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Fortinet, Inc. (NASDAQ:FTNT)

Q4 2012 Earnings Call

January 30, 2013 4:30 pm ET

Executives

Michelle Spolver – Vice President, Corporate Communications & Investor Relations

Ken Xie – Founder, President and Chief Executive Officer

Nancy Bush – Interim Chief Financial Officer

Analysts

Jonathan Ho – William Blair & Company, LLC

Keith Weiss – Morgan Stanley

Gary Hall – Wells Fargo

Walter Pritchard – Citi Investment Research & Analysis

Brent Thill – UBS

Robert Breza – RBC Capital Markets

Sterling Auty – JP Morgan

Jayson Nolan – Robert W. Baird & Co.

Ron Zember – Bank of America Merrill Lynch

James Wesman – Raymond James

Shelby Seyrafi – FBN Securities

Shaul Eyal – Oppenheimer & Co.

Dan Cummins – B. Riley

Aaron M. Schwartz – Jefferies & Co., Inc.

Rick G. Sherlund – Nomura Securities International, Inc.

Daniel H. Ives – FBR Capital Markets

Scott Zeller – Needham & Co.

Operator

Good day, ladies and gentlemen, and thank for standing by and welcome to the Fortinet Fourth Quarter 2012 Earnings Announcement. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference maybe recorded.

Now my pleasure to turn the call over to Michelle Spolver, Vice President of Investor Relations. Please go ahead.

Michelle Spolver

Thank you. Good afternoon and thank you everyone for joining us on this conference call to discuss Fortinet’s financial and operating results for the fourth quarter and full year of 2012. Joining me today are Fortinet’s Founder, President and CEO, Ken Xie; and Interim CFO, Nancy Bush.

In terms of the structure of the call, I will begin by providing a quick summary of our key fourth quarter financial metrics. Then turn the call over to Ken Xie who will provide perspective on the market and our business and product highlights. Nancy Bush will then review our operating results along with some thoughts on our outlook for the first quarter and full year of 2013 before we open up the call for questions.

As a reminder today, we are holding two calls. Following this call, we will hold a second conference call to provide an opportunity for financial analysts and investors to ask more detailed financial questions. The second call will begin at 3:30 PM Pacific Time and will also be webcast from our Investor Relations website and is accessible as detailed in our earnings release. Before we begin, let me read this disclaimer.

Please note some of the comments we make today are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause results to differ materially from those projected in these statements. Please refer to our SEC filings, in particular the risk factors described in our Forms 10-K and 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements.

Also please note that we’ll be discussing certain non-GAAP financial measures on this call. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and on slides 15 to 18 of the presentation that accompanies today’s prepared remarks. Please refer to the Investor Relation section of our website at www.investor.fortinet.com for important information, including our earnings press release issued just a few minutes ago and slides that accompanies today’s prepared remarks. A replay of this call will also be available on our website. Note that we routinely post important information on Investor Relations website, and we encourage you to make use of that resource.

Before I turn the call over to Ken to provide perspective on market drivers, and Fortinet’s product and business highlights, I will first summarize our key financial results for the fourth quarter. Note that these figures include the positive impact of the patent sale of approximately $1.9 million that was executed during the quarter. I’m pleased to say that Fortinet had an exceptional fourth quarter. Across all key financial metrics, we exceeded our prior guidance even aforementioned patent sale. Specifically, billings were $174 million exceeding our guidance and increasing 24% year-over-year. Revenue was $151 million, up 25% and also exceeding our guidance range.

From a profitability perspective, non-GAAP operating margins were 27% and non-GAAP EPS was $0.17 both above our guidance. And finally, our cash generation was strong evidenced by the $48 million of free cash flow generated during Q4, which well exceeded the high end of our guidance range.

In a few minutes, Nancy will give additional financial details. But first, let me now turn the call over to Ken.

Ken Xie

Good, Michelle. Thank you and thanks everyone for joining us here today. We’re very pleased with our first quarter results, which exceed our expectation across all key metrics. Fortinet executed well and grow all geographics, and gaining market share and continue our security technology innovation and leadership.

An area of focus for us, we continue to make good traction within the large enterprise segment. So during Q4, we won against and displaced competitors in a large deal within a key vertical market, such as financed service, and year-over-year we grow the number of deal over 1 million by 100%, and the number of deal of over 500k by 80%.

So despite some market up challenges, the security market overall remained very strong. And Fortinet is benefiting from the key market drivers such as increased network speed, require high performance security solutions.

As far when we’re fresh and the metrication to integrate next generation firewall and the UTM product. An increasingly complex tough environment demand the advanced protection and security related regulation such as PCI compliance, and the continued trend towards delivering security as a managed service and secure firewall in a public cloud. So all of this contribute to Fortinet’s strong performance during the fourth quarter, and also position Fortinet well through 2013 and beyond.

So we have a cutting edge technology innovation, an extensive product portfolio, a secure performance advantages, and a strong team executing well around the world. So we continue to have momentum in our business and deliver Fortinet well positioned to extend our leadership through the better product recently introduced, and in the pipeline as well as increase the marketing and lead generation investment already underway, and plan for later this year.

The two are often compromised when I think about Fortinet, the fast and secure. So we offered a faster product in the industry, so our family of CSMA ASIC and also having the broad security coverage, which integrate firewall, IPS, application control, antivirus, web filtering and the host of address security technologies and intelligence such as behavior based, Advanced Persistent Threats to fight in even the most sophisticated known and unknown network threats.

So during the fourth quarter, we introduced a new high, mid, low-end product and received a third-party recognition and innovative it and validate the performance of security of our solutions. So in last quarter, full-service provider and large enterprise, but introduced a new FortiGate-5001C security blade for our high-end FortiGate-5000 series, which raised the performance bar we already set.

With fully [populated] with new Forti 5001C blade, Forti 5000 system can deliver 400 80-gig firewall support and up to 240 gig of IPSec support, with ultra low latencies. Additionally, we also extend our family of UTM appliance in a remote office and the distributed enterprise such as retail, offering a single vendor solution to support their landline and wireless security needs. So this product provides superior price performance, lower PCO and centralized single pane of glass management for remotely deployed device.

And last week, we also introduced a new enterprise class next generation firewall appliance that provides industry leading performance more granularly, visibility into and control of some of our network applications, users and devices, and advanced behavior inspection for improved threat detections.

The FortiGate-3600C is ideal for deployment in large enterprise data center and complex environment as the next generation firewall with integrated firewall, IPS, application control, VPN functions.

So the security and performance of our products was recently validated by NSS Labs, which in a test in lab firm – in a comprehensive benchmark test report, FortiGate-800C enterprise cost appliance are in a 100% score in the category of overall protection, stability, reliability, firewall enhancement and security effectiveness.

In addition, NSS Lab also verified that FortiGate-800C is able to sustain 9.7 gig used in real world traffic throughput. No other vendor could deliver the higher level of security and performance that Fortinet delivered.

So in our new FortiOS 5 operation system was also certified by the Virus Bulletin with reactive and proactive measurements score of 96.6%. The significance here is that Virus Bulletin, the RAP score measure of security solutions’ reactive ability to detect malware collect from previous weeks as well as its proactive ability to catch advanced open view this malware that has appeared since the solution was submitted for the testing.

And out of the 30 participating vendors, Fortinet is the only company to secure the VB100 award and scores above 90% of proactive detections. Other recognition we are proud to have received during the fourth quarter include Info-Tech Research Group’s next-generation Firewall Champion and the Best Overall Value award for entire FortiGate platform. The award based on the market share, mind share, the platform coverage, Info-Tech Research Group evaluates ten competing platform in the next generation market including Cisco, Juniper, Check Point, and Fortinet. And Fortinet is the only vendor to receive these two awards.

And finally, in the Business Solution Magazine surveyed more than 3,000 value added reseller, Fortinet scored the Best Channel Vendor for 2012 in security category based on Fortinet’s strong product innovation, feature, reliability, comprehensive channel program and overall working relations with the channel partners.

So now let me turn the call over to Nancy, who will review our quarterly operational results and the outlook for the first quarter and full year of 2013.

Nancy Bush

Thanks, Ken. We are very pleased with the company’s solid execution during the fourth quarter which as Ken shared translated into strong performance across our key operating metrics including billings, revenue, operating income, EPS and free cash flow. I will first discuss our fourth quarter and 2012 results in more detail, and then conclude with our outlook for the first quarter and for the full year 2013.

As you can see on slides 3 and 4, billings were $174 million during the fourth quarter, an increase of $34 million or 24% year-over-year and excluding the $1.9 million impact from the aforementioned patent sales, billings were $172 million, which was at the top end of our guidance range. As a reminder, we bill in U.S. dollars so our billings are not impacted by FX fluctuations.

From a geographic perspective, growth was strong across all regions with billings growth in the Americas 24%, EMEA 25%, and Asia-Pacific 22% compared to the fourth quarter of 2011.

The Americas had a solid performance with large enterprise and service providers in the U.S. Excluding the patent sales, Americas billings growth would have been 21% and we were pleased with our results here given a somewhat cautious spending environment during the quarter. This is a testament to our product line, competitive advantage and investments made to expand and enhance our sales force in the region.

Moving to EMEA, we had an excellent quarter and grew billings 25% year-over-year as the investment and our sales infrastructure continues to pay off. During the fourth quarter, we saw a strong growth in the UK, France, Germany and Middle East with continued traction in the financial services vertical and service provider segment.

Finally, in Asia-Pacific, billings increased 22% compared to the fourth quarter of 2011. We again have record quarters in Japan, Korea and Taiwan, which was partially offset by China. Just as a reminder, last quarter we mentioned that we were taking steps to enhance Fortinet’s channel and management sales team in China to diversify there and mitigate reliance on large deals.

While we are pleased with the progress we made here in Q4, it will still take a couple of quarters for our efforts to translate into improved performance in this region.

In regards to product segmentation, as you can see on slide 5, product billings were again well diversified against cross segments, the high end FortiGate products accounting for 36%, mid-range 30%, and entry-level 34%. In addition, billings per vertical remain relatively consistent with service provider at 29%, financial services at 12%, government 11%, retail 8%, and education 6%.

The number of large deals during the fourth quarter increased year-over-year in all categories. Specifically, the number of deals over $100,000 during the fourth quarter of 2012 increased to 229 compared to 192 for the same period last year. Deals greater than 250,000 increased 37% to 78 compared to 57 in the fourth quarter of 2011, and deals over 500,000 increased 80% to 27 compared to 15 last year.

Finally, we had several deals of a million or more. And as Ken mentioned, deals over 1 million increased 100% year-over-year and are now in the low double digits demonstrating our increased success within larger Fortune 500 enterprises and service providers around the world.

Turning to revenue, during the fourth quarter, total revenue was $151.2 million, up 25% year-over-year and excluding the $1.9 million received from the patent sale mentioned earlier, revenues would have been a $149.3 million, an increase of 23% year-over-year and above our guidance range.

On a geographic basis, you can see on slide 6 and 7 that revenues continue to be diversified globally which remains a key strength of our business and during the fourth quarter we saw a healthy growth across all geographies. Specifically in Americas, revenues were up 33% to $61.5 million and excluding the patent sale revenues increased 29% compared to the same period last year, which again far exceeds our guidance expectations.

As we mentioned earlier, we were pleased with our execution in the Americas given what somewhat cautious spending environment and difficult comparison to last year's fourth quarter. We continue to have success in penetrating large enterprise Fortune 500 accounts, as well as grew our already impressive base of leading service provider customers. A few large America rents during the quarter included a seven figure deal with a New York-based financial services company that was looking to consolidate firewalls to simplify their environment and reduce cost.

We replaced Palo Alto Network products and run the steel against Check Point based on our superior follow-up performance and UTM broad feature set to allow the flexibility to add other security technologies in future. The company plans to initially deploy our high-end FortiGate appliances as core firewalls in their data centers, and then slowly integrate IPS and other UTM functionality to replace various point solutions.

We also closed another seven figure deal with a large Fortune 100 retailer for full corporate data center security deployment that will include firewall, IPS and web content filtering. After rigorous testing and evaluation, Fortinet was selected to replace the incumbent Palo ALtra Networks and beat out Cisco, Check Point and HP TippingPoint. We are also competing for this deal.

And finally, I want to highlight around Latin America is one of the region's largest mobile service providers how was to secure its mobile network and applications in terms of Fortinet over the incumbent Check Point due to our superior performance and product quality.

In EMEA, revenues were $54.1 million, up 22% compared to $44.2 million last year as we continue to benefit from the investments we have made in the region. We have an exceptionally strong and cohesive team there which is executing well despite some macroeconomic challenges.

So moving to the America and these are growth during the quarter, it was driven by success in selling to a number of Fortune 500 enterprises across key verticals such as financial services and service providers. Specifically, we had a win with one of the world’s largest international banking financial services company that was looking to refresh its firewall and IPS infrastructure for two separate business units and were seeking an integrated next-gen firewall solution. The company chose Fortinet over Check Point and Sourcefire due to our price, our performance and functionality advantage along with our strong enterprise class support.

Demonstrating further tracks in financial services, we also won a large deal with one of the world’s largest global banks. They needed to upgrade their online security to protect the retail and business making customers. They needed an integrated high performance security offering that was able to support layer 2 networking. This was a competitive displacement which we won against Check Point, Juniper, and Palo Alto Networks.

And finally, we beat out Cisco, Juniper, and Check Point in high performance parallel deals with one of the world’s largest telecommunications company and with a government controlled service provider.

In Asia Pacific, revenues increased 17% to $35.6 million from $30.4 million. We had an especially strong performance from Japan, Korea, and Taiwan and continue to win new business with enterprises and service providers across the region. For example, we won a seven figure multi-phase deal with a large health agency that was looking to enhance and consolidate security across thousands of locations throughout the country. Fortinet was chosen over Check Point, Cisco and Juniper due to our superior price performance and high scalable product line.

We also replaced Cisco and Juniper in the regional division of one of the world’s largest e-commerce company that was looking for a best of breed, high-performance firewall to protect its high traffic platform. After thorough testing, we won the deal based on our ability to deliver significantly higher performance and as well as total cost of ownership.

And finally, we won a seven figure deal with a leading wireless services provider due to our performance and reliability advantages as the carrier was looking to introduce new wireless services and accommodate future traffic growth.

In regards to the revenue breakdown of products and services, slide 8 highlights that. Product revenues increased 24% year-over-year to $71 million driven by growth across all product segments, particularly from some of our new models including the entry-level FortiGate-100D, mid range FortiGate-800C and high end FortiGate-3240C appliances.

In addition, service revenues grew from 26% to $76.7 million compared to $61.1 million during the fourth quarter of 2011. The increase in service revenue was primarily due to the consistent growth and support in subscription offering as well as strong growth in our professional services revenue as a result of more large enterprise customers who require ongoing resources onside. We also had several professional services projects completed in the quarter which allowed us to recognize that revenue.

In terms of the renewal, rates continued to be in the mid-to-high 70% range. Finally, ratable and other revenue was $3.4 million which includes the $1.9 million from the patent sale. In regards to head count on slide 9, you can see that we ended Q4 with 1,954 employees, which was up 23% year-over-year and 5% sequentially. We continue our aggressive hiring efforts in sales and marketing and R&D to support expected growth in 2013.

The investments in our sales teams and productivity enhancements continue to pay off with further growth in revenue per employee. Annualized revenue per employee increased to 318,000 in Q4 from 311,000 in Q4 2011 and 301,000 in 3Q 2012. You can see this on slide 10.

Turning to non-GAAP expenses and profitability, for the fourth quarter, total gross profit margin was 73% as product and service gross margins were 62% and 83% respectively, all of which were consistent with our expectations. We continue to invest and support to meet the needs of our growing enterprise customer base and these investments are paying off as recent survey show customer satisfaction levels are increasing.

Total operating expenses were $69.5 million during the fourth quarter, up 23% year-over-year and consistent with revenue growth. Excluding the patent sale, this resulted in a non-GAAP operating income of $39.4 million or 26% of revenue, which was above our guidance. Non-GAAP net income during the fourth quarter was $28.1 million or $0.17 per share based on 167 million diluted shares outstanding. Excluding the impact of the patent sales, non-GAAP net income was $27 million or $0.16 per share, which again exceeded our guidance.

On a GAAP basis, net income for the fourth quarter totaled $21.5 million, $0.13 per share compared to $16.5 million, a $0.10 per share in the prior year period. The effective tax rate for the fourth quarter of 2012 was 41% bringing the annual rate for 2012 to 36%, up from 32% in 2011 due to greater income and lower deduction from the prior year. A reconciliation of non-GAAP and GAAP can be seen on Slide 15 and 16.

Let me wrap up quickly by running through some summary level financial results for the full year 2012. Billings for 2012 were $602 million, up 27% year-over-year. Revenue for 2012 was $534 million, up $100 million or 23% year-over-year. Non-GAAP gross margin was 73% and contributed to non-GAAP operating income of $129 million or 24% of revenue in line with 24% last year. Non-GAAP diluted net income per share was $0.53 for the year based on 166 million shares compared to $0.45 per share based on 164 million shares in 2011.

I just want to highlight a few key items on the balance sheet as you can see on Slide 12. We ended Q4 with 740 million in cash, cash equivalents and short and long term investments, up from $690 million during Q3.

As you can see on Slide 13, the increase was driven by the $15 million in cash generated from operation. It’s our 28th consecutive quarter of generating cash from operations, exclusive of one time items. Free cash flow was $48.5 million in the fourth quarter, up $26.8 million or 123% and well exceeded our guidance.

Collections were very strong during the quarter. For the full year 2012, Fortinet generated free cash flow of 162 million compared to $129 million in 2011. Strong collections resulted in DSOs of 64 days, which was below our targeted range of 65 days to 75 days.

Our deferred revenue balance of $363 million increased $68 million or 23% year-over-year and $23 million sequentially. The sequential increase was primarily in our services deferred revenue, which increased by $26 million and was offset by a $3 million decrease in ratable and products.

Turning to guidance, I want to finish with some thoughts regarding our financial outlook for the first quarter and full year 2013. Before reviewing guidance, let me remind you that our guidance consist of forward-looking statements, and please keep in mind Michelle's earlier comments regarding such statements.

While there continues to be some volatility in global economy, we believe that the demand for network security solution remains very strong and Fortinet is well positioned to grow market share due to the strength of our product line and our investments we are making that were mentioned earlier.

As we’ve previously done, we expect to provide quarterly updates to our outlook over the course of the year because we continue to gain more data points and visibility. Starting with full year 2013, we currently expect billings to be in the range of $710 million to $720 million, up 19% at the midpoint or 20% when you exclude the $3.7 million in patent sales from last year. The 20% is consistent with our initial 2012 guidance delivered last year at this time and higher than the mid-to-high teens growth rate we committed last quarter.

Total revenue is expected to be in the range of $625 million to $635 million, an increase of 18% year-over-year at the mid-point. If you have met between 2012 patent sales and its planning ratable revenue balance, products and services revenue is expected to grow at a combined 20%, gross margin to be in the range of 72% to 73%, and non-GAAP operating margin to being comparable to 2012 at 24% for the year.

Just as a reminder, we expect our operating margin to increase over the course of the year as it is seasonally lower in the first quarter due to certain payroll related tax expenses combined with the fact that we plan to gain leverage on our growth investments over the course of the year.

EPS to be in the range $0.60 to $0.61 based on our expected weighted diluted share count of approximately 170 million to 174 million. From a free cash flow perspective, we are targeting a range of $180 million to $190 million for 2013, up approximately 15% year-over-year, as we expect to incur higher cash taxes in 2013, and are planning to make capital investments and technology infrastructure.

Turning to our outlook for the first quarter of 2013, during Q1 we expect billings to be in the range of $158 million to $162 million, which at the midpoint represents growth of 17% year-over-year. Total revenue is expected to be in the range of $138 million $141 million, which at the midpoint represents year-over-year growth of 19%. Gross margin is expected to be in the range of 72% or 73%.

Non-GAAP operating margin is expected to be approximately 20% reflecting the continued investments in the business and expect headwinds of approximately $5 million due to payroll related tax expenses, employee merit increases and classification usage. Our pro forma tax rate will be 33%, down 1% from 2012 due to the reinstatement of R&D tax credit.

In summary, the fourth quarter was a strong finish to the year as we had a number of regions that performed exceptionally well, deliver new products that strengthen our competitive advantage, gained market share, and further penetrated large Fortune 500 enterprise markets across a number in the price markets across a number of key verticals. We’ve entered 2013 with good momentum and are excited about that opportunity ahead of us, which we believe will enable us to continue to offer our market and gain share.

In closing, I would like to thank the Fortinet employees, the Fortinet partners and the Fortinet customers for helping us achieve these great results, and as well as shareholders for their continued confidence in the company.

With that, I will turn the call over to the operator for Q&A. Also joining us for Q&A will be a couple of key members of our finance team, Doug Meyer and Jim Bray. So with that, operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jonathan Ho with William Blair. Please go ahead, your line is now open.

Jonathan Ho – William Blair & Company, LLC

Congratulations on the strong quarter guys.

Ken Xie

Thanks Jonathan.

Nancy Bush

Thank you.

Jonathan Ho – William Blair & Company, LLC

Just wanted to start off may be with a little bit of a discussion around the competitive environment. Did you guys see any notable changes this quarter from either a larger or smaller competitors? That may be was deviated from prior quarters or cost for concern?

Ken Xie

I think we see the – the bigger customer most part I talk is UTM a major firewall solution compared to some low point solution right now. So that’s where we feel we have all advantage on the performance and the rich function compared to some of the competitors. I think still similar like that the unit are now looking company because its own quite focusing security, they are starting for behind on the function. And that I think is the (inaudible) company so far the – depend on the sulphur based on some server, some other regular OS, which lack the performance needed for the large enterprise. So we started see quite a lot of advantage of the platform we have.

Jonathan Ho – William Blair & Company, LLC

Got it. And just in terms of some additional color with regards to the spending environment, you guys decided maybe some softness in North America. Can you maybe talk a little bit about what you're seeing there and whether that’s persisting into the first quarter?

Ken Xie

I think we have some concern towards the December the fiscal cliff, so that’s probably some lighter company gone and holding and spending a little bit. I think right now probably that issue you have little bit concern, but kind of better compared to December now.

Michelle Spolver

Yeah, if I could just add John, this is Michelle, that we saw that a little bit more in retail.

Jonathan Ho – William Blair & Company, LLC

Yeah.

Michelle Spolver

We have a little bit – federal is not a big part of our business but retail was, so it wasn’t a significant impact or we did see some of that.

Ken Xie

But the other side is really the UTM after we engage some customer in UTM kind of give them better cost advantage compared to the all solutions, so we do see some cost to see the benefit of it, so we don't see, you can see the bigger deal. We started to get more bigger deal, because the bigger customers are starting to realize the solution has much better, better performance, better value compared to their previous solutions.

Jonathan Ho – William Blair & Company, LLC

Got it. And I just understand your competitive comments, but you displaced Palo Alto Networks often networks. Can you maybe give us some thoughts around what it is that allowed your solution to displace them, displaced on feedback that you receive from customers?

Ken Xie

Yeah like I mentioned the two things fast and secure, because our platform is much faster compared to Palo Alto which more based on the software, and then we have much broader security function and also function at one of our peer, like the example we gave in my calls there sort of VB100 has a test over 30 companies for the proactive detection for the malware which basically they just hold your box for like a couple of weeks whatever the malware or the intrusion happening possibly we have no chance to update a signature and then testing all these things. So we will only run flagship over 19%. So I think that that’s where the fast secure thought we have a huge advantage. I think Palo Alto is doing good job really. They have a pretty good marketing machine and also a pretty aggressive sales team, which we also try to invest more in our sales team. And I believe as we target a little different market, but our approach is really to have much more long time advantages compared to some other software based companies.

Jonathan Ho – William Blair & Company, LLC

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Keith Weiss with Morgan Stanley. Please go ahead, your line is open.

Keith Weiss – Morgan Stanley

Thanks for taking my question and off to a very nice quarter. I wanted to ask you guys a little bit about the guide, stronger than I think Consensus expectation and what most people thought coming in. And particularly in Q1 it looks like the billings guidance is a little bit more aggressive in terms of the seasonality than you guys have guided to historically. Can you give us some commentary about the type of pipeline that you are looking at perhaps the backlog that you have coming into 2013, and may be compare that to the pipeline and the backlog at this time last year.

Nancy Bush

So, we are not typically a backlog company right, so pretty much within the quarter we shift whatever we take. However, we do look at our forecast. And as we talked about before coming into the quarter, we have a certain percentage that will come off the balance sheet and that continues to grow overtime. So that gives us some strength coming into the quarter. And then as we size up and look at our forecast, across our geographic regions we’re doing quite well. So what we saw in Q4, we saw continuing into Q1. And then it’s not this similar from last year kind of the processing that we went through in the seasonality year-over-year.

Ken Xie

We on a technology side, on October last year, we announced the FortiOS 5. We get positive feedback from the customer, from the channel partner, and also like last quarter, this quarter we starting deliver a few new platform and probably more this year later based on a new FortiASIC. So we have a new FortiASIC announced in the Q4 last year starting point of the part this year, and then there is another new FortiASIC which I had the performance a lot were delivered this year, so that’s all we’re helping the full year growth. And we're confident for the 2013 that the long-term potential we feel we have a more advantage keeping increase the gap compared to some of our competitors.

Keith Weiss – Morgan Stanley

Got it. Excellent. And maybe in more proper terms of the backlog, you guys do have some product revenues that go into deferred revenues, how is that look just in Q4 versus how deferred product was this time last year?

Nancy Bush

Yeah, if you look at our ratable revenue and the chart that we show, that would typically be what’s coming off the balance sheet. So the revenue rules changed right almost I think eight quarters ago now. So there is very low ratable product that's coming off the balance sheet anymore. It’s more subscription services and support that's coming off the balance sheet.

Keith Weiss – Morgan Stanley

Got it. And if I could perhaps sneak in one last one again. When we look at the split of SKUs by high-end mid-range and low end, it looks like the high-end SKUs were – they saw slower growth than mid-range and as low end which did very well. But you had really strong metrics in terms of large deal, can you touch a little bit about the composition of those large deals and because it doesn't seem to be just large deal meaning high-end SKUs?

Ken Xie

I think that some fund – the last deal also composed of some smaller low-end box for the branch office, so that’s probably one of the reason. The other thing similarly I think last year we see the enterprise growing well, so it is really the enterprise. We don't want get quarter-by-quarter as it’s difficult to track, but the whole year we’ve grown like 55% in the enterprise segment. I think this year we'll invest more in the enterprise both in the team and also in the marketing side. So we feel that will also help in both on the high-end product and also in the larger deal, but some kind of longer deal don't have to be all high-end product.

Nancy Bush

Just to reiterate what Ken said to, we give the quarter numbers every quarter, but I think you kind of have to look at them over a trended period of time and not just focus on one particular quarter.

Keith Weiss – Morgan Stanley

Got it. Excellent. That's all I had.

Nancy Bush

Thank you.

Operator

Thank you. Our next question comes from Gary Hall with Wells Fargo. Please go ahead. Your line is open.

Gary Hall – Wells Fargo

Taking the questions. Just a couple of quick ones. So should we expect any significant changes to your marketing message in 2013, specifically should we expect you to market more around next-generation firewall versus UTM? And then how should we think about the selling and marketing line and the impact on operating margins over the course of year? Thanks.

Ken Xie

I think in 2013, we will be more focused on enterprise solution and from my personal point of view, the maximum part of UTM – we are talking about the same box, so this is just my angle to view the solution. But, whatever customer needed and then we try to help and find the best solution, and that's also give because the platform also has the feasibility to deliver some dedicated function compared to the compound integrated function, so that’s where like 2013 that the massive (inaudible) target some enterprise. And we are keeping ahead of the channel, we are keeping ahead the service provider, but we will believe like we see enterprise going quite well last year and this year we feel we should invest more into the enterprise environment, which we have now too much investment in the past, but the solution is starting well enterprise right now.

Nancy Bush

On the operating margin question across the year, we’ll be up 24% overall for the year and starting that 20% in Q1, so obviously it will go up as we go throughout the year. I think you can look to the previous two years and get an idea of how it tracks.

Ken Xie

I think – you can see some of our competitor they probably till profitable, which they almost no gross and some other competitor may be they make no money, just trying to more aggressive. I think we feel we have achieved fine among that the profit and also growth.

Gary Hall – Wells Fargo

Got it. That’s very helpful. Thank you very much.

Ken Xie

Thank you.

Operator

Thank you, sir. Our next question comes from the line of Walter Pritchard with Citigroup. Please go ahead. Your line is open.

Walter Pritchard – Citi Investment Research & Analysis

Hi, I was wondering if you could talk about your investments and sales in 2013 and I think we’ve seen plenty of competitors talk about the investing there I’m wondering we have ever seen product leadership perspective, but I’m trying to understand how much do you expect to invest on the sales markets relative to your overall growth in OpEx? Thanks.

Nancy Bush

The percentage as we end the year won’t be a lot different, right. But we see verticals – we already talked about the enterprise where we’ve grew a lot year-over-year so we will continue to invest in sales opportunities like that. There are some regions where we feel like we can move up our market share position. And then there are some incentive programs that we enacted with some of our partners last quarter that we’re going to continue that we felt. Paid off very well, and actually probably gave us more leverage on the revenue side for the spent. So I don’t think the percentage as we end the year will be any different in the long term model, but we’ve been out there for a while.

Walter Pritchard – Citi Investment Research & Analysis

Just on the cash taxes, could you talk about normal cash taxes we should expect in 2013 relative to 2012.

Nancy Bush

Yeah it’s – we are modeling and right now at about 50% of the GAAP tax rate which is 35%. Obviously as every corporation, we are going through what is passed in Congress and see if we can improve that a little bit, but that’s our starting point for the year.

Walter Pritchard – Citi Investment Research & Analysis

Okay. Thank you.

Operator

Thank you, sir. Our next question comes from Brent Thill with UBS. Please go ahead, your line is opened.

Brent Thill – UBS

Ken, you had nice momentum in the million-dollar plus transactions, and I was curious if you could just drill in, that’s a big improvement in growth but obviously it’s still a low number. What you are seeing in terms of what’s enabling that, if you could just drill in a little further and if you could also just touch based on the pricing environment I think there’s been a lot of concerns, a lot of vendors have the same marketing metrics. And what you are seeing in terms of on the pricing side? Thanks.

Ken Xie

Okay. I think first on the pricing side, we don’t see any pressure. So that’s why we don’t see any need to like that discount whatever to win the deal, because we believe we have the best platform that can deliver the best performance and best function. But on the performance side, the whole network was secure and you kind of followed the Moore's law for every two years, the speed double. So that’s where, because our performers advantage we can really kind of match all these demand in the field. On the larger deal, I think that – because internally we are starting position of structure (inaudible) more dedicate for some vertical space, and also the whole landscape are also changing in the whole market, its better some traditional firewall and no longer can stop the newest attack, the malware attack or this virus attack now. So that's where you see the need in the market, which they need to be refresh their current solution to a faster and a newer generation at same time and they also need to add additional security function to meet all this new application come from the internet.

So that's where the royalty rates say we probably gave annually, because still little bit lumpy quarter-by-quarter so we don't want to mislead in maybe customer overreaction there. So as they probably – annually we probably gave us some more detail will make more sense, but quarterly we really hesitate to give too much detail which may cause them overreaction there.

Michelle Spolver

Yeah, it’s Michelle. To Ken's point, there’s been a quarter in the past that we had an eight figure deal. So we could have larger deals at lower numbers, so I think we can fine tune to be in the perception now. But the other thing just to add in terms of what we see helped large deals grow is, if you recall the last I guess the year or so we have been making investments in growing our enterprise sales team in particular, and I think that is probably helping get the rewards in terms of larger deals and more of those.

Brent Thill – UBS

Thank you.

Operator

Thank you, sir. Our next question comes from Robert Breza with RBC Capital Markets. Please go ahead. Your line is open.

Robert Breza – RBC Capital Markets

Hi, thanks for taking my question. Ken, I was hoping you could dig into a little bit more about the geographic issues and I know you talked about maybe digging in an extra couple quarters to kind of work through either specific issue. Wonder if you could just give us a little bit more color on how you see that market kind of unfolding here? Thanks.

Ken Xie

That does make APAC probably China we mentioned last quarter. I think it would take a few quarter to turnaround, to fix the issue there, which we hope the second half of this year. We are starting to see big growth again. And just like we did in UK about in middle of 2011, we see, we have some issue there and then take about one year, starting to turnaround the result. I think it’s a similar timing for some APAC country there, but overall we are operated globally, I think we see that overall all three regions perform quite well.

Nancy Bush

Just a reminder in Asia Pacific, China is one of our smaller market drivers there. As we mentioned earlier in the script, Japan, Korea and Taiwan all had very strong performances. So I think we expect to continue to see Asia Pacific in the near term to show growth.

Robert Breza – RBC Capital Markets

Okay. Thank you.

Operator

Thank you, sir. Our next question comes from Sterling Auty with JP Morgan. Please go ahead. Your line is open.

Sterling Auty – JP Morgan

Yeah, thanks. Hi, guys. Ken, I wonder if you could give us some more color on the telco space. How much of the success that are you seeing there in telco provider installing your solutions in their own port network versus what you’ve seen traditionally where they successfully go out as part of their managed security service business and install your solution on the customer site.

Ken Xie

The telecom provider, now they try to transition into more like a major service provider, which when they purchase a product sometimes more for their customer try to help and manage the service. I still see it’s a big potential there, but on the other side the telecom service provider tend to be very careful when they are making the decision and also they take some possible to testing because the telco is better availability, the performance is all were critical for them. And so that’s where – so far we see a few good trend in the area, and also we see some more enterprise customer starting more engaged with some technical service provider try to do the math in service solution there. So we don’t see much changing in the space.

Sterling Auty – JP Morgan

Okay and then one question on operating margin. Looking at the operating margin guide and putting into context to your longer term growth here, is this really kind of where you feel is the right level for operating margins? Or was there kind of time where you think there is still more operating margin upside and more leverage that we had as you get some traction moving up market?

Ken Xie

I think we speed on the (inaudible) in the last two quarter. You can see last quarter we had about 100 people and even like this quarter we are also pretty aggressively try to invest in sales and marketing like in this margin. We add in that 60 people. So we want to keeping invest for the growth, because that’s where sometime we try to balance so how the – what’s the best value for the shareholder is more on the growth side, on the profit of value side. So that’s what we try to see what the best balance there. So we believe with the cash we generate, with the cash level we have, so this year if we are keeping the same operational model as last year and then you invest more in the growth comparatively keeping improve in operation margin. That’s probably the best strategy. So please on now, so that’s where we want to keeping you invest in the growth which is really the sales and marketing and R&D.

Sterling Auty – JP Morgan

Okay. Thank you.

Ken Xie

Thank you.

Operator

Thank you, sir. Our next question comes from the line of the Jayson Nolan with Robert W. Baird. Please go ahead. Your line is open.

Jayson Nolan – Robert W. Baird & Co.

Hey, thank you. Ken, I wanted to ask about new products, could you talk about the response to 5.0 and some of the SSU based products in the lower end?

Ken Xie

Okay. I still see we announced that last quarter and we start to integrate into the part of this quarter, but it also takes some time because when we refresh the platform then the leverage to the new ASIC, I still see reporting there, but I still see more target into the low and middle range there. So we have some benefit starting to come up this quarter and this year. The OS 5 we announced in October last year, so you can see the testing with VB100, so we're running the most security solution especially protect all these kind of like a zero-day and behavior and APT-based attacks and all this is 30 plus vendor. So we have the best solution and the most fastest solution there. None of the other competitor even comes close. We had only once caught over 90%.

So that’s were the OS 5, the OS 5, I have to say will take little more time to put a customer to change. I mean right now we have over 1 million fully deployed. So I think we take some time, some time the cost – they don't see the need to change right away, they may hold their current operation system for a while and then we also starting gradually putting the new product, new shipment for the new OS. But I think we'll be starting to play out in the next few quarters so we don't see a big jump and all of this kind of see a slowly gradually – see the benefit.

Jayson Nolan – Robert W. Baird & Co.

Okay. And then timing anything you can say about NT6 the custom ASIC around timing or expectations?

Ken Xie

I think can say what is this year, so they are quite confidence where we deliver. It’s a quite revolution advantage in this area, because there is one on the past solution in this space.

Jayson Nolan – Robert W. Baird & Co.

Okay. I’ll leave it there. Thanks, Ken.

Ken Xie

Thank you.

Operator

Thank you, sir. Our next question comes from Todd Leone with Bank of America Merrill Lynch. Please go ahead. Your line is open.

Ron Zember – Bank of America Merrill Lynch

Hi, this is Ron Zember on for Todd. Congrats on the quarter guys.

Ken Xie

Thank you.

Nancy Bush

Thank you.

Ron Zember – Bank of America Merrill Lynch

Quick question, I know government is still small part of the business, but I notice that something I guess deceleration in there. Is that predominantly because of fiscal cliffs, can we expect a bump up next quarter or is that more of a shift in the paradigm?

Nancy Bush

So government is the same percentage this quarter that was last quarter. So I am not sure I saw deceleration in government.

Ron Zember – Bank of America Merrill Lynch

On a year-on-year basis?

Nancy Bush

Year-over-year.

Michelle Spolver

I wouldn’t, its Michelle, Ron. I wouldn’t get that tied up around that. I mean government is for worldwide and that vertical is – worldwide government, we do, do well internationally. We still do well in Americas in terms of state and local government. So I really wouldn’t we’ve said this before get that and hung up on year-over-year changes and verticals. We didn’t really see anything different in Q4 than we did in Q3.

Ken Xie

Yeah. And also we have all the highest level certification for the government like Common Criteria for EAL and it’s an important market for us and also we are like a U.S. company, most employees in U.S. and Canada. So we want to keep investing in that area, but that also takes some turn and also there is like a fiscal cliff or whatever. We do have some concern in some spending, but like we said it’s really firstly it’s not a bigger percentage for us, we don’t see much impact compared to some other competitors. And second, we see the technology, the product advantage that we have actually can lower the total cost of ownership and can help receiving some project compared to the previous solutions.

Ron Zember – Bank of America Merrill Lynch

Gotcha. Thank you. And one more quick one, are you guys actively looking for permanent CFO or what’s the status of it?

Ken Xie

Yes, we are very well acting to searching a CFO. And I believe Fortinet is one of the best company in the space, so we really want – and also CFO position is quite important, so we want to find the best CFO. On other side we have very strong finance team. You can see the last few months, we execute well, we deliver well, we have the strong and best team and a finance team and all sitting here, and keeping delivered – very good result.

Ron Zember – Bank of America Merrill Lynch

Okay. Thank you very much and congrats guys.

Ken Xie

Thank you.

Operator

Thank you, sir. Our next question comes from the line of James Wesman with Raymond James. Please go ahead. Your line is open.

James Wesman – Raymond James

Hey guys, good afternoon. First, Nancy, could you just clarify your comment on, I believe you said product and services revenues were expected to grow combined 20% that’s ratable in 2013, is that correct?

Nancy Bush

Correct.

James Wesman – Raymond James

Okay, got it. And then second one just looking to guidance, what’s macro economic assumptions are you guys taking into guidance, are you expecting global macro to improve or stay the same towards or just any color there might be helpful.

Nancy Bush

I think that Michelle and I have talked about this several times to different people over the course of the last couple of months. I mean it's always been a challenging macro out there. I think it continues to be one, but I think what gives us little bit of thought into the year is, people continue to need security reading the latest article in the paper today was, is Congress going to go back and enact something around cyber security. So I don't see a lot of changes in it and we just have to continue to try to manage through it and take the opportunities that we see. Ken, if you have any additional color.

Ken Xie

Yeah, security tend to be more resistant compared to some hardware structure or IT company, because also you can see more than half of our revenue come from the service support which is fairly like I said before. When the whole macro environment economy really slow down, some customer may not really buy a lot of new product, but they do keep up out of service support and then – he may extend the current product service support. So overall even like the end of 2008, 2009 we’re still growing because network security is the path they need to make the whole thing working.

James Wesman – Raymond James

Great. Thank you guys.

Ken Xie

Thank you.

Operator

Thank you. Our next question comes from Shelby Seyrafi with FBN Securities. Please go ahead. Your line is open.

Shelby Seyrafi – FBN Securities

Can you elaborate more on why you’re doing so well in the enterprise? How much of this is using like the next-generation firewall term more sales efforts in the enterprise? You did very well with high-end billings or deals were very impressive, just elaborate on the progress you are making?

Ken Xie

I think first we believe that the advantage we have on the technology and the product, the enterprise currency to benefit and also we have a good dedicated team starting to focus on enterprise since couple of years ago. So that is starting to result in the fast growing enterprise. And also we are going to invest more this year for enterprise.

The message – we have quite a flexible whatever because helping customer to provide a best solution there. So where some customer – the enterprise customer especially they got like distribute enterprise environment they are more like the UTM message, some other customer they may like the next gen firewall message but it's really – basically it's really the multifunction device. So that a device have a firewall, VPN, intrusion, app control, antivirus together compared to the single point solution or single function device in the past.

So that’s were the whole market trended right now. So that’s where we – the platform we have is really the best platform kind of address this trend, its changed with both the performance and also the broader security function. So that give us more few advantage and we also keep steady improving in the sales and marketing where we can see the change opportunity going forward.

Shelby Seyrafi – FBN Securities

Okay. And what percentage of your products have a new FortiASIC SSE2 now and how do you see progressing as the year progresses?

Ken Xie

We started on ASIC front of work. Again we are going to find the company and out of FortiGate, we have ASIC there but it's really the generation and this unit takes about total solution to our new chip come out. That's where you can look into the system. If the system has been relatively old, they may have the older chip there and the newer system will leverage to the newest FortiASIC shipped, the newest CPU, the newest network processor chip there. So that's – every quarter we have a few new product come out. So the one we just announced last week, the FortiGate-600C that’s leverage on newest chip and newest CPU. We have a few larger product that will be announced in the next few months. So that’s how leverage the latest newest which is difficult to say. We have over 30 gig, 40 gig path for our product line, so it is difficult to say we’re trying to reach in the call there.

Shelby Seyrafi – FBN Securities

Well, I was talking for like round number or estimate is like a third right now going to two thirds by the end of or the middle of the year that kind of thing? Just your estimate on this?

Ken Xie

(Inaudible) one and one half years to have to chip starting to get into the system. So the one we announced as you will see through in Q4 was starting point in a system this quarter. So I think the most system come out this quarter were lagging we announced last quarter. And then the other chip we are going to come out MP6 this year will be, the system will be, may be the second half or towards the end of the year we’re starting using the new MP6, afterwards we’ll using the MP4 we had before.

Shelby Seyrafi – FBN Securities

Okay thank you.

Ken Xie

Thank you.

Operator

Thank you. Our next question comes from Shaul Eyal with Oppenheimer & Company. Please go ahead. Your line is open.

Shaul Eyal – Oppenheimer & Co.

Thank you. Hi, good afternoon guys. Congratulations on my end as well on the great performance. Two quick questions, Ken, Nancy what are the hiring plans for 2013, can you kind of provide us with some number that kind of employees you think of hiring later on this year?

Ken Xie

I think we won’t be hiring the same person as our growth. So if we target growth like 27% so that’s where the hiring we have. That’s also kind of we feel that’s the investment we need to keep the growth compared to we will kind of limit behind hiring in the last one or two years. Now, were starting to catch up now.

Shaul Eyal – Oppenheimer & Co.

Got it. And Ken, as you look on your product portfolio and you guys have done a terrific job kind of expanding it, just kind of going higher-end of market. Do you feel that kind of any thoughts that you would like to beef up a little bit the portfolio in certain areas?

Ken Xie

We see quite some opportunity spending in enterprising of finance service provider, healthcare, education. I think the strategy structure we have kind of different than few years ago which is more like focus on some regions sort in China. Now we’re starting to see some vertical space really like this integrated solution now. So we'll keep invest more in this area.

Shaul Eyal – Oppenheimer & Co.

Got it. Okay, thank you very much and good luck.

Ken Xie

Thank you.

Operator

Thank you. Our next question comes from Dan Cummins with B. Riley. Please go ahead. Your line is open.

Dan Cummins – B. Riley

Thank you very much. Let's see, it feels as if the company is perhaps back to let's say 18 months ago in terms of conservative kind of cushion of your guidance. The DSO's were down quite a bit versus what they were year-end 2011 and 2010 yet look like a phenomenal quarter for large deals. Can you give us a sense of how much these – all the enterprise deals that you’ve talked about in the third quarter many of those I thought had a strong element of follow-on business expectations. Can you just give us a sense of how was that follow-on business and how many new deals in the fourth quarter did you sign where you have a similar confidence around follow-on business? Thanks.

Nancy Bush

Let me just say our guidance was built of – we exceeded in Q4, so that makes a tough year-over-year comp. So we’ve actually kind of pushed guidance up from where we're talking last quarter. So we're kind of starting the same place that we did last year.

We don't track kind of net new customers versus customers in the installed base. What I would tend to say is that what we see is geographic performance was strong across-the-board and our diversity and product lines give us a lot of opportunities to sell in lot of places. So that's probably more of an influence little factor in some cases. Ken?

Ken Xie

Yeah, I don't think we’re changing the way we operate right now compared to last three years. I think in beginning of the year we have a less visibility, so that's where we tend to – once we have more visibility we tend to update the guidance there, but in the beginning of the year it's a similar part we have in the last three years.

Dan Cummins – B. Riley

Thank you, Ken. Just a follow-up about comment, Ken you made last quarter about mobile device connectivity or BYOD trends, what are you seeing in terms of requirements and what kind of contribution is that making to the size of purchase orders? Thank you.

Ken Xie

The enterprise like the BYOD approach and especially in the new FortiOS 5 so that's one of the three major advantage we have, as well as secured mobile device especially for the enterprise environment. And I think with OS 5 kind of more adopted by the more customer, so we will see some more advantage. But right now I have to say we just starting to see the BYOD kind of mobile come by the customer and we have a lot of customer trial just to because of BYOD. Going forward we see that's the one of the fast-growing area for the company.

Dan Cummins – B. Riley

Okay, thank you very much. Congratulations.

Ken Xie

Thank you.

Nancy Bush

Thank you.

Operator

Thank you, sir. Our next question comes from the line of Aaron Schwartz with Jefferies. Please go ahead, your line is open.

Aaron M. Schwartz – Jefferies & Co., Inc.

Good afternoon. I know you’ve already covered a lot, but just real quickly, it sounds like in the services line you’ve talked about specific service engagements that help that out. My question was did you see any sort of change in the tax rate of services per box that underlie that at all? And then secondarily, with the ASIC release this year, would you expect the improved performance there, any change on that?

Ken Xie

Yeah. Definite ASIC will improve the performance a lot. I think that really allows HLC 2, the VPM performance equals 10 times compared to the previous solution, previous chip. So it is each version ASIC, they can gain a huge advantage compared to some other what to depend on CPU or some other software or even the previous ASIC there. And what…

Nancy Bush

On the tax rate on the service, what we’re starting to see as we move into the enterprise phase is more people would like resident engineer or they need some type of short-term engagement. So I wouldn’t say it was a significant impact across 2012, I think as we look into 2013, we might anticipate that might be more contributing and little bit to our services line, but still not significant for us. Okay, we can move probably to the next question.

Ken Xie

I’m not sure answer all the question…

Operator

Okay. No worries. Our next question comes from Rick Sherlund with Nomura. Your line is open.

Rick G. Sherlund – Nomura Securities International, Inc.

Yeah. Thanks and congratulations Ken, it’s getting well in the tough environment in Europe and the U.S. and for also to Nancy in hurricane. So first, just the growth in capacity further sales force, is there anyway of kind of addressing that for us in terms of how much additional capacity with the growth and capacity experienced in 2012 and what you’re investing in for the future. So we the similar kind of capacity increase in 2013 and are you going to continue to invest at that pace?

Ken Xie

I think that the longer deal sometime you can increase some of the efficient for the sales team, but also it would take a long time to close a larger deal. And also once we study more focused on certain vertical market, you also tend to see some productivity and improvement, but also will take some time, yearly that legal enterprise are service provider sometime big or even like six months or one year, two year to close a deal. So that’s the long [haul] since and the worst we got a bigger like deal, our customer base there, we also can leverage, because we have quite a broad part of here.

So sometime, even beyond the FortiGate, so we have some order like FortiWeb, FortiEmail and some other solution, we also can see the benefit that the sales can offset some other solution there. I think we are still in a more growing stage. So I do not expect the product EBITDA sales will be good send you march there, because we quite aggressively high in the sales and marketing. And also I think the company got a bigger, I think we have pretty much in (inaudible) network security company worldwide now, and we do expect that the branding will help in and also to invest in the marketing and lead generation will also help in sales to improve the productivity there.

Rick G. Sherlund – Nomura Securities International, Inc.

So Ken you’re continuing to invest if you’re benefiting now from capacity increases you put in place over the last year or two, you’re continuing to invest or expand capacity to similar rate going forward?

Ken Xie

Yes. I would say that’s if you just look at the percentages and how we’re expanding now, I’ve talked to several investors around there, something that’s not only sales people, right, but its resellers, distributors, if you enter a country or a region, if you want to enter into a vertical, sometime your investments you made fair. But I’m with Ken where growth stop, we see a lot of opportunities for suite should invest and grow.

Ken Xie

Yeah. That’s also we kind of mentioned, we try to achieve the vast, balance moderate growth and also the profitability. So you’ve had kind of towards one hand and also. So that’s the best we try to achieve, but definitely with the strong cash position is the warehouse margin, we can also kind of like low well, prepared to adopt to changing this space.

Rick G. Sherlund – Nomura Securities International, Inc.

Okay, thank you.

Ken Xie

Thank you.

Operator

Thank you. Our next question comes from Daniel Ives with FBR. Please go ahead, your line is open.

Daniel H. Ives – FBR Capital Markets

Yeah, Ken. Especially being investor in this space, how much in stead, I mean are you starting to see a change with customers looking to go to more like a next generation security platform as more guys really the cloud and you’re therefore seeing kind of like next cycle spending, maybe then what we saw called a year ago?

Ken Xie

Negative enterprise customer starting to the need for the multifunction device, and you can call this next generation kind of replacing their current and firewall solution there, which we believe, because the platform we like I said, in the last 20 years, I tried the software on a platform that ASIC-based (inaudible) the combined the best CPU with the best FortiASIC platform, which can address both the performance and also the function – the newest function there, so that’s where we feel, we were prepared for the changing in the space, which need a multifunction and also higher performance solution for the network security.

So that's – especially for the enterprise, because the traditional approach provided a single function point product, its too costly to operate and also cannot defend the latest attack there. And also the speed, the other thing in the network security space every like as three, four, five years you need to replace the box, just like you need to upgrade the network device and also the server PC, so because the every two years the speed double. So that’s where, I think that's constantly need to be a key part of the changeable pro forma also the additional functional there. So that's where we see – it's a pretty healthy space.

Daniel H. Ives – FBR Capital Markets

Okay. Great insight. Thanks.

Ken Xie

Thank you.

Operator

Thank you, sir. (Operator Instructions) Our next question comes from the line of Scott Zeller with Needham & Company. Please go ahead. Your line is now open.

Scott Zeller – Needham & Co.

Hi, thanks. I wanted to get back to a very early question in the cycle here about the distribution of smaller boxes, but sometimes being included in larger deals. Could you give us a sense of the interest in spending from branch versus either the large enterprise or hosted service provider deals?

Ken Xie

In the retail space, we tend to have less and bigger box in the headquarters and the branch office using the smaller box, and for some bigger enterprise and also the data centre even (inaudible) interesting. Some of the service provider, they are using the smaller box gave to the customer so they can charge modestly whatever more like a leasing solution there, so they are using the FortiManager remote to manage, we see more of this kind of patent overseas, but in the U.S. service providers they still more preferred that bigger box with virtual system, virtual solution and which using one box to manage multiple customer with one like the virtual domain there.

So that’s were as kind of interest and we see on the enterprise probably it's difficult to say what’s the percentage, I think most of the part we do have some kind of branch, some as most on [my branch], but that's the only we see enterprise solution sometime they have – they need a combination of the high end and low end even some big enterprises just like even few location not even one location sometime this is do need a combination of a bigger and smaller box.

Nancy Bush

And let me just add Zeller, we see growth in all of those areas alternate areas and as Ken mentioned about market drivers to things like PCI compliance sort to driving spending in the retail sector in particular, which is Fortinet is very, very well in that sector, and those could be large deals with hundreds of thousands of non-boxes included in the some of the larger boxes in the larger location in headquarters.

In the history enterprise, large enterprise the transition for being standalone whole generation firewalls to next generation firewall, but obviously it’s a driver for us as well. And then finally in the service provider sector clear moment to delivering service security asset manage service. We do very well there, so it's pretty much all types of large deals, the drivers in each of those segments we do well.

Michelle Spolver

Ken, because of broad part of line and also like ASIC helping the performance, so we can do compete well is into this kind of a multi-box more broad solution compared to some competitor, which stay they probably on the high-end box and some of them you’ve been some of the high sched management software, some of them done, but for us we have a much broader part long term need, and customer need and also we have quite a good management software for the manager, which also helping a lot for the customer, and as far as service provider some partner, which also lot of other competitor don't have so that will also helping the growing in the bigger high-end deals.

Scott Zeller – Needham & Co.

And just a follow-up could you say if there has been any change in appetite for spending to protect the branch at all or it sounds from your comment is it strong in the core of the network as well as the branch were spending?

Ken Xie

Yeah they need have the same policy as the headquarters, so that's were to comprise that’s all the requirements so that's where that doesn’t like a bigger broad part of land that -- both headquarters and also that the branch office really is the best solution for them.

Scott Zeller – Needham & Co.

Thank you.

Operator

Thank you. And presenters at this time I’m showing no additional questioners in the queue. I would like to turn the program back over to Nancy Bush.

Nancy Bush

Great. We’d like to thank everyone for attending our call today, we welcome all your questions, and I appreciate your interest and then just to remind you we have a second call again at 3:30. Thanks and have a good afternoon.

Operator

Thank you. Once again ladies and gentlemen this does concludes today's conference. Thank you for your participation and have wonderful day. Attendees you may disconnect at this time. Thanks.

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Source: Fortinet s CEO Discusses Q4 2012 Results - Earnings Call Transcript
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