Good day and thank you for standing by. Welcome to the Fortinet’s Second Quarter 2021 Earnings Call. At this time all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Peter Salkowski, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Kathryn. Good afternoon, everyone. This is Peter Salkowski, Vice President of Investor Relations at Fortinet. I am pleased to welcome everyone to our call to discuss Fortinet's financial results for the second quarter of 2021 which we are hosting from inside of our new building. Speakers on today's call are Ken Xie, Fortinet's Founder, Chairman and CEO; and Keith Jensen, our Chief Financial Officer. This is a live call that will be available for replay via webcast on the Investor Relations website. Ken will begin our call by providing a high-level perspective on our business. Keith will then review our financial and operating results for the second quarter, before providing guidance for the third quarter and updating the full year. We will then open the call for questions. During the Q&A session we ask that you please keep your questions brief and limit yourself to one quarter to allow others to participate. Before we begin, I'd like to remind everyone that on today's call we will be making forward-looking statements and these forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular the risk factors in our most recent Form 10-K and Form 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements. Also, all references to financial metrics that we make on today's call are non-GAAP, unless stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations are located in our earnings press release and in the presentation that accompanies today's remarks, both of which are posted on the Investor Relations website. Lastly, all references to growth are on a year-over-year basis, unless noted otherwise. I will now turn the call over to Ken.

Thanks, Peter, and thank you to everyone for joining today's call to review our outstanding second quarter 2021 results. Billings increased 35% to $961 million, driven by solid execution and was the best it has been since 2015. Secure SD-WAN contributed 14% of second quarter billings. Total revenue grew 70% to $801 million with product revenue up 41%. Product revenue growth was the highest for nearly 10 years. Free cash flow was $395 million a quarterly level. With strong business momentum we remain focused on growth. Today we have announced expansion of our FortiCare and FortiGuard security services, adding a new security service called FortiTrust. FortiTrust security service offer user base licensing that follow the user across the organizations and high security platform. This enables organizations to easily manage and secure across all networks, endpoint and cloud, which traditionally has been siloded [ph]. Initial service level have been offered for Zero-Trust Network Access, and identity modifications. We have the current FortiCare security services which cover all Fortinet security fabric product with two-level services to include 24 x 7 technical support and timely insurance revolution. Additionally, FortiGuard security service has been [indiscernible] for different segment with added individual services for enterprise found those for commercial and the packages for SMB. Not only just an industry leading AI enabled security [indiscernible] that is regularly adjust protection across the FortiGuard security fabric. Today we announced a new FortiGate - 100F the industry's first high performance next generation firewall, with [indiscernible] Zero-Trust network access and advanced number of protection powered by the Fortinet NP7 [indiscernible] SPU the sigaoffers an average two times more performance than other competitive products based on our security [indiscernible]. These make the full apps the best protection for high speed internal network [indiscernible] centers. You can even see the momentum and the adoption of our SD-WAN [indiscernible] across network access and cloud solutions among the world's largest service providers. In May Fortinet was recognized as the winner of the Microsoft Security [indiscernible] type award. Lastly, Fortinet has named Google Cloud's 2020 Security Partner of the Year, recognized for innovative thinking, outstanding customer service, and benefiting process of a car product and services. Before turning the call over to Keith, I would like to thank our employee, customer and partners worldwide for their continuous support on our work.

Thank you, Ken. And to add to your comments, we should note that as of the prior quarter, billings growth, product revenue growth and total revenue growth, all accelerated sequentially. In fact, all three growth rates were five-year Fortinet highs and product revenue growth was at its highest in over nine years. Okay let's drive through more detailed Q2 discussion with revenue. Total revenue of $801 million was up 30% driven by industry leading product revenue growth of 41%. The product revenue growth was broad based across geographies, FortiGate and non- FortiGate products, and across the use cases, illustrating market acceptance and customer demand through our integrated, single platform security fabric strategy across our customer infrastructures. Our financial strategy includes a rule of 40 target. The target the total of the revenue growth percentage and operating margin to be at least 40 and the second quarter strong demand and execution drove this actual total to be a rule of 55. FortiGate product revenue growth was 40%, while we continue to see robust growth from our secure SD-WAN functionality. Majority of the growth was driven by FortiGate revenue from other capabilities which are embedded in the FortiGate operating system. Non- FortiGate product revenue growth was over 40% for the second consecutive quarter and was driven by strong growth from our integrated security fabric products. One additional comment on our product revenue growth, the product revenue growth was a reflection of our continued strong organic growth and not the result of a few large deals, drawing down backlog, nor unusual number of delayed transactions from the prior quarter or pulled in from future periods. Service revenue of $503 million was up 24%. Support from related services revenue of $230 million was up 26%, while security subscription services revenue of $273 million was…

Sure. [Operator Instructions] Our first question is from Brian Essex of Goldman Sachs. Sir, please go ahead.

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

Yes, thanks Brian, good question. I have said the industry whether during the pandemic, after the pandemic probably in some kind of a whole structure changing is no longer the traditional border kind of firewall will be enough. You have to expand into the WAN like security WAN the 5G and also internal have to do maybe internal segmentation replacing the switch with secure switch and the Wi-Fi to program now it is kind of a [indiscernible] kind of internal attack. So that's where and also consolidation also going on and also maybe have a [indiscernible] make a different powerful structure security together to protect the whole attack more to kind of attacks everywhere protection there. So that's where we will see is a big change for the whole architecture of how to architect a new protection architecture to protect the whole infrastructure security there. So that's probably different than the actually fresher traditional firewall that is the new expanding infrastructure need to be have our own protection there. So that's what we see like the program we announced today, [indiscernible] inside the high speed mobile environment to do all these kind of internal segmentation, [indiscernible] protection and all these kind of things. And then also we see very strong growth whether the secure C-band and also the 5G [indiscernible] and that's to have lot of [indiscernible] work on phone solution there. That's what is doing probably even much faster there. So maybe this is the whole infrastructure being changed. [Indiscernible] now working started coming more [indiscernible] by the boost on the price and also different kind of vertical.

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

I think in the ramp up stage, in the early stage of ramp up, compared to last quarter probably like down about 15 percentage, this quarter grew about 25%. So it is [indiscernible] like dimension, they are kind of building infrastructure right here for the 5G, [indiscernible] and now SASE, which we have a different strategy or faster strategy actually quite a different, probably very different from our other player. And so we have a new strategy and we are [indiscernible] and are working with service provider to build in their SASE at the same time like the service revenue we will be kind of low to margin that will be there. Also we have seen some own infrastructure, if some customer don’t have a service provider or want to working without them that we also have a kind of own kind of SASE solution there, which is also in the grade with the -- for the OS, inside for the OS, they have a building SASE they trust no access and some other part. They could also come in a different, there is no competitor and eventually they also hoped they can use ASIC plus data to additional continued power to our kind of own SASE solution there. So that's where we feel is a long term investment, but once we have it, we have a huge advantage compared to other competitors.

All right, that's helpful color. Thank you very much and congrats again.

Thank you.

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

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

You know, we see the pipeline were strong for the larger multiple products deal, which like approach, I mean covered multiple part of infrastructure and also the product only grows like 41% is also very strong. We feel that all products we have different than the traditional are some of our competitors are using the [indiscernible] only. So we have the latest in the industry, but also we developed ASIC in the last 21 years. Just like the product we announced today, the -- based on our [indiscernible] we call it [indiscernible] region, but for the same cost was the function, performance compare to other competitor of industry average, so will have six time better performance basically like a -- because the competing part is huge from our own ASIC. And so that's what's changing the landscape of like the product what is now a security product or some other leverage basic is a huge [indiscernible] power gave us much better function and a better performance that can hugely replace a lot of our competitors. At the same time, we did see the expansion product as per market whether it will be from home or kind of a security internal work inside the company inside a data center which also plan lot of high end product loss, so the hybrid product [indiscernible] also we see public putting high maybe the highest in the last few quarters and even last few years.

All right, that's helpful. And maybe just a followup question for Keith or Ken. Now Keith you mentioned the operating margin in the back half having about a 200 basis point impact from FX. I was just wondering just on your spending plans around hiring what you're seeing there, it's obviously a very competitive market for talent these days and I'm wondering if that's been factored all into your guidance?

Yes, I think we obviously pay attention to our recruiting and to our attrition rates. I think the metric that we gave was that our overall headcount increased 17%. I would offer that the sales headcount actually grew significantly more than that. So I think that we're in a bit of a sweet spot and it kind of relates to what Ken was saying just a moment ago in terms of the success that we're having and I think you could read through to the high end FortiGates was probably being data center deployments and probably taking advantage of some competitors that are going through a refresh cycle and at the same time some of the branch FortiGates maybe [indiscernible] visual transformation. And I think that the audience of sales people understand that and they see the opportunities there.

Thank you.

And sir, our next question is from Sterling Auty of JP Morgan. You may go ahead.

Yes, thanks guys. For my one question, I just wanted to dive into Keith, in your prepared remarks you made the comment that the majority of growth was driven by FortiGate revenue from other capabilities embedded in the operating system. I wondered if you could kind of peel back the onion there? What does that mean and what capabilities were you referring to that were in particular demand in the quarter?

Yes, I think that we tried to make the point in the past that some people think about the firewall somewhat complicically. We found a track close to 12 to 15 different firewall use cases. Well if you want to talk about micro segmentation, IPS, et cetera, all of those, the totality of those, the growth there was contributed more if you will than SD-WAN. SD-WAN we saw still obviously contributed very nicely at 14% of our total billings, which probably puts it close about 35%, or probably 55% growth. So I think there's a long list of things that a firewall is use for and we were very pleased with the success that we saw throughout that suite of offerings.

Also, especially the Forti [indiscernible], your beauty and your cosmetic access, and the beauty of SASE there we see strong interest in this area. Both found a service provider for enterprise by working on a solution there.

Understood. Thank you.

Thank you,

And sir, our next question is from Rob Owens of Piper Sandler. You may go ahead.

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

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

Thank you very much.

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

Thank you. Also, single question on my end. When we look at the billing upside, revenue upside you've printed, can you unpack for us the mix between your logos and the current installed base? Any qualitative color and discussion will be appreciated.

Yes, this Shaul is Keith. New logos were very strong in the quarter, probably up about 50% year-over-year. And I've given numbers in the past to kind of suggest that 5000 customers that we had the quarter, obviously a very strong quarter is going to be north of that first part of the response. Second part response, you would not normally expect to see that the new customers in the initial quarter would be significant contributors to revenue, but rather contributors to revenue growth over the longer period of time. But there was a very strong performance from the new logo segment in terms of customers have signed up with us in the quarter.

Thank you.

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

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

We do see going forward, especially like works from now remotely. The producer license which can cover multiple devices, including the mobile home device, work for home, and also internal inside enterprise company there like a cover multiple, like a not just a 40-K that goes through to the trust network access, but also some other like a web or mail or some other application or kind of a compiler infrastructure data center, they need access. So that per user license will make much easier for the user for the customer to really use in all these security servers in a multiple part infrastructure module cover multiple product there. So that's where we feel this is also very important part. And on top of the current FortiCare, we certainly would cover all the parts that we have and also the FortiGuard cover the product need a real time update on the subscription, all these kind of things there. So we feel this FortiTrust is probably the trend in the future, but still needs some time to ramp up. Especially we see the deal trust member access setting have a pretty quick growth opportunity with which we are fully paid out to have all this built in. And also the identity how to like, kind of make sure the identity across multiparty infrastructure and easily kind of management user we feel all these two services also kind of don't get very important. It needs some time ramp up, but we do see there's a huge increase and demand in front of customer. That is also the reason we launched this new FortiTrust service.

Got it. Thank you.

Thank you.

Our next question, sir, from Michael Turits of KeyBanc. You may go ahead.

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

Last year, the probably more like in the rush supporting whatever can make it work in working remotely. But this year, they did definitely see the infrastructure need to be upgraded to be changed to more supporting this long-term. So that's where we see a lot of new infrastructure design and how to supporting not just work remotely, but also secure the whole infrastructure, different part of the infrastructure from their own when access to their internal segmentation. And also even the 5G or I see my own internal Wi-Fi. So there's a lot of new security architecture covering multiple part of product is more of a strong interest. And also Keith mentioned the OT is a moderate because the whether the 5g IoT OT, also that's also rather strong.

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

Great, thanks guys.

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

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

I'd love to say that we're completely immune to chip shortages and such, but I can't say that. I do think that as we talked about last quarter, the fact that our inventory turns we run, hover around to, suggested that we have six months of inventory on hand. We do and then some of the chip manufacturers are pretty focused on a 52 week lead time. I think I feel very, very good about how the manufacturing operations team executed in the second quarter and how they're going about things for the third quarter for the rest of this year. I would offer that as part of the forecasting process and the guidance setting process. That has become a more significant input, if you will, into that process and making sure that we've accounted for it in terms of our estimates of any challenges that we may have was moved through the rest of the year.

Thank you.

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

Good afternoon, everyone. Thanks for taking the question. Ken, historically, when there are periods like this, where you see accelerated purchase behavior and a little bit of a one on supply, if you will, inevitably there's a bit of a digestion period after the fact, as customers learn how to deploy and consume what they just purchased. Could you talk a little bit about how fabric in the broader organization, either in sales or the channel is addressing or thinking about that potential risk into the future?

Yes, we definitely see more and more customers to the benefit of the fabric, call it fabric which on multiple products, I think we make with ultimate together. So that's also making the Non-FortiGate grow faster than the FortiGate will be over a billion dollar, over a simple do a billion dollar this year. And so it is a customer, buy this multiple product most of them already, like whether they are our customer or already test them on the pod, and then just keep expanding beyond the what's the initial purchase there. So we do see the interest get stronger and stronger and the Non-FortiGate also keeping flow much faster than the FortiGate, which keep expanding from whatever the current installation base within the big enterprise. That's also the Gartner forecast. They see the integration, the consolidation starting kind of more and more important for these big enterprise because to manage multiple products from different vendors, much higher cost compared to like, that the platform approach, which can multiple products have a different part of infrastructure also using it quite often to guide at least the FortiGate fabric that we have.

This is Keith and just kind of to build on Ken's comment, I think that is the business strategy, right? If we look at our installed base of customers and see how their adoption progresses in terms of the number of fabric products that they add, over what period of time, we will certainly expect that to continue on. And then if you look in the current quarter, the new customers that we added, those are largely, those are buying firewalls, if you will, and maybe one or two things, if you will from the fabric suite. But we would expect them I guess I understand they have to digest and install the firewalls. But as we get as they get to know and understand our product and our integration strategy more and more, that we'll have the opportunity to come back in and sell them additional products and services as we go forward.

Thank you.

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

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

The Non-FortiGate, we have almost 30 products, most of them are developed internally and it's super [indiscernible] now gave up. I mean, individual product, because it is up and down quarterly, and also pretty much all contribute to the growth, we don't see any one or two too much kind of often compared with others. So that's probably maybe some time later, we can start I guess sorting things out. But at this stage, we do see, it's also dependent on a customer environment, depends on the sales support in, like some of them like have a e-mail working with FortiGate, some with website, some is employing, some is -- like access control, or some kind of sandboxing. And all cloud approach is a quite a white collar job or kind of even cover all these as like a 2020 product. So that's where it was difficult to break out and then try to see the trend, but we do see that the compliment is really to consolidate, integrate, automate approach, definitely has a huge benefit compared to our separate products from different vendors.

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

Yes, thank you.

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

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

Yes, we definitely keeping closely watching out of the chain in the industry, and also new technology auditions. But also we want to keep the innovation, not the culture we have in the last 21 years and also keep the organic growth was strong. Probably the cash level investment strategy to Keith to cover that.

Yes, I think for us, we look at our R&D spending as a source of investment, not a traditional capital allocation. But we are have historically been a buy versus permanent build versus buy company. And that is to, we feel strongly about the importance of having the platform to be integrated. You do see us doing tuck-in acquisitions, sometimes they take a little bit longer to bring to market perhaps because the technologies are things that we want to work with a little bit more before we bring them out. So I don't think that's a surprise. I don't know that precludes us from doing something larger in the future, but we'll look at those opportunities as they come up. The continuing focus will be take finding the opportunities to rebalance the balance sheet with a little bit of deploying some of the cash we raised the debt offering perhaps repurchase some, some share buyback, if you will. And at the same time also, as we look out for the next three to five years, and we anticipate continued growth, perhaps a little more investment, if you will, in our facilities footprint.

That's helpful. Thank you.

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

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

Irvin, good question. There are a few more and we still see more of our strong demand and also huge potential. That our product we have Integrated Security from our beginning leverage to FortiGate has a huge computing power. Part of what - FortiGate, we see a huge advantage compared to some other competitor whether using the universal CPU or some other approach, which difficult at any function because the company implementation for a low cost CPU. So that's where we do believe we will be the leader, the number one leader in IT one space size, now definitely will be strong. And [indiscernible] it will offer a kind of huge advantage, like availability, the cost saving compared to the traditional networking protocol MPLS, or some other part. And also a lot of service provider also starting kind of most focus on their IP where no 5g some other part, we used to also kind of fit in all kind of long-term bigger picture, we call it security through networking, which will be compared with today all the networking just through a connection and the speed. And the security networking will also need to look at application, the content, the device behind, the user behind and even different kind of location there. So that's where we see all these kind of security function add on top of networking has huge potential and which is to buy the security while also doesn't just one part of it, but also the secure 5G and also internal secure switch infected Wi-Fi we do see a lot of our potential to keep in using security cover the whole infrastructure.

Got it. Thank you.

Thank you.

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

Hey, guys, thanks for your question. I have a question around the attach of supported subscriptions were part of this quarter because it looks like you had strong momentum and product. Your strong earnings momentum. Also it looks like the upside in product didn't lead to maybe it's sort of similar upside in billings. Was there a difference in products mix was led to difference in attach rate within subscription and support the score.

Now, I think the -- we track our attach rates and our renewal rates, if you will, within those advantages anything I let say plus or minus 2%. And I think that, you know, we were comfortably inside those brands. So there was nothing unusual in that regard. I think that the services buildings in total, we're probably have to go back and check that the best quarter that we've had in four years. So I feel so good about the both the services and the product performance in the quarter.

And just one follow up, you give us a mix of balance between FortiGate to Non-FortiGate is that had the same kind of mix you have in the product line also. This the 70,30 roughly, is that the mix of Non-FortiGate and FortiGate in the product line, or is that mix different for products?

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

Those are growth rates we don't we haven't given a breakdown by mix for the two per product. We haven't even FortiGate a product and non- FortiGate product there's a mix we haven't given that.

Got it. Very helpful. Thanks, guys.

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

Thank you so much for taking my question. I mean, 41% product growth is extremely impressive. I guess, questions were fielding from investors around the cyclicality or the kind of, I guess, whether it's secular growth and so, could you just help us understand, whether one time benefits because of recent hacks or because in recent events or post-Coronavirus that led to this kind of very strong number or a feeling that, the follow market there comes from some secular dynamics that we all should be aware of?

We do see the lot of product started going through the, lot of a new part of infrastructure or kind of a new area. And that has also like Keith mentioned, decided top five vertical, we do see the, other vertical growth faster, much faster than the top five verticals that common service provider, finance service, education type something like that. That is, but also make a money infrastructure we do see like, whether deploy on the WAN side on the whatever the [indiscernible] or some other kind of internet infrastructure within data center, or even with a home, there's a quite a broad, kind of like a buying pattern compared to before. And that also, we do believe we eventually will drive additional service because the western product round may go up and your service revenue will come in later. And also classic production of the new FortiTrust service. They feel it's all also add an additional layer of potential security survey for the future. It's definitely not definitely simpler, like I mentioned early that receives the changing of the security infrastructure. It is not kind of refresh or replace the traditional firewall, which also from time-to-time need to be upgraded, because now we'll have faster and faster, but also expanding into the new infrastructure part and also kind of a new area. We do see all kind of growth faster than the traditional microfinance surveys or some other part.

Yes, to add to Ken;s comments, I think it was a quarter. And it has been for a while now that we just saw a lot of tailwinds. The tailwinds included whether it was SD-WAN or OT as an example. Now, the refresh opportunity, if you will, is really an opportunity for us to review as updated displays the incumbents. Credit for net that has 500,000 customers and 70 different firewall models and we even today we announced the new firewall in our press release. You know, it's not as if, historically you've seen blips with us in terms of spikes from refresh. But on the flip side, some of the competitors and legacy players have a shorter list of customers and a shorter list of products. And maybe you're not doing as well in Gartner Magic Quadrant as we are. So we view that as an opportunity. I do think that, other tailwinds that came into the quarter. We talked about the verticals can mention it again, and also when I look at our customer sizes, whether you're SMB, to always to the global 2000 did very, very well, I think one thing that stood out for us was the mid enterprise or the commercial part of the business that came on very, very strong in the quarter as well. So I think there was a long list of tailwinds for us that that worked out in our favor on that product revenue growth number.

Yes, also the review, the introduction of the new products that compete in part advantage comes from [indiscernible]. It's bigger and bigger compared to other competitor, which not only helping make, replacing some of the installation page, but also expanding the memory area of the internal network, high speed environment, but also has a much more function beyond a traditional network security. Therefore, VPN, like we mentioned, whether from as your partner acts as a module, like a SASE or other product like SD-WAN and the 5G security, which none of the traditional firewall has. And that's also what had additional like sales and on the product, also the future service, which is not refresh compared to the traditional firewall, which they don't have that function or don't have a company in power to keep additional function of their current performance demanding. So that's where we feel the strategy we have. That is ASIC company and part advantage and that give us additional function and additional performance, much lower costs, and starting working very well.

Great, thank you so much.

Thank you.

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

Hey, great. Thank you. I want to talk about gross margin. If I'm correct, and it's if I'm not, it's not going to be the first time, but if I'm correct, your gross margin had gotten down about 140 bits sequentially. And I also checked it versus consensus. It's lower, 100 bits lower than consensus this quarter, next quarter and 200 bits below consensus for the year for the guidance. So do I have any having stake in my calculation or it's not? Can you elaborate on gross margin? Why is it lower sequentially and the guidance?

Yes, I think what you're seeing it's all is the mix shift, right? The product mix shift versus the services mix shift, you can do some pretty simple math in the second quarter. And you can get to, when you have 41% product revenue growth at 61%, 62% gross margin, versus the services that's fairly confident 23% and 88%, gross margin, that 25%, swing and gross margin. When you take that back and you look at it 20 points or 25 point over performance and product, it works out to be just about one point maybe a just little bit north of one point on the gross margin line.

Also you can look in the product gross margin, we actually improved year-over-year, even the cost kind of increased, but we do improve the product gross margin. And also we do believe is the product gross margin, product growth 41%, we can have a lot of a future growth in the service. That's also the reason we had the FortiCare and the FortiGate and same had FortiTrust, which we do believe we're keeping, making the future, so ending that the service studies grow faster going forward.

Is there any change in the pricing environment?

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

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

I don't expect, I do not expect margins to decline now. Beyond what will happen with a mix, you have to if you will, between products and services, right to the extent we continue to overreact to over performance, the product line the way we just did, it's going to put pressure on the gross margin line. But keep in mind, the operating margin came in right at the high end of the range. So I think we successfully managed that. And it's certainly very consistent with what we foreshadowed earlier in the year, where we said within our framework, this was a year in which we would go towards growth. We obviously did that putting up 35% billings growth and 41% product growth, and at the same time delivering 25% operating margin plus.

Yes, we also did more investment on infrastructure, which kind of making the service revenue gross margin lower a little bit, but also help in the future and additional servers come in.

Great, thank you.

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

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

Better the growth - and we just have some long term strategic investment, which gives us more advantage, whether from the ASIC chip, which we started with 21 years ago, or starting building other part of fabric products, which integrate ultimately from day one, comparison, or competitor, more company acquisition makes it more difficult to do the integration and automation and maintain the organic growth there. But on the other side, we do see this sort of market shift changing. We also want to take the time, like our SASE strategy, we have a private omni lender working with a service provider to feed their SASE need long term good product for them the same time building some infrastructure as a model to integrate within the FortiGate, Forti OS as a single as our products and cover also SASE that has no access or some other parts, such as the one security, making the product kind of more easier for customer to deploy and fit in the big environment, fast environment much, much better. So that actually we continue to have this kind of a lot of long term strategy, and we do see the -- like a long-term benefits going forward.

Very good. I tried. Thanks, guys.

Thank you.

Speakers, that would be our last question for this call and I'll turn it back over to Peter Salkowski. You may go ahead.

Thank you, Kathryn. I'd like to thank everyone for joining the call today. Fortinet will be attending the following investor, Virtual Investor Conferences during the third quarter. We're doing the Oppenheimer Conference on August 10 and KeyBanc on August 11. Events with presentations will be webcast and those web cast links are going to be up on our website. Actually, they're already up on our website as of now. If you have any questions, following this call, please feel free to reach out to me. And with that, have a great day and take care everyone.

This concludes today's conference call. Thank you all for joining. You may now disconnect.