Hello and welcome to Fortinet's first quarter 2026 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 over the call to Anthony Luskri, Vice President of Investor Relations. Please go

ahead. Thank you. Good afternoon and thank you for joining us on today's conference call to discuss Fortinet's first quarter 2026 financial results. Joining me on today's call are Ken Zee, Fortinet's founder, chairman, and CEO, Christiana Ogard, our CFO, and John Whittle, our COO. Ken will begin our call today by providing high-level perspective on our business. Christiana will then review financial results for the first quarter of 2026 before providing guidance. During the Q&A session, we will 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 the 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 stated otherwise our GAAP results and gap to non-GAAP reconciliations are located on in our press release and in the presentation that accompany today's remarks both of which are posted on our investor relations website as a reminder this is a live call that 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 investor relations website 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 thank you anthony and thank you to everyone for joining our call we are very pleased with our excellent first quarter result exceeding our guidance through strong execution and broader base demand as a result building growth 31 percent total revenue increased 20 percent and the product revenue growth 41 percent non-gap and gap opportunity margin were very strong under 36 and 31 percent with gap operation margin and revenue growth total together 51 percent one of the highest in the industry we also generate a record 1 billion free cash flow highlighting the strength and durability of a business model. Gap earning per share increased 29% demonstrating our commitment to strong shareholder return. The convergence of networking and security approach Fortinet has lead for 26 years is accelerating in the AI era. Customers are adopting Fortinet platform with secure networking, unified SASE, secure operation built on a single FortiOS operation system, enabling in expanding across many use cases. By delivering all core SASE capability natively integrated in one option system, our SASE firewall significantly reduced complexity for customers. Innovations such as FortyOS 8.0 with its rich integrated functionality of Forty ASIC technology, which deliver higher secure computing performance and a significant lower cost, and our direct supply chain management continuing to differentiate Fortnite and supporting market share gain as the AI drives strong demand for SaaS e-firewalls. Secure networking building growth 32% outperforming the broad market. Today we announced the 4D gate 3500G and 400G deliver significant performance improvement over previous generations. Further strength in Fortnite's leadership. OT security accelerated in a quarter with OT building grows over 70 percent as customers prioritized protecting critical infrastructure amid a heightened threat. Unified SASE building grows 31 percent. Our differentiation is powered by three key advantages single operation system across negative firewall SD-WAN and SASE. Our own global cloud infrastructure delivers better security and performance and roughly one-third the total cost ownership of peers and our much larger total addressable market especially in sovereign and private sassy which allow customers to deploy sassy in their own environment to meet data sovereignty and regulatory requirements beyond secure networking and sassy ai is rapidly expanding opportunity in security operation as air driven security operation building growth 23 percent supported by more than 20 ai enabled solution on our platform as customer consolidated vendor and simplified operations finally giving our strong result and confidence in the business we are reaching our 2026 guidance we continue to expect balanced growth strong cash generation recurring revenue and shareholder focused long-term growth capital allocation strategy while it consistently delivers gap profitability since IPO. As AI increases the demand for security, our platform approach continues to differentiate, supported by a strong direct operation model that's enabled us to turn supply chain challenges into opportunity to gain market share. 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 Kristiana.

Thank you, Ken, and good afternoon, everyone. As Ken noted, we delivered a strong first quarter, exceeding the high end of our guidance across billings, total revenue, operating margin, and earnings per share. The success reflects broad-based demand and strong execution across customer types, industry verticals, our geos, and all three pillars. total buildings grew 31 percent to 2.09 billion driven by broad strength across secure networking unified sassy our large enterprise segment was particularly strong secure networking buildings grew 32 percent driven by robust 40 gate demand as customers expanded protection across operational technology environments contributing to ot billings growth of over 70%. Unified SASE adoption continued to build during the quarter, with billing scoring 31%, driven by strength in SD-WAN and 40SASE. 40SASE expansion within our customer base also remains strong, with 18% of our large enterprise customers now having purchased 40SASE, an increase of over 45 percent ai driven security operations buildings grew 23 percent highlighting our continued platform expansion within our installed base turning to revenue total revenue grew 20 to 1.85 billion with product revenue increasing 41 to 645 million as customers shifted toward higher performance products this included a number of ai related deployments where customers invested in 40 gates to support increased throughput segmentation and security requirements across ai infrastructure technology upgrades upselling and expansion into new use cases drove strong growth in both hardware and software we again benefited from our strong supply chain execution Recent pricing changes had a low single-digit impact on product revenue growth. Service revenue grew 11% to $1.21 billion, while service billings growth re-accelerated to 27% and deferred revenue increased 15%, driven in part by SecOps ARR growth. Review service billings growth, deferred revenue, and SecOps ARR growth together with accelerating providing product revenue as leading indicators of future services revenue. Stepping back, these results reflect both strong execution in the quarter and durable demand drivers that continue to shape customer priorities as customers invest in and upgrade their network security solutions to defend against sophisticated attacks that are growing in both speed and complexity due to the availability of ai tools ai is expanding the attacks surface and increasing performance requirements which is driving higher and more durable security spent across networking sasi and security operations our strong product revenue and service billing strengths and outlook continue to be driven by key tailwinds including the ongoing convergence of security and networking, rising customer investments and demand to secure AI infrastructure as traffic, segmentation, and performance requirements increase, and accelerating IT and OT convergence as customers recognize growing exposure across critical infrastructure. These drivers translated into strong demand this quarter, particularly in large enterprises, where both the number of deals greater than 1 million and total deal value grew over 60%. We saw strong growth in both Europe and the U.S. Looking ahead, we can see these dynamics reinforced by durable tailwinds that support continued platform adoption over time. Tailwinds include vendor consolidation, ongoing technology upgrade cycles, and the continued expansion of enterprise attack services across cloud, OT, and AI environments. In OT specifically, we are seeing strong demand driven by heightened ransomware and nation-state activity alongside rapid digitalization as organizations seek to deploy AI. These same dynamics are extending into SASE, where customers increasingly require flexibility to meet data privacy, sovereignty, and regulatory requirements. We support both cloud-based SASE and sovereign SASE, enabling enterprises and service providers to deploy SASE within their own data centers when required. Demand for our sovereign SASE continues to be strong, and no major SASE competitor currently offers a comparable solution. Rising cyber risk heightened regulatory scrutiny, growing data sovereignty requirements while dealing with economic pressures are further accelerating customers to adopt platform-based approaches. At the same time, rapid AI adoption and increased geopolitical uncertainty are expanding the cybersecurity term as organizations prioritize resilience, sovereignty, and consistent protection across increasingly complex and distributed global infrastructures. Importantly, these trends align with the reasons of our platform approach continues to resonate. Fortinet's platform approach is differentiated because secure networking, unified SASE, and AI-driven security operations are all built on the single operating system for the OS. This unified architecture enables customers to deploy security consistently across private, public, and hybrid multi-cloud environments, as well as across hardware, software, and SASE form factors, while supporting seamless expansion across use cases. As AI rapidly expands the attack surface, customers are prioritizing integrated platforms that share telemetry and reduce operational complexity, accelerating vendor consolidation. Against this backdrop, our strong network security foundation remains a core differentiator, driving adoption of SD-WAN, SASE, and security operations, and supporting continued wallet share expansion as customers simplify architectures and consolidate vendors this contributed to growth of 28 percent in unified sasi and secops combined with momentum continuing across our more services rich pillars we are also introducing a new sdwan and sasi services bundle designed to broaden adoption and further support services revenue over time we also benefit from durable competitive advantages, particularly as performance requirements increase. Our proprietary ASIC technology and integrated operating system deliver superior performance and lower total cost of ownership, which is increasingly important in high throughput environments as customers scale AI-driven traffic inspection. Finally, customer demand remained broad-based across segments, demonstrating the durability of our platform strategy, with over 6,600 new organizations selecting our FortiOS platform during the quarter, reinforcing the breadth of demand across SMB mid-market and enterprise customers. Overall, these results reflect consistent demand drivers and durable long-term trends. As the market continues to evolve toward platform-based security architectures, we believe Fortinet remains well positioned to take share and deliver sustained growth and long-term shareholder value now i would like to highlight some key seven figure deals that demonstrate our market leadership and customer expansion first a cloud infrastructure provider focused on gpu compute for ai workloads selected 40 net to secure a new ai data center as part of its continued expansion the customer chose our 40 gates to deliver high performance perimeter protection segmentation and secure connectivity for a new production environment the win was driven by fortinet's ability to provide scalable high throughput security aligned with the customer standardized architecture enabling rapid deployment of new capacity as demand for accelerated compute continues to grow In another AI-related deal, Fortinet was selected for the initial phase of an AI data center project in the Middle East for a leading generative AI company. This win positions Fortinet as a key security partner for next-generation AI data center infrastructure, which demands significant scale, performance, and architectural flexibility. The customer selected Fortinet for the strength of our security architecture to address the complexity of securing high-performance AI environments. This deployment also reinforces the importance of standardizing Fortinet security solutions to enable consistent, scalable, and efficient protection as AI data center deployments continue to expand. Next, a multinational energy company selected Fortinet to standardize and secure its network through the deployment of our full SD branch solutions across more than 3,000 locations, alongside OT security for an additional 300 global sites. The win reflects strong customer confidence in our ability to support large-scale distributed infrastructure environments with a unified approach to networking and security. By consolidating networking and security onto a single platform, the customer simplified operations while improving resilience and highlights Fortinet's ability to scale securely within complex, mission-critical infrastructure environments. The customer is also exploring an expansion into Fortisasi, highlighting the opportunity to further extend secure access and capabilities across the enterprise. Lastly, a global manufacturer selected our Fortisasi solution to secure approximately 40,000 users as part of a strategic initiative to modernize its remote access environment. The win was driven by our lower total cost of ownership and commitment to ongoing feature development, positioning us ahead of the competition. The customer chose Fortisasi for its unified 40OS platform, which provides a single security policy across 40 sassy and 40 gates with globally distributed pops for simpler consistent protection across on-premises and cloud environments and enabling them to build a scalable security architecture turning to margins and cash flow non-gap gross margin of 81 was better than expected which is impressive given the strong product revenue growth of 41 and the related makeshift towards product our gap gross margin was also strong at 80.3 percent non-gap operating margin of 35.8 percent was a first quarter record up 160 basis points and exceeded the high end of the guidance range mainly due to better than expected revenue growth and continued cost management our gap operating margin of 31.4 continues to be one of the highest in the industry Non-GAAP earnings per share increased 41% to $0.82, while GAAP earnings per share grew 29% to $0.72, significantly outpacing our top-line growth, reflecting high-quality earnings, supported by disciplined stock-based compensation, and continued return of capital over the past year. Free cash flow was a record of $1.01 billion, and adjusted free cash flow was $1.07 billion, up 27%, and we presented a margin of 58%. We repurchased 10.6 million shares of common stock for $827 million during the first quarter, and an additional 1.9 million shares for $146 million quarter to date. The remaining share repurchase authorization as of today is approximately 766 million. Now moving on to guidance. As a reminder, our second quarter and full year outlooks, which are summarized on slides 30 and 31, are subject to the disclaimers regarding forward-looking information that Anthony provided at the beginning of the call. Consistent with our disciplined and prudent approach to guidance, our strong first quarter execution supports a higher second quarter and full year outlook we are raising our full year guidance across all top line metrics including billings revenue and service revenue while managing the second half of the year on a quarter by quarter basis for the second quarter we expect billings in the range of 2.09 billion to 2.19 billion which at the midpoint represents growth of 20 percent revenue in the range of 1.83 billion to 1.93 billion which at the met point represents growth of 15 percent non-gap was margin of 79.5 to 80.5 percent non-gap operating margin of 33 to 35 percent non-gap earnings per share of 72 to 76 cents which assumes a share column between 736 and 740 million infrastructure investments of 50 to 100 million in non-gap tax rate of 18 percent and cash taxes of 160 to 180 million for the full year we expect the links in the range of 8.8 billion to 9.1 billion which at the midpoint represents growth of 18 percent revenue in the range of $7.71 billion to $7.87 billion, which at the midpoint represents growth of 15%. Service revenue in the range of $5.09 billion to $5.15 billion, which at the midpoint represents growth of 12%. We continue to expect services revenue growth to pick up in the second half of the year, driven by accelerating product revenue growth, a key leading indicator. Non-GAAP gross margin of 79% to 81%, non-GAAP operating margin of 33% to 36%, non-GAAP earnings per share of $3.10 to $3.16, which assumes a share count of between $743 and $749 million. infrastructure investments of 350 to 550 million non-gap tax rate of 18 percent and cash taxes of 400 million to 450 million i will now hand the call back over to anthony to begin the q a session

thank you christiana 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 thank you if you would like to ask a question please click on the raise hand button at the bottom of your screen when it is your turn you will hear your name called and receive a message on your screen notifying you that you may unmute yourself we will allow one moment for the queue to form our first question comes from shawl ayol at td cohen your line is

open please unmute and ask your question thank you uh good afternoon guys congrats on quarter and the guidance. Cano, Christiana, what drove the strength this quarter, but probably more so, what provides you with the confidence in this strong guidance? It would appear that even second quarter could be prudent, to put it very mildly. Just curious, ask your thoughts about it.

so it's great question thank you uh if you uh first definitely ai is a tailwind to drive the growth and for us we can also invest in ai for for like 15 years with over 500 pattern and a lot of internal usage and also like building the product so that's where kind of we prepare for this growth also from the operation side which is whether direct manufacturer operation inventory all these things so that's where we see is a it's an opportunity and also AI I keep saying AI accelerate the convergence of our network in our security like I mentioned like two months ago in the phone accelerate which is really a lot of company need to secure their internal network their server data center all these things so that's what we see is this growth probably will be more long-term and the same time we kind of differentiate ourselves a lot with other competitors I actually put a slice on the investor presentation slice 10 go back almost 30 years with all these at different point solution compared to all this integrate solution so Fortinet probably the only company every major like like a new demand for network security we kind of a in-house develop a solution including the right now the sassy and the same time we kind of also integrate well with all the previous function and we also keeping improving on all this with our ASIC acceleration with our own infrastructure to better security lower cost I think all these drive the company keeping gaining market share in the last like 20 plus years so that's i feel this time is that we definitely want to leverage this opportunity and uh whether ai also kind of supply chain and we just feel we we gain market share very quickly right now thank you our next question

comes from sakit kalia at barclays your line is open please unmute and ask your question

okay great hey guys thanks for taking my questions here and great start to the year um can maybe maybe for you you know the security environment feels different after after mythos maybe the question is because i know you spend a lot of time with customers what are customers saying to you about how they're reacting and and what parts of fortinet's portfolio

do you think could benefit most i think i keep in telling customer you need to use your ai to secure ai all this right there it's a kind of an interesting definitely ai exposed a lot of vulnerability and also you have to react very quickly and leverage ai to react all this operation so that's where like for long term definitely secure operation which we have a over 20 product using ai a building ai that's really helping the customer but on the other side And we also feel the AI also, I mean, to meet all this AI demand, also a lot of infrastructure build up. So that's why we see, like, especially we're the only leader in the OT security area, we see the OT grow like 70%. It's very, very strong growth because OT really, like, secure pretty much the bottom few layer of the AI five-layer cake, right? So whether the energy level, infrastructure level, only leverage OT security, we are probably the only leader in that space, give us a lot of strong growth there. On the other side, we also see kind of a customer see the value, starting to realize the value, whether this integrate more function into the single OS and also the ASIC advantage and also the supply chain operation model we have. It's all kind of a long-term investment

but starting paying off now. Makes sense. Christian, maybe for you from our follow-up, I'd love to get a little bit of a historical perspective. I think back in the early 2020s, post-COVID, we had the benefit of some early ordering, which then created a bit of an air pocket in later quarters. Maybe the question is, how do you think about how much early ordering maybe helped this quarter, and what gives you the confidence that this also doesn't create an air pocket at some point in the future?

So I think the situation in 2026 is a little bit different from COVID because the threat landscape is accelerating significantly. During COVID, I think there were some new requirements by the companies where they needed to secure remote access and digitize their their business a little bit more now it's about really a lot of significantly more threats so I think that the demand for our products is going to continue as the AI data centers are going to be built out as customers are deploying AI internally so we see significant tailwinds for our business and for our product specifically yes

Second, also we put a presentation on the slide 25. You can see during the COVID, we're the one gaining a lot of market share compared to all the other peers, right? So we feel this is an opportunity because we feel our operation model, our kind of a long-term investment has much more advantage than any other competitors. So we feel this is the same like last time. I don't feel anybody can predict how long this supply chain will last, but we feel we have a strong direct operation model which is much better than pretty much all the other competitors and at the same time a lot of long-term investments are starting to show the advantage right now. So that's you can see the Slice 25 showing during the COVID five, six years ago, we're the one gaining a lot of market share. Even there's some kind of a, we call the digestion in the 24, early 25, but we're still keeping gaining share. And that's why we feel this is the hard opportunity. We feel it works better for us than other competitors.

Super helpful. Thanks, guys.

thank you our next question comes from rob owens with piper sandler please go ahead with your

question thank you guys for taking my question and can i i appreciate the throughput and segmentation arguments relative to ai but i want to dovetail a little bit more on sockets question just around when you mentioned the 20 or so products that uh you use ai within your portfolio are there a couple things that customers are honing in on that are driving kind of that sense of urgency

for them right now uh actually christiana gave a few case about supporting some ai data center build out all these things i think initially they probably just like the five layer cake right you need to have all these uh the lower layer build up first from all this energy infrastructure and then secure the data center so we see after they build out some kind of a AI infrastructure then the security need to come in especially when the application starting deploy so we see one company when studying kind of leverage AI we feel it's a lot of opportunity for secure company to help him to helping the company or customer to really using AI to secure it I would say which we feel is we kind of a head of a most of our competitor with all this long-term investment with all the pattern with all this whether you know on decide in the in the GNA in the customer supporting and also you know the product we feel is a like I said I'm kind of his engineer background I love all the new technology that's where in the last 30 years like I said in the last time so we're only one internally develop all this new technology meet all the challenge integrate together and compared to most of competitor have to go through acquisition to meet all this new demand that's actually give us a confidence to continue grow faster gaining market share and then maybe to

add to this um yeah i think that what what we hear from customers that are not building out their own ai infrastructure that are more on the um ai use side they they are most afraid of um traffic flows and shadow ai and so i think that's that's where a lot of our products can help them as well and also with the 4d os um improvements and upgrades there's there's a lot of interest in in what can our existing products do and which additional products like for the AI gate can they deploy to have more visibility, more transparency and monitoring of the traffic flows.

I appreciate the color. Thank you.

Our next question comes from Brad Zelnick at Deutsche Bank. Your line is open. Please go ahead with your question.

Oh, excellent. Thank you so much for taking the question. I actually wanted to follow up on what Rob had asked and ken's comments about a the ai data center opportunity and christian what you shared that was very helpful about the win in the middle east and securing ai infrastructure what are you seeing specifically in this market for securing ai data centers like who are you competing with who are you partnering with how long are the cycles and maybe how much of the pipeline uh for these opportunities is contributing to the strong guidance that you've given us

for the year? Actually, if you look at the 49 technology, we're the only cybersecurity company build their own ASIC chip from day one. So that's give us much better performance and the lower cost, both on the competing power cost and also energy cost, and also feed all this data center, internal segmentation development quite well. None of our competitors competing with us, So I went on the performance on cost, including the two products we just announced today. So on average, all the top like 10 function, we yielded like a 3 to 5x better performance for the same cost, same function, and much lower energy consumption. That's fitting quite well for a lot of bigger infrastructure data center build out. Also for a lot of internal segmentation. ai especially the agent traffic definitely generate a lot of additional traffic especially we call the east-wide traffic and all the server or even like a different department you do need additional security to protect that for the internal segmentation that's where we see a lot of strong demand in not just data center but also internal segmentation to protect all this I'll get a better manageability or better visibility for all this agent traffic.

And then, Brad, maybe related to your question on what do we see with regards to pipeline building. I think my comments around the customer wins were also about reference architectures and scalability. And most of these providers that are starting to build out data centers, they're creating their kind of reference architecture to build out more as the demand increases for their services. And so I think we are confident that this creates a tailwind for us.

Yeah, and also especially like a lot of technology like ASIC, like a system, the hardware, It's more long-term investment compared to some software, some other, which most other secure company kind of more focus on that one, the software side, which I feel definitely now is the time to see all this long-term investment benefit, all the Harvard ASIC benefit. That's customer setting. I appreciate more in the Harvard ASIC now.

Thanks, Ken. It reminds me very much of the heritage of Fortinet and all the early success that you had in the service provider. market segment and and why it's so important today in ai data centers maybe if i could just follow up with a with one quick follow-up um for you christian just to get your latest thoughts on memory pricing and any further price increases that you might be contemplating throughout the year and maybe specifically what's what's actually baked into the guidance along those lines thanks

again great job so from a guidance perspective um we have we've baked in a low single digit amount into specifically into product and from what are what are our plans with regards to pricing I mean we kind of said it multiple times that that we're trying to maintain gross margin so as as our component costs increase we are contemplating pricing actions but we will also bring it down again when um we don't have the pressures anymore yeah we the the yeah the policy we have is uh

now like some other company in using this opportunity to increase margin where we are now we just want to maintain the healthy margin and when our cost increase we also do the monthly adjustment but when the cost coming down we also adjust lower uh just maintain the same margin that's the policy and just like five years ago in the last supply chain and also it's the same policy during this this time the supply chain memory shortage but for us also because we have a much bigger quantity than on the other competitor like we have almost 60 percent market share on the unit shipment of the the network security system uh which we feel and also with direct manufacturer operation model we feel we uh we prepare better we kind of operate better we also negotiate better compared to other competitors. So that's what we feel is a chance to gain market share again like we did five years ago.

Awesome. Thank you.

Our next question comes from Tal Liani with Bank of America. Your line is open. Please unmute and ask your question.

Hello. You got me back. You can't get rid of me. Hi, Tal.

You're a few analysts stuck with the space for

it's fun to cover the space um i have um have everyone asked about ai i'm going to ask about the other thing um the most surprising part of your result is actually the billing growth of legacy 32 year-over-year growth in secure networking and checkpoint when they reported they said that their firewall went down or the growth decelerated and and the market is weaker so the question i have for you is how is your you know what are the firewall trends what drives it what drives this 32 percent growth in in secure networking building and how sustainable is it

thanks yeah actually i prepared a slice 10 in the presentation for you uh actually the most growth on the secret networkings come from 40 gate you can see for the network security every year you need to meet a new function demand requirements so basically for us we are probably only company in-house keeping me down this new function development whether from early-day UTM agent firewall to sandbox to like SD-WAN SASE to today's AI quantum computing right so once you you kind of come up all the innovation you also need to integrate so now the 40OS 8.0 integrate about 30 function there but with all the 30 function you also need to keep improvement that's where the ASIC come in to improving the performance and additional computing security computing and the same time we also invest in infrastructure to make it more secure and also kind of lower the cost so that's where I using the 3i to describe what happened in the network security space in the last 30 years I feel some of a competitor they kind of cannot come up the new function quick enough or kind of cannot integrate they have to go through acquisition to meet all this demand and they become like a multi-point solution that's the blue blue area you can see there's a lot of company including some of competitor therefore using multiple solution to meet one 40k solution for the OS solution we have whether the SD-WAN and the SASE some other function there that they're also still a lot of a point solution provider including SASE they just can now offer customer the total security infrastructure infrastructure security there so thus we see the the benefit of this a single OS with all this integration with all this kind of new function and improvement, ASIC, all these things get more like advantage over other player. And this supply chain is the opportunity to show the advantage we have and that's also the operation model we have. Yeah, that's a comment of this slice kind of using 3i to describe the advantage we have.

And Ken, is there, so how, like 32% growth is very respectable. How sustainable is it, is there a comparison thing that boosts up the, I don't have the slide in front of me, so I don't have the numbers in front of me, but is there an easy comp situation this year that boosts up this growth to 32% or is it, is it, there is something more fundamental that could be sustained over time?

So you can look at slides 24 and 25 compared to five years ago. It's pretty comparable. So that time we also grow like a 40, 40, 40 some percent. Yeah.

So, so we can really see interest demand in, in network security and, and the drivers are not only AI, it is consolidation, it is simplicity, it is the the security posture across the products that that are driving significant interest into that network security portfolio. Great, thank you. Our next question comes from Fatima

Boulani with Citi. Please go ahead with your question. Good afternoon, thank you

for taking my questions um ken i wanted to ask you my first question and then i'll follow up with christiana um we are at a very very high level in uh one of the most consequential uh capex and infrastructure investment cycle across the board you are clearly seeing the benefits of that you know based on the seven figure uh precedent transactions you talked about related to ai infrastructure build out and some of the responses to earlier questions. I wanted to ask you specifically what the impact is to your secure networking portfolio and specifically the higher end FortiGate appliances. Should we expect the product mix of the business to trend towards some of the very, very high end skews as you support the infrastructure build out in a secure infrastructure build out opportunities ahead. And then my follow up for Christiana is related to the product growth upswing and presumably the higher end mix of product and appliance uptake from your FortiGate portfolio. Why aren't we seeing maybe a more visible, bigger catch up on the services side? And I guess to ask it more simply, when I look at your services revenue guidance, you've only really tightened the range bringing the low end of the services revenue up so i'm just wondering if to the extent you are seeing a better product mix shift why we wouldn't see an even better uh attach on the services revenue thank you so much it's a great question uh yeah

definitely 49 has more advantage in the high end with its own a6 solution uh it's a it's a much better performance much lower cost and both on the on the product and also on the on the energy cost there so that's we see pretty strong growth in the in the high end but the same time you can look at the unified SASI also grow like 31% and also Q4 LASI grow 40% that's more dry by the a lot of by the ST1 low end that's also the reason we kind of launched a new bundled service to a salary both the current customer and also the new customer adopt sd1 and sassy i also put a slice on there try to give the number there it's a one of slides also you can see the bundle is very attractive for the customer to adopt the new sassy and sd1 service there is a slice 14 actually so that's at least all this different incentive there for both current customer and and also the the new customer there so that's why I feel the growth like both higher and also low and below and more driven by the ST1 science inside high and definitely more data center but data center also a few once more AI data center build out it's still in the very early stage and also once the application starting leverage AI that will be very long-term growth going forward it's just starting kind of a very early run pop stage but definitely on the other side we see also the growth was strong in the in the SD-WAN SASE area and we believe this a bundled service will also drive additional service revenue after customer have the hardware box but to address your your

um concerns so to speak i i'm super enthusiastic about our services billings yeah 27 growth deferred revenue grew 15 so i think it all um trends in the right direction the conversion from the balance sheet into revenue just takes longer so you don't see it immediately but the trends are all positive our growth was was really good so um i'm i'm very happy with the quarter results and also with the attached rates of services with hardware thank

you our next question comes from gabriella borges at goldman sachs please go ahead with your question

hi good afternoon thank you ken if i'm hearing you right it sounds like there has been a little bit of a step function change in the pipeline related to AI data center. And my question for you, if I'm hearing that right, is why do you think that's happening now? I'm curious if there is a shift maybe happening with sovereign AI projects or if it has something to do with the mix from training to inference. Curious to get your thoughts.

Actually, they both connect together. So both the AI data center combined with the sovereign SASE, sovereign AI, kind of drive some of the growth together. So that's where, because even for this, it's interesting, it's the same 40 gate, 40 OS, to do both the AI security and also the SASE to protect all this zero trust environment. And I think that, yeah, they kind of, I feel it's both connect, driving the growth together.

That's really interesting. And the follow-up I have for you is, Quarannet has been transparent on some of the vulnerabilities that you found in your own technology when you find them. How is your internal process for hardening your infrastructure changing as you get access to some of these leading-edge LLM models that can perhaps help you upgrade the quality of your own infrastructure?

Yeah, we're working very closely with us as a leading AI company, whether to handle the vulnerability or kind of helping automate a lot of operations for our customers. At the same time, we also build our own infrastructure which has better security, better performance than some other third-party infrastructure. We feel we do better than most competitors, and at the same time, we're kind of keeping developing new technology, like we say, using AI to secure AI.

Thank you for the thoughts. Congratulations on the quarter.

Thank you.

Our next question comes from Brian Essex with JPMorgan. Please go ahead with your question.

Thank you for taking the question, and congrats on the results for the quarter. Maybe just a quick one for me, and I think I wanted to follow up on Fatima's question because I wanted to make sure that I understood some of the dynamics here with regard to the unified SASE billings. Could you maybe unpack that a little bit and help me understand with regard to the growth, how much is SD-WAN? how much is SASE, and particularly with, if you can help us reconcile the deceleration and SASE IRR, just so we can put the two together to understand, you know, what the primary drivers of that in the segments of the business at play are.

Yeah, the slide four, we have the three pillars there. Yeah, definitely, the SASE is more like a 40 SASE, some other things there. Actually, the 40 SASE also we see very, very strong growth on ARR, all these things there. And also we believe the new bundle will also accelerate the SD-WAN, which on the slide 14, both SD-WAN and the SASE service going forward. So it's, yeah, the unified SASE grow like a 31 percent. It's on a pretty big, yeah, it's about 25 percent of building right now to come from the unified SASE. is a pretty big number we're the top three player in the space and also probably one of the fast

growing right now that's helpful and how much was uh contribution from sovereign sassy certainly getting a lot of focus right now on both sovereign data centers and sovereign infrastructure would

love to understand the contribution there uh solving sassy i feel probably almost the same size as the cloud-based SASE, probably even bigger, but also sometimes the sovereign SASE, because we're using the same OS, same 40 gates, sometimes they just buy as a firewall, gradually turn on the SASE function and deploy internally in their data center or infrastructure, and also we see the service providers starting to run public-solving SASE work quickly, especially in Europe, which there are a few big service, telecom service providers starting kind of a launch of this service service with our product so that that's also helping drive a lot of product revenue got it very helpful color thank you ken thank you

our next question comes from gray powell with btig your line is open please go ahead

okay great thanks i just want to make sure you can hear me okay yep all good uh i this is perfect timing um i actually wanted to follow up on on brian's question uh uh and it kind of relates to what we've been hearing in our field work uh specifically are are you starting to see more of your branch office firewall customers turn on sd-wann components and and then convert to firewall convert their firewall subscriptions to secure service edge and if so So, I guess, how should we think about the ballpark uplift to a customer's annual spending or just just how should we directionally think about that opportunity? Just because it does seem like you have an installed advantage in the market that maybe we weren't thinking about six or 12 months ago.

Yeah, it's definitely a very good survey, very good feedback. And that's also the reason on the Slice 14, we launched a new bundle service to helping us accelerate the SDI and SASE. You can see we combined like a four or five different separate service into one bundle service, including some SASE license based on the model of a product from like a 40k60 up to like a middle range product, we all come with some kind of a SASI lessons together with all the SD-WAN, whether the underlay surveys or the application monitored. Yeah, so it's a very good observation. Definitely customer study more turn into the firewall into SD-WAN and also into the SASI zero trust environment now. So it's kind of helping us accelerate the additional service. Also, you can see we also have the slice that we're tracking the big enterprise. It's the slice 11. You can see the adoption of whether the SaaS, the SD-WAN, the big enterprise we're tracking. I think last quarter, the SaaS is about 16%. The quarter quarter is now 18%. So it's a very strong growth. So, yeah, definitely that's the trend.

And, Gray, let me add to that. As we upgrade our customer base, these features become more interesting, and so it allows us also to sell the next higher-end model, typically for the edge, which is super beneficial for us as well.

Okay, that's really helpful data points. I know we're tied on time, so I'll leave it there. Thank you very much. Thank you.

our next question comes from joe gallo with jeffries please go ahead with your question

hey guys thanks for the question um i just want to unpack the current service billing strength in one q it grew 13 was a nice acceleration you know what was the driver there was that subscription was that more support was it just moving further away from prior year headwinds and can we expect that line to further accelerate this year so it i would say it's um the strength

in the quarter we had good linearity that that helped us a little bit in the current quarter already and then with a strong overachievement it helps for the rest of the year that our that we believe our growth or that we are now super confident our growth rates are picking up as I said earlier it takes time right so this is where we've adjusted the low end of the range to bring up the midpoint, but it's not that you can get super fast acceleration of the balance sheet. So we are confident with not only this year, but also the benefits that the service billings give us for next year.

Okay, thank you. And then just as a quick follow-up, I appreciate the historical context you provided earlier on COVID versus now and the need for more cyber. But just more explicitly, did you see a change in buying behavior in 1Q related to people pulling forward because of higher memory costs? And I'm just curious, if not, what are the metrics that you're tracking that give you confidence internally that you haven't really seen a change in buying behavior yet? Thank you.

I think during the COVID, we do see some pull forward, especially like retail when they have like a like a like a deployment they schedule like for 12 months they try to order ahead of time make sure all the all the products are available for them but this time we don't see much pull forward but we do see the demand pretty strong and also we kind of control the whether the channel even trace the margins in much we don't see increase there also so that's what we just just try to manage better and the same time we just tell customer we just want to maintain a margin we don't want to raise the margin and like some other other supplier and then once our cost higher we'll raise the price but also once come down we also lower the price in real time so that's where I think we build some good trust with some of the partner the customer and also the direct model also helping there. So it's difficult to judge how long this will be last, could be longer, could be shorter. But for us, we just operate based on our own kind of a healthy margin and also a more quick response and the direct operation manufacturing model to get better, supporting better to the customer.

That's really helpful. Thank you. And really nice quarter. Congrats.

Thank you.

Our last question comes from Junaid Siddiqui with Truist.

Please go ahead with your question. Thank you and good afternoon. Ken, you mentioned in the past how the edge is eating the cloud as customers move latency-sensitive and cost-intensive workloads to the edge. My question is, how are you adopting your security architecture to support this shift to capture this demand redistribution? And does this shift meaningfully change the value proposition or monetization opportunities at the edge versus traditional data center deployments? Thank you.

Yeah, the cloud is more because it kind of built ASIC for 20, 30 years because we want to increase the computing power and also real-time processing on our plans on the edge. That's got a lot of criticized before, which why this kind of big long-term investment and compared to whether the cloud but definitely the the AI and also kind of the new trend you see the the edge the hardware studying has show better value now so that that's a few what we'll continue keeping the same strategy we have keeping investing the ASIC keeping investing the hardware appliance and also kind of because a lot of a new like what do you call the physical AI or some modern they do need a use edge computing to the real-time computing decision there instead of I try to go to the cloud to do some kind of cloud more for the management side so that's we see the new trend especially like OT you see that the strong growth in OT over 70% a lot of the have to deploy in the field and manage the traffic in real time on the edge. So that's we see pretty strong growth. I have to say it's kind of hybrid approach. It's never 100% on the cloud, never 100% on the edge, but kind of both sides has a value. I just feel like a few years ago, there's too much talk emphasized on the cloud. Some competitor even thinking it's a cloud only, I don't feel that's the case. that's where we keep insist on investing in the in the system our side and now the customer the partner and see the benefit of this hybrid approach great thank you thank you

we have no further questions at this time i will now hand it back to anthony lusgrid for closing

remarks thank you i'd like to thank everyone for joining today's call we will be attending investor conferences hosted by JP Morgan and Bank of America during the second quarter. Fireside Chat webcast will be posted on the events and presentation sections of our investor website. If you have any follow-up questions, please feel free to contact me and have a great day.