Earnings Call Transcript - FTNT Q1 2024

Operator, Operator

Good day and thank you for joining us. Welcome to the Fortinet first quarter 2024 Earnings Announcement Conference Call. Please note that this conference is being recorded.

Peter Salkowski, Senior Vice President of Investor Relations

Thank you, Brianna. Good afternoon, everyone. This is Peter Salkowski, Senior Vice President of Finance and Investor Relations at Fortinet. I am pleased to welcome everyone to our call to discuss Fortinet's financial results for the first quarter of 2024. Joining me on today's call are Ken Xie, Fortinet's Founder, Chairman and CEO; Keith Jensen, our CFO; and John Whittle, our Chief Operating Officer. This is a live call that will be available for replay via webcast on our Investor Relations website. Ken will bring our call today by providing a high-level perspective on our business. Keith will then review our financial and operating results for the first quarter of 2024 before providing guidance for the second quarter of 2024 and updating the full year. We'll then open the call for questions. During the Q&A session, we ask that you please limit yourself to one question and one follow-up question to allow others to participate. Before we begin, I'd like to remind everyone that on today's call, we will be making forward-looking statements, and these forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10-K and Form 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements. Also, all references to financial metrics, which 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 accompanies today's remarks, both of which are posted on our Investor Relations website. The prepared remarks for today's call will be posted on the quarterly earnings section of the Investor Relations website immediately following the call. Lastly, all references to growth are on a year-over-year basis, unless noted otherwise. I'll now turn the call over to Ken.

Ken Xie, Founder, Chairman and CEO

Thank you, Peter, and thank you to everyone for joining our call. In Q1, we've managed the business with strong spending discipline and increased our operating margin by 200 basis points to a first quarter record of 28.5%. We also generated record cash flow from operations of $830 million, and our adjusted free cash flow margin was 61%. We remain focused on investing in a fast-growing Unified SASE and secure operation market, which, combined, accounted for one-third of first quarter billings. We continue to gain security networking market share, leveraging our advanced and differentiated FortiOS and FortiASIC technologies with an increasing number of large customers adopting our industry-leading Secure Networking solutions. Last month, attendance at our annual Accelerate conference increased 25% year-over-year to nearly 5,000 participants. Our Unified SASE and new AI offerings dominated the discussion with our partners and customers. For the first quarter, Unified SASE accounted for 24% of total billings. To introduce customers and prospects to our new Unified SASE solution, we plan to run attractive promotions this year in 2024. For several reasons, we believe no service secure company can come close to our differentiated Unified SASE solutions. First, we have developed all Unified SASE functionality into one single operating system, FortiOS. This includes a full networking and security set comprising ZTNA, Secure Web Gateway, CASB, and our market-leading SD-WAN and firewall technologies, providing content, application, user, device, and location awareness to reduce attacks. Second, our Unified SASE solution can be deployed on-premise, in the cloud, or both. Peer solutions send traffic to copy the PoP, which increases security risk and latency and is less efficient. Lastly, Fortinet's Unified SASE offers both traditional software endpoint agents and hardware agents such as FortiWiFi access points and FortiSwitch for customers, allowing for easier deployment and broader use cases such as Unified SASE for OT and IoT devices. We expect our differentiated Unified SASE offering to emerge as the SASE leader. Fortinet's advanced platform approach has been earning third-party awards for many years. Last month, we entered the Gartner Magic Quadrant for Secure Service Edge. As shown in the Slide 12 in the investor presentation, Fortinet is the only vendor recognized in the Gartner Magic Quadrant Report for Security Service Edge, SD-WAN, Single-Vendor SASE, Network Firewall, and Enterprise Wired and Wireless LAN infrastructure. All five security and network offerings from Fortinet are uniquely built on one operating system, FortiOS, leveraging FortiASIC to increase secure computing power for more functions and better performance while lowering cost and energy consumption. Fortinet's Secure Ops solutions, which are better integrated and more automated than competitors, accounted for 9% of total billings. Initially launched as part of our FortiSIEM and FortiSOAR, our Gen AI technology, FortiAI, is being deployed across both networking and security products. Today, we announced the industry-first IoT security Generative AI assistant. Customers can ask FortiAI for help in 30-plus languages. Fortinet is also the market leader in OT security solutions, the fastest-growing sector in network security, with billings from devices connected online, and with most OT devices having limited computing power, making our security solutions the most effective in providing security. Today, we announced the FortiGate 200G, a mid-range firewall powered by a new SD FortiASIC with secure computing ratings of 3, expected performance in real-time. We're reinforcing our leading networking and Unified SASE advantage that delivers customers industry-leading security functions, performance, and power efficiency. Before turning the call over to Keith, I wish to thank our employees, customers, partners, and suppliers worldwide for their continuous support and hard work.

Keith Jensen, CFO

Thank you, Ken, and good afternoon, everyone. Let's start with the key highlights from the first quarter. As Ken mentioned, we continue to manage the business through macro uncertainty and successfully drove operating margin to a first quarter record of 28.5%, exceeding the high end of the guidance range by 200 basis points. Free cash flow of $609 million represents a 45% free cash flow margin, benefiting from strong Q4 '23 billings and their subsequent collection in Q1 of '24. Billings of $1.41 billion and revenue of $1.35 billion were within their respective guidance ranges. Looking at billings in more detail. While Unified SASE and SecOps delivered strong billings growth, total billings declined 6% as expected. The billings performance was driven by the difficult year-earlier comparison created by the backlog contribution to billings that occurred in last year's first quarter. Total bookings were down just slightly. Unified SASE and SecOps had outstanding growth across a variety of benchmarks in the first quarter. In addition, we saw significant progress from our investments in Unified SASE and SecOps. These include cross-selling into our large installed base. Existing customers delivered over 90% of SecOps and Unified SASE billings. On an even more targeted basis, existing SD-WAN customers delivered 81% of Unified SASE billings. Larger enterprises are proving to be our largest customer segment, with large and mid-enterprises representing 78% and 84% of SecOps and Unified SASE billings, respectively. Even with increasing scale, both pillars have strong pipeline growth, 30% for SecOps and over 45% for Unified SASE. More importantly, within SASE, the SSE pipeline growth is over 150%. Our investment in SASE is being recognized by third-party agencies. We recently recorded the Trifecta with Gartner's SASE Magic Quadrants: SSE, SD-WAN, and single vendor SASE. As Ken noted, with last month's addition to SSE, Fortinet now appears in five Network Security Gartner Magic Quadrants, all running on a single operating system. With the SASE Magic Quadrant Trifecta, customers have shown increased interest in learning more about our unique SASE platform that runs on one operating system with one Unified agent, one management system, and one data lake. To offer an example of customer interest at our Accelerate conference early last month, the SASE demo booth was our most active as customers surveyed SASE's new features and functions, including end-to-end digital experience monitoring, remote browser isolation, advanced data loss prevention, and third-party SD-WAN connectivity. As a second example, nearly 25% of the attendees who joined our CMO for the SASE breakout session expressed interest. The attendee count for this breakout session would have been even higher if it wasn't for fire marshal regulations that forced us to turn away customers and partners eager to learn more about the SASE offering. Lastly, the customer partner SASE Fast Track training program launched in January is already the #2 most attended technical training session, trailing only a single vendor SASE partner, SD-WAN. We're committed to driving more effective security solutions worldwide and welcome greater partnerships with our industry peers. The new third-party SD-WAN connectivity technology is designed to support consolidation, not only on Fortinet but with Fortinet. In terms of scale, we continue to open new Google and Fortinet PoPs in sync with our customers' expanding footprints to meet deployment scale demanded by large enterprises. Regarding the 7-figure, 300,000-seat education deal that we mentioned last quarter, the full production environment was activated in March, and we are on track to onboard over 300,000 seats to start the new school year. To elaborate on Ken's earlier comment on today's AI-related announcement, Fortinet's Gen AI assistant follows our FortiAI launch last year by supporting and guiding SOC and NOC teams as they configure and manage changes to their networks and investigate and remediate threats. Its intuitive interface allows individuals to engage using 30 different natural languages, bridging the industry's skills shortage. I encourage everyone to visit fortinet.com to learn more about the Gen AI system. Rounding out our billings commentary, SMB was a top-performing customer segment. International Emerging was our best-performing geography. Our three largest industry verticals continue to be government, service providers, and financial services. Service providers and government experienced the highest growth, while retail and financial services faced some challenges. As noted in our prior call, the 6 8-figure deals in Q4 '23 pushed our average contract term in DSO to elevated levels. The average contract term in the first quarter was 27 months, just under one month down year-over-year and 3.5 months down quarter-over-quarter. DSO decreased by 12 days year-over-year and 23 days quarter-over-quarter to 66 days. Turning to revenue and margins, total revenue grew 7% to $1.35 billion, driven by service revenue growth. Service revenue of $944 million grew 24%, accounting for 70% of total revenue and a revenue mix shift to services of 10 points. Service revenue growth was led by over 30% growth from Unified SASE and SecOps. Product revenue decreased by 18% as expected, to $409 million, following a challenging 35% year-earlier comparison impacted by backlog fulfillment in the prior year. Software license revenue increased by 20%, representing a mid- to high-teens mix of product revenue. Total net product bookings were down slightly. Combined revenue from software licenses and software services, such as cloud and SASE security options, increased by 29%, representing an annual revenue run rate approaching $750 million. Total gross margin of 78.1% was up by 180 basis points and exceeded the high end of our guidance range, benefiting from the shift to higher-margin service revenues. Service gross margins of 87.9% were up by 200 basis points as service revenue outpaced labor cost increases and benefited from the shift to FortiGuard security subscriptions. Product gross margin of 55.7% was pressured by challenges related to inventory levels and the transition to a more normalized demand environment. Operating margin of 28.5% was 200 basis points above the high end of our guidance range, reflecting strong gross margins and prudent cost management. Looking at the statement of cash flows summarized on Slides 16 and 17, free cash flow was $609 million. Adjusted free cash flow, which excludes real estate investments, was $821 million, representing a 61% adjusted free cash flow margin. Infrastructure investments totaled $222 million, including $212 million of real estate investments. Cash taxes in the quarter were $31 million. While we did not repurchase shares in Q1, share buybacks have totaled $5.3 billion over the past 4-plus years, and the remaining buyback authorization is $1 billion. Now I'd like to share a few significant wins in the first quarter. I'll start with the one 8-figure deal in the quarter, a competitive displacement and new logo win. This large U.S. financial institution selected Fortinet as part of their data center update and consolidation projects. Key to this win included our experience in this highly regulated and customer data-sensitive industry and our ability to lower the total cost of ownership while exceeding their low latency performance requirements. Similar to other large financial institutions separating from their incumbents, this customer is expanding their Fortinet footprint by adding our SD branch solution and planning to consolidate additional technologies. Next, in the competitive 7-figure win, a hospitality company serving over 5 million guests annually updated their various Fortinet solutions, including their FortiGate firewall footprint and FortiNAC solutions. Keys to expanding our relationship included our price-to-performance advantage on the firewalls and the proven ability to discover and lock down devices that attempt to join their network, along with the operational simplicity and integration of a dozen different Fortinet solutions the customer employs. In another 7-figure deal, a hotel and restaurant chain purchased our SD branch solution for 800 locations, as well as our data center FortiGates for centralized management and enhanced security. The SD branch solutions provide improved efficiency and security across their branches and IoT devices. Key to this win, along with other retail opportunities, is enabling retailers to deploy, expand, and deliver a growing array of in-store digital solutions to support their customers' experience and enhance their top-line performance. These customer wins illustrate that our Security Fabric platform includes each of our security pillars: Unified SASE, AI-driven SecOps, and secured networking, making it the most integrated and open portfolio of products in the industry, backed by one operating system, FortiOS; one Unified agent, FortiClient; one management console, FortiManager; one data lake, FortiAnalyzer; and open APIs integrating over 500 competitor products and other third-party products. This consolidation allows customers to reduce operational costs while enhancing security effectiveness. Moving to guidance. As a reminder, our first quarter and full year outlook, summarized on Slides 21 and 22, are subject to disclaimers regarding forward-looking information that Peter provided at the beginning of the call. For the second quarter, we expect billings in the range of $1.490 billion to $1.550 billion, which, at the midpoint, represents a decline of 1%. Revenue in the range of $1.375 billion to $1.435 billion, which, at the midpoint, signifies growth of 9%. Non-GAAP gross margin of 76.5% to 77.5%, non-GAAP operating margin of 25.75% to 26.75%. Non-GAAP earnings per share of $0.39 to $0.41, assuming a share count between 775 million and 785 million. Capital expenditures of $30 million to $40 million; a non-GAAP tax rate of 17%; and cash taxes of $240 million to $270 million. Before updating the full-year guidance, I would like to elaborate on the easing backlog headwinds in the second half of 2024 and share what we believe are early signs indicating that the firewall digestion cycle is nearing completion. First, the billings headwind from last year's backlog drawdown is over $150 million in 2024 and gradually diminishes throughout the year with no headwind in the fourth quarter. Second, we are observing early signs of a more normalized firewall market. One metric we monitor is the average time to register security service contracts, as shown on Slide 19. In 2022, we noted a 50% increase in user registrations, consistent with customer buying and stocking behaviors at the time. More recently, this metric decreased by about 25% from SP and is now consistent with late 2021 levels. We expect it to return to normal levels in the second half of 2024. A reasonable interpretation of the data indicates that customers are completing their inventory digestion process and moving towards a normal firewall-buying behavior. With that, for the year, we expect billings in the range of $6.400 billion to $6.600 billion; revenue in the range of $5.745 billion to $5.845 billion, which, at the midpoint, represents growth of 9%; service revenue in the range of $3.940 billion to $3.990 billion, which, at the midpoint, signifies growth of 17%; non-GAAP gross margin of 76.5% to 78%; non-GAAP operating margin of 26.5% to 28%; non-GAAP earnings per share of $1.73 to $1.79, assuming a share count between 780 million and 790 million; capital expenditures of $350 million to $400 million; a non-GAAP tax rate of 17%; and cash taxes between $500 million and $550 million. I look forward to updating you on our progress in the coming quarters. And I'll now hand the call back over to Peter to begin the Q&A session.

Peter Salkowski, Senior Vice President of Investor Relations

Thank you, Keith. Operator, please open up the line for questions.

Operator, Operator

Our first question comes from Hamza Fodderwala from Morgan Stanley.

Hamza Fodderwala, Analyst

Perhaps both for Ken and Keith, you spoke of a lot of green shoots in your prepared remarks. SMB service provider growth looks a little healthier. You're getting recognition on SASE, and you spoke about competitive replacements. That said, the billings in Q1 was a bit closer to the lower end of your guidance versus the high end. So I'm just curious what drove that? And what gives you confidence based on what you're seeing in the pipeline to maintain your guidance and assume a reacceleration on the top line in the second half of the year?

Keith Jensen, CFO

Yes, I'll talk about the full year. I think that if you look at where we ended up in the first quarter, inside the guidance range, maybe just a little bit of weakness that we saw in Europe, just enough to move us off the midpoint, but not really a significant movement in terms of our final results compared to the midpoint. If we look at where we end up with the total for the year, I don't think we're far off from the plan we thought. Maybe there's some more adjustments there that you're kind of pointing out. But as we look at the pipeline, to your point, I think the mix we see in our pipeline today, together with some of the hygiene improvements we've worked on for the last 6 to 9 months, I think we feel better about where we end up with the full year numbers.

Ken Xie, Founder, Chairman and CEO

Yes. I think the high interest rates are making money more expensive, causing a lot of enterprises to prefer OpEx over CapEx for some of their network security projects. That's also a reason we are starting to shift our focus more towards SASE and SecureOps, which really helps companies save costs at the same time. We have also made some adjustments in certain product prices back to pre-pandemic levels. That happened in Q1 and probably had a little impact, but overall, I think our product competitiveness remains strong. We see a lot of competitive product replacements, especially with the new FortiOS introduced last month that includes more functionality, including in Unified SASE. All these factors are driving increased customer interest.

Gabriela Borges, Analyst

For either Ken or Keith, I'd love to get an update on your pricing strategy more broadly. More specifically, how do you think about the trade-off between discounting when you're cross-selling a broader bundle of portfolios such as SecOps or SSE services versus being able to capture some of the value from the cross-sell? How do you think about that trade-off?

Ken Xie, Founder, Chairman and CEO

I think our pricing strategy has been consistent over the last 20-plus years. We want to maintain a healthy gross margin and also a healthy margin for our partners. When we see certain cost increases, like supply chain shortages, we adjust pricing upwards. However, with some costs coming down, we also return some margin to our partners and lower product prices to match pre-pandemic levels. Currently, we are focusing on new products while ensuring they follow our healthy margin guidelines. I don't foresee further adjustments in pricing for existing products.

Brian Essex, Analyst

Appreciate it. Maybe for Ken, in terms of the SASE traction you experienced in the quarter, how much was due to SD-WAN conversion? Could you give us a little more context on the split of customers you saw in that business, particularly between large, mid, and small enterprises? This will help us understand how you might line up against peers in the SASE market.

Ken Xie, Founder, Chairman and CEO

I think that's a great question. I believe we have a slide for that.

Keith Jensen, CFO

Yes, Brian. We included that information in the prepared remarks, and I can quickly tap into that while we pull the actual slide number for you. However, existing customers accounted for over 90% of both SASE and SecOps billings, indicating they were expansion sales. We noticed a significant shift in terms of larger enterprises dominating both pillars of growth. We've shifted our reporting from customer counts to dollar values, as this is more traditional and representative of our expectations moving forward.

Fatima Boolani, Analyst

Keith, I wanted to have you spending a bit more time talking about some geographic theater-level performances. We've seen a notable deceleration in your Americas business. EMEA has been relatively resilient and APAC has actually shrunk this quarter. Could you provide insights into nuances or idiosyncrasies in demand and/or buying perspective from an end market standpoint or customer attribution?

Keith Jensen, CFO

I think the SMB segment continues to perform stronger than expectations, both internally and externally, which has proven to be very resilient. Europe was slightly subdued, particularly on the enterprise side, which impacted our guidance midpoint. A significant contributor to the deceleration can be attributed to high-value 8-figure deals in prior quarters, creating volatility in the U.S. enterprise segment. This quarter, we recorded only one 8-figure deal, distorting growth metrics. Many such opportunities may not be available in other geographies like APAC.

Ken Xie, Founder, Chairman and CEO

Yes. Japan represents a substantial portion of our business in APAC, and the exchange rate has influenced this segment. However, we are observing increased interest in SASE from SD-WAN customers. On average, businesses are experiencing around 50% cost savings with SD-WAN compared to traditional networking solutions. We're seeing many customers upgrading to SD-WAN and subsequently adding on SASE functionality.

Tal Liani, Analyst

You gave some comments at the end of your prepared remarks about signs of recovery in the firewall market. Could you elaborate on that? Do you expect the non-FortiGate category to recover, and how does it correlate with the FortiGate cycle? Additionally, what is your view on market share gains during a market recovery?

Keith Jensen, CFO

Do you want to take the market share and the mix question, and then I'll discuss the algebra on Slide 19.

Ken Xie, Founder, Chairman and CEO

Yes. We believe we continue to gain market share, even during this quarter in the cyclical secure networking space, which includes both firewall and other sectors like FortiWiFi and FortiSASE. The strong performance and advantages we hold in terms of ROI and security differentiate us from competitors. It is noteworthy that the secure firewall market has contracted between 10% and 20% year-over-year. However, we are still gaining market share under such conditions.

Keith Jensen, CFO

For those that have access to it, Slide 19 in the deck illustrates the trend we've observed. Customers initially bought equipment in bulk due to supply chain constraints, postponing registration of service contracts. This registration delay peaked in early 2023. As we progress through the digestion cycle, these registration times are returning to normal, indicating that inventories are being cleared, suggesting customers are nearing a typical buying pattern.

Rob Owens, Analyst

Keith, I want to build on your answer to Fatima's question earlier regarding growth. You noted significant 8-figure transactions in Q4 and only one in Q1. Should we expect similar outcomes regarding those substantial deals as we progress throughout the year? What is the health of the enterprise pipeline?

Keith Jensen, CFO

Yes, I feel good about it. The parallel drawn in previous conversations highlights how the company has expanded beyond the SMB space to larger deals over the years. While we have plenty of million-dollar agreements, the concentration of $10 million deals can create volatility. We anticipated strong performance in Q4 and set expectations for Q1. Historically, we've recorded about two to three 8-figure opportunities per quarter over the past few years, although their distribution can vary. We expect the rest of the year to yield a few more substantial deals in Q4 and some in Q2.

Saket Kalia, Analyst

Ken, could you elaborate on the conversations you are having with customers regarding their plans to refresh firewall appliances? When do we expect the firewall refresh cycle to gain traction?

Ken Xie, Founder, Chairman and CEO

Yes. The digestion of supply chain issues is nearing completion, perhaps within the next few months. The refresh, which pertains to current customers upgrading to new products offering better performance, is being impacted somewhat by the economic slowdown and high-interest rates, leading some customers to retain existing products longer. We do, however, observe an uptick in replacement cases, particularly for OT/IoT security demands. Many large enterprises are utilizing our products to replace competitor products that do not provide adequate performance or power efficiency.

Brad Zelnick, Analyst

Keith, revisiting your response to the prior question about the remaining $1 billion buyback authorization and the strong cash generation of the business, why did you opt not to buy back any stock in Q1? Can you remind us of your approach to buybacks and how M&A factors into this?

Keith Jensen, CFO

Peter mentioned that John Whittle from M&A will answer. We haven't changed our buyback philosophy. We remain opportunistic, working with Wall Street firms each quarter to make a program. Over the past four years, we've bought back $5 billion in stock. There's no preset percentage of free cash flow allocated, as our strategy focuses on market opportunities as they arise.

John Whittle, COO

Thank you for the question. On M&A, we've been very disciplined, focusing on strategic tech and talent tuck-ins. We're open-minded about M&A opportunities but will continue to be selective as it makes sense.

Ken Xie, Founder, Chairman and CEO

The current M&A environment is the busiest we've seen in the last 10 to 20 years, with many potential opportunities.

Keith Jensen, CFO

The business model, as seen through the cycles, illustrates that as the firewall market experiences a slowdown, we're seeing a mix shift towards high-margin services. This enables us to easily hit our margin targets. We anticipate strong performance in the full year, reflected in the 0.75-point increase in the midpoint margin guidance.

Benjamin Bollin, Analyst

Keith, could you discuss the receivables drawdown and DSO performance? You mentioned the large deal impacts on collections, but DSOs seem lower than in previous years. Is there a change in working capital management?

Keith Jensen, CFO

No significant changes occurred. The DSOs are primarily influenced by the six 8-figure deals closed last quarter, which strained collections. Only one 8-figure deal in Q1, which closed earlier, alleviated some pressure. This accounted for the improved DSO figures.

Adam Borg, Analyst

Ken, you mentioned increased traction with enterprise agreements and I wanted to understand how you're planning to systematically drive these EAs, especially in the back half of this year.

Ken Xie, Founder, Chairman and CEO

We are seeing an increase in enterprise customers wanting to establish long-term relationships with us, especially as they consolidate product offerings. This is leading to a growth in enterprise agreements.

Keith Jensen, CFO

As Ken noted, enterprise agreements typically emerge during expansions within larger enterprises. We’re not often seeing them during first sales to new logos. However, programs like FortiPoints that cater to long-term customer relationships have been well received.

Keith Bachman, Analyst

Slides 7 and 8 in your presentation were intriguing. Regarding the 24% of billings from SASE, could you clarify how much comes from SD-WAN? It’s also interesting to see the enterprise segment account for 40% of SecOps. Are there patterns within the SecOps portfolio serving enterprise clients?

Keith Jensen, CFO

The FortiCare support line item is directly tied to recent product sales and will reflect the growth cycles we experience, with FortiGuard subscriptions benefiting more significantly from stronger tailwinds from SASE and SecOps than FortiCare.

Ken Xie, Founder, Chairman and CEO

Most of the SASE billings still come from SD-WAN. Analyzing the pipeline, Unified SASE is seeing growth of around 45%, with SSE pipeline growth exceeding 150%, implying strong customer interest. We're seeing companies progressively adding SASE and SD-WAN capabilities.

Joseph Gallo, Analyst

A lot of exciting developments surrounding AI at your conference. Any early feedback on FortiAI and thoughts on monetizing it? Will it impact gross margins, and when might we see that reflected in the top line?

Ken Xie, Founder, Chairman and CEO

Yes, there’s significant interest in AI, especially with how it integrates with various products to enhance customer management efficiency. This drives additional service uptake. While we see some initial benefits already, it’s still in the early ramp-up stage. I cannot predict when these benefits will become material.

Keith Jensen, CFO

The monetization of FortiAI is structured separately from the existing pricing. LLM purchases by the customer may be necessary for full utilization. I invite everyone to check out the demo featured on our website showcasing FortiAI’s capabilities.

Ken Xie, Founder, Chairman and CEO

There's little seasonality regarding the registration metric. Over the last two years, supply chain issues could have caused delays, but current delivery times are now back to a normal pace.

Keith Jensen, CFO

The data to be analyzed stretches back to 2019, indicating no distinct quarter-to-quarter seasonality that we need to flag.

Peter Salkowski, Senior Vice President of Investor Relations

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

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.