Hello and welcome to Fortinet's First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, we will conduct a question-and-answer session. Please be advised that this call is being recorded. I would now like to hand the call over to Aaron Ovadia, Senior Director of Investor Relations. Please go ahead.

Thank you and good afternoon everyone. This is Aaron Ovadia, Senior Director of Investor Relations at Fortinet. I am pleased to welcome everyone to our call to discuss Fortinet's financial results for the first quarter of 2025. Joining me on today's call are Ken Xie, Fortinet's Founder, Chairman and CEO; Keith Jensen, our CFO; Christiane Ohlgart, our CAO and Sales Operations Leader; and John Whittle, our COO. As a reminder, Keith will be stepping down from the CFO role on May 15th, and Christiane will take over as our next CFO. Ken will begin our call today by providing a high-level perspective on our business. Keith will then review our financial result for the first quarter of 2025, and Christiane will provide a forward-looking view, including guidance for the second quarter and updating the full year. We will then open the call for questions. During the Q&A session, we ask that you please limit yourself to one question and one follow-up question to allow others to participate. 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 their risk factors in our most recent Form 10K and Form 10Q 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, all references to financial metrics that we make on today's call are non-GAAP unless otherwise stated. Our GAAP results and GAAP to non-GAAP reconciliations are located in our earnings press release, and in the presentation that accompanies today's remarks, both of which are posted on our investor relations website. As a reminder, this is a live call. It will be available for replay via webcast on our investor relations website. The prepared remarks will also be posted on the quarterly earnings section of our IR website following today's call. Lastly, all references to growth on a year-over-year basis unless noted otherwise. I will now turn the call over to Ken.

Thank you Aaron, and thank you to everyone for joining our call. We are pleased with our strong performance in the first quarter, successfully balancing growth and profitability, including building a revenue growth of 14%, record first quarter operation margin of 34%. Record free cash flow of $783 million, a margin of 51%, and strong growth in secure operations and unified SASE with security service accounting for building growth of over 110%, which drove our unified SASE building growth to 18%, accounting for 25% of our business. Fortinet's leadership in innovation and long-term investment is evident in our market position as the number one deployed firewall vendor worldwide, a market leader in SD-WAN and OT security. With our strong SASE strategy and growth, we are confident we'll be number one in this space as well. The strong momentum behind our unified SASE pillar is evidenced by the customer reliance on our single OS platform. The typical SASE journey begins with the customer's initial purchase of Fortinet's industry-leading ASIC based FortiGate firewall powered by FortiOS. From there, the majority of large enterprise customers expand into SD-WAN before progressing into a FortiSASE solution. This expansion continues to grow; 73% of large enterprise customers have now adopted our SD-WAN solution and have either begun or are well-positioned to transition to FortiSASE, with our FortiSASE penetration among large enterprises increasing nearly 10% quarter-over-quarter to 11%. We remain the only vendor to have organically developed all of the core SASE capability within a single operational system for FortiOS, including next-gen firewall, SD-WAN, DLP, Secure Web Gateway, and CASB technologies. This native integration of networking and security reduces complexity and operational costs while enhancing user experience and ensuring security across both on-premise and cloud environments. In addition to our traditional SASE offering, we also offer sovereign SASE, our tailored solution for large enterprises and service providers that require full on-premise or in-country control of their data. With sovereign SASE, customers can deploy FortiSASE with their own data centers ensuring that all data is processed through customer-owned or country-specific locations to meet compliance requirements by country or industry regulations. This approach accelerates performance through our FortiASIC technology and is well-suited for highly regulated sectors such as finance, government, and healthcare. AI-driven secure operations building increased by 29%, accounting for 10% of our business as customers continue to consolidate multiple security vendors on our integrated and AI-enhanced Forti Fabric solution. Looking ahead, in addition to SASE and secure ops, we expect OT security and AI to be key growth drivers over the next five years. In OT security, a rapidly expanding market driven by a surge in connected devices, Fortinet is recognized as the only leader in the relevant advisory report supported by over a decade of strategic investment and specialized solution positioning us for continued growth. We also continue to invest in our AI capabilities, which we began developing more than 15 years ago, and now hold over 500 issued and pending AI patents, more than any other competitor. With our AI technology now integrated into a dozen products, new AI capabilities like FortiAI Assist for automating security tasks, FortiAI Protect for advanced threat detection, and FortiAI Secure AI for protecting AI infrastructure are advancing our offerings. Today, we announced the FortiGate 700G series, a high-performance firewall for mid-sized businesses and distributed enterprises, powered by our FortiASIC technology, which delivers a 5 to 10x performance advantage over our competitors and FortiOS, the only operational system recognized across five secure networking Gartner Magic Quadrants. This approach significantly lowers total cost of ownership and complexity while reducing energy consumption and driving Fortinet's continuous strong growth and market share gain in secure networking. I would like to thank our employees, customers, partners, and suppliers worldwide for their continued support and hard work. I will now turn the call over to Keith and Christiane.

Thank you, Ken. Thank you, Aaron. Welcome, Christiane, and good afternoon everyone. Let's start with the key financial highlights from the first quarter before handing the call off to Christiane for a more detailed and forward-looking view. We delivered strong performance and top line results that approached the high end of our guidance range together with record first quarter operating margin of 34%. Total revenue grew 14%, driven by strong product and service revenues with product revenue growth of 12%. In addition, new logos increased 14% to over 6,300, driven by continued worldwide investments in our channel partners. Looking at our financial results in more detail, total billings grew 14% to $1.6 billion, driven by 18% growth in unified SASE and 29% growth in AI-driven SecOps. Unified SASE and SecOps now account for 25% and 10% of total billings respectively, up 1 point each. RPO grew 12% to $6.5 billion, while current RPO grew over 15% to $3.4 billion. Unified SASE and SecOps ARR increased 26% and 30% respectively, reaching a combined ARR of $1.6 billion. Turning to revenue and margins, total revenue grew 14% to $1.54 billion. Product revenue increased 12% to $459 million, driven by growth in both hardware and software solutions. FortiGate hardware revenue grew in the mid-teens, outpacing total product revenue growth driven by strong performance in low-end and high-end models, and supported by early mover large enterprise customers upgrading their firewall infrastructure. Software license revenue grew in the mid-teens and represented a high-teens percentage of total product revenue, driven by on-prem time-based software license growth of over 30%. Service revenue of $1.08 billion grew 14% to 70% of total revenue. Security subscriptions revenue increased 16% while support and related service revenues increased 12%. Service billings grew 14%, our highest growth rate in the past 5 quarters. Total gross margin increased 380 basis points to 81.9% and exceeded the high end of the guidance range by 90 basis points. Product gross margin of 67.7% increased 1,200 basis points as inventory-related charges normalized from the highly elevated levels we saw in the first half of 2024. This added approximately 1,300 basis points to product growth margin, and approximately 400 basis points to total gross margin. Service gross margin of 87.8% was down just 10 basis points as we successfully absorbed increased costs associated with the expansion of hosted security solutions. Operating margin increased 570 basis points to a first quarter record of 34.2%. It was 320 basis points above the high end of our guidance range, reflecting the strong gross margin, and FX tailwind of around 100 basis points and cost efficiencies in the business. Looking to the cash flow summarized on Slides 18 and 19, free cash flow tends to be seasonally strong in the first quarter. It was a record $783 million while free cash flow margin was 51%, up 6 points. Adjusted free cash flow was $839 million, representing a margin of 54%. Infrastructure investments were $67 million, down from $155 million due to a lower level of real estate investment. Cash taxes were $27 million. Average contract term was 27 months, roughly flat year-over-year and down 2 months, quarter-over-quarter. While we did not repurchase shares during the first quarter, we did repurchase approximately 4.6 million shares for a total of $401 million during the month of April. The remaining share buyback authorization as of today is approximately $1.6 billion. I'll now turn the call over to Christiane to share a few significant wins from the first quarter, as well as our more forward-looking view, including business conditions in the second quarter and full-year guidance.

Thank you, Keith. As Ken mentioned earlier, the noteworthy headline in this uncertain macroeconomic environment is that customer adoption of our solutions is accelerating. This momentum is driven by two key factors: one, our decades-long innovation leadership, and two, our competitively differentiated dedication to putting the customer first. Together this creates a powerful network effect with some of the most discerning organizations rapidly adopting Fortinet solutions at scale. This is exemplified by Fortinet being the number one solution at firewall, as well as a leader in SD-WAN and OT security. Also, our leading SASE strategy is driving strong growth, reinforcing our confidence in becoming the number one player in the SASE market. Building on this momentum, our SSE solution is gaining strong traction fueled by continued success in up-selling SSE to our large SD-WAN customer base. With both ARR and billings growth at over 100%, we believe FortiSASE is the fastest growing SSE solution at scale in the market. As shown on Slide 7, the typical FortiSASE journey begins with a customer purchasing our market-leading FortiGate firewall, followed by an expansion to SD-WAN and then onto our single vendor SASE solution. Our adoption of SD-WAN and SSE continues to grow with our large enterprise expansion penetration rates increasing to 73% and 11% respectively, with the SSE penetration rate growth increasing nearly 10% quarter-over-quarter. In addition, a second customer buying journey illustrates the growing convergence of security and networking. It too starts with our FortiGate firewalls and expands to our switches and access points. The key to this expansion is FortiOS, FortiLink technology, which enables seamless management of our switches and access points through our unified operating system. Our increased penetration rates show the success of this strategy. Now, I'd like to review some deals that showcase our SASE adoption and customer expansion. In an eight-figure displacement deal, an international government purchased our SD-WAN solution as well as our FortiSASE solution to secure the hybrid workforce of 6,000 users. This customer chose Fortinet for its ability to deliver flexible and consistent security enforcement, ensuring secure access to both on-premises and cloud applications while maintaining a seamless user experience. By harnessing the power of our FortiOS, we delivered superior performance over the competition, reduced total cost of ownership, and effectively consolidated multiple security functions into a single integrated platform. In another SASE win, we replaced the incumbent vendor at an international education provider, which chose FortiSASE for their 40,000 users. The decision to transition to FortiSASE was driven by ongoing performance challenges with their previous SASE vendor. Keys to this win included FortiSASE’s ease of use, seamless integration with the Fortinet Security Fabric, and proven scalability across their SD-WAN sites. Based on the success from their proof of concept, this customer will benefit from improved performance, consistent security for users everywhere, and greater operational efficiency. In a seven-figure deal, a large multinational manufacturing company selected our SD-WAN and multiple SecOps solutions. Fortinet displaced the legacy SD-WAN provider by demonstrating how FortiOS simplifies operations, reduces total cost of ownership, and unifies security and networking functions on a single platform. The integrated nature of FortiOS also enabled seamless alignment with the company's existing Fortinet security infrastructure, establishing a strong foundation for future projects. Lastly, a Fortune-500 company signed an eight-figure deal that spans all three of our pillars. Over the past three years, they've expanded their FortiGate installed base by more than 80%, driven by our world-class support for their data centers and branch locations, as well as the automation and seamless integration enabled by our FortiOS operating system. Rounding out the billing's commentary, larger enterprise was our top-performing customer segment with growth of around 30%. The number of deals greater than $1 million were up 30%, including three eight-figure deals this quarter, up from one during the same period last year. EMEA was our best performing geography driven by mid-teens growth from international emerging markets. Among our top five verticals, financial services and worldwide government led the way with growth of over 20%. Before moving on to guidance, I'd like to spend a few minutes discussing the current U.S. tariff situation. The U.S. tariff situation landscape is evolving rapidly, and our comments on this call reflect the information currently available to us. Despite the current geopolitical uncertainties, demand for our cyber-security solutions remains strong. Our pipeline continues to grow, and we are not seeing signs of near-term erosion. Additionally, our close rates remain robust, and sales cycles are tracking within our normal historical range. For the second quarter, we do not expect U.S. tariffs to have a meaningful impact on our operating margin, as only a few components are subject to tariff charges. Should tariffs increase in the future, we expect any resulting impact on our operating margin to be limited to hardware sales to U.S. customers. As long as our international hardware sales do not flow through the U.S., they are not subject to U.S. import tariffs. Moving on to guidance, as a reminder, our second quarter and full-year outlook are subject to the disclaimers regarding forward-looking information that Aaron provided at the beginning of the call. While our business remains strong and we outperformed on the top line in the first quarter, with continued confidence in our ability to execute, we recognize that our customers' investment decisions can be influenced by the broader economic outlook. As a result, we are maintaining our full-year billings and revenue guidance ranges to account for potential top line risks associated with the evolving geopolitical environment. Regarding the record firewall upgrade cycle that we've spoken about previously, we continue to expect the firewall upgrade cycle to gain momentum in both purchasing and planning activities in the second half of 2025.

Thank you, Christiane. As a reminder, during the Q&A session, we ask that you please limit yourself to one question and one follow-up question to allow others to participate. Operator, please open the line for questions.

Our first question will come from Brian Essex with JP Morgan. Please unmute your line and ask your question.

Hi, good afternoon. Can you hear me okay?

Yes.

Great, great. Yeah, thanks for taking the question and congrats on the results for the quarter. I guess maybe for Keith or Christiane, could you unpack the dynamics behind the maintenance and services revenue? Just trying to understand it's a segment that I think we were expecting to kind of accelerate, it declined sequentially. So, just trying to understand some of the puts and takes behind that and how you expect that to, I guess, grow throughout the rest of the year, so kind of like level set expectations.

So, I think there are a couple of aspects that you touched on. One is the quarter-over-quarter slight decline is really affected by Q4 having two more days than Q1, and that affects the daily rate going into revenue. Of course, we would have expected a slightly better acceleration, but there's a little bit more time that we need to grow our acquired entities and their revenue streams, so that's impacting Q1 service revenue predominantly.

Is there a dynamic there between FortiGuard and FortiCare that we need to think about?

I would say current RPO is still strong, so I mean we have confidence in the growth.

Yes, and also the FortiGate growth above the building growth, which will drive future service revenue, so we see the FortiGate building growth actually couple points above the average growth, so we see it's a pretty good sign, plus we start to add more service on top of the FortiOS and that's also what drive the future service revenue.

Great, great. Thank you Christiane and Keith, thank you so much.

Our next question will come from Tal Liani with Bank of America. Please unmute your line and ask your question.

Here we go, can you hear me?

Yes, please.

Thank you. In previous quarters, we discussed the end of service and how it would bring demand forward. Last quarter, you mentioned that demand would materialize in the next four or five quarters this year rather than next year. My question is, why is there some weakness in the guidance for the next quarter? Why isn’t the demand showing up sooner? Can you elaborate on the factors at play? I’ve been comparing your guidance to the consensus, and I'm trying to understand why there isn’t noticeable strength, particularly with the upcoming tariff increase that is likely to raise prices for everyone.

I don't think we plan to change the price under the current conditions. However, there is still some uncertainty, which makes us cautious. We do see that customers appreciate the solution we offer, but various geopolitical factors and other elements are increasing uncertainty, so we need to be careful. Christiane, you might have more insights on this.

So I would say, we saw good close rates and a good linearity in Q2 in April. So, it gives us confidence, but we also are tied a little bit by the expectations that we get from our sales teams. So, we see good momentum, but sales is hesitant with all the things that are going on to go up in their expectations for us. And so, I think that's where we'd rather be careful with the guidance and then hopefully are going to meet our numbers.

Got it, thank you.

Our next question comes from Gabriela Borges with Goldman Sachs. Please unmute your line and ask your question.

Hey, good afternoon and thank you. Maybe Christiane, I'll pick up right where you left off on sales being hesitant. Clearly, we're all seeing similar headlines as you are. Maybe just tell us specifically what are some of the conversations that sales is having from customers. What are the reasons they're hesitant to commit to purchasing Fortinet and how are you thinking about maybe some of that hesitancy getting resolved? Is it maybe when we run into the lead time situation for the end of life or how do you think about that flowing through over the next few quarters?

We had a number of events in Q2, and we get really good feedback, so I think it's going to resolve. We have good channel activity. We have good channel programs, and I think some of you may have seen that in channel checks also that they are positive about Fortinet's programs. So, I think it just needs to, with all the macro news that are coming in every day and don't turn out as bad as they are. There is hesitancy because until the PO is in, it can get delayed. Yeah, we are positive. I mean, I think you saw it from my comments. We haven't seen delays yet, but we don't know what happens over the next two months right, or the rest of the year.

That's fair. Thank you.

Our next question will come from Keith Weiss from Morgan Stanley. Please unmute your line and ask your question.

Thank you for taking the question. Maybe carrying on with that line of thought, if you will. What gives you guys confidence that you're still going to be able to perform to like the stronger second half pickup? I get there's a product cycle going on and people have to start preparing for end of life. But is there no risk there of potentially people kind of sweating the asset or pushing it out? I guess that's just the question of, like where do you stand confident that the second half will be stronger? And how much of that second half strength is implied in the guide right now?

I mean the second half strength is implied in the guide because we have harder comparisons to meet, right, as in the second half as well. What gives us confidence? We have a number of products that have been released, the next generation. Our products provide, I think, significant improvement of total cost of ownership and security compared to what customers bought 8, 9, 10 years ago. We see the activity going on, especially in the enterprise. I think we mentioned in our prepared remarks that FortiGates grew faster than the rest of product revenue, which I think is a testament to the strength that we are seeing. The same is true for OT. So, we are confident, probably in this room more so maybe than sales when they talk to customers and need to put a commit on their pipeline.

We have identified growth in three key areas. In secure networking, which is our traditional strength, we remain dominant as the only provider of ASIC technology with a single FortiOS, and we are continuing to capture market share despite being the current leader. In unified SASE, we believe we rank among the top three players and are outpacing others in growth, positioning us to become a leader in that space as well. Additionally, our Secure Operations segment saw a growth of 29%, likely exceeding the growth rates of other companies of similar size. We are consistently gaining market share in these areas. However, we are uncertain about the overall market growth projections for this year and next, as some forecasts suggest variability. We are confident in our unique technology advantages, which we believe will enable us to continue expanding our market share, despite the uncertainties in the overall market conditions. While many acknowledge that security tends to be more resilient compared to other sectors, it is not entirely immune to impacts. We remain cautious but are optimistic about exceeding our guidance.

Got it, that makes sense. Thank you.

Thank you Keith.

Our next question will come from Shaul Eyal with TD Cowen. Please unmute your line and ask your question.

Thank you, good afternoon everybody and congrats on solid set of results considering the growing macro. The number of eight-digit transactions has been on the rise over the past few quarters. When we unpack those transactions, and I know they could differ from one another, are they representative of the entire Fortinet platform stack? Do they include SD-WAN and SASE? What's driving those large transactions predominantly from a product perspective?

So, a significant driver for these large transactions is SD-WAN deployments and enterprises. And so typically that's the starting point, but then as we mentioned, the customers are buying into the fabric and are buying additional solutions in addition to SD-WAN.

Our next question will come from Rob Owens with Piper Sandler. Please unmute your line and ask your question.

Great, thank you very much. To follow on with Shaul's question there just around these large deals. Were they considered in the pipeline as you looked at the first quarter? I know back in the fourth quarter, on some of the larger transactions, you did talk about some potential pull-forward relative to the end of life. So, curious if this was a similar experience with the larger transactions or was it more wall-to-wall SD-WAN deployment or global SD-WAN deployment like you spoke to? Just some more color would be great.

So no, these were transactions that were in the pipeline and closed as expected. So, I think this is where our remarks came in. We do not see deals pushing out yet, but these deals also closed before the end of March mostly.

Our next question comes from Eric Heath with KeyBanc. Please unmute your line and ask your question.

During your prepared remarks, you mentioned how tariffs would affect hardware sales to U.S. customers. Can you quantify the impact of tariffs on margins? Additionally, could you discuss the steps you might be taking to adapt your supply chain to lessen these impacts?

So, we did not mention that we have impact from tariffs in Q1, right? So, we don't expect any impact from tariffs in Q1 or significant impacts in Q2, because only very few of our products are subject to tariffs. And then it's only a small portion that actually gets imported into the U.S. for U.S. customers.

Yes. The other part is really because we design from ASIC chip to the system to all the operating systems and the service. We'll be able to relocate our manufacturing, and we tend to maintain a bit more inventory than some other companies, which provides us with a buffer. So far, we don't see any impact from the tariff yet.

Thank you.

Our next question will come from Saket Kalia with Barclays. Please unmute your line and ask your question.

Hey guys, thanks for taking my questions here. Christiane, maybe for you just to stay on that topic but just from a different angle. Can you just talk about whether there was any changing behavior from channel partners this quarter ahead of tariffs? I think some industries out there saw just some earlier purchasing ahead of potential price increases. Did Fortinet see any of that this quarter?

We've got questions about whether we will increase our prices, but we did not see specific acceleration of deals.

And Saket, to expand on what Christiane mentioned, let's discuss whether tariffs are affecting our business today. The first impact would be on cash flow, as you won't notice it in the income statement due to how COGS is recorded for GAAP purposes over several quarters. Essentially, you should assume there is no impact from tariffs in that context. Regarding your question about whether we experienced a pull-forward in purchasing as seen in other industries, the answer is no, not really. Our business model and pricing advantage keep us insulated from that. We aren't immediately raising prices if tariffs are added since it won't affect our profit and loss for a significant period of time, which I hope clarifies things.

Yes, that helps a lot. If I could add a follow-up question for Ken to step back a bit from the tariff discussion. It's encouraging to see the unified SaaS business continue to grow. Could you elaborate on the great deals mentioned earlier? What types of solutions are you usually replacing for these customers? Is it mainly VPN hardware, secure web gateways, or other solutions that FortiSASE can take over?

We see ourselves not only replacing some traditional old VPNs but also competing with other SASE providers. We have identified three key differentiators in our SASE offerings. Firstly, our SASE is integrated into a single operating system platform, which no other competitor offers. This makes it easier for traditional customers, particularly since we lead in the firewall space with over half of global deployments. They can smoothly add SASE and SD-WAN services to their existing operating systems, and this accounts for over 90% of our growth. Secondly, we initially aimed to partner with various carrier service providers, but due to their slower response, we took matters into our own hands about 18 months ago. We are now engaging with these service providers and larger enterprise customers, especially in finance and healthcare, who are increasingly interested in implementing their own private and sovereign SASE solutions. We are already seeing the deployment of sovereign SASE, where we can help build their SASE solutions within their own data centers, catering to significant customer bases. Lastly, the global infrastructure we've developed, supported by our secure technology, gives us an edge and allows us to provide more secure solutions than many other SASE competitors. Hence, we're seeing our services replace traditional VPNs and, as mentioned by Christiane, also other SASE players, particularly in the enterprise sector. While traditional VPN replacements are penetrating smaller SMBs and mid-enterprises, we are certainly displacing numerous other SASE providers within larger enterprises.

Very helpful, thanks guys.

Thank you.

Our next question will come from Patrick Colville with Scotiabank. Please unmute your line and ask your question.

Hi, thank you for taking my question. I want to circle back to Keith and Christiane regarding the service revenue decline sequentially. Christiane, you mentioned this was due to two fewer days in the fiscal first quarter compared to Q4, and I assume part of this is related to the leap year. However, we didn't observe this pattern four or eight years ago. What makes this situation different now? Is part of the explanation that customers are updating their appliances and adding new subscriptions, which might be causing this dynamic?

Patrick, I'll jump in because some of that was based on historical data. We actually had a similar discussion in 2021 after a leap year because year-over-year comparisons were unusual then. I seem to have forgotten about that in the last 3.5 years, which is now coming back to bite me. From Q4 to Q1, there's a natural decline with two fewer days, or about a 2% drop, which I believe is what Christiane mentioned. You were also discussing customers refreshing their service revenue, but it wasn't entirely clear. Perhaps I can offer a comment, and Christiane can correct me if needed. The conversation around setting guidance and the observations about pull-forward shows that, in this environment, the guidance acts more as an observer than a participant. It was wise not to fully account for the positive results. The discussions Christiane is referencing with channel partners and end users highlight a significant improvement in the upgrade cycle compared to six months ago. Our sales team is experiencing this as well; it's evident in channel checks and surveys. We're seeing it reflected in account plans too. So far, we haven't seen any indications that customers intend to change their design architecture, nor have we lost deals because they're opting for a SASE solution. I believe our team would guide them toward our product instead. Additionally, there haven’t been any competitive displacements against us. These factors influenced the guidance-setting process, but I’ll let Christiane add to this to ensure I haven't put her in an awkward position.

No. I mean, Keith is right, there are a lot of factors why we guided the way we guided from what we can see and what we get from the sales teams, right? Also, don't forget that each fiscal year, you start rolling out new channel programs. And it takes a little bit of time until you see how these are picked up, right? So, we expect service acceleration through our channel programs, and we expect improvement. But from a quarter-over-quarter perspective and from a growth rate, we were not there where we wanted to be. And partially, it's also due to a little bit more churn on some acquired customers.

Okay, very helpful. Thank you so much for that both Keith and Christiane.

Our next question will come from Shrenik Kothari with Baird. Please unmute your line and ask your question.

Thanks. Can you guys hear me all right?

Yes.

Great. So, Keith and Christiane, you mentioned that EMEA was your best-performing geo with mid-teens growth and partner-like momentum there, clearly a tailwind. And you also made it clear that tariffs pull-forwards are not really a dynamic. So just curious, what is driving strength out there? I mean I know Ken mentioned about the telco partnerships and tariff shaping demand for sovereign SASE. Just curious if you can elaborate a little bit there. And in APAC, are you also starting to see traction from other modernization initiatives around OT or AI SOC deals as well? And I had a quick follow-up.

In the EMEA region, especially in internationally emerging markets, there is significant strength in operational technology as well as in government opportunities. Regarding modernization, we are also seeing positive developments in the APAC region, where we achieved successes in government and other sectors.

Got it. Just a quick follow-up on the new logos, which showed solid growth at 14% year-on-year. I'm curious about how much of the SASE and SecOps growth is coming from first-time Fortinet customers compared to expansion from your existing installed base. Are these newer models being implemented early in the deals, or are they still mostly reliant on FortiGate deployments?

I would say the majority of our new customers are smaller customers, as you can tell by the number of customers. We had some nice large new logos, but most of the smaller customers do start with the FortiGate.

Got it, thanks a lot.

Our next question will come from Brad Zelnick with Deutsche Bank. Please unmute your line and ask your question.

Great, thanks so much. Can you guys hear me?

Yes.

Awesome. Last quarter, I think it was you talked about investments that you're making in various forms of enablement. So that's channel and your direct sales would be optimally positioned to capture the refresh opportunity. How is that progressing? And what have you seen over the past few months in terms of your competitors trying to capitalize on this end-of-service event that's coming up?

We don't really notice competition in our end-of-support group, even though our competitors are discussing it.

And then the incentives.

Yes, there are several channel incentives to implement new products along with additional services. Particularly in the lower end of the market, the potential to grow SASE and other products is significant. We also offer multiproduct incentives to our channel partners.

Thanks for that. If I could maybe just ask one follow-up. I think this is the first quarter where you now have consolidated. I assume it's not all that material, but is there anything just to call out that we should consider when we think about the trends going forward in terms of contribution and flow-through to the financials?

I would say it's immaterial. I don't think there's anything to really factor in there.

In the first quarter guide, we indicated what we expected the impact from the M&As would be, and I believe we were consistent with that, if I remember correctly.

Yes. And right now, we are letting them run on their own strategy while we are creating our internal integration plan for service providers.

It will take about 1 to 2 years to co-develop a new product that allows consumers to utilize some of the ASIC technology and other related technology. This presents long-term growth potential, but it's not expected to materialize in the short term.

Awesome.

Our next question will come from Adam Borg with Stifel. Please unmute your line and ask your question.

Great. Do you hear me okay?

Yes, please.

Great. Just maybe, Christiane, on the upcoming refresh cycle. Any way to talk through some of the assumptions, both in terms of, hey, the number of firewalls we expect to be refreshed, will it be the same or fewer than what they had previously? Obviously, I'm assuming the performance of the models will be greater given these are old models. And I know you talked about it a few minutes ago, but maybe talk a little bit more about are you expecting any type of shift towards virtual or SASE from physical as part of this refresh.

So what we are seeing so far, the customers that have EOS devices, the smaller customers are buying more. The larger customers who had large FortiGates, it depends on the strategy and it depends on whether they are consolidating on bigger FortiGates or buying pretty much a similar amount of the same next-generation model. So, I don't think on the enterprise side and in the data center appliance, you see one strategy. It depends on customers. In the MSE and the smaller customer cohort, what we see is that they are buying more than what they had previously.

Yes. An interesting conversation Christiane was sharing with me right before this call was that one of the challenges in tracking the refresh is not just that they're out there and saying, "Okay, I have 10 products that are going into service." But as she pointed out, they have those 10 plus they're buying for other used cases at the same time. So the deal sizes are getting bigger, but it's a little bit blurrier in terms of how much of that is the old product versus a new use case as you go forward. But I would say that the deal sizes, she's quite pleased with.

We are still focused on developing new products, such as the FortiGate 700G that we announced today. There are additional developments planned for later this year and into next year. We aim to ensure that new products significantly outperform their predecessors. Many customers might still be about a year away from making a decision, giving them time to evaluate their options.

That's great. I really appreciate the color there. And maybe just for Ken, a bigger-picture question. In our field work, data security just continues to come up as a really important priority. I know late last year, I think it was back in August, you guys acquired Next DLP. Love to talk a little bit more about early feedback on that acquisition and how you're thinking about the broader base security opportunity for Fortinet?

Yes. The acquisition of Next DLP is a significant advancement for our data loss prevention technology. It not only strengthens our existing secure access service edge but can also be offered independently to improve data security for large enterprises, particularly in terms of preventing data leakage. We view it as a collaborative effort with our teams focused on enhancing data security measures. This is why we are intensifying our efforts with sovereign SASE solutions, especially in sectors like finance, government, and healthcare. Data protection is critical, making this solution highly valuable.

And we're seeing that being rolled out at scale at large enterprises, and we just have to accelerate that. But it's working well at scale at large enterprises.

Our next question will come from Junaid Siddiqui with Truist. Please unmute your line and ask your question.

Hi, can you hear me?

Yes.

Yes.

All right. Great. Thank you. Yes, I just had a question on the CNAPP market and the traction that you're seeing in Lacework. One of your competitors has effectively ceded that space to a partner of yours. How do you see that market shaping up? And who are you seeing from a competitive perspective? And how are you differentiating from some of those competitors?

We see a significant opportunity with the Wiz Google development, as it has the potential to disrupt the market considerably. The Lacework solution is strong, but since it's somewhat of a new sales strategy for us, we need to concentrate on refining it. It will take some time, but we believe it represents a valuable opportunity in a large market with a significant total addressable market and considerable disruption. The solution recently received positive ratings, and we just need to improve our sales approach.

Our next question will come from Keith Bachman with BMO. Please unmute your line and ask your question.

Thank you very much. I wanted to ask a little bit about sensitivities. And what I mean by that is, Ken, you highlighted the three buckets of spend that Fortinet has: secure networking, unified SASE, and SecOps. As you think about over the next number of quarters, is there any comment when you hear feedback from the channel on deal elongation? Is it more, in fact, on the subscription side than the hardware side with maybe users not wanting to sweat their assets for regulatory reasons or compliance reasons or governance or what have you? And is there by a risk of some crowding out, if you will, on hardware refreshes that perhaps are ongoing that make may cause some weakness in the unified SASE and/or SecOps? I think SD-WAN, probably not. But just talk about the buckets of spending in terms of sensitivities as we go out over the next number of quarters, whether it be deal elongations or what have you. And Keith, certainly all the best to you.

Thank you.

Yes, that's a good question. Over the past 30 years, the industry has experienced downturns that caused a slowdown in infrastructure changes and hardware purchases. During these times, companies tend to stretch their existing resources. There is some uncertainty right now, but on the flip side, we see opportunities to gain market share due to our strengths in network security, secure networking, and Unified SASE, SecureOp. While the overall market may grow slowly, this gives us a chance to capture more market share quickly because we have unique advantages in each category. For instance, secure networking leverages convergence, ASICs, and a unified operating system, and we're seeing significant growth in SecureOp, with a 29% increase. We are committed to long-term investments that will drive growth over the next 5 to 10 years, benefiting the sector, customers, and partners. Last quarter showed promising billing growth, marking the best performance in the last six to seven quarters, particularly with FortiGate performing even better. This is a positive indicator of our strength, potentially driven by upgrades and core refreshes. At the same time, we notice smaller players in the market, especially in secure networking, becoming weaker, which allows us to gain their market share. Additionally, some larger players have begun shifting their focus, and we believe we have superior products and positioning across all three pillars, which will help us capture market share in each area.

Okay, thank you.

This concludes our question-and-answer session. I will now hand it back to Aaron Ovadia for closing remarks.

Thank you. I'd like to thank everyone for joining today's call. We will be attending investor conferences hosted by JPMorgan and Bank of America during the second quarter. The fireside chat webcast link will be posted on the Events & Presentations section of our Investor Relations website. If you have any follow-up questions, please feel free to contact me. Have a great rest of your day.