Fortinet, Inc.
Q4 2013 Earnings Call Transcript

Published: 30 Jan 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to your Fortinet Q4 '13 Earnings Financial Analyst Q&A. [Operator Instructions] And as a reminder, today's conference is being recorded. And now I would like to turn it over to your host, Drew Del Matto.

[Andrew H. Del Matto:]

Thank you, and thank you for joining us again. Ken and Michelle are with me here in our room at Fortinet. Before we get started, I'd like to note that all forward-looking statements made during the second call are subject to Michelle's early comments on the prior call. With that, let's start the Q&A.

[Operator:]

[Operator Instructions] So we will take our first question from Keith Weiss from Morgan Stanley.

[Melissa Gorham:]

This is Melissa again for Keith. This question is for Ken. I'm just wondering, the improvement in growth in the quarter, how much do you think that is related to an improving macro versus just an improvement in execution on Fortinet's part?

[Ken Xie:]

I think both improvement, it's difficult to quantify it. But I think the -- definitely have -- the hiring we made in early of the year helping on the growth. And also, I mentioned the inventory also. We have a better inventory control now, and that's also helping. The macro, we can see that the service provider also relatively better, but also, we see quite strong enterprise [ph] in some other sector as well. Also, Europe, you see probably not only Fortinet. Some other company also starting doing better in some Europe area so that we also have the same experience. That's pretty much all the contribution. It's difficult to see how much specific come from internal, how much will come from the outside. And I'm not sure, Drew or Michelle, if you have any...

[Michelle Spolver:]

Maybe that's fine.

[Ken Xie:]

Yes. [indiscernible] question.

[Melissa Gorham:]

Okay. Great. And then one question for Andrew. On cash flow, for Q1, you mentioned 2 onetime items

[Andrew H. Del Matto:]

Sure, Melissa. The first, I think we said $18 million to $21 million on the tax item. And then the other thing we flagged, which was probably -- and again, we're not giving FY '14 guidance, but we did flag the ERP, the fact that we're actually going to start building out -- scaling the company in the back office, which means a new ERP. And so that -- at some point, that will have some impact. And we can see some minimal impact to that in Q1. And again, not to get into FY '14 guidance, but that was more just a heads-up. There could be some impact there longer-term.

[Michelle Spolver:]

And the building cost was about -- estimated about $10 million.

[Melissa Gorham:]

And that's all just in Q1?

[Michelle Spolver:]

Yes.

[Operator:]

And our next question comes from Jayson Noland from Robert Baird.

[Jayson Noland:]

And just a follow-up on the CapEx, too. Can you bracket that for the full year at all? $25 million, $30 million, is that how we should think of the CapEx number for F '14 or hard to do at this point?

[Andrew H. Del Matto:]

I think -- yes, I think hard to do at this point, Jayson.

[Jayson Noland:]

Okay. A question on the hiring. It's pretty aggressive ramp. Are those people mostly already on board? Or are you still out looking? And how have those hires gone? Where are you finding people? Just any additional color there.

[Ken Xie:]

We more aggressively [indiscernible] over last year. You can see the high comp growth quarter-by-quarter. And then Q4 is -- compared to the earlier in the year, we kind of slowed a little bit. But I believe that the micro growth data centers, service providers, certain enterprise, vertical market, we probably were starting kind of hiring, but it's also -- like I said, it's also probably not quite as aggressive as we did 1 year ago. But it's probably where we still keeping hiring growth. So we kind of make sure that all seems better, because I have to say, early -- I mean, like in the first 3 -- after the IPO, the high comp growth is probably half or less than half of the top line growth, which are kind of starting to pay some tax in the last 1 or 2 years because it's kind of -- whether the service part or some other sales coverage part are kind of falling behind. Now we're starting to see the benefit, especially I mentioned in Latin America and in Canada, where we kind of hired some people about a year ago. We see much better growth. So we're keeping hiring but also consider -- seeing the whole things together, not kind of aggressive hiring but also kind of more reasonable keeping hiring and also growth in sync.

[Jayson Noland:]

It sounds like a lot of these new sales hires are focused on large accounts as opposed to regions or territories. Is that a fair assumption?

[Ken Xie:]

I think in the channel in some area, we have a good coverage at some of the vertical space and also some of the -- like -- something like a bigger data center or some other area that we see will be a good potential. So we probably need hands in that area.

[Michelle Spolver:]

Yes. I mean, I think that's in the future. If you look back in 2013, I mean, it was pretty -- it was spread out across the board, really. And then there was a focus on enterprise and large accounts. But from a territory standpoint or a geography standpoint, we made reference before. We also did a lot to beef up Latin America team and had a lot of hires there, too. So it's a little bit of both but with a focus on growing enterprise.

[Operator:]

And our next question comes from James Wesman from Raymond James.

[Michael Turits:]

So in some of the comments, I know you're not giving '14 guidance, but I just want to make sure I understood some of them. I think you've commented something about being able, at some point, to grow twice the industry rate, which I think you said was 6.5% to 7%. Does that mean you're only targeting 13% to 14% revenue growth for '14?

[Michelle Spolver:]

We're talking about -- right now, currently, it's 6% to 7.5%, so the opposite of what you had said. 6% to 7.5%. IDC at 6.5%, Gartner at 7.5%. We did make a statement that we think that those numbers are a bit conservative. I don't know exactly how conservative it is, but based on, I think, where the market is right now, they're probably a little conservative, because, again, remember, that was -- the entire market got cut last year. There was sort of a slowdown there.

[Ken Xie:]

And also, the market is, we say, is very bad. The total network security appliance is about $10 billion market size. So that's the market both IDC and Gartner point to there.

[Michelle Spolver:]

Yes, so Michael, to your point, I mean, I think you're saying, "So is that what the guidance is?" Is it 12% to 15%? We're not giving guidance, so it's hard. But we do want to -- we did want to give you some sort of a sense of what our goals are, I guess, for the year. So I would say, again, our goal is to outgrow the market by 2 or better. Where that market is growing right now -- sir, go ahead.

[Michael Turits:]

Okay. And then on margins, so you did 19% margins in 2013, and you're talking about 17% margins for '14? Is that right?

[Andrew H. Del Matto:]

Yes. We said 17 plus or minus 1 point on an annualized basis.

[Michael Turits:]

Annualized, meaning full year?

[Andrew H. Del Matto:]

Yes. I mean, even, James, just to say that, we were trying to get some level of direction, kind of more aspirational at this point. Again, as I've said, we're going to take some time to go look at where we really should set the bar. I'm just trying to get some sense of where we'd see kind of the lower side of it, I think, would be the way to characterize it, hopefully, in the 17 to plus or minus 1 range.

[Michael Turits:]

So do you think the floor is...

[Andrew H. Del Matto:]

We're not trying to set annual guidance for that number, quite frankly. We're just trying to give people sense.

[Michael Turits:]

Right. So that's what you think the floor might be. I mean, again, I'm sorry to ask it, but it's a big, big cut to talk about, 2 points of margin compression in the next year. So I want to make sure I understand what you're trying to message.

[Michelle Spolver:]

Yes, I mean, like I said, the problem is -- and I understand what you're trying to do, Michael. You have a model you need to build for a year, and we're giving you quarterly guidance. We could say nothing over a year or we could say something. So we're trying to give you a sense. So, yes, so 17%, we are saying our floor, 17% plus or minus. It could be 18% or it could be 16%. It will be somewhere in that range.

[Michael Turits:]

And again, I know you've talked about it, and I appreciate it you jumping in. If you talked, what are the -- just to really focusing on what are the 3 drivers of that margin compression? What are the big spending areas to drive that?

[Andrew H. Del Matto:]

Sure. Again, it's really investment in sales and marketing, primarily. I mean, on the sales side, we're expanding and improving our sales teams across geographies and verticals. It's just what Ken just answered just a minute ago. I think Jayson asked him a question to that. Marketing, we're also investing on just general marketing and lead generation really to improve the overall productivity of the sales force, but that takes some upfront investment in the near term. So we're accounting for that. There's a little bit of investment in R&D for new product and introduction. I don't think I mentioned this before, but there's actually a little bit of investment in support. Our customer base is growing, and so we need to make sure that we scale with that. And then I think the final thing I said on the -- was just some investments in G&A as well just as we scale the back-office part of the business to keep up with the growth of the company and be ready for the next level.

[Michael Turits:]

If I could ask a few more. Now to move on to free cash flow. So you talked about an incremental 1Q tax payment of $18 million to $20 million. So is that all cash taxes or is that $18 million to $20 million more than previous?

[Andrew H. Del Matto:]

It's all cash taxes.

[Michael Turits:]

That's your full cash tax payment? That's what you're paying cash taxes?

[Andrew H. Del Matto:]

Yes, for that quarter. Yes, for Q1.

[Michael Turits:]

And what was it -- what's the run rate? What's the change here? That $18 million to $20 million...

[Andrew H. Del Matto:]

I would think -- I mean, what I would be kind of willing to do here is I think from a non-GAAP perspective, I know that's not the question, but I'm going to start here, probably the right rate to model for now is 33%. I think that's been the rate in the past. We have -- what's driving the tax rate is actually that there's been a -- there's going to be a jurisdictional shift in income, which will ultimately bring tax rates down lower later. We probably won't see that benefit in the next year, unfortunately. What drove a little higher in Q4 was the fact that the estimates included a higher kind of income offshore, if you will, or higher in a lower tax jurisdiction, and that just didn't happen quickly as originally anticipated. And so that drives a little higher tax near-term. But longer-term, it offsets a more beneficial tax rate, but we won't see that probably in...

[Michael Turits:]

Cash flow is just really important here. So I just -- as I said, I just need to understand the cash tax.

[Andrew H. Del Matto:]

Yes, no problem.

[Michael Turits:]

So is this -- what would typically -- I guess I could go back into my model and back into where we were, but what are you saying about Q1 cash taxes relative to the run rate? So what would you have expected it to be? How much is higher and for what reason? And is that a one-timer for this quarter? Or is that the run rate for the year?

[Andrew H. Del Matto:]

I got it. So my understanding, James, is that we paid about $25 million last year. And so that was roughly $6 million a quarter. So maybe it goes up a little bit with the income. There's probably an increment of 10 to 12 in there, something like that. If I'm doing my math right, 11 to 12.

[Michael Turits:]

Right. So $25 million for all of last year.

[Andrew H. Del Matto:]

I'm sorry?

[Michael Turits:]

It was $25 million last year for all of cash taxes?

[Andrew H. Del Matto:]

Yes.

[Michael Turits:]

So is this boost from kind of a $6 million run rate to $18 to $21 million for the quarter? Is that a one-timer or -- just for this quarter? Or does it go back [indiscernible]

[Andrew H. Del Matto:]

Yes, we believe it is a one-timer, but again, we're not giving forward guidance other than on the nontax -- on the non-GAAP tax rate. We don't anticipate seeing it again, I would say that.

[Michael Turits:]

Okay. So it goes back to the kind of $6 million run rate after that?

[Andrew H. Del Matto:]

Yes. Or -- yes. Again, you have to account for higher income over time, if that's what happens. But...

[Michelle Spolver:]

Yes.

[Michael Turits:]

Okay. $6 million then, yes, whatever, of growth off of last year?

[Andrew H. Del Matto:]

Yes. Got it.

[Operator:]

And our next question comes from Gregg Moskowitz from Cowen.

[Gregg S. Moskowitz:]

Actually, just a very quick follow-up to Michael's question. So in terms of the $25 million, Drew, that was paid in 2013, it sounds like that will go up by around, give or take, $15 million or so in 2014. Is that roughly the right way to think about it? If we sort of, in other words, take the $18 million to $21 million for Q1 and then assume kind of a normalized run rate in Q2 through Q4?

[Michelle Spolver:]

Yes, but it's off a higher income base.

[Andrew H. Del Matto:]

Yes, I think so. It's about -- I'll tell you what, I'm going to -- Gregg, I'll tell you what, I'm going to follow up on that question, but that is the way we're thinking about it. I want to make sure we have that right, though. So I'll ask somebody to actually follow up, and maybe we can follow up in the next 20 minutes or so with you.

[Gregg S. Moskowitz:]

Okay, perfect. And then, Ken, so enterprise spending rebounded for you in Q3 and certainly continued into the Q4 as well. Just wondering if you could elaborate on your investments here and, really, if you have any proof points of how that might be starting to resonate with customers.

[Ken Xie:]

I think in the enterprise space, we don't have enough coverage starting in the U.S. in the past. So that's an area we're going to fully [indiscernible] by additional sales force, also by the new [indiscernible]. So we see a pretty good return once we have the sales force covered. So that's the area we're thinking we're going to improve, especially in the U.S. enterprise, this year.

[Gregg S. Moskowitz:]

Okay. And then, Ken, do you have any thoughts, there's been a lot of talk around a network refresh, just in terms of when one might occur and what that could mean for Fortinet and the industry overall as well.

[Ken Xie:]

I think -- like I said, there's a few drivers for the network refresh, and in the enterprise, definitely, we see the higher -- like 40-gig, 100-gig will be driving that. And that is part of the data center. Probably, I think 40-gig is kind of mature. Now the 100-gig is still a lot of function [ph], kind of not quite mature or stable enough. So I think it's probably towards the mid of the year this will be much better shape. So that's where we see probably something -- maybe starting like Q2, Q3, whatever. We'll see the data center solutions starting more mature in the 100-gig level. The carrier is taking relatively long time. Also, the carrier have the annual budget planning. So we see a lot of tightening going on and also a lot of opportunity to secure the mobile better carrier. So that's probably -- my understanding is that maybe we'll do better than last year and probably not jump that quick, as in data center still have more opportunity.

[Gregg S. Moskowitz:]

Okay, that's helpful. And then just one last one, if I could. Wondering if you could talk about the FortiSandbox-3000D, just in terms of how that compares to dedicated solutions that try to protect against APTs. And going forward, do you expect more customer deployments as a standalone on premise appliance or integrate with FortiGate and FortiMail?

[Ken Xie:]

We do have a sandbox function we integrate in a FortiGate already, but also, the dedicated box and also a lot of deployment. And also, they need a dedicated box combined with the primary firewall also the email solution together. So I think the dedicated box you usually try to put behind a firewall for the actual layer protection. And then the FortiGate is relatively small, but it's a more real-time sandbox function, which has been there for many years already. And that's where -- the test, we mentioned on the earning call is really trying to detect all this, they call it, proactive kind of detection is really you don't have signature. You also kind of cannot get any update off the box. You need to catch all the malware kind of in the back there. So that, we did quite well. Like I said, the sandbox -- in the firewall [indiscernible] -- firewall has to do a lot of real-time protection compared to some kind of sandbox, it may take some actual delay and do some actual check. But it's really the hyper mode, the combination. For the big enterprise, sometimes they have additional dedicated sandbox, but for a lot of enterprise, they probably more depend on the firewall to do the job.

[Andrew H. Del Matto:]

Can I follow up on the -- this is Drew. I do have an answer on the tax question. So just to go back -- and then we have the answer in front of us. I just wanted to make sure it's correct before I give it. But, yes, if you were modeling 35, I think you'll be right in the range. We would call it somewhere between 32 and 36, it looks like, depending on a couple of factors. But -- so, yes, probably 7 to -- 7 to 10 incrementally year-on-year.

[Operator:]

And our next question comes from Andrew Kisch [ph] from Jefferies.

[Unknown Analyst:]

This is Andrew here for Aaron. Just a real quick question. When you're talking about double the market growth rate, are you talking about billings or revenue?

[Michelle Spolver:]

Billings.

[Operator:]

And our next question comes from James Fish from Citi.

[James Fish:]

Just kind of wanted to get some more detail and clarification on -- I believe you guys said that new products were a driver this quarter for you guys. Kind of just some commentary around that as to why that was, as past years, it wasn't as much.

[Michelle Spolver:]

I don't know what I would say. I'd like Ken to elaborate. I don't know if I'd say it was not as much. We definitely had quarters in the past where whether it's typically around new ASICs, we'll tend to drive some business. But I don't know that it was -- in fact, I do know, that it wasn't anything more significant than what we would normally see. New products do tend to drive business because it tends to be a more competitive offering in the market.

[Ken Xie:]

I think that's probably like last quarter. This quarter will be the same as the previous quarter. No big difference because once we have a new chip, every quarter -- I mean, each quarter, we have a few product come out, leverage new chip, new solutions. So we'll be mostly ramp up for the new product using the new chip and new technology. Not a change -- a big change from the previous pattern.

[Michelle Spolver:]

Right.

[James Fish:]

So I'm trying to just get a clarification here. Is it more the pickup then in customer demand? Or was it more new products coming in the line that really, really helped you guys this quarter?

[Ken Xie:]

I think the product will be, like I said, really the same as...

[Michelle Spolver:]

Yes, I mean, I think it's between the 2. It's a pickup of customer demand across the board. So it's not -- definitely, we saw additional interest in new products that wasn't what drove everything during the quarter. There's demand across our product line. Some of the new products were met well, but I would look at it more of just demand across.

[James Fish:]

Okay, great. That definitely helps a little bit more. And then just kind of probably for Drew. With the sales and marketing spend, I know what you're talking about, and we've had numerous questions here on the operating margins and the fact that they're going to be about 12% is what you guided to for Q1. What kind of ramp should we expect, well, deceleration in sales and marketing spend then throughout the year? And is that going to kind of be more across a couple of years that we should expect high sales growth? Or is it going to kind of dwindle down as normal?

[Andrew H. Del Matto:]

I really don't have a lot to add to what we've already discussed. We're giving Q1 guidance, and that's the 12% operating margin we discussed. I think, for the year, we talked about 17% on an annualized basis, plus or minus 1 point, as what we hope is the lower end. But I really don't have a lot more to add other than qualitatively what we're investing in, which I think we've discussed.

[Operator:]

[Operator Instructions] So our next question comes from John Lucia from JMP Securities.

[John Lucia:]

Given the investments you'll be making in sales and marketing, what are you doing to improve your channel relations and improve your mind share in the channel?

[Ken Xie:]

We commit to be the channel company and to open this for other [ph] channel. So that's why in the partner conference, we have about 1,000 channel partners attending the conference. Early this month, it's -- like I said, it's -- they're all very excited about opportunity both in the market and the new product. I think we're 100% supporting the channel. And the 1 sales partner we're hiring is ready to, we call it, direct touch, but we still go through the channel [indiscernible] channel and also supporting the channel together.

[Michelle Spolver:]

Yes, let me just add a little bit there. I mean, certainly, we're always looking to improve, so I don't want to say that there's no improvement there. But I will say that we do actually have good channel relations. We've kind of traditionally or typically been recognized, even last year, as the best vendor in the security category by Everything Channel, which is -- it's sort of like the big channel award there. And it measures channel satisfaction on the way of partnership, profit margin and product line. So again, I don't want to imply that we have bad channel relations. We're always looking to improve a bit. But we're pretty pleased with where they're at. The other thing in terms of what else are we doing, one area that we are putting some attention in is expanding and deepening our relationships with sort of what we call national resellers, which are sort of the larger channel partners that are really focused on enterprise. We have those partnerships today. We're looking to put a little bit more focus and investment behind that as well.

[John Lucia:]

And the investments you made prior -- earlier in the year, did that lead to any better channel execution in this quarter? Is that what contributed to the strength? Or is that just overall demand?

[Michelle Spolver:]

No, it's overall demand. In Q4, we did talk about it. I believe it was either Q3 or Q2 we had a really, really great, really strong channel quarter, and part of it was because we put investment into the channel. I think Q4 was more across the board with more strength in -- yes, channel did fine -- did well, but it wasn't -- it didn't make our quarter, basically.

[John Lucia:]

Okay. And then I have one more question. Given the attacks on Target, Neiman Marcus and the like, are you expecting any change to the regulatory environment for cybersecurity in FY '14?

[Ken Xie:]

I hope [indiscernible] see now in all the security in that space, retail, whatever, but we do see -- during the trade-show early this month, we do see more strong demand in the retail space to be more secure, especially a lot of online transaction, all these kinds of things. So we see there's a good potential there. But the regulatory, hard to say.

[John Lucia:]

Okay. So no comments on regulatory environment, but you think that demand will be strong in FY '14?

[Ken Xie:]

Yes.

[Operator:]

And our next question comes from David Kaplan from Barclays.

[David Kaplan:]

Yes, a little bit of a follow-on to that last question. Also, in terms of the types of products that you guys see out there, both from -- both the new products you guys are developing, plus what you see from your competitors, some of the more disruptive newer technologies, as the market likes to call them, what do you think is really driving the spend right now? And is the focus on single vendor or on trying out different new technologies or approaches to security from different vendors?

[Ken Xie:]

Because we compete in the network security plan space every 4 year, 5 year, there is a need to refresh out the equipment because they need higher speed and more function, all these kinds of things. So that's why we see there's a good opportunity in the next 1 to 2 years, especially upgrade to the 40-gig, to the 100-gig level. Also, a lot of new attack, a lot of attention to the APT area also would drive some of the upgrade of the function. And I think since we see that the mobile device is another potential, like I mentioned in the call there, I mean, all these will keep driving all the demand for the network security and also the service provider. The carrier will also start to play a more important role, especially in the mobile space.

[David Kaplan:]

Okay. I mean, and I'm thinking also kind of more specifically about the FortiSandbox that you guys talked a little bit about on the call. I know there's at least 2 other products out there from some other companies. What is it -- I mean -- and I think that, that is, again, a slightly different approach to how to protect the network based on slightly different technologies. Do you think that, that's changing the face of how CIOs look at the threats perimeter or otherwise versus -- or just say new ways of looking at it as opposed to the traditional perimeter view?

[Ken Xie:]

I think we can offer some additional protection, but that's also not a total solution. You still need the firewall and you still need some other -- like some VPN intrusion. All this technology have been working together. I think the sandbox is just one of the function can enhance some area but also not the whole solution. I don't feel that's what -- it's still a relatively new market. And so far, most deployment is behind the regular firewall that covers some of the protection. And also, the sandboxing behavior kind of detection is also not new, has been there for like 20 years. And that needs to be combined with the traditional firewall, some kind of signature base, because you totally [ph] based on the behavior, simulation is very difficult sometime to distinguish some good program, bad program and also some attack that can make -- get away usually from all these simulation things you do. So that's what had to be combined, unified solution and to join together to defend. And so far, I have not seen any sandboxing to replace the traditional firewall or some other solution yet and to just add additional protection in some area.

[Operator:]

And our next question comes from Nandan Amladi from Deutsche Bank.

[Imtiaz Koujalgi:]

It's actually Imtiaz on behalf of Nandan. So this quarter was good. You beat the guide for your revenue and billings. But then if I look at the guide for next quarter, the sequential downtick for both revenue and billings is even lower than what you had in Q1 '13, which was a really bad quarter. So is that just you being very cautious or is that a reflection of the pipeline that you have in place today?

[Andrew H. Del Matto:]

So first of all, I think you have to kind of look at it over several quarters. I believe the ramp in Q3 to Q4 last year was different than the ramp in Q3 to Q4. And the ramp in Q3 and Q4 in 2012 was different relative to -- different than in 2013. So that's a factor you really have to look at over a longer-term basis. The second piece that I would say, we're really kind of targeting, I mean, from a high-level hunch, from the perspective of -- targeting 2x or better growth from the market, which we believe is currently 6% to 7.5%. And you also have to take into account, we're investing in a lot of new people and also new markets and verticals and with new products. And so all of that may take some time or more than just kind of near term. And so the guidance does take some of that into account.

[Michelle Spolver:]

Yes. What I was going to say is kind of echoing what Drew said, 3 factors. So, one, seasonality, so it's always down, Q1 -- sequentially, Q1 from Q4. You're looking at a very strong Q4 '13. Yes, we had a strong Q4 '12 but not as strong, and that was to Drew's point about the ramp from Q3 to Q4. So it's that. Then the seasonal factors that we talked about, things like payroll taxes and things like that, that has -- that tie back to employees, we did do hiring last year. Those are magnified a bit in Q1 of this year over last year because all the seasonal elements that are related to employees and benefits and things like that hit at a greater magnitude this year than they did last year because we have more employees.

[Imtiaz Koujalgi:]

Yes, but that shouldn't impact the top line, right? I mean, I agree that, that will impact the bottom line, but then your payroll tax and the employee count will not impact the top line going forward.

[Andrew H. Del Matto:]

Yes, agreed on that, but I think the earlier part of the answer was true.

[Michelle Spolver:]

Okay. Yes.

[Imtiaz Koujalgi:]

Okay. And the second on the margins. You said that you could end around 17% range and then you're guiding to Q1 margin of 12%. If you ramp up the margin throughout the year, it does imply that you would probably end the year at 20% range operating margin Q4 2014?

[Andrew H. Del Matto:]

Nice try. So, yes, we're not really giving guidance beyond Q1 at this point.

[Imtiaz Koujalgi:]

No, I'm just doing basic math here, just averages. It does imply that it should go up to that level by the end of the year.

[Andrew H. Del Matto:]

I think you have what we're going to provide on that.

[Michelle Spolver:]

Yes.

[Imtiaz Koujalgi:]

Okay. Just one -- and one last question, if I may. You guys gave the percentage of billings from service provider in this quarter. Do you guys give that in the last year, Q4 of '12? I can't find that number. If you have it handy, please.

[Michelle Spolver:]

I don't have -- I can give it. I will send you an email in a second.

[Andrew H. Del Matto:]

We'll follow up and get that as quickly as we can.

[Michelle Spolver:]

I'm sorry, Taz, if you haven't -- if you're still on, it was 29% last year.

[Operator:]

[Operator Instructions] And at the moment, I'm showing just one final question from James Wesman from Raymond James.

[Michael Turits:]

Yes, Michael Turits again. I'm sorry. You probably did answer this already, but again, on the CapEx side, so it's $10 million for building, x for building in Q1. Is that $10 million total CapEx? How should we think about CapEx for the full year? I know you went through this. I apologize.

[Andrew H. Del Matto:]

Well, Michael, we're not giving full year guidance. I think we were talking about Q1.

[Michelle Spolver:]

I think what you're asking, should we expect any more billing costs for the rest of the year? Is that kind of what the question was?

[Michael Turits:]

So first of all, it's $10 million in total CapEx for Q1? Is that it?

[Michelle Spolver:]

For the building.

[Michael Turits:]

Okay, just for the building. Okay. So should -- and is that the only building expenditures Q1?

[Andrew H. Del Matto:]

Well, let me -- so, Michael, we are starting an ERP project, although it'll probably be a small. We could see some in Q1. We're not expecting to see much. I mean, you have to -- think of it this way, you have to ramp the project and get people on board and start spending. And we could be in a position to do some of that, but I don't see much.

[Michael Turits:]

But the building project, that's $10 million -- that's a 1-quarter project only, right?

[Andrew H. Del Matto:]

Well, it's been an ongoing project that I believe completes this quarter.

[Michelle Spolver:]

Yes.

[Michael Turits:]

Okay. And so should I think of the -- x that $10 million? So should I think of that kind of $10 million for the year, plus kind of a normal 3% of revenue kind of run rate for CapEx?

[Andrew H. Del Matto:]

Well, we're not -- you mean for the rest of the year?

[Michael Turits:]

Yes.

[Andrew H. Del Matto:]

Yes, well, again, we're not giving guidance beyond Q1. Again, I would say the only anomaly that we're aware of is the ERP project potentially, which...

[Michelle Spolver:]

Which was still over beyond the year.

[Andrew H. Del Matto:]

Which was still over beyond Q1 and into the year and perhaps [indiscernible].

[Michael Turits:]

So should we -- because -- even x the building, ERP will drive it above kind of a normal low single-digit CapEx?

[Andrew H. Del Matto:]

Yes. And we'll have more on that when we update people next quarter.

[Operator:]

That actually does conclude our conference for today. I would now like to turn it back to the host if they have any concluding remarks.

[Ken Xie:]

No. Thank you for joining the call. So we'll see you probably in the next few conference and on the next earnings call. Thank you.

[Andrew H. Del Matto:]

Thank you again.

[Operator:]

Okay. Thank you, everyone, for joining. You may now disconnect, and have a great day.