Fortinet, Inc. (FTNT) Earnings

Management highlights

- Strategic Product Innovation and Market Positioning * Launched the new SASE firewall category, which converges secure networking and unified SASE on a single FortiOS operating system. Fortinet is the only vendor that develops all key SASE firewall components in-house, integrates them on a single OS, leverages proprietary 4D ASIC technology, and offers both on-premise and cloud deployment options. * Announced the new FortiGate 1200G next-generation SASE firewall, which combines local security enforcement with cloud-delivered capabilities to meet customer demand for data privacy, high performance, and AI infrastructure management. The total addressable market for SASE firewall is estimated to be 2-3x larger than cloud-only SASE offerings. * Launched the new 40 SoC cloud-delivered AI SOC platform and expanded 40 endpoint capabilities to address growing demand for AI-native security operations. - Key Market Trends Driving Demand * AI adoption is reshaping the cybersecurity landscape: machine-to-machine traffic now exceeds human-generated traffic, creating large volumes of internal east-west traffic in data centers and enterprises that requires high-performance security and visibility. AI is accelerating the convergence of networking and security, driving infrastructure modernization to protect AI models, data sets, and distributed workloads. * Enterprises are prioritizing cyber sovereignty and data residency requirements, especially in EMEA and the public sector, which plays to Fortinet's flexible deployment model for on-premises/sovereign SASE. * OT security has become a top board-level priority due to increasing threats against critical infrastructure, new regulatory requirements, and ongoing IT/OT convergence, creating significant white space for Fortinet, which holds a leading market position in this segment. * Customers are increasingly consolidating cybersecurity vendors onto integrated platforms to reduce operational complexity and lower costs, which benefits Fortinet's end-to-end platform strategy. - Operational Highlights * Secured multiple large strategic wins in the quarter, including an eight-figure deal with a major cloud provider to secure its generative AI data center infrastructure, a seven-figure competitive displacement deal with a global pharmaceutical company to secure 45,000 SASE users, and a seven-figure deal with a major utility for large-scale OT security modernization across thousands of field locations. * Continued shareholder capital return: repurchased 1.9 million shares for $146 million in Q2, and $973 million worth of shares year-to-date at an average price of $78 per share. $766 million in remaining repurchase authorization as of the call date. * Achieved higher operating efficiencies driven by internal AI adoption, disciplined cost management, and operating leverage from strong revenue growth.

Guidance

Management raised full-year 2026 guidance across all metrics following a strong first half performance, maintaining a disciplined quarter-by-quarter approach for the remainder of the year: - Q3 2026 Guidance: * Billings: $2.25 billion to $2.35 billion (27% YoY growth at the midpoint) * Total revenue: $2.01 billion to $2.1 billion (19% YoY growth at the midpoint) * Non-GAAP gross margin: 79% to 81% * Non-GAAP operating margin: 35% to 37% * Non-GAAP EPS: $0.83 to $0.87 - Full Year 2026 Guidance (upward revised from prior outlook): * Billings: $9.35 billion to $9.55 billion (25% YoY growth at the midpoint) * Total revenue: $8.02 billion to $8.18 billion (19% YoY growth at the midpoint) * Service revenue: $5.18 billion to $5.22 billion (14% YoY growth at the midpoint), with management expecting service revenue growth to accelerate in the second half of 2026 * Non-GAAP gross margin: 79% to 81% * Non-GAAP operating margin: 35% to 37% * Non-GAAP EPS: $3.41 to $3.47 * Infrastructure investments: $350 million to $550 million

Segment performance

The company organizes its business into three core strategic pillars, with the following Q2 2026 billing performance: 1) Secure Networking: Billings grew 34% year-over-year, with OT billing increasing over 55% driven by widespread adoption across industrial environments. 2) Unified SASE: Billings grew 35% year-over-year, and 40 SASE billings specifically grew over 100% year-over-year. 90% of large enterprise installed base has now adopted 40 SASE. 3) AI-driven Security Operations: Billings grew 25% year-over-year, driven by strong upsell momentum as customers consolidate point solutions onto the Fortinet platform. Total company revenue grew 26% YoY to $2.05 billion: product revenue increased 52% YoY to $773 million (37.7% of total revenue), and service revenue grew 14% YoY to $1.27 billion (62.0% of total revenue). Total deferred revenue increased 17% YoY. Non-GAAP gross margin was 80.9%, Non-GAAP operating margin hit a Q2 record of 38% (up 490 basis points YoY). Non-GAAP EPS increased 41% YoY to $0.90, GAAP EPS grew 44% YoY to $0.82. Free cash flow more than tripled YoY to $966 million, with adjusted free cash flow of $996 million representing a 49% margin.

Risks & headwinds

No new material risks were specifically discussed in the earnings call. Management noted at the opening that all forward-looking statements are subject to general risks and uncertainties that could cause actual results to differ materially from projections, and referred investors to risk factors disclosed in the company's most recent Form 10-K and Form 10-Q filings with the SEC.

Analyst Q&A

• Q: After two quarters of accelerating billings and product growth, what is driving this acceleration and how durable is it? /

  A: Management stated the growth is driven by long-term structural changes in the cybersecurity market. AI has reshaped the security landscape, and Fortinet's long-term investments in ASIC chips, in-house R&D, and infrastructure have positioned it better than competitors. The new SASE firewall is replacing traditional next-generation firewalls, single-vendor SD-WAN solutions, and outcompeting cloud-only SASE offerings that cannot meet customer requirements for local data processing and privacy. Management expects this growth to be durable, similar to the transition from traditional firewalls to UTM next-generation firewalls 20 years ago.

• Q: How is AI accelerating the convergence of firewall and SASE, and do customers now view Fortinet as a leading platform provider comparable to other top cybersecurity platforms? /

  A: AI has generated massive new volumes of machine-to-machine traffic, most of which is internal east-west traffic within enterprises and data centers, increasing demand for better visibility, control, and security that drives convergence of networking and security. Management confirmed customers do view Fortinet as a leading platform provider, attracted by its fully integrated single-OS architecture, cost benefits, and ease of operation. Unlike competitors that rely on acquisitions, Fortinet focuses on network security with organic in-house development and long-term investments in ASICs and infrastructure, with many customers purchasing across all three of the company's growth pillars.

• Q: What drove the acceleration in Unified SASE billings this quarter, and is SD-WAN becoming a bigger consideration for customers? /

  A: Fortinet's 40 SASE grew more than 100% year over year, with strong growth in both SD-WAN and SSE. All top competing SASE players acquired their SD-WAN capabilities and run disjointed point solutions across multiple platforms, while Fortinet delivers all capabilities in a single box on a single OS. The fastest growing segment is sovereign/on-premises SASE: Fortinet is the only vendor that can meet customer requirements for local processing of sensitive confidential data (like the pharmaceutical company win in Q2) while also supporting global workforce access, driving significant market share gains from competitors. AI-related security demand is also contributing to strong SASE growth.

• Q: Service revenue growth is expected to accelerate in the second half—can you share color on growth contributions from FortiCare vs FortiGuard? /

  A: Growth is accelerating across both segments. Attached services (FortiCare support and FortiGuard security services) are growing alongside expanded product deployments, and new bundled services for SASE firewall that combine SD-WAN and SASE capabilities are seeing very strong growth. AI-related security services are also being added as new FortiGuard offerings, driving incremental service growth on top of traditional offerings. SecOps unattached solutions are also contributing to overall service growth.

• Q: What is driving 55%+ OT billing growth, and how durable is this growth? /

  A: Growth is driven by multiple durable factors: Fortinet has invested in OT security for many years while competitors have largely neglected the space. Increasing regulation (like NIS 2 in Europe) requires critical infrastructure providers to improve cybersecurity, and OT environments historically had very little cybersecurity deployment, creating large amounts of white space. Growing infrastructure buildout and AI infrastructure development are also increasing OT security demand. Fortinet's integrated, ruggedized on-premises solutions are uniquely suited to OT environments, and independent analysts rank Fortinet as the clear leader in the OT security space, so management expects this durable growth to continue.