Fortinet, inc (FTNT) Q2 2021 Earnings Call Transcript

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Fortinet, inc (FTNT 1.00%)
Q2 2021 Earnings Call
Jul 29, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by, and welcome to the Fortinet Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

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

Peter M. Salkowski ` -- Vice President, Investor Relations

Thank you, Katherine. Good afternoon, everyone. This is Peter Salkowski, Vice President of Investor Relations at Fortinet. I am pleased to welcome everyone to our call to discuss Fortinet's financial results for the second quarter of 2021, which we are hosting from inside of our new building. Speakers on today's call are Ken Xie, Fortinet's Founder, Chairman and CEO; and Keith Jensen, our Chief Financial Officer. This is a live call that will be available for replay via webcast on the Investor Relations website.

Ken will begin our call by providing a high-level perspective on our business. Keith will then review our financial and operating results for the second quarter before providing guidance for the third quarter and updating the full year. We will 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 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 outstanding second quarter 2021 results. Billings increased 35% to $961 million driven by solid execution and was the best it has been since 2015. Secure SD-WAN accounts for 14% of second quarter billings. Total revenue grew 30% to $801 million with product revenue up 41%. Product revenue growth was the highest for nearly 10 years. Free cash flow was $395 million, a quarterly record level. With strong business momentum, we remain focused on growth.

Today, we announced expansion of our FortiCare FortiGuard security services, adding a new security service called FortiTrust. FortiTrust security service offer user-based licensing that follow the user across the operations entire security platform. This enable organizations to easily manage and secure acquire our network, endpoint and cloud, which traditionally has been siloed. Initial service level are being offered for zero-trust network access and identity verification. We enhance the current FortiCare security services, which cover all Fortinet Security Fabric product with same level of services to including 24/7 technical support and timely issue resolution.

Additionally, FortiTrust security service has been fine-tuned for different segments with added individual services for enterprise, bundle for commercial and the packages for SMB, leveraging industry-leading threat intelligence from FortiCare Lab.

FortiCare secure service offer market-leading AI-enabled, secured capability that regularly adjust protection across the Fortinet Security Fabric. Today, we announced a new FortiGate 3500F the industries high-performance next-generation firewall. We integrate uTrust newer access and ransomware protection, powered by the Fortinet MG7 SBU the 7,500 app offers an average six times more performance than other competitive products based on our security compute reading. This makes a Fortinet app the best protection for high-speed internal network on base centers. We continue to see the momentum and adoption of our SD-WAN new trust me access and cloud solutions among the, worlds largest service providers.

In May, Fortinet was recognized as the winner of the Microsoft Security Customer Impact award. Last week, Fortinet was named Google Class 2020 Security Partner of the Year, recognized for innovative thinking, outstanding customer service and best-in-class use of our cloud products and services.

Before turning the call over to Keith, I would like to thank our employees, customers and partners worldwide for their continued support and hard work.

Keith F. Jensen -- Chief Financial Officer

Thank you, Ken. And to add to your comments, we should note that as in the prior quarter, billings growth, product revenue growth and total revenue growth, all accelerated sequentially. In fact, all three growth rates were at five-year Fortinet highs and product revenue growth was at its highest in over nine years. Okay, let's start with a more detailed Q2 discussion with revenue. Total revenue of $801 million was up 30% driven by industry-leading product revenue growth of 41%.

The product revenue growth was broad-based across geographies, FortiGate and non-FortiGate products and across use cases illustrating market acceptance and customer demand for our integrated single platform security fabric strategy across customer infrastructures. Our financial strategy includes a Rule of 40 targets. We target the total of the revenue growth percentage and operating margin to be at least 40. In the second quarter, strong demand and execution drove this actual total to be a Rule of 55. FortiGate product revenue growth was 40%, while we continue to see robust growth from our secure SD-WAN functionality.

The majority of the growth was driven by FortiGate revenue from other capabilities, which are embedded in the FortiGate operating system. Non-FortiGate product revenue growth was over 40% for the second consecutive quarter and was driven by from our Integrated Security Fabric products. One additional comment on our product revenue growth, the product revenue growth was a reflection of our continued strong organic growth, and not the result of a few large deals, drawing down backlog, nor an unusual number of delayed transactions from the prior quarter or pulled into future periods.

Service revenue of $503 million was up 24%. Support and related services revenue of $230 million was up 26%, while security subscription services revenue of $273 million was up 23%. Moving to the mix of FortiGate and non-FortiGate platform revenue, FortiGate product and services revenue increased 26%, driven by very strong demand for both branch and high-end FortiGate products.

High-end products included 10 MP7 powered FortiGate models, representing approximately 25% of high-end FortiGate shipments. Our ASIC-driven FortiGates give customers five times to 10 times more computing power than firewalls running on common CPUs. The advanced computing power creates additional speed and capacity to continue to add functionality to our operating system, further driving our price for performance advantage.

The combination of the ASIC Advantage and the common operating system across products can enable vendor consolidation, lowering total cost of ownership and increasing automation. Non-FortiGate products and services revenue grew 39% and accounted for approximately 30% of total revenue, up over two percentage points.The Integrated Security Fabric consists of a complete range, which closed -- reversal for all our hands meeting later on today. So you've got an inside scoop on what Patrice is going to say. We start again, if I may. Non-FortiGate products and services revenue grew 39% and accounted for approximately 30% of total revenue, up over two percentage points.

The Integrated Security Fabric consists of a complete range of form factors and delivery methods, including physical and virtual methods, including physical and virtual appliances, cloud, SaaS and perpetual software, as well as hosted and nonhosted solutions. Together, they provide a range of security solutions and form factors, enabling integrated protection for the hybrid environments and the expanding digital attack surface from network data centers to endpoints to the cloud.

Let's turn to revenue by geo. The summary is on slide 5. Revenue in EMEA increased 34%. The Americas revenue increased 29% and APAC posted revenue growth of 24%. The Product revenue growth for both the Americas and EMEA regions was over 40%.

Moving to billings. Second quarter billings were $961 million, up 35%. We saw strong growth in both the FortiGate and non-FortiGate segment of the Security Fabric platform. The FortiGate segment delivered billings growth of over 30%, accounting for 71% of total billings.

As shown on slide 6, branch and high-end FortiGates posted very strong billings growth. The non-FortiGate segment accounted for over 29% of total billings and delivered billings growth of over 45%, driving a two-point mix shift to non-FortiGate products and services. Given the continued strong performance, we believe our non-FortiGate platform is on a pace to be a $1 billion business this year. Secure SD-WAN billings, represented 14% of total billings and is a key functionality for an integrated SASE solution.

In terms of billings by geo, EMEA outperformed all geos, followed by the Americas and APAC. Europe had a very good quarter, and growth in the Americas was driven by the United States, which was up sequentially by more than 30 percentage points. Latin America continued to recover from the pandemic-induced slowdown, closing billings growth in the mid-20s for the second consecutive quarter.The average contract term was approximately 28 months, up two months from the second quarter of 2020 and one month in the first quarter of 2021. Deals over $1 million increased from 59 to 79, and the pipeline for deals over $1 million continues to look good for the remainder of the year. Secure SD-WAN deals over $1 million increased from 13 to 19.

Moving to worldwide billings by industry verticals. Billings by vertical illustrate diversification in our business model and importantly, suggest the current threat landscape is driving security investments in industries that may have historically shown lower investment levels. For example, the verticals that have historically not been in our top five combined for billings growth of over 75%. Service providers accounted for 14% of total billings and were up 25%.

Moving back to the income statement. Product revenue growth of 41% drove a three point shift in the product and services revenue mix. And along with it, a gross margin decrease of 160 basis points to 77.5%. Product gross margin improved 70 basis points to 61.7%. Services gross margin decreased 160 basis points to 86.9% with data center investments in FX accounting for about 100 basis points of the impact. Operating margin of 25.4% was at the top end of the guidance range despite a 350 basis point headwind from the gross margin decline, a weaker US dollar and increased travel and marketing event costs. We ended the quarter with a total headcount of 9,043, an increase of 17%.

Moving to the statement of cash flow summarized on slide 7 and 8. Free cash flow for the second quarter came in at a quarterly record of $395 million, benefiting from strong revenue growth, good month one linearity and lower capital expenditures. In the quarter, we repurchased approximately 455,000 shares of common stock for a total cost of $92 million at an average share price of approximately $201. The remaining share repurchase authorization at the end of the second quarter was 921 million with the authorization set to expire at the end of February 2022. We ended the first half of the year with total cash and investments of $3.4 billion, an increase of $1.7 billion. The increase includes the proceeds from our $1 billion investment-grade debt issuance during the first quarter of 2021.

DSOs returned to pre-pandemic levels, decreasing seven days year-over-year and 15 days quarter-over-quarter to 66 days. Inventory returns increased to 2.7 times from 2.2 times, reflecting strong product sales in the quarter. Capital expenditures for the quarter were $24 million, and we have started to move into the new Sunnyvale building. We estimate third quarter capital expenditures to be between $65 million and $75 million, which includes a $30 million payment for the new campus building. We estimate 2021 capital expenditures to be between $175 million and $200 million. With the acceleration of the growth and a little more understanding of the post-pandemic work patterns, we're turning our attention to reviewing our facilities footprint and the needed office and warehouse capacity in the US and Canada. As we work through this process, it is possible that our estimated capital expenditures over the next few quarters will increase as we prepare for the next phase of our growth.

Looking forward, our goal remains to balance growth and profitability. And given the growth opportunities that we believe lie ahead, we continue to expect 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, increased sales effectiveness, the growing success with a single integrated security platform strategy and the convergence of security and networking, the response to the current threat environment and our development efforts, which include continuing to invest in our ASIC advantage, which enables a shared operating system across the Security Fabric platform drives our price for performance advantage, increase the capacity to add features and functions while maintaining price points.

And now I can review our outlook for the third quarter, summarized on slide 9, which is subject to disclaimers regarding forward-looking information that Peter provided at the beginning of the call. For the third quarter, we expect billings in the range of $940 million to $960 million; revenue in the range of $800 million to $815 million. Non-GAAP gross margin of 77.5% to 78.5%, non-GAAP operating margin of 24.5% to 25.5%, which includes an estimated 200 basis point headwind from foreign exchange and increased travel and marketing costs.

Non-GAAP earnings per share of $0.90 to $0.95, which assumes a share count of between $169 million and $171 million. We expect a non-GAAP tax rate of 21%. With that, we are raising our 2021 guidance and expect billings in the range of $3.870 billion to $3.920 billion, which the midpoint represents growth of approximately 26%. Revenue in the range of $3.210 billion to $3.250 billion, which at the midpoint represents growth of approximately 24.5%.

Total service revenue in the range of $2.045 billion to $2.075 billion, which represents growth of approximately 23% and it implies full year product revenue growth of approximately 28%. Non-GAAP gross margin of 77% to 79%, non-GAAP operating margins of 25% to 27%, which includes an estimated 200 basis point headwind from foreign exchange and increased travel and marketing costs.

Non-GAAP earnings per share of $3.75 to $3.90, which assumes a share count of between 168 million and 170 million. We expect our non-GAAP tax rate to be 21%. We expect cash taxes to be approximately $90 million. Along with Ken, I'd like to thank our partners, customers and the Fortinet team for all their hard work, execution and outstanding success in the first half of 2021.

I'll now hand the call back over to Peter for the Q&A session.

Peter M. Salkowski ` -- Vice President, Investor Relations

Thanks, Keith. Operator, Catherine, we're ready to open the call for questions, please.

Questions and Answers:

Peter M. Salkowski ` -- Vice President, Investor Relations

[Operator Instructions] And our first question is from Brian Essex of Goldman Sachs. Please go ahead.

Brian Essex -- Goldman Sachs -- Analyst

Great. Thank you for taking the question and congratulations on the results. Really nice set of results this quarter. Maybe to start off, Ken, I know you've talked for years about not having exposure to firewall refresh cycles within your business. Could you maybe unpack a little bit the product revenue performance? Are you starting to see perhaps some exposure to the refresh cycles of others? Is this more rip and replace infrastructure upgrades or expansions? Maybe if you can maybe give us a little bit of an understanding of what's going on behind the product revenue growth this quarter?

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

Yes. Thanks, Brian. Great question. I think the industry whether during the pandemic or after the pandemic probably in some kind of a structure changing. It's no longer the traditional border kind of firewall will be enough. You have to expand into the WAN side like Secure SD-WAN and 5G and also internal has to do like the internal segmentation, replacing the switch with secure switch and the Wi-Fi to prevent all this kind of resin of kind of internal attack. So that's where -- and also a consolidation also going on and also need to have an integrated like a different part of infrastructure to integrate together to protect the whole attack from multi kind of tech service protection there. So that's where we see it's a big change for the whole architecture of, how to architect the new protection architecture to protect the whole infrastructure security there.

So that's probably different than just refresh the traditional firewall, but it's the new expanded infrastructure need to be -- have all protection there. So that's what we see like the product we announced today sort of 100 is more go inside the high-speed network environment to do all this kind of internal segmentation, within data center protection and all these kind of things.

And then also, we see very strong growth, whether the CQS brand and also the 5G world. That's a lot of brand trial face working home solution there. That's where the unit growth probably even much faster there. So we see the whole infrastructure being changed all ecall secure-driven networking start kind of more adopt by both enterprise and also a different kind of vertical.

Brian Essex -- Goldman Sachs -- Analyst

Got it. That's super helpful. Maybe to follow up, service provider was slightly lower as a percentage of revenue this quarter. I understand that on the product revenue side, in the high end, you saw a lot better growth. But is that -- should we think about that segment, particularly to the extent that they might be selling through for SASE or you might be getting better traction with OPAQ. How should we think about growth of the service provider market? Is that still to come? Or is that a more stable kind of mid-20s grower segment for you?

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

Seen a ramp-up stage, still in the early stage of ramp-up compared to last quarter, probably like down about 15%. This quarter, grew about 25%. So starting ramp up, like I mentioned, they are kind of building infrastructure, whether for the 5G, SD-WAN or SASE, which we have a different strategy.

Our SASE strategy actually quite a different probably very differentiated from other player. So we have a dual strategy. We are probably the only one working with service provider to building their SASE. And at the same time, like the service revenue, we kind of lower the margin it be there also investing some on infrastructure if some customers don't have a service provider or want to work with that directly, we also have a kind of SASE solution there, which also integrate with the DOS. Inside for the DOS, they have a building SASE trust network access and some other parts, it's also kind of a different the competitor.

And eventually, we also hope we can use an ASIC or a salary to add additional computing power to our kind of on-site solution there. So that's where we feel it's a long-term investment. But once we have it, we have a huge advantage compared to other competitors.

Brian Essex -- Goldman Sachs -- Analyst

That's helpful color. Thank you very much and congrats again.

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

Thank you.

Operator

Our next question from Hamza Fodderwala of Morgan Stanley. You may go ahead

Hamza Fodderwala -- Morgan Stanley -- Analyst

Hamza Fodderwala>: Hey, guys. Thank you for taking my question. I had a follow-up regarding the prior question on some of the drivers of product revenue growth. So Ken, as your customers start coming back into the office or as we move into this more hybrid work environment, you talked a lot about these larger network transformation deals. I was wondering, what do you see the pipeline looking like for those larger deals heading into the back half and beyond? And do you think that some of the things that we saw in the past 12 to 18 months is going to be an accelerant for those more larger infrastructure type deals?

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

Yeah, we see the pipeline very strong for the larger multiple product deal, which like approach -- I mean, cover multiple part of infrastructure. And also, the product revenue growth like 41% is also where strong, we feel that our product is really different than the traditional or some more competitors using the CPU only.

So we have the latest CPU for our industry, but also we developed ASIC in the last 21 years. Just like the product we announced today, the 3500F based on our calculation, we call secure computing region basis, for the same cost, what's the function performance compared to other competitors or industry average.

So we'll have a six better performance basically like -- because the computing power vent is huge from our own ASIC. So that's we're changing the landscape of like the product or whether the network security product or some other leveraged ASIC. This huge computing power gave us much more function and better performance that can easily replace a lot of our competitors.

At the same time, we did see the expansion to the addressable market, whether we will or home or kind of a secure internal network inside the company, inside data center, which also drives a lot of high-end product growth. So the high product percentage also, we see probably pretty high, maybe the highest in the last few quarters or even last few years.

Hamza Fodderwala -- Morgan Stanley -- Analyst

Got it. That's helpful. And maybe just a follow-up question for Keith or Ken. Keith, you mentioned the operating margin in the back half having about 200 basis points impact from FX.

I was just wondering, just on your spending plans around hiring, what you're seeing there? It's obviously very competitive market for talent these days. And I'm wondering if that's been factored at all into your guide?

Keith F. Jensen -- Chief Financial Officer

Yeah. I think we obviously pay attention to our recruiting and to our attrition rates. I think the metric that we gave was that our overall headcount increased 17%. I would offer that the sales headcount actually grew significantly more than that. So I don't -- I think that we're in a bit of a sweet spot and it kind of relates to what Ken was saying in just a moment ago in terms of the success that we're having.

I think you could read through to the high end FortiGate is probably being data center deployments and probably taking advantage of some competitors that are going through a refresh cycle. And at the same time some of the branch FortiGates, maybe reflective of digital transformation, and I think the audience of salespeople, understand that and they see the opportunities there.

Hamza Fodderwala -- Morgan Stanley -- Analyst

Got it. Thank you.

Operator

And sir our next question from Sterling Auty of JPMorgan. You may go ahead.

Sterling Auty -- JPMorgan -- Analyst

Yeah. Thanks guys. For my one question, I just wanted to dive into, Keith, in your prepared remarks you made the comment that the majority of growth was driven by FortiGate, are driven by FortiGate revenue from other capabilities embedded in the operating system.

I wondered if you could kind of peel back the onion there. What does that mean? And what capabilities were you referring to that were in particular demand in the quarter?

Keith F. Jensen -- Chief Financial Officer

Yeah. I think that we tried to make the point in the past that the -- some people think about the firewall somewhat simplistically, we probably track close to 12 to 15 different firewall use cases whether you want to talk about micro segmentation, IPS, et cetera.

All of those -- the totality of those -- the growth there was, contributed more, if you will, than SD-WAN. SD-WAN, itself still obviously contributed very nicely at 14% of our total billings, which probably puts us close to about 35% or probably 55% growth.

So I think there's a long list of things that a firewall is used for. And we were very pleased with the success that we saw throughout that suite of offerings.

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

Also, especially the FortiOS 7, we are building and zero trust network access and building SASE there. We see very strong interest in this area, both from the service provider or enterprise on work-on-home solution there.

Sterling Auty -- JPMorgan -- Analyst

Understood. Thank you.

Keith F. Jensen -- Chief Financial Officer

Thank you.

Operator

Our next question from Rob Owens of Piper Sandler. You may go ahead.

Rob Owens -- Piper Sandler -- Analyst

Great. Thank you guys for taking my question. And following the lead of Mr. Auty, I'd like to ask one question. Could you elaborate a little bit on your commentary around some of these non-traditional verticals that are starting to tick up meaningfully in spend. Is this more onetime in nature or these verticals are just starting to wake up to some of the security issues that we're reading about in the media every day. And to that and maybe you could comment a little bit around your OT success in your strategy there? Thanks.

Keith F. Jensen -- Chief Financial Officer

Yeah. And Rob, I think you did a very good job of laying all the dots to connect there. We talked -- we're looking at industries or verticals such as manufacturing, transportation, energy, utilities or what have you, and to see the dramatic growth that we saw in that segment of the business. We've historically talked about our top five financial services, government, service provider, tech and retail. And they've been very consistent about that 65%, 66%. But we saw a significant shift this quarter to those others, and it was just the sheer growth that we saw on those others. And the point that you alluded to, OT. OT performed very, very strongly in the quarter. And I think that's consistent with what we saw with that vertical growth and those other verticals that I just mentioned.

Rob Owens -- Piper Sandler -- Analyst

Thank you very much.

Operator

Our next question is from Shaul Eyal of Cowen and Company. You may go ahead.

Shaul Eyal -- Cowen and Company -- Analyst

Thank you. Also single question on my end. When we look at the building up side, revenue up that you printed, can you impact for us the mix between new logos and the current installed base? Any qualitative color and discussion will be appreciated?

Keith F. Jensen -- Chief Financial Officer

Yeah. Shaul, it's Keith. New logos were very strong in the quarter, probably up about 50% year-over-year. And I've given numbers in the past to kind of suggest that 5,000 customers that we had in the quarter, obviously, a very strong quarter is going to be north of that. First part of the response. Second part of the response, you would not normally expect to see that the new customers in the initial quarter would be significant contributors to revenue but rather contributors to revenue growth over a longer period of time. But there was a very strong performance from the new logo segment in terms of customers that signed up with us in the quarter.

Shaul Eyal -- Cowen and Company -- Analyst

Thank you.

Operator

Our next question from Saket Kalia of Barclays. Please go ahead.

Saket Kalia -- Barclays -- Analyst

Okay. Great. Hey, thanks for taking my question here. Ken, maybe for you. You touched on this a little bit in your prepared remarks, but can you just talk a little bit about the new pricing options that you announced recently? Specifically, do you feel like there is demand for that per user pricing for kind of access to the broader FortiCare and FortiGuard portfolio? And what was sort of some of the early feedback as you maybe tested those options?

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

We do see, going forward, especially like work from home or remotely the producer lessons, which can cover multiple devices, including the mobile operating own device to work from home and also internal inside enterprise company there like cover multiple like not just the FortiGate as they go through the zeta network access, but also some other like a web or may or some other application or kind of part of infrastructure data center, they need access. So that's per user license will make it much easier for the user, for the customer to really using the security service in the multiple part infrastructure, carbon multiple product there.

So that's where we feel this is also very important and on top of the current FortiCare, which cover all the products we have and also the FortiGuard cover the product need a real-time update on the subscription, all these kind of things there. So we do this for trust is probably the trend in the future, but still needs some time to ramp up especially we see the Zero Trust network access starting to have a pretty quick growth opportunity, which we -- Forticare have all this building. And also the identity, how to kind of make sure the identity across multipart infrastructure and easily kind of management user, we do all this to service also kind of get very important. Assuming some time to ramp up, but we do see there's a huge increase in demand from the customer. That's also the reason we launched this FortiTrust service.

Saket Kalia -- Barclays -- Analyst

Got it. Thank you.

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

Thank you.

Operator

Our next questions are from Michael Turits of KeyBanc. Please go ahead.

Michael Turits -- KeyBanc -- Analyst

Hey everybody. Nice quarter, of course. I think for both Keith and for Ken. A lot of people have been circling around and trying to understand the strength and the upside. But I guess I'd like to just try to compare where the demand was last year during 2020 to where it is this year and why it seems so much stronger? Has there been a shift say, from remote access focus to more breach? Or what has changed both qualitatively and quantitatively that we're seeing this acceleration?

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

I think last year, they're probably more like rush supporting whatever can make it working remotely. But this year, they definitely see the infrastructure to be operating to be changed to more support in this long term. So that's where we see a lot of new infrastructure design and how to support not just work remotely, but also secure the whole infrastructure different part of infrastructure from the WAN access to the internal segmentation and also even the 5G or SD-WAN or internal WiFi. So there is a lot of secure architecture cover multiple parts of our product. It's a very strong interest. And also Keith mentioned the OT some others is because of whether the 5G or TOT, also that part also rather strong.

Keith F. Jensen -- Chief Financial Officer

Yes, Michael, I think I would agree with Ken completely and maybe just to add, if you think back about Q2 2020 specifically, at least for us, it was a quarter that was characterized probably by a lot of software. We did very well with our software in the second quarter last year. But on the flip side, anything that requires somebody to be on-premise in a data center or taking on a large deployment or phase deployment or something like that. Q2 of last year really wasn't much of that. Obviously, today, I think it's a year later; it's a very, very different environment in that regard. And I do think you're also seeing the threat environment and things like the OT part of the business do very, very well.

Michael Turits -- KeyBanc -- Analyst

Great. Thanks guys.

Operator

Our next question from Jonathan Ho of William Blair. You may ask your question.

Jonathan Ho -- William Blair -- Analyst

Hi. Good afternoon. I just wanted to understand, if you're running into any issues around the supply chain or potential chipset shortages. And does this lead to any potential impact to your order cadences at all?

Keith F. Jensen -- Chief Financial Officer

Hello Jonathan, I'd love to say that we're completely immune to chip shortages and such, but I can't say that. Yeah, I do think that as we talked about last quarter, the fact that our inventory turns of around two are suggested that we have six months of inventory on hand.

We do and some of the chip manufacturers, we're pretty focused on a 52-week lead-time. I think I feel very, very good about how the manufacturing and operations team executed in the second quarter, and how they're going about things for the third quarter and for the rest of this year.

I would offer that as part of the forecasting process and the guidance setting process, that has become a more significant input, if you will, into that process and making sure that we've accounted for it in terms of our estimates of any challenges that we may have as we move through the rest of the year.

Jonathan Ho -- William Blair -- Analyst

Thank you.

Operator

Our next question is from Ben Bollin of Cleveland Research. Sir, you may go ahead.

Ben Bollin -- Cleveland Research -- Analyst

Yeah. Good afternoon everyone. Thanks for taking my questions. Ken, historically, when there are periods like this where you see accelerated purchase behavior and a little bit of a run on supply, if you will.

Inevitably, there's a bit of a digestion period after the fact as customers learn how to deploy and consume what they just purchased. Could you talk a little bit about how fabric in the broader organization, either in sales or the channel is addressing or thinking about that potential risk into the future?

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

Yeah. Definitely more and more customers see the benefit of the fabric Fortinet Fabric, which come multiple products in maid automate together. So that's also making the non-FortiGate growth faster than the FortiGate and will be over $1 billion will be over $1 billion this year.

So it's customer by this multiple product, most of them are already like whether they are a customer or already test them on the part. And then, just keep expanding beyond what the initial purchase there.

So we do see the interest as much stronger and the non-FortiGate also keeping growth much faster than the FortiGate, which keeping expanding from whatever the current installation base within the big enterprise.

That is also the Gartner forecast see the integration, the consolidation starting kind of more and more important for this big enterprise. Because to manage multiple products from different vendors is a much higher cost compared to like the platform approach, which can multiple products cover different part infrastructure, also integrate automate together with the Fortinet Fabric product we have.

Keith F. Jensen -- Chief Financial Officer

Ben, it's Keith and to kind of build on Ken's comment, I think the -- that is the business strategy, right? If we look at our installed base with customers and see how their adoption progresses in terms of the number of fabric products that they had, over what period of time, we would certainly expect that to continue on.

And then if you look in the current quarter, the new customers that we added, those are largely -- those are buying firewalls, if you will, and maybe one or two things, if you will, from the fabric suite. But as we would expect them, because I understand they have to digest and install the firewalls. But as we get -- as they get to know and understand our product and our integration strategy more and more, that we'll have the opportunity to come back in and sell them additional products and services as we go forward.

Ben Bollin -- Cleveland Research -- Analyst

Thank you.

Operator

And our next question from Gray Powell of BTIG. You may now ask your question.

Gray Powell -- BTIG -- Analyst

Okay. Great. Thanks. Yes. So I'd like to stick with the topic of non-FortiGate and fabric and cloud and just sort of the strength that you've been seeing there. Within fabric and cloud, what are like the biggest product components that have the most momentum? And then how should we think about just the sustainability of that demand longer term?

Keith F. Jensen -- Chief Financial Officer

The non-FortiGate, we have almost 30 products, most of the developed internally and so it's super not give up any individual product because it's up and down quarterly and also pretty much all contribute kind of to the growth. We don't see any one or two too much kind of compared to the others. So that's probably maybe sometime later, we can start get certainty out.

But at this stage, we do see -- it's also dependent on the customer environment, depending on the sales supporting like some of them like to have an email, we can with FortiGate some is a website, some is endpoint, some is like a network access control or some kind of sandboxing and cloud product. It's quite a wide cage of kind of even cover all these like 2030 product. So that's where it's very difficult to break out and then try to see the trend. But we do see that the common message really consolidate, integrate, automated approach definitely has a huge benefit compared to our separate product come from different vendors.

Gray Powell -- BTIG -- Analyst

Got it. That's really helpful. Thank you very much and congratulations on the great results.

Keith F. Jensen -- Chief Financial Officer

Yes. Thank you

Operator

[Operator Instructions] And our next question from Adam Tindle of Raymond James. You may now ask your question.

Adam Tindle -- Raymond James -- Analyst

Okay. I wanted to ask a strategic question to Ken. You had record quarterly free cash flow, so keeps doing a poor job at managing that more efficient balance that you talked about at the Analyst Day. But all joking aside, Ken, you've got significant liquidity available, both on the balance sheet and you can imagine lenders beating down your door. So if you could double click on the key tech areas that you would consider to enhance the value proposition. I would just imagine that SASE is accelerating. You're the SD-WAN leader. For example, some of those secure web gateway players in the private markets are more mature and would that be an area of consideration or any other key areas that you would consider enhancing the value proposition inorganically? Thank you.

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

We're definitely keeping closely watching out of the change in the industry and also new technology ever since. But also, we want to keep the innovation at the culture we have in the last 21 years and also keep the organic growth very strong. I probably the cash level and the investment strategy to Keith to cover that.

Keith F. Jensen -- Chief Financial Officer

Yes. I think for us, I mean, we look at our R&D spending as a source of investment, not a traditional capital allocation, but we are -- have historically been a buy versus pardon me, a build versus buy a company, and that is to -- we feel strongly about the importance of having the platform to be integrated. You do see us doing tuck-in acquisitions. Sometimes it takes a little bit longer to bring to market perhaps because the technologies are things that we want to work with a little bit more before we bring them out. So I don't think that's a surprise.

I don't know that, that precludes us from doing something larger in the future, but we'll look at those opportunities as they come up. The continuing focus will be finding the opportunities to rebalance the balance sheet with a little bit of and deploying some of the cash that we raised with debt offering, perhaps to repurchase some share buyback, if you will. And at the same time, also, as we look out for the next three to five years, and we anticipate continued growth, perhaps a little more investment, if you will, in our facilities footprint.

Adam Tindle -- Raymond James -- Analyst

That's helpful. Thank you.

Operator

Our next question from Irvin Liu of Evercore ISI. Sir, you may go ahead.

Irvin Liu -- Evercore ISI

Hi. Thanks for letting me in. And I would also like to add my congratulations on the great quarter. I had a question on SD-WAN. I was wondering if you can perhaps unpack some of the drivers behind the continued momentum here. Whether the current hybrid work environment has been a contributor behind this strength? And can you help us understand what workers gradually returning to offices means for you?

Keith F. Jensen -- Chief Financial Officer

Irving, good question. The SD-WAN, we still see very, very strong demand and also huge potential. The approach we have integrated security from our beginning and leverage the FortiGate has a huge computing power part of the FortiOS, FortiGate. We see a huge advantage compared to some other competitor, whether using the universal CPU or some other approach, which is difficult to add any function because the company power limitation from a low-cost CPU. So that's where we do believe we will be the leader, the number one leader in SD-WAN space. If not now, definitely will be soon. And SD-WAN offer kind of huge advantage like reliability, the cost saving compared to the traditional networking protocol NPLs or some other part.

And also a lot of service provider also starting kind of more focused on the SD-WAN or 5G, some other part, which also kind of see in our kind of long-term bigger picture, we call secure-driven networking, which will be compared to today, all the networking just through the connection and the speed and then the secure network also need to look an application, the content, the device behind the user, behind an even different kind of location there. So that's where we see how the kind of security function and on top of networking has huge potential and which SD-WAN, the security SD-WAN also just one part of it, but also the secure 5G and also internal secure switch in secure Wi-Fi, we do see a lot of potential to keep in security cover the whole infrastructure.

Irvin Liu -- Evercore ISI

Got it. Thank you.

Keith F. Jensen -- Chief Financial Officer

Thank you.

Operator

Our next question from Imtiaz Koujalgi of Guggenheim Partners. Sir, you may go ahead.

Imtiaz Koujalgi -- Guggenheim Partners -- Analyst

Hey guys. Thanks for taking my question. I had a question on the attach of support and subscription to your partner this quarter because it looks like you had strong momentum in product our strong billings momentum also. It looks like the upside in product didn't lead to maybe sort of similar upside in billings. Was there a difference in product mix, which led to difference in attach rate between subscription and support this quarter?

Keith F. Jensen -- Chief Financial Officer

No. I think we track our attach rates and our renewal rates, if you will, within those bands. You've seen at the analyst day of plus or minus 2%. And I think that we were comfortably inside those bands. So there was nothing unusual in that regard. I think that the services billings in total were probably -- and if we go back in check, that's the best quarter that we've had in four years. So I feel -- I think we feel good about both the services and the product performance in the quarter.

Imtiaz Koujalgi -- Guggenheim Partners -- Analyst

Got it. And just one follow-up. You gave us the mix of billings between FortiGate and non-FortiGate, is that had the same kind of mix you have in the product line also. The 70-30 roughly, is that the mix of non-FortiGate and FortiGate in the product line? Or is that mix different for product?

Keith F. Jensen -- Chief Financial Officer

Yes. I don't have that number in front of me, but I don't have a reason. I don't recall them being significantly different we've looked at them, and I'm trying to recall what we made in the script just a moment ago in terms of product revenue. Yes. I think we've offered FortiGate product revenue growth in the script as well as non-FortiGate product growth. And we said they were both FortiGate was 40% and non-FortiGate was over 40%.

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

Those are growth rates. We haven't given a breakdown by mix for the two per product. We haven't given FortiGate product and non-FortiGate product as a mix, we haven't given.

Imtiaz Koujalgi -- Guggenheim Partners -- Analyst

Got it. Very helpful. Thanks guys.

Operator

Our next question is from Patrick Colville of Deutsche Bank. You may go ahead.

Patrick Colville -- Deutsche Bank -- Analyst

Thank you so much for taking my question. I mean 41% product growth is extremely impressive. I guess the question is we're fielding from investors around the cyclicality or kind of, I guess, whether it's secular growth. And so could you just help us understand where the onetime benefits because of recent hacks or cause some recent events or post coronavirus that led to this kind of very strong number? Or are you feeling that the following market, there are some secular dynamics that we should be aware of?

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

Yes, we do see a lot of products starting to go into the -- a lot of the new part of our infrastructure or kind of a new area. And that has also, like Keith mentioned, besides the top five vertical, we do see the other vertical grow faster, much faster than the top five vertical is the government service provider, finance service, education, high tech, something like that. But it's -- but also like among infrastructure, we do see like whether deploy on the WAN side, on the whatever the Smart City or some other kind of internal infrastructure within data center or even work-from-home. There's a quite a broad kind of like a buying pattern compared to before.

And that's also we do believe we eventually will drive the additional service because once the product revenue go up and the user service revenue will come in later. And also plus the introduction of the new FortiTrust service we feel also add additional layer of potential service for the future. It's definitely not -- definitely the simpler like I mentioned earlier, we see the change of the security infrastructure. It's not kind of refresh or replace the traditional firewall, which also, from time to time, need to be upgraded because the network has faster and faster, but also expanding into the new infrastructure part and also kind of a new area or kind of grow faster than the traditional medical finance service or some other part.

Keith F. Jensen -- Chief Financial Officer

Yeah. I'd just add to Ken's comments. I think it was a quarter and it has been for a while now that we just saw a lot of tailwinds. The tailwinds included whether it was SD-WAN or OT, as an example.

The refresh opportunity, if you will, is really an opportunity for us to review as an opportunity to displace the incumbents as compared to Fortinet that has 500,000 customers in 70 different firewall models. And we even today, we announced a new firewall in our press release.

It's not as if historically, you've seen blips with us in terms of spikes from refresh. But on the flipside, some of the competitors, the legacy players have a shorter list of customers and a shorter list of products. And maybe you're not doing as well in Gartner Magic Quadrants as we are. So we view that as an opportunity. I do think that other tailwinds that came into the quarter, we talked about the verticals Ken mentioned it again. And also when I look at our customer sizes, whether SMB all the way to the Global 2000 did very, very well.

I think one thing that stood out for us was the mid-enterprise or the commercial part of the business. That came on very, very strong in the quarter as well. So I think there was a long list of tailwinds for us that worked in our favor on that product revenue growth number.

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

Yeah. Also, the few, the reset introduction of the new product, the competing call advantage come from ASIC is bigger and bigger compared to other competitor, which not only helping like replacing some of their installation base, but also expanding the new area the internal network in high-speed environment, but also has a much more function beyond the traditional network security like our VPN like we mentioned, whether from zero-trust network access also more like SASE or other part like SD-WAN and the 5G security, which none of the traditional firewall have.

And that's also what drives additional like sales on the product and also the future service, which is not refresh compared to the traditional firewall, which they don't have that function or don't have the computing power to keep out additional function of the current performance demanding. So that's where we feel the strategy we have leveraged ASIC power advantage and give us additional function and additional function and additional performance, much lower cost and starting working quite well.

Patrick Colville -- Deutsche Bank -- Analyst

Great. Thank you so much.

Keith F. Jensen -- Chief Financial Officer

Thank you.

Operator

Our next question is from Tal Liani of Bank of America. You may go ahead.

Liani -- Bank of America -- Analyst

Hey great. Thank you. Great, I want to talk about gross margin. If I'm correct, and if I'm not, it's not going to be the first time. But if I'm correct, your gross margin had gone down about 140bps sequentially.

And I also checked it versus consensus. Its lower -- 100bps than consensus this quarter, next quarter and 200bps below consensus for the year for the guidance, so -- do I have a mistake in my calculation? Or if not, can you elaborate on gross margin? Why is it lower sequentially in the guidance?

Keith F. Jensen -- Chief Financial Officer

Yeah, I think what you're seeing, Tal, is the mix shift, right, the product mix shift versus the services mix shift. You can do some pretty simple math in the second quarter, and you can get to -- when you have 41% product revenue growth, it's 61%, 62% gross margin versus the services that's fairly constant at 23% and 88% gross margin.

That 25% swing in gross margin. When you take that back and you look at a 20-point or 25-point over performance in product, it works out to be just about one point, maybe just a little bit north of one point on the gross margin line.

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

Yeah. Also, you can look at the product gross margin line.

Keith F. Jensen -- Chief Financial Officer

Yes. Also, you can look at the product gross margin, we actually improved year-over-year. Even the cost kind of increase, but we do improve the product gross margin. And also, we do believe with the product growth of 21%, we can have a lot of future growth in the service. That's also the reason we enhance the 4-tier and FortiGuard and FortiTrust, which we do believe we're keeping -- making the future -- I mean, the service starting to grow faster going forward.

Liani -- Bank of America -- Analyst

Is there any change in the pricing environment?

Keith F. Jensen -- Chief Financial Officer

There's no change in the discounting. Discounting for the quarter was neutral for us, if you will. We have taken certain steps as we look forward to some of the changes in the cost structure that we're seeing from our suppliers. And we've taken certain steps in terms of our own pricing going -- have not actually hit yet, but they will hit in time for when we actually see those costs in our income statement.

Liani -- Bank of America -- Analyst

Can you elaborate on the last point? What does it mean? So do you expect the margins to decline? Or do you expect to increase prices in anticipation?

Keith F. Jensen -- Chief Financial Officer

I don't expect -- I do not expect margins to decline, no, beyond what will happen with the mix shift, if you will, between products and services, right? To the extent we continue to over perform in the product line the way we just did, it's going to put pressure on the gross margin line. But keep in mind, the operating margin came in right at the high end of the range. So I think we successfully managed that. And it's certainly very consistent with what we foreshadowed earlier in the year, where we said within our framework, this was a year in which we would tilt toward growth. We obviously did that putting up 35% billings growth and 41% product growth, and at the same time, delivering 25% operating margin plus, right?

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

We also did more investment on the infrastructure, which is kind of making the service revenue gross margin lower a little bit, but also will help in the future additional service come in.

Liani -- Bank of America -- Analyst

Great. Thank you.

Operator

Our next question from Ittai Kidron of Oppenheimer. You may ask your question.

Ittai Kidron -- Oppenheimer -- Analyst

Thanks. And great results as well guys. Ken, I was hoping you kind of -- you gave a lot of great color on the backdrop and what you're doing and how you're executing well in the field. But maybe you can tie it up also with the competition discussion. Maybe you can kind of help us understand what you're seeing from your competitors right now. And who do you see is most vulnerable for share loss? It's clear that you're going to continue to gain share in this marketplace for the foreseeable future. But who do you see are -- is the more vulnerable vendors here that are likely to see to you and others that bring to the table what you can bring to the table?

Keith F. Jensen -- Chief Financial Officer

Go ahead.

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

And -- but we just have some long-term strategies investment which give us more advantage whether from the ASIC chip, which we started to build 21 years ago are starting building other part of fabric ago are starting building other part of fabric product, which integrate automate from day one compared to competitor more comfort acquisition makes it very difficult to do the integration and automation and maintenance and organic growth there.

But on the other side, we do see the certain market shift changing. We also want to take the time like our SASE strategy. We have probably the only vendor working with a service provider to see their SASE need long-term good product for them at the same time, building some infrastructure as some other thing integrate within the FortiGate for the OS is a single OS product can cover both the SASE access or some other part like SD-WAN security, making the product kind of a more easy for customers to deploy and seeing the big environment, faster environment, much-much better, so, that as we continue to have this kind of a lot of long-term strategy, and we do see the -- will give us like a long-term benefit going forward.

Ittai Kidron -- Oppenheimer -- Analyst

Very good. Make sense. Thanks guys.

Keith F. Jensen -- Chief Financial Officer

Thank you.

Operator

Speakers that would be our last question for this call. And I'll turn it back over to Peter Salkowski. Sir go ahead.

Peter M. Salkowski ` -- Vice President, Investor Relations

Thank you, Catherine. I'd like to thank everyone for joining the call today. Fortinet will be attending the following investor -- virtual investor conferences during the third quarter.

We're doing the Oppenheimer Conference on August 10th and KeyBanc on August 11th events with presentations will be webcast and those webcast links are going to be up on our website or actually they're already up on our website as of now.

If you have any questions following this call, please feel free to reach out to me.

With that, have a great day. And take care, everyone.

Operator

[Operator Closing Remarks].

Duration: 61 minutes

Call participants:

Peter M. Salkowski ` -- Vice President, Investor Relations

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

Keith F. Jensen -- Chief Financial Officer

Brian Essex -- Goldman Sachs -- Analyst

Hamza Fodderwala -- Morgan Stanley -- Analyst

Sterling Auty -- JPMorgan -- Analyst

Rob Owens -- Piper Sandler -- Analyst

Shaul Eyal -- Cowen and Company -- Analyst

Saket Kalia -- Barclays -- Analyst

Michael Turits -- KeyBanc -- Analyst

Jonathan Ho -- William Blair -- Analyst

Ben Bollin -- Cleveland Research -- Analyst

Gray Powell -- BTIG -- Analyst

Adam Tindle -- Raymond James -- Analyst

Irvin Liu -- Evercore ISI

Imtiaz Koujalgi -- Guggenheim Partners -- Analyst

Patrick Colville -- Deutsche Bank -- Analyst

Liani -- Bank of America -- Analyst

Ittai Kidron -- Oppenheimer -- Analyst

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