Fortinet (TICKER: FTNT) Fortinet Inc Ftnt Management Presents J P Morgans 50th Annual Global Technology Media And

Fortinet, Inc. (NASDAQ:FTNT) J.P. Morgan's 50th Annual Global Technology, Media and Communications Conference Call May 23, 2022 8:40 AM ET Company Participants Keith Jensen - Chief Financial Officer Peter Salkowski - Vice President, Investor Relations Conference Call Participants Raquel Betesh - JPMorgan Raquel Betesh Good morning, everyone, and welcome to JPMorgan's 50th Annual Global Technology, Media and Communications Conference. Thank you, everyone, for being here. We're excited to be back in person. I'm Raquel Betesh. I'm a software analyst here in research at JPMorgan. And today, I have the pleasure of speaking with Keith Jensen, the CFO of Fortinet; and Peter Salkowski, the Vice President of Investor Relations at Fortinet. Thank you both for being here today. Keith Jensen Thank you. Raquel Betesh So now I'm going to pass it over to Keith and Peter to do the disclaimers. Peter Salkowski Just a quick one. I'd like to remind everyone that we may be making 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 10-K and Forms 10-Q and to other reports that we may file from time to time with the SEC for additional information on 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, we are ready to go. I know that was the best part but... Question-and-Answer Session Q - Raquel Betesh Keith and Peter, thanks again for joining us. So to get the ball rolling here, can you give us a brief introduction of your product and platform offerings and how they fit into the security landscape? Keith Jensen Yes. I'll kick it off and Peter may join in a little bit. Simply put, our primary product is a firewall, represents about 70% of our business. And I think the - what makes us successful is our proprietary ASIC, which creates a significant amount of speed but also capacity. And the capacity is important because we use that to create embed more features and function in our operating system, around OS7. And that's the cornerstone of our platform strategy. And from there, we expanded out to - depending on the on at 30 or 40 different products that are virtually all homegrown, we are very much a build-versus-buy strategy in terms of our company. And with that in mind, you'll see those other products that are all integrated on a single platform that includes things, in addition to the firewall, things like EDR and SIM and SOR and the sandbox, etcetera. And we're really promoting and believing in the consolidation of vendors. We understand there is a role for point solutions in the market. But we think that we agree with Gartner and others there that is a significant amount of consolidation going on with platform vendors. Raquel Betesh Let's talk about the competitive landscape now. Who do you guys see as your primary competition? Keith Jensen Yes. On the firewall side, it's pretty much the same and probably in order, I would say Cisco, Palo Alto and Check Point. I think the things that have evolved over the last, say, 12 to 24 months would probably be that we're getting significantly more at bats in these competitive opportunities than we have historically. Pipeline is very strong and very robust. I think the other part of it is seeing more of the platform competitors, if you will, show up in the competitive landscape. We do track the mix of how many times we're in each of these different firewall companies, but also the other security vendors. And as the platform has continued to grow, we've seen the mix naturally shift a little bit to some of these other platform competitors. Raquel Betesh On the topic of your firewall, you recently announced five new FortiGuard services for your next-generation firewall in your Analyst Day. How do these enhance the functionality and protection? Keith Jensen Yes. I think the - we've been very successful over the years with what we call our bundle strategy for services. We offer two different services. One is traditional support. We call that FortiCare, bug fixes, call support, etcetera. But the other one is FortiGuard, which is a bundle of security subscriptions. And if you look back at the history of the company, historically, it started off being extremely successful through the distributor model, primarily with an SMB focus already in its life. And I think those bundles were very successful for that particular market segment and some of the verticals that the company was in, including service providers or MSSBs. Over the last several years and you've seen some the of numbers, we've seen success come our way now. And in the Enterprise segment, we talked about our G2000 growth. And I think it was 90% or something like that in the fourth quarter and over 60% in the first quarter. These are very strong numbers for us. And as we've gotten into it a little bit deeper, we start to understand that the enterprise customers, while they have an appetite for the bundles as well, but they are also interested in individual security offerings. And it gives them a good chance - they tend to have larger budgets, bigger staffs. And it gives them an opportunity to cherrypick some of the security offerings that are attached to the firewall. Peter Salkowski Yes. I think one of the things to point out that some of the things that Keith has already said is that Fortinet is a very diversified business, right? He talked about the fact that 70% of our business comes from the core firewall business, which is not just the firewall itself, but also the services that you just mentioned in FortiGuard and FortiCare that get attached to that. So it's not just a hardware component of it. But more importantly, we're diversified with another 30% of our business that's growing probably in the high - mid to high 30s in terms of its growth in all these other products that are software-based, that are the point products that you would see from a variety of different companies, whether that's mail or sandbox or SIM or SOR or whatever. And there is 30 to 40 different products that at least that we track, probably more than that, that we track in the non-firewall side of the business. So there is a diversification across the landscape of different security capabilities. There is also a diversification across different customer segments, whether it's very large enterprises, which Keith mentioned, was growing 60% plus in this last quarter for a G2000, which is kind of what we look at from a proxy for large enterprises, to mid-enterprise to SME, small and medium-sized type enterprises. And we have a capability across all those different customer segments, I don't know, 60, 75 different SKUs on the firewall side from an entry-level firewall that might have two digits, the 60F or the 70F to a 7000 series firewall that's a very high-end, very expensive machine that can run a lot of different capabilities into 400 gigs of throughput in terms of its networking capabilities or firewall capabilities. But not only diversified by geo or by customer segment, but also by geo, right? Only 27% of my revenue in 2021 came from the United States. We are a much more international business with 40% of our revenue from the Americas, 40% of our revenue from EMEA and 20% of our revenue from Asia Pac. So it's a very diversified business across not only product, but customer segments as well as geographies. Raquel Betesh To kind of elaborate on functionality here, what security gaps do you commonly see in between functional areas and enterprise security strategies? And how do you think about mitigating these potential entry points with your platform and products? Keith Jensen Yes. I think when you're looking at a large enterprise, particularly you're looking at a company that probably has 30, 40, 50 different security vendors with disparate technologies. And this comes back to the platform conversation. And the challenge is when you have - there is a number of challenges when you have that many security vendors. One is how do you integrate them? And how do you create automation? How do you ensure that when one functionality, one security product sees something that it can communicate to the other 49 products or services inside your threat landscape and that you can automate your response. One thing that we're seeing here over the last year or so was the speed with which the bad actors are not only evolving but the tools they are using. And why that's important is because there is a premium to CISOs and CIOs to stop the kill chain, to stop the spread inside your organization. And when you're dealing with that many security vendors and you have some poor guys sitting in your SOC or your NOC that's trying to track alerts and determine what your false positives and which are real and get the response that you need across your entire security landscape. I think that gap, if you will, continues to be exposed in the current threat environment. And I think it also speaks to why again we believe in the platform strategy. Now there are specific places that we think that security at the moment needs to be looked at very, very closely, and we would call that an edge, virtually any place that an organization has a device exposed to the Internet, which can be in a branch, which could be on a device of some sort. It could be on the manufacturing floor. In all those areas, now there is a premium to securing your edges. And then also internally, because the reality is, a patient, well-funded bad actor will oftentimes be successful, you then need to create micro segmentation. What that is prevent them from moving laterally inside the organization if they do get in. Peter Salkowski And even, I mean, the new concept that - well, but the concept a lot of people are talking about in the last 12 months is Zero Trust. And the reason they are talking about Zero Trust is it's basically trust no one that's inside your network. No matter where they are, don't trust them. And that really has accelerated over the last 12 months because of ransomware. And the concept that if you look at the data from what happened in 2021 from a ransomware perspective, our data shows that the level of ransomware attacks increased tenfold during 2021. And so everyone is worried about how do I handle that? Well, one of the ways they handle that is micro segmentation, limit where they can go within your network and/or Zero Trust, follow them everywhere, don't let them go anywhere they are not supposed to go. But for that concept to really play out and work, you have to see the network from the data center to the edge to the cloud. And our operating system, which really we get called a hardware company all the time because we design our own ASICs and we have these firewalls at 70% of our business, keep in mind, again, that 70% of the business includes the services that get attached to those firewalls. So it's not just all product. Our business is about 30% product when you look at the income statement. But you have to be able to follow that person or that thing across that entire network. And our operating system - he said 7.0, it's actually 7.2. Our latest operating system that came out a few months ago is built for Zero Trust. It has all the Zero Trust capabilities built into it, and it's an integrated solution. So, if the endpoint sees something, it can inform the other parts of the network and communicate with the other parts of the network. So if it's a laptop, for example, just don't let that laptop go anywhere. If you're a point solution and all you see is the endpoint and you can't inform because you're not working with the rest of the network to inform it, that isn't very useful to you. And so Fortinet's from the beginning has had this belief that for - by the way, for those who don't know the company, we started in 2000. Our first product came out in 2002. So we've been building this for 20 years. The platform has probably been built since the mid-2010, 2012 kind of time frame. So that's been going for 10 years. We've been continuing adding functionality to the operating system. And we can add that functionality to the operating system and expand that operating system because we have these ASICs that allow us to have a lot more capability within our operating system to run that without slowing the network down. And at the end of the day, we haven't mentioned the word yet, so we will use it, it's all about convergence. It's the converging of networking and security that are coming closer together. And those two buying centers are starting to communicate more with each other so that the networking people are working with the security people as they are trying to today reconfigure their networks for things like the cloud. There are a lot of companies that aren't ready to go to the cloud today even though everybody does it. Everybody is in the cloud. And in order to do that, they have to reconfigure their networks. And as they are reconfiguring their networks, they are rethinking about their security that 5 years ago, they weren't considering the cloud for. And that reconfiguring of their network is an opportunity for us to sell them more security on top of that, but also to reconfigure their networks and be it network speeds with our firewall capabilities that literally can do 400 gigs of throughput with our ASIC capabilities. And there is no one else in the security space that can do that. No one else has their own ASICs. There is a couple of players out there now that have gone out and bought ASICs from an ASIC company. And they are basically realizing they need to have ASICs, but they are not building their own. We have built them from the beginning. The inception of the company in 2000 was the point that security is so much more compute-intensive the networking that you need to have your own computer chips to do that, and we have three of them. Raquel Betesh So on the topic of your computer chips, actually, you recently touched on chip shortages for FortiGate hardware. How are you managing the worldwide shortage? And do you have any expectations on the duration of this? Keith Jensen Well, I think we - I'm here to announce, look, I think that everybody that we - when we read reports, if you will, the common theme seems to be, to paraphrase it, look out about 6 months and nobody really willing to commit at this point that it's going to get better within that 6-month time frame, which kind of puts us now into early 2023. And I think there seems to be a bit of a rolling conversation point. If you ask people 6 months ago, you probably got a similar statement, it's probably at least 6 months away. And it just seems to continue to push out. And I would expect that we're going to be into 2023 before we start to see only - because I don't see it in 2022 a significant improvement in the supply chain. In terms of how we manage the supply chain, I think we've done a number of things. We talked about some of these at our Analyst Day a couple of weeks ago. One is we've gone through - we continue to reconfigure products, if you will, our engineering team. For whatever reason, we seem to see this and respond to it perhaps earlier than some other reports that I read recently. And by that, I mean, when we are in the third quarter, we started this of last year, we started to see the chip shortage starting to appear on the landscape. And with that, we went back to the engineering team and talked to them about how we may redesign certain products such that there is a multivendor strategy or supply strategy for those or design around certain functionality that maybe really isn't in high demand in terms of from our customers, but isn't a limited supply. We've also spent a fair amount of time talking to our suppliers, working with them very closely in terms of what's going to be available and when. We have - I would also add to that, made significant commitments to our contract manufacturers and to our suppliers about how much inventory we plan to buy in the future, both in terms of dollar amounts, but also how far out. Historically, you're probably looking at everything that was probably an order was maybe 6 to 9 months out with a contract manufacturer. It's probably twice that much now. And I think that's important to the contract manufacturers, given they are in a very difficult situation at the moment or could be perhaps with some working capital challenges because they are being forced to assemble, if you will, all the different components that are required for finished goods. And until they have all the components, they are really just sitting on that inventory and they can't manufacture it, and they can't sell and convert it to cash. And so we are hopeful that by giving them some visibility in the long-term, that, that is some information that they can plan around that they can use to help their situation. But I think that's probably been the, financially, the largest part of it is in terms of commitments that we've made to our contract manufacturers. And the last element, you've probably heard about the concept of expedite fees. We do have contractual relationships with many suppliers, whether they are chips or power supplies or what have you. And then you receive what we call the dreaded midnight phone call when they call and they say, "We are not going to be able to deliver tomorrow." And for a variety of reasons. It could be because of a COVID wave. It can be because of poor capacity. It could be because of capacity within the system. It doesn't really matter why. And while we have a contractual arrangement that says they are going to deliver, the reality is there is not much you can do about that. Putting them in breach isn't going to do you any good. So, instead, you work with the chip manufacturers. They will sometimes come back to you with a subset of products that they are willing to sell to you if you are paying expedite fee, a premium, if you will. And from the very beginning of this phase of the pandemic or the supply chain crisis, whatever you want to call it, I think we have shown a high degree of willingness to pay those expedite fees so that we can ensure delivery of products not only to ourselves, but to our customers. Peter Salkowski I think, Keith, might be important in that conversation to talk about backlog. Like what was our backlog at the end of the first quarter? How has that looked from a year ago and size it in terms of the size of the business? Keith Jensen Yes. Thanks for the question, Peter. Peter Salkowski You're welcome. Keith Jensen We are a company that strategically over the years, there was always a bit of a conversation between the CEO and myself about inventory turns. He likes inventory turns low. Shockingly as a CFO, I would like to see them high. And so one effect of that was as we got into the supply chain, we came into with a high level of inventory and no real backlog. When you saw a backlog for us before, it may have been $10 million, $20 million. And it was primarily services, professional services and things like that, that would be delivered in the future. And that's really where we are at for the first half of 2021. And as we got into the third quarter, we started talking about backlog, and it was getting larger or maybe be something that we disclosed. And then in the fourth quarter, we did indeed disclose it. And I believe that number was $160 million, if I am not mistaken, $162 million, and provided some mix of it. Switches with the lion's share at that point in time. And we also shared that we expected backlog to continue to increase. And I think we ended the first quarter with backlog at about $280 million. And the now mix is probably about 50% switches and access points and 50% firewalls. Now you are talking about a company that's going to be $5 billion. So, that's not a huge backlog. One metric that we have provided with people is just to measure what is the - what's the incremental increase in backlog in the last two quarters as a percentage of bookings. And that increase runs about 10%. So, we are starting to see some trend lines develop that we are using for some of our planning processes and so forth. For context, one of the very large networking companies reported last week, I think it was a $15 billion backlog number. So, I suspect we are a little bit smaller than that. Peter Salkowski And I think we guided a little bit. We did say that by the end of the year, we thought our backlog would be at least $500 million. Again, that's on a $5 billion revenue number. I think a little over $5 billion revenue number. I can't remember the exact numbers, but less than 10% of our overall business sitting in backlog. We have an audience question there. Raquel Betesh Yes? Unidentified Analyst I don't think that the market is associated with switching. And so maybe can you just elaborate on your how much of the business that is? It seems like you are doing well on [indiscernible] Peter Salkowski Can you just talk about your switching business, I don't think the market really associates you too much with that. It sounds like it's going well given your backlog and how do you play in that? You use your own ASIC, who are you competing with and stuff like that. Keith Jensen Sure. I don't think we think of ourselves as a switching company either. We think of ourselves as a secure switching company. Switch for us is part of the platform strategy. It's secure switching and as part of that automation that you are trying to create if there is an event also to communicate things. I am not aware of us selling to a new logo switches for the first sale. It's almost always the firewall. It could be one of the other platform products. But as part of that extension, we do look to opportunities to sell access points and switches and other platform products as well. We have commented in the past that if you look at our platform suite of products outside the firewall, you can roughly measure that out at about one-third switches and access points and one-third software and one-third other hardware products that are part of the platform. For further sizing, and Peter, and, I were talking about this earlier today, he was doing some advanced math on me in terms of what our - what our switches are for backlog, and I think the number that we came up with was something on the order of maybe $100 million or something like that or something a little bit less. Peter Salkowski Was that before coffee? Keith Jensen Yes. Perfect. And again, let's say, it's $100 million, rounding $25 million up or down, again, comparing that to a true switching networking company of $15 billion, we are not there. That's not where we are at. We are not responding to RFPs or large switch deals. They are sole source. If you are not a security customer of ours, you are not going to be a switching customer. Peter Salkowski It really goes back to that convergence idea of networking and security and the fact that we are going to get into SD-WAN, but I will bring it up anyway because it always comes up. If you are doing an SD-WAN implementation, and we call secure SD-WAN, you are probably buying our firewalls to get the operating system to get the SD-WAN functionality that we built into the operating system 5 years or 6 years ago. By the way, we didn't buy it like our competitors did. We didn't spend $0.5 billion each to buy an SD-WAN functionality. We built it into our operating system. And so it's integrated as part of that solution. And if you are implementing that, even if you are just buying it for SD-WAN, which we do have some customers that have done that as a start-up, they are now buying other stuff. We may also do what we call SD branch, which means we will come in and we will replace all your access points, which are Wi-Fi access points and all your routers in that branch location, put them all on Fortinet equipment, and so now that entire branch location is going to be able to communicate with that operating system, and we have sold use of networking equipment. But at the end of the day, we have really sold you a secure SD-WAN implementation where you are getting the security. And we are doing it in a single box, right. You are buying one box, installing it. Whereas if you are going to buy someone else's SD-WAN that isn't a security company, you are going to have to partner with the security company to do that location. Then you are going to have another company doing the networking inside of that location. And then you are going to have your SD-WAN. You are going to deal with three, four vendors in that scenario. We can do that all in one operating system across the entire thing. And so that reduces their total cost of ownership, gives them one visibility into that entire location. And when you come to visit our new headquarters, you can see an entire SD campus that's all Fortinet. So, that's where we get the networking aspect of it. It's not that we are out there competing directly against Cisco and their switch business. That's just - I mean like you said, they had a much higher backlog than we did last quarter. Unidentified Analyst [Question Inaudible] Peter Salkowski No, a lot of that is going to be common CPUs. The ASICs, the security ASICs that we have, there is a system on a chip, a content processor and a network processor. They are all security based. They are all on that firewalls. Raquel Betesh So, to speak a little bit more to SD-WAN, bookings grew 54% and OT grew 76%. Can you talk a little bit more about the SD-WAN and OT use cases and how that's driving growth in the company? Keith Jensen You cover like overall the good stuff already, Peter. Peter Salkowski Sorry. Keith Jensen Yes. SD-WAN, I think is - obviously, we have been very, very successful. And Peter described some of the competitive advantages that we have there. For those of you that aren't really familiar with SD-WAN, I would just offer that the compelling ROI or payback period on SD-WAN, which is generated by avoiding or minimizing MPLS fees, I think that has been a significant driver to that market, and you have seen significant growth from us. And now and while not every company and many, many companies have yet to adopt an SD-WAN strategy, some of them were coming up on a bit of a refresh technology as an opportunity. We are starting to see new use cases appear in the landscape for SD-WAN, things like cloud on-ramp, things like SASE [ph] and SD-WAN. So, we think that - well, Arne would talk about the market growing, I think, 25% over the next several years, Obviously, our growth numbers are much, much higher than that. And it is our goal to be number one in the SD-WAN marketplace. OT, I think that when we kind of talked around some of the key data points on what may be driving the OT business. One is it can be sometimes a smaller device, and we are very successful with that. But I think it's really the elevated threat landscape. You are seeing so many other places now in so many other industries, whether it's places like manufacturing, utilities, transportation, etcetera, that previously may have been air gapped and not connected to the Internet or some of these devices and technologies tend to be very old with low compute, but yet their exposure point. There is part of the edge where a bad actor can attack. And I think with that combination of events, you are seeing the see OT marketplace do extremely well in this current environment. And I would expect that to continue. Peter Salkowski Yes. I would expect that to expand actually as 5G becomes more ubiquitous because what 5G allows a lot of companies to do is just connecting more things to their network and in that process open up a lot more vulnerability to things that weren't necessarily connected before and then they need to protect. They knew - one, they need to know it's there. They didn't even know it's actually connected to the network, and then they need to find a way to secure it. And in some cases, I don't see a thermostat on the wall here, some of it, sometimes there is going to be a thermostat on the wall. It's got an IP address, and therefore, that's an attackable situation. And you can't necessarily protect the thermostat at the thermostat because it doesn't have enough compute power in it. But you can protect it at the network level and be aware that it's actually attached to the network. Unidentified Analyst So OT, are you defining this as sort of industrial use cases where it wouldn't be like a regular enterprise firewall deployment, but you are protecting a factory or a utility that normally wouldn't have a traditional firewall, but now it is having that? Peter Salkowski It becomes our OT room at the new headquarters. And you will see ruggedized firewall... Unidentified Analyst So, it's ruggedized, industrialized? Peter Salkowski In some cases, yes. Keith Jensen It can - we can define it by either the appliance itself, the size, the ruggedized nature of it or by the use case that we talked about. But those would be OT uses. Unidentified Analyst And do you disclose the sales of that? Keith Jensen We did disclose total OT growth in 74%, I believe. I don't know that we actually disclose the dollar amount. I have described it as being not as large as SD-WAN, but growing faster. And I think we have expectations that it's going to continue to grow dramatically. Peter Salkowski I think we didn't say in the first quarter. It was a very busy quarter with a lot of other things going on, closing backlog and all the other fun stuff. But I think in the fourth quarter, we said it was probably high-single digits as a percentage of billings. And it's growing, like I think it's 74%, 76% just last quarter, something like that. Raquel Betesh I want to continue to offer an opportunity for the audience to ask any questions you may have. Peter Salkowski While we are taking a pause. If you haven't, by the way, we did do an Analyst Day two weeks ago on May 10th, which was on our campus for some folks, limited availability in space. But if you haven't had a chance to listen to that, there is a two-hour presentation for the Analyst Day portion of it. Obviously, Keith did 45 minutes of that. Our Chief Marketing Officer also is our EVP of Products, John Madison, spends an hour in 15 minutes. You would say that's a really boring presentation. But it was actually a Q&A session with the analysts and some of the investors were that there. I don't know a few people that I took questions offline or through the online portal. But it's a great presentation by John to really answer a lot of the questions that we get. We get a lot of questions about cloud, obviously, because people say you are a hardware company, which is true and really addressing things like VPN and cloud and Zero Trust and SASE and all those kinds of questions. So, if you get a chance, I really recommend that presentation. It was quite well received by The Street. That's my plug. I got to get one in. It's my job. Unidentified Analyst Can you talk a bit about the pricing strategy, right? I mean we have seen a lot of input costs rise significantly. That may also be the effect on sort of the chip side and a number of other inputs for you. Can you tell us what you have done on the pricing side or what you plan to do? Keith Jensen Yes. We had - we announced price increases, first, in August of last year, then again in November, and then the third time in February. And then it's very, very small, almost unnoticeable actions in May. We came into this situation, if you will, with the reputation of being the cost and performance leader. And we believe that we are starting to see the channel surveys suggest that and the feedback from our customers and our partners are reflective of that. And numbers we have heard is that our price for performance advantage could be as high as 30%, even 40%. So, with that, it was a fairly easy process for us to go through it and say, we can cover some of the cost increases, whether they are expedite fees or whether they are freight or general inflation or labor or what have you. And you saw us take those pricing actions that I mentioned. And we knew that there was a risk that we would eat into that competitive advantage on cost or performance. However, what we are - certain of is how our competitors were going to react to their own supply chain challenges. And we have certainly seen that our competitors have also raised prices. So, that price or performance advantage has remained intact, we believe. No doubt about that. Our goal is to try and, particularly as it relates to expedite fees, look and model out the cost, the increases from expedite fees and cover those through price increases. And if we are successful on that, it will still leave a little bit of cost for freight and other components, if you will, that we are absorbing. And the phrase that we have described to our customers is that, yes, we have had price increases and we have passed on some of those cost increases, but not all of the cost increases and you see that in the gross margin. Peter Salkowski And Keith had a great slide during the Analyst Day that shows the gross margin impact on product from increasing the price that we didn't pass along. There as a yin and a yang between how much you raise prices and protect margin versus how much market share. And at the end of the day, we do want to be the number one player in this space, and we think we have a very unique differentiated sort of solution with our operating system. And so there is a little bit of that challenge as well. Keith Jensen Yes. And I am going to clarify that when Peter says that how much we could pass along, we actually believe that we could pass along more. And it really is a matter of market share gain versus the margin while we stay faithful to our 25% operating margin target. And I would expand a little bit as probably what most companies do, we track in our CRM tool our wins and losses. And I am particularly interested in when we are not successful, why do we lose and what the response can be. Oftentimes, there is an incumbent and with the spirit of the Golden State Warriors about we go to the final soon, having the home court advantage is a very nice thing. But part of that is looking at pricing. Does the salesperson say they lost the deal on pricing, we saw no change in that metric in terms of what percentage of time we lost on pricing in the fourth quarter. In the first quarter of this year, it actually improved. So, it got smaller as a percentage of the mix. So, I believe that the key to the - going back to the strategy question and Peter's response is we know we have the ability to, but it's a bit of a trade-off for market share gain and growth and profitability. Peter Salkowski And I would be surprised that - it's a very low percentage that we lose on price. And I would be really I would like to know which ones those are because it's got to be at the low end where it's a little bit more competitive on a price perspective. We are not going to lose it on the high end on price. Keith Jensen For further context, the only other category that we give them choice on that has a lower loss rate than pricing is poor sales execution. Peter Salkowski They don't pick that one. Unidentified Analyst I have two questions. Would you address the upgrade cycle and whether it's lengthening or shortening? How often do the customers come back and really refresh their whole system? And how does that impact you? And then the concentration of your customer base, how many customers make up most of your business? And how is that changing? Peter Salkowski Do you want to start? Keith Jensen Sure. We have hundreds of thousands of customers. So, it's - the concept of refresh cycles is something that if you are a company focused on large enterprises and large devices, you are more apt to see a refresh cycle appear in the income statement. When you have as many products as we do, I think it's 70 different firewalls plus the high volume of platform products, you just see a constant overlap of product cycles, and it's really hard to discern one over the other. In terms of the life cycle of a product itself, you can probably figure like with any other technology solution or many others, you are probably about a 5-year life. Keep in mind, when you are selling into, say, a large service provider or MSSP, they are constantly buying appliances. Or if you are selling into a very large enterprise, maybe it's a retail organization with branches or financial services organization, they are constantly installing and replacing devices. It's not that you have a massive air drop of appliances one day in one quarter. We have made the comment previously that I think it's been 5 years since we saw a customer be more than 2% of our business in the quarter. So, it's a very - it ends up being a very smooth process in that regard. Peter Salkowski I would add to that. So, the comment I made earlier, 27% of our revenue comes from the United States. That's split between very large enterprises that are going to do a refresh once every 5 years or whatever, medium-sized enterprises and SMEs, small and medium-sized enterprises. So, if we just look at the very large enterprises and assume it's about a third of our business, that's 10% of my revenue. In the United States, that's a large enterprise. Go compare that to my competition. And what you are going to find is a multiple times smaller than them in the United States. So, when they have a refresh, which is what they are going through right now, they have just talked about it last week on their earnings call, that's an opportunity for Fortinet to get invited into an RFP scenario, where 5 years ago, we might not have been invited in because we weren't thought of as an enterprise-level firewall company. But in 2017, we moved into the Gartner Magic Quadrant as a leader in enterprise firewalls. And over the last 4 years, we have used that as a calling card to get into RFPs. And you get don't fired if you are the CISO inviting in the leaders. And so now I can actually compete directly against all the other firewall vendors when they are doing a refresh because it probably wasn't my product. They didn't buy my product 5 years ago. They didn't even think I was an enterprise level fire 5 years ago. It's an opportunity. Keith Jensen And last comment in five seconds here about our competitors' commentary. We are very pleased to see them also talk about how data volumes in the current environment are driving an extremely healthy firewall market and will in the future. Raquel Betesh Thank you, Keith and Peter both for joining us. Thank you everybody for being here.