Fortinet, Inc. (FTNT) June 2, 2026 Conference Transcript

thank you very much for joining us um so i have the joy of covering cyber security again it's very easy with bank of america whenever someone leaves they ask me to cover it so i cover software and data centers and cyber security and networking it's a one-man show research but i'm very pleased i know this space extremely well i've been covering it for 15 years almost 20 years, and I'm very pleased to host Ken Zee, CEO, and John Whittle, Chief Operating Officer, and we are going to speak about the fundamentals. I want to talk about the quarter, but very little, because I really want to focus on the fundamentals and what's coming for the next few years. With this introduction, I'll start with the quarter, Ken. The quarter was unique because the numbers were very strong. The billing growth was 31%. Secure networking billing was 32% up. Unified SASE was up 31%.

And the question is, what drives the growth both of the secure networking as well as the new areas? uh like i mentioned the in the earnings uh we see the ai actually accelerate and we call the convergence of networking network security uh especially within the enterprise uh because uh ai definitely drive a lot of additional traffic whether a agent or using some ai for certain application most enterprise still today they only have this they call the parameter security internal they don't deploy much network security whether to the internal segmentation or protect some key server or certain departments and data there so that's where we see the strongest growth actually come from the enterprise for us really the middle range 40k product you can see the product revenue grow like 41%. Not much come from this supply chain price increase. It's more come from the new demand. And at the same time, there's other area, whether the OT security, we see like a 70-80% growth year over year. And some other AI data center building, because we have a huge advantage on ASIC performance, more function to supporting these high-speed network environment, network security. So we see that also in the earliest data run pop right now.

There was concern after the quarter that maybe it's early ordering. People are concerned, investors were concerned that maybe this is not sustainable. So how much of it, and can you know actually if it's early ordering of customers?

We actually managed the channel inventory managed before quite well. And also, we told customer, partner of our trade, we are maintaining the same margin. So if our costs go higher, we may adjust monthly. And like this time, we do raise some of the price on the product side. But most of the service, we do not touch. You only service a percentage of our price. But right now, we feel some kind of memory, some component, maybe temporary, maybe I don't know how long will last. maybe a few quarters or maybe but we we also if you look at last time five years ago when there's a supply chain issue there we raised the price in the beginning and we lowered the price when the price comes down also that's where for us the policy just maintain the same margin which growth margin around 80 percent i feel we build a trust with our partner customer and also we told them no need to pull forward we also have some policy once you bought a product if you don't deploy within 90 days, we automatically trigger the service revenue, all this content. We call the 40 care. So that's where there's no incentive for keeping access inventory for the partner, for the customer.

And we've been seeing kind of sustainable growth drivers across all three of our pillars, OT, et cetera, for many quarters, well before we increased pricing. And this is even before the AI tailwind, which to us feels like a sustainable growth driver as well. And so, you know, we see that momentum well before the price increase. Like Ken said, we manage the inventory. We're not seeing increasing in stocking orders. So it feels like these sustainable growth drivers have been really strong before the AI tailwind. And now that's a new sustainable growth driver that is really accelerating that growth.

So I'm trying to understand the AI tailwind. agentic AI is not a big driver yet in terms of deployment the numbers are small when I look at companies even like Salesforce we're presenting after you it's 1 billion of orders out of 50 billion of revenues it's not it's not a big number why do we see AI as a tailwind already now before actually we see agentic being adopted I think usually the revenue come after people starting using all these things, right?

We see the interest pretty high. If you talk to company inside, pretty much every engineer, they try to leverage AI now. And even a lot of like Salesforce, their customer support, they say maybe 80% are handled by the AI. And then there's a lot of other, even GNA or even, that's where we see a lot of company, they starting to try to see how AI can help them, how AI changing since there. That's where we see the AI, we see the increase the company traffic within the company, probably like some they say 20%, some 30%, some 40%, they do have increased the company traffic within their own kind of enterprise environment, because this is usually inside the company, especially all this edge AI, organic AI, that's where the traffic, the traditional, now with security, they will secure the parameter. They don't quite see how internally that's we see the biggest growth come from the middle range, which we see the customer multiple inside the company We do the internal segmentation.

It's kind of internal securities Yeah, and I would almost categorize it into three buckets when I think about the growth drivers And there probably are others from AI the AI tailwind You have kind of the elevated threat environment in general with AI tools And I would put mythos in that category, even though, you know, I think people are worried about mythos or the equivalent functionality becoming public and then their entire software surface could be exposed. So I talk to CISOs a lot and they're very concerned about that. That's impacting buying patterns. In addition to the increased threat level with the AI tools that are out there, then you also have the AI sprawl within organizations. And people are very concerned about that. CISOs are like, I don't even know what's out there. A lot of this is shadow AI, and then you have AI data centers, and we're seeing a lot of investment there. Security is a big portion of that, and you see billions of dollars being invested there. A portion of that is going to security, and that will be a sustainable driver over time.

And where is this demand? What kind of customer? So if I rewind back, I don't know, 20 years, you started from the SMB market and your product specs, the fact that you are low latency and features brought you into the enterprise space. Where are we seeing this? This time you spoke about sovereign AI.

This time you spoke about, so where do you see the demand as a result of the AI cycle? what kind of customers i mean uh i think like uh in early 49 we more leverage a channel right so yeah it's uh it's uh uh doing well and also when ipo 17 years ago uh is uh like over 30 percent business come from we call the service provider telecom service provider uh now we see uh not only the enterprise try to get better visibility internally but also some service providers that didn't come back. Where there's some AI service provider, there are also some kind of a hyperscaler working with us, but also whether the sovereign AI, sovereign SASE, also we see huge market opportunity for us. We gave a few examples during the Earning Call, which I feel some of our competitors not address our market yet. Especially like a sovereign AI, sovereign SASE, they they do need to deploy on their own infrastructure, on their own premise, instead of the cloud deployment for a lot of like a SaaS player there. So that's like a two, three times bigger portal addressable market than the cloud, AI or cloud SaaS there.

That's where we see huge growth there.

And also I do believe a lot of service provider will be very, very important part of the ecosystem, like 17, 20 years ago when we IPO, So that's where it could be even driving the biggest market segment for whether AI or SASE.

John, in general, what can you say about the sales cycle, the pricing environment? Where are we in terms of the risks to the business model?

Yeah, I think if you look at our business, it's very well diversified across geos, solution sets, our three pillars and OT across customer sizes, across verticals. It's a very diversified business and we see these sustained growth drivers across all of those different sets. And so, you know, we're not seeing risk to the business. If anything, we're seeing a little more urgency in terms of these conversations with Fortinet and the CISOs are coming to us for help in this new AI environment. So we see a lot of demand. We see a lot of momentum. It was reflecting our Q1 results. We saw the demand picking up before that as well. And we feel that demand right now. So we're not seeing risk. I mean, our big opportunity is to address the demand. And we've got to just move really fast to make hay while the sun's shining.

And it feels like for the next three to five years, at least, with a company like Fortinet, where we have this scale of solution set great solutions for this environment the momentum is very very strong across our diversified business so i'm trying to understand the secure networks your you know you had very strong growth of orders and you spoke about traffic ken you spoke about traffic growing going up checkpoint reports weakness in in firewalls palo alto says the firewall market is growing five percent you're growing 31 percent 32 percent where is the disconnect why are you more successful than the others uh that's and and by the way sorry just to maybe that maybe i'm not

comparing apples to apples so if you can expand on what's included in it yeah yeah uh yeah actually the product revenue in q1 grew 41 percent right that's the problem compared to palado uh checkpoint whether single digit or even negative like Cisco. I feel kind of using the, if I look at the brochure also in the investor presentation, I'm using the three I to describe this. You're the only few analysts in this space for like 20 plus years, right? So the first I is the innovation, because if you look at Fortinet, and probably the only company, online field company, but internally develop SASE, SD-WAN, in the past, NetGen firewall, sandbox, in like app control, all these things. And then that's where when company keeping growing, how to keeping catch up the new wave, the new function needed, that's very, very important. Like some company, they starting falling behind when they're bigger, they cannot internally innovate. that's where the first eye. The second eye I call the integration. So when you develop internally, you can more integrate easily in a single OS. So Ford OS has about 30 functions now. So if you depend on acquisition, the integration is more difficult like how Cisco, Palato, when they compare whether SASE, SD1 or before, they have a separate box, every solution to cover SD1, cover SASE, cover all this network security, all these things there. So they cannot have a single integrate solution. In the network security, single integrations are so important because customers don't like to deploy multiple bugs in line. That's where in the network security space in the last 20, 30 years, most of the single point solution companies all disappear. And only the platform, when the multiple functions integrate together, that's one. That's the second I, integration. And then the third I call the improvement, which is also very unique. So from day one, we developed ASIC to improve in performance. The additional company power can enable more function, lower the cost, lower the energy consumption. And also, we're also the only cybersecurity company investing in our own global data center infrastructure. So we own the data center. We own all this kind of like a 4D stack with our own software. So that's making us a one-third cost compared to other SaaS players. That's where the 3i, innovation, integration, and improvement of the infrastructure, that gave us an advantage for the long-term. That's why I feel the market itself probably grow around 10% year-over-year. But whoever can keep in this gaining market share, that's why we have our confidence. I say multiple times in the last few years, we have very, very confident to grow faster than the market and keeping getting market share, which some of the players are starting falling behind now.

Yeah, I think it's also a competitive advantage that we have been very focused on that network security market for 26 years, and there's no competitor that's been focused on that in terms of investing for growth. You know, Checkpoint was more focused on profitability. Pan said they're getting out of it. Cisco sometimes invests in security, sometimes doesn't. And we've been very focused on that market and we're seeing a lot of demand for it. I think some of the market growth rates may have been understated, you know, which may have helped us a little bit because people don't view it as a shiny new object. But we've been very loyal to that market more than anybody else. And that investment Ken's talking about in the technology is really putting us in a good position right now.

So Ken spoke about the three I's and you touched at the end about SASE. I want to go back to Unified SASE just to ask a simple question. Why are you growing so much faster than the others? And who are the customers? Meaning, what is the addressable market you're going after from a profile of customer point of view?

Yeah, I think the differentiation is really, we put SASE, SD-WAN, and all the NetGam firewall security in the same OS. So that's, it's very easy, quick for a customer to adopt. SD1 SASE. That's where in the last few years, we already become the number one SD1 player because SD1 is part of 40OS. Now SASE part of the 40OS. That's also like 90% of things right now come from the customer, transition from like a firewall to SD1 to SASE. Just in a few minutes, they can get a SASE deploy. On the other side, we also, the only company invest in the sassy infrastructure globally it's part of a some other service we have 40 guard 40 mail which also leverage all this data center infrastructure that's make us a one-third cost much lower cost compared to after using cloud providers and other color so that's other huge advantage and then the third one i saw the so the the first one i call three in one right so three functions into one OS. The second, I call that like one-third cost. And then the third one, I say the 3x, the market size, like a sovereign SaaS, on-premise SaaS, all these appliances, which the competitor is not addressing. They only have a cloud SaaS approach. We see the sovereign SaaS grow so strong. There's a lot of service provider carrier. We do give an example. They just say, hey, SASE will be huge potential for them. Just like 17 years ago, they did the firewall APNs big potential business for them. So they starting quickly adopt the sovereign SASE using our box on-premise in their own infrastructure, deploy SASE service for their customer and keep the data within their own infrastructure. So that's where the sovereign SASE, I feel will make our market total address market like a two to three time compared this cloud sassy the other player play and all barbara competitive yeah so that's a few the sassy like you can see the unified sassy q4 grow 40 percent q1 like a 31 32 percent faster than any other sassy player and also very bigger yeah and so that's a few uh even starting called sassy firewall right so it's the same operation system the same box you can't enable SASE and that's together with firewall that's where sometimes in Q1 it's a little bit different difficult to differentiate because in secure networking the most growing is the 40 gate which is like maybe 80 some percent being there because for us the sales have no incentive where to identify the SASE or firewall so both bins go like a 30 some percent so it's both pretty strong but we do see SASE we have huge advantage that even using the sassy firewall as a term which is just your sassy just like a few years ago how the sandbox being integrated into the firewall then the the sandbox firewall is kind of disappear and and also the nature of firewall replacing traditional firewall as if the sassy started replacing some of the non-sassy firewall and part of the whole network solution now Got it.

Is your SASE offering today at par with competitors? Because I stopped covering you about eight months ago and I started covering you about two months ago, there is a six month gap in my knowledge. So back then, when I left you, you were still ramping the feature set of SASE. Where are you today in terms of competitive positioning?

Actually, we do see very strong demand for the Sandy, and you see the ramp up pretty quick. What's new in the last two or three months really, we started launch, we called a two bundled service. Bundle, SASE, SD-WAN, and all these other services together, which for the existing customer is 35% for the hardware cost per year. But that's also, if you bundle all this kind of four or five service together it's less than one-third cost you buy individual because in the past i see when we do offer sd1 part of the 40os function but we don't charge much service they do have underlay over your service but only the work help customer buy it so when we bundle sd1 sassy all together with also like a 5 10 20 uh free license part a sassy user lesson part of it we see the drive of this amount of service grow for like a small restaurant and we we are seeing the most discerning enterprise customers buy our sassy in very competitive deals so we're seeing an increase in that and i think we're really kind of distinguishing ourselves versus some of the single solution providers out there who don't have the optionality of sovereign sassy and cloud sassy And I think you see that in growth rates and stock price performance versus like a Zscaler or a Netco. And so I think kind of the winners and others may be, you know, there may be a trend where that's starting to separate a little bit.

On the last call, you said, if I remember correctly, and if I'm not, correct me, that you're 18% penetrated within customers with SASE.

Yes, for the enterprise we're tracking. Probably 70% now already using SD-WAN, but 18% now using the SASE now, but also that's probably about 50% growth compared to one year ago. It's a pretty strong growth for the current customer base, quickly up from like a far old SD-WAN to SASE.

Got it. You touched on Sovereign.

For those who don't understand the difference can you explain sovereign sassy what is it and what is the market opportunity uh basically you can process all the data within whether customer on-premise we call private sassy on in their own kind of infrastructure like certain countries certain service provider won't have the data being processed with their own infrastructure instead of full to the cloud right that's the one you do need to provide them the the product the to process within their own infrastructure. Basically selling a product first, and then they kind of using the product offered a SaaS service to their customer base processed locally.

And is this a U.S. phenomenon or that's the outside of the U.S.?

More EMEA.

More EMEA, got it.

U.S., we do have a few bigger enterprise industrial finance service. They do, they call the private SaaS. They using their own data center infrastructure to process data on their own premise yeah the other parts of the business also grew very well uh this quarter um talk about the other parts uh ot i mean take us through the journey of the newer parts of the portfolio outside of sassy yeah i think ot is the one we say grow like a 70 80 percent year over year we kind of focus in that area in the last five to ten years and we don't see much other player get into this space because kind of a there's a lot of unique protocol they also sometimes need a special hardware in the recognized form in this outdoor environment that's where also kind of do need some kind of long-term investment there on other side you can see OT, IoT is the space which probably a lot of time or probably most of the time network security may be the only way to secure that environment because endpoint pretty much impossible to deploy in this OT, IoT device which has a very limited computing power, very different operation system which is the traditional endpoint solution now working. So the networking security is probably the only way to protect them. So we see a huge market potential, especially all this edge computing, all this kind of a connect device, all these things. So that's where we are probably the last three, four years. If there's a market report, we are probably the only leader in that space. That gave us a huge growth potential advantage there. I feel that's probably, I keep saying in the next 10 years, probably there's 10 times more device connect online than people. Maybe if you add a jetting AI, maybe even a hundred times.

Security operations. Think about how central is security operations to the broader platform?

We just try to help customer to quickly automate an on-level security operation. So we have about, actually about 40 products in that portfolio there. now over half more than 20 has all built AI capability inside like AI making all this decision automatically so they can react very quickly within seconds so that's also it's for us more like upsell cross-sell so if you look and secure up it's a very huge market almost like a $200 billion but I do believe probably no player even have a double digit market share they are so fragmented So that's where for us, probably like around 10% business come from the secure op, but more from existing customer, upsell, cross-sell. And because we develop most of the product in-house, they integrate up, like automate to get much better. So that's where kind of we feel that's the advantage we have, but it's on the other side, it's a very, very fragmented market and we still are focused on that with security right But a lot of customers, once we get in, we're starting to expand into some operation to help them to quickly automate.

We are also seeing a lot of kind of mid-sized customers who buy across the three pillars, secure networking, SASE, and security operations. And MSSPs who love the full portfolio because they can offer it as kind of an a la carte menu and sell additional amounts. And they're also expressing interest in some of our AI visibility for the AI sprawl so they can help their customers identify the AI sprawl throughout their organization and secure it and have cost control around it as well. Is this a standalone product or is it normally sold with the other parts? It's typically an expand sale. So it can be a standalone product, but more often than not, it's an expand sale. And oftentimes these mid-market customers will buy across the portfolio. And we see the bigger customers consolidating vendors as well, whereas they may buy from multiple vendors. But I think that kind of broad platform approach and opportunity is pretty significant in mid-market and below.

You know, when we measure cybersecurity companies, very often we look at how much business is coming from new customers versus how much business is coming from an upsell. Especially now when we talk about platforms, upsell is a big part. but also new customers is a big part so talk about your situation talk about uh you know kind of business with new customers versus upsell to existing customers and and how do you go to market differently about these two things uh i think for us we definitely want to take care of the existing cover for the new security need that's how we kind of uh keeping up all this space changing whether the now sassy with quantum computing with our ai so we try to internally develop the same

new function in the os make it more easy to migrate to the next next function they need it on the other side we do see competitors starting whether falling apart or behind uh which make us also gaining a lot of new customer especially like a u.s enterprise you can see it's pretty strong growth uh so if you look at the 10 20 years ago uh there's a top five player has less than 50 market share on network security now probably the two top two players already have over 50 market share so they do have some consolidation going on and i do believe we have more advantage than other competitors keeping gaining market share that's what we were confident will grow faster in the market in the next few years and the same time we're keeping gaining market share got it um we're almost running out of time i want to talk about supply chain um any constraints how do you how do you handle supply constraints uh we managed this multiple times and just like five years ago we told our customer partner we just want to maintain the margin and we don't want to make more money or whatever we're about to the real-time adjustment and we also have a six-month inventory and the same time because uh we have like almost 60 percent market share on the unit shipment in the space we're able to operate manufacture working with all this like memory supply the cpu supply the network chips applied directly so we work in with the chip company directly to sourcing all this i think has a better source capability more long-term commitment contract make it more stable and the same time the policy of excess inventory help us during this time to gain the market share which a lot of competitors probably don't even have the product or shipping that's that's we say it is a once of a five to ten year opportunity to gain a market share we view it this way got it and do you envision maintaining this leadership but what is structurally right with you that is wrong with the others?

I mean, why are you structurally able to handle supply constraint better than the others?

We're trying to be more long-term focused. Like, I don't see any of our competitors trying to keep in six months inventory for the key component, like our own asset, we keep even one year inventory. So there may be lower some operation cost short term, but they're missing the opportunity which I feel if we don't have this, there's an opportunity cost if we don't do this. So that's a few, some kind of, maybe we go through this a few times, we do a little bit better than competitor, but I view this as the opportunity to get market share.

We ran out of time, but I can steal a minute or two from the next, from the break. Any question from the audience? So I'll let you go.

Okay, thank you. Good having fun.

Thank you. Thank you so much.