Fortinet (TICKER: FTNT) Fortinet Inc Ftnt Goldman Sachs Communacopia Technology Conference 2022 Transcript

Fortinet, Inc. (NASDAQ:FTNT) Goldman Sachs Communacopia + Technology Conference 2022 Call September 12, 2022 1:45 PM ET Company Participants Keith Jensen - Chief Financial Officer Peter Salkowski - Investor Relations Conference Call Participants Gabriela Borges - Goldman Sachs Gabriela Borges Alright. Good morning. Thanks everyone for joining us. We will go ahead and kick off the format presentation at Goldman Sachs Communacopia + Technology Conference. I am Gabriela Borges. I head up the emerging software vertical here at GS. I am delighted to have on stage with me, Keith Jensen, CFO of Fortinet; and Peter Salkowski, Investor Relations. Thank you both for being here today. Question-and-Answer Session Q - Gabriela Borges Keith, I wanted to start high level as you anniversary 4 years as CFO. Fortinet today is larger scale than it was 4 years ago. So talk a little bit about how some of your internal proceeds have involved as the company has scaled and how is your forecasting process different today than it was 4 years ago? Keith Jensen 4 years ago, it was providing guidance and forecasting was sure panic. And today, it's sure panic. So I don't think that's really changed, as you would expect, a lot of focus, a lot of attention on it. I think the edits roots for us, we are in a very fragmented market and we think we have a superior product offering. And with that in mind, it's really about investing in go-to-market, investing in the pipeline, keeping the sales capacity in the pipeline numbers, marching in tandem without one getting out of the other and at the same time being faithful to our operating margin and we have talked about 25% in there. So I think that's really about it as a headline. We do a lot of diagnostics in terms of the deal size and whether or not they are existing customers and things of that nature. Obviously, the big change in the last 12 months is bringing in backlog into the conversation. As we started moving into this phase of COVID or the economy, whatever you want to talk about, we are a company that has historically not had backlog and certainly not so that we have talked about publicly. And we felt that around the third quarter, fourth quarter of last year, the backlog was becoming a large enough number that we wanted to share that with the Street and others. So, they can kind of keep track of how we are doing, provide us some guidance around that. Backlog has a very direct impact on historical metrics, billings and product revenue. So I would say, over the last year, in addition to providing that number, I think the level of effort, if you will, around forecasting and having conversations about backlog is something that's completely different than it was 4 years ago. Gabriela Borges Yes, Absolutely, please. Peter Salkowski Can I just jump in for a second? I am going to do a Safe Harbor just because... Keith Jensen No, thank you. We get back. Peter Salkowski As it's important for me, I'd like to remind everyone that we may make forward-looking statements during today's fireside chat. These forward-looking are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements speaking of guidance like things. Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10-K and Form 10-Q and to other reports that 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. Now, you can go ahead. Gabriela Borges It's a great segue on the forward-looking statements to how you are thinking about the supply chain. And so maybe we can pick up on the comments on backlog and tell us a little bit more about how you have navigated your supply chain challenges over the last 12 months and levels out as to where you are today? Keith Jensen Yes. We have talked externally, I think, about being impressed with our operations team and some aspects about our business model that really first is to get a better appreciation forward and better awareness of. One would be we really want to be supportive of our contract manufacturers. We have the balance sheet that we can do that. It could take a variety of forms, but one form is by giving our contract manufacturers longer term ordering commitments. And really, what we are doing is they are reserving capacity with their - in their manufacturing operations. I think we've had some success with that in terms of responsiveness that we've gotten from our contract manufacturers. I think it's also watching the operations team ability to - because number of firewalls will have common components, they have the ability to move components around - between lines of business, between parts of the firewall from the entry level to the high end or what have you and how they manage that activity and plan for it in light of what customer demand is. And then in a similar vein, also looking at the contract manufacturers that capacity that we have taken down and in some ways, reserve, moving that capacity around in response to demand. You have also seen a significant contribution from the engineering team, particularly as it relates to the ability to qualify additional suppliers, qualify additional vendors and bring new products to market. For example, we just brought a low-end product to market on an accelerated basis called the 70F, which is successful to the 60F and things of that nature. So I think overall, net-net, just very impressed with the nimble the manufacturing, the operations and the R&D team have been through this process. Peter Salkowski I think the one thing about supply chain, it remains a dynamic situation could change on a daily basis. We have given some guidance in terms of what we think our backlog will be by the end of the year and in terms of it being around or possibly exceeding $500 million. We ended the second quarter at $350 million. So that would be an average of $150 million a quarter for the next two quarters. Backlog grew $72 million in the second quarter. So I would say that while things haven't gotten better, they haven't necessarily gotten worse. And we are still seeing demand outstripping supply. Gabriela Borges The comments on backlog lead a little bit into a question about visibility. And so maybe I'll start on the cancellation part piece of this, which I think you've been very consistent in talking about the 4% to 5% that could potentially be cancelable. So maybe a little bit more on that how do you know that the 4% to 5% doesn't go up over time? Keith Jensen Yes. I think we have always had cancellations of orders for ordering errors or what have you. And for context of that 4% or 5%, I would say that probably about half of that has been for legacy reasons that have always existed in the business and the other half of that a couple of points has probably been related to cancellations. As we went into this backlog phase, if you will, we were obviously internally, it was new to us. And so we really had the same question that investors do and we are hearing what is the cancellation risk? And so we spend a lot of time trying to understand the backlog and the sources of the backlog. And as part of that, we provide a lot of metrics that we use internally to get comfortable that we should not see cancellation rates that we become something unusual from what we've seen to this point. And this should be fairly stable and it has been at this point. We talked about the cancellation rate itself. We talk about the fact that 90% to 95% of all orders and backlog are from existing customers that about 50% of those orders have been at least partially deployed. And it's really not made up of large orders. I think we have four customers that have orders that are over $2 million and in total, Peter? Peter Salkowski 6%. Keith Jensen 6% of the orders. So we - those are the same types of metrics that we look at internally to give ourselves comfort and track any perceived risk with the backlog and we share those with investors and with others as well. Peter Salkowski And one other stat to add to that and that is sort of aging of backlog. If backlog is going to get old, then you would be more concerned about it being canceled, right, because it's getting older and older and they are having to wait. Again, all these data points are somewhat limited because we have only had two quarters of really of experience of this, but in the past two quarters, about 60% of the backlog that was in backlog at the beginning of the quarter was shipped during the quarter. So you are seeing a rollover in backlog. Now backlog in both of the last two quarters has increased. So we have replaced the backlog that we shipped with new backlog and added additional backlog to take the backlog up, but it's not aging. We are seeing it rollover. We are seeing what we can ship or what the supply that we can get, which differs by quarter, we have been able to get. Gabriela Borges Peter, you mentioned earlier the idea of demand outstripping supply and continuing to outstrip supply. On the demand side of the equation, Fortinet has uniquely diverse customer base. You have got smaller customers, larger customers, good visibility into international versus North America. So, the question for both of you is compared to trust for us what you are seeing in terms of demand in the pipeline. Are there any nuances internationally about North America? Are there any nuances across verticals that you can share those things? Peter Salkowski I'll let you do that. Keith Jensen I am just waiting to see what's happening [indiscernible]. I think the pipeline growth has been strong and we specifically made reference to Europe because all eyes are on Europe at the moment. And we are seeing no indications of any sort of slowdown in the - in that. And we look at - we have somebody coming up in the front of the group here to help us with it. Peter Salkowski Yes, it's not [indiscernible]. For those of you on the webcast, this is the musical interlude point of the presentation. Keith Jensen If you want to get up, get the coffee, please get going. Peter Salkowski Okay. Keith Jensen Yes. I would just - look, all eyes are on Europe at the moment and we have certainly seen no indication of any sort of - in our own business, at least demand slowdown in Europe. The pipeline remains very, very strong. We are pleased with what we are seeing. Peter Salkowski I think we made comments on the earnings call and the prepared remarks are on our website. But saying that and we have said this the last several quarters because there is not only a question of macro question going forward in terms of visibility of demand, there is also this belief or concern that there has been a pull-forward of deals into the current periods. For the last - I haven't gone back to look, but at least two, probably three or four quarters, we have said our pipeline has been accelerating on a going forward basis. And if it was pulled forward, we should see that in our pipeline demand and we are not. And then the other additional comment we made in this last quarter was about EMEA and saying that EMEA got off to a very good start in the third quarter and that the pipeline demand there is very good, because people are very much concerned about the EMEA macro with the war in Ukraine and those kinds of things being top of mind. Gabriela Borges Yes. The other question I will ask on EMEA is a relative FX pricing question, which is given that price of your products in U.S. dollars, are you seeing the higher relative prices in EMEA for format products having an incremental impact on customer willingness to purchase our ability to purchase it? Keith Jensen No, we really haven't. And I think for as part of that is we have the reputation of being the cost of performance leader. And if you are benchmarking our price or our price per throughput unit or security unit or what have you, it's going to continue to benchmark very, very favorably. We have also had a series of - in addition to the FX change, we have also had a number of price increases over the last year. And again, those have been met with, I would say, a large degree of success and not any sort of shift in demand because of the price increases. Gabriela Borges Excellent. And Keith, you made a comment last week at an investor conference about having visibility into the end user as opposed to aggregating visibility from your channel partners. So, maybe just a little more on that, how do you aggregate a better sense of demand beyond what your immediate channel partners are telling you? Keith Jensen Yes. I think that's a very good question. And our history of being very channel focused and some of our tools were more designed initially to be supportive of selling to distributors and things of that nature. As we have continued to mature and evolve the company, particularly as the expansion of the enterprise, you have seen some of those tools take CRM as an example, become I think comparatively much, much more mature, the notes, the commentary the drop-down menus, the flags, if you will, the data that we ask our direct sales team to now populating the tool is completely different from where it was 4 or 5 years ago. And it's giving us visibility into a wide range of things in terms of what type of support or activity we are seeing from our end users, deployment schedules and so forth. I would also note, I think the supply chain challenge itself has certainly forced or provided an opportunity for our sales team and our customers have spent a lot more time talking together about things like deployment schedules and strategy about when orders should be placed in what quantities and so forth. So I do think we have a much more visibility now to end user activity than we have had historically. Peter Salkowski And just to go back to the first question about your last 4 years of giving guidance. If we go back to 2018, when Keith and I both sort of started in our current roles, there was an ERP system and a CRM system that were in place, thanks to our predecessor in terms of putting them in. But the data wasn't as robust at that time, because they were just really ramping up and getting going. And so in 2018, you didn't have comfort that your year-over-year comparisons were meaningful or you could trust, but we made sure to build that data into 2018. So when we got to 2019, we had data we could trust looking backwards. And so we have really benefited from that visibility over time and continue to benefit today. Gabriela Borges I wanted to move into your discussion on the product side and the platform side. And so one of the metrics that you all have been providing is platform extension billings, up 44% year-over-year, accounting for 31% of total billings mix in 2Q. You have talked about split being one-third networking, one-third cloud, one-third other, maybe just taking a step back as an investor, what are the one or two biggest growth drivers that we should be aware of when we think about platform extensions? Keith Jensen I have been probably more framing around what you are seeing from CISOs and what you are seeing from CIOs today. I think Gartner, for example, reports that 2 years ago 29% of companies want to have some conversations about platform and that number is probably closer to 70% today. And I think that's reflective of - if you are a CISO over a CIO, you have a lot of challenges right now. And one is you're probably being asked to manage 20, 30 or 40 different point solutions and that's becoming fairly onerous. And at the same time, you were being asked to manage that those point solutions in a very challenging labor environment where it's difficult to find the labor resources. I think those types of things together with the costs that are required to manage and maintain those disparate point solutions are all kind of pushing this platform strategy. And I don't know that I would necessarily suggest that you should look at any one product within the platform as being a key growth driver. Certainly, we have had success with the virtual form factors of firewalls and our manager solution and our analyzer solution and switches and access points. But I really do believe that as you start to see CIOs and CISOs place greater emphasis on some level of consolidation, then I think each of the products during the platform extension are going to see a tailwind from that consolidation activity. Gabriela Borges The customers that you see embracing the Fortinet platform approach versus those who are perhaps earlier on in their education on their understanding of the platform. How would you describe the difference between those two cohorts? And I guess the more specific question is, what can you and your sales team do to move folks across the spectrum towards embracing the platform more holistically? Keith Jensen Good question. And I think you really - we need to dissect it by looking at customer size or customer class. As you get into a smaller enterprise, they are certainly much less interested and have far less capacity for introducing a long series of point solutions. They are going to be very interested in some sort of a platform strategy. Now they may actually acquire that through a service provider. They will look to a service provider or an MSSP to provide that consolidation. So they have, call it, one throat to choke, so to speak. So you really want to provide the entire spectrum to the MSSP. When we look at penetration rates of the platform products, not surprisingly, we see the greatest degree of penetration from those MSPs. As you move up into customer size, I think you see those industries that maybe have been operating with more challenging margin environment for a longer period of time being more likely to be the earlier adopter of some of the platform strategies. They are looking for that savings opportunities, they are perhaps a little more agnostic about form factors are very, very focused on cost. And as you move to the utmost highest end of the customer segment, I think when you get into the very large enterprise I think there is make no mistake. There will - there has been and I expect that will continue to be a very real market for cutting-edge point solutions. No doubt about that. But at the same time, those CISOs and those CIOs are looking for some sort of spending relief and that comes back to the form of consolidation, if they can consolidate two, three, four, maybe five different vendors, that's a win from there. And I don't think when we talk about consolidation that there is an expectation that it's going to be one company with one platform. Rather, it's more likely that company is probably going to have two, three maybe four different platform suppliers. There maybe one that's handling some sort of consolidation for the various cloud providers because the cloud providers don't necessarily talk well together. There maybe two or three more that are handling something more internally, something from the ERP side, something from the firewall side, but that would be represent a win and again, for a company of any size. Peter Salkowski And I have been sharing an example of a deal we did in the second quarter that was one of the 122 deals over $1 million that we closed in the second quarter. And in that situation, they have been a customer since 2017 which is typical with most of our first customer sales, they bought firewalls from us in 2017. In 2022, in the second quarter, we took out 10 vendors with one operating system. And whatever those 10 vendors were doing, our operating system is now doing and they are only having to deal with us. That's the idea of consolidation. They don't need to have 10 different vendors provide that solution to them. They can use one operating system in a platform approach that gives them all that capability and they don't have to deal with 10 different vendors. Now those vendors probably don't disappear from the security stack. They are probably somewhere else still there because they were all the names we all know. But in this one particular case, my operating system allows me to consolidate that, that's taking market share from 10 different companies. Gabriela Borges What about convergence and consolidation between the networking budgets and the security budgets. Talk to us a little bit about what you're seeing in terms of customers aligning the networking and security strategies and then we can segue a little bit into SD-WAN as well. Keith Jensen Yes. Certainly, it's a changing landscape. I think historically, you've seen a bit of a tension point that exists between the networking people and the security people. But that, I mean, the security people naturally want to add more and more security onto the network. And sometimes that can slow down network performance. And so, the networking people have been a little bit more hesitant to open the door and very protective about network performance because, of course, they hear about that. But I think you're now seeing - and when I'm going to talk to salespeople, we're seeing a lot more collaboration between those two different camps inside of organizations. And maybe secure SD-WAN would be a very good example of that. Obviously, you can process SD-WAN and think about being application and wear routing, with security. And so there is a very natural use case that requires both the CISO, the security people and the networking people that work together on bringing something to their organization. Peter Salkowski I'm going to say some words that are very hot topics, SASE, digital transformation and network reconfiguration. Those are big terms that are being used in the industry right now. And what it really means is people are - companies are looking at their networks and reconfiguring them, I mean, Gartner changed their definition of SASE last year from an all-cloud solution to a hybrid cloud solution. because companies aren't ready to go all cloud and not all companies are ever going to go all cloud. And so they said, look, some of this stuff has to be delivered on-premise. Some of this stuff can be delivered in the cloud like CASB, which is cloud security in WAF and some others. The point is, though, as those companies go through that sort of transition of their networking, they are reconfiguring and rethinking about their security that is where Fortinet plays in that world of, well, if you're going to reconfigure your networking and you're going to kind of rethink your security, maybe to be ready to the cloud because you didn't do it 7 years ago when you last reconfigured your network. We can play in both of those worlds. And we can help you - we don't - we're not going to give you data center switching components, that's not our business, but we can help you reconfigure your network so that you can do things. SD-WAN is a better term for SD-WAN is cloud on-ramp. It's how the data gets to the cloud from your premise or from your branch location or wherever it needs to be, you want to own that real estate to take the data to the cloud and also back to the data center, if that's where it's going to go. You want to own that real estate. We think that's extremely important. But that's part of the reconfiguration of networks to move to a SASE model to move to a zero trust model. All of that is part of what we're - that's part of the convergence idea that we've been talking about for several years. Gabriela Borges The idea that covered was a catalyst for some of these network transformation, digital transformation, reconfiguration stories at your customers or journeys that your customers. Help us bridge from that to SD-WAN bookings being up over 60%. And I guess the question would be, how do you think about durability of some of these transitions? Keith Jensen Well, I think COVID certainly brought a few other things have recently over the last several months, more awareness about risk and COVID in this case is it's work from home. At the end of the day, what you're really trying to do is provide security no matter where it resides and provide security anytime it moves. Work-from-home, I think, was perhaps a watershed moment in terms of risk that CIOs and CISOs were taking on. They were really forced in a situation early on and COVID in stand-up applications. And I think security came as a follow-on thought in many, many cases. I think that was very challenging for them. I think ransomware has been another watershed moment where many industries that have perhaps view themselves as not being umber one on the target list, such as financial services would be and maybe healthcare and now we're seeing it in educational systems and schools. But a lot of other verticals all of a sudden realized that they were very much on the radar screen and they have had to make investments into it. So I think it's been a little bit an elevated threat environment and that seems to, for a variety of reasons, particularly with the bad actors doing bad things, and poised to continue on. If you translate that then, what does it mean for SD-WAN and what's the second act for SD-WAN. We look at things, and Peter talked about 1 being SD-WAN is the cloud on-ramp, two, SD-WAN being one of the key components of the framework for SASE zero trust solution. And you'll probably see us talking more about how our SD-WAN solution fits into that. And I think third is that we still see opportunity with the service providers and the carriers where they may have had legacy or have legacy relationship with other SD-WAN providers that I think we're working very hard and you've seen some press releases over the last few months in particular. And even over the last year, announcing closer and closer relationships with that. And then I said last thing but really lastly in this case, there has been some M&A activity in the space. And I think we look at that M&A activity is there is probably going to be some fallout in creating some opportunities for us. Gabriela Borges I'd like to move the discussion into some of the comments you've made on product growth versus services growth and the moving pieces in the model. I think you've talked about seeing services revenue accelerate into 2023. I think you've already seen product revenue growth accelerate over the last 12 months. Maybe talk to us about the delta in those two pieces of the business and why haven't we seen the services acceleration sooner? And what is driving acceleration next year? Keith Jensen Yes. So a quick accounting lesson, Sorry, very - so we recognize product revenue upfront. You sign a contract that you typically has product and services, inside the contract or inside the invoice. The product component is recognized as revenue immediately. So you're seeing it immediately. The service component is recognized over the term of the service contract. It can be 1-year, 2-year, 3 years, 5 years, so you're getting it recognized ratably. So you're always going to have a lag, if you will, about that. I think that lag becomes more pronounced in an environment in which we're having price increases. So those price increases, just like product revenue itself, price increases showing up in the product revenue line much, much faster, if not immediately. And that same price increase is also increasing services. But again, you're seeing the lag and that's going to be recognized over time. So there is always been a bit of a lag, a little more pronounced now because of the pricing increases. And I'm going to guess that Peter wants to talk about our short-term deferred revenue. Peter Salkowski You ran my mind. Two things on the products that are also driving product revenue growth besides the price increases. Earlier - year-earlier comps matter for product revenue growth, right? Because in-period sales. So if you go back to the mid two quarters of 2020, in the second quarter, product revenue growth was 11%, in the third quarter it was 13%. So in 2021, when it becomes 40% and 50%, that's off easier comps and also of smaller numbers because service is only 40 - our product is only 40% of my revenue. Services is over 60%. So it's a bigger number. And then the other thing that had an impact on product revenue growth in the last 12 months is we bought a company in closed on September 1, 2021, called Alaxala, which is a networking company based in Japan that does about $130 million, $140 million in revenue. We paid $75 million for it. But it's mostly product. There are some services, but it is a networking company. So it's going to have a bigger impact on product than it is an omni-service. So you have to factor those things in when you start looking at the product revenue and the service revenue dealt. The other thing about services revenue, and there is a great slide, Slide 36 in our investor presentation, for those of you who want to go to the website and you're all linked it anyway tied into the network here. Slide 36 will show you that for the last six quarters, our short-term deferred revenue has accelerated from 20.5% growth in the fourth quarter of 2020 to 31.3% growth in the past quarter. That's almost a 12 percentage point increase over a six-quarter period of time divided by 2, it's about 2 percentage points a quarter of acceleration, ending at 31.3% this last quarter, the highest that growth rate has been in 6 years. Not since 2016, we were a much smaller company in 2016. So that growth is sitting there. The price increases for services are sitting on the balance sheet, they will flow into income, eventually based on new and the accounting loss and again. Based on the accounting lesson, that revenue will show up on the income statement over time, which is why we guided to an acceleration in services revenue growth into the back half of this year because you can see it on the balance sheet. Now we had a similar phenomenon happened a couple of years ago when we took 8x5 pricing off the pricing list and moved everybody to 24/7 security - that took over 2 years for us to stop talking about what percentage of billings or revenue were coming from 24/7 versus 8x5 before it leveled off and got to a steady state. And the difference here in service and price increases is we've added price increases over time, that contracts that got sold a year ago and we have one price increase, but we've had more than one pricing. So we're going to have renewals going on for years that are going to capture these price increases over time. Gabriela Borges And leads into the forward-looking question on how to think about normalized product revenue growth? There are industry estimates for single digits. You're gaining share within the industry. Help us bridge some of the moving pieces to what you think normalized product growth could be going forward? Keith Jensen You want to talk about 2023 guidance? Peter Salkowski No. But you could talk about backlog as being a visibility maybe 2023, maybe 2024, whenever that rolls off. Keith Jensen Yes. I think as we look - we've given the mid-term guidance are comfortable with it. And as part of that process as we go through the exercise of - again, we believe that we're in a very fragmented market space where there is significant opportunity. We continue to believe that with third parties say about us that we have a competitive advantage. And it's really a matter of how you add the sales capacity and the pipeline numbers within that margin framework that we've provided and making sure that you can continue to do that. We have historically taken market share. And again, I would point to the ability of the team to execute as well as a product advantage. When you look back at that mid-term guidance and what it implies for market share, you're talking about TAM is going from $130 billion to almost $200 billion. It's really less than about 1 point of market share in those numbers. So I think we feel very, very comfortable look at it. As we kind of bridge more near-term and how things may happen, I imagine that internally, we're doing much the same thing that investors are doing, which is a bit of a sensitivity analysis of looking at that backlog and when might it roll off and when it does roll off, roll off, meaning when does it actually ship and convert to billings and product revenue and deferred revenue, what is that going to do for the growth numbers as we - and what period will it happen? I think it's very early to actually pick a quarter or a year even. And when that may be, obviously, when we give guidance in early February of next year, that will be a component of that. As we look at what 2023 may offer I think that the product revenue component of that is important. I think also the service revenue component that Peter talked about is important. I think on the - there is going to be some FX, if you will. We've had a very good year margins from FX. We will be interesting to see how the dollar plays out. We've lapped the Alaxala acquisition. So there'll be some puts and takes in there for people as they go through and provide some of their modeling. But I think net-net, we feel good about the execution of the company. We feel good about the macro environment as it relates to cybersecurity. Peter Salkowski Yes. It's been an interesting 2 years since COVID. There is been a lot of things to sort of navigate around in terms of supply chain and just not being able to ship anything out of Asia because the airports were closed and there was no boats leaving the ports. And now it's going to be supply chain for the next period of time. Just to level set for those that don't know, we did give a medium-term guidance model back in May. We said we'd get to $10 billion in billings and $8 billion in revenue by the end that represents in both of those cases, a 22% CAGR growth from the end of this year to the end of 2025. Gabriela Borges I'm going to ask one more question on margins, and then we can pivot to the audience. So please do raise your hand if you have a question. We will get a microphone to you. On the margin guidance and the longer-term margin guidance specifically, give us a sense of how to think about incremental puts and takes to margin leverage from here. And then maybe just a little bit of a commentary on how you're thinking about sales capacity assumptions and sales capacity planning? Keith Jensen Maybe starting with the sales capacity because I think the is a key input to the process. We obviously track sales productivity numbers and sales capacity and how long it takes salespeople to become productive or accretive. And part of that is also bifurcating our sales team between channel people and enterprise people. Channel people tend to not be as far along on the compensation curve yet. And with that in mind, it's very much a process in terms of making channel sales, they can become accretive to margin very, very quickly. Enterprise salespeople, you may be looking at something that 6 months, 12 months, 18 months in duration, and a higher compensation. In some ways, as we look at margin, what we're doing is we're subsidizing the growth and the expansion with the enterprise sales force with these accretive channel people as we look forward at it. And then in terms of margins and where it could go in the future, that's the natural conversation that we have frequently between market share gains and margin. We've done very well historically for the last 4 or 5 years of talking about 25% margins in various context. Very early on, it was 25% margin, was a target that we wanted to reach. And as we approach that, and we started to see the richness of the business and the execution, we started talking about the ability to average 25% margin and maybe a floor of 25% margin. I think in some way, shape or fashion as we continue to go forward, and you see it in our mid-term guidance, we like that conversation. What it allows us to do is give some predictability to the model. but also reinvest back into the growth engine in the go-to-market into the sales capacity into the pipeline dollar amount in excess of that. Frankly, we talked about balanced growth and profitability. And it's been a balanced growth and profitability conversation for several years with a balance or a bias towards growth. And I think you've seen that in the numbers. Peter Salkowski Just again, model sense as we gave the guidance, what we said for the mid-term model is averaging from this year through 2025. So, 4 years of average of annual numbers, we would average at least 25% non-GAAP operating margin over that period of time. Gabriela Borges Questions from the audience. Unidentified Analyst Hey, guys. I guess a question for the service provider market. I understand it's a pretty big part of the SD-WAN strategy. And I remember even back in early 2021, you guys released a lot of big partnerships with AT&T and the like. I guess - just given that metric has been relatively flat as a percentage of your overall business, what would you have to see incrementally kind of confidence that movers continuously go up? And is it about deepening the relationship is there some strategic component that could be but helping drive that number. We will have to have any color there? Thanks. Keith Jensen I think the question is what are we seeing in the service provider market? And what may SD-WAN do to the service provider market? If I'm saying it correctly back to you. Keep in mind, the service provider market for us, with us as an international company, it's a very broad market, if you will, not just in the U.S. I think that historically, our success in the service provider market has always started with Europe, whether that's selling to them for their sell-through or sell into their infrastructure, and we continue to see that. As we look at SD-WAN specifically, there, again, I think that you're looking at a business model or a sales use case with MPLS fees that makes a ton of sense in the U.S. as well as internationally, but I think it resonates more in the U.S. And what we want to see there is the ability to take within the service provider market, take market share away from some of the incumbents that are currently providing SD-WAN technology and replace that obviously, from those incumbents with our own technology. Peter Salkowski It also plays into the SASE strategy, right? We're building out some of our own pops to build our own sort of - for those enterprise customers that aren't going to go through the service provider and use an MSSP sort of framework that are going to want to go it alone because you're always going to have those. We've built out and are building out some of our own points of presence, if you will, to do that. But we do think on a going-forward basis for SASE for the SD-WAN. The real - the way to run that is to go through their existing networks and their existing data centers, if you will, and leverage their infrastructure. as opposed to building out 150 or 200 or whatever it is, number of pops are on. Gabriela Borges Alright. Peter Salkowski Anybody else? End of Q&A Gabriela Borges Thank you so much. Thanks, everyone, for being here. Thank you especially to Keith and Peter for taking the time this morning. We appreciate it. Keith Jensen Thank you. Peter Salkowski Thank you.