge opportunity for us. But probably toward the second half of the year, we'll see a lot of benefit of it.

Ben Bollin -- Cleveland Research -- Analyst

Thank you.

Keith Jensen -- Chief Financial Officer

Thank you.

Operator

Our next question come from the line of Michael Turits with KeyBanc Capital Markets. Your line is now open.

Eric Keith -- KeyBanc Capital Markets -- Analyst

Hi. This is Eric Keith on for Michael. Thanks for taking the question. Just one from me. Keith, it seems like you got a billings for 4Q assuming some macro headwinds. How does that play out differently than you expected, especially on the product side? And in the end you see deferrals of hardware refreshes in 2020 that might snap back in 2021?

Keith Jensen -- Chief Financial Officer

Yeah, we have such a long product list. I don't think that we really saw deferrals of refreshers that's what the asset concept. I think the -- any -- I don't think Q4 was unusual in terms of what you normally see with other years and by that I mean, I think there was probably some element of the typical budget flush falling through, I think there is probably some element of salespeople working really hard to hit accelerators. And I think there was also some element of deals is simply pushed.

I don't think that Ken kind of made a good point earlier to build on a little bit. I think the SolarWinds event happened so late in the quarter, at least for us and probably for many other security companies. It seems doubtful that that activity really have much impact on the last two weeks of December in the quarter.

I do think and Ken made this point that is certainly raise awareness of security and events like that unfortunately for the world at large creep focus on security matters and the importance of it that people are going to suffer because of it. So I don't know that in terms of the learning to be cautious, if you will, going back to the beginning of your question on guidance setting. I do think there is an element of caution once we came out of second quarter and saw how the pandemic impact close rates and you saw that come through in the guidance setting process in both Q3 and Q4.

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Also, we see a pretty nice growth in SMB, but overall the SMB still have very low percentage leverage whether the network security or cybersecurity, that's where -- including the retail, so that's where we see there still have a huge growth opportunity over there.

Eric Keith -- KeyBanc Capital Markets -- Analyst

Great. Thank you, both.

Keith Jensen -- Chief Financial Officer

Thank you.

Operator

Our next question come from the line of Andrew Nowinski with D. A. Davidson. Your line is now open.

Andrew Nowinski -- D.A. Davidson -- Analyst

Great. Thank you and congrats on a nice quarter. Maybe just starting with a high-level question. So as we think about the mix of your revenue, do you think the SolarWinds attack will create a positive tailwind force more spending in the firewall market? Or do you think you will pressure your product growth as customers perhaps shift spending toward some of your cloud-based subscription solutions?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

I'd say probably they would like to have a more integrate and bigger infrastructure security. So that's where probably -- yes, definitely that SolarWinds is more like a kind of come from the network side. On the other side, they also try to like cover, but the pandemic is whether it's work from home has a lot of other benefit, try to digitalize during this process, which also increased the security need, that's why I said the security spending, kind of on the overall IT spending probably will keep increase this year and that was also helping drive the -- the SolarWinds, just like few years ago, there is a case where [Indecipherable] definitely raised awareness of that the importance of cybersecurity.

Andrew Nowinski -- D.A. Davidson -- Analyst

Great, thanks, Ken. And then just a follow-up. As we think about the growth phase you're entering here this year and your go-to-market strategy to drive that growth, if you look back over the last few years, your playbook has certainly been the lead with the firewall. I'm just wondering in this new growth phase, are you using the same playbook to accelerate your growth or are you seeing more deals come to your way your SEIM products and your virtual solutions and your other subscriptions and perhaps changing your go-to-market strategy to drive that growth?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

That's a few -- in the next few years, the network security market still the biggest market also probably the fast-growing market, not just because there is more connectivity like 5G, SD-WAN or some other part work from home. But also, that's the center of the whole infrastructure security, but also you cannot just -- to network security only you also need to have network security working closely with endpoint with some other infrastructure cloud or some other part together. That's what we call it integrate automated solution to respond to any of these quick change in dynamic industry here. And that's why it's important we keep the organic growth and we also keep develop the product from day one, make it integrate, automate together. It's a little bit different compared to the competitor which whether come from acquisition or some other targets. So it's more challenging to integrate and also keep innovation going forward.

Andrew Nowinski -- D.A. Davidson -- Analyst

Okay, understood. Thank you.

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question come from the line of Gray Powell with TB -- BTIG. Your line is now open.

Gray Powell -- BTIG -- Analyst

All right, great, thanks for taking the questions. And congratulations on the good results. So, maybe circling back on the 5G questions. In past telecom upgrade cycles maybe 3G was too long ago, but looking back at like the 4G upgrade cycle, how did that play through to Fortinet? What kind of tailwinds did you see then? And then how does the 5G cycle feel in comparison?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Yeah, compared to 3G, 4G is more connect people, whether the phone whatever together. The 5G is more connect to the device, and that's also the number of connection probably will increase as may be 10x at least because there is much more device to be connected. And that also kind of more address a lot of industry need whether certain smart city or auto driver or a lot of bigger infrastructure. So that's where we do see a lot of bigger opportunity because so far the network security may be more toward the B2B, toward the business side compared to toward the consumer part.

Thus, we do see a huge opportunity going forward. It's just like a couple of years ago, the SD-WAN. So SD-WAN helping drive a lot of smart connection with application and more dynamic based on application have a different connection there. So that's where the 5G definitely have a lot of additional opportunity, but also bringing a lot of risk to the business there, which need to be protected. And also service provider, we see play quite important role there, which is we have probably the best service provider carrier relation among all the cybersecurity vendor there. So we do see a lot of potential in this area.

Gray Powell -- BTIG -- Analyst

Understood. Okay, thank you very much.

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Thank you.

Operator

Thank you. Our last question will come from the line of Irvin Liu with Evercore ISI. Your line is now open.

Irvin Liu -- Evercore ISI -- Analyst

Hi, thanks for letting me on. I have one question and one follow-up. First, I was wondering if you can perhaps update us on your business mix by customer size, maybe a breakout by enterprise, commercial or SMB? And whether you've seen a shift up or down market and how do you see this mix trending through calendar '21?

Keith Jensen -- Chief Financial Officer

Yeah, I think we had a slide in our Analyst Day in November 2019 that we get -- if it gets a little -- but basically the answer is one-third, one-third, one-third, and then to explain it, a little bit of MSSP gets allocated between them, but you end up with something that's very, very much like that. Small business, small enterprise one-third, mid one-third, enterprise one-third. I think the thing that has been a very pleasant surprise to us throughout 2020 in the pandemic was how well the enterprise -- the small enterprise segment of the business held up. It really did very well.

Irvin Liu -- Evercore ISI -- Analyst

Got it. And for my follow-up. We're now one year into the current pandemic and assuming things normalize in the back half of calendar '21, do you anticipate any changes or shifts in demand or customers buying patterns, assuming a return to normal environment?

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

I think during the pandemic, the customer, especially enterprise customer tend to hold on to the current vendor, especially in the developed country and -- but for us, like whether in the U.S. or some Europe country we are keeping gaining market share. So we do get into a lot of new customer, which will probably take more effort during the pandemic, because it's difficult to meet people or do certain test in there. Once it's open, we do see there is more opportunity, more window open for us, especially with the new hardware, new OS and the new infrastructure. So that also lead us to kind of a little bit toward the -- invest in the growth for us going forward in the next few quarter at least.

Keith Jensen -- Chief Financial Officer

Yeah, I think Ken is spot on with that. I think the quote unquote nice thing about the pandemic is, I think we have a lot of understanding about our business and what to expect in pandemic quarters, and I think that all of us here at Fortinet, I think throughout the country are looking forward to at some point in time, when this herd immunity, there is vaccine and then the other growth drivers kick in. And that seems destined to be sometime toward the second half of this year.

I think we're all very aware of some of those GDP numbers and the year-over-year swings that we're seeing from negative 3% to positive 6% or 7%, those are pretty dramatic numbers, but I think most people's expectation are that that's really going to come when the economies in the country start opening up further.

Peter Salkowski -- Vice President, Investor Relations

All right, thank you, Sarah.

Operator

Thank you.

Peter Salkowski -- Vice President, Investor Relations

We're going to close the call at this point. As you read in today's press release. I'd like to point out to everybody that Fortinet's Accelerate 2021 Virtual Conference will be held on March 9th for the U.S. As part of that conference, we'll be doing an Analyst Day. So, you can register. There's a link in the press release as well as up on the website to register for investors and analysts. So, please do that prior to March 9th, if you're interested in attending that morning event.

In addition, we'll be hosting -- in addition to hosting Accelerate, we're also going to be attending the Goldman Sachs Conference next week on February 10th and the Morgan Stanley Conference on March 2nd. Links to those webcasts will be on our website and available on the Investor Relations -- Investor Events page of our Investor Relations website. Thank you very much for your time today. If you have any questions, please feel free to contact me. Have a great rest of your day.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Peter Salkowski -- Vice President, Investor Relations

Ken Xie -- Founder, Chairman of the Board, and Chief Executive Officer

Keith Jensen -- Chief Financial Officer

Brian Essex -- Goldman Sachs -- Analyst

Shaul Eyal -- Oppenheimer -- Analyst

Tal Liani -- Bank of America -- Analyst

Ben Schmitt -- Piper Sandler -- Analyst

Fatima Boolani -- UBS -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

Brad Zelnick -- Credit Suisse -- Analyst

Sterling Auty -- J.P. Morgan -- Analyst

Adam Tindle -- Raymond James -- Analyst

Ben Bollin -- Cleveland Research -- Analyst

Eric Keith -- KeyBanc Capital Markets -- Analyst

Andrew Nowinski -- D.A. Davidson -- Analyst

Gray Powell -- BTIG -- Analyst

Irvin Liu -- Evercore ISI -- Analyst

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