Good day, and thank you for standing by. Welcome to the Fortinet First Quarter 2022 Earnings Call. At this time all participants are in a listen-only mode, after the speakers’ presentation, there’ll be a question-and-answer session. And please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Peter Salkowski, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Laurie. Good afternoon, everyone. I'm pleased to welcome everyone to our call to discuss Fortinet's financial results for the first quarter of 2022. Speakers on today's call are Ken Xie, Fortinet's Founder, Chairman and CEO; and Keith Jensen, our Chief Financial Officer. This is a live call that will be available for replay via webcast on the Investor Relations website. Ken will begin our call today by providing a high-level perspective on our business. Keith will then review our financial and operating results for the first quarter before providing guidance for the second quarter and updating the full year. We will then open the call for questions. Before we begin, I'd like to remind everyone that on today's call, we will be making forward-looking statements, and these 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. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements. Also on all references to financial metrics that we make on today's call are non-GAAP, unless stated otherwise. Our GAAP results and the GAAP to non-GAAP reconciliations is located in our earnings press release and in the presentation that accompanies today's remarks, both of which are posted on the Investor Relations website. Ken and Keith's prepared remarks today for the earnings call will be posted on the Quarterly Earnings section of our Investor Relations website immediately following today's call. Lastly, all references to growth are on a year-over-year basis unless noted otherwise. I will now turn the call over to Ken.

Thanks, Peter, and thank you to everyone for joining today's call to review our outstanding first quarter 2022 results. Our better-than-expected first-quarter results demonstrate the strong demand for our cybersecurity innovation. Total revenue growth of 34%, driven by record product revenue growth of 54%. Total billings increased 36%. Our strong results reflect new orders that were significantly greater than anticipated, partially offset by an increase in backlog. As a result, bookings increased 50% year-over-year to $1.276 billion, which included booking growth for SD-WAN of 54%, Global 2000 growth of 61%, and OT growth of 76%. For the quarter, net new backlog was 9% of bookings as we continue to navigate a challenging supply chain environment. We believe that the hybrid network will adhere for the foreseeable future, and Fortinet is pushing the boundaries of what is possible with innovation to enable customers to successfully operate in today's elevated threat environment. Our solid performance and market share gains are being driven by our efforts to make our customers' entire infrastructure more secure and integrate into a zero trust network. Fortinet's secure-driven network approach converges networking functionality with security capability fueled by our powerful ASIC SPU to provide the best performance and rich functionality. The new FortiOS 7.2 offers multiple new and enhanced services across FortiGuard, FortiCare, and FortiTrust such as VPN, identity, demand unboxing, and advanced device protection for OT and IoT environments. Additionally, Fortinet provides one of the broadest security service offerings at an average of half the cost compared to our main competitors. In addition, we have prioritized our most organic research and development efforts on integrating security products into our centralized FortiOS fabric platform, which Gartner refers to as a cybersecurity mesh architecture. Today, we announced a new suite of FortiGate powered by our ASIC SPU. The FortiGate 3700-F, 600-F, and 700-F deliver high-performance converged networking and security, with security computing reaching on average five times better performance than competitive offerings. During the quarter, we were pleased to receive the Gartner Peer Insight Customer Choice Award for both infrastructure and next-generation firewall for three years in a row. Our innovation positions Fortinet as one of the most influential cybersecurity leaders. These growth drivers and organic innovation are accelerating our growth potential to new levels. Before turning the call over to Keith, I would like to thank our employees, customers, partners, and suppliers worldwide for their continued support and hard work. It is their collective effort and trust that will contribute to Fortinet's strong growth and market share gains.

Thank you, Ken, and good afternoon, everyone. Before adding to Ken's comments and going into more detail on our Q1 financial results, I'd like to briefly discuss a wording change in how we describe our business. FortiGate is now referred to as the core platform and non-FortiGate as the platform extension. This change helps to emphasize the importance of our FortiOS operating system. FortiOS drives our entire security platform across multiple platform extension use cases, including Zero Trust access, cloud security, security operations, and secure networking. With that in mind, let's start with a more detailed Q1 discussion. Customer demand was again strong and broad-based across geographies, customer sizes, industries, use cases, and security solutions, reflecting three key demand drivers: the elevated threat environment, convergence of security and networking, and customers consolidating across our platform offerings. These key growth drivers are contributing to our strong results and accelerating pipeline growth. In short, we believe we are in a period of sustained high growth for the cybersecurity industry and Fortinet. Moving to the Q1 financial results, total revenue of $955 million was up 34%, driven by record product revenue growth of 54%. Taking into account an $80 million sequential increase in product backlog, product bookings growth was 87%. Product revenue growth was broad-based, with core platform and platform extension product revenue growth at 50% and 59%, respectively. While we continue to see robust product growth from our SD-WAN and operational technology, or OT, the core platform product revenue growth was mainly driven by the wide range of other use cases embedded in our operating system. Service revenue was up 24% to $584 million. Support and related services were up 26% to $271 million, while security subscription services revenue was up 23% to $313 million. To offer one observation about how customers may be responding to the supply chain challenges, we are seeing indications that a subset of customers are placing product orders further in advance and may have delayed purchases or registrations of the related service contracts. This, together with the timing differences with age product and service revenue recognition, creates a lag between product and service revenue growth rates. We expect quarterly service revenue growth to accelerate throughout the rest of the year. As summarized on Slide 6, total revenue in the Americas increased 32%. EMEA revenue increased 25%. And APAC posted revenue growth of 57%, which includes the contribution from AlaxalA. EMEA's growth includes the impact of suspending operations in Russia. Nonetheless, EMEA easily exceeded their internal targets. Looking forward, EMEA's pipeline growth indicates continued strength in our EMEA business, despite the situation in Eastern Europe and its potential impact on European economies. Platform extension revenue grew 49% and accounted for 34% of total revenue, up 3 percentage points. Moving to bookings, backlog, and billings, we are experiencing exceptionally strong demand that continues to exceed supply by more than historical norms. Bookings were up 50% to $1.3 billion, reflecting exceptional demand and a $116 million quarter-over-quarter increase in total backlog, bringing backlog to $278 million. Larger enterprises continue to favor Fortinet's industry-leading cost-performance advantage and are increasingly appreciative of our integrated platform strategy. The platform strategy allows customers to converge networking functionality with security capabilities and consolidate multiple point products. The following key metrics illustrate growing demand from enterprise customers: Global 2000 bookings were up over 60%. Large enterprise bookings were up over 65%. Secure SD-WAN bookings grew 54%, reflecting the convergence of networking and security as well as a strong economic case. OT bookings were up 76%, illustrating the continued response to the elevated threat environment. As a reminder, backlog is excluded from the current quarter billings and revenue; however, it is expected to provide increased visibility and a top-line tailwind in future quarters. At $1.2 billion, billings were up 36%. Core platform billings were up 30%, accounting for 67% of total billings. As shown on Slide 7, high-end FortiGate posted very strong billings growth with a mix shifting 6 points toward high-end appliances. Platform extension billings were up 50% and accounted for 33% of total billings, up 3 percentage points. Average contract term was consistent year-over-year and down 1-month sequentially at 27 months. Moving back to the income statement, total gross margin was 74.4% as the revenue mix tilted 5 percentage points to product revenue from higher-margin services. Product gross margin of 57.4% reflects the impact of component and freight cost increases as well as higher less predictable component expedite fee expenses and the impact of consolidating AlaxalA’s results. Service gross margin of 85.2% was impacted by AlaxalA, costs associated with the expansion of our data center footprint, and increased labor costs. Operating margin of 22% exceeded the midpoint of our guidance range by 200 basis points due to increased sales productivity and efficiencies in other OpEx areas offsetting the gross margin decline. Headcount increased 26% to 10,860. Moving to the statement of cash flow, free cash flow was $273 million, representing a margin of 29%. Capital expenditures in the quarter were $123 million, including $93 million for real estate investments. Adjusted for real estate purchases, our free cash flow margin was 38%. Our capital expenditure strategy includes investing in cloud and data center infrastructure, as well as our office and warehouse capacity to support our higher levels of growth. We repurchased approximately 2.3 million shares of our common stock at a cost of $691 million. At the end of the quarter, the remaining share repurchase authorization was approximately $830 million, with the authorization set to expire in February 2023. Inventory turns at 3.5x were up nearly 1.5x year-over-year. Now let's spend some time reviewing backlog in a bit more detail. As I mentioned earlier, very strong demand with a $116 million increase in total backlog to $278 million. To put this in perspective, total backlog at the end of the first quarter was approximately 6% of our trailing 12-months total billings. We shipped 60% of the Q4 ending hardware backlog in the quarter. In consistent with the prior quarter, 73% of the backlog relates to expected future product shipments, while the remaining 27% relates to various services. We believe our backlog is very strong and should provide a billings and revenue tailwind to growth in future periods. There are several reasons to support our view, including: existing customers account for 93% of our backlog, and no single end customer accounts for more than a low single-digit percentage of backlog; there are 10 deals in backlog, 9 from existing customers with the remaining balance of over $1 million that together account for less than 10% of total backlog. Remaining balances are defined as the original order amount less the partial shipments we've made; just 5% of Q4 backlog was canceled in Q1, suggesting that double ordering is not a significant contributor to our backlog. We do not believe that customers are meaningfully pivoting to software form factors from hardware. The software is frequently a more costly option and may require architectural redesign and investment in changes in form factors and other equipment beyond just the firewalls. We believe our competitors are similarly impacted by the supply chain. More customers are accepting the supply chain challenges and working with us to mitigate the issues by switching products, adjusting deployment schedules, and accelerating evaluations of new products. Similar to others, we are experiencing ongoing supply chain challenges. Our responses to these challenges include significantly increasing inventory purchase commitments, redesigning products, qualifying additional suppliers, and working closely with our suppliers to further enhance our resiliency and mitigate the effects of disruptions. We expect supply chain constraints to be challenging throughout the remainder of the year. As a result, we expect component and logistics costs to remain elevated and backlog to increase through the course of the year. As we balance our pricing actions with the opportunity for continued market share gains, we have passed along most, but not all cost increases. As such, we expect ongoing pressure on gross margins. While the situation is very dynamic, we believe we will have access to sufficient inventory to meet our guidance. The outlook is also subject to the disclaimers regarding forward-looking information that Peter provided at the beginning of the call. For the second quarter, we anticipate bookings in the range of $1.325 billion to $1.385 billion, which at the midpoint represents bookings growth of 40%. We expect billings in the range of $1.225 billion to $1.265 billion, which at the midpoint represents growth of 30%. Revenue is expected in the range of $1.005 billion to $1.035 billion, with non-GAAP gross margin of 74.5% to 76%. Non-GAAP operating margin will be in the range of 22% to 23.5%, and we expect non-GAAP earnings per share of $1.05 to $1.10, which assumes a share count of $165 million to $167 million. We estimate second-quarter capital expenditures to be between $75 million and $85 million, with a non-GAAP tax rate of 17%. For the full year, we anticipate backlog could approach or possibly exceed $500 million and expect billings in the range of $5.500 billion to $5.508 billion, representing growth of 32.5% at the midpoint. Revenue is expected in the range of $4.350 billion to $4.400 billion, representing growth of 31% at the midpoint. This assumes the current supply chain environment remains constrained throughout the year. We anticipate total service revenue in the range of $2.640 billion to $2.700 billion, representing growth of approximately 28%, and full-year product revenue growth of approximately 36%. Given our view of component costs and other supply chain pressures, we expect non-GAAP gross margins of 74% to 76%, non-GAAP operating margins of 24% to 26%, and non-GAAP earnings per share of $5 to $5.15, assuming a share count of between $166 million and $168 million. We estimate full-year capital expenditures of between $270 million and $300 million and expect our non-GAAP tax rate to be 17%. Finally, I want to remind everyone that we will be holding an Analyst Day on May 10, coinciding with Accelerate 2022. A link to register for the webcast is located on the Events and Presentation page of Fortinet's Investor Relations website. Along with Ken, I would like to thank our partners, customers, suppliers, and all members of the Fortinet team for their hard work, execution, and success. I'll now hand the call back over to Peter to begin the Q&A.

Operator, we can open the line please.

And our first question is from Fatima Boolani from Citi. Your line is open.

Good afternoon. And thank you for taking the question. Keith, a question for you is on the product revenue performance quarterly, one of the more standout metrics among others in the front. You gave us a sense of the top-down dynamics that are helping with respect to the demand environment, the threat environment, and consolidation activity as it relates to discrete products. But from a bottom-up or a more micro perspective, can you talk to us about the net impact of the pricing increases that you've realized in the quarter? And if you can speak to linearity in the quarter, if there might potentially have been some acceleration or pull forward of demand that you might have seen later on in the year? Thank you.

Yes, I think the color I can offer on that is I think linearity was again strong in the quarter. We've been seeing strong linearity for probably four quarters in a row now, measuring month 1 versus month 2. I think I was going to get 45% was a little more discounting than maybe I anticipated through that process. I forgot your third area that you mentioned, I didn't write it down to, I'm sorry. Linearity pricing, something else.

That’s good enough. Thanks.

And our next question is from Brian Essex from Goldman Sachs. Your line is open.

Thank you for addressing my question and congratulations on the impressive results. My question is about your progress in the upmarket segment. Could you share your thoughts on how product and services are evolving as you move upmarket, particularly regarding margins? Additionally, I would like to know about lead times. I've heard that you've managed to keep lead times lower than your competitors. Is this contributing significantly to acquiring new business in the upmarket?

Definitely, the Fortinet operating team did a very, very good job. The model we have, working with a manufacturer and doing our own ASIC chip directly is also helping. So that's where, compared to a lot of other vendors using third-party on-time supply, we have more difficulty dealing with the current supply chain issues. We do see like with the price increase sometimes, as Keith mentioned, there are some stronger requests for some discounts. We have actually discounted more easily to go to the product side than compared to the service side. There's a certain recognition curve; you cannot discount service too much. Since we have strong products, we use security computing regions. Our performance tends to be five times better than competitors. So we do have market pricing power, which converts customers towards our product. At the same time, thinking for the service, we offer a very broad service, similar and better than competitors, but we probably only charge about half, especially with all the bond orders since. That’s where we do have the pricing power, both on the product and service side. That's where customers are drawn to our solution. Also, there are a lot of new cases, which our competitors don't have, such as SD-WAN and vertical to OT, which also drives quite a bit of additional growth for us.

Yes, I'd probably offer a little more color behind Ken's comments there, if I could, Brian. If you think about the market, let's take the networking equipment, switches, and access points. The constraint exists all around the board, if you will. I don't know that us versus more traditional networking companies have any more availability in those products than anybody else. When we look at our backlog, that mix seems to certainly support that. Firewalls, I don't see many customers switching over availability. I offered the comment earlier in the script that 93% of our existing backlog is with existing customers. So there's 7% of new logos informing that number; not a very big number. In terms of the billings and accounts we got from the quarter, it was very normal in both the billings and the new logos. We have about 5,500 or so on new logos. I don't really see that to be a concern. If we pivot back to Panama just quickly, your last question was about pull forward. I don't think I'd characterize this as any sort of pull forward with such tremendous results, and we have a pipeline with such a significant growth.

Great. Thank you.

And our next question is from Saket Kalia from Barclays. Your line is open.

Okay. Great. Hey guys, thanks for taking my question here. Maybe a question for both of you, Ken and Keith. I feel like we've talked a bit about some of the redesign efforts with some of the newer appliance families recently. I was wondering if you could just talk about some of those efforts that Fortinet has done to maybe help some of those supply chain issues. And how helpful those changes could be in terms of fulfilling the demand that you're seeing?

Yes, we started in the redesign effort at the end of last year without the supply restriction audience. You can see the products we announced today, the 4070-F and even the 600-F, probably would move to like kind of redesign, and then some of them also leverage our new FortiASIC chip. That's really helping customers have a different choice, which is important in some shortage. But also, in general, we have a much broader product range in both the core product and also the platform extension. That gives customers much better choices. In terms of silicon products, they can easily steer to the next product but still offer a much better solution compared to other competitors. So that's where the redesign actually helps a lot in reducing the supply chain limitation we face and also provides more choices for customers. We're continuing that effort and keeping a very broad product portfolio, which we do feel during the supply chain issue or maybe will last you throughout the whole year. This will definitely help us and our customers.

Very helpful. Thanks.

And our next question is from Adam Borg from Stifel. Your line is open.

Great. And thanks so much for taking the question. Either for Ken or Keith, I'm sorry if I missed it, but in the past few quarters, you've talked about increasing traction in some of your non-traditional verticals. I was just curious how they performed this round, and assuming you saw continued traction there, how you are thinking about making any additional investments to capitalize on the opportunities there? Thanks so much.

Yes. I see Peter has got me on a word limit on the script, so I apologize that I got taken out because I thought it was worth commenting on. But we've been looking at about a 3-year 5-point shift to that other group. The other group is everything outside the top 5, and we got that again in the current quarter. The one vertical that continues to stand out is manufacturing. That really speaks to the threat environment, ransomware, and OT, things of that nature; manufacturing is trying to break into the top five of our verticals and getting closer every quarter.

Great. Thanks so much.

And our next question is from Jonathan Ho from William Blair and Company. Your line is open.

Sorry for that. I was on mute. Yes, this is John Weidemoyer for Jonathan. Thanks for taking the question. If I heard you correctly, when you mentioned use cases, SD-WAN and OT, did you say those are the other use cases that contributed more to growth or just grew faster?

The SD-WAN and OT definitely grew faster than the overall company growth.

I think the growth rates were faster, but the total contribution was greater than the other use cases that we're trying to parse there.

Okay. I just want to clarify that. And I'm hoping that doesn't count as actually my question, but I'll make it easier for my question. R&D spending going forward, what are your intentions? Do you anticipate any stepped-up investment, or do you anticipate pretty much typical of what you've done in the past?

We kind of feel that real estate is considered some long-term investment, but we started doing that like 10, 15 years ago. Our rental cost is probably less than half compared to competitors similar in size, saving us about $100 million a year, which we're putting into R&D and other investments. Sorry, I misunderstood; R&D is not real estate. Yes, R&D we will definitely continue to invest in a lot of long-term R&D projects from the ASIC, on which we’ve made investments for more than 20 years. This gives us a huge technology advantage and enable us to be the only vendor that can meet the convergence of our security and networking trends, driving tremendous growth and a much better secure computing region. With a large quantity of product being deployed, we can offer the service much cheaper than competitors for the same service, adding huge value to the customer.

From a business model viewpoint, I think we kind of like where we're at with the level of investment we're making in R&D. We can move by one point or two in a given period. If you look at the R&D team, there's certainly a significant number of engineers and percentages that are working on the ASIC and the chips and so forth. We have more software engineers than hardware engineers because the operating system is important to us. The ASIC enables the operating system; they have to work together. We also see the opportunity to make more discrete investments and mature those products a little bit more. I'm not suggesting significant changes in total spending, just giving some insights in terms of where we see spending.

That’s very helpful. Thank you very much.

And our next question is from Michael Turits from KeyBanc. Your line is open.

I was interested in the comments that you made about the strength of hardware and that the same form factors aren't switching over significantly to software. Given your strong product numbers, could you talk about the sources of the hardware/appliance security demand and how sustainable that strong growth should be looking forward?

I think it needs to be a little bit of both. The high-end FortiGate taking six points of market share is a pretty good indicator. Obviously, the high-end FortiGates are very much targeted at large enterprises. That dovetails nicely with some of the growth numbers we mentioned on G2000 and large enterprises as well. I would also supplement that with the metric we've mentioned in the past. I think three or four years ago, we talked about an account rep ratio in the U.S. of about 65 accounts to one rep. I don't think it's a coincidence that you're seeing success in large enterprise with large appliances given the investment we've made in that segment of the market.

Since our beginning, we focused on securing the whole infrastructure, especially for areas where, in the past, security was very difficult to involve due to speed requirements and manageability. Our investments in ASIC enable us to enter new areas where traditional network security cannot solve issues. We're seeing huge growth in this area. At the same time, we promote the convergence of security and networking, which offers us competitive power from our ASIC and also upgrades to FortiOS every year. We see more and more security being deployed throughout the whole infrastructure beyond traditional network security.

And our next question is from Hamza Fodderwala from Morgan Stanley. Your line is open.

Hey guys, thank you for taking my question. And thanks for the great detail earlier in the call. Keith, maybe one for you. Just you attributed the gap in product and service growth to customers having a slight uptick in early ordering versus last quarter. I think you mentioned that about 60% of the hardware backlog in Q4 was billed in Q1. In terms of your Q2 billings guide, how do you think about that backlog to billings conversion, particularly in a perhaps less certain macro environment and perhaps a bit more than an uptick in early ordering?

Yes, as it relates to how we think about the backlog, we made the switch in the middle of Q4, asked our sales team to run the business on bookings, and we’ll convert it to billings here. This means working very closely with our manufacturing and operations team. I spend more time with operations as part of the forecasting guidance process than I do with the sales team. What is net backlog increase as a percentage of bookings? That number has hovered right around 8.5% to 9% in Q4 and Q1. When looking at the bookings number of $12.75 billion in Q1 and the number in Q2 at the midpoint of $13.55 billion, I don't see a deceleration.

And our next question is from Adam Tindall from Morgan at Raymond James. Your line is open.

Okay, thanks. Good afternoon. Keith, I just wanted to ask a question to try to get to the heart of real-time demand. I appreciate all the disclosures you've given. I'm looking at bookings, it has been strong on a year-over-year basis, but from Q4 to Q1, it was the same level of increases as last year. If I heard you correctly, your guidance for Q2 bookings implied maybe down a little sequentially. Is that signaling that we're plateauing on incremental growth in demand and returning to a more typical orders cadence?

Yes, I think that's correct. I think the bookings number in the first quarter was about $12.75 billion, and the bookings number in Q2 at the midpoint is $13.55 billion. I don’t see a deceleration in demand. However, I will admit we do recognize that there are some uncertainties in the current macro environment, and we’d like to see how it plays out a bit more.

Understood. I'm looking forward to the Analyst Day; I'm sure Peter will plug it.

On that note, next question, please.

And our next question is from Andrew Nowinski from Wells Fargo. Your line is open.

Great. Thank you. And congrats on the nice quarter. I just want to ask about your pipeline because this is the second quarter in a row that you've talked about pipeline strength. At the end of Q4, I think you said you had a strong pipeline entering 2022, and now you're saying you have an accelerating pipeline growth. Can you provide more detail on where you're seeing that growth accelerating? Thanks.

I think it's pervasive. We look at the three different sources of pipeline: the channel, the marketing team, and the direct sales force. We’re pleased with the contribution from all three of them. We’ve talked for an extended period about the channel and the investments we make and partnering with them. The marketing team deserves a lot of credit, especially with the success of the Fortinet championship and how they’ve leveraged that in other geographies. The pipeline growth appears solid throughout.

I agree. Both the additional investments we made in marketing and sales, along with restructuring the team, have made it more efficient and driven a lot of additional pipeline for us.

And our next question is from Ben Bollin from Cleveland Research. Your line is open.

Thanks. I appreciate you taking the question. I was hoping you could address a bit about how you view service opportunities longer term. You suggested you're expecting some catch-up or acceleration on services through the back half based on backlog lead times and procurement but are interested in how you think the elevated level of appliance placements this year could influence demand for services even beyond 2022.

Yes, it’s a great question. We do see the service will drive additional growth and margin for us going forward, especially with the new FortiOS 7.2, which offers a lot of new services. Many of those services today we don’t charge customers for. Our service cost averages about half of our competitors’. There’s a lot of room to grow service and improve margins there. With additional product deployments and our service platform extensions, we believe this will drive additional revenue, sales, and margin for us.

Just from a modeling standpoint, keep in mind that those price increases in the second half of last year and the first quarter of this year give us an immediate lift in product revenue. It takes a little longer to see that in services due to revenue recognition timing. Between new sales and renewals, the new price points for the services will start to have an impact, contributing to the acceleration that we mentioned.

Thanks, guys.

And our next question is from Rob Amen from Piper Sandler. Your line is open.

Hey, guys, this is Justin on for Rob. I wanted to follow up on the OT topic. You guys have quantified the success in selling into this use case for a couple of quarters now. How do you view OT as a driver into 2022 and beyond, especially considering federal government guidance and broader spending intentions around protecting critical infrastructure?

Yes. The OT clearly sees a bigger market going forward, probably bigger than SD-WAN. We're seeing strong growth there, and we anticipate further investment to meet that demand.

Got it. Thanks.

And our next question is from Gray Powell from BTIG. Your line is open.

Great. Thanks for taking the questions. Congratulations on the really strong results. I was just hoping to drill in on the SD-WAN side. How should we think about the growth of your SD-WAN business this year in context with guidance, or maybe relative to the overall company growth? And how do you feel about the competitive environment in that category and maintaining growth at or above market rates in the next few years?

First, I do believe SD-WAN will continue to grow like 30%, 40% year-over-year for the next five years because it's a technology that addresses application-based traffic management. Our offering is the only one combining security with SD-WAN and leveraging ASIC for a huge performance advantage, providing more function. So far, we're selling SD-WAN as part of the FortiGate platform, where we don’t even charge for that service, unlike other vendors. We feel we have a huge advantage for both the technology and the cost, and we will continue to gain market share, growing above market rates.

Understood. That’s very helpful. Thank you.

And our next question is from Irvin Liu from Evercore ISI. Your line is open.

Hi, thanks for the question. I was surprised to hear that 93% of the backlog is from existing customers. Can you help us parse through some of that strength within your existing customers? How much of this addresses the broader growth of their IT workloads and more attack surfaces versus a like-for-like growth in or installed base refresh? Or is this more about displacing other vendors within your current customer base?

I can't really quantify it. It's a good question, but I think expansion is by far the largest opportunity for us. Refresh and competitive placements probably weigh fairly equally for the remainder, considering we have a long product suite that frequently receives updates. We're consistently getting more opportunities with sales and competitive displacements. So I would imagine expansion is the biggest and refresh and competitive displacements share a similar area.

Also, we have the largest customer installation base in the industry. We have roughly 40% of all deployments, which is more than the number two, three, and four combined. This gives us a broad customer base, currently around 600,000 customers. Some of them are only using Fortinet solutions in part of their infrastructure. So we see significant benefits expanding to additional infrastructure and managing what we call a mesh network.

Thank you. That's helpful.

And our next question is from Gregg Moskowitz from Mizuho. Your line is open.

Hey, thank you for taking the question. Keith, just to follow up on early ordering last quarter. You had estimated that low single digits of your Q4 business came from products ordered in advance. How would you size this for Q1? I’d appreciate a clarification regarding the backlog, is it still about two-thirds networking equipment?

I think the backlog is closer to 50-50 between networking equipment and the core platform. We’ve seen a balanced approach. I do think it’s low-end FortiGates that are still dominating our space. I don't remember quantifying early ordering. It's certainly something we’ve discussed internally. The main constraint lies in finding out when the supply will be available.

Well, I think what we stated in Q4 last year was that we had some transactions, a couple of deals that we expected to deliver into 2022—these were part of the backlog at the end of 2021. That was just a few million-dollar deals.

Yes, the constraints are about when supply is available because it’s in our backlog and we can deliver as soon as the supply arrives.

Thank you. And there are no further questions in the queue. Do you have any closing remarks?

Thank you, Laurie. I'd like to thank everyone for joining us on the call today. As a reminder and a plug, Fortinet will be hosting an Analyst Day on Tuesday, May 10, next week. A link to register for the webcast can be found on the Events and Presentations page of the company's Investor Relations website. If you register now, it's a little quicker next Tuesday. You can also register the day of. But again, thank you for your time. Appreciate the interest in Fortinet. Have a great day. Take care. Bye-bye.

Thank you. And this concludes today's conference call. Thank you for participating. You may now disconnect.