Fortinet, Inc. (FTNT) Q2 2026 Earnings Call Transcript

Hello, and welcome to the Fortinet's second 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 the call over to Anthony Lusbrey, 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 second quarter 2026 financial results. Joining me on today's call are Ken Zee, Fortinet's founder, chairman, and CEO, Christiana Olgard, our CFO, and John Whittle, our COO. Ken will begin our call today by providing a high-level perspective on our business. Christiana will then review our financial results for the second quarter of 2026 before providing guidance for the third quarter and updating the full year. We will then open the call for questions. 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 risk and uncertainties, which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular the risk factors, and our most recent Form 10-K and Form 10-Q for more information. All forward-looking statements reflect our opinions only as of 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 GAAP to non-GAAP reconciliations are located in our earnings 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 second quarter result driven by our differentiated strategy and innovation, strong execution, and the broad-based demand. Buildings grow 33%, while total revenue increase 26%, propelled by 52% growth in product revenue. Fresh cash flow more than tripled year-over-year to nearly $1 billion. Based on this strong momentum, we have raised our 2026 guidance. With AI quickly reshaping the security landscape, I would like to offer an other angle on the network security space and its trend by combining our secure networking and unified SASI pillar, which both run on the same 40OS, to create what we are calling the SASI firewall. Similar to UTM NetGen firewall replaced the traditional net-based firewall 20 years ago, I believe this new SASE firewall, which addressed the fast-growing area of SASE, AI, and Qantas, represents another massive opportunity for accelerated growth with a much larger total addressable market, as shown on the slides of 4 to 6 of the investor presentation. In the second quarter, Fulton and SASE firewall business growth 34% to over $2 billion, dollars, cementing our position as a top player in this space. What makes Fortinet SASE firewall unique compared to other competitors' SASE and firewall solution is that we are the only vendor to develop all key components of SASE firewall in-house and integrate into a single operation system, FortiOS. Furthermore, we have developed our Forti ASIC technology and invest in our own global infrastructure to accelerate the performance and lower the cost, making adoption and migration seamless for a large global customer base, as shown on the slides 10 and 11. Another key advantage of a SASE firewall is that we are the only vendor offering an easily deployable on-premise solving SASE solution, together with Cloud SASE. As we announced yesterday, the new FortiGate 1200G, the next generation SASE firewall that combines local enforcement with cloud-delivered security to meet evolving customer demand for data privacy, performance, and AI infrastructure management. We believe this has driven a strong product growth recently and has an addressable market that is approximately two to three times larger than the cloud-only SASE or competitive offering. and we continue to win a SASE deal versus all of the top SASE competitors. We also see strong demand across our other strategic pillar, AI-driven secure app, which had building growth of 25%, supported by over 20 AI-unabled solutions on our platform. As customer consolidated vendor and simplified operations, We recently launched 40ISOC, a new cloud-delivered AI SOC platform, and expand our 40 endpoint with new capabilities. As organizations deploy and use AI tools throughout their operations, they realize they must modernize their security to handle the complex, high-speed threat of AI error. And Fortinet is uniquely positioned here as our 40OS platform and 40 ASIC technology along enterprise to securely scale their next-generation AI environment with faster and better protection and simplified operation. Looking ahead, we believe the combination of AI-driven security demand, our integrated and accelerated SaaS-y firewall platform solution, and our strong operation model position foot in a well for long-term balance growth with strong cash generation, recurring revenue, and a shareholder-focused long-term growth capital allocation strategy while consistently delivering gap profitability. 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. We delivered a strong second quarter, exceeding the high end of our guidance across billings, total revenue, operating margin, and earnings per share. Our continued momentum reflects broad-based demand and strong execution across customer segments, industry verticals, geographies, and our integrated and innovative portfolio of solutions, further validating the strength of our platform strategy. Total billings grew 33% to $2.37 billion, driven by robust demand for physical infrastructure and related attached services across secure networking and unified SASE. We delivered exceptional billings growth across each of our three pillars in the first quarter, followed by an even stronger accelerating growth rate in each of the pillars in the second quarter. Secure networking billings grew 34%. We saw persistent high 40-get demand as customers expanded their network security, including operational technology environments, LAN edge, and AI data centers. OT billings increased over 55%, reflecting continued adoption of all solutions in industrial environments with high contribution to growth. We also saw outstanding strength in unified SASE, where momentum built throughout the quarter resulting in 35% billings growth. Adoption of 40 SASE within our installed base increased to 90% of large enterprises. Our success is highlighted by 40 SASE buildings growing over 100%, benefiting from expansion sales across our installed base, competitive replacements, and new wins with large enterprises. This momentum was driven by customers recognizing us for our continued investments into flexible deployment strategies for SASE, including our new SASE firewall strategy. The SASI firewall natively converges firewall, SASI, and hybrid mesh capabilities to protect users, applications, and data across the data center, cloud, and remote workforce. Instead of juggling high-volume east-west traffic up to a cloud pop and back, it inspects and enforces security locally while seamlessly leveraging SASI for outbound traffic. Billings from AI-driven security operations grew 25%, driven by strong upsell momentum as our installed base increasingly consolidates point solutions onto our broader platform. Turning to revenue, total revenue grew 26% to $2.05 billion, with product revenue increasing 52% to 773 million. Accelerating product revenue benefited from strong FortiGate unit growth and an increase in ASPs as customers shifted towards higher performing models. Customer investments to secure AI workloads and mitigate AI-related risks drove both new business and upgrade activity across our installed base, supporting growth across hardware, software, and attached services. Service revenue grew 14% to $1.27 billion, with growth improving from the prior quarter. Service billings growth increased 26%, and total deferred revenue increased 17%. This quarter's improved service revenue, alongside robust product momentum and operational improvements driving revenue conversion, reinforces our confidence in the long-term durability of our service business. We believe the first quarter of 2026 marked the trough for our service revenue growth rate and we anticipate a positive trajectory in our growth rates going forward. Taking a step back, our results reflect strong ongoing momentum from the durable market themes shaping customer priorities. Today, bad actors are leveraging AI to automate and scale sophisticated attacks, increasing the speed and complexity of threats facing organizations. Consequently, cybersecurity has become an urgent business priority, with high visibility at the executive and board levels, driving faster investment decisions. In addition, regulatory activity requires companies to act. In response, enterprises are increasingly upgrading their network security infrastructure to support the demands of AI-driven workloads and growing data volumes, more complex distributed environments, and the need for stronger network segmentation. Our strong second quarter results and outlook continue to reflect several important market dynamics, including the ongoing convergence of networking and security, increased investments to secure AI infrastructure, accelerating IT and OT convergence, and growing demand for high-performance security solutions that address evolving compliance and sovereignty requirements. This sovereignty theme is especially concentrated in EMEA and across public sector customers globally, playing directly into our strong market position in the region and that customer segment. As we look ahead, we continue to see these market dynamics gaining momentum, supported by ongoing technology upgrades, vendor consolidation, and the continued expansion of enterprise attack services across cloud, AI, OT, and critical infrastructure environments. AI is becoming a dominant driver of security infrastructure modernization. As organizations move from AI experimentation and early adoption toward broader deployment, they require security platforms capable of protecting AI models and data sets while securing large volumes of east-west traffic and enforcing zero-trust segmentation across distributed AI workloads. To navigate this growing complexity, customers are progressively looking for integrated platforms that provide shared telemetry, improved visibility, and reduced operational overhead. Fortinet addresses these evolving needs with a comprehensive strategy centered on three core areas. Securing AI data centers, protecting AI-driven applications, and delivering AI-native security operations. For example, a NeoCloud provider offering hosted infrastructure for generative AI workloads selected Fortinet to secure AI data centers in an eight-figure win. This builds on a seven-figure deal we secured in the first quarter, further enabling the customer's rapid expansion. They chose Fortinet for our strong price for performance advantage and our ability to deliver scalable, high-throughput security. This enables the customer to accelerate deployment of new capacity while maintaining consistent security and operational efficiency as demand for accelerated computing continues to grow. This expansion reflects a broader theme we saw in the quarter, with many AI data center wins from customers scaling their AI infrastructure. AI is creating demand for high-performance security solutions that serve as the foundation for secure, compliant infrastructure. As organizations gain greater awareness of AI-enabled tech technologies, security teams are accelerating investments to ensure their infrastructure can deliver the performance and protection required for the next generation of threats which also requires sassy technologies to meet these critical need for high performance security fortinet supports complex customer requirements through cloud-based hybrid on-premises and sovereign sassy offerings enabling organizations to deploy sassy in the environments that best meet their operational and regulatory needs. Customer demand continues to grow with our flexible deployment approach, representing a meaningful differentiator. In a competitive displacement win, a global pharmaceutical company signed a seven-figure FortiSase deal to secure over 45,000 users, replacing its incumbent SSE-only provider. The customer chose Fortinet for our unified architecture and integrated platform approach across SD-WAN, next generation firewall and switching, which reduces complexity and it delivers significant cost savings versus managing multiple point solutions. A key differentiator in this SASE win was our ability to extend security processing to the edge through our on-premises appliances, providing greater control, improved performance and deeper visibility compared to a cloud-only architecture. This deal validates our strategic rollout of 40 SASE Outpost, which is specifically engineered to bring local SASE enforcement closer to users and applications. This win also highlights our platform advantage, as we were the only vendor able to meet the customer's full set of technical requirements while enabling centralized management, simplified operation, and enhanced end-user experience. beyond ai and sasi ot security remains a critical business and board level risk priority the threat landscape has expanded beyond traditional ot environments into critical infrastructure supply chains and manufacturing operations with 40 nets integrated platform approach customer gain visibility across both their ot and it networks consequently we continue to see strong demand across our OT portfolio and related services driven by the combination of increasing cyber threats, AI adoption, and geopolitical uncertainty. In a seven-figure deal, a major utility organization selected Fortinet to support a large-scale communications modernization OT initiative spanning thousands of distributed field locations. The deployment leverages our integrated 40OS platform to enable reliable secure connectivity for operational environments by simplifying management and reducing infrastructure complexity. This engagement demonstrates Fortinet's ability to support mission critical infrastructure initiatives. Our strong results highlight our continued execution against the durable market themes shaping the cyber security industry. This is reflected in our services acceleration in the second quarter and our improved services outlook for the year, reinforcing the compounding strength and high margin predictability of our recurring revenue model. As organizations navigate AI adoption, expanding attack services, evolving regulatory requirements, and complex infrastructure environments, we believe Fortinet's integrated platform approach positions as well to capture share, deliver sustained growth, and create long-term shareholder value. Turning to margins and cash flow. Non-GAAP gross margin of 80.9% exceeded the high end of guidance, while GAAP gross margin was also strong at 80.2%. Non-gap operating margin of 38% was a second quarter record, up 490 basis points. This performance exceeded the high end of our guidance, driven by stronger than expected revenue growth, disciplined cost management, and growing efficiencies from our AI initiatives. Moreover, our gap operating margin of 33.7% continues to be one of the highest in the industry. The strong operating performance translated to the bottom line. Non-gap earnings per share increased 41% to 90 cents, while gap earnings per share grew 44% to 82 cents, significantly outpacing our top-line growth, reflecting high-quality earnings supported by disciplined stock-based compensation and continued capital return over the past year. free cash flow more than tripled year over year to 966 million benefiting from improved linearity higher billings and strong working capital discipline adjusted free cash flow was 996 million representing an exceptional margin of 49 percent we repurchased 1.9 million shares of common stock for 146 million during the second quarter and 12.5 million shares for 973 million year-to-date, which represents an average price for repurchases this year of around 78 per share. The remaining share repurchase authorization as of today is approximately 766 million. Now moving on to guidance. As a reminder, our third quarter and full year outlooks, which are summarized on slides 23 and 24 are subject to the disclaimers regarding forward-looking information that was provided at the beginning of the call. Consistent with our disciplined and prudent approach to guidance, our strong first half of the year supports a higher full-year outlook. We are raising our guidance across all top-line metrics, including billings, revenue and service revenue, as well as operating margin and earnings per share, while managing the remainder of the year on a quarter-by-quarter basis. This quarter's improved services revenue growth, along with a strong outlook, allows us to raise our service revenue guidance reflecting a positive trajectory in our service revenue growth rates. For the third quarter, we expect billings in the range of $2.25 billion to $2.35 billion, which at the midpoint represents growth of 27%. Revenue in the range of $2.01 billion to $2.1 billion, which at the midpoint represents growth of 19%. Non-GAAP cross margin of 79 to 81%.

Non-GAAP operating margin of 35 to 37%.

Non-GAAP earnings per share of 83 to 87 cents, which assumes a share count between $741 and $745 million. infrastructure investments of 100 to 150 million and non-gap tax rate of 18 percent and cash taxes of 100 to 130 million for the full year we expect billings in the range of 9.35 billion to 9.55 billion which at the midpoint represents growth of 25%. Revenue in the range of 8.02 billion to 8.18 billion, which at the midpoint represents growth of 19%. Service revenue in the range of 5.18 billion to 5.22 billion, which at the midpoint represents growth of 14%. We continue to expect service revenue growth to pick up in the second half of the year driven by accelerated product revenue growth key leading indicator non-gap gross margin of 79 to 81 percent non-gap operating margin of 35 to 37 percent non-gap earnings per share of three dollars 41 to three dollars 47 which assumes a share count of between 741 and 745 million. Infrastructure investments of $350 to $550 million, non-gap tax rate of 18 percent, and cash taxes of $400 to $450 million. I 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 will 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 a moment for the queue to form. Your first question comes from Socket Kalia from Barclays. You may now unmute and ask your question.

Okay, great. Hey guys, can you hear me okay?

Yeah, all good. Thank you.

Hey, excellent. Well, hey, thanks for taking my question here and and congrats on on another strong quarter um ken maybe for you on on that point you know this is the the second quarter in a row of of accelerating billings and product growth and and we've all talked about things like ai data center ot and and other trends but but i'm curious what do you think is driving the accelerating growth here and and just as importantly, how durable do you think it can be?

Yes, that is a very good question. We also spend a lot of time trying to study whether it's a new market trend or it's a supply or other things. We do believe the growth actually is a long term for Fortinet. Definitely you see the AI change a lot of our security landscape and also with all kind of a like a investment like a from the ASIC chip from our own infrastructure from the R&D innovation we also position much better than any of our other competitors that's also the reason I kind of a try to call a new term which I'm not sure will be everybody would like that is a SASE firewall. You can see on the investor slide number six, I believe. It's kind of a this new platform starting replacing the traditional nitrogen firewall and also replace a lot of like a single solution SD-WAN vendor and also competing quite well with all the cloud SASE provider, which Christiana gave the example, in like some global company, the cloud-only SaaS solution cannot meet a customer requirement, which they need to have a data privacy, they need to process a lot of information locally instead of sent to the cloud. So that's drive the change in the whole landscape, and we do believe it's the growth of quite long term, just like 20 years ago, the UTM NetGen firewall replaced the traditional net-based firewall.

Got it. That's very helpful. Christiana, maybe my follow-up for you, and hopefully your team has gotten you a little cup of tea or a cup of water there, but maybe the follow-up for you is, How are you thinking about the impact of price increases on your product growth for Q3 and Q4? I think there have been a couple price increases, of course, to reflect the higher input costs. But I'm curious how you're thinking about the impact here as we go into the second half.

Yeah, we have approximately high single digits impact built into our billings assumptions for the second half. and it's very dependent on product mix and what what is being sold because it i mean yes there were price increases but they were not for every product and every service so it really depends on what's um going and um this is why also if you if you look at back at my prepared remarks we saw really good unit growth and we saw good asp growth from moving higher in the various product mixes

so that's that's a good sign also that the customers are preparing for more network traffic than um previously yeah yeah also we kind of uh building the trust with our partner with our customer so we just want to maintain the same growth margin that's where we kind of a real time adjust the price based on the some component cost like memory that's where so if the price going down we also real time drop in the price so there's a so that's also we don't see any like access inventory or pull forward because we told the partner customer there's no need to really take actual inventory. And also, we have a policy we tend to start charging 90 days after shipment for some kind of service supporting. So that's where there's no incentive to keep actual inventory.

Very helpful, guys. Thanks so much.

Thank you.

Your next question will come from Shal et al with TD Securities. You may now unmute and ask your question.

Thank you. Good afternoon, everybody. Congrats on the ongoing strong performance. Ken, I was listening to your firewall SASE commentary. Maybe help us understand, and maybe it's building a little bit on Sackett's question or at least your reply, but maybe how AI is propelling the convergence of firewall SASE forward?

AI definitely see generate a lot of additional traffic. There's some study, whether a few weeks ago, a few months ago, the machine-to-machine traffic first time passing the human-to-machine or human-to-human traffic on the Internet. So that's definitely the AI agent and a lot of other AI applications drive a lot of traffic. And a lot of the traffic actually within the enterprise, within some kind of data center. And also like the new cloud deal we mentioned in the last quarter, which is an eight-figure deal last quarter after the seven-figure deal. We do see that kind of drive a lot of enterprise customer, even service provider, to have a better visibility, better control, management of this kind of traffic. That's also kind of, I mentioned last quarter, it's also kind of accelerated convergence on our security, and especially on top of that there's a kind of a zero trust initiative so that that's what we see is kind of a few it's a sudden change in a landscape of network security that that's a cause a sassy firewall it's more like an early day I went for it I started like a 25 26 years ago initially I call it like a antivirus firewall because that's the first firewall can do the antivirus and And then later, they call UTM or NetGen firewall. That's all fine. But I do believe the SASE, the AI drive a lot of growth, especially within enterprise, within service provider.

Understood. And maybe slightly more of a, I don't know whether philosophical or strategic question to you or Christiana. So broad-based performance across the three growth pillars. Do you think customers are viewing Fortinet as a platform provider in a similar way? They're looking at, say, you know, the two leading platform providers right now like Palo or CrowdStrike. Is that a fair assessment?

From the customers I talk to, it's definitely a fair assessment because there is a combination of factors that they like about us. It's the integration of our solutions. It's the one OS, but then it's also the cost benefits that we return to the customer from that making it much easier to operate.

So from that perspective I think our customers definitely see us as platform providers and they are constantly asking us to develop more functionality to expand.

Yeah we We are also very focused on the network security. It's different than whether Palazzo Crosstrek, one is more endpoint side, the other probably a little bit everything. With endpoint, with secure operation, with a lot of acquisition. But for us, it's a very focused on the network security with internal R&D and integrate, develop all these functions for 40OS and also a lot of long-term investment like a 40 ASIC, like our own infrastructure globally. And all this we feel is really the focus, the long-term investment starting to see the benefit compared to other competitors.

And we also do see a lot of customers buy across all three pillars. We're kind of converging the first two, so you can consider it two pillars. We'll see a bunch of deals where customers are buying from the secure networking, the SASE, and the security operations pillar. So I think that's indicative of the fact that we are a platform play. We've got a really broad solution out there that customers like because, like Ken said, it's integrated well together. It was designed from the ground up to be integrated and work really well together. So I think that's a big competitive differentiator for us.

Thank you for the caller.

Your next question will come from Gray Powell with U.S. Bank. you may now unmute and ask your question.

Okay, great. Thanks. We'll make sure. Can you hear me okay?

Yep. Yep.

All right. Well, thank you. Congratulations on the strong results. Maybe just to dig into some of the disclosures. It was really great to see the acceleration in both unified SASE, ARR, and Billings this quarter. Is there any way to comment on what component within that category contributed the most to the acceleration? Was it on the SD-WAN or the secure service edge side of the portfolio? And then I guess just my follow-up would be, are you seeing SD-WAN or like the access part of SASE become a bigger consideration point in those discussions with customers?

Yeah, we see the 40 SASE more than double year over year. And SD-WAN also we see pretty strong growth because all the other top five competitor all come from acquisition and they all have a separate approach compared to whether the firewall, SD-WAN, and then SASE. So they have to have a point solution run like two or three different box to do what we can do in a single box, single OS. On the other side, we also, there's a new market that we call the sovereign SASE, on-premise SASE. like the example we gave this a global pharmaceutical company where the only one can meet their requirement have a data process locally they have a lot of confidential data all this medical data they have to process locally and the same time they do have a global footprint and workforce they also have some kind of global access that's where the solution we provide can have a whether on-premise SASE, sovereign SASE, private SASE compare all I mean plus all the cloud-based the global 4d net infrastructure give them the best solution or give them the only solution actually they see on the market. So that's actually drive a lot of growth. I see one we do see more replacing taking market share from competitors because I don't see any of them kind of keeping invest or develop the technology which after acquisition is more challenging for them on the other side we do see however strong growth whether the the ssc part and also the solving sassy and plus also ai kind of related security and ar growth attached and unattached service solutions understood that that was great comment thank you thank you your next question will come from

keith bachman with bmo please go ahead keith your line is open please ask your question yeah can you hear me okay okay great christiana first of all i hope you feel better um second on on the services when you indicated that services growth would increase through the year I was hoping you could give a little bit of color on the distinction between FortiCare and FortiGuard. In other words, the support function should increase because you have more firewall units in the field and it's been going on for several quarters. So that should increase.

But is there any color you can give on the contributing factors to the increase in service growth? is it both um this the 40 garden 40 care part or is the is the support sort of more weighted towards the increase in growth it's it's both it's um attached services which is 40 care and 40 guard as well as also um growth coming from sec ops with which is typically more um unattached solutions and we see good growth across both.

Yeah, also with the SASE firewall, we're also launching some new service like SD-WAN and also some kind of AI-related security service could be part of the Fortica solution.

So that's where we see there's an additional service we can add on top of the traditional firewall and the SASE service, which will drive the new uh new service business and maybe to provide some more color i mean when we when we expand in customer um deployments and and that's what i tried to point out in in my um prepared remarks as well we really make sure we sell um attached services including um respective 40 guard services also the bundled service yeah the bundle service we launched like a few months

ago see warmer strong girls which bundle the the st1 and the sassy uh all together so that that's as a very good drive for the girls service girls okay great and my follow-up is for you on slide 17 you depict, that's OT grew 56%, Billings grew 56%.

Maybe give a little bit of characterization about what's really driving the acceleration in OT, and so how durable is that? If it was AI-based, it would seem that that has long-term durability, but just maybe flesh out a little bit on the why and the durability?

Yeah, it's really like a two, three factor. One is really we have invested in OT for a very, very long time. And we don't see our competitor really much focus in this area. And also recently, there's a lot of growing in like infrastructure buildup, utility, security, and all this. That's also because not only our long-term investment, but also technology like ASIC are feeding the OT security quite well. So thus we feel we have a huge advantage compared to any other competitors, and we continue to lead. Actually, in field report, we're the only leader in the space, and we do believe we're keeping growing going forward.

Let me add some more color on the OT side. i mean critical infrastructure um is being targeted quite a bit more than maybe years ago and it it has it hasn't had that much security in the past from a cyber security perspective mostly because the critical infrastructure was not integrated into it networks so we see a lot of um white space so to speak from that perspective in in this field if you look at europe you have a lot of regulations whether it's nist2 or others that actually require critical infrastructure providers to secure um their infrastructure and and have good reporting have supply chain validations and so on for cybersecurity there so there are a lot of drivers that make this a super durable and growth driver for us yeah I think okay thank you yeah we are probably the only network security vendor talk about OT security the last few years I have not heard a competitor talk about OT security yet we've invested yeah we think there's net new logos there too as well yeah yeah we've been growing this for years and you know it's ruggedized solutions so it's also

on-prem solutions that are well suited for ot environments and it's integrated solutions that simplify the management so for example our fortigate integrated with fortalink and access points and switches really is a solution that a lot of ot providers like a lot and i think all this has culminated in this growth, and also industry analysts agree that we're number one in this sector.

Yeah, perfect. Thank you.

Your next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Great. Thanks so much. A couple of questions. Just in terms of customers changing traffic patterns with AI, just wondering if you could speak to whether some of the increases that you're seeing are due to kind of shortening refresh cycles as they need to kind of upgrade to the newest ASICs to accommodate the traffic or just kind of how you're seeing that refresh behavior from customers. And then maybe a second question, just following up on that OT question that you just got, just in terms of sizing, like how to think about, you know, for an average data center how we should think about kind of the ot attach rate if there's just like a percentage of of a data center bill that we should think of that is kind of security related that would be helpful thanks uh yeah for the uh yeah yeah definitely changing some behavior and also keeping saying uh ai actually accelerate the convergence of a network security So within enterprise, the customer definitely want to have a better visibility,

how this AI agent, how this AI traffic kind of behave. And the same thing for the service provider, the data center, or this near cloud provider. That we see a pretty strong, we call the internal, or we call it east-west traffic, which is mostly deployed internal inside data center, inside enterprise. price. That's actually ASIC performance advantage is definitely much precision for that much better than the competitors. That's actually we see, you can see the both the strong product revenue growth and also the unit growth, which probably I think even compared to five refresh, you would take about five years average for the boss, but compared to five years ago, So all product revenue auditions probably tripled. And plus, we have this 56% product revenue growth. Definitely, there's a much bigger than just a refresh or kind of a... So that's why we feel customers starting replacing whether some traditional firewall and SD-WAN, some other one. And the reason I kind of combine the two pillars together because they run in the same OS. Sometimes customers initially just buy for firewall SD-WAN and then they gradually enable SD1 SASE, that's actually kind of difficult to category whether it's a SASE deal or it's kind of a secure networking deal. So that's why I feel using the SASE firewall, which addresses much better compared if we secure networking growth still kind of single digit, but we grow like 34%. On the other, the second question.

Yeah, well, the sizing of IT versus OT, it really depends on the industry. In some industries, the OT side could be much bigger, and on other industries, the IT side is much bigger.

Yeah, and also especially when building the AI infrastructure, the problem more starting from building the utility, all this kind of the basic OT side, and then eventually we'll kind of get a higher layer or this kind of like a server and then the model application. So that's where you see the initial strong OT growth to in the early stage of AI infrastructure build out.

Great. Thank you.

Thank you.

Your next question will come from Fatima Bulani with Citi. You may now unmute and ask your question.

Good afternoon. Thank you so much for taking my questions. Ken, I wanted to ask you a higher level strategic question And Fortinet has done a remarkable job navigating through the supply chain environment, not only in recent memory, but also during COVID. And so I wanted to talk to you and ask you about the collaboration with Intel, you know, what the next phase of the network and security process would look like in collaboration with Intel. And, you know, how do you think that brings to you a more advantageous position as you think about the future iterations of ASICs and how you can deliver them profitably and, you know, continue to kind of navigate the current environment where cost inflationary pressures are extremely high? And then I have a follow up for either John or Christiane.

Yeah, it's a great question. I see the reason from day one, 26 years ago, when we started Fortinet, that we want to build ASIC chip is a network security need much more competent power compared to networking and some other kind of security. that's where if we own depend on the general purpose cpu which we're also using together for its own asic we feel it's not enough cannot like like a process the data quick enough or cannot add enough function to meet a customer need so that's where from day one we started investing the asic chip is one of our strategy as sometimes the payback may take 10 years but we feel after 10 years we have a huge advantage and i believe so far we are still the only separate security company develop on asic chip and the partnership with intel also were very significant because intel probably the only manufacturer in the u.s probably do the to all this kind of chip manufacturer and we have a great partnership and we do believe combine the two company technology innovation we can ready bring the network security to the new level and also even can be expanding into the new space on the other side yeah we also few network security what will continue to expand in beyond the traditional enterprise can be eventually go to like now is that with sassy can support in remote work from home eventually can be in a consumer in some lot of broad area and the convergence of network security will keep in keeping driving the space grow faster than the other other area at the same time the AI we also see as a it's a huge boost for the network security need especially with a lot of a new vulnerability discovering you know this is a software and network security It definitely gives them another layer of protection, another layer of visibility control. So that's what we see is a, I believe it's a very, very important strategy to keep investing in this kind of long-term ASIC chip on the infrastructure. That's what drives the long-term performance and lower the cost and eventually pass all this benefit to a customer.

I appreciate that detail. Well, either for John or Christiana, Christiana, you mentioned in your prepared remarks that the source of the operating leverage and the margins outperformance was tied to the revenue beat, cost controls and rigor and also some AI efficiencies. I wanted to take a step back and ask you, you know, over the course of the last six to 12 months, what have you done operationally at the company to allow for these types of efficiencies to become more prominent in your profitability profile? And, you know, specifically from a go-to-market sales management, sales rigor perspective, could you talk to anything that you've been doing differently whereby your forecasting and your planning accuracy has increased because the trend of results in the recent quarters has been, you know, consistently up into the right and certainly since you've come into the role. So I wanted to get more deeper, maybe granular perspectives on internally. I mean, the external market opportunity is very strong, but internally, how have you prepared with any metrics that you can share in very nimbly responding to the very strong market and demand forces?

Thank you.

Yeah, I think it's a team effort across all functions where we are leveraging technology, where we are leveraging also our internal AI build out to develop additional solutions that help us with cost-effective processes and insights. So that's what we're going to continue to do. We started it years ago in the support organization, and we've seen good success there with our significantly slower headcount growth or not even having to backfill certain roles in support. And we are doing it across many functions to make sure that we are on top of technology trends, deploy them internally and and also mine our own data for better insights to make the right business decisions yeah and I think we also have a culture of being very disciplined and also not really getting complacent when things are going well and really buckling down and I think Ken spreads this culture throughout the organization and like Christiana said it's a team effort to reinforce that.

And so I think when things are going well, we buckle down and we don't want to get complacent on the sales and growth side, but also on the cost side. And AI helps us there and other efficiencies and economies of scale can help there as well.

Our next question will come from Gabriella Borges with Goldman Sachs. Please unmute and ask your question.

Hey, good afternoon. Ken, I wanted to follow up on your comments on how this product growth that you're seeing today is unlikely to be a function of pull forward. And I wanted to ask you and Christian to comment a little bit on the visibility of the pipeline to 2027. I know we're still six months away from any sort of formal 2027 guidance. We sort of have to dial in our model this evening on these 50% plus product revenue growth crops and last quarter, of course, north of 40%. So I guess, give us a little bit of direction here. How should we be thinking about product revenue growth? It's a little bit similar to Socket's durability question into 1H27 next year. What is the pipeline telling you? I know in the past you've talked about that 10% plus industry growth rate and taking share on top of that. So whatever you can tell us early reads into how we should be modeling next year.

It's pretty tough to predict the future, but maybe I'll try from two angles. One is really replacing some of the old infrastructure. The other is really the new growing area. Definitely we see the traditional UTM NetGen firewall and the single point SaaS, I mean SD-WAN solution and even like cloud SaaS has their limitation. So we do see we kind of quickly gain a market share there from the few case we went there. that's definitely we feel pretty confident our product solution is much better the customer partner will benefit a lot and on the other side there's a new area whether related to some kind of AI security and the new infrastructure build out the OT that's also we see kind of we position well it's a good a good kind of opportunity. We kind of closely engage with, even for SASE, like three years ago, we only focused on SASE for service provider. Now we see they're all starting to come back with all this sovereign SASE, private SASE, and the on-premise solution is huge. That's the reason I say it's two to three times larger than the cloud-only base SASE.

But on our side we do see is a kind of a as long as there's a the new trend keeping growing we do see we kind of uh keeping get uh growing this new space also also quite well but it's uh probably a little bit too early to give any number on the 2027 maybe christiana have better visibility i think we are focused on the durability of our growth and and i the themes that we're seeing whether it's ai whether it's ASI, whether it's OT, they will continue into next year and then the regulatory activity in some parts of the world will continue as well. I think the question is how much share can we capture from others and how much can we grow in our own customer base, and we will get you those numbers in January or February.

That is fair enough. Thank you. Our next question will come from Junaid Siddiqui with Truist. Please unmute and ask your question.

Thank you for taking my question. Ken, you've talked about the sovereign SASE opportunity ultimately could be much larger than the cloud delivered SASE around 2 to 3x, as you just mentioned. Much of that sovereign SASE opportunity seems tied to service providers deploying and monetizing their own SASE infrastructure. What are you seeing in the field that suggests providers are prepared to invest behind that strategy? And what are some of the big factors that could potentially slow adoption relative to your expectations?

Yeah, I do believe a lot of service providers, they need to change in their security service, go beyond the traditional, like some firewall VPN service. Then that's definitely some of the SaaS services actually are quite important for their customer. that's also they do have a infrastructure advantage if they can never their infrastructure deliver a sassy would be more like give kind of a better data privacy better performance leverage their local infrastructure and and same time kind of a women situation for them and for customer for us but on the other side a few years ago they're kind of a little bit slow but now we see since accelerate. But on the other side, we also see the enterprise also starting demanding this sovereign SASE, like the case we gave out this global pharmaceutical company. They do want to have a SASE deployed within their enterprise, within their data center. That's where the on-premise solution also quite important. That's also the product we announced yesterday, the 40K A200G, we do put some, like a big percentage of content, emphasize how this outpost SASE deployment is important for a lot of customers because you can process all this data locally on the fully gate and at the same time can also leverage some cloud, some management to really enforce some policy globally. That's the solution we see also well adapted for the enterprise. When they see this solution, they feel it's much better than the cloud only, which they have to pull a lot of their data traffic to cloud to process. And so we do see it's a kind of huge market, both for the enterprise and for the service provider. But we also kind of working well with a lot of service provider, which we see they have acceleration of this kind of a sovereign SASE deployment now.

Great. Thank you so much.

Thank you.

Our last question will come from Joe Gallo with Jeffries. You may now unmute and ask your question.

Hey guys, thanks for the question. Margin guidance was really, really impressive. Can you just kind of talk about visibility into that and do you envision any more price increases as it stands today?

Actually, like I said, we want to maintain the same gross margin. the memory price kind of was stabilized in the last few weeks or even last few months. We're doing like a monthly adjustment based on the cost, but we want to maintain the same gross margin as the policy. So that's what we feel. But like I said, it's still a single-digit impact of the of the business we do believe the the strong the bigger drive is really that the new science firewall approach which gave a customer a much better solution better local control of their their ai their their data and and the same time the new growing area like ot like all this ai related we do see that's much bigger drive for the for the growth and yeah we We see that the SaaS firewall could be the new trend to drive the growth in the next five to 10 years.

And then thanks for that. And just as a quick follow-up, you know, product growth was very, very strong. Just any sense of the different components of that, you know, networking versus firewalls, you know, how late growth profiles were for each of those?

FortiGate probably the fastest growth among that. But that's also because FortiGate run the same FortiOS for both the traditional firewall security function, the same time for like SD-WAN, for SASE. That's where sometimes it may be difficult to category whether it belong to unified SASE or secure networking. Because sometimes they may deploy as a secure networking first but quickly run POP to enable SD-WAN SASE. That's why I would like to call it a sassy firewall because it's the same operation system. Yeah, but FortiGate sees the strongest growth.

Awesome. Thank you very much. Nice job.

Thank you.

Thank you. That concludes our allotted time for Q&A today. I will now hand it back to Anthony Luskri for closing remarks.

Thank you. I'd like to thank everyone for joining today's call. We will be attending investor conferences hosted by Rosenblatt, Stiefel, Deutsche Bank, Goldman Sachs, and Kepler-Chevreau during the third quarter. The Fireside Chat web links will be posted on the events and presentation section of our Investor Relations website. If you have any follow-up questions, please feel free to contact me and have a great rest of your day.