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Fortinet Q4 2021 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing

Participants

Corporate Executives

  • Peter Salkowski
    Vice President, Investor Relations
  • Ken Xie
    Founder, Chairman of the Board, and Chief Executive Officer
  • Keith Jensen
    Chief Financial Officer

Presentation

Operator

Hello. Thank you for standing by, and welcome to the Fortinet Fourth Quarter 2021 Earnings Announcement Conference Call. [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. Please go ahead.

Peter Salkowski
Vice President, Investor Relations at Fortinet

Thank you, Josh [Phonetic]. Good afternoon everyone. This is Peter Salkowski, Vice President of Investor at Fortinet. I am pleased to welcome everyone to our call to discuss Fortinet's financial results for the fourth quarter and full year of 2021. 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 via replay via our webcast on our Investor Relations website.

Ken will begin our call today providing a high-level perspective on our business. Keith will then review our financial and operating results for the third quarter before providing guidance for the full year -- for the first quarter and full year of next year. We'll then open the call for questions. During the Q&A, we ask that you please keep your questions brief and limit yourself to one question to allow others to participate.

Before we begin, I'd like to remind 1everyone 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 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 accompany today's remarks, both of which are posted on the Investor Relations website. Lastly, all references to growth are on a year-over-year basis unless noted otherwise.

I'll now turn the call over to Ken.

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

Thanks, Peter, and thank you to everyone for joining today's call to review our outstanding fourth quarter and full year 2021 results. For the fourth quarter, bookings increased 49% to $1.420 billion. Billings increased 36% to $1.306 billion. Global G2000 billings growth accelerated to over 90%. The Q-on-Q billings was up 67%, accounting for 16% of total billings. Total revenue growth, 29% to $964 million with product revenue up 31%.

Our team navigated well through a challenging supply chain environment to deliver outstanding results. For the full year, revenue was $3.3 billion and GAAP operation margin was 20%. We generated a record of $1.2 billion of free cash flow, and we reported our 13th consecutive year of GAAP profitability. Three growth drivers, convergence of security and networking, vendor consolidation with a security fabric match platform and an elevated threat environment are driving our strong financial results and market share gains.

The move to Work from Anywhere has rapidly expanded the attack surface, which traditionally network security found hard to protect. Fortinet Security driven networking approach converges networking of security, including next-generation firewall, SD-WAN, 5G, AT&E and OT to reduce capacity, while securing and connecting remote user to advance security and performance and a networking speed. [Indecipherable] are increasingly consolidating to a cybersecurity match approach.

Fortinet Security Fabric platform delivers unparalleled protection through a cybersecurity match architecture that provide broad, integrated and ultimate protection across multiple edge from endpoint to data center and hybrid cloud environment.

Today, we announced a FortiGate 3000F, the latest FortiGate next-generation firewall, powered by Fortinet basic NP7 SPU to deliver sustainable, high-performance convergence of networking and security for zero trust edge and core network. The FortiGate 3000F secure computing routing offers an average 5 times better performance than competitive offerings.

Fortinet recently stood out amongst 19 network firewall vendors into a critical capability for network firewall. We evaluated for their performance across non-critical capability. Fortinet FortiGate solution received overall high score in the enterprise data center, distributed enterprise edge and SMB use case and the second highest score in public cloud use case.

Our FortiGate product is the only leader in both Gartner Magic Quadrant for network firewall and SD-WAN. Over the last several years, Fortinet's industry-leading innovation has transformed our company into one of the most influential and fastest-growing cybersecurity leaders. This, in addition to our growth drivers, strongly position us to capture market share and move to the next level of growth.

Before turning the call over to Keith, I would like to thank our employees, customers, partners and suppliers worldwide for their continued support and hard work, and we especially like to thank our operations team for doing a great job supporting Fortinet fast growth. Keith?

Keith Jensen
Chief Financial Officer at Fortinet

Thank you, Ken, and good afternoon, everyone. I'll start with a summary of our very strong 2021 performance. Customer demand was strong and broad-based across geographies, customer sizes, industries, use cases and security solutions, reflecting the three key demand drivers that Ken mentioned, convergence of security and networking, vendor consolidation on our Security Fabric mesh platform and the elevated threat environment.

Convergence or security-driven networking requires integrated security solutions to be delivered at networking speeds across the company's entire threat landscape of edges, including data centers, endpoints, work from anywhere and clouds, as well as across multiple use cases such as secure SD-WAN, WiFi, switching, 5G and OT.

The networking speed and computing capabilities of our ASIC-powered for gates can be five to 10 times more than competitor firewalls with their off-the-shelf silicon products. Vendor consolidation is driven by customer focus on security effectiveness, performance and cost management. We deliver vendor consolidation through our Security Fabric platform and its broad range of products integrated with a single operating system, offering increased automation. As we saw in 2021, we expect strong customer demand fueled by these key drivers to continue.

And turning to our 2021 performance, billings growth accelerated to 35% or $4.2 billion, representing our highest annual billings growth rate in six years. Revenue growth also accelerated coming in at 29%, representing the fourth consecutive year of revenue growth of 20% or more. And despite the supply chain environment, product revenue growth came in 37% growth, our highest annual product revenue growth rate in 10 years.

Driven by strong demand for our fabric and cloud security solutions, non-FortiGate billings and revenue each exceeded $1 billion for the first time in our history. Non-FortiGate billings increased 46% to $1.25 billion, and non-FortiGate revenue increased 42% to $1.1 billion. Gross margin was 77.5% and operating margin was 26.2%. Our GAAP operating margin was 19.5%. It's one of the highest in the industry. Our near GAAP profitable, as Ken mentioned, for 13 consecutive years.

Free cash flow was a record $1.2 billion, exceeding $1 billion for the first time in our history. Free cash flow margin was 36%. And when adjusted for real estate investments came in at 43%. Total deferred revenue increased 33% to $3.5 billion, and short-term deferred revenue increased 28% to $1.8 billion.

We are experiencing exceptionally strong demand, demand that exceeds supply by more than historical norms. As a result, we are expanding our disclosures to include bookings and backlog to provide greater visibility into the strength of our business. Bookings represent the value of all orders received from customers. Backlog represents the value of all orders received but not fulfilled. When the order is fulfilled, we recognize both billings and product revenue.

Turning to Q4 results. As noted on Slide 4, bookings were $1.4 billion, up 49%. On a sequential basis, backlog increased $122 million due to very strong demand. On a year-over-year basis, backlog increased $150 million to end the year at $162 million. Breaking down the backlog between product and services, approximately 75% relates to future product shipments, while the remaining 25% relates to various services.

While it's difficult to forecast if an order might be canceled, several factors support our view that our backlog is strong, it should provide a tailwind of growth later this year and into next year. Existing customers account for approximately 90% of our backlog. No single end customer accounts for more than a, say, a low single-digit percentage of backlog. Many competitors are also impacted by supply chain constraints.

Our products, along with our integrated operating system are not commodities really changed with offerings from other vendors. We actively manage our own supply chain and for the most employed security network solution over one-third of all firewall unit shipments, we are an attractive volume buyer from any suppliers.

And lastly, our price for performance advantage may be difficult for our competition to match. And I apologize for the sound in the background, we don't know what's causing it, but I'll continue on. Moving to Q4 billings of $1.3 billion, billings are up 36%, which compares to 49% bookings in noted earlier. Enterprises favorites Fortinet's leading cost performance and integrated platform.

This is especially evident in the 5-point increase in the large enterprise billing mix. Add more color to this, we could share, global 2000 buildings were up over 90%, the third consecutive quarter of accelerating growth. The number of deals over $1 million increased 79% to 122 deals, breaking the 100 deal threshold for time in our history. We saw a record of four low eight-figure transactions all in the Americas in the quarter. And lastly, Secure SD-WAN deals over $1 million increased 63% to 26%, contributing to SD-WAN use case billings growth of 67% and putting SD-WAN at 16% of total billings.

FortiGate billings were up 33% and accounted for 69% of total billings. As shown on slide 11, high-end FortiGates posted very strong billings growth. Non-FortiGate billings were up 43%, driving 1.5 points mix shift to non-FortiGate. Top 10 non-FortiGate solutions with growth over 40% included virtual firewalls, endpoints and switches.

At the same time, several smaller solutions posted triple-digit growth rates. Consistent with the elevated threat environment and the breadth of Ransomware and other attacks, OT use case billings were up 70% and accounted for 8% of total billings. Average contract term was consistent year-over-year and quarter-over-quarter at 28 months. For the third consecutive quarter, we added approximately 6,000 new logos. Worldwide government billings grab the largest share of the mix at 16%. Financial services accounted for 14% of billings on billings growth of 63%.

Billings and manufacturing, transportation, utilities, construction and other verticals that have not consistently been in our top five remained elevated with billings growth of 40%. We believe the growth of these verticals is an indication of the broadening nature and greater awareness of the threat landscape, which is driving cybersecurity investments in industries that have historically perhaps spent a little bit less on security budgets.

Moving over to the income statement. Revenue growth was 29%. Product revenue growth was 31%, illustrating the impact of backlog on product revenue growth. If backlog had remained flat quarter-over-quarter, the product revenue growth would have been as high as the mid-60s.

Service revenue was up 27% to $585 million. Support and related services revenue was up 31% to $275 million, while security subscription services were up 24% to $309 million. Non-FortiGate products and service revenue of $324 million grew 41% and accounted for approximately 34% of total revenue, up 3 percentage points.

FortiGate product and services revenue of $639 million grew 23% and accounted for 66% of total revenue. Total gross margin of 77.3% was 180 basis points above the midpoint of our guidance range and up 80 basis points quarter-over-quarter. A lower-than-expected drag from acquisitions and pricing actions taken to offset supplier cost increases contributed to the better-than-expected total gross margin and product gross margin.

Product gross margin of 62.1% increased 140 basis points sequentially. Service gross margin of 87.1% increased 50 basis points sequentially. Operating margin of 28.5% improved 270 basis points sequentially and exceeded the midpoint of our guidance range by 100 basis points. Better-than-expected gross margin performance and a slightly less-than-expected impact from acquisitions contributed to the better-than-expected operating margin. Headcount increased 24% to 10,195.

Moving to the statement of cash flow summarized on slides 12 and 15. Capital expenditures were $151 million, including $129 million for real estate investments. Our capital strategy includes increasing our office and warehouse capacity to support our higher levels of growth. We repurchased 1.8 million shares of common stock for a cost of $541 million. For the year, we repurchased approximately 2.6 million shares for a cost of $742 million. At year-end, the remaining share authorization was approximately $1.5 billion and set to expire in February of 2023.

Inventory turns at 2.7 were flat year-over-year and on par with 2.9 times in the prior quarter. Overall, what we believe was better than market growth for the fourth quarter and full year, we believe we again gained market share. Supported by a strong pipeline growth and the key growth drivers outlined earlier, we believe we are in the early innings of a sustained high growth period for the cybersecurity industry and Fortinet, driven by digital transformation, hybrid cloud and the moving of data and security to the edge.

The products we've created, the channel and customer relationships we've developed and the investments we've made to build a broad and integrated security fabric platform powered by our proprietary Hasek FortiGates, are expected to drive our continued growth and market share gains.

Now I'd like to review our outlook for the first quarter summarized on slide 16, which is subject to disclaimers regarding forward-looking information that Peter provided at the beginning of the call. For at least the first half of the year, we expect elevated demand to outpace supply chain capacity, increasing backlog, an increase in backlog as a headwind to billings and revenue growth and provides interim pressure on margins.

For the first quarter, assuming bookings in the range of $1.100 billion to $1.150 billion, which at the midpoint represents bookings growth of 32%, we expect billings in the range of $1.50 billion to $1.90 billion, which at the midpoint represents growth of 26%; revenue in the range of $865 million to $895 million, non-GAAP gross margin of 75.5% to 76.5%, non-GAAP operating margin of 19.5% to 20.5%.

Non-GAAP earnings per share of $0.75 to $0.80, which assumes a share count of between $166 million and $168 million. We estimate first quarter capital expenditures to be between $140 million and $150 million. We expect a non-GAAP tax rate of 18%.

Before providing our full year 2022 guidance, I'd like to congratulate every member of the Fortinet team for the truly outstanding execution in 2021. The efforts and results have been outstanding and this is on top of now several years of consistent, predictable performance and improvements in key growth and profitability metrics.

In 2022, we expect a small shift in our seasonality towards the second half of the year by two or three points. And for the full year, assuming bookings in the range of $5.580 billion to $5.680 billion, which at the midpoint represents growth of 30%, we expect billings in the range of $5.400 billion to $5.480 billion, which at the midpoint represents growth of 30%. Revenue in the range of $4.275 billion to $4.325 billion, which at the midpoint represents growth of 29%.

Total service revenue in the range of $2.685 billion to $2.715 billion, which represents growth of approximately 29% and implies full-year product revenue growth of approximately 27%. Non-GAAP gross margin of 74% to 76%, non-GAAP operating margin of 24% to 26%, non-GAAP earnings per share of $4.85 to $5, which assumes a share count of between $169 million and $171 million. We estimate full-year capital expenditures to be between $270 million and $300 million. We expect our non-GAAP tax rate to be 18%, we expect cash taxes to be approximately $210 million.

Lastly, I want to inform everyone that this we will be holding an Analyst Day on May 10th coinciding with Accelerate 2022, where we expect to update our medium-term financial model. Along with Ken, I'd like to thank our partners, customers, suppliers and all members of the Fortinet team for all their hard work, execution and outstanding success.

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

Peter Salkowski
Vice President, Investor Relations at Fortinet

Thank you, Keith. As a reminder everyone, please limit yourself to one question on how we lost a little time there due to the technical delays, apologies for all of that. But operator, can you open it up for Q&A, please?

Questions and Answers

Operator

Sure. Thank you, sir. [Operator Instructions] I show our first question comes from the line of Brian Essex from Goldman Sachs. Please go ahead.

Brian Essex
Analyst at The Goldman Sachs Group

Hi, good afternoon. Thank you for taking the question and thank you. Congratulations on a nice set of results. Thanks as well for the additional disclosure. And I guess maybe on that point, maybe could you help us understand what qualifies as a booking from a timing perspective, if an order is placed with a timing event maybe nine months from now, is that still included in bookings? And then maybe any other incremental color you can provide us on the supply chain management? How you're managing the supply chain?

You mentioned pricing increases offsetting an incremental supplier costs. But maybe a view on -- are the issues abating at all? Are lead times still consistent with where they were last quarter? And any other nuances we should be aware of, like channel partners pre-buying inventory, which is one of the things that we picked up a little bit this quarter? Thank you.

Keith Jensen
Chief Financial Officer at Fortinet

Yes. A lot of good stuff there. I don't know if we'll get to all of it Brian. Maybe couple of...

Brian Essex
Analyst at The Goldman Sachs Group

[Technical Issues]

Keith Jensen
Chief Financial Officer at Fortinet

Yes, I know you did really well. Keep in mind, our business model, right? End users buy from resellers, who buy from distributors who buy from us. So it's not like a very large complex $50 million solution that's going to be deployed over time. When we get orders, it's typically the customers want the product. So I don't know that we would see something like we described at the beginning of the conversation in terms of order bookings. As far as our booking is -- distributor sends an order to us, and they would like to have shipment throughout if we -- so that counts the booking. And if we ship it, then it's becomes a building and it becomes product revenue. And if we don't, it becomes backlog.

I'll just pause at that was, sorry. So in terms of supply chain and maybe Ken would offer some additional thoughts on that. I do -- we talked previously, I think that we felt that September, October and maybe very early in November could turn out to be the low watermark for supply chain challenges, at least in terms of what we call decommitments from our contract manufacturers and from our component suppliers. And I think that, to this point, is shown to be the case. We do still from time-to-time, have the commitments, but they're much, much smaller than they were back in that time frame. I think the general tone, if you will, with our channel, whether there's components versus contract manufacturers, is much, much better than it was.

We do, like everybody else, we read the reports, and we see conversations and commentary around things like -- particularly in consumer electronics, where there be some improvement in auto manufacturing. I think we have reason to believe that the situation continues to improve as we move forward. At the same time, working extremely closely with our suppliers, conversations at very high levels and talking about maybe some longer-term projects that we may work on together, for example, making them aware of what our volume of business is and also a bit of a tip of the capital or engineering team, who's been going through the process of redesigning and recertifying some of the components and some of the other changes, if you will. All of that, I think, kind of, gives us a feeling that the second half of this year should see improvement. Ken?

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

Yes. I think you commented all of them. I think it is different, compared to most of our competitors. We handle the design, manufacture operation, put them out directly our self. And also we have a bigger quantity compared to our competitors can better negotiate with suppliers. And also the engineering also starting -- last year also starting redesigned some of the product to award a certain shortage of the component, which are working well with us, but some of them may take about six months.

I think overall, that's what we feel pretty confident in the second half of this year, since we'll be improving both, because the supply chain itself and also some alternative design and also, kind of, better planning. I have to say last quarter, the demand was very, very strong, with booking grew 49%, which even, kind of, beyond, kind of, our planning. So that's caused some of the shortage. But overall, we have a much better shape, compared to competitors in the inventory and in the supply. And also the other question, we don't see increased inventory in the channel in the distributor there, pretty much the same as they have in the last few years. So we don't see any increase of the channel to setup the product. So that's not the case for us.

Keith Jensen
Chief Financial Officer at Fortinet

Yes. And Brian such a good job of only answering one question, I'm going to jump also in and give some more color on it. I do -- did somebody orders a product early, some place in the world? Sure, I'm sure that happened. When we try and look at our own business, we try to identify possibilities of that happening. And the best number we can come up with is something that represents extremely low single-digits of our business may have been impacted by that. And at the same time, you immediately pivot over to look at your pipeline. And even if that was happening, it's certainly not evident in the pipeline. We're extremely pleased with what we're seeing in terms of the pipeline growth.

And then just a follow-on to Ken's comment about distributor inventory levels, again, with our model, we do have visibility of the inventory that's in the channel. And that inventory -- those inventory levels are actually down a little bit year-over-year. So I don't think we're seeing the types of things that maybe you may have some concerns about.

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

Yes. And also the shortage more limit and pretty much most limited in the very low end and -- so the middle and the high end FortiGate, we do have enough inventory even for the more strong like 49% billing growth. And also, we have a very broad product portfolio. So there's a lot of alternative product. The customer, the channel controls. And at the same time, something redesigned already working, so will be ready in a few months.

Brian Essex
Analyst at The Goldman Sachs Group

Fantastic color. Thank you.

Operator

Thank you. I show our next question comes from the line of Fatima Boolani from Citi. Please go ahead.

Fatima Boolani
Analyst at Smith Barney Citigroup

Good afternoon. Thank you for taking my question. Keith, let me focus this one for you. At the risk of oversimplification, I know you've given us the bookings growth. You've given us the billings growth and certainly, the product growth and the guidance for fiscal '22. So between the 49% growth you saw in bookings, 36% billings growth that you saw this quarter and the 31% in product. Can you talk us through how that is dovetailing into your guidance for next year?

And frankly, how much of this backlog you're expecting to amortize into your revenue and billings profile over the course of 2022? And as related to that, I understand you've taken some pretty substantial pricing increases for your subscription packages for the portfolio. I'm curious how much of that is contemplated in your guidance across these metrics? Thank you.

Keith Jensen
Chief Financial Officer at Fortinet

Okay. I think Brian set the standard and Fatima is following it through. How many questions will account as one? Because I start with the easy one first pricing. We raised prices. We've talked about before there is prices in August and again in November. On our price list, keep in mind, those get discounted down. The price -- because services, whether it's support or security, attaches -- the pricing attaches to the box, so to speak. When you raise prices on the appliance, you're also effectively raising prices on the services. But then if you think through revenue recognition, obviously, you'll get some -- you'll get the price increase in revenue for the product more currently than you will for the services you're going to recognize that over time.

And I think your question of what are we expecting in terms of backlog and amortization or what have you? As you can imagine, we've done a fair amount of scenario planning to go through the year. And I don't know that there is a one scenario that we would point to as opposed to a combination of scenarios. I think you can kind of solve for that maybe not on the phone right now, with some of the information that we've provided in terms of our expectation for backlog increasing, right, for the year. And so backlog is increasing for the year, I don't think that would be reflective of us bleeding into the income statement backlog that currently exists. The components of the backlog will shift, but net-net, it's going up.

Fatima Boolani
Analyst at Smith Barney Citigroup

Thank you.

Operator

I show our next question comes from the line of Ittai Kidron from Oppenheimer. Please go ahead.

Ittai Kidron
Analyst at Opppenheimer

Thanks, guys. Great numbers. I had a clarification and a question. Just on -- Keith, on the two-point shift in seasonality in the second half. Is that just tied to supply chain fulfillment? I just want to make sure I got that right? And there's no other cause here?

And then, Ken, maybe you could talk about, from a competitive standpoint, are you seeing any changes? And I wonder if you have any thoughts with respect to CheckPoint's recent introduction of their Lightspeed firewall, which is extremely price aggressive? How do you think about that in the market? Any thoughts there would be great?

Keith Jensen
Chief Financial Officer at Fortinet

Yes, I'll just come quickly on the linearity. We just wanted to make sure we open the door to have the conversation with you guys about how linearity may be a little bit different this year than what has been historically for us. And yes, you can point back to the supply chain on that.

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

Yes. I also mentioned the checkpoint earnings this morning. I probably sent to deal we mentioned Fortinet. And so their newest product, probably like 20% faster than Fortinet product 1,800 app, but that's the product we released more than two years ago. I think based on Moore's law. So every two year -- every 18 months, the speed will double. So I think the latest product a much faster now. So I do see because the -- we see security-driven networking conversion of network and security. So the network security started deploy pretty much in all the infrastructure, not just secure the border.

So when we deployed internally at a much higher speed and that's where the high-speed firewalls needed to do the internal segmentation, security server, segment, different department, all these kind of things. So that's where we see quite a strong demand in milestone growth with the current ransomware environment. But also, we see that with working from anywhere, a lot of our users have to connect remotely or kind of connect remotely. So that's where the security SD-WANs and 5G market also see very strong demand. So that's what we see.

We're leading innovation in both space with our own ASIC with all the secure SD-WAN 5G connection. It's a much bigger total addressable market compared to the traditional network security. So that's where we identify as over $170 billion total addressable market for us in the next three, four years. It's a huge potential and market large enough pretty much for all the competitors to compete, but definitely have to keep up the innovation, keep up the change to keeping gaining market share.

Ittai Kidron
Analyst at Opppenheimer

Got it. Very good. Thanks.

Operator

Thank you. I show our next question comes from the line of Shaul Eyal from Cowen. Please go ahead.

Shaul Eyal
Analyst at Cowen

Thank you. Good afternoon guys. Congrats. I'll behave myself limiting to one question. Back to the supply chain, Keith, I just want to make sure, is that predominantly non-FortiGate products, or do we have some FortiGate products also included in that entire supply chain discussion? Thank you.

Keith Jensen
Chief Financial Officer at Fortinet

Yes. And I think Ken touched upon that a little bit. I'll just build it out for little more clarity. If you look at more traditional, what we call secure networking products such as switches and access points, you're looking at probably something in the order of 60%, maybe two-thirds of the backlog would fit into that category, and the remainder is in FortiGate. And then Ken was making sure that we understood that. Within FortiGate, roughly one-third, the majority of that is in the entry level or low end FortiGates. We're not really experiencing the same pressure in the midrange and the high end that we see in the low end.

Shaul Eyal
Analyst at Cowen

Thanks guys.

Peter Salkowski
Vice President, Investor Relations at Fortinet

And then operator, just a quick one. I just want to let everybody know on the call, given the technical difficulties we had earlier, we'll post the prepared remarks about the CEO script and the CFO script to the IR website as soon as we can after the call. Next question, please.

Operator

Thank you. Our next question comes from the line of Ben Bollin from Cleveland Research. Please go ahead.

Ben Bollin
Analyst at Cleveland Research

Good evening, everyone. Thank you for taking the question. Ken or Keith, when you think about the elevated demand and placements on the product front, can you share any thoughts about how coincident that demand is or leading as it relates to additional fabric traction? Any thoughts or hooks around number of applications that are being deployed typically with that initial rollout versus what comes later? Thanks.

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

We see a lot of enterprise they need to protect their internal network, because its ransomware attack like we released that we served a few months ago, is 11 times higher on the ransomware attack, compared to one years ago. So there's big demand to secure the company, whole infrastructure. Also working from home -- work from anywhere also need more security, especially like secure SD-WAN, secure 5G, all these connections. So we see -- the demand is very, very strong. So that's where -- and also for supply for some other chip manufacturer, even with our own chip, usually, there's a lead time. So that's where we see the backlog and we're hoping we'll be -- go back, I hope will be more normal towards the end of the year.

Keith Jensen
Chief Financial Officer at Fortinet

Yes. Hi, Ben. How are you? Ken's pointing at me, so I'll follow-up a little bit. I think in terms of pull-through of non-FortiGate products, maybe I kind of came to the conversation a few years ago thinking that that was going to be more of a commercial and mid-enterprise area where we see the quantity. In actuality, it seems to move with customer size. The SMB is somewhat limited as we still see other products attaching and building that out. And then the mid-enterprise, the enterprise, and then the service providers are very strong buyers of multiple products.

And I think that why that's relevant is that's the affirmation of the platform strategy. I think they very early on realized the overhead cost of managing point solutions from different vendors could be fairly onerous, and that was pretty challenging. And so it is moving its way through the rest of the customer chain, if you will. I think the other thing that's happening more currently now is we've seen -- we talk about these other verticals that represent not in the top five, but coming to the table and buying security.

And I think they're very clear with us in conversations that I've had with them and Ken as well that they're looking for a total solution. And the ability to cobble together a series of integrated products into one solution. Not only does that save them in terms of the initial purchase, but also the management cost. So I do think there's definitely a tailwind in that area.

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

Yes. The other [Indecipherable] point is really the Global 2000 account grow over 90%, so it's almost double year-over-year, a very strong demand in there.

Ben Bollin
Analyst at Cleveland Research

Thank you.

Operator

Thank you. I show our next question comes from the line of Hamza Fodderwala from Morgan Stanley. Please go ahead.

Hamza Fodderwala
Analyst at Morgan Stanley

Hey, guys. Thanks for taking my question. I wanted to ask a question about just the appliance demand more broadly. Maybe a question for Ken. How do you think about the demand for hardware between factors like return to office, campus refresh, data center? What's really driving that appliance as we go through 2022?

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

I think the convergence of network and security will be long-term and I think during the pandemic and even after pandemic, you see a lot of things changing, whether the working environment or more access, that's what the zero trust in starting to build up very demand there. And also internally, they need to secure the whole infrastructure both in the -- within the like campus network, data center or remote in connecting branch office. So that's where we see the whole infrastructure need to be secured.

And also kind of consolidation among different vendors also starting happening more quickly, because like Keith mentioned, the management cost is very high, if they have a different vendor for different part of cybersecurity. So that's where the vendor can provide more product integrate, automate together definitely has more advantage and lower total management cost. Actually, that's why you see the, like I mentioned, the three driver converging of our network and security and the consolidation of the vendor, and at the same time, the strong elevated cybersecurity threat right now, especially like ransomware is a big impact to the business is all driving the strong growth.

Hamza Fodderwala
Analyst at Morgan Stanley

Thank you.

Keith Jensen
Chief Financial Officer at Fortinet

Yeah, I would share I think one of the things that Ken asked us to go look at was what our product revenue growth has been if we didn't have backlog, right? And that's that kind of who knows when they call out with that point, but it was 65% or 66% product revenue growth if we had the product to deliver. I mean, that's a huge number. And I think it speaks to the kind description of this is a -- the demand is extremely high for appliances right now.

Operator

Thank you. I show our next question comes from the line of Sterling Auty from JPMorgan. Please go ahead.

Sterling Auty
Analyst at JPMorgan Chase & Co.

Yeah, thanks. Hi, guys. Keith, one for you. If I'm looking at it correct, if it wasn't for the gross margin pressure, it looks like operating margins would have expanded nicely in '22. And I'm curious with things like return to office, maybe a pickup in business travel and maybe even wage inflation, how are you able to deliver that kind of underlying margin expansion in the operating line?

Keith Jensen
Chief Financial Officer at Fortinet

I don't -- for 2022 versus 2021, I think we're guiding to 24% to -- I think we're guiding to basically 25% at the midpoint and I just closed out a year at...

Peter Salkowski
Vice President, Investor Relations at Fortinet

26% [Phonetic].

Keith Jensen
Chief Financial Officer at Fortinet

26%. So, I don't know that that's up, Sterling, you mind thinking about that?

Peter Salkowski
Vice President, Investor Relations at Fortinet

I think if the gross margin wasn't down...

Keith Jensen
Chief Financial Officer at Fortinet

On the operating -- the leverage is coming through on the operating expenses.

Sterling Auty
Analyst at JPMorgan Chase & Co.

Yeah, exactly.

Keith Jensen
Chief Financial Officer at Fortinet

Yeah, yeah. I think that while you can look at the percentages in terms of what we're spending, I think sales productivity in the current environment is probably the biggest driver, if you will, in terms of the leverage that we get out of this. Obviously, if you go back to 2021, not a lot of sales productivity average probably in 2020. With COVID, very nice sales productivity numbers in 2021, now we're looking at tailwinds, I must be honest, the price increases will indeed increase sales productivity.

Sterling Auty
Analyst at JPMorgan Chase & Co.

Got it. Thank you.

Peter Salkowski
Vice President, Investor Relations at Fortinet

Okay.

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

Thanks, Sterling.

Operator

Thank you. I show our next question comes from the line of Adam Borg from Stifel. Please go ahead.

Adam Borg
Analyst at Stifel Nicolaus

Hey guys, and thanks so much for taking the question. Maybe just on SD-WAN, it's great to see the strength there continuing. Maybe you could comment just on, I guess, first, the sustainability of those trends in coming years? And are you seeing this growth coming more from greenfield opportunities or some brownfield displacements? Thanks so much.

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

It's pretty broad. As you can look on SD-WAN, probably, I'd say, more than half majority products go to the middle or high end range. And at the same time, a lot of enterprise customers, a lot of are all starting using leverage SD-WAN. So it's quite a broad -- much more beyond the retail.

Peter Salkowski
Vice President, Investor Relations at Fortinet

Operator, next question, please?

Operator

Thank you. I show our next question comes from the line of Jonathan Ho from William Blair. Please go ahead.

Jonathan Ho
Analyst at William Blair

Hi, good afternoon, and let me echo my congratulations on the strong quarter. I guess, just given that you've delivered a quarter that's been particularly strong this year, can you give us a bit of a sense of what's happening with the pipeline, and maybe what is giving you the confidence that you can continue to drive that sustained growth for several more years? I think you've gone through some of the factors one by one, but what are you seeing in sort of the immediate term that allows you to continue growing at these rates? Thank you.

Keith Jensen
Chief Financial Officer at Fortinet

Yeah, I -- I've looking at Ken if he wants to get more strategic. I'll give you a very tactical conversation about it. And Peter is making a shameless plug for the Analyst Day in May and saying that we'll talk about that then. Look, I'm really, really pleased with what the pipeline looks like at the moment. We go through our usual, we've talked before, I think Jonathan is slicing and dicing it in terms of how much our new customers, renewals, expansions inside customers, what's the deal size, what's the geography, and it's -- we -- I don't want to just loss over some of the numbers that we saw in the enterprise segment in the fourth quarter.

I think we're at 90% growth on the G2000 for three quarters in a row. The U.S. did extremely well, and without getting into a lot of details, they too have accelerated for three quarters in a row. Looking at the pipeline and looking at again, more enterprise growth that's coming, I think we have a good position on the SMB, love the execution. We've had some people in other settings comment upon, the maturity that the sales and marketing and execution level has reached now as a Company. So I think the pipeline and our ability to execute, I don't see why that would change.

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

Yeah. And also we have a lot of growth potential, especially in the Global 2000. So like we said last year -- last quarter grown at 90% year-over-year. And also this is the bigger account, you also can up-sell, cross-sell a lot of other products. So we do see the pipeline is very, very strong. And also we're keeping -- enhancing the marketing and keeping pretty aggressively higher net sales at sales capacity. So far some regions, some of the vertical, we still have much less capacity than some of our competitors. I think with the additional marketing sales capacity, we do see the growth will continue in the next few years.

Operator

Thank you. I show our next question comes from the line of Michael Turits from KeyBanc. Please go ahead.

Michael Turits
Analyst at KeyBanc

Hey, guys. Thanks, Keith, for making the statement of demand very high for appliances. I guess I'd just like to reask Hamza's question about the sources of demand for appliances right now, particularly in the context though of how strong cloud is. I mean, we just had very strong cloud numbers coming in from Amazon, as well as from others. So how should we really understand why so much is being spent in physical boxes right now as opposed to even some of your products that are in the cloud?

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

I probably -- one common deal mentioned this morning in the call, definitely, the network security is a much bigger total addressable market. The cloud security probably by 2025 is just a little bit over $20 billion and compared to current total addressable market, including network security, converging network security, endpoint or other will be $170 billion. It's a much bigger market. And at the same time, there's a lot of innovation going on and we have to secure the whole infrastructure. So that's where we see the price also, even access the cloud, you need all this appliance, you also need this SD-WAN, 5G connection, all this to access the cloud. So that's where we see the -- there's a huge market potential in the very fragmented market, so a lot of growth potential.

Michael Turits
Analyst at KeyBanc

Thanks, Ken.

Operator

Thank you. I'm showing now we have time for one more question coming from Keith Bachman from BMO Capital Markets. Please go ahead.

Keith Bachman
Analyst at BMO Capital Markets

Yeah, I'm going to ask a similar question to Michael before. Your product revenue growth has been 40%, 50% and now the underlying growth this quarter was north of 60%. Your competitors are also experiencing good product revenues, not nearly to the extent that you are. And so it's more than Checkpoint that's experiencing demand and it's more than the -- what I characterize as the consolidation when you're taking share from the likes of Cisco and SD-WAN.

And so I'm trying to understand if you thought about the aggregate demand is in the last three quarters have been far exceeded anything that's happened in, say, the last five years between not only yourself, but your three primary competitors ex Cisco. And so the question is, if traffic is normally one of the key drivers, but what are some other drivers for not just yourself, but for the three primary vendors? So just trying to understand really, I think consistent with some of the other questions about the durability of demand not just for yourself, but for the industry in general?

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

Yeah. I think the industry I do believe, they need to start to secure the whole infrastructure, both internal LAN and also the WAN connection put outside. And that also like we see very, very strong demand to secure inside the company and also like all this data center, all this internal segmentation, which is for the network security too slow to deploy it in the high-speed environment internally. And then also the SD-WAN, you can see pretty strong growth. And -- I think the overall convergence of repeating, say, in the network or security, that's the three driver we gave out.

I think probably in the Analyst Day, Peter, Keith mentioned, May 10. So we'll probably give some more details some data, some analysis and we'll see how long. I do believe this will be pretty long-term changing in the whole space, where we're keeping growth in the next 5 to 10 years. And also ASIC advantage and the continental scale and scope all started working for us because we have the quantity, which helping lower per chip cost, which none of our competitors have. And also we're probably the only cybersecurity company design own ASIC chip. And we also leverage any other commercial chip available, including all the -- whatever Intel, MV, GPU, TPU, IPU, all the other things we're using, but we have unique advantage of our own ASIC chip, which helping drive lot of our high-speed low-cost network security solution.

On the other side, the economy of scope also working, because we have like a set of some different products, what we call the fabric and now kind of call mesh, cybersecurity mesh architecture, which is helping us to cross-sell. I think last quarter is the first time they over 30%. I think right now, it's a FortiGate count about 69%, non-FortiGate 41% and also over $1 billion last year. Also see very, very strong growth, grow faster than the FortiGate. So that's also helping to supporting the whole infrastructure security, converging on network and security and also elevate the threat environment.

Keith Jensen
Chief Financial Officer at Fortinet

Yeah, Peter, it's pretty...

Keith Bachman
Analyst at BMO Capital Markets

Thanks very much for the question. Shameless on Peter for continuing to plug for the Analyst Day. Thank you.

Peter Salkowski
Vice President, Investor Relations at Fortinet

Hey, Ken.

Keith Jensen
Chief Financial Officer at Fortinet

Early in the life cycle of cybersecurity industry, maybe 10 or 15 years ago, where firewalls had a very specific use. And the environment, if you will, is more stable. It may have been more -- it may have been easier to identify refresh cycles that we keep looking for and have not yet seen in the last five years. And I think that's perhaps going back to Ken's point, I think that's because the environment is not stable at all.

I think the reality is what you're seeing out there right now in terms of use cases and data volumes, data is all over the place, and it's lots and lots of data, it's just getting more and more. And the use cases, I mean, five years ago, a lot of things that were air gapped from the -- away from the Internet aren't anymore. And now you see, it's probably what's driving the manufacturing vertical for us. I just -- I don't know that you can presume that the environment, so to speak, and the political interest in it, the insurance company's interest in it, CIOs, management team's interest in it, it is a hot topic of conversation. So even if you are due for a refresh cycle in the industry, and I don't know that we are, I don't think you're going to see that because of what's happening in the world out there.

Keith Bachman
Analyst at BMO Capital Markets

That's right. Okay. Thank you gentlemen.

Operator

Thank you. This concludes the Q&A session. At this time, I'd like to turn the call back over to Peter Salkowski for any closing comments. Please go ahead.

Peter Salkowski
Vice President, Investor Relations at Fortinet

Thank you. Again, apologies for the technical difficulties today. As I said earlier, we are planning to post the prepared remarks up on our website as soon as we can. So you can see all the numbers that Keith shared that I think help answer some of the questions with regards to bookings backlog and the sustainable growth in our business.

I'd also like to remind everybody we'll be at the Morgan Stanley Conference on March 9th, an in-person conference, our first and gosh, I don't even know how long. Fireside chat at the event and the webcast link for that -- for the Morgan Stanley Conference will be on our Investor Relations website for you all to listen. If you have any follow-up questions, please feel free to contact me. Thank you very much for your time. Again, apologies for the technical difficulties, and have a great day.

Operator

[Operator Closing Remarks]

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