Fortinet, Inc. Q3 FY2026 earnings call

• AI and Network Security Leadership: Fortinet is positioning itself as the foundational security provider for AI, leveraging its network security expertise to protect AI workflows, GPU clusters, and data centers. The company introduced 'FortiGuard inline AI security services' to turn every FortiGate into a real-time AI enforcement point.
• SASE Firewall Growth: The SASE firewall pillar grew 31%, making Fortinet the fastest-growing vendor in this segment. The company holds a unique architectural advantage with a unified OS for both cloud and on-premise sovereign SASE solutions, addressing regulatory needs in Europe and the public sector.
• Operational Technology (OT) Expansion: OT billings grew nearly 40%, validating leadership in securing mission-critical infrastructure. Recent wins include an eight-figure deal with a transportation company and another with a major US retailer, demonstrating the ability to secure distributed industrial and retail environments.
• Platform Integration and Efficiency: Fortinet’s integrated platform approach allows for centralized visibility and automated responses, reducing total cost of ownership. The company emphasizes that its ASIC technology and direct manufacturer relationships provide supply chain advantages over competitors.
• Financial Discipline: Non-GAAP operating margin reached a record 38.2% (+130 bps), and free cash flow grew 52% to $865 million. The board approved a $1.2 billion increase to the stock repurchase program, bringing the remaining authorization to $2 billion.

Total revenue grew 20% year-over-year to $2.08 billion. Product revenue increased 37% to $765 million, driven by strong demand and higher average selling prices (ASPs) as customers shifted to higher-performing models. Service revenue grew 13% to $1.31 billion, facing headwinds from delayed service activations in large enterprise deals. Total billings grew 29% to $2.34 billion. Key growth drivers included SASE firewall billings (+31%), OT billings (+~40%), and AI-driven security operations billings (+15%). Large enterprise deals (>$1M value) grew 51%, contributing significantly to U.S. performance.

• Q4 2026 Billings: Raised guidance to $2.775–$2.925 billion (midpoint implies ~20% growth).
• Q4 2026 Revenue: Raised guidance to $2.155–$2.245 billion (midpoint implies ~15% growth).
• Full Year 2026 Billings: Raised guidance to $9.568–$9.718 billion (midpoint implies ~28% growth), representing an increase of $1.14 billion vs. initial February guidance.
• Full Year 2026 Revenue: Raised guidance to $8.125–$8.215 billion (midpoint implies ~20% growth), an increase of $570 million vs. initial guidance.
• Full Year 2026 Service Revenue: Guidance set at $5.15–$5.17 billion (midpoint implies ~13% growth).
• Margins and EPS: Full-year Non-GAAP operating margin guided at 36.5–37.5%; Non-GAAP EPS guided at $3.54–$3.58.
• 2027 Outlook: Management expects billings and revenue growth to outpace the overall addressable market. Service revenue growth is expected to accelerate in 2027 compared to 2026, supported by strong deferred revenue trends.

• Supply Chain Constraints: Increasing lead times for certain components were noted, particularly from Q3 onward, though management believes their direct manufacturer relationships mitigate significant risk.
• Service Revenue Timing Risks: Large enterprise deals often involve ramped service activations and consolidated agreements, leading to delays in service revenue recognition despite strong billing growth.
• Competitive Pressure: While Fortinet claims leadership, the cybersecurity market remains dynamic, with competitors vying for share in SASE and AI security niches.
• Regulatory and Sovereignty Requirements: Growing demand for sovereign-compliant architectures requires flexible deployment models, which, while a strength, adds complexity to global execution.

Q: Analyst asked about the criticality of network security for AI use cases and how it impacts sustainability, plus details on service revenue timing issues. / A: Ken Xie emphasized that SASE firewalls are essential for AI security due to visibility and data training advantages, allowing Fortinet to grow faster than the market. Christiane Ohlgart explained that service revenue delays are primarily a timing issue caused by large enterprise deals requiring longer ramps for activation and consolidation of existing services into new enterprise agreements, rather than a lack of demand.

Q: Analyst inquired about product growth trajectory for 2027 given tough comparisons and pricing dynamics. / A: Ken Xie expressed confidence in growing faster than the market, citing supply chain advantages through direct manufacturer relations and own-managed production. He noted that while pricing provided ~10% benefit earlier, costs have normalized and stabilized, with a strategy to maintain gross margins by adjusting prices based on component costs.

Q: Analyst compared current AI-driven spending cycles to post-COVID periods and asked about durability. / A: Ken Xie agreed the current cycle feels larger and more durable, driven by infrastructure build-out and heightened AI security concerns. John Whittle added that the threat environment following AI advancements is structurally different and likely more sustainable than previous threat drivers like Target breaches or COVID, suggesting we are still in the early stages of this demand wave.

Q: Analyst asked if OT security demand is broadening and if there are staffing/installation bottlenecks for customers. / A: Christiane Ohlgart confirmed OT strength is broadening globally due to expanding attack surfaces and customer references. Regarding installation, she stated there is no shortage in channel capacity; delays are mostly due to customers’ internal year-end planning. Ken Xie added that FortiCare now uses AI to assist service personnel, and for massive rollouts (e.g., 4,000 stores), Fortinet can augment partner efforts directly.

Q: Analyst questioned why management is confident in service acceleration for 2027 despite Q3 delays, and if large customers require a different business model. / A: Christiane Ohlgart clarified they predict 'improved growth rates' rather than immediate acceleration, noting service billings are strong and will convert to revenue over time. Ken Xie acknowledged that large customers (like hyperscalers) need different service approaches and take time to ramp up server usage, but this feedback drives innovation. He emphasized that the trend in billings and deferred revenue remains healthy, supporting long-term confidence.