Fortinet, Inc. (FTNT) Q3 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to your Fortinet Q3 ‘15 earnings announcement. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session which instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. And now I'll turn it over to your host, Michelle Spolver. Michelle, please go ahead.

Hi everybody, apology for that again. Want to be respect for your time, but I also wanted -- I think it's important for everybody to hear the information. Not that everyone is dying to hear our disclaimer but let me go and read it one more time. And then we’ll conclude this quickly. Please note that some of the 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 Form 10-K and 10-Q for more information. All forward-looking statements reflect to 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 will be discussing certain non-GAAP financial metrics on this call. Our GAAP results and GAAP-to-non-GAAP reconciliations can be found in the earnings press release and on Slide 14 and 15 of the presentation that accompanies today's remarks. Please refer to our Investor Relations section of our website for more important information, including our earnings press release issued a few minutes ago and slides that accompany today's prepared remarks. Before I turn the call over to Ken, I would say thank you all for email me and told me about the sound quality because we don’t know the problem on our end. So if by chance it happens again please contact me, email or text message for those. And with that I’ll turn the call back over to Ken.

Okay. Thanks Michelle, and I hope everyone can hear me okay. And thank you for joining the call today to discuss our third quarter 2015 results. I'm pleased to share that for the third consecutive quarter of this year, Fortinet accelerated billings growth to a record level, deliver 41% billings growth. So this is approximately four times the current growth rate of the network security market, and at the highest growth rate, we have ever achieved as a public Company. Our technology advantage is very strong and our growth strategy is working. Our Q3 business was driven by ongoing healthy security spending environment to defend against an increasing array of sophisticated security attacks, companies continue to invest in upgrading and expanding their network infrastructure and selecting Fortinet's high-performance best-in-class integrated platforms. During the quarter, we won deals with some of the world's largest enterprise, finance institutions and service providers. This type of customers require the best product and perform the most stringent testing for their complex security environment. Time and time again, Fortinet outperform competitors with a superior technology and unmatched level of performance, validation of this is in our managed and products' application and recommendations. We also continue to see strong enterprise demand, we deployed high-speed FortiGate appliance as an internal segmentation firewall to help protect the key network resources from attack that get past prime-tech defences or come from within. This more high performance that is required for the internal firewall deployment is something Fortinet offered better than anyone else. And the ability to deploy our solution in a transparent or switch mode to enhance, not disrupt, the existing network security architecture is enabling expansion opportunity for our installed base and is also opening door with competitive account. In the third quarter, sales of our FortiSandbox advanced server protection appliance increased to record level, more than tripling year over year. On the ATP front, beyond just our NSS recommend FortiSandbox appliance, Fortinet has a strong advantage in our ability to offer ATP frame work not integrate FortiSandbox with 40-gig next-generation firewall, Fortinet email security, FortiWeb Web application firewall, and Fortify and from security product with our world-class solutions team to detect, correlate, stop near the threat and the parameter internal Internet, and Web, and end point. Customer want less competitive and a true integration and competition between multiple protection systems. Just some of the many that we win during the quarter including a seven-figure deal with a large U.S. based service provider, a Fortune 100 U.S. technology service company, a well-known U.S. federal government entity and a large Asian Pacific city government. Fortinet has a comprehensive platform of products and services to protect the cloud to the client and the network point in between. So a strong partner ecosystem, which can be seen on Slide 3, we can tightly integrate and interoperate at our major relation, SDN, cloud, secured analytics and the new vendors. During Q3, we enhanced and expand our ecosystem to include deeper partnership with VMWare through the NSX with addition with the FortiGate VMX 2.0. This complements Fortinet's internal technician [ph] power strategy that enhances the security culture of micro-segmentation in the data center. We also broadened our partnership with Cisco to integrate the FortiGate next-generation firewall into Cisco ACS software-defined network architecture. And we entered into new technology into our ability partnership with Splunk and our recent network, as well as a technology integration and a sales partnership with Capgemini and NTT. All of these partnership broaden our market opportunity and make it easy for customer to secure the multivendor, multilayer networks. Fortinet has a clear technology advantage and a strong and innovative road map in place to help us continue to strengthen our market position. In addition to new product and software that will expand our advantage and opportunities, our soon to be released FortiASIC quantum processing line or widen Fortinet's performance path even further. Our eyes are set on the continued growth and innovation, and I feel confident about our road ahead. Now I will turn the call to Drew to further review our Q3 financial results and provide outlook for the remainder of the year.

Thank you, Ken. Fortinet executed well during the third quarter, and our investment strategy continues to pay-off. Our billings growth accelerated to 41%, making this the third consecutive quarter that we've delivered record growth as a public Company. Fortinet is one of very few companies with over $1 billion run rate that is achieving this level of impressive growth. It's noteworthy that we're also maintaining sensible profitability and significant free cash flow. During Q3, we continued to execute our strategy of acquiring first seats at enterprise tables and landed several marquee deals with some of the largest, most savvy enterprise customers in the world. All of these customers have vast infrastructures and provide abundant expansion opportunities for Fortinet in the future. Let me now share with you our financial results for the third quarter, which can be seen on Slide 4. As I just mentioned, Fortinet's billings increased 41% year-over-year to $300 million, exceeding our guided range of $285 million to $295 million. Total revenue of $260 million was up 35% year-over-year, and was at the high end of our guided range of $255 million to $260 million. And our deferred revenue balance increased to $707 million, up 41% year-over-year, in line with our billings growth. From a profitability perspective, non-GAAP operating margins were 14% and non-GAAP EPS was $0.14, both exceeding our guidance. As expected, we continued to invest in line with our strategy to drive growth as we successfully absorbed the costs associated with the Meru integration yet still delivered additional margin upside to shareholders. And finally, our cash generation was strong, as evidenced by the $52 million of free cash flow generated during the quarter. This continues to demonstrate Fortinet's ability to generate a significant amount of cash, while at the same time investing for future growth. Our quarterly performance continued to reflect a robust security market, as the number and sophistication of network security threats continues to grow. This is illustrated by the various high profile attacks which highlight increasing corporate responsibility and accountability to protect information. As a result, security remains a critical IT investment priority, and as Ken stated, companies are demanding a proven, best-in-class integrated security platforms like Fortinet's. In Q3 we added approximately 8000 new customers to our base of more than 250,000 customers. We continued to land deals with new Fortune 100 customers, which is key to our long-term growth strategy. These large enterprises represent significant opportunity for cross-sell and upsell, as they purchased more products and services over time, yielding substantial lifetime value. A few deals landed with new customers included several wins with new financial services customers, both in the U.S. and internationally. In particular, our largest win of the quarter was a multimillion dollar, multi-phase deal with a large U.S.-based financial firm. Fortinet was chosen for a branch-to-core deployment to replace the incumbent provider at the Company's data centers and each of its thousands of branch locations. This customer conducted in-depth testing and chose Fortinet due to our ability to provide a combination of better security, scalability, and networking features than competitors could deliver. Additionally, we also landed deals with two of the most recognizable technology brands in the world, both of which were competitive replacement deals. One of these deals was with a multibillion-dollar Fortune 25 company that chose Fortinet due to our ability to provide a comprehensive security solution, which included our FortiGate, FortiSandbox, FortiMail, and FortiAuthenticator products. The other deal was to provide a high-speed network firewall for an extremely well-known technology brand. Gaining first seats at both of these very large companies provides significant future expansion opportunity. These are just a few of the many deals that Fortinet landed during the quarter. We continue to win initial seats at some very large tables, and are also expanding nicely within existing accounts. This is due to the strength and performance of our integrated technology platform and stronger sales and marketing efforts. Fortinet has a broad solution portfolio that enables us to address all phases of the attack cycle. We prevent, detect, respond to, and mitigate the most sophisticated threats. Our offering allows us to do this at the network perimeter, interior, end point and numerous points in between through a common operating system and the ability to communicate across the entire platform. This provides us lucrative expansion opportunities to cross-sell additional products over time, which is key to our lifetime value model and the long-term growth, and profitability goals. To this point, a few of the many expansion deals closed during Q3 included one of the largest and most recognizable investment banks in the world that we landed just last quarter after being selected over competitors for a multiphase enterprise-wide next generation firewall refresh project. During Q3, we expanded within this account to win another piece of business to deploy our FortiGate appliances as internal segmentation firewalls for added layers of threat protection for its mission-critical network. We also expanded in another North American bank that will now be replacing its legacy firewalls from a competitor with Fortinet's solutions, three of its large data centers. And we won some expansion deal with one of the world's largest international banks which purchased our FortiGate high-end data center appliances and employ products for end-to-end security, scalability, reliability, and high performance. On the service provider front, we expanded with several Tier 1 providers, including two of the largest and most recognizable names in the world. Both of these companies have been customers of Fortinet for more than eight years, and spent more than $100 million within that time. The first customer we won a multimillion dollar deal to protect network backbone for its numerous hosted data centers around the world. While competitors were considered, none could provide the performance, scalability, management or proven track record that Fortinet delivered. In the second deal, we won a multiyear expansion project with a telecommunications company that is migrating its firewall infrastructure from an acquired subsidiary and replacing competitive offerings with Fortinet's. As Ken mentioned, sales of our FortiSandbox ATP appliances more than tripled year-over-year. And the number of deals were cross-sell opportunities with existing FortiGate customers. Finally, I also want to highlight that we had numerous, large subscription and support renewable deals with existing Fortinet customers. Our renewal rates, which attract by appliances are customers remain in the mid-70% range, and exclude product refresh and upgrade purchases. As we said earlier, our customer retention rate is above 90%, which demonstrates overall customer satisfaction as well as the stickiness of our solutions. Our high renewal and retention rates also show that we are not only winning numerous customers from the company, but we are keeping them. During Q3, we were pleased with our large deal metrics as a number of deals over $1,000 grew 59% and deals over $1 million grew 55%. Our breakdown of billings across our top five verticals remained relatively consistent, with service provider at 22%, government at 12%, financial services at 11%, education at 10% and retail at 6%. Geographically, year-over-year billings growth was strong across all regions. Americas billings grew 36%, EMEA billings grew 50% and APAC grew 36%. We are pleased with our growth in the Americas, given some economic headwinds from Canada, which is experiencing a slowdown. During the quarter, the pace of wins with large strategic enterprise customers continued nicely and we closed deals with 11 of the U.S. Fortune 25 companies. We also experienced strong performance from U.S. service provider segment, where we closed a number of seven-figure expansion deals. In EMEA we delivered another exceptional quarter, and our impressive 50% growth was driven by strong performance across all regions. Earlier investments and upgrading sales and channel partners continue to bring attractive returns. We have an experienced high quality team in place in EMEA who is executing extremely well. And in APAC our growth doubled over Q2 and we saw very strong performance from Japan as well as Korea and India. We continue to believe APAC presents a large growth opportunity for us. We started to benefit from the investments we've made, and will continue to make in expanding and upgrading our sales force. Turning to billings by product segment on Slide 7, we continue to see diversity of product billings across all segments. Our high-end FortiGate products accounted for 38% of total product billings. Our midrange enterprise products accounted for 26%. And our entry level products accounted for 36%. As a reminder, our product billings mix varies quarter-to-quarter based on the model to product to make up all size deals. And one quarter does not make a trend. Total revenue was $260 million during the third quarter, up 35% year-over-year and at the high end of our guided range. Revenue performance was driven by the combination of 36% year-over-year product revenue growth and 33% year-over-year services revenue growth. This was our highest revenue growth rate achieved in the past three years. While we're not breaking out the small amount of revenues associated with Meru, it should be noted that Q3 included the contribution from the acquisition since the July 8 close date. On a geographic basis, you can see on Slides 8 and 9 that revenues continue to be diversified globally, which remains a key strength of our business. In the Americas, revenues grew 38% to $113 million. EMEA revenues grew 39% to $92 million. And APAC revenues grew 23% to $55 million. Moving to non-GAAP expenses and profitability. During the third quarter, consolidated total non-GAAP gross profit margins were 74%, which was above our guided range of 70% to 71%. Non-GAAP product gross margins were 63%, the highest in several quarters. Non-GAAP service gross margins were 83%, highlighting the recurring nature and margin expansion value of our FortiGuard and FortiCare subscription offerings. Non-GAAP gross margins were positively impacted by higher sales of software products, such as our VM line of virtualized security solutions. Non-GAAP gross margins also benefited from the impact of recent price increases to our FortiGuard security subscriptions, as well as inventory management efficiencies. Total non-GAAP operating expenses were $156 million during the third quarter, resulting in non-GAAP operating income of $36 million, or 14% of total revenue, and above our guidance. Non-GAAP net income for the third quarter was $24 million, or $0.14 per share based on 178 million diluted shares outstanding, and also ahead of our guidance. The non-GAAP tax rate for the third quarter was 35%. A reconciliation of non-GAAP and GAAP financials can be seen on Slides 14 and 15. As seen on Slide 11, we ended Q3 with a strong balance sheet, including $1.17 billion in cash and investments, up from $1.148 billion at the end of Q2. The increase was primarily driven by the $65 million in cash generated from operations, which was partially offset from the cash used for the acquisition of Meru. As previously mentioned, free cash flow was $52 million in the third quarter. Our continued strong cash flow reflects our ability to both reinvest in the Company to support growth while also generating cash that will benefit future growth. Annualized inventory turns for Q3 were 2.1, in line with our annualized goal of 2 or better. Our deferred revenue balance increased to $707 million, up $207 million, or 41% year over year, and $49 million sequentially. Now, let me finish with our guidance for the fourth quarter and full year 2015. As a reminder, all forward-looking statements, including all of the guidance statements provided, are subject to Michelle's cautions at the start of this call. Fortinet's market opportunity and technology advantage is significant, and our investments are paying off. We are succeeding in laying the foundation for our future as we scale Fortinet to be a multibillion-dollar business. We've more than tripled our growth rate over the past two years, and have reported record billing growth for the past four quarters. And while we have almost doubled the size of our sales force with experienced quality salespeople, our investments in marketing are in earlier innings and we still have some work to do. With new marketing leadership and focus on improved systems and profits in coming quarters, our investments in sales and marketing should result in continued improvements in market awareness, lead generation, and sales enablement. Additionally, while the network security market remains healthy and Fortinet's competitive position is extremely strong, we are nonetheless facing continued uncertainty in Canada, as well as in Brazil and other emerging markets, which could impact our business. For these reasons, we are approaching Q4 with cautious optimism. During Q4, we expect billings to be in the range of $364 million to $369 million, up approximately 30% year over year at the midpoint. Total revenue is expected to be in the range of $293 million to $298 million, up 32% year over year at the midpoint. Non-GAAP gross margin is expected to be approximately 70% to 72%. Non-GAAP operating margin is expected to be approximately 16%, reflecting improved leverage while continuing to invest to drive growth. And finally, we expect non-GAAP earnings per share to be approximately $0.18 to $0.19, based on an expected diluted share count in the range of 179 million to 181 million fully diluted shares. For the full year 2015, we expect billings to be in the range of $1.215 billion to $1.220 billion, up 36% year over year at the midpoint, and above our guidance range provided in July. Total revenue is expected to be in the range of $1.006 billion to $1.011 billion, up 31% year over year at the midpoint, and also up from our prior guidance. Non-GAAP gross margin is expected to remain in the range of 71% to 72%. And we are maintaining our non-GAAP operating margin guidance of approximately 14%. We've shown leverage in our operating model, and our growth strategy is working. We believe our investments will benefit us long-term from a customer lifetime value perspective. Our original 2015 guidance anticipated operating margin improvements throughout the year, and we've delivered and expect to continue to deliver on this. And finally, we’re maintaining our prior non-GAAP earnings per share guidance, and expect it to be in the range of approximately $0.51 per share to $0.52 per share, based on an expected diluted share count in the range of 176 million to 178 million fully diluted shares. In closing, I'd like to thank Fortinet employees, partners, customers and shareholders for their continued confidence and support. With that, Ken, Michelle and I will now take your questions. Operator, you may start the Q&A.

[Operator Instructions] And I am showing numerous questions and first coming from Brent Thill from UBS. Please go ahead.

Good afternoon. Just as it relates to last quarter, you had a material upside above the high end of the guide, and this quarter you came in at the high end of the guide. Was there anything that changed that you saw in the quarter, whether it was geographically or competitively, that may have caused that difference relative to Q3 versus Q2?

Revenue. You're talking about revenue, Brent, right? Not billings?

That's right.

Yes. Fair enough, Brent. Yes, on the billing side I think we over performed a bit. So that's like fine. Look, I think just the revenue, it's a little harder to predict. Part of it was just simply as you raise prices you end up carving out more per billings dollar, quite frankly, because the price is higher and you reflect more of the overall deal value, say the invoice value, to deferred revenue than revenue. And I think that's a piece of it. But there was nothing else there that I can point to that really had any effect on the revenue side. But it came in at the high end of guidance, didn’t quite pick up all the benefit you saw in the billing side. But I’d attribute it to just small amounts of just different -- kind of the accounting difference, if you will.

Okay. And appreciate the billings comment. Just when you look at the backlog that you saw in this quarter, no real change in terms of the overall spending appetite or close rates that you've been seeing historically everything continued in Q3 at the rate that you've being seeing in the first half of the year?

Yes. I mean, look, just start with EMEA. I mean 50% growth is, I think, outstanding. We're very proud of that. I think the fact that we grew, I think, what 33% in APAC, which is almost double the rate of growth, and really just due to investments there really over the last six months. I think these are things we are proud of. When you kind -- when you come closer to home, clearly the security demand environment hasn't changed. I heard one of our competitors say that everything goes out to RFP anymore because it's a board-level conversation. That's absolutely the case. I think the -- clearly the deals are there, that's our opportunity. The only thing we point to in terms of where we saw kind of a bit of a soft spot was probably Canada. Clearly we would have liked to see them perform a little better. But I think that's just due to their economic situation up there. That was really the point. And then looking forward, we pointed that out. And I think we're also being somewhat cautious about just emerging markets in general, given the economic situation in any commodity based economy.

Canada and Brazil. Brazil also.

Yes. Brazil I think we pointed out in the script, yes, specifically. But I would say Latin America could be even a tougher place. We haven't seen that yet in Latin America. Latin America had a decent quarter, quite frankly.

We’ll take our next question from Gray Powell from Wells Fargo. Gray, your line is open.

Great. Thanks a lot. Thanks for taking the questions. Maybe just some pricing. How has the UTM bundled price increases that you implemented at the start of the year impacted billings? And then has that worked its way through the entire customer base yet?

It helps a little bit on the billings. It helps -- what it does is it helps on the deferred revenue, which I was just explaining to Brent, Gray. So it rolls into revenue over time because you have a higher -- if you look at the overall deal value, so to speak, a higher percentages is now attributed to the undelivered element or the subscriptions and support which you deliver over 12 months or longer. I think you get a little bit of pricing uplift over time. Clearly that's a piece of the growth, I think. I don't have a specific number for you, but I would consider it a tailwind. I don't think it's a major tailwind. But I think it's a tailwind. I think it still takes time to work its way all the way through. We're doing a lot of larger deals with installed base customers. We saw quite a bit of that activity. It's hard to instill that price increase just upfront. That's something that rolls in over time. And so we hope to get that benefit over the longer term.

Okay. That's helpful. And then, on Meru, I know you don't want to quantify the revenues, but can you maybe help us think through the impact on operating margins in Q3? I'm just guessing that there was probably some deferred revenue write-down of the asset. But you probably still had something close to the full run rate of OpEx. So I'm just trying to get a sense as to what core quarter net margins would have looked like, any thoughts on timing of synergies?

Just starting with what we're trying to accomplish with Meru, I think it's just really important to set the context. When we see -- again, wireless was becoming part of enterprise networks. And so it's another way to access the network. And so we had a wireless product. Meru had high density wireless. We're bringing the two together, effectively, to give us a broader presence in a $5 million market, quite frankly. So that was the idea there. And where we saw most of the value is really in the R&D team. We brought over the sales team, but we did our best to wean efficiencies. And we restructured, quite frankly, quite a bit of the Meru team, because obviously if you do the math, I think somebody said the margins would be $10 million to $13 million, low teen-millions dilutive. And I think we've done a good job of basically incorporating them without taking that hit. So what we did was basically failed redundancies across the merged Company. And then also found ways to eliminate real estate where possible, where we have multiple and dual location, let’s say. And then just even synergies on the contract side. And we'll continue to look to do that. I mean, that's one of the benefits here. But we did not buy it as a run rate business. Clearly, Meru is not -- first of all, they weren't really performing at their run rate. You saw declining revenues. And I would characterize the business as kind of continuing in that direction, quite frankly. We didn't -- it was not growth in what they had in the past, certainly.

This is Ken. Also the reason we buy Meru was really wanted to secure Wi-Fi, not just the Wi-Fi they did in the past. And also that's where we only vendor to offer security combined Wi-Fi together. So, that's where most of sales team, Meru team, really had to be retrained to see how to sell a secure Wi-Fi solution, which we started a few years ago. So that's the purpose really, not continue the traditional Wi-Fi, but really secure Wi-Fi solutions. So that's the long-term target we have.

Yes, and Gray, I would even say this. I mean, what we were really trying to do, when you think about the business we acquired, was penetrate the install base with FortiGate and FortiGuard. And we even had incentives. We even changed the incentives to target the sales force to go that. I think, look, clearly we'll acknowledge that they were probably clearing out their funnels to a certain extent. But we had additional incentives in place, really encouraging the teams to work together to get their installed base on Fortinet products. That's really what we're trying to do strategically, both near and long term. And then, as Ken said the overall injecting more security into their wireless end.

Yes. That is really like including the Meru sales force. We add a lot of sales force in Q3. And most of them need to be trained. They need to ramp up, especially in U.S. side. And that's where we are keeping like get them ramp up quickly, but at the same time, it's also somewhat a deal may take time to get better.

Yes. I think it is very different purpose in life than what they had prior to the acquisition.

Got it. That's great detail. Thank you very much.

Okay, John. We can take the next question. John?

We’ll take our next question from Saket Kalla from Barclays Capital. Please go ahead.

Hey, guys. Thanks for taking my questions here. So, first just for Drew, not to revisit one of the earlier questions, but could you just maybe talk us through how to think about product revenue this quarter? I know you have a larger carve-out from some of the pricing benefit benefiting deferred. But product sales might be a little bit lighter than what some expect it. So did Meru maybe decline more than we thought, were we frankly just maybe high on the product side? Or was there something else that you would call out on product revenue in the quarter?

No, I don't think there's anything to call out. I think it's relative to the upside. Again, we are at the high end of the guidance on revenue. You are really talking about the mix. I actually think it's a normal mix, if you go back and look historically. It's not out of line with the normal. I can't really speak to what you had in your models. I pointed to a little bit of an accounting change, certainly versus a year ago. And that does account for some of it. It dilutes the upfront revenue, quite frankly, as you increase the price of the bundle on a deal-by-deal basis. I don't have anything, there's really nothing else there. I don't see anything else there that would -- certainly nothing there to bother us. I think we've pointed out, if there were any soft spots in the business, it would be more the Canada and Brazil that we talked about, emerging markets so to speak, and probably more going forward than in retrospect. And other than that, I think the billings were pretty strong.

Absolutely. Got it. And then just for a follow-up, maybe for Ken. From a product perspective, Ken, I guess with the new content processor coming out soon, can you just talk about how you plan on rolling it out, maybe over the next 12 to 24 months? Is this something that you built into the higher end appliances first, and then maybe go down the stack? Or maybe just talk to us about the cadence of that new ASIC release?

Okay. The ASIC kind of processor the one we build a successful chip, was started new to the product. Probably would take like a few years to totally go out for the product. This apply for all the mid and high-end, and some of the low-end because low-end we using the system chip, which also integrates some of the function from the kind of processor there. So that's where it's -- like we said in the past, probably every quarter there's a couple of new products using the new chip and because they have a huge performance improvement. Like some example, like in the [SSR] acceleration, so we've improved performance by 14 times. And like the intrusion engine, they more than doubled. Like the IP stack, and that performance more than tripled. I think it is a lot of improvement, in fact a lot of new function we have. So that will help us to gain a lot of new performance in the middle range and the high end, especially to process the content side. It will take some time. We don't see much material impact, but once the product come out you can see the differentiation will widen the gap, because not our competitor will be able to deliver this kind of performance, especially in the company processing angle there.

Yes. Just one last point on the revenue, not to revisit it. But I look at billings to be -- to really reflect the overall health of the business. We've talked in the past about trying to create recurring revenue streams. The bundles actually do that very well. You may have a little bit of upfront dilution because of the change. But over time, that's the gift that keeps on giving. So effectively I have the right to bill more over time. So really I would focus more on that, the fact that from the price increase perspective, that you're really generating a higher customer lifetime value, because that's the part that you renew over time versus the upfront, which only refreshes every so often.

The bundle also is, as you can see, the gross margin has been the highest in the last couple of years. It's at 74% now, keeping -- that's actually similar contribution. And at the same time you can see that deferred revenue growth was over $700 million, grow like 41%. And that's also higher than the revenue, higher than the product growth. That's some contribute from the bundle increase, because the bundle also -- not only just the hardware, but also that the increase volume in the service component there. That's also helping probably more the shift in something to the server side.

We’ll take our next question from Sterling Auty from JP Morgan.

Thanks. Hi, guys. The stock is partially reflecting here in after hours the guidance on operating margins to the fourth quarter. And the sense that I get in my discussions with investors is they're worried that as we get to next quarter and the guidance for next year, that we're going to have a repeat of what happened last year, or a repeat of what we're seeing tonight where the guidance for operating margins comes below where the Street is expecting. I think we all agree that you're getting the return on investment, given the growth, the acceleration. But can you at least give us a little bit more transparency in terms of helping us understand where the right level of investment should be so that at least we are setting the right expectations in terms of the investments as it moves forward? Will we get further operating margin expansion off of the December quarter, or do you need to continue to invest at a rate where margins stay flat?

Yes. So Sterling, we, as you said, the investments are paying off. I mean, 41% growth, I think we've had record quarters several quarters ago on the billing side, so clearly paying off. We continue to see demand. And I believe that most of our competitors are saying the same thing. It's a unique opportunity to go after the incumbent space, as well as just the overall growth in security market. So it's a unique opportunity that we see, and quite frankly we're going to continue to invest. We've said that and we stand by that. We see specific opportunities in APAC. We think just a little bit of investment there in the last six months or so has made a big difference and elsewhere around the world. I mean 50% growth off some pretty good run rate in EMEA right now, I think is emblematic of the opportunity out there. And so we're going for it at. And again, the CLV happens. I think we've had a -- we've mentioned quite a bit of follow-on deals. We did 11 deals with the -- I don't know if we mentioned this, but we closed 11 deals with the U.S. Fortune 25 this quarter, some of those were expansion deals. And then the last point I would make is we are doing, we believe, extremely well at the top end of the enterprise. And one of the areas we want to invest in is more kind of in the middle and smaller part, smaller size of the enterprise. And that takes a different market awareness program, if you will, or a volatile strategy and investments, some slightly different kind of lead-to-conversion cycle. And then the sales enablement side is different. And so how we -- we are still making adjustments and we're going to continue to invest because we see opportunity. And I would just cycle back. We see the value again for every $1 initially spent on our 2009 cohort they've spent $5 over time over the next five years. And we believe that applies, and certainly we feel like we're doing extremely well at the top end and we want to translate that across the broader enterprise market.

One there, also the marketing also, we have the new marketing leadership there. And that's where we're keeping our best, because what we've fallen behind compared to some of our competitors, really, the mid-enterprise, which need a marketing help a lot. So that's we were keeping building both the marketing and also the mid-enterprise. It takes some time and also we have to make some adjustment in Q3, both in the field and also in the management. So we do believe we have the best product once we get all the right process, all the right -- the team in place, you can see the growth can be accelerate.

And then Sterling, just to finish, and it sounds like you might have had a follow-up or you want to push a little bit. But, we have a lot of new people in place here. And we've had a lot of success. And we now have the opportunity to really go through a robust strategic and tactical planning exercise that would -- and it would be far more beneficial to go through that with the new team than to give guidance that we didn't necessarily feel comfortable with in 2016. And so we gave guidance for 2015. We look forward to giving guidance in January on 2016. But the right thing to do here is really go look at the market, look at our opportunities, and make sure that we have the people and investments in line to drive the highest possible growth rate that leads to the highest customer long-term value for our shareholders.

So you're right, just a push in this direction, so, you've seen an acceleration in billings, which will have an uplift on revenue. So I guess in order for margins to be flat or down, you would have to accelerate the pace of investment, so maybe if I asked it this way. Do you feel in order to capture the opportunity that's in front of you that you are going to have to accelerate the pace of investment relative to what you did here in 2015?

Look, I would say the right thing -- we're not -- clearly we've guided on ’15. I would leave it we're going to continue to invest. How much we're going to invest, we really need to go through our planning cycle with our new teams. And again, we'll give you an update in January.

And also, like we’ve mentioned the growth. This is not only at a sales capacity, but also improving the process and efficiency, so that other part, we also doing. So that's, I think, sometimes the growth can be outpaced the investment sometime if you have the better process, you can also do it other way.

Got you. Thank you.

So our next question comes from Melissa Gorham from Morgan Stanley.

Great. Thanks for taking my question. Drew, on the pricing increase are you seeing any customer pushback from that pricing change, or is it that you have pricing power in this case? And then how should we expect the benefit of that ASP increase to kind of ramp through the model, I guess through 2016?

Well, are we seeing pushback? Quite honestly, very little, on a one-off deal I want to -- in full disclosure, every once a while you'll hear something. But it's not -- certainly it's very much the exception. Even in the case of some of the emerging markets where I think teams were probably raising concern about it, but it never really came through, to be frank. And I wouldn't characterize it as, any different, than we've been describing over the last three or six months, quite frankly. Every once in a while you hear about it, but nobody seems to really push back at the end of the day. Our price performance is an advantage, I think, at some levels. I mean, clearly we still have a price performance advantage, even after the price increase. And I think we're pretty good at selling that, and that's the key. Where its a little rougher is where you have agreements in place, existing agreements with customers who have current pricing. And obviously that's where you're going to get the pushback, perhaps on their renewal, or even on maybe a refresh deal. That's where it's a little tougher. But on the new business, you're really bringing them in at a higher rate, so to speak, at a higher annuity stream, as I was mentioning earlier. So that's probably how to think about it. As the longer term benefit, when you think about the -- if you're talking about the accounting piece, it kind of takes a year to lag that, right, because you are doing a different compare year on year.

Okay. That makes sense. And Ken, you talked about the internal firewall opportunity. I'm just curious, is that business meaningful for you today? And then how we should expect to see that sort of ramp? And is there a different competitive dynamic in that market that you're seeing?

Yes. It's for the large enterprise as the all like the idea and the study implement the internal segmentation firewall. We don't see any study yet because I think for the big enterprise, again, we are studying when there are a lot of large enterprise like close to 11 of the top 25 like Fortune 25 company there. It's most of them really you've seen some internal segmentation to protect inside their network using like what they call a transparent mode or the switch mode which can protect different department, different server there. It's a net add in this whole network secured space because it is still keeping the parameters security, but it's additional protection for them. How big, how quick the market grows, we may still need a few quarter to see, but it's -- I feel it's a new architecture needed to protect a lot of big enterprise.

And Your next question is from Shaul Eyal from Oppenheimer. Please go ahead.

Thank you. Hi. Good afternoon, guys. I think you mentioned that the APT product, if I'm not mistaken, has doubled.

Tripled.

Tripled, I'm sorry. Let me take it back. Tripled. Is it the market? Is it displacement? What's driving specifically the APT?

I think they see a lot of a new attack, and because you see a lot of news in -- about a security breach there. And ATP is a pretty hot topic these days. But what actually helps is really how we can make an ATP working together with firewall, with other email web system because today some other like APT vendor, they can only detect some of the attack. They cannot do anything about it to prevent it happen or block. So that's the key differentiation. And we see we're needed for the customer to not only detect but also take action, and send to automatic action to prevent all these attack. It's a -- and long-term wise I do believe ATP more like a 10 years, 15 years ago our intrusion system will be part of a gateway. And just like in early days there an intruding detection system, the IDP, and then ID action -- the IP intrusion prevention. And then the next day it will be integrated into the firewall, whether Canadian firewall called UTM. So that's I feel that the ATP still in the early stage, more in the detection and they still need to working with other gateway device to do the prevention. But eventually I hope ATP can do some prevention itself. Eventually also will integrate to the gateway. So that's what I see, still in the early stage.

Yes, and I think the only thing I would like to add is that in Ken's prepared remarks he talked about several deals, highlighted a few of several deals that we won on the ATP front. And all the ones he highlighted, and they are all significant organizations, government organizations or enterprises, those included more than the Sandbox. So yes, ATP is a hot market. Vendors are being evaluated. It's definitely gone and opened up to firewall vendors with ATP solutions, but really where Fortinet's advantage is in addition to having integration between the firewall and the ATP, is the ability really to do it, to detect these types of threats and to correlate activity and communicate back and forth at the mail server through our FortiMail product, the web application firewall through FortiWeb, clients through FortiClient, as well as FortiGate and FortiSandbox.

Got it. Thank you for that, Michelle. Drew, in some of the commodity driven economies, was there a major foreign exchange impact that could have also had a direct or indirect impact on the length of the sales cycle? You did mentioned Brazil, a little bit in Canada. Maybe in Asia a little bit?

Yes. It's certainly not in Asia. And we didn't really see it in Latin America either, quite honestly. In terms of pricing, look, we didn't really -- I can't correlate any of -- any pricing issues with any of the economies, quite honestly. I think I heard noise, but I didn't see anything come in. It was more like, be prepared if I need to drop a little bit on price, that I may need your support. But I never really see it -- I never saw anything hit my screen, so to speak, that would've indicated that that happened. And there is no indication that we have when we go back and look at the numbers that would show that. If anything, the gross margins look good. So you have to kind of believe that the pricing held. What we really saw on those economies, you just started to get the sense that it's going to get a little more challenging in some of those emerging markets. And then in Canada I think it's already challenging. I think we saw that and clearly saw that in Q3.

Thank you. And our next question is from Andrew Nowinski from Piper Jaffray.

Great. Thanks for taking the question. I just wanted to actually follow-up on the last one. So with the upside in the gross margin this quarter, do you think you could use it possibly more aggressively to drive higher billings growth?

Could we use price -- you're basically asking me if we use price to drive higher billings growth. Look, I don't think we need to. We feel we're still very compelling on the price-performance front. If we're going to -- if people are going to go based on price performance, we're probably going to get the deal. So I don't see any reason to go do that. If I were seeing deals that we were turning down based on that then that may be a consideration. I think it's more about the selling cycle itself that really hits the impact of the deals. I haven't seen lose on price, to be frank. So I wouldn't want to do that. If anything, I think we're personally headed, I would like to see us headed in the other direction sometimes, so.

And then regarding some of the investments you've made in sales and marketing, can you just give us any sort of color on what percentage of your sales reps are currently at full productivity and where you are with that investment?

Yes. The tenured reps are really doing well versus productivity. I would say kind at or above, I think in general, a nice, probably a pretty solid distribution on the tenured. The newer ones coming in, where we've been focusing has been on the lower end of the enterprise. If you look at the mid-level and the lower level, if you look at where we've build capacity, it's been more on the high end of the business. And as I said, we closed -- I mentioned two deals with -- on the call, and I think I just mentioned that we've closed 11 deals with U.S. Fortune 25 customers. So we seem to be knocking off the big names and the big brands extremely well. We’ve seen that coming, so we started investing more middle and lower. And clearly, we have new marketing leadership. And what we believe -- where we believe the focus needs to be now is really on getting the newer people up to productivity actually quicker than they had been in the past. And it's more of an opportunity. Let's say it's an opportunity, not an issue. And I'm just going to kind of turn this into kind of where we're investing, because that's one of the areas we're investing and we called out on the call on the script, for instance, market awareness, the lead generation cycle, lead to closure, and then sales enablement. It's just a different motion and from the top to the bottom of the market, top to middle to bottom.

Got it. Thanks.

You're welcome.

John, we can take the next question.

We’ll take our next question from Michael Turits from Raymond James. Please go ahead, Michael.

Drew, thanks for letting us know that the Meru revenues did go down. That's helpful. Last time that they reported it was about $17 million in Q1. But unless they went down to $9 million or less, you'd have to calculate that your organic revenue actually decelerated from the 30% growth rate to less than 30% in 3Q. So, what should I conclude that your organic revenue growth actually did decelerate from 30%, or that the Meru revenues really came down, like to less than $9 million? And if so, how can that be? How could they possibly come down that much?

I'm not sure I'm following your math. It certainly wasn't $17 million.

Mike probably $10 million really, the reason on Meru was really it has offered a secure Wi-Fi solution. We’d do that, it's a huge market opportunity in Wi-Fi space. So that's -- so we had to retrain a lot of sales, pretty much of sales there in Meru to how to do the secure Wi-Fi solutions, or that's the purpose we're doing. Also, you see the early question we have the most service piece right now. So that's where you see the deferred revenue growth is higher than some other part. So I'm not sure the revenue or the billing -- maybe billing is a better way to measure it.

Yes. But anyway, Michael, it wasn't a significant piece of our business, quite frankly. We got them at least a week plus into the quarter and there was a ton of sales enablement going on there, sales training and even looking, trying to refocus them to sell more FortiGate and FortiGuards. So, I don't think reading too much into that would really be the right way to think about it.

Right, so I'm trying to give it the (multiple speakers)

That's not where we're going at.

Yes, I know. And understand the reason for it. I'm just trying to get the best possible read in terms of the numbers which have been so strong. So assuming am I fair in concluding that really you're just talking about a couple million that it was contributing? Because otherwise it really seems like the numbers were not all that great?

I really can't give a number. So we haven't done it. We said we were -- we didn't give a number to start with, we didn't give a number now, and we're not -- we're looking at as -- we have a secure wireless business. That's really the way we're doing it. We run it inside-out. I think trying to get targeted, I'm just concerned about getting targeted on a number like that, it sounds like we're running it like Meru ran it, which like you said, we took a lot of cost out of there so it's a much -- it's not at all the business that they were running as a separate company.

The other thing I'd add too, though Michael, is that when we give our guidance for Q3 we said we didn't break it up. We made a very clear point that we weren't breaking it up. We said it wasn't going to be what -- it was less than what the Street was sort of forecasting. We worked it into, and we consider that. We considered that the contribution into our guidance and we overachieved our guidance. And the far overachievement -- and the overachievement on billings did not [multiple speakers]

We also promised we’ll maintain the operating margin, 14% for the year, even with the acquisition. So that's also lot of reporting there, try to make sure we keep the cost down.

We were focused on integrating as quickly as possible. And Michael, I don't know if this helps, but one way to think about it is that their gross margins, I believe, were in the low 60%, kind of 61% range. Clearly we were well above that. And if there were any positive skew on the revenue side, you would certainly pick it up in the gross margin.

So I think of that as the way of going forward? In other words, if it's really just an insignificant amount of millions of dollars this quarter, is that going to change anytime in the future? Is that the way I should think of for a couple of…

Well, look, I mean we're going to -- it's going to be -- we're not keeping the brand. It's a Fortinet product, its Fortinet wireless product and pretty soon it will be a Fortinet and increased security Fortinet wireless product. That's the way we're going to run it. The Meru piece of it really goes away over time as what we bought.

So our next question is from Erik Suppiger from JMP. Erik, your line is open.

Yes. Thanks. Can you give us a little sense for how we should think of the Americas revenues geographically? What kind of exposure can we think of in the U.S. versus outside of the U.S.?

In Q4?

Just in general, or at least in Q3. And the reason I'm bringing it up is you had noted emerging markets in Canada as being a headwind. I'd like to get a sense for what kind of exposure you have to those headwinds.

I think what you're talking -- it does help to actually if you're talking about Q3 or Q4. I think what he's asking from a revenue perspective what -- one, we don't break it out, but what contribution comes from outside. In the markets we identified, and in Q3 a headwind came from Canada. In Q4, when we’re talking in terms of uncertainty, it still remains to be Canada, and Canada's in a recession, its public. And Brazil is just uncertain in terms of what happens in their economy. I would say we don't break out revenue for billings for a country. But together Latin America and Canada is a material portion of America's revenue.

Yes. If the question was more just around the economic advisement in the U.S., we think it remains solid, certainly from security perspective.

Is the majority of revenue in the Americas coming from the U.S.?

Certainly the majority is, Yes.

Okay. Then you had a -- I know you guys have shifts quarter-to-quarter in terms of the product breakout, but there was a meaningful decline in the high-end product versus -- the volumes of high-end products versus the prior quarter. And you're talking about doing more segmentation firewalls. So can you give us a little sense for what it was that was causing the decline in the high-end products?

Well, I think it's just more skew towards the lower end. There was at least one deal -- we talked about a FortiBranch -- there was one deal in particular, and it's a large enough deal that it probably contributed to the skew on that side, where they bought the branch first. And so the branches are a lower-end product. Look, I mean…

And they brought it in conjunction -- it's a branch to core. They bought high-end products, they bought midrange products, and they bought a lot of low-range products.

Just keep in mind, what's really a large opportunity over time. We just got the initial taste in it in Q3. I think the product mix piece, if you look at the trend over time I think the high-end is in the relative range -- relevant range that it's been in over the last couple of years. I think last quarter was particularly good from the high end. And then this quarter was probably -- was certainly down from that but within range on the longer term trend.

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

Guys, just switching gears a little bit to some of the partnerships that you referenced in the early part of the conference call. I just wanted to understand a little bit better about your opportunity set with both VMware and Cisco. And maybe how you think about that sort of driving growth in 2016, what the revenue recognition model looks like for more virtual appliances, and just that general sort of partnership contribution over time?

They are definitely the partner which already have quite some installation in whether data center in the network side. So that's where the partnership really help us not only get into some new deal but also enhance some of the solution we have with them. I guess also said as would empower ahead of our competitor because like I said, it's a secure to need to be part of infrastructure. So this partnership actually help us like make our solution fit better in the total solution there. It's difficult to quantify any of this partnership may bring it, but definitely from the position side is a well positioned, much better than like a couple quarters ago. Also the Sprung is other company we partner well, so we have a joint event a few weeks ago, and it's a long customer like the partnership a lot.

I guess one of these things that we’re on questions that you have to answer for customers on the large deals, will you be -- how will you play in a more virtualized infrastructure, if that occurs. I don't think people or customers really aren't -- we haven't seen much activity buying against that necessarily yet. And then, Jonathan, you asked about the revenue recognition piece of it, and it depends. There's a variety of ways to go there. I mean they could literally buy, still buy a FortiGate and stick that closer to the data center. Again, we have a performance of management, it's a chip that’s just one architecture another architecture is to buy a virtual license, basically buy the software, a virtual firewall, which we sell. And then another way to get there is actually do it from a service provider. So go to AWS or buy a license and do it on AWS. Quite honestly, it's probably going to be -- if it's an appliance, it's kind of our traditional model right now where some of it is upfront, some of it is deferred and recognized over time. If it's a software license, that actually pretty much goes upfront, but they're probably buying subscription with that too. So that part gets over time. And then if it's a service, there's really no upfront. That's just happening -- that's a pay-as-you-go model where they pay on a utility base, how much do I use, and you basically bill them monthly or whatever the utility basis is for that deal. So it could be anything. If I had -- I don't have anything major to highlight there in the near term that would impact I think the recognition of the site, certainly in the near term. And it's something probably more important to watch on the longer term.

And then just as a follow-up, you guys talked about the 11 out of the top 25 on sort of Fortune 25 companies that you were able to sell to. Are you starting to see a tipping point in the market where folks are now really recognizing the Fortinet brand, and what does this do to sort of accelerate momentum in the enterprise space?

Jonathan, you broke up a bit there at the beginning of the call. Can you repeat the question please?

The question is that now that you've gotten sort of traction with the top 11 or you talk about 11 out of the top 25 customers signing onboard in terms of the Fortune 25. How does that sort of translate in terms of getting more brand recognition, more traction? Does this start to accelerate your growth now that you've signed more marquee customers in this enterprise range?

Well, I think one, they have big wallets. So that's the first thing to state. Obviously those are going to be where the biggest wallets are. So rich opportunities, both near and long term is the way we think about that. Then just not only for expansion with more FortiGates or more FortiGuard, or what's currently on our price book, but just as we add additional products, that's another way to upsell them, so to speak, over time and further monetize them. So that's the first dimension of that. Then I think the second piece is those companies tend very much reflect very tech savvy customers, cutting-edge. What they are buying and architecting is probably what gets reflected in the broader enterprise over time. And so then we capture the thought leadership, so to speak, is the idea. And then hopefully that translates more into the middle market and across the enterprise over time. That's how we think about it. So, step one was to get the big names. And we feel like we're doing a good job of doing that, as evidenced by some of the numbers we said. I think we also threw out some large deal statistics, which were 59% growth in deals over $100,000, 55% in deals over $1 million. We've said this many times, that's one of the things we look at to see, are we really getting traction with our investments in the enterprise specifically, because SMBs aren't buying the $1 million deals.

Great. Thank you.

Thank you. And our next question comes from Scott Zeller from Needham. Scott your line is open.

Hi. Good afternoon. I may have missed it earlier, but I'm used to hearing about the U.S. enterprise growth last couple of quarters. Could you update us on that, please?

Sure. As I said very robust market in the U.S. enterprise, our deals greater than $100,000 were 59%. Our deals ever $1 million were 55%. I think I also mentioned that we had deals in 11 of the U.S. Fortune 500. And so that went very well. Year to date, our growth in the U.S. enterprise alone is north of 60% -- I think it's 61%. So those are the numbers we have.

Well, I think we got a number last quarter of 90% year-on-year growth. So can you give us the quarterly number?

Yes. It was I think, yes, 27%.

So it was up 27% year-on-year?

Yes.

Yes, 27%.

You have to look at it, though. I mean, I think that for us, we're looking at continued growth. We're really looking at the type of deals that we are winning, the logos that we're winning. So I think every quarter's a little bit different in terms of growth as we get bigger. So the numbers will get smaller in terms of growth. But what's really important to us is making sure we're getting the right deals that will fuel our growth for the future. And we talk about, again, securing deals in 11 of the top 25. The deals we won this quarter we're really proud of. We've talked about who they are, one of the largest investment banks in the world, two of the largest technology brands in the world. So those are not the type of deals that we were getting before we made the investment in the U.S. enterprise, So we're pleased with that.

Yes, when you look at just the growth and the enterprise traction, I think -- that's why I pointed out the deals, the number of large deals. Again, that's what we very much look to, to look at the traction. And again, our tenured reps seem to be very -- doing very well. So we feel pretty good about that that business.

I guess I'm just confused because in the June quarter it was up 90% year-on-year and in the March quarter it was up 70% year-on-year. And you're saying now it's up only 27% year-on-year? I mean, I think that needs a clear explanation.

Then we just explained?

It doesn't make sense.

I don't know that we can explain any more than we just explained. I mean, I think that obviously the growth is lower from a year-on-year perspective. I'd have to go back and look at and see what it was in Q3 and how difficult the comp was. But it's going to change quarter-to-quarter. And I think for us what's really important is getting the right companies and we've really been focusing a lot on the high end. Drew mentioned, I think, before in terms of, and Ken, doing a little bit -- needing to do a little bit more where investments will be going as well on the mid-market, which are clearly enterprise.

Yes, Scott. I mean, we're doing well at the top end. That's the way to think about it. We pointed out the investments where we think we need to make them, which were more in the middle and the low end. We've onboarded people, and we talk about it's just a different -- we think it's just a very different selling motion. What we look at the beginning, like I said was the large deals. That's why I started off like that. That's good, clearly very good. The names we're taking down are very good as well. Where we feel we have an opportunity to make adjustments, really, is in that middle and lower end space where we have, one, new marketing leadership. And then also I think we're very much looking at the way we go to market in the mid and the smaller enterprise. And Scott, this isn't new. We've been talking about that, that we've been doing well at the high end and where we're going to invest is more in the middle and below. And that's where we are. And that's, I think, pretty much how we did it. I mean, there's always, as you get into larger deals, just always timing, if you wanted to go there of when a deal happens or not. But again, we had 41% growth and we're happy with the growth. The investments are paying off. And I think that's the explanation that we have.

Also, some of the big enterprise deal can be chunky. And for us sometime winning some new customer initially, maybe a small could be more important because they have a long-term value there. So that's where like you see some quarter there are maybe a few bigger deal, they may help the growth. But sometime -- but we also want to measured how many new customers we also signed on. So that's why we're happy with the result in last quarter.

I don't know. I mean, can you help explain -- one would think that there's a correlation between the high-end SKUs and U.S. data center or U.S. enterprise sales. So why -- we saw a change in the mix for high-end SKUs and we saw a sharp downturn in U.S. enterprise. Are those not connected or correlated?

Some customer can be by, so like some big enterprise customer, they can buy like tens of hundred high-end box in one deal. That's why I mentioned some deals can be chunky. That may shift a certain percentage associating a little bit from quarter-to-quarter. So we're not worried about some of that. It's only like -- we're more looking at long-term value, and that is some new deal and I mean, new customer. Some is more important and because like once we land it, we see the long-term value. And like Drew said, the initial $1 purchase, a few years they can expand more than $5. So that's more important for us.

Scott, you have to understand there are lot of these customers are -- we talk about an initial seat at very large tables. And sometimes the deals actually are relatively small in the enterprise. And I think that was a bit of what we saw this quarter. It's -- look, that's why I think the year-to-date number is important, the fact that we had pretty good larger deal transactions. We feel like we continue to take down the names and we'll land and expand in those. And then I think we're fully -- I think where we really look to expand going forward is kind of more in the mid and the smaller end of the enterprise.

Yes. Scott maybe the other way to measure, you look at the number of deal over like whether $1 million or $0.5 million $0.25 million. So that growth rate has not slowed down, and that has maintained almost the same compared to the last few quarter. But it's some of enterprise, like I said, the big enterprise, they can have some bigger deal which is chunky, may affect quarter up and down little bit and the last word and also some developed by the many like do some big enterprise, they may like do some branch office deployment, which may also change in the percentage of our high-end to low-end product. and that's what happened in the last -- could be happening in the last few quarters.

Yes. And also I think internationally. I know you're asking about the U.S., but the 50% growth in EMEA is a very enterprise-centric statistic. So, it's not like everything is going to be great, extremely great every quarter. And I think the EMEA 50% growth was something to point to, to look at continued fraction of the product. And then I think we certainly acknowledge the opportunity to penetrate further in the enterprise in the middle and lower end of the U.S. enterprise.

Yes the other point, really, we are much more diversified compared to some other company to focus in certain sector, so both on the geographic, you can see the international and like a both in the APAC and also American here, we were quite well diversified. The same thing in different sectors, whether the carrier, the enterprise, the SMBs, so we are much more diversified that's where making -- so we have a healthy building growth even some enterprise mix change in some of the deal may be like a shifting from quarter to quarter. But we're not that impact compared with some other companies.

Thanks for the color.

Okay, John. Actually before -- actually, if I can interrupt I know we have a few people in the queue here. We need to start a 3:30 call and we need to get off this call to start the next one. So I think let's just have the next question be the last question. And then I apologize there's three of you in the queue. If you are planning on calling back at 3:30, I will make sure you get the first -- the priority in the queue. So with that, I think let's take the next question.

Our next question is from Walter Prichard from Citi.

Hey, guys. This is actually Jim on for Walter. I'll make this one quick and then I'll join the other call. I guess my question is around how much of that deferred revenue written down was short-term versus long-term for Meru? Just trying to gauge the short-term billing.

Do you mind repeating the question? I'm getting advice, but I'm not sure I'm answering the same question.

Just around how much --

How much are you asking, what was the split, kind of the percentage split, long -- short and long term on Meru?

On the….

On the write-down or the deferred revenue?

Yes, on that $10 million deferred.

You know what, I'm going to double-check the number and I'll get back to you. They're telling me 50%, but I want to double-check the number.

Okay. I'll talk to you guys in a bit.

We'll get back to you, I'll tell you what we'll get back to you in five minutes.

Okay, great. Thanks.

I just want to make sure I have the right -- answering the right question.

I think with that, we're going to -- we'll end this call. And I apologize again that we had to sort of start over. We went long here. For those of you calling back in at 3:30, we will talk to, I guess, in about 12 minutes. So enjoy the short break. And thanks again for your patience through this process.