Jul 23, 2015
Executives
Michelle Spolver - Fortinet, Inc. Andrew H.
Del Matto - Fortinet, Inc. Ken Xie - Fortinet, Inc.
Analysts
Gregg S. Moskowitz - Cowen & Co.
LLC Sterling Auty - JPMorgan Securities LLC Saket Kalia - Barclays Capital, Inc. Michael Turits - Raymond James & Associates, Inc.
Walter H. Pritchard - Citigroup Global Markets, Inc.
(Broker) Jayson A. Noland - Robert W.
Baird & Co., Inc. (Broker) Fatima Aslam Boolani - UBS Securities LLC Melissa A.
Gorham - Morgan Stanley & Co. LLC Catharine A.
Trebnick - Dougherty & Co. LLC
Operator
Good day, ladies and gentlemen, and welcome to your Q2 2015 Earnings Financial Analyst Q&A. At this time, all participants will be in a listen-only mode, but shortly, we will go to Q&A session and instructions will be given at that time.
And as a reminder, today's conference is being recorded. And now, I'll turn it over to your host, Michelle Spolver.
Michelle Spolver - Fortinet, Inc.
Hi, everyone. Thank you for calling in again.
Ken Xie and Andrew Del Matto are accompanying me on this call and before we start, it's an all Q&A session. Before we start, I have to remind you that remember the disclaimer I provided during our 1:30 call earlier applies to any forward-looking statements we make during the second call.
So with that, John, you can go ahead and open up the call for questions.
Operator
First is coming from Gregg Moskowitz from Cowen. Gregg, your line is open.
Gregg S. Moskowitz - Cowen & Co. LLC
Okay, thank you very much. Hi guys, how are you?
Andrew H. Del Matto - Fortinet, Inc.
Great. How are you Gregg?
Gregg S. Moskowitz - Cowen & Co. LLC
Yeah, doing well. Thanks very much and I guess, just a couple of follow-ups.
Drew, obviously, your growth in seven-figure deals was very good. Can you see if there were any kind of mega deals in the quarter, sort of in that kind of $5 million or above-type range?
Andrew H. Del Matto - Fortinet, Inc.
Not a lot, I mean I can't think of any off top of my head, maybe one. Yeah, it's not skewed like that.
It's – the customers tend to buy over time I think, and so more characterized instead of frontloading purchases.
Gregg S. Moskowitz - Cowen & Co. LLC
Okay, perfect. And was also just kind of wondering if you guys are looking to bring on a new CMO, and if so, if that was likely to be an internal or external hire, I guess any color there would be that will be helpful.
Ken Xie - Fortinet, Inc.
Yes. We are actively recruiting, interviewing the CMO candidate.
We also will keep investing in the marketing and we're hiring in all the level. Actually, you can see the investment we had in the last few quarter in the marketing is actually starting to pay off.
So it's a lot of lead gen, lot of event going on right now.
Gregg S. Moskowitz - Cowen & Co. LLC
Okay, great. Thanks, Ken.
And if I could just ask one last one. This is the second consecutive quarter in which you didn't buy back any stock after having done so in the prior five periods and I'm just wondering if you could update us on your buyback philosophy.
Thank you.
Andrew H. Del Matto - Fortinet, Inc.
Sure Gregg. It's true.
Look, we're very focused on our growth, I mean that's our strategy right now to invest in growth. As we said, we'd be opportunistic on buyback.
Obviously, it's hard to define that, but if you look at history, I think our average price of the – look roughly 79 million shares we brought back under the current program was – I think the average price was like $20.50. But right now, I would say, again, we'll obviously remain opportunistic, hard to define what that is, but we're clearly more focused on growth and buyback.
Gregg S. Moskowitz - Cowen & Co. LLC
Okay. Thanks very much.
Andrew H. Del Matto - Fortinet, Inc.
Thank you.
Operator
Thank you. And our next question is from Sterling Auty from JPMorgan.
Sterling, you're now open.
Sterling Auty - JPMorgan Securities LLC
Yeah. Thanks.
Wanted to drill into two areas, Drew. First, the inventory turnover the 2.2 times, now that some of the port items and other things that were drags or concerns on inventory are behind us, is there anything that should prevent that from maybe trickling higher?
I know your stated guidance is better than 2 times, but what would be the puts and takes that would either help that number elevate in the back half of the year or keep it constrained.
Andrew H. Del Matto - Fortinet, Inc.
Sure, look as you said, I'll stick to the two times or better. But I think on the puts and takes side, it's really about forecast and timing, and timing if deals were to come forward or slip, I think that's what really drives it one way or the other.
But I mean I'm kind of – we're comfortable with where we are and that's certainly not to imply that anything pulled into the quarter or anything like that, I wouldn't want you to take that away from that. It's not the case at all.
But I think I like – I mean 2.2 times feels like a very comfortable number for us, but again, I would guide to two or better just – you can't – it's just hard to be that precise on forecasting inventory needs.
Ken Xie - Fortinet, Inc.
Sterling, this is Ken. We may have a little bit different business model than some of our competitors, the most server has slowed down (05:03) the standard server PC, because we, customer build, I think the FortiGate is the biggest – the super majority of (05:14) we have.
So FortiGate is the moderate even some other appliances (05:17) we have the customer build with our own ASIC, so we did on a chip level or the system level and through the software application level there. So that's where we – all inventory need to be – because the lead time is longer and because there's no like readymade system for us.
So we have to build up from the chip to the system to customize so far the solution we have. So that we need to keep in some large inventory.
And also the inventory costs were low is whether the interest whatever, so that's where we compare to. So we have some model compared to the opportunity loss, we've short of inventory also compared to some inventory costs, so we feel true enterprise is a healthy multiple there, so that's why we're keeping that as the model we have.
Sterling Auty - JPMorgan Securities LLC
Got you. And then the second topic is I think Mike Turits asked you about kind of directionally just cash flow growth and should it grow in line with net income, and I didn't quite catch your answer.
And I guess I would be surprised if it grew in line with net income, because just looking at the billings guidance and the revenue guidance, just the contribution you should get to cash flow from deferred revenue, shouldn't that make it a much higher growth rate in cash flow than net income?
Andrew H. Del Matto - Fortinet, Inc.
Yeah. I think you're right.
Yeah. That's a good answer.
I was thinking of the growth in billings, and basically, modeling changes in working capital. I guess maybe I perhaps misinterpreted the question, but that's how I was thinking about it.
The top-line growth being, I thought I heard him say top-line, maybe I'm mistaken, but that's how I heard it, and I met more on the billing side, so kind of following the billings forecast, it grows billings. I mean that's the point right now, where cash flow outpaces the P&L, and you see margin compression simply because you defer so much.
Sterling Auty - JPMorgan Securities LLC
Exactly. Okay.
Great. Thanks guys.
Andrew H. Del Matto - Fortinet, Inc.
I see your point. I think that's right on Sterling, yeah, that's right on, but my apologies if I didn't answer that correctly.
Sterling Auty - JPMorgan Securities LLC
All right. Thanks.
Andrew H. Del Matto - Fortinet, Inc.
Yeah.
Operator
Thank you. And we'll take our next question from Saket Kalia from Barclays.
Please go ahead.
Saket Kalia - Barclays Capital, Inc.
Hey, hello again guys. Thanks for taking my questions.
Drew, I just wanted to zero in on FortiGuard and FortiCare billings, you mentioned on the call you had a tougher comp there this quarter, but you still manage to accelerate. I guess just a dig into that a little bit more, was it a particularly good renewal quarter, did maybe weighted average contract duration come in higher than you expected?
Any color on that strength there would be helpful.
Andrew H. Del Matto - Fortinet, Inc.
No, look, just as I always remind people an easy way to kind of see the duration is just look at the percent of long term deferred as a percent of overall deferred. It's been ranging I think roughly about the same 32%, 33%.
It hasn't changed in a while. So it's pretty consistent duration.
And in terms of renewals, no, it's not an abnormal quarter at all one way or the other. We don't allow people to pull in renewals, for instance.
We wouldn't pay on it.
Saket Kalia - Barclays Capital, Inc.
Okay. Got it.
So it sounds like just better attach rate and perhaps a little bit of that pricing impact maybe having an impact in (08:37).
Andrew H. Del Matto - Fortinet, Inc.
Yeah, a little bit of that, but I think just good execution all around, people definitely having a nice take on the bundles. It does – I think clearly enterprise customers are clearly buying the bundles and we're doing a lot of enterprise deals.
Saket Kalia - Barclays Capital, Inc.
Got it. And then not to revisit the Meru question again, but I guess just curious, is it fair to think about the majority of their support revenue being written down post close, and then, similarly, I guess as you integrate those sales teams for a much more of a combined effort, how do you think about any potential expense synergies?
Andrew H. Del Matto - Fortinet, Inc.
Well, first of all, they've been through a quite a bit of disruption over the last year. I think they've had multiple restructurings and they were still losing money.
Again, we're trying to pull it in to fit our model. We're being very selective strategically in terms of our strategy, which is to basically drive a secure WiFi offering, and then, basically, cross-sell our products FortiGate and FortiGuard and FortiCare products ultimately into their installed base.
So yeah, we're rationalizing what's there. We've – not everybody came over.
We're clearly making sure that we take a step back and ensure as just in good hygiene as we do, where every quarter we're looking at what makes sense for us and what doesn't make sense and we're really – as I've said, it's an integrated business. We're really stepping back and looking at the whole, what does it take to be successful in the future versus going out and trying to cherry pick of things here and there.
That's the right way to do an integration, make sure you don't throw the baby out with the bathwater so to speak and make sure that you get the value out of the case you're looking for, which is an enriched integrated wireless solution.
Saket Kalia - Barclays Capital, Inc.
Sure.
Ken Xie - Fortinet, Inc.
Also the supporting revenue is wire's small percentage. I think it's probably 10% to 20%, it's because they only have this like supporting for the deployment and whatever (10:40) they don't have any subscription like we have on the FortiGate.
Andrew H. Del Matto - Fortinet, Inc.
Yeah, we're not accounting on a lot of that at all. I think look, they're going through the opening balance sheet stuff right now, the accountants and they just don't figure that out, but obviously, as you said gets haircut.
Ken Xie - Fortinet, Inc.
Just immaterial (10:54).
Saket Kalia - Barclays Capital, Inc.
Got it. Got it.
And then lastly, if I could squeeze it in, I guess, Ken, you had mentioned sort of the new content processors sort of coming over the next six months to 12 months, how should we think about that conceptually in terms of rollout by appliance. Is this something that starts with the low end and works its way up to the high-end or does it start at the high end and work its way down?
Ken Xie - Fortinet, Inc.
I think the network processor is more starting from the high-end and then the ASIC more starting from the low-end, but the content processor pretty much apply to all the – from high to the low to mid range, as more follow what's the next whatever the FortiGate pipeline was going to come out. So we just replaced the CP8 with CP9, that's improving like the performance like few hundred percent on the content, on the scan on SSL.
That's probably the CP9 tend to be is a core processor next to the CPU as compared to the MPEs (11:57) more accelerated interface level.
Andrew H. Del Matto - Fortinet, Inc.
(11:59).
Ken Xie - Fortinet, Inc.
And the ASIC is more applied to the low end.
Saket Kalia - Barclays Capital, Inc.
Got it. Thanks very much guys.
Andrew H. Del Matto - Fortinet, Inc.
Thank you.
Operator
Thank you. And our next question is from Michael Turits from Raymond James.
Michael Turits - Raymond James & Associates, Inc.
Hey guys. I've got a couple of questions just now regarding things like duration or big deals.
I think what we're trying to get to is whether or not – obviously, that's a huge quarter, is there anything that we should really think of as having been exceptional in this quarter? Or another way of thinking of it is there anything should we then think of given what you just did, should we think of normal seasonality going forward or is it not, it was somewhat exceptional?
Ken Xie - Fortinet, Inc.
It's not huge deal. It's really, I think, the overall performance of enterprise sector there, so this is really like we did last quarter sort of like 70%, this quarter and 90%.
I think the team is starting to get on board and they're more mature. At the same time, we're keeping investing in the marketing and some other what will helping.
Also, I see the Internal Segmentation that's other – that also write-down (13:06) to become the sweet spot for the enterprise, because a lot of enterprise also see the need for the Internal Segmentation. So Internal Segmentation, that's probably the one – is the new, but as we don't have much data, I don't see any other data from analysts yet, but we feel the big enterprise really badly need this kind of solution to secure internally.
Andrew H. Del Matto - Fortinet, Inc.
Yeah, Michael and there's just a good standard distribution across the deal size, so it's not – we answered the earlier question, there's not like a large deal or two driving the growth at all, that's not the case. I mean think of it, we added 9,000 customers, I think in the quarter.
And it's very consistent, it's a very run rate – it seems to be very run rate oriented business. And we seem to pick up steam as the sales reps come up to productivity and they've just quite honestly continued to overperform.
Michael Turits - Raymond James & Associates, Inc.
So in theory, normal quarter-to-quarter seasonality should apply.
Andrew H. Del Matto - Fortinet, Inc.
Yeah. But again, you just have – yeah.
Michelle Spolver - Fortinet, Inc.
Yes. Yeah.
There is nothing – there was nothing – no one-offs or anything this quarter that would sort of change seasonality for next quarter. And then, the other thing I want to highlight is deals, while we didn't have any big mega deal or one-off deal, the deal then for the $1 million range, which we never actually given the percentage before, but we saw really good growth in the $1 million and above.
So more $1 million plus deals than we've ever done with 133% year-over-year improvement, but again, there wasn't a big mega deal that drove that.
Michael Turits - Raymond James & Associates, Inc.
Okay. And then what's the status of the ERP implementation I figure out how much of that is going to cost over what period of time and is that you're non-GAAPing that out of the expense point of view I believe, but where we're seeing that on the cash flow statement, is it CapEx or is it somewhere...
Andrew H. Del Matto - Fortinet, Inc.
It's in CapEx. Yeah, it's all.
Michael Turits - Raymond James & Associates, Inc.
It's all on CapEx?
Andrew H. Del Matto - Fortinet, Inc.
There is some in OpEx too. Basically, the non-run rate portion is the pro forma piece of the non-GAAPing.
Michael Turits - Raymond James & Associates, Inc.
Right, because if you're non-GAAPing that as the note says, some of that has to be – nothing capitalized in there.
Andrew H. Del Matto - Fortinet, Inc.
Yeah. It's the non-recurring piece you're doing you basically have an investment and some consultants and that goes away when the project goes away.
Michael Turits - Raymond James & Associates, Inc.
All right. So can you just...
Andrew H. Del Matto - Fortinet, Inc.
The design work, yes.
Michael Turits - Raymond James & Associates, Inc.
...- when is the project over and how much is in CapEx, how much is in OpEx over what period?
Andrew H. Del Matto - Fortinet, Inc.
We should be over roughly around this time next year and then I think – and we set $40 million to $45 million for the year in CapEx, how much for the ERP?
Ken Xie - Fortinet, Inc.
$5 million.
Andrew H. Del Matto - Fortinet, Inc.
Yeah, for the year, kind of $5 million or $6 million is then this year in the CapEx piece, yeah.
Michael Turits - Raymond James & Associates, Inc.
$40 million to $45 million is your CapEx and $5 million to $6 million of it is the ERP?
Andrew H. Del Matto - Fortinet, Inc.
Yeah, $5 million to $6 million of the $40 million to $45 million is ERP in FY 2015.
Michael Turits - Raymond James & Associates, Inc.
And then how much is OpEx that's not being capitalized that's being non-GAAPed out?
Andrew H. Del Matto - Fortinet, Inc.
Yeah, it's about $5 million.
Michael Turits - Raymond James & Associates, Inc.
Another $5 million.
Andrew H. Del Matto - Fortinet, Inc.
And-a-half, it's about 50%-50%, think about it that way.
Michael Turits - Raymond James & Associates, Inc.
Okay. And then, on APAC, so just if you review what I mean for us why the growth has been so much slower in APAC and what's your China exposure and is that any part of the issue?
Ken Xie - Fortinet, Inc.
China is very small, probably less than couple percent is – so that's where – and also in the other part of APAC, we feel we need to hurry investing in growth quickly. So that's like us a little bit behind.
That's where we need to keep investing in the growth in APAC. But China is a very small part of it.
I don't think that there would be any material impact to us.
Michael Turits - Raymond James & Associates, Inc.
Okay. Great.
That's it from me. Thanks.
Andrew H. Del Matto - Fortinet, Inc.
Thank you.
Operator
Okay. Thank you.
So we'll take our next question from Walter Pritchard from Citi. Walter, your line is open.
Walter H. Pritchard - Citigroup Global Markets, Inc. (Broker)
Hi. Thanks.
On the G&A expense, it looks like you had a pretty significant uptick there. I think we're non-GAAPing out the ERP, but was there anything driving that specifically that should be highlighted?
Andrew H. Del Matto - Fortinet, Inc.
Yeah, probably. We had just a small spike in legal fees probably this quarter.
Walter H. Pritchard - Citigroup Global Markets, Inc. (Broker)
And are those, the things continue at that level?
Andrew H. Del Matto - Fortinet, Inc.
Hard to predict, but I would just, I think it's probably fair to hold the percentage, G&A percentage where it is.
Walter H. Pritchard - Citigroup Global Markets, Inc. (Broker)
Okay. Can you tell us what matter that relates to?
Andrew H. Del Matto - Fortinet, Inc.
Just multiple. We've been running through them, I wouldn't highlight anything particularly, Walter.
Walter H. Pritchard - Citigroup Global Markets, Inc. (Broker)
Okay, okay. And then...
Andrew H. Del Matto - Fortinet, Inc.
We've been kind of running through, yeah.
Walter H. Pritchard - Citigroup Global Markets, Inc. (Broker)
Okay. And then just on the – you highlighted your average buyback pricing in low-$20s, you mentioned you're using your cash for growth.
I guess the way I look at it, you're certainly able to fund your growth organically, you're profitable, you're not burning cash from operations. So as we think about using cash to fund growth, with such a substantial amount on the balance sheet, is that a cash used for acquisitions or it just doesn't seem necessary that you would actually hold the cash to fund growth given profitability levels?
Andrew H. Del Matto - Fortinet, Inc.
Well, look, again, we're focused on growth, that's our strategy. We could use some of it, obviously, for M&A, if that makes sense, Walter, but again, we're fundamentally focused on our growth.
Walter H. Pritchard - Citigroup Global Markets, Inc. (Broker)
Okay. And then, just lastly, on sales and marketing spend, I think Sterling asked this on the call, on the first call.
It feels like your spending actually decelerates a bit in the fourth quarter based on your guidance. We note that your sales and marketing spend a year ago really picked up in the fourth quarter and there's a bit of a – you're anniversarying that now at this point, should we, I guess can you just talk us through sort of how you think about sales and marketing through this year and is that part of what looks like a more level – OpEx level between Q3 and Q4?
Andrew H. Del Matto - Fortinet, Inc.
Well, look, as we said, I mean I think the self adjusting side of expenses, obviously, are the COGS side and also commission self-adjust with the number a little bit. We continue to invest and we're sticking to get the 14%.
Walter H. Pritchard - Citigroup Global Markets, Inc. (Broker)
Okay. All right.
Okay. Thank you very much.
Operator
Thank you. And our next question is from Jayson Noland from Robert Baird.
Jayson A. Noland - Robert W. Baird & Co., Inc. (Broker)
Okay. Thank you.
I wanted to follow up on the Internal Segmentation Firewall. Ken, it's been a topic we've heard about from the industry for a while, it does seem like it's very nascent.
It's typically described as software to monitor east-west traffic. I don't know that I've heard of an appliance, certainly not a custom ASIC based appliance given the throughput required.
But maybe if you could detail that a little more versus the software-only approach?
Ken Xie - Fortinet, Inc.
Yeah. The software-only or some other, they called the sandbox or detection, that's in the TAP mode, it's not a inline device.
So they can detect that's what so far internally they do deploy a lot of detection device, our detection software on the server, but as the firewall is the only device, inline can take action and do the prevention. So that's where a lot of like bridge or whatever the company, they do have the detection like a Sony, like all they do deploy some latest software to do the detection, but there's too many like (21:36) anything about it.
The key is really have the inline device take the actions to prevent the attack and also deploy internally like security department, like whether the finance or engineer or sales whatever. So it's internal segment, even department, also protect the server that's relatively new, and it's the inline device.
It's not just the detection tapping device, which don't need to be inline. So that's different than before.
The inline devices have to match and keep up the internal network speed. You cannot slow down the internal traffic and also has to be reliable enough and that don't bring down the network.
So that's different than the traditional detection and also different than the perimeter security, which is connected with Internet. The Internet traffic is much, much slower, like we say, it's a 10x to 100x slower than the internal network speed.
So that's the challenge, need to be very fast, need to be inline and also need to be very low latency, while it's better for the server.
Jayson A. Noland - Robert W. Baird & Co., Inc. (Broker)
Okay. Is it logical that a company could have more Internal Segmentation appliances than a perimeter facing firewall?
Ken Xie - Fortinet, Inc.
Still the cost, I have to say, today, if you look at whether per 10-gig or per gig, the firewall cost is 50 times to 100 times higher than the switch. So it's really – some company, they may have more budget, they start and deploy more Internal Segmentation, but it's more dependent on the budget and also dependent on how they want to manage it together.
I'd say, if they have more budget, they probably definitely will – some bigger enterprise, we're starting to see – starting like implement and also some time, made mandatory to the Internal Segmentation, but is – some other enterprise not there yet. It's a more budget sense, but this is new.
It's really the (23:42) new, we don't see it before to deploy internally and we're high-speed inline device.
Jayson A. Noland - Robert W. Baird & Co., Inc. (Broker)
Okay. That's interesting.
And then a follow-up on a couple of sales exec hires. I think the gentleman from NetApp is going to be running the finance vertical.
Would he have counterparts then in tech and healthcare also?
Ken Xie - Fortinet, Inc.
He will more focus on enterprise and especially the media enterprise all this together and that's the area he knows the best.
Jayson A. Noland - Robert W. Baird & Co., Inc. (Broker)
And he was added if he wasn't replacing a previous salesperson.
Ken Xie - Fortinet, Inc.
Yes, you're right. Yeah, we need to keep adding sales capacity and same time keeping improved model and also keep improving the marketing and the (24:36) pipeline.
And also, it's growing from like today $1 billion to like a multi-billion dollar. That we also need to keep improving a lot of – on the process, on the system, on the team level.
Jayson A. Noland - Robert W. Baird & Co., Inc. (Broker)
Okay, thanks a lot.
Ken Xie - Fortinet, Inc.
Thank you.
Operator
Thank you. And we'll take our next question from Fatima Boolani from UBS.
Your line is open.
Fatima Aslam Boolani - UBS Securities LLC
Hi everyone, it's Fatima on for Brent Thill. Thanks for taking the questions.
Just a few on go-to-market. Just with respect to go-to-market and the America as the approach sales verticalization has been very successful and I'm curious kind of given the mandate to build sales capacity internationally, to what extent you're actually thinking about porting over the U.S.
model internationally and if that would make sense and then I have a couple of follow-ups.
Ken Xie - Fortinet, Inc.
Probably what depend – in some country like some big country in Europe, we may starting to do some verticalization and divide by the vertical. It really depends on which model is more efficient.
Some smaller country or region, they probably based on the regional as the model like we did early maybe better, but some larger, we may starting dividing the vertical. It's difficult to say which one we were...
Andrew H. Del Matto - Fortinet, Inc.
There's global coordination on the verticals though is the good way to think about it. They're regionally based teams, but they worked on stuffs like global accounts.
I think as you get down the lift in terms of size, in any of those verticals, that's where you would have more of the regional orientation.
Ken Xie - Fortinet, Inc.
Yeah. I agree, but like Joe said, we're starting to have some global accounts that will be more managed by like...
Andrew H. Del Matto - Fortinet, Inc.
Yeah, the big names are global.
Fatima Aslam Boolani - UBS Securities LLC
Fair enough. And I know there is also an emphasis around building out to the midmarket and channel focused investments, and you mentioned that you did make some additional hires in that space.
I'm wondering what's kind of on their roadmap. Is it more marketing event, is it more pipeline building activities, additional discipline around building or improving forecasting in the midmarket?
I just wanted to get a sense of how exactly you're building up the midmarket and your channel relationships with your recent investments?
Ken Xie - Fortinet, Inc.
Yeah. I think it's all of that you mentioned and also we are hiring at all level and including the CMO, actually we're recruiting them even right now is we feel that the marketing will be very important for the media enterprise, and we keep investing in this year, that's where we're way behind with some more competitor.
Andrew H. Del Matto - Fortinet, Inc.
I would just add that it's probably a slightly different sales interaction and marketing interaction, even sales engineer interaction in the midmarket versus the top end where you're doing a lot of testing. I think reputation in the mid-market is going to matter more in the mid-market.
And so, we want to make sure that we're developing. We're ceding that reputation and we're growing that and then making sure we're communicating with people in the right way in that market.
It tends to be more like that some of the – I would say probably higher level of social marketing, if you will, then perhaps at the top end.
Ken Xie - Fortinet, Inc.
Yeah, (27:58) play more important role in that enterprise market there. At the same time, we also see, I think like I mentioned, a couple of weeks ago, we announced a couple of new products in the mid range.
There is a few more to come out in the next few months. That's all help enhance the mid-market growth.
Fatima Aslam Boolani - UBS Securities LLC
And does that imply you're sun-setting kind of your historical mid range SKUs, I imagine you're referring to the 400D and 900D that you announced a few weeks ago, but just curious what happens to the existing line-up and if you're just going to sun-setting those, then rolling these into the lineup?
Ken Xie - Fortinet, Inc.
Yeah, these are probably the latest version that's where some of the middle ranges not quite using the latest MP6 yet, so we are going to use MP6 more in the middle range and come up with some new product there. So that's what accelerate the performance and also are helping position even stronger in the mid enterprise.
Fatima Aslam Boolani - UBS Securities LLC
And a last couple from me, if I may, just regarding the bundling. So you have talked a lot about that 10% price increase that was in effect as of January.
I mean presumably, this was for the new customers that you're onboarding, but I'm wondering how the price increase process works for existing customers, if you're kind of transitioning them in the bundle direction where previously they were just buying a la carte services and if there's sort of a dollar net expansion happening at time of renewal with the existing customers?
Ken Xie - Fortinet, Inc.
Yeah. It's probably more kind of fixed some of the things we have before.
If you look and in the – like UTM bundle, we offer full service, like from anti-malware and the intrusion, including app control and also anti-spam and the web filter, each is about 20%. And then also, we added like by file (29:54) supporting us 15%.
So if you look on the previous UTM bundle, you have four services, each about 20% and then you add 15% on the supporting, that's we're only selling for like 45% that's way low. So we turn it to 55%.
It's more fixed and in some sense we not quite bundle the right before, but like I said, is a – we're more focused on offer improving the services, so that's what ATP and also the new mobile security we feel eventually will help customer add additional value, so instead of try to changing some of the pricing in the past.
Andrew H. Del Matto - Fortinet, Inc.
Let me boil that down. I think, look the – a small tailwind in Q2 for that action, I think if you're talking about going forward, I think your question was on the installed base, I think you're basically asking, what do they renew at?
They do get the increase – your ability to get that though is somewhat challenge. A lot of people lock that piece of the budget in.
So it really takes a while to cycle through that. You're doing it more on new customers than renew even though that's what the quote will say where that ends up maybe a slightly different place, so quite frankly.
And so that's a little bit of why you kind of end up with a minimal impact near term. But it's good to think about longer term, and then, yeah, I think to the extent that if we have 235,000 customers, they don't all have bundles, that's something we clearly look at as a growth factor going forward in a way to ensure that we're – when we see a renewal or we see a customer, we open that door to sell them something else.
Fatima Aslam Boolani - UBS Securities LLC
And a very last one from me, if I could. Just wanted to clarify again that you are expecting to do another round of increases on prices in the back half of this year and I'm just curious as to how widespread this will be within the portfolio.
Ken Xie - Fortinet, Inc.
No, we are not planning any price increases and none is planned. We feel the current price is reasonable.
What we're going to offer is additional service, additional subscription service like a mobile security service. So customer, whatever they have the current bundle price, they still can buy it.
We're not increasing and just additional new service that's also could be a different bundle. Whatever the bundle have today, we're keeping there and also the same price.
Fatima Aslam Boolani - UBS Securities LLC
That's it from me. Thank you very much for the color.
Operator
Thank you. And our next question is from Melissa Gorham from Morgan Stanley.
Melissa A. Gorham - Morgan Stanley & Co. LLC
Great. Hi guys.
Just one quick one for you, for Drew. I'm just wondering to the extent that you're selling more virtualized appliances, is there any implication from a gross margin perspective that we should think about as you ship more virtualized form factors versus hardware?
Andrew H. Del Matto - Fortinet, Inc.
Well, obviously, software has a higher margin. So you know it's not a material part of our business there, Melissa, that's the problem.
And again, I – to remind everybody, we've kind of guided for the year, so the 14% is the right number, but theoretically, you're correct. The problem is just not a major part of the top-line, yes.
Melissa A. Gorham - Morgan Stanley & Co. LLC
Okay, great. And then I just wanted to quickly just drill down on the public sector given that we're getting into the September quarter.
Today, you announced another certification with the public sector. I'm just kind of broadly wondering if you could give us an update on how your government business is performing and what the opportunity is there?
Andrew H. Del Matto - Fortinet, Inc.
Sure. I think the OPM breach highlights a bit of the opportunity.
I think we hired a vertical team there, a smaller investment than in the healthcare and financial services, because we already had a government team or fed team, but we augmented that with the new leader back in – I think October-November of last year, and that team is doing better. We've given guidance for Q3, obviously, and obviously, September being the year-end, that's reflected in there, but we do feel like we're getting more looks anyway from the government.
We asked this question as a team, obviously, it's an obvious question, and they felt that they were getting a better presence and better attention in the government than they had in the past, and clearly, OPM piece being a part of it and I think part of the comment they made was that there's a lot of the longer-term legacy providers installed there, and they seem to be at risk or more risk than they've been. And there was a high resistance to change in the past, but clearly, the breach and I think that is why the breach matters, I think it stimulates some rethinking of the architectures.
Melissa A. Gorham - Morgan Stanley & Co. LLC
Okay. Thank you.
That's it from me.
Operator
Thank you. So we'll take our next question from Catharine Trebnick from Dougherty.
Catharine, your line is open.
Catharine A. Trebnick - Dougherty & Co. LLC
Thank you very much for taking my question. Could you give us a service provider split out from the earlier call?
Michelle Spolver - Fortinet, Inc.
Catharine, do you want the vertical – the percentage of...
Catharine A. Trebnick - Dougherty & Co. LLC
Yes.
Michelle Spolver - Fortinet, Inc.
Okay.
Ken Xie - Fortinet, Inc.
It's 22% for Q2, I think 23% Q1. I think it's probably in the last few quarters around 22%, 23%.
Michelle Spolver - Fortinet, Inc.
Yeah. So in Q2, we've 22% of total billings.
Catharine A. Trebnick - Dougherty & Co. LLC
Okay. Perfect.
And then my question is you did a lot of discussion on the internal firewall and what I'm trying to understand in that aspect as you invest in your R&D, are you looking at identity and management as another product extension, complementary to where the internal firewalls are?
Ken Xie - Fortinet, Inc.
Some of that, but I feel the internal more try to stop the intrusion of malware as there's not quite access – access a lot of times still goes with the perimeter of firewall, but the internal is really where high-speed is how to prevent some of the malware, some of the – it's more likely some of data leakage prevention kind of things. It's not quite in the – the management then is very important, so we have good partner with some other vendor.
They do a lot of data analysis as in a management, so that's where we're working more closely with them, but is not quite in the authentication or access control yet.
Catharine A. Trebnick - Dougherty & Co. LLC
Okay. That's helpful.
And then you know earlier in the year and last year there was a big issue with the port contracts in the LA area. And at any point did you switch some of your shipment directly to Europe and not to the U.S.?
Ken Xie - Fortinet, Inc.
Yeah, that's probably – we like kind of have tried to pull in some inventory ahead of the time, that's causing the Q1 inventory a little bit higher. But over the year, the issue has come down now, as I think it's starting kind of very normal now.
Catharine A. Trebnick - Dougherty & Co. LLC
Okay. All right.
Thank you very much. Good (37:06) today guys.
Andrew H. Del Matto - Fortinet, Inc.
Thank you.
Operator
We will take our next question from Sterling Auty from JPMorgan.
Sterling Auty - JPMorgan Securities LLC
Hey, just a quick follow-up. When you look at the guidance for the September quarter, I think we're looking at some acceleration in terms of the revenue lines, just curious which of the revenue line should see the biggest acceleration in the subscription area or the product area?
Ken Xie - Fortinet, Inc.
Yeah, we don't guide that way, Sterling.
Sterling Auty - JPMorgan Securities LLC
All right. Thank you.
Operator
Thank you. So ladies and gentlemen, that concludes our Q&A session.
I'd like to turn the call back to your host for any concluding remarks.
Andrew H. Del Matto - Fortinet, Inc.
Look, thanks everybody for your attention and again your support. We really appreciate it and look forward to talking to all of you soon.
Thank you.
Operator
And ladies and gentlemen, this does conclude your conference. You may now disconnect, and have a great day.