FTNT

Fortinet, Inc. (FTNT)

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Fortinet, Inc. (FTNT)

Morgan Stanley Technology, Media & Telecom Conference

February 25, 2013 4:55 pm ET

Executives

Ken Xie - Co-Founder, Chief Executive Officer, President and Director

Michelle Spolver - Vice President of Corporate Communications & Investor Relations

Nancy Bush - Interim Chief Financial Officer, Vice President and Worldwide Corporate Controller

Analysts

Keith Weiss - Morgan Stanley, Research Division

Presentation

Keith Weiss - Morgan Stanley, Research Division

Thank you, everyone, for joining us. We're very -- my name is Keith Weiss. I'm a member of the software team here at Morgan Stanley. We're very pleased to have with us from Fortinet, both Ken Xie, CEO and Founder; Nancy Bush, CFO; and also, Michelle Spolver from Communications.

Question-and-Answer Session

Keith Weiss - Morgan Stanley, Research Division

So maybe to get it started, given that this is also the week of our stay, you guys had some product announcements this morning, particularly around better technologies for addressing Advanced Persistent Threats. Maybe, Ken, you could talk to us a little bit about what you guys announced this morning, how that integrates into your existing product portfolio, and what it's really meant to do?

Ken Xie

One thing we see, nowadays because, obviously, every year, you see the security landscape in T.V. is changing, a lot of new threats, a lot of new technology. So we are announcing this morning is really the one that we call the FortiGuard Service which, actually, more than half of the revenue come from the subscription service, 40x is the base of that. So we are announcing we're starting to offer the sandbox in the cloud. So we do have the sandbox, the smallest sandbox version in the FortiGate is the device. That's where we set our price. [ph] Now you also can have some other sandbox function into the cloud, so basically, you can have some more like thoroughly simulation behavior or simulation outcome to go to the cloud to do all that analysis. Because what we do is different than some other companies, some other things really. A lot of time our plan itself, whether the firewall technology or IPS or our control they called the flow based or kind of connection based security. So that is where it only block whatever the connection of the flow there. So the sandbox is like the oldest proxy technology, they also analyze the behavior, all the simulations, and not based on the signature, and that's where it's very effective to detect this 0-day attack. So that's where we feel the technology we have market in that because there is also a lot of testing going on who is the most effective to detect the 0-day attack. Basically, because today, every day, we see over 100,000 new wires, new malware, new intrusion all come in, so it's very difficult to always develop the signature quick enough and also -- so that's where how to detect this 0-day attack will become a key issue today. And that's where using the sandbox thing, using the behavior heuristic analysis, we feel will be huge because that's all the traditional network security companies that are falling behind. And you see some new companies that are trying to do it in this area. So we feel it is a quite important announcement we made in this morning very -- all this kind of sandboxing analysis and behavior base. And also the testing going on like in few weeks ago, so they evaluate like in -- based in Europe, it's a bp 100 test, so that they do every month. So you've added over 30 companies out of the top 30 companies. So we're the only one, we scored over 90% on the 0-day attack. Basically, they announced all the -- they get you a box, hold for like a few weeks, which they lock it down. You have no chance to operate a signature [indiscernible] composition, and then they have all the new wires installed, the new malware coming the next few weeks to test against this box. So we're the only one, we came to over 90%. That's where the technology is different. You need to put in not only the traditional like a flow base or connection base, but there also had to be more behaviors 0-day data attack base.

Keith Weiss - Morgan Stanley, Research Division

The other announcement that you guys made today had to do with the NSS Labs giving you guys a recommended rating for your next-generation firewall. I think that's interesting for a couple of points. One of the pushbacks that I hear from investors, but also a perception that I hear when I talk to resellers is that Fortinet is a UTM vendor and UTM vendor means small, midsized businesses. So the question to you would be, to what extent is something like NSS Labs giving you the recommended rating and next-generation firewall help get you over that hurdle? And what other efforts do you guys have from, let's say, a sales and marketing perspective to overcome that perception that Fortinet isn't just about small, midsized business?

Ken Xie

Yes. I kind of agree, certainly, the UTM -- first, I'm more comfortable on technology areas, sometimes we don't do a lot of marketing like that, the other companies do. So that's where you can see the market usually the low-end, the SMB, whatever, they more look at what's the value they can provide. So if you have this box can have a multiple function, a better value, a better performance, they usually are quick ones to jump off because IT guys not only need to man the security, they also need to man network and lots of other devices, storage and all the other things. And then we're also doing well in the wire high-end, the carrier service provider, some school university because they tend to be more technical. They're usually testing the box themselves instead of just listening to some other marketing or some other message there. So that's where the reason we are doing extremely well in the low end, also in extremely high end. In the middle end, we're missing some of the markets so that's one thing we started improving is really working with NSS, working with those other third party testing research firms. They try to message, make sure they can see the value in the enterprise, how we can provide a more integrated solution because today's attack is no longer a single point attack. It's no longer the virus or the spam, the intrusion, the less [ph] countries all come back together, all the planet attack. So you have to work together otherwise, you'll have multiple parts that mostly come from multiple vendor, sometimes they are not working together, so that's more difficult to defend. It's a blended attack and also very, very costly because security is also what's the best most efficient way, because if you want 100% security basically cut up the line, no connection. But then you also lost all the value there, so that's where you need to have the device in the middle, not only to offer better security, but also make sure you're not impacting other infrastructure, make sure they can provide the best value and whatever you put in the money that you invest in there. So that's a few -- the message from -- and as I said, is really starting, kind of helping us to get into the bigger deal or bigger account, which we see a lot of improvement, and that's where we have the earnings actually. The deal we have on last quarter we report last year [ph] really, that the overall million dollar, we doubled that, that bigger deal and also the deal over half million, we grew 87%. So I think that's probably the effort we put in marketing. We also do with the dedicated team. That's helping, and we are still kind of a bigger gap compared to some of our competitors in the area. So how do you improve in the marketing, how to improve in some bigger enterprise like the investment, but we kind of get the message. We try to improve them quickly, so that will be the focus for this year, more invest into this area.

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