Call Start: 12:50 January 1, 0000 1:25 PM ET
Fortinet, Inc. (NASDAQ:FTNT)
Barclays 2022 Global Technology, Media and Telecommunications Conference Call
December 7, 2022 12:50 ET
Company Participants
Peter Salkowski – Vice President of Investor Relations
Ken Xie – Founder, Chairman & Chief Executive Officer
Conference Call Participants
Saket Kalia – Barclays
Saket Kalia
Good morning, everyone. Welcome to day 1 of the Barclays TMT Conference. My name is Saket Kalia. I cover software here at Barclays. Very happy to have with us the team from Fortinet. We’ve got Ken Xie, Co-Founder and Chief Executive Officer. We’ve also got Pete Salkowski, Head of Investor Relations. We’ve got about 30 minutes together. Maybe what we could do just to frame this is we’ll spend maybe 20 or 25 minutes just with some fireside chat here with the team.
And then I’d love to make this interactive. So if you have any questions, just pop up your hand, we can have a mic run around and would love to make the best use of these guys’ time. So maybe with that, Ken, Peter, thank you so much for the time.
Peter Salkowski
Okay. Thank you. Happy to be here.
Saket Kalia
Absolutely.
Peter Salkowski
Quick Safe Harbor?
Saket Kalia
Please do, Peter. Yes, absolutely.
Peter Salkowski
There is — look at that top on the screen. You can all read that at your leisure, please do. Quick apologies, Keith Jensen, our CFO, is home with flu today and so he won’t make it, unfortunately, so I’m filling in for him. And I’m not going to read that completely. You can all read it at your leisure. It’s up on our website. I’m sure in many, many places. So we’ll just turn it back to you.
Saket Kalia
Absolutely, yes. Absolutely. We wish Keith a swift recovery there.
Saket Kalia
Ken, I’d love to start with you. I was wondering if you could just talk about some of the points from last quarter’s results that you were particularly proud of. And Peter, maybe for you, maybe you could just help us fill in some more of the financial detail just to help level set us all as we dig deeper into the business.
Ken Xie
Thanks. Like 3, 4 areas, we feel we’re doing quite well, much better than any other competitors. One is the SD-WAN and the OT is still growing very, very strong. So the SD-WAN growing like 45% year-over-year. Now probably about 15%, 16% of the business now, continue to grow very, very strong. I do believe SD-WAN market itself will keeping — grow like a 30% year-over-year in the next 5 to 10 years. At the same time, we’re gaining market share there because compared to a few other competitors, whether Cisco, VMware, HPE, Palo Alto, the AllComp [ph] acquisition and also their product also cannot integrate with their existing products.
And also kind of way behind on the function and the performance. OT also, I believe, will be a bigger market than SD-WAN. So we have about 10% business in OT, grow 75% year-over-year. Also, very, very strong growth. Eventually will be a much bigger market than SD-WAN. Also, we started to more invest in the enterprise sales. It’s quite different than the strategy we have already there is more focused on channel. So enterprise sales need direct marketing, direct sales force. So we’re happy — like last quarter, the enterprise sales like a Fortune 2000 company almost double year-over-year.
And at the same time, the deal over $1 million grew 85% year-over-year and the dollar value was more than double. So you can see a lot of bigger deal, big enterprise that in kind our — become a focused new growth area. So we still have a small percentage come from enterprise but I do see the momentum very strong and also the pipeline also very, very strong this quarter. So we feel it’s a pretty strong position to keeping — gaining market share.
Saket Kalia
That’s great.
Peter Salkowski
Yes. I think just to add on the deals over $1 million. We had a record quarter for deals over $5 million which we haven’t really spoken about in the past. So just to kind of give you a sense. And then I think the other thing to be interesting that I think, the Street was waiting for over the last several quarters is service revenue. You’re starting to see service revenue growth accelerate. I think we were just over 28% this last quarter. I think our guidance for the full year implies about a 29%-ish growth for service revenue in the fourth quarter. If you go back to earlier in the year, I think there was some concern that we weren’t seeing the price increases showing up in services revenue.
As we’ve been trying to point out is if you look at the change in short-term deferred, it gives you a sense of what’s going to happen eventually in the service revenue because the income statements are backward looking, a number in terms of services. And so I think seeing that starting to show up in the income statement, I think, is something that I think can give people a little more comfort.
Ken Xie
Yes. One more point, really. Right now, it’s the first time we called enhanced technology which is the FortiCare sales is about 1/3, the first time over 30%. So that part grew 45% year-over-year and will continue growing because it will come from consolidation, also the strong position in the fabric which will automate integrate together because most products, we have only — we traditionally call the fabric or enhanced technology internal developed which gave us better integration from day 1, better automation from day 1 compared to pretty much all the other competitors, they all come from acquisition to build something beyond their core product. So we have all for the U.S. integrated a lot of function but also the fabric some additions in the product or design most of these are internally to automate way much better.
Saket Kalia
Well, there’s a lot of fun stuff in both those comments that I would just love to dig into but maybe another place to dig into with you, Ken. I mean you’ve been in the security industry for decades now. You’ve seen different cycles come and go. And we’ve had a couple of healthy years of product revenue following COVID which kind of supported the idea that there’s been a refresh cycle or a catch-up cycle, whatever you want to call it. I guess the question for you, Ken, is where do you think we’re at in that cycle? And how do you think it looks going into ’23 from an industry perspective?
Ken Xie
I believe ’23 will go back to normal before pandemic which the product revenue grow probably between 10% to 20%. I’m not giving any forecast just since we’ll be going back to a little bit more normal. Because if you look in last 2 years, there’s 2 things driven some product revenue growth. One thing is the supply chain issue. So we somehow managed little bit better than other competitors because we have own operational manufacturer kind of more under own control and also, on average, we keep about 6 month’s inventory.
So when the supply chain issue happen in Q2 last year, we have no problem for Q2, Q3 which also grow like 40%, something like that. And then Q4 is the first time — and also, we are the only security company to disclose that we’re working some backlog issues because majority backlog also come from FortiGate. So now the scenes are different now. So that’s why starting last quarter, we feel the backlog information probably a little bit misleading now too much information because the majority of backlog I’ll kind of go back to the switch and routing our AP which is more manual related no longer is a FortiGate.
And at the same time, in the backlog no longer growth starting to flat out or even going down now. So that’s a few — but if you look at overall space, they do have the traditional firewall continue to refresh every 4, 5 years because just like any other network device after 4, 5 years will be too slow. But network security try to address the market much more beyond security — a traditional security firewall. And it’s really go to the one side, like SD-WAN, like the 5G and also OT security.
And also go internal — to the internal segmentation and also go to the cloud. All this is much bigger than the refresh. So if you refresh really not much material to us. Even it could be a little bit slow down. We do see in the last recession in 2000, 2008, some customer may delay purchase of some of the traditional firewall. But because right now, they address so many new issues, like we say SD-WAN — actually SD-WAN costs from I have to say about 40% to 50% cost if they deploy SD-WAN today.
And that’s also — we have a press release actually this morning, it’s a study by Forrester. That’s where — there’s a few big enterprise customers from their study, they show the ROI will be 300%, the payback period to deploy our SD-WAN solution — pretty much, yes, exactly. So that’s where it’s more cost saving for the customer even during the recession. We also can consolidate a few different solutions into a single box. And so that’s really more benefit to the customer even during the recession. So that we see as a huge opportunity to continue to drive the product revenue growth.
Saket Kalia
Got it. Got it.
Peter Salkowski
I think, Saket, the interesting thing, everybody wants to try to figure out what product revenue growth is going to be in 2023. It’s been the number one question that I get repeatedly over the last several weeks. I think one of the things to think about is just the operating system. At the end of the day, what drives our — one of the things that really drives our business is the ability to have multiple different capabilities built into the operating system.
So when we talk about things like single vendor SASE which is the press release we had about a month ago, that didn’t get a lot of press or Universal Zero Trust Network Access. What we’re talking about there is the ability to deliver in multiple different form factors, whether it’s on-prem, in a software form factor or in the cloud and across multiple different capabilities all built into one operating system. And so that gives us a lot of different growth drivers, whether it’s SD-WAN or OT or Zero Trust or SASE or whatever, typical firewalling, if you will, let’s go back to the basics.
The operating system is what allows us to do that and the robustness of that operating system, the fact that it’s primarily been integrated and created in-house by our own R&D development group which, by the way, we have 3,000 R&D people in our company and about 2/3 of those are software engineers writing that software, really gives us an advantage to integrate and provide a single platform across any of those different points of the attack surface and in whatever form factor the customer wants.
So what that does, the product revenue growth in ’23 versus ’24 versus ’25, the drivers are really that operating system and its ability to provide those different capabilities. And the long-term drivers which I’m sure we’ll talk about repeatedly today is convergence and consolidation. The concept that security and networking are getting closer together and the concept that companies have too many point products and they are looking — you’ve heard that over the last month through all of the different cybersecurity companies that have reported since their October quarters, they’re all talking about consolidation, right? They’re also talking about profitability and growth which we’ve been talking about for years but you’re hearing those same messages being repeated by others.
Saket Kalia
Yes, absolutely.
Ken Xie
Yes. One other interesting area is customer and also even partner starting to inquire us already in the last 2 months has never happened before, was the power consumption of the product. So that’s we’re starting like the last earnings call. I think maybe a few weeks ago, when we started also this call, every new product what’s the power consumption. So we will be able to save over 80% energy power consumption coming in, that’s average compared to other competitors.
So that’s where — that’s on the system level. In the chip level on the FortiASIC chip for the same secure computation compared to general purpose CPU, that FortiASIC chip can only use like 2% to 3% of power consumption. So that’s also a lot of our service provider, cloud provider like that idea a lot because the power consumption probably the biggest cost for a lot of cloud computing, for a lot of other things. So that’s where the technology we spent more than 20 years to develop. Eventually what we also not only increase the performance and also can add more function at the same time as much lower power consumption. So that’s starting to get pretty interesting for a lot of our customers.
Saket Kalia
Yes, absolutely. I mean if I kind of take what both of you have talked about here in terms of the OS and the power consumption, really, the way that I would summarize it would be additional value for performance that you guys have consistently provided, right? And listen, given the supply chain constraints, I think, industry-wide, I think that most firewall — probably all firewall vendors, right, have responded to sort of those increased component costs with price increases of themselves — price adjustments.
Maybe for you, Peter. Can you just remind us what those pricing actions have been over the last year or so? And you talked about the revenue piece. I’m curious if you can talk just about how we should think about trickling that — how should we — we should think about that trickling into billings as well? Does that make sense?
Peter Salkowski
Yes. I mean — so we did 2 price increases in 2021, one in August, beginning of August, one at the beginning of November, combined those — we disclosed those as being in a total basis — on a gross basis of 12%. We’re probably not somewhere in the 4 — 5% to 5.5% net back to us in terms of those price increases. We’ve done 3 additional price increases in 2022, one every quarter, not as big as the first 2 but additional price increases.
Basically — and the reason for those price increases have been to offset cost increases, right? The expedite fees we’ve had to pay for getting supply, the higher transportation costs that we’ve had to pay to get things shipped to us quickly as opposed to sending them by boat across the ocean. And so really trying to maintain our product gross margin. And if you look at the numbers, I think we’ve kind of stuck in the low 60% range which is kind of where product margins have been for a long time.
So we are — we have been able to so far offset those pricing — those cost increases with our price increases. The thing with the income statement and kind of going back to my service comment earlier is the price increases for products show up immediately, right, they’re sold in periods. The service revenue or the services are sold as a percentage of products. So the price increases are showing up and are getting attached to the services.
The difference is they get deferred to the balance sheet and deferred revenue before they ever show up in the income statement. And so you’re starting to see the benefit this year, certainly in the second and third quarters, you’re starting to see the benefit of the price increases showing up on the services line. But you can really see it if you look at the short-term deferred. If you go back to the fourth quarter of 2020, the growth in short-term deferred on a year-over-year basis was 20.5%. Seven quarters later, it’s 31.7%. And so you’re seeing the price increases showing up on the short-term deferred, you should start to see that flow into the income statement at some point.
Saket Kalia
Got it. Got it. Ken, I’d actually love to — I’d love to move to the SD-WAN market, right? Because you’ve obviously disrupted the SD-WAN market by bundling this with the firewall. And I think that goes back to the benefits of the OS that you called out earlier. Maybe the question for you is how much room is left for adoption there? And are there any different approaches that you want to take with the SD-WAN business, open ended, in 2023, if at all?
Ken Xie
The Secure SD-WAN feed out, we call the convergence of networking and security quite well. So SD-WAN actually is not the first networking function we tried. We actually — 15 years ago, we also try to secure WiFi. But at that time, maybe when the WiFi market go too quick or we’re too small, so we did not make much impact. So we’re also starting to develop the secure SDN eventually also benefit a lot of Secure SD-WAN.
So last, we started to release like 5, 6 years ago and then quickly gaining market share because whether the competitor most come from acquisition which is much slower on innovation other things. And also, we have perfect timing to go to the market. So we are large enough starting making the impact in the space. So I do believe long-term wise, SD-WAN will be replaced majority of the routing. And at the same time, we’ll be continue to, like I mentioned, grow like 30% year-over-year in the next 5 to 10 years. And at the same time, it’s moreover a fragmented market. We do believe we’re keeping — gaining market share. So we are now in probably number 2, number 3 in the space but you can look at the number 1, number 2 and other top 5. We’re the only one internally developed and internal integrate together. And it’s the same OS system is the leader in both SD-WAN market, in the network firewall market and also part of the SASE, some other solution there.
So it’s the integrated single solution, single box single-wire solution has a huge benefit to customer. And that we see the huge value we can provide to customers drive a lot of strong growth. Even like today’s press release, there’s a lot of customers, they see the huge benefit of using the Fortinet SD-WAN.
Peter Salkowski
Yes. I think Ken made the comment — used the word in his comment there that I want to reinforce and that is SASE, right? Gartner’s definition of SASE has changed over the last 4 years since they’ve kind of talked about it as a definition. And about a year ago or so, they started talking about as a hybrid cloud solution, right? Initially, they said that all cloud delivered and they realize that some — first of all, the companies aren’t ready to go all cloud. I don’t think they ever will. I think it’s going to be a hybrid cloud world for a really long time. And so Gartner changed the definition of SASE, say some of these things need to be delivered on-premise. Some of these things can be CASB and WAF are cloud-delivered security. So they have to be delivered in the cloud. But they’ve changed the definition again recently to be SD-WAN plus Secure Service Edge, right?
SD-WAN is the delivery method for the data throughout the SEC, throughout the secure service edge. And owning that real estate, call it a bottleneck, if you will, you kind of look at it as the cloud on-ramp, right? The SD-WAN is what’s delivering the data to the cloud and receiving the data back from the cloud. And so owning that real estate, kind of being in that bottleneck position gives us an advantage. We can follow the data back to the data center out to the cloud, wherever it goes but we’re directing the traffic.
We’re controlling where the traffic is flowing. So we think that’s really important. And then having an operating system that can provide all of these capabilities of the SASE solution within one operating system, not only becomes attractive to enterprise customers, it becomes really attractive to service providers because at the end of the day, service providers want to provide a SASE solution to their customers but they want to provide it from one operating system. They don’t want to have to go out and buy CASB and WAF from one vendor and SD-WAN from another vendor. And then all the other different components of SASE from other vendors and having to cobble it together. They want one solution. They want one operating system. And so having a single vendor SASE solution which is what we’re talking about, is extremely important to them.
Saket Kalia
So I mean, it couldn’t have teed it up as cleanly as that. I mean, maybe for you, Ken. I mean, I think SASE’s been very topical in the industry. How do you think about Fortinet’s SASE initiative in 2023? I mean certainly, we nearly own the SD-WAN market, certainly in the firewall. What else do you do — does Fortinet need to really have a full SASE solution? And how do you make that more well known, I guess, from a marketing perspective?
Ken Xie
Put it in this way, a secure service or security for a lot of service provider will continue to be one of the biggest markets in the cybersecurity space. But a lot of service providers, including other telecom companies, they’re a little bit behind in the last few years, say within the traditional firewall VPN service. So they’re not — can go up additional service like whether the CASB the sandboxing, some WAF, some other service. So that’s traditionally like a service provider count about 30% or more of business if you look back to 30 years ago, not — 10 years ago. So that’s where we do believe the service provider business will keeping — coming back but they do need to offer additional service beyond the traditional firewall VPN. So SaaS is a good example. So they are a much broader service as a service model. But for SASE itself, I feel the technology is still not quite mature enough. So they need to be more distributed because if you look at some SASE provider, they can — they have a 100 PoP worldwide. So customers have to forward their traffic to their PoP being processed and then sending back. And then within their PoP, they have quite a lot of different systems, 100 different security functions.
Some do the traditional networking firewall VPN, some do like CASB, some do sandboxing or WAF, it’s efficient across all these multiple box within the PoP to process all secure computing there. So for us, I do believe a SASE function just like some other traditional security service, they need to be offered in the same OS, in the same system and to be very efficient, integrated together because a lot of different SASE service, they are not well integrated. Like SD-WAN different box compared to the traditional security compared to all the CASB, some other centers, right? So if you can integrate in the same OS and then use the same system, they can be more distributed and be more efficient and also reduce all the latency and better performance. But as I see today’s SASE using — provided by some SASE provider is not quite mature, they need to keep it improving. So that’s where starting like a few years ago, we do promoting our own SASE should be developed in the same OS using the same system and will be more easily to be distributed and to be managed by a lot of service provider, even some customers they can manage some of themselves. So that’s where we continue to invest in this area.
Like last year, we first released FortiOS 7.0. We’re building out the SASE and ZTNA. Also, this year, we keep improving the 7.2 for the OS, out of SASE, ZTNA, all the CASB within the same OS. And some of the function already using ASIC to accelerate, some function not yet still using the general purpose CPU. But give us a few more years where we have most function being accelerated by the ASIC will be much better performance, low cost. At the same time, it will be more easy to deploy. So I think the market will continue to evolve in and I do believe long-term service provider including a lot of cloud providers like whether Microsoft or Google or whatever, they can easily jump into this market because they have the infrastructure. They own a lot of data centers, a lot of PoP. They can easily turn this on compared to some other SASE player today.
So they have some advantage. We are more prefer to partner with this kind of bigger cloud provider telecom company. So that’s also instead of competing with them for the customer which using their infrastructure which they have cost relation, we would rather promoting together the solution with them and also develop a core technology which we are very, very good in the grid OS, using ASIC to accelerate and also better security service, helping them to provide service to customers. That’s where we continue to invest a lot in this area but will be more integrated and more kind of use the ASIC to accelerate and eventually more leveraged service provider instead of more approach ourselves.
We do have a lot of PoP in ourselves but I do feel this is not a long-term solution. So that’s where we leverage the infrastructure from telecom, from cloud providers will be much more efficient and also SASE has to be more distributed and more in real time, more push towards the edge instead of all this kind of go to the power process and back and forth, multiple systems. So it’s kind of need to be the architecture not mature enough.
Saket Kalia
Very interesting. We’ve got about 7 or 8 minutes left here. I’m going to shift to some financial questions here. But before I do that, any questions here from the audience? Peter, maybe for you, I want to jump back to Q3 results where Keith also provided — Ken and Keith provided a Q4 guide. And it certainly came through. I think we considered a bit of macro uncertainty here. I was wondering if you could just walk us through your approach to setting that Q4 guide anecdotally, right? And maybe any detail you can provide just on the macro assumptions embedded in that guide? How you thought about it, just given all the uncertainty that we have right now?
Peter Salkowski
Yes. I mean I think the change that occurred, if you look at the guidance we gave from a billings perspective for the fourth quarter, it’s interesting. If you look at the guidance that we gave, pretty much every number went up in terms of revenue, margins. The only one that really changed was billings which is a forward-looking metric. And if you look back to when we gave guidance for the third quarter on the second quarter call which would have been in August versus the November call for the third quarter and then giving explicit guidance for fourth quarter.
The reason billings came down slightly was really concerns about macro in the sense that if looked just our $1 million deals, right? We just talked about how successful we were in the third quarter, 153 deals over $1 million. In the fourth quarter last year, it was the first time we went over 100 deals over $1 million. So think about that. But as we look at the fourth quarter, what we were seeing is a lot of deals over $1 million which is great but at the same time, looking at sort of the progression of those deals through the sales cycle, they seem to be going slower than they have been in the past.
And then having conversations with the sales — head of sales and the sales teams, the conversation being that we’re very confident in the fact that we have these transactions in play. We just don’t know if they’re going to close in the next 2 months. right? Because to land in the fourth quarter, you got 2 months, right, from November to the end of December. So we took a little bit more of a conservative approach with regards to where we think the number of deals that will close over $1 million. And that led to, I think, a 3% decline and what the billings guidance was. We went back and looked because we didn’t show this on the earnings call but went back and looked after the call and said, well, how many deals are in the pipeline for over $1 million as of October 1, right? Sort of a snapshot that potentially could close this quarter. They will all close, that never happens, right? But just what’s in the pipeline, what’s happening and then looked back to the same snapshot a year ago.
If you look at just the number of deals over $1 million, the number of deals is up 50% year-over-year in terms of deals over $1 million sitting in the pipeline as of October 1 that potentially could close. And the billings on those deals are up 60% on a year-over-year basis. So we’re seeing the transactions. We’re involved in these as possible deals to close but they are getting longer scrutiny. They are — more scrutiny, longer times to look at it. And I think companies are just — you’re not going to say, oh, we’ll give you a 2%, 5% discount and they’ll close on you. That’s not the way they operate. They’ll close when they’re ready to close, when the customer is ready to sign some of it. So I think taking a more conservative approach on that is what really led us to lower our guidance.
Saket Kalia
I think that’s a really prudent approach and a really interesting tidbit there just on the $1 million-plus deals. I mean, Peter, just to stay with you because it’s funny. It’s always the forest in the trees, right, when you’re thinking about a business included. We’ve talked a lot about the trees. I want zoom out in the forest a little bit, right and just talk about some of the medium — the medium-term financial targets. Maybe just for the benefit of the group, can you just recap what some of those medium-term financial targets are? And then I’ve got a follow-up on the back of that here for Ken.
Peter Salkowski
Sure. So we had an Analyst Day back in May. We reiterated these numbers on the earnings call in November. We said the medium-term guidance is for 2025. So we’re guiding to $10 billion in billings for 2025, $8 billion in revenue at — greater than or equal to average 25% non-GAAP operating margin over that period of time from 2022 to 2025. And adjusted free cash flow margin in the mid- to high 30%. Those are the numbers we gave.
Saket Kalia
Got it. Got it. Ken, maybe for you. I’d love to think about the profitability here. I mean, even to Peter’s point, just the margin target of 25% plus through fiscal ’25. I think Fortinet has done such a great job of actually outperforming that through this time. So maybe the question for you is, how are you thinking about investing in the business and sort of balancing top line growth with margin expansion going forward?
Ken Xie
I think we always want to keep a healthy margin. So we feel 25% above will be pretty healthy margin. And also company has been GAAP [ph] profit since the IPO 13 years ago. On the other side, if you consider the space still, however, fragmented space, we do have a very good technology, we can keep in gaining market share. So that’s what we also need to invest in some of the growth. Like I mentioned earlier, for the enterprise sales, sometimes they take a longer sales cycle, average maybe take about 12 months to see some good return there.
So that’s where we need to continue to invest. That’s where compared to a few other competitor in the space, some of them probably just more of our growth, almost no profit on the GAAP [ph] base. Some other maybe to profit has no growth. So we want to have a little bit both healthy margin and maintain above market growth. So that’s the strategy we have been doing for the last 20 years.
Saket Kalia
Yes, absolutely. Absolutely. We’ve just got another minute or so left here. One of the questions we’re trying to ask all of our companies here at the conference, just given all the uncertainty around macro is — and I’ll — maybe Peter, I’ll direct this one to is a little bit more financial. What percent of your annual billings, revenue, whatever metric you want to speak to comes from new logo business? And can you talk about how that new business has performed in prior recessions?
Peter Salkowski
So new business is about 10% in the quarter. So I think this last quarter, we added somewhere in the range of, I think it was 6,100 new customers in the third quarter. Obviously, a lot of that’s going to be at the SMB level when you have that magnitude of new logos. Certainly, some of those are going to be an enterprise level as well. They represent about 10% of billings. The interesting statistic from a going forward perspective, if you look at the service revenue, for example, if you look at the percentage of deferred revenue in the fourth quarter — the third quarter that came from new customers, it represent — well, any — wouldn’t even be new.
Any service contract that was signed in the third quarter would have captured all of the price increases we’ve done over the last 5 quarters. And I said earlier, we’ve done 5 price increases over 5 quarters. Only 10% of the deferred revenue that would have been signed in the third quarter actually has all 5 price increases. So other service contracts that are sitting in deferred revenue that haven’t come into the income statement, either a 4, 3, 2, 1 or could have no price increases in it yet because it takes — our average contract length is 2.5 years. So we have contracts still sitting in deferred revenue that don’t have any price increases in them. So as they come up for renewal over the next 1.5 years, they’ll have to catch up to those price increases.
So that alone should help drive our service revenue on a going-forward basis. But to the point to your question, about 10% is from new logos. And so that’s kind of what’s represented in the deferred revenue today.
Saket Kalia
Got it. Last question we got one an e-mail just through the webcast. So — and maybe, Ken, I’ll direct this to you. Particularly some of the companies that have reported in the last week or 2 have kind of called out weakness in small medium business or softness in small medium business. Any comments that you’ve got just on the health of small medium business?
Ken Xie
The small medium business still have a pretty small percentage have a network security solution there. Go through our channel partner, we still see pretty strong demand in there. Especially right now, a lot of runs and we’re starting to target some small medium business. Before its bigger company now they’re all going down. So that’s where we see there’s a pretty strong demand [indiscernible].
Peter Salkowski
Understood. I think one just last comment on that because that certainly has come up in the last couple of weeks here with some of the companies reporting. We have a very diversified business model, right? 50% of our billings come from 100 countries, not one of which is 3% of billings. And a lot of that is being handled by the channel, right? We have a very diversified business model by customer segment, right, 1/3 large, 1/3 mid and 1/3 small enterprises.
I think by the way, on the SMB one, keep in mind, we define SMB as companies at or below $50 million in revenue. So it’s a pretty big company. We’re not talking the mom-and-pop shop in terms of that. So we do think there’s a lot of opportunity still in the SMB business. We provide a greater value to our customers than our competition does and we really leverage the channel to do a lot of that.
Saket Kalia
Couldn’t think of a better place to end, guys. Ken, Peter, thank you so much for taking the time.
Peter Salkowski
Thank you.
Saket Kalia
Thanks, Peter.
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