Good day, ladies and gentlemen, and welcome to your Fortinet Q1 2015 Earnings Announcement. [Operator Instructions] And as a reminder, today’s conference is being recorded. And now, I would like to turn the program over to your host, Michelle Spolver.

Thank you, John, and thank you everybody for joining the call this afternoon to discuss Fortinet's financial results for the first quarter 2015. With me today are Ken Xie, Fortinet’s Founder, Chairman and CEO and Drew Del Matto, CFO. As for the structure of the call, Ken will begin by providing perspective on our business and product advantages, Drew will then review our Q1 financial and operating results and conclude with our forward guidance outlook, before opening the call for questions. As a reminder, today we are holding two calls. For those who have additional and more detailed questions, we will hold the second conference call at 3:30 PM Pacific Time. Both calls will be webcast from our Investor Relations website. Before we begin, let me first read this disclaimer. Please note some comments we make today are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Please refer to our SEC filings; in particular, the risk factors in our Forms 10-K and 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 please note that we'll be discussing certain non-GAAP financial measures on this call. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release on Slides 14 and 15 of this presentation that accompanies today's remarks. Please refer to the Investor Relations section of our website at http.investor.fortinet.com for more important information, including our earnings press release issued a few minutes ago and slides that accompany today's prepared remarks. A replay of this call will also be available on our website. Note that we routinely post information on our website and we encourage you to make use of that resource. With that let me now turn the call over to Ken.

Thanks, Michelle. And thanks to everyone join the call today. I am very pleased with Fortinet's execution during the first quarter. We have a strong start to the year time significantly with our guidance across all key operation metrics. And in fact, we achieved the highest year-over-year building growth ever since it becoming public company five and half years ago. Our all results continue to clearly show our investment strategy is working. We are executing extremely well and this is strong demand in the market for Fortinet's best-in-class portal services. During the quarter, we continue to expand sales within existing account as well as acquired over 8000 new customers adding to our large existing customer base of more than 225,000 which included most of Fortune Global 100 companies. We also again nicely grow the number of large deals with enterprise and service providers which as we discussed last quarter, is key to our long-term growth strategy, as this high end customers provide compounding life time value and are beneficial to our business model over time. The service provider environment remain dynamic and vendors and it only gaining in severity. As a result, network security is among the highest priority for enterprise but beyond product refresh purchases, we are now looking and architecting the entire security infrastructures. Today's highly sophisticated architecture find a way to circumvent parameter firewall defenses, so compromise device such as smartphone, laptops and USB drives and a large amount of attack actually originate within. Once inside the network, the most precious information is under risk and most network security systems are not currently designed to defend against this type attacks. There is a need to protect a network front inside out. This is resulting in evolution beyond the multifunctional security to multilayered security in which high-speed security…

Thank you, Ken. In all respect, Fortinet delivered a fantastic first quarter. We exceeded our guidance and showed strength across all key operating metrics, further validating that our investment strategy is working. As Ken mentioned, we achieved our strongest year-over-year billings growth in more than five years as a public company. I'm pleased to share that during the first quarter, Fortinet's billings increased 36% year-over-year to $254 million, significantly exceeding our guided range of $226 million to $230 million. Total revenue of $230 million was up 26% year-over-year, also well above the high end of our guided range of $200 million to $205 million. And our deferred revenue balance increased to $600 million up 33% year-over-year. From a profitability perspective, non-GAAP operating margin was 9% also above our guidance. We were able to deliver margin upside primarily as a result of topline over performance as well as a positive impact from foreign exchange. Non-GAAP EPS of $0.08 was also above the high end of our guidance of approximately $0.06 and also benefited from the positive foreign exchange impact. And finally our cash generation remains strong as evidenced by the $60 million of free cash flow generated during the quarter. This was a 100% increase year-over-year when excluding the $20 million settlement we received from Palo Alto Networks in Q1 of 2014. Important to note, is that our billings, deferred revenue and adjusted free cash flow is outpacing our overall revenue growth year-over-year, which is a positive indicator for our future revenue growth. Our strong top line performance during the first quarter was a result of a healthy security market driven by factors Ken just discussed, a strong competitive position and an ongoing return from our sales and marketing investments. We continue to grow and strengthen our enterprise sales force including…

[Operator Instructions] And our first question comes from Sterling Auty from JPMorgan. Sterling, please go ahead.

Hi, guys. This is Jackson Ader on for Sterling. One question from us on inventories. I know you guys mentioned that you've been intentionally building some inventories because of some of the port impacts. Is that everything as far as what the inventory impact has been? And what do you guys think that will look like going forward?

We hold to our annualized guidance of two or better on inventory turns, we don’t think that will change, we just - this issue we talked about in the January call, we were really concerned about the port strike for anybody in the Bay area, we saw the Bay, you could see all the ships parked in the middle of the Bay there for quite a while and lot of our products was sitting out there. So we literally have to fly things in which actually is what - then they held the strike and then we got our inventory off the boats and the stuff we flight in, so we had a little more inventory than we probably would have liked. We’re moving the inventories, we don't have it overall inventory problem if you will, or an obsolescence problem but it did cause us to go below the two threshold, I think here temporarily. The other thing I would point out on that is flying it in cost a lot more than shipping it in be it water, and then also touched us a bit on the product gross margin line.

Okay, great. Thank you.

Thank you. And our next question comes from Walter Prichard from Citi. Walter, please go ahead.

Hi thanks. Drew, let me just quantify the - you mentioned the benefit to profitability this quarter from currency. I'm wondering if you can just quantify that either dollars or percentage on margin?

Yes it was about $2.5 million. I think we said 1% of revenue roughly that is what it was.

And then just maybe a follow-up for Ken on the enterprise side. I'm wondering, you're seeing really good success, you talked about 70% growth. Have you seen any sort of evolution in terms of what types of deals those are as you're having more success in enterprise where is the incremental success coming there?

We see deals both we placed in some of the current solution which they bought few years ago and also adding additional layer to protect internal server. So that, as mentioned now the network security space changing from the multifunction to the multilayer prevention right now. So we see especially a lot of large enterprise see the importance of deploy some network security inside the company to protect their server and their department.

And, Ken, just if I can drill down on that a little bit more. Versus success you were having a year ago, is that more - do you attribute that more to better coverage on the sales side or do you think you refreshed some of your product. I'm wondering if you attribute it more to having a better aligned product with where the need is there?

I think both, we started building some vertical team like to mention in like finance service and healthcare. So we can see a lot of new winning in this area but also the product also we're keeping improving. So a lot of new product now covered by the MP6 which is much faster chip and to help and deploy in the high speed environment now.

Great. Thank you very much.

Thank you. And our next question is from Jonathan Ho from William Blair. Jonathan, please go ahead.

Guys, can you hear me okay?

Yes good.

Congratulations on the strong quarter. Just wanted to get a little bit more color in terms of the strength that you saw in the EMEA region and maybe why we see sort of a resurgence there just to start off.

Sure Jonathan. Quite frankly it is just excellent execution on our go-to-market model there. I think we made our early investments there probably earlier than we have made elsewhere. And the team there is just performing exceptionally well as you can see in the phase of top currency headwind to be frank and I think we attribute that to basically having the right leadership, having the right team and then building out the marketing side of the go-to-market model very well and so they have done very well in terms of building kind of an integrated end-to-end go-to-market model which we are replicating elsewhere. We would also like to point - I guess I would also point out that the people we’ve seen come in and ramp there are ramping faster than we’ve seen historically, I think in Fortinet and so over the last year that team has ramped faster than their predecessors would say and I think that attributes to the investments we’ve made on the marketing side. And just getting it right bringing in professionals who’ve been there, done that and doing it here with an excellent product set. That combined with what I would characterize as an excellent security opportunity combined with our best breed integrated platform is just resonating extremely well there.

Got it. And then I think one of the things that we were trying to understand a little bit better is how much of your growth, if you guys could maybe quantify this, is coming from larger deals that you are able to sell this multilayer approach into versus picking up new customers versus just having larger deals as you target the enterprise. I'm just trying to understand some of the dynamics around what's driving the growth, if you could maybe segment it among those buckets.

I will do my best. I think you could tell from our verticals numbers that those haven’t shifted much but I think the growth really is coming out of the Enterprise segment and I would characterize that more towards larger end of the enterprise. Right now we seem to do very well, where people take a very hard look at the products, they look at the strategy in terms of integrated best of breed and our focus that we can provide. Then they also test the products and as the NSS test which Ken referred to obviously play a role. They are very savvy, sophisticated differentiating buyers and we resonate extremely well at that level. So I think that's the key thing and the other thing I would say is we are getting the right marketing dollars in place. So customers know who we are before we get there, they have a sense for us and provide us a great opportunity along with bringing in professionals with relationship. That is new enterprise, the large, high enterprise sales force didn’t really exist several years ago and so that is something that we’ve done more recently and expanded into the verticals probably in the last six months or so. So that’s what we’re seeing, we’re also seeing these people as we build the go to market engine, get the marketing right, the legend side of it right, we’re seeing people, seeing sales people ramp faster than they historically ramped before.

And then I would add Jonathan, it’s Michelle, Jonathan. The only thing I would add is that is I think you covered three points and specifically the multilayered security was one of that. That is still early on in the process. Ken mentioned, that we had deals in that but it is still early. So I would say that is more of a growth driver than with contributing to growth right now.

And just also point out I think the enterprise is where the security sea level boardroom issue is most profound. So we are kind of hitting the mark there I think.

Great. Thank you.

Thank you. And our next question comes from Melissa Gorham with Morgan Stanley. Melissa, your line is open.

Okay. Great. Thanks for taking my question. I'm calling in for Keith Weiss. Ken, just wanted to delve into the billing strength again. You mentioned earlier the strength related to a refresh cycle. I'm just wondering if you believe that there still is kind of a refresh cycle going on and, if so, what kind of phase of the cycle we're in currently and how much do think that impacted your results?

I think there is few in the probably in the mid of refresh cycle to upgrade from the old like a single function or intuition box but this is the multifunction box was a connection firewall UTM. So that's and to say today probably majority enterprise do not quite update to this new generation yet. So that is going and same time and also we see the new opportunity especially in the large enterprise for the multilayer protection and also the opportunity in the service provider in the carrier to offer the clean pipe to secure the mobile device. So we see like a multiple trend and multiple opportunity to grow in this area right now and like to mention security now becomes highest priority for the management, for the board and is the market, is the space, like in my 20 plus years this is probably the hardest time to do the network security right now.

Okay. Great. Thanks. And then just wanted to follow up on Endpoint. You did mention that you'll be releasing a new version. You have had FortiClient for a while now, but are you seeing kind of a turn where you have your traditional customers that would buy network security increasingly also wanting to buy Endpoint, and then can you maybe talk about how big of a business that is for you today and maybe how fast it's growing?

We see a lot of interest and the customer really like the FortiClient with this added ATP capability. So we have over 2 million user and for FortiClient we offer free download and then they pay for the supporting fee, pay for the service. Now we have the FortiClient linking with the FortiGate, with FortiSandbox, with FortiMail with some other appliance which mostly in the network side in the central office. So that’s where once you link all this end point with network device, with management all together, we are going to much better inadequate protection compared to some other end points related to isolated device themselves. So that's where we see a lot of customer who are interested in this approach and then give them better multiple layer of protection, especially a lot of our mobile device now they can protect together with the network side.

Okay, great. Thank you.

Thank you. And our next question comes from Brent Thill from UBS. Brent, your line is open.

In Q1 you announced some new bundled pricing solutions that tie a lot of different products together. I'm just curious if you started to see some success with those solutions and, if so, are you seeing longer durations added initially in some of these original contracts that you're signing?

Great question, Brent. So we announced the increase in middle of January. It actually takes somewhere between 30 to 90 days to really work its way through the channel. So I don't just say best case here, you are getting it in quotes in probably early March possibly late February. But most of it isn’t - I would say it's too early to call from that perspective. I don’t think it provided much of the tailwind if you say from the billings perspective, I think that too early. What it does do interestingly enough is because the way we actually estimate the revenue piece, the product a little more gets differed now because you're actually attributing, you have a higher differed component or subscription component, routable component if you will. And so it actually takes down the near term revenue just the end quarter revenue a little bit because you’re now marking - you kind of benchmark that deferred component to the new price which is a little bit higher. And so, I would say if anything, I mean on billings it was probably neutral, on revenue its probably a couple million of just kind of pushed to deferred if you will. I wouldn’t call that hugely significant but just point out that it in terms of how it impacted us its probably slight near term mark on revenue, little up on deferred revenue and because the product revenue goes down a little bit it also impacts the products a bit.

Okay. So you think it’s a catalyst more going forward in the next couple of quarters?

Yes I think so, and I could say this, if you want a qualitative perception we've been talking to the field, its something that our channel really likes especially as you get into the mid and higher level deals it just gets increasingly important. They are like a higher price, they think there is a lot of value there. We do a really good job of enriching our product offerings over time as we add components to it, the functionality and keeping it up to date. And so, the channel likes it the higher price means more money for them.

Okay. And just clarification on the 8000 customers you added. Was that relative to what you saw in past quarters, can you just give us a sense of where that stood?

Yes. I think that's consistent.

Yes. It's similar.

Great. Thank you.

And our next question comes from Matthew Niknam from Goldman Sachs. Matthew, please go ahead.

Hey, guys. Thank you for taking the question. Just one on margins. Guidance implies second quarter margins are pretty flattish sequentially at about 9%, but you're sticking with the 14% guide for the year. Just if you can help us understand the trajectory in the back half of the year and what gives you confidence in such a steep implied ramp in 3Q and 4Q? Thanks.

Sure Matthew. Again we've guided for Q2 and we've guided for the full year of 2014 and so obviously it implies a ramp. I'm going to have to let you how you want to do it from your model perspective but we’re very comfortable with the 2014. Our comfort has to do with the fact one, that what we look at internally suggest we’re very conscious about how and where we spend, we’re very disciplined. Again I would point out that’s its all on the sales and marketing line, a lot of it is very programmatic and headcount driven at this point and so we know the dials on how to engineer that result if we need to. And quite honestly we feel very good about our forecast and how we are going to proceed through the year. Our plans are very crisp and we’re going to execute those and if we do that, which we believe we will then, we are very comfortable we can hit that target.

And just a follow-up. So that kind of implies the sales and marketing ramp we've been up about 50% year-on-year the last two quarters. I think that kind of implies we begin to flatten out that ramp in 3Q and 4Q?

Well from a percentage perspective obviously get to 2014 and probably have improved but from a dollar perspective it’s just, we know what the programs are, there are still some investment to make, we are kind of I would characterize it kind of mid-stream especially on the marketing side the verticals still have a little, you have to give them a little time to pay off. I think we are somewhere between four to six months into that program and I think it’s reasonable to get people a year there to bear some fruit. And so I would call it kind of more mid-stream if you will.

Perfect. Thank you.

Thank you. And our next question comes from Imtiaz Koujalgi from Deutsche Bank. Imtiaz, please go ahead.

Hey, guys. Thanks for answering my question. I had a question on the billings. I think you answered this earlier, but just want to clarify. If you look at the duration of your contracts, did that go up substantially in this quarter versus the previous quarters?

This is similar.

No I think it’s very similar again Imtiaz we don’t focus, we were agnostic as to the duration of the contract from a customer perspective, we let choose that and I think if anything I think if you look at the ratio long-term deferred to short-term deferred, overall deferred I think it might even compressed a little bit.

Got it. And then on the gross margins, if I look at the gross margins going back four or five quarters it's been going down every quarter. I think this quarter was kind of the lowest in the last few quarters. Just some more color on what's driving that.

Well I think the margins overall have been consistent, we’ve forecasted 71% and we hit that. The services margins I would highlight that those are very good and our focus has been on selling more subscriptions and virtual offerings and that looks to be doing very well and I think that is a great way to expand margins and so that strategy, that focus seems to be paying off. On the product side 58% I think that is not too dissimilar to what we have seen in the fairly recent past and there were couple of things that actually impacted that and I think I pointed these out, one would be the port of Oakland strike and so we had the fly in some inventory and it is short term issue and it caused more to flight and then ship it by board obviously and then the second piece of it was the increase in price of the bundles. And that is just an accounting thing where the overall billings probably get I think it is little too early to say there was a tailwind this quarter perhaps next quarter, the quarter after that but from an accounting perspective you’re now attributing a little more to the subscription which causes little more of the billings to be deferred and so that drags down the revenue slightly. I think we have said a couple of million dollars and then a little bit extra cost from the port of Oakland strike and that hits the margin kind of all once in one quarter.

And then just one final one for me. I think you mentioned about the FX impact of $2.5 million benefit. Do you guys price in local currencies and that's why you got a benefit from the FX moves this quarter?

No we price in USD, U.S. dollars and then we have costs in local currency and so that is primarily from Euros.

Okay. So the net impact was a benefit because you gain more on the cost side?

Yes revenues and dollars are consistent and there is no change and then your cost are in Euros and there is obviously favorable benefit.

Okay, perfect, thanks.

Thank you. Our next question comes from [Subul] [ph] from Juna Group. Please go ahead sir.

Thank you. I wanted to understand on the enterprise side if you could talk about the success how it's been split between campus branch opportunities versus data center as most of your success been on the data center side with your new wins. And also on the internal firewall opportunity, is that also for sort of east-west applications in the data center and what kind of competitive environment are you seeing from some of the virtual solutions out there?

This is Ken. I think it is a sweet different market, internal multilayer securities more apply for the enterprise campus there is really security department, different server within enterprise, some of servers in the data center but that is also little bit different than the data center security that’s where like we are working with some like Cloud service providers and data center more using like Chase based 5000 or some 100 gig interface, so that’s running security in the data center, sometime even deploy the product in virtual platform there. So out of five virtual platform including like VMware, Amazon, Microsoft and also it is all of the virtual platform there. So we do see that data center, virtual platform also ramp up quickly and then the branch office is the one especially in other retail space you can see they need have a box to cover all their branch need not only just security piece of that component but also even that communication, some of the Wi-Fi communication, even some of the voice communication. So that we also see ramp up very, very quickly because with this system-on-chips solution, we can offer the best TCO for the enterprise solution there.

And is the data center firewall perimeter, is that the biggest piece of the enterprise business of these pieces you've described?

I see the data center still in early ramp up but is the enterprise, within enterprise campus that is the biggest piece and also that we also see ramp up very quickly, it is deploy there is a multilayered internal security because you can look on today’s press release the news that is testing so we have the product, they just position us the best intrusion prevention system and the same box also test last year as the best firewall and also the best firewall platform. Because when you deploy it inside enterprise you need to have the box capable to handle all type application because we see this is new opportunity within enterprise and multiple layer campus security.

And then Subul the only thing I would add to it is Michelle and we talked about most of the deals that we highlighted as some of the key deals for the quarter were data center, enterprise data center deals or is the core next generation firewall or firewall. So I mean we don’t - we haven’t broken out where we are not reporting a metric in terms of breaking out the enterprise business by the type of deployment but I would say if you look at Fortinet today versus two or three years ago there would be a higher concentration for sure of the data center security versus for the branch type deployment.

Thank you very much.

Thank you. And we will take our next question from Jeff Kvaal from Northland. Jeff, please go ahead.

Yes. Thanks very much. I have two questions, if possible. I think one is, could you help us understand a little bit better about the revenue impacts that you are seeing from the euro? I understand that you price in dollars, but to what extent is the fall in the euro forcing companies to cut back on their orders? What are you seeing in that realm?

Okay. We are just seeing a hot security market, I don’t think there is any other way to characterize that the market there because clearly there is a headwind there, we bill in dollars which you would think would typically be a challenge but I think security has just become paramount and so we are just really not seeing we can’t say we’re seeing much of an impact once in a while we will hear something, somebody might say that the price is challenging or something like that but we seem to be working through those and it’s a lot less than you would expect.

It is Ken. I feel Fortinet growth is more limit by the sales capacity and also execution because we have a much better product, when in product testing or beta, we win most of that and thus you can see whether in the carrier in the Fortune 100 enterprise whenever there is a beta testing and we have highest winning rate compared to competitor, once we have full capacity in Europe, in America few quarters ago you can see the results kind of ramp up very quickly, the symptom for some of the vertical space in U.S. that is where you match in and we believe we can have some work as result come in.

And then Jeff just to add on I think raises a good point, we view ourselves as a market disruptor in our price performance and if you look at the NSS lab test, we tend to be in the upper right quadrant because the correlating security effectiveness which we perform at the highest level it is price per bit protected and are gigabit protected and we do very well. And so I think in the phase - when you look at us versus competitors, we still come across as a very effective solution both from security, from a security performance enterprise perspective.

Okay. That makes a lot of sense. Thank you. Which segways actually into the second part of the question and that is, Ken, when you say that this market is still hot, is the hottest that you've seen in 20 years, that's a very strong statement and very impressive. To what extent do you think some of the strength that we are seeing in the market is cyclical and then how long, in your experience, might the cycles last?

I think some of the changing make increase up the network speed whether in the enterprise or in the home user, in the cloud or the keeping involving there and I think the most law still applies, so every 18, 24 months that the speed double, the, [indiscernible] semiconductor also double there, that's probably we're keep going there. On other side I see - because a lot of applications that we move to the mobile device and also attack the threat come from like - passes more like they could connect attack that’s what the traditional firewall they can break the connection and the secured the company with the parameter firewall. Now pretty much all the time we move to this agent based attack which they don’t need up connection, they can just get into your smartphone, get into the compromised laptop, PC even the USB drive. And once they bring something inside which can bypass the parameter firewall, then a big trouble internally because internal networks all connect by the switch were high speed switch, which we don’t have the capability to go to the higher layer to review the content, the user application to secure and to server department. So that’s where once similar mobile device bring into the enterprise - compromise mobile device bring into the enterprise and then there is a huge security usually there. So that’s where we see - until we can address the mobile device security, which whether by multilayer protection, all have some endpoint solution to secure a mobile device and the same time secure a pipe, I mean the traffic, other mobile device, otherwise I see still security is still a big issue.

Yes and Jeff, I know the question was to Ken but I can't resist adding on - I think what’s different is that, I mean all the breaches, all the headline events, I think have been a game changer for everyone over the last year and probably looking forward. I mean a year ago we’re talking about target, we get on to talking about some consumer breaches, maybe the Apple event and now we here we will forward to anthem and TV monitor for instance. And you’ve got President Obama, talking about terrorism and I think its hard to ignore, without I want to seem over height but its hard to ignore, its hard for corporations to ignore that because it now goes to their brand that I think one of the game changers clearly as that they now know they’re more cyber security is more about then protecting their own assets they have to be stewards of consumer or customer data. And that goes to their brand and then obviously the whole cyber terrorism thing. Whoever that might not impact everybody but its, it creates a lot of attention on the space and I think that attention transcends into the, to the board level and the sea level and people are concerned about it, want to understand it, want to understand what their risks are, and want multilayers of security to picks and I think that just creates a huge tailwind a fact the probably hasn’t existed in the past at the enterprise corporate level let’s say. I think that’s been there in the consumer level, if you go back in history but I think its more unique or more profound today at the corporate level than ever.

Yes. Now drivers make a lot of sense. I guess we all know that trees don't grow to the sky and everything, so we have to watch out for what may happen two or three years down the road or what have you. That's all I have, gentlemen. Thank you very much.

Thank you. Our next question comes from Michael Turits from Raymond James. Michael, please go ahead.

Hey, guys. Two questions. First, on the enterprise deals if you can characterize, is it mostly displacements on incumbents, if so, who, or is it more enterprise's building out some additional capacity or projects and you get in there? And then I have a second question.

So I will say most of them are displacements, I mean there is some of them that enterprise, I think what it is and we talked about it our script is that enterprise, many enterprises are looking at rather than just replacing a firewall, one firewall for a new firewall and changing vendors, its looking at doing it differently whether its going from the single function firewall to a multi function security solution or building out the infrastructure, look at the security differently but its not straight Greenfield type opportunity it really as far as displacing incumbents.

Yes. And I think, if you go back to keep for Michael I think we saw more above, I think I would characterize Q1 to be displacing incumbents, I would not, there certainly was some expansion for sure, I think we mentioned that, that’s definitely there, that’s definitely part of our final and part of strategy. I would call it more of a timing thing, I thing Q1 just totaled probably little more towards new customers.

Okay. And then Drew I know you'll be disappointed if I didn't ask you about cash back, but I think you said it be $25 million this year? Are we still on for that and is there anything else that we should be aware of when modeling cash flow this year that might be out of the ordinary?

No, I would stick to what I said last, I mean I actually said 20 to 30 Michael, and you said 25, was 25 a good numbers and I think, I agreed with you, so I'll stick with that. And then as far as CapEx goes, we’re sticking to the 40 to 45 range for the year.

Okay. And nothing else in cash flow from ops that I should be aware.

No, nothing, nothing else, we’re very focused on to be fair, I think if you look at our model, because I do think there is a bit of a disconnecting the accelerated level of growth, certainly as you, you go north of 30%, the P&L becomes bit disconnected from the sales activity which we reflected more in billings. And now even more so in deferred revenue and then cash flow and so we very focused on ensuring we do everything we can around free cash flow for instance and, that might be like working capital for instance and just being very focused that were not, we’re not consuming more cash then we need to.

Okay, great. Thanks great quarter. Appreciate it.

You’re welcome. Thank you.

Thank you. So our next question is from Gregg Moskowitz from Cowen & Company. Greg, please go ahead.

Thank you very much. Nice job on the quarter. Just a couple of questions. Drew, you alluded to briefly earlier the vertical you felt market strategy and targeting obviously financial services healthcare, cloud, federal as well. Can you just walk through the investment that's required there and what your expectations are terms of incremental demand in 2015 and beyond?

Sure, so qualitatively you can see the compression of our margins reflected and as reflected by the 14%, guidance and I think the performance in Q1 which is little better than we guided and then Q2. And so it is a significant investment in terms of headcount, we don’t share the number of headcount but its certainly a significant focus. In terms of the payback if you will or the time to kind of closing deal, I think you to really get rolling there probably takes, close to a year. I would say this though, early returns are very good. We closed what we believe is one of our largest healthcare deals as we mentioned in the script ever, one of our largest healthcare deals ever, we closed several federal deals, which were sizable. And I think we’re looking very good in the financial services area, little early there but, from what we can see and we look at our milestones there, we feel like we’re hitting all of those are, the other thing I would mention, we are very, we tend to look at the funnel quite a bit, I used that as a metric to kind of gauge the - be a good barometer of the forward business. And that looks great as well as the productivity whether you’re looking at the funnel based productivity or looking at the actual, people seem to be ramping better than the historically have here and I attributed that to the marketing investments we’re making, I think that’s going very well and then also I think the way we onboard people particularly in the enterprise is very good. We have seasoned professionals with proven track records coming in, not only with their own book of business or relationships if you will, but they’re very good in onboarding people and building teams and I think we are seeing the benefit of that, we certainly hope you could see that over the next year in those verticals specifically.

Okay. That's very helpful, Drew. Thanks for that. And then just secondly, are there any changes to where the non-FortiGate mix stand as a percentage of total revenue or billings today?

Not materially, no.

So some area like we mentioned, we announced like last week that the 40 client now with - capability we see a lot of interest in that area, so we don’t have like 2 million user download the software, which it is not a big number compared to some other endpoint solution provider but also not small number which we also found out is a good user can actually benefit from connect endpoint with network together. So that is really the key we can integrate the endpoint with networking with amount of management together which have a much better protection for the overall inside enterprise.

Okay. Thank you.

Thank you. And our next question is from Daniel Ives from FBR Capital markets. Daniel, please go ahead.

Thanks. This is actually Jim Moore in for Daniel. Just a question about the cash balance. It's growing obviously in profitabilities fairly steady, so I guess just wondering what kind of appetite you guys have for M&A and if there's anything interesting out there that would be worthwhile for you?

Hi Jim the way I would like to answer the question is maybe just talking about our capital strategy and our capital strategy has been to invest for growth that’s largely been in sales and marketing over the last year or so, year and half I guess. And from what we could see that is the best return that we can give, I think you could see the growth in the top line and I also just we have share holders and investors and I think it is also falling through to the share price. So either from a return on capital perspective, we think that is a great investment, in terms of inorganic we constantly look out there, what are the challenging things is that security gets a lot of attention and so you’re looking at some very high multiples and we’re very disciplined on price and strategy and we want to look to things that can enrich our offerings over time but be accretive certainly over the shorter or near term because those are the things that tend to make sense. So we continue to evaluate, I am sure we will do something at some point kind of hard to predict that timing but we are going to be very disciplined in how and where we look and we have to be very consistent with our strategy and enrich value for our customers over time.

Okay. That was it from us. Thanks good quarter.

You’re welcome.

Okay. And our next question is from Aaron Schwartz from Macquarie. Aaron please go ahead.

Hi. Good afternoon. I just had a quick question here. Given that the billings out performance relative to the product revenue out performance, are you seeing a different sort of attach rate with maybe the US enterprise sales? I know you touched on the bundling a little earlier. That didn't have much of an impact on the quarter, but it does seem like the attach rate on subscription is changing a little bit. I was wondering if you could just walk through that? Thanks.

Yes fair Aaron. I don’t think you’ve seen I mean it is hard to predict. I say Q1 is often a little bit lower product revenue mix wise I think than Q4, so if you are looking at sequentially I think there is always a bit of a step down to simply because keep such powerful spend out quarter for purchases from a calendar perspective for enterprises and companies as a whole. And so I think you get a bit of that in Q1, look I think it’s certainly part of our strategy to enrich the subscriptions and charge more and build out decline, I think it is a little early to claim too much of a victory there quite honestly but I think mathematically if you just look at the accelerated pace as a natural fact you are just going to as you model it, you are going to end up deferring a little more because the mix, the lot of the growth ends up just falling into deferred revenue if you will being attributed to FortiCare and FortiGuard subscription services.

I guess just a follow-up there. Was there any sort of change in renewal or anything else that would drive the deferred up if the subscription attach would change all that much?

Can you repeat that please?

I was just saying, sorry for the background, if the subscription attach rate is just moving slowly higher and there is certainly benefit longer term, I mean was there anything either on the renewal rates, core maintenance, or anything else to change? Because it was quite pronounced in terms of the booking subside. I'm just wondering what drove that to that degree? Thanks.

No, I think we talk about our customer retention rate which is just the overall number of customers renewing and that is north of 90%, so that is good, I don’t think we’ve seen anything overall, I think we I honestly I just think we’re executing very well.

Okay. Thank you.

Our next question is from Jayson Nolan from Robert Baird. Jayson, please go ahead.

Okay. Great. Thank you. I wanted to ask about the headcount add at the end of Q4. It would have been surprising to see that group contribute some in Q1, but I'm curious if they did and what the expectation is on full productivity. Is that kind of a 6-month target or 12-month target? It sounds like people are ramping faster than you expected.

Well Jayson I think the last comment is probably the way to look at I think people are ramping better than expected I attributed to - I think we’re very good at who we hire where we found our right profile if you will of experienced sales leaders and I think they’re bringing in their teams whether it’s team from their historical relationships or just how they onboard people. I think we’re also getting the marketing right in terms of how we generate leads for them and then also how we onboard them and how they deliver our message I think that’s just getting a lot better. And people are - sales people are getting the productivity faster than they had historically. I think it’s a combination of those things. Now talking about people who were hired, I don’t really look at people who are hired in December and how they performed in March don't speak, I think that’s just too early in fact you look more at their funnel and are they developing well enough such that they’re doing their job so to speak. And all those things look fine and that's it. I just think people are executing very well overall due to good leadership, good products, good marketing and good onboarding.

Okay. That makes sense. Ken, a question on kind of timing of refresh. I think we are going to start to go from the network processor to the content processor. Does that happen in this year and is the timing -- would that matter to revenue or is the CP less of an event than the MP?

MP definitely kind of improving the network speed interface speed quickly, especially in the firewall encryption. CP is more improving on the intrusion, on some other - some other content scanning performance. So we’ll have a product come up in second half of the year leverage new CP, will be the CP9, probably the product announced in the second half of the year then we’ll give some details.

Okay. Appreciate it. Congrats on the quarter.

And your next question comes from Rohit Chopra from Buckingham. Go ahead sir.

Thanks very much. Hey, Drew, can't tell that you are feeling good about the quarter. I wanted to go back to the port strike real quickly. Product gross margins you mentioned port strike, the transit issue, so given that it is short-term in nature does it make sense to look for modest incremental upside as we move through the next few quarters? So that's my first question on gross margin and then second question related to E-rate and the education opportunity. As you know, the government is giving schools a lot of money and I know you guys get a lot of revenue from the education segment. We noticed that in California alone or why don't I just give you a total for the United States - you guys look like you may have an incremental $10 million of opportunity named in a whole bunch of education deals for 2015. Can you just give us your thoughts on E-rate and the potential opportunity there?

We do see the email coming, this is Ken, let Drew answer maybe first question.

May be you want to go first Ken.

Yes that’s where - that’s most supporting infrastructure, we do see the need of some combined infrastructure with the security together so that’s where offer like secured Wi-Fi instead of just the Wi-Fi connection there. So that's opportunity we see, because right now we’re using FortiGate as a Wi-Fi controller so that's definitely will help in the school handle not only the better infrastructure but also better security.

Yes, and Rohit, hopefully I’m being appropriately factual in terms of how I characterize a quarter. The guidance - we’ve given the guidance and I don’t obviously we wouldn’t want to expand on that too much. What I would say is that’s, what I expressed in the past is that, on the good side, I think the positive things are that we seem to be ramping very nicely, the marketing investments seem to be paying off, the people seem to be performing very well. I think our messaging resonates not only from the NSS labs tests that we referenced but just from a, the notion of best-of-breed integrated platform, I think also resonates very well at the enterprise level. I think on the cautious side, look we’re getting into bigger numbers, the compares are getting bigger year-on-year, we do have a lot of new people, and new processes in place and, I think we're being very appropriate in how we guide.

I was just trying to get you to slip up and give us a higher number.

Yes, right.

Our next question comes from Scott Zeller from Needham & Company. Scott, please go ahead.

Hi. Thanks. Could you just give sort of a summary of where you are at the vertical sales force build-out strategy? You've referenced a number of times and we are pleased with results, but there were questions earlier around margin ramp in the second half of the year and specifically around sales and marketing. So could you just talk about how far you are into that build out of those teams and how it will affect sales and marketing throughout the balance of the year?

Scott, I think we were about, I would say midway in our overall sales and marketing investments, I would call, I would characterize it as mid way. Verticals is the major component of that, I think we're through quite a bit of that part of the strategy from a sales capacity perspective but now we're layering in marketing, we're layering in the marketing side of that and so that, that’s a bit of a an investment. The other investments we're making again are just investments continuing to scale the enterprise sales force globally and particularly in emerging markets and then also little bit in Asia where we probably have and invested as much as we would have liked, and you can see the results in Asia aren't quite keeping pace with the EMEA or the America’s and so that’s where we see the opportunity. I know it’s a little broader answer but when I think about the margin I just think its, I think its, you really want to take a step back and look at the whole frame if you will. I would say and just in particular with verticals again it takes a little while to have that investment payoff, you’re talking about bigger customers, lighthouse customers and each of those verticals. We saw a nice uptick in healthcare on one of the largest healthcare deals we’ve ever closed and then some very nice traction in the federal space, where we closed several deals.

Thank you.

Thank you. And I am showing our final question from John Lucia from JMP Securities. Please go ahead sir.

Hey, guys. Thanks for my questions. I have two questions. Ken, you referenced the internal server security opportunity ramping pretty well. I was just wondering if you could give us a sense for what inning we are in that opportunity, how long you think it'll take to become meaningful in terms of revenue, and then also what the competitive environment looks like there?

This is Ken. I think that's a new area beyond the primary security for enterprise is that still, like I said still in early stage, but we do see the customer, large interest and also want to spend money to provide multilayer security because it also depend on platform to handle the speed of internal security because internal security tend to be like 100 even thousand times faster than the parameter, the board of security because internal is all connected by the high speed switch. So you need to have a high speed deployment and also have to be easily replacing some of the switch, has to be very quick and also lot of things now depend on the fixed policy but all depend on the some merchant lending, some behavior-based what's normal, what's abnormal traffic kind of pattern to really manage that. So as this is still early and but you can see from the large enterprise for all this - like they see the important of security servers, security datacenter, security department there. I don't see much – pretty much no research for some research firm to address this one yet and but I do believe this is relatively additional market and as a new opportunity, we position well, well because the platform we have with ASIC accelerate beyond the CPU, which can have huge advantage before internally in the high speed environment. That’s probably more - happen in the large enterprise right now and I think eventually they may expand into some mid enterprise even some data center service provider but is in early stage right now.

Okay. Thank you. And then, Drew, I had one quick question. Can you quantify the one-time items in gross margin, the Port of Oakland, the increase in the price of the bundles?

I think I share the price of bundles, I would characterize roughly a couple of million dollars. As far as the Port of Oakland, yes somewhere maybe somewhere slightly north of 300 to 500 K, kind of in the 300 to 500 K range.

Okay. Thank you.

Some of that carries into inventory still the way you do the accounting in some of the cost of the freight actually rolls into the inventory balance and so you pay for it over time let's just say.

All right. Thank you very much.

Okay. Thank you. I'd now like to turn the program over to Michelle Spolver for any concluding remarks.

All right, thank you everybody. Thanks especially we had a busy day. We are having a busy week. So thanks for all your time today. For those of you who have additional questions, we will continue to do our second call at 3.30 PM, so feel free to call back there. And everybody who's at RSA will be there this week. Our booth number is 4400. Come by, come look at the technology and hopefully we will see lot of people there. That's it. That concludes our call today. Thank you very much.

Thank you.

Thank you.