Fortinet, Inc. Q3 FY2024 earnings call

Key Managerial Messages - Ken Xie: Reported strong execution and continued growth momentum, including record gross margin and operating margin. Unified SASE building growth of 14%, secure operation building growth of 32%, and secure networking returned to positive growth. Leveraged single operating system and proprietary ASIC technology for competitive advantage. - Keith Jensen: Total revenue grew 13%, driven by service revenue growth and product revenue return to growth. RPO grew 15% to $6.1 billion and total billings grew 6% to $1.58 billion. Mentioned wins like a 7-figure upsell deal in retail and a 7-figure win for a medical device company. Discussed guidance for fourth quarter and full year. - Significant Wins: A retail customer in a 7-figure upsell deal added FortiSASE for 16,000 users; a medical device company purchased FortiSASE; a multinational bank selected FortiGate firewalls and multiple solutions.

Total revenue grew 13%. Unified SASE building growth was 14%, secure operation building growth was 32%, and secure networking returned to positive growth. Service revenue was $1.034 billion, growing 19% and accounting for 69% of total revenue. Product revenue increased 2% to $474 million, returning to growth after 5 quarters. Product gross margin was a quarterly record of 71.6%, increasing 1,370 basis points. Service gross margin was 88.4%, increasing 130 basis points. Operating margin was a quarterly record of 36.1%, increasing 130 basis points. Unified SASE was 23% of the business, up 1.5 points.

Fourth Quarter - Billings between $1.9 billion and [indiscernible], midpoint growth 5%. - Revenue in the range of $1.56 billion to $1.62 billion, midpoint growth 12%. - Non-GAAP gross margin of 79.5% to 80.5%; non-GAAP operating margins of 33% to 34%; non-GAAP earnings per share of $0.58 to $0.62. ### Full Year - Billings in the range of $6.43 billion to $6.53 billion, midpoint growth 11%. - Revenue in the range of $5.856 billion to $5.916 billion, midpoint growth 11%. - Service revenue in the range of $4.15 billion to $4.45 billion, midpoint growth 19%. - Non-GAAP gross margin of 80.3% to 81.3%; non-GAAP operating margin of 32.9% to 33.9%; non-GAAP earnings per share of $2.20 to $2.28.

Forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10-K and Form 10-Q for more information.

Q: Hamza Fodderwala asked about Fortinet's approach in terms of Sovereign SASE and differentiation versus competitors.

A: Ken Xie responded that Fortinet has invested in SASE for 5 to 10 years, with SASE functions in the same FortiOS both on-premise and in the cloud, having a huge differentiation as no competitor can run SASE in the same OS or even different boxes. Also, leveraging the installation base and easy migration path from traditional firewall to SD-WAN to SASE.

Q: Brian Essex asked about the firewall refresh cycle.

A: Keith Jensen said end-of-life of products starts in the second half of 2026, customers don't wait until the 11th hour, and 2026 is a little bit more than 2x 2023. Christian Agard added that enterprise customers have enterprise agreements and refresh about every [time], smaller customers wait until contracts expire.

Q: Fatima Boolani asked about cannibalization of refresh potential from SD-WAN to SASE.

A: Ken Xie said SASE supports DTA and remote growth environment, and most SASE growth comes from current SD-WAN or firewall customer base, with 3 pillars of secure networking, SASE, and secure operations growing, keeping market share gain.

Q: Saket Kalia asked about solutions ARR growth and profitability sustainability.

A: Christian Agard said the growth number was organic, not including acquired ARR, with solutions like FortiEDR, FortiClients, etc. driving growth. Keith Jensen said pro forma margins, backing out onetime benefit, product gross margin would be about 68.4%-68.5% and operating margin 35.1%, and they feel good about profitability sustainability with room to invest in growth.