Fortinet, Inc. (FTNT) Earnings Call Transcript & Summary

Good afternoon to everybody joining us today as we come to the close of day 2 of UBS's Global TMT Conference. I'm UBS software analyst, Fatima Boolani. And I am delighted to be hosting Fortinet with me. On the line and on the virtual stage, I have with me CFO, Keith Jensen; as well as Head of Investor Relations, Peter Salkowski. Thank you, gentlemen, for spending some time with me today.

Thank you.

Thank you for having us.

Terrific. Well, before we get into the thick of the discussion, we've got to cross our Ts and dot our Is. Peter, I'll have you -- well, I'll turn it over to you to -- for some safe harbor language.

Thank you, Fatima. I'd like to remind everyone that we may make forward-looking statements during today's fireside chat. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10-K and Forms 10-Q and to other reports that we may file from time to time with the SEC for additional information and factors that may cause actual results to differ materially from our current expectations. 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. With that, back to you, Fatima.

Thank you. Keith, just if I can state the obvious, it has clearly been a very unique year for enterprise software companies. And looking back, what have been maybe the most sensitive puts and takes on the Fortinet business and specifically Fortinet's financial performance as you've navigated this pandemic?

Yes. It's certainly been an event for all of us, right? The 100-year pandemic is something that we would prefer not to experience again. I'd probably frame the conversation -- if you've heard us talk about diversity in our business model, right, whether it's by geography, customer segment or verticals. So maybe I'll kind of stay with that theme a little bit and then kind of check it off that way. We expected coming into the second quarter that Asia Pacific would do very well because they had -- it showed the ability to close down hard in those countries and open back up and not go through successive waves. And we got that out of Asia Pacific in the second quarter. It continued on into the third quarter and into the fourth quarter. We expected the U.S., which has perhaps a different sense of freedoms, if you will, to be a little more troublesome, to shut down hard and for us all to behave ourselves. And with that in mind that the U.S. is probably not going to be the leading geography for us in the second quarter, and we got that, right? I think that Europe and the rest of our diversification, whether it's from Africa to Eastern Europe and then Middle East, I mean, they were in the middle, a mix of companies kind of reflected with that. Third quarter has a nice bounce-back geography kind of across the board. If you look at the customer segments, if you were to ask me on March 31 what I expected to get out of the SMB versus what I've gotten out of the SMB, I would have performed very poorly on that exam. Reading everything in the press, I really thought the SMB was going to be challenged. And it's come through for us very, very strongly. We can probably talk about that later on. On the other end of the spectrum, the large enterprise has done very well for us as well. Those are longer-term projects that are going through a POC and ROI and taking longer to execute. The mid-enterprise is probably the place that got hit a little bit harder. And we look at data such as -- our belief is that those companies were shoring up their balance sheet. If you look at data in the second quarter, take investment-grade debt or some other borrowings, those numbers were huge in the U.S. compared to other years, 2x or 3x what was expected. On the verticals, financial services did well. International government did well. Retail and probably because of the breadth of retail, did very, very well for us as well. And I think as you would expect, hospitality and restaurants and so forth were a little more challenged. So I think kind of using that framework kind of gives you a little context of what we saw throughout 2020.

Maybe just staying high level with respect to the demand patterns -- sorry, did I cut you off, Peter?

No, I'm just going to add one quick thing. And yes, you did but that's okay.

Please do.

One quick thing. I think the question we're getting a lot lately is, did we see a pull-forward into 2020 from 2021? And maybe you get in this later in the questions, I can't remember, but I think the view there from everything that Keith laid out with regards to diversification of the business model and sort of how the year's been playing out, we really haven't seen that, that pull-forward sort of nature. There's puts and takes in every quarter as there would normally be, maybe a little more puts and takes in a pandemic year but not really a pull-forward in this point of time.

A great segue actually is my question around durable demand versus burst demand. I think a lot of investors are wrestling with this. So clearly, the overnight shift to work from home, work from anywhere that was catalyzed earlier in the year had some specific demand implications for you and certainly for sales cycles as well. So can you talk about the impacts that you witnessed specifically vis-à-vis this pandemic backdrop? And what gives you the confidence that a lot of the trends that you've seen year-to-date are indeed sustainable versus a bursty or an episodic nature?

Yes. I think the -- if you go back -- and we've talked about this publicly before. For us, the burst, if you will, that we got in the first quarter was really in the February-March time frame with 3 related products out of the fabric platform, our authenticator, our client and our token product. If we quantified those, it'll probably be about $10 million of tailwind in the first quarter. We said at the time that we expected that to taper off throughout the year and it has indeed. The third quarter came back for those 3 products with probably about a $5 million overperformance, and we'll probably see something smaller than that. Beyond that, I don't know that we would -- there are corner cases of deals that slipped in the second quarter and may be some deals that got accelerated, maybe a new education from home got stood up or something like that. But at the same time, other deal slid in. And when you step back and look at it, although regions, maybe different, the ideas of having net positive and negative wasn't really different in the quarter. So getting a little bit of feedback there. So I think that was fairly consistent. And I think also, if you look at our customer base, there's been some conversations we've had with people about pulling forward demand from 2021 or something. Again, if you look at our customer segments, it's not ripe with candidates that would be doing that. The SMB customer segment is probably not one that's prone to say, in troubled or challenging economic times, we're going to invest capital today for what we need in 2021 or 2022. In the mid-enterprise, I kind of covered that a moment ago, just about -- all about shoring up their enterprise. My suspicion is if it happened, it probably happened with maybe our competitors are more focused on the enterprise segment, and it's not something that's really applicable to us. I think we're very, very pleased to kind of answer you -- respond to your second part of your question about consistency of our performance. If you look back at our growth and our ability to execute over the last 2 or 3 years in the trend line and you roll into that the midterm goals that we set at the Analyst Day a year ago, when we talked about growth in excess of 15% and margins averaging over 25%. And even the guidance that we set for the year, I know we pulled it in May. But if you look at all those inputs and then you kind of overlaid out with how do we perform in the first 3 quarters of this year and add our guidance into it, I think you're going to see that 2020 is a very, very good year looking at all those different metrics. And truthfully, there's really not a reason that we can see when we look at -- and we'll talk about this later, one of your other questions about sales capacity and pipeline for us to really think that 2021 should be significantly different. Not setting guidance for 2021, just saying that the early indications are strong.

Before we close the loop on the pandemic-level impacts and considerations on the business, you've referenced SMBs and the strength and the resilience in the SMBs a number of different times. It seems counterintuitive. So I'm curious, what is that sort of rationale as to why the SMB space, again very counterintuitively, has been so good for you and certainly far better than expectations?

Yes. Well, since I had to own up the fact I was so wrong on March 31 about what I expect and I had to go ask people why was I so wrong, yes, and I think there's probably 3 or 4 probably key things and in no particular order. Yes, I do think that the SMB space is perhaps more price-sensitive than other spaces in the other customer segments. And I think as we got into a more price-sensitive environment, that played well for us. I think also the success that we have with the MSSPs. The MSSPs are not solely targeted on the SMB but they are a large part of it and they do tailor to that organization. I think they've done very, very well in this era. I think the channel programs -- really, when we talk about channel, yes, we all have distributors but we also have the resellers. And really what you want are distributors that can continue to add channel partners, well in excess of 10,000 channel partners worldwide for us doing business with us on a quarter. That cast a very wide net, if you will. And I'll give you a data point that I don't think we shared before just in terms of new logos. We actually set a record for new logos added in the third quarter of this year. And I'm going to say that's probably SMB, and it was well in excess of 6,500 new logos. So it gives you an affirmation point in terms of not just the revenues that we've talked about but how broad that market is, how large that market is. I think lastly, the leadership in our channel team and the leadership in our channel partners working together and saying -- sitting down and saying, "What are your goals? What are our goals? And let's make sure that our channel incentive programs are lined up with what you as a channel partner are trying to accomplish as opposed to just guessing at it." I think there's been a significant amount of execution between the 2 groups that's gone very, very well.

That's very helpful. Keith, just shifting gears to just the overall demand backdrop. We've kind of approached it a number of different ways. But what I want to begin with from a demand and then spending and appetite standpoint is your core network security business, the FortiGate franchise. Look, there is this steady erosion of the traditional perimeter that a lot of organizations are undergoing right now. And this whole concept of network borders has changed as cloud has become front and center, as we've worked -- been working from home. So there's a sense from investors about where your value proposition as a perimeter and network security vendor, particularly in the competence of the next-generation firewall, where that all sits in kind of this new world that we're quickly moving to. So what are the opportunities and maybe the challenges that you're facing today on the core next-generation firewall side? And frankly, how do you debunk what maybe some investor misperceptions on how you're positioned here?

Such a long question. I'm going to beg Peter to come on top of me after I give you a few data points on that. So I think the -- many of us have kind of come into this environment -- in this environment and said, look, we're starved for information in terms of what you expect. And the -- looking at surveys, whether they're channel surveys or CIO surveys, are very tailored to U.S. enterprise segment. And I think a lot of this commentary is also tailored to the U.S. enterprise segment. And I think, particularly for that customer base, cloud and SaaS and digital transformation are all clear concepts for us, with a much, much broader customer footprint, if you will, whether it's worldwide, as we've talked about, the geographies and such. We have to satisfy many other people. And I don't know that some of those have the same appetite or the same ability to execute on some of the concepts that are being talked about. Let's take work from home as an example. I have customers that are in countries, if you will, where the -- we take broadband for granted. Here we are in Zoom having this conversation. Parts of Asia Pacific, Latin America, the African continent probably don't have the same infrastructure related to the Internet and broadband that we do here in the U.S. So it makes it a little more challenging. Even housing situations, very different. We're very comfortable here in the United States with our suburban-style houses or apartments where we have our own room or what-have-you. That may or may not be the same play -- sorry, just reading something else. That may or may not be the same in other parts of the world where housing can be much more compacted, if you will. So I think there's -- it's important for us to keep in mind who are our customer base, what's our customer base and how are we serving them and what are our routes to market, if you will. And then we've talked about the factors that build on the success, and I'll pause there and see if Peter wants to jump in.

Peter was on mute. Yes, I think one of those is certainly the multiple use cases for firewalls. I think we've proven that out in the sense that we're using our firewalls as an SD-WAN tool because we've built that into our operating system and therefore, give a holistic solution that other players might have to do with 2 or 3 different vendors or multiple different boxes, and we can do that in 1 case. Also moving into new enterprise, new TAMs in a sense of moving up market into now an enterprise space where it's been 3 years that we're now in the Magic Quadrant for -- in the Leader Quadrant for enterprise firewalls. It's been 4 Magic Quadrants because we started in '17. But 4 consecutive Magic Quadrants where not only we now show up in the Leader Quadrant for next-gen enterprise firewalls, but as of end of September, we're now in the Leader Quadrant for SD-WAN with exactly the same product. There's no one else who can say that. There's no one else who's done that. The -- in this market just sort of the platform approach and the ability to add more capability to our firewall, whether it's a virtual firewall or through the operating system or an appliance and being able to basically provide our customers with a lower total cost of ownership because I can give them so much more value and run it through my capabilities. I mean then there's this belief that everything's going to the cloud and we just don't believe that. I think it's a hybrid cloud in a [indiscernible] cloud world for a long time for compliance reasons, for regulatory reasons, for the fact -- the points that Keith pointed out earlier that in some markets, it just doesn't make any sense. But even in the U.S., the surveys I'm seeing right now say that 50% of the people want to go back to the office when they can, the other 50% are split. They want to either -- half of them want to work from home forever, and the other half want to be in the office as well as at home. Well, all that does is expand the threat vector in terms of all the different things that the companies now need to protect. So there's a lot of opportunities there, I think, that a platform that can do both on-premise and in the cloud matter a lot for. And so I think there's just opportunities for us to play. And then lastly, and then I'll turn it back over to Keith because I'm sure he's got even more to say, if you look at the Gartner Magic Quadrant that just came out a couple of weeks ago for the enterprise firewalls, there's only 3 companies now in the Leader Quadrant, right? And we're 1 of those 3. We've been there for 4 years. The other players in there, one that moved out of the Leader Quadrant, their firewalls are 10 years old. They acquired them. They've never really upgraded them. Are they going to upgrade them in this next cycle? Or do they just -- have they fallen so far behind that maybe they don't even take that time? What about the other players in this space? Well, one of the other leaders in the quadrant, their firewalls are at least 3 years old at this point. I think the last time they upgraded them was 2017. And now they're pivoting more to a cloud. They just spent $2 billion on cloud assets. So are they going to upgrade those? Can they get anywhere close to the performance of our NP7 chip that we just released this year? So there's a market for appliance that I don't think is going to completely go away as some people are theorizing. And there's also an opportunity for us to play in the cloud space as well. Keith, got anything to add?

Maybe taking all that together, what implications do you think all these factors have for your market share gain scope, your pricing power and certainly, the discounting dynamics in the marketplace? I know these 3 are questions that you probably frequently get asked in a market that is as established and well understood as perimeter and network security?

Yes. I think we come into that conversation knowing that we have the proprietary ASIC advantage. And what does that mean in this context? Well, the combination of 20 chips that have been introduced over 20 years in Moore's Law, it offers -- I think we're widely viewed as having the cost advantage over our competitors. You've heard us talk over the last year or so the discounting has not been a headwind for us. In fact, it's been a tailwind more often than not. And I think what you're really seeing, particularly as we've moved up against some of the enterprise players and we're looking to displace them, that probably what's happening there is that they're being forced to come to our price points as opposed to the other way around. And so the discounting part of that is not really something that -- and it's because of the value that the ASIC brings, right? The ASIC with its performance advantage and now that Gartner Magic Quadrants are out there and NSS Lab and others talking about it. I think what you also add to that the operating system advantage because virtually all of our firewalls are on the same operating system, and virtually all the platform products that Peter just referenced a moment ago were all integrated on the same operating system. So the combination of those 2 things is driving costs out of the equation for the CIOs and the CISOs at a time where many of them are being forced or asked to rationalize their spending in some way, shape or fashion, right? What are you getting for this? And why are you paying that much for this incumbent when you can get it cheaper elsewhere with superior performance?

Taking another flavor of demand for you, cloud, it's a very loaded word. Digital transformations, cloud adoptions and now security transformations are top of mind and on the lips of all CIOs, CISOs. How do you see Fortinet's hardware and chip and ASIC-based advantage, extending into the cloud while managing for potential cannibalization? And then maybe part B of that question is, what does the addressable market opportunity look like for you as you proliferate in the cloud and help customers protect their cloud environment?

Yes. There's no doubt that the cloud has a role, and it's a growing role in terms of the opportunity. When you talk to the customers and you ask them their vision and what they're looking for and what their expectations are, over the next several years, a couple of things come out, and one is the concept of the platform and a consolidation of security vendors. Gartner has provided some information, I understand. They talk about the fact that 20% of customers right now -- or companies are having conversations about consolidating on a platform or a small number of platforms. That 20% number is going to reach 80% in the next several years. So the question becomes, what are the customers looking for in a platform vendor? Our expectation is there's going to be more than one platform vendor. The cloud providers may have their platforms. We'll have ours and some of our competitors will have it. And it's very likely that we're going to integrate across those different platforms in order to be successful. But what the customers need is they really want from -- when it comes back to security as they have different use cases in different locations. And if they can get the same security provider regardless of the use case, regardless of the location, regardless of the form factor, that's a win for them because they can then create automation and take labor costs out of their system. Our expectation is you're going to have data centers that have appliances, no doubt about that. There simply isn't a way around it. The cost structure of software essentially that's cost prohibitive to try and run data centers on a software version. You're going to have campuses. You're going to have branches. You're also going to have virtual appliances sitting into cloud providers and pay-as-you-go applications. If you're the CISO and you're the CIO, if you can finally get close to that infamous pane -- single-glass pane of vision, this is the way to get there. And that's where that consolidation of the platform vendors are going to come in. Cloud will be a part of it, no doubt.

Shifting gears to maybe the third pillar of the demand and market opportunity for you is SD-WAN. It's certainly a newer area for you and you began seeding the vision here and this whole notion of security-driven networking close to 3 years ago. So maybe if you can walk us through the strategy with secure SD-WAN and what are some of the milestones you've achieved in the last 3 years?

Yes. So I think we start with the milestones, maybe that will kind of frame the conversation for us a little bit. If you look back at say, 2018, we probably have market share of basically 0, none. And we exited 2019 with about 9% market share. If you look then also a little deeper in 2019, then we provided some commentary about what billings were as a percentage of growth. And I think we said in 2019, while it increased throughout the year, is it probably averaged mid-single digits. So let's call that 5% for simplicity. And about that time, Ken was kind enough, our CEO, to set a goal for us of getting to 10% of product billings, right? And now that we've come forward into 2020, you've heard us talk about it being 12% of product billings and 13% of product billings. And Ken has dutifully set a new goal for us of 15% of product billings. And now as we approach 15% of product billings, I think we all have a pretty good idea what Ken's next e-mail is going to be to the rest of us in terms of the -- what the next goal is going to be. Whether it's 20% or whether it's #1 market share, it remains to be seen, but I'm sure the e-mail will come shortly after this presentation. How is that? But if you look at the competitive landscape, I think -- and Peter can go into more depth in a moment, but there's really 2 types of competitors that we see. One are legacy routing and networking companies that have the speed and the throughput capacity and capability, but they don't have the security, and so they've gone out and acquired the security companies. And now they're going through that infamous process that we don't like, which is integration of competing technologies, right, inside their own organization in different architectures. So those are their challenges. On the other side, you have the security companies, which they've got the security, but they're largely, at the end of the day, really software companies. And because of that, they don't have the throughput capacity that the proprietary ASIC strategy brings to it. And in between, you have Fortinet, which has both. It has the throughput capacity and it has the security and it has it at dramatically lower cost per price points than others do. Peter?

Yes. I would just to add to that last point is -- yes, and I can't remember if we said it already today, we've spoken to this a few times already, but the fact that our product, our FortiGates are in the enterprise firewall, Leader Quadrant for enterprise firewalls and that exact same product as of September is in the Leader Quadrant for SD-WAN. It's the same product because it's running on the -- it's running the same operating system. There's no other vendor out there that can say that they're in the Leader Quadrant for those 2 different things. One's a network functionality, the other one's a security. And to your point, Fatima, in the beginning of your question, you talked about security-driven networking. That's a term that Ken's been talking about for a while now and that we believe that security and network will continue to get closer together. And they won't completely overlap, there will be differences. But as a security company, we can come down to the networking layer and do some of the networking functionality because we have the compute power capability, whereas to Ken -- what Keith was just saying, the network players can't really move up easily into the security level because it just takes more compute power, more capabilities and there's an integration factor [ to that ]. So we're uniquely positioned, and that's how you go from no market share 1 year to 9% the next, and we expect to be #1 in the SD-WAN space over the next couple [ of years ].

What's been the most tangible use case you've been able to address right out of the gate from going from 0 to 10% market share overnight? Slated to double that over the course of the next 12 to 18 months. What has been sort of that one single killer use case for SD-WAN that's really put you on the map as a vendor to look out for?

If you look at industry verticals, I would say the 2 places that it went immediately was financial services and retail. I mean that was the branches and the number of locations that are involved. We're talking about not hundreds but thousands of different locations for some of these larger enterprises. It was a no-brainer. And I think it was a no-brainer because the MPLS savings was so fast and so dramatic for those decision makers.

[ A point I note ] but I think it's important to point out, like retail is spread across multiple different sub-verticals, right? We use the word pawnshop on this one. But there are things like pawnshops that we actually did really well with. I think it was in the second quarter, we were looking at that. But even on top of that, you look at -- we announced deals -- that might have been last year, but we announced this large grocery chain that owned 30% of the Norwegian market, I believe it was, and they did an SD-WAN implementation. There was a shoe retailer that did stores across Europe an SD-WAN implementation. And so it can -- it gets into the diversification aspect of it. And one more point, we mentioned this last -- a year ago, where we said, "Look, we're seeing a great pickup in SD-WAN in both the U.S. and then EMEA but Asia Pac was somewhat lagging." Well, now Asia Pac is not lagging anymore. We're starting to see a real pickup in SD-WAN implementations in Asia, and we said that they tend to not be first adopters of new technology or things that are growing quickly. And now they're part of that and we're starting to see that in our Asia Pac numbers as well.

And I do think when investors think SD-WAN, they sort of immediately gravitate towards the notion and concept of branch offices. With the way we work having dramatically changed over the course of this year, there is this view that is the branch office ever going to return? And what is the construct of the branch office going to look like next year and years from now? And so what does that do to your SD-WAN value proposition, particularly in the enterprise?

Yes. I think the rumors of SD-WAN's demise have been greatly exaggerated, right? We first had through this in the second quarter when everybody went from home, right? And I think when we -- one of the things we paid close attention to is not only our billings growth and our revenue growth in SD-WAN but obviously our pipeline growth. And there were several weeks there in that April time frame, maybe a little bit in May, where we saw the SD-WAN pipeline growth pause, right? I mean it kind of hit a plateau. We thought, "Wow, this is interesting." But it quickly resumed and is where we sit right now and as we sit down and get ready for planning for 2021, part of this exercise, looking at sales capacity and making sure you have the right products with the right go-to-market strategy but making sure your pipeline is there. And the pipeline growth for SD-WAN, if those rumors or those ideas were true, you would expect to see it in the pipeline, and we're not seeing it in the pipeline. We'll put another way, we've not seen dramatic growth in the SD-WAN pipeline.

Yes. Positive, not negative. But I also think on the -- there's a total cost of ownership or savings from a customer perspective of lowering their MPLS cost. This is a way to save a lot of money and therefore apply those dollars elsewhere into their security stack or whatever in their IT spending, but they can save money. And a lot of locations, a lot of retailers even, if they don't have the retail locations, they don't have a business, right? Whether you're talking retail or financial services or restaurants or pawnshops, you just don't have a business if you don't have those locations.

Fair enough. I think we talked about SD-WAN. We talked about digital transformation, security modernization. And in this whole concept of SASE, right, Secure Access Service Edge, so a lot of these sort of alphabet soup terms, how does Fortinet and your entire portfolio and the security fabric address some of these buzzwords around SASE or ZTNA and Zero Trust?

Yes. I think if you look at it from the lens Gartner talks about 13 different technologies that make up SASE, and depending upon what company you talk to, you get a different point of emphasis and then a different idea of what that actual solution is. With the acquisition of OPAQ over the summer, that added 2 of the key technologies of those 13 that we were missing. Now we're all -- we have all 13. In the top 5, Firewall-as-a-Service but also SD-WAN and CASB. Now these are key. So we have the complete suite of the SASE product. We're looking at the OPAQ acquisition, and there's a couple of things there that are driving the time line for us. One is OPAQ brand on a competitor's firewalls, and we're in the process of taking those competitive firewalls out and then completing the integration on our site. And then secondly, working with our managed service providers about the go-to-market cadence, right? And whose infrastructure is most appropriate to use? Should we use our own infrastructure -- or pardon me, should we use your infrastructure or should we be using the POPs, building our own POPs? And I think that's a conversation that's happening in real-time. As we move into 2021, I think that's a logical time that we're going to see SASE come online for us and have a contribution to the business.

That's a good segue into my next question around how you're thinking about the investment profile of the business in 2021. Clearly, there's been tremendous leverage in the business that you've demonstrated this year. And maybe that's no small part to the fact that nobody is getting on planes and T&E levels have really ratcheted down, given the circumstances. So as you think about 2021, where is the priority sequence for your reinvestments into the business?

We've always looked at this from the idea of balanced growth and profitability, right? And we've talked about the midterm guidance, so we've talked about growth over 15% and margins over -- averaging over 25%. But we came into this year saying that we thought this would be a year that we would tilt towards growth, pre-pandemic. And even through the pandemic, we're putting out some pretty attractive growth numbers. So I think the expectation is -- going forward is we're still looking to execute on a balanced growth and profitability. And particularly without the headwind of COVID and the pandemic, we think that the bias will continue towards growth. One of the things we've been able to do throughout 2020 is take that savings that you made reference to in terms of sales and marketing events, and let's quantify that at maybe 2 points of margin for everybody and really repurpose that in terms of adding sales capacity. Now that sales capacity can come in the form of channel salespeople would tend to get productive very, very quickly, 3 months or less, and very much direct salespeople, which will maybe take 12 months or 18 months to be productive. So that adding of the capacity in 2020, while exceeding our margin target very, very easily, has really, we think, positioned us for 2021 in terms of having that capacity that we need to continue our growth mandate, our internal growth mandate in terms of what we want to achieve. And so I think we're fairly well positioned in that regard.

And Fatima, I think just from the growth perspective, I think we hear a lot certainly towards the end of the back half of 2020 that growth is decelerating and the business is slowing down. I'd look at that a little differently. I would look at it and say we had a really strong back half of 2019. And if you do a 2-year CAGR on every quarter in 2020, including -- using the midpoints of our guidance for the fourth quarter, you'll see that on a revenue basis, we're growing consistently at about 19% every quarter, 18% to 20%, depending on the quarter. And that's on a revenue basis. And similarly on a billings basis, it's about the same. We get 18% to 20% every single quarter on a 2-year basis to take out some of that, call it, seasonality or growth that we had last year [ where there were ] tough comp. It's been a pretty consistent business.

On the R&D front, you've been very balanced around organic expansion of the platform. But certainly, M&A activity has ticked up and not to leave out the acquisition that you announced this morning. What's the strategy with respect to R&D between your FortiGate and non-FortiGate business? And then where do acquisitions like OPAQ and like Panopta from this morning sort of fit into that framework for you on R&D?

Yes. I think you can pretty safely now look back at what our history has been of M&A, and you can see a very consistent pattern there. They're tuck-ins and they're fabric products, right? And they tend to be things that are small enough that we feel very comfortable with and excited enough about their technology that we can integrate it into the operating system. The platform is only successful if it's a broad platform and it's an integrated platform that [ rate ] automation. And so our focus has historically been combining technologies that will build out the fabric more so than technologies that we don't think we're missing in the firewalls, but they can -- that we can bring to market in an integrated platform fashion and protect the platform going forward. It would be -- to date, it would have been unusual for us to do something that was a low -- a large, stand-alone acquisition.

Maybe talk a little bit about the economics on the acquisition from this morning.

So the -- I figured the -- yes, the market's closed. Sorry. Yes, I think we filed an 8-K. The transaction this morning about $34 million, about 40 employees tilted towards engineering as you would expect. They play in the network performance and monitoring section as well as the application performance and management section. They are SaaS. They are cloud. They're located here in the U.S. I don't expect any material changes in terms of the numbers for the fourth quarter or in 2021 related to it.

Very clear. And as I zoom out and sort of think about some of the things we've talked about on the spectrum of demand and budget dollar capture opportunities, as I think about the different form factors and the expansion of platform as well, is there an aspirational target you have to run the business at a certain FortiGate versus non-FortiGate mix? Or how do you drive towards the mix of the business moving forward?

Well, I think the FortiGates will remain key, and whether that's a physical appliance or a virtual machine or something else, there's no doubt about that. That, to us, is -- well, we talked about the platform in terms of different products and services. The firewall itself is really a cornerstone to everything. It has the capacity. All the data flows through it. It has the ability. It's the logical place for us to actually anchor ourselves and say, "That's what we're going to build around." Now do we expect the mix to continue to shift as it has over the last several years from firewall to fabric? Yes, I think that's a reasonable expectation. Do I know this is going to dramatically shift? We'll wait and see how 2021 planning comes out, but we haven't seen something, thus far, that suggests it's going to be a dramatic shift.

Fair enough. And just the last question from me. Reflecting -- Keith, reflecting on this year's learnings, how has your approach to pipeline management and conversion rates and even the guidance-setting process evolved, knowing what you know now? And at a high level, maybe what is top of mind for you as you do move into the budgeting and planning cycle for 2021?

Yes. I don't think the guidance setting process has changed. I think some of the assumptions and maybe some of the inputs have changed, right? It always starts with the pipeline and then simply put is what your close rates are. And we've always sliced and diced that and looked at by geography because different geos have different close rates, by deal size, larger deals don't close as fast as smaller deals. By transaction type, is it a new logo? Is it an expansion? Is it a renewal? So all those things are still considered, if you will. But I do think coming out of the second quarter and seeing that the close rates in the second quarter in the throes of the pandemic were different than what we had seen historically. And so with that in mind, when we set the guidance for the third quarter and the fourth quarter, we were cognizant that we've seen a shift in the close rates, and so that came into the factoring. As we move forward and we look at some of the numbers and some of the inputs that will come into play for 2021 planning, there's a number of key inputs: one is sales capacity, making sure you have the right amount of sales capacity; sales productivity, making sure that they're going to perform and any reasons for thinking that; also the pipeline, and then we want to make sure that the pipeline is lined up with the sales capacity. And at this early point in planning, we feel good about our long-term pipeline as well as sales capacity. TAMs. How much of the market is going to grow? How much market share do you think you're going to take from different parts? We also look at it by geography. We look at it by, as I said, TAMs, fabric and non-fabric and so forth. So all those things will go into it. I think as we look into 2021 at this early stage, we feel good about what we're seeing across the board. We also look at GDP, whether it's in the U.S., which we saw something yesterday at a GDP number of 4.5%, which should be very attractive, a worldwide GDP growth of 5.5%. All those things at this early stage are shaping up to point to a favorable 2021.

Very good. I think that's a great place to cap it off. Thank you so much, Keith and Peter. Always a great discussion with you. Appreciate the details and a great conversation. So I appreciate the feedback and time.

Thank you.

Thank you. Have a good day. Thank you very much.

Take care.

Bye-bye.