The paragraph introduces a Fortinet earnings conference call for the third quarter of 2024. Aaron Ovadia, the Senior Director of Investor Relations, welcomes participants and outlines the agenda. Key speakers include Ken Xie, Fortinet's CEO, and Keith Jensen, the CFO, who will discuss financial results and future guidance. A Q&A session will follow, with a request to limit questions. Participants are reminded that forward-looking statements will be made, which involve risks and uncertainties as detailed in Fortinet's SEC filings, and the company disclaims any obligation to update these statements.

The paragraph from the earnings call highlights Fortinet's strong quarterly performance, featuring record gross and operating margins with a notable increase in operating margin by 830 basis points to over 36%. It reports a 13% total revenue growth, driven by positive growth in building and product revenue, as well as 14% growth in Unified SASE building and 32% in secure operation building. Fortinet continues to gain market share in its $284 billion total addressable market. It distinguishes itself as the only vendor utilizing a single operating system in the U.S., offering an integrated solution across various secure network offerings. The company's proprietary ASIC technology enhances computing power and efficiency, reducing costs and energy consumption. Unified SASE building represents 23% of the business, a 1.5-point increase, with secured building growth and pipeline growth also noted.

The paragraph discusses Fortinet's comprehensive SASE offerings and rapid deployment capabilities through FortiSASE, emphasizing its leadership in the SD-WAN market for five consecutive years and its integrated security solutions. It highlights Fortinet's significant investment in global infrastructure, providing a cost advantage and security management via FortiStack. The security operations segment is growing rapidly, with new product launches creating a $20 billion market opportunity. The company's focus on innovation and R&D has led to the expansion of its FortiAI system across several key solutions, with further advancements in AI-based security operations anticipated by early 2025.

In the third quarter, the company reported strong financial performance, achieving record gross and operating margins, with total revenue growing 13% due to robust services revenue and a return to growth in product revenues. They added over 6,000 new customers, driven by small enterprises and strong channel partnerships. The company raised its full-year revenue and operating margin guidance, anticipating its seventh consecutive year of surpassing the rule of 40. RPO grew 15% to $6.1 billion, and total billings grew 6% to $1.58 billion, driven by significant growth in security operations and Unified SASE. The company's Unified SASE and security operation pillars are gaining traction, with over 50% of billings from their installed base, leading to a SaaS organic ARR growth rate of 74%. The customer journey typically begins with a firewall and expands to SD-WAN and SASE, with two-thirds of large and mid-enterprise customers already deploying their SD-WAN technology.

In the first year of SASE, the company achieved mid-single-digit penetration rates, indicating significant expansion opportunities and demand for vendor consolidation. Unified SASE saw pipeline growth of over 30%, while SSE technologies experienced pipeline and ARR growth of 130% and over 500%, respectively. Large enterprises are driving expansion into Unified SASE and SecOps, accounting for 91% and 76% of their billings. The company managed to overcome last year's backlog, leading to growth in secured networking as anticipated. SMB and large enterprises were the top-performing customer segments, with EMEA showing the best geographical performance through double-digit growth. Manufacturing billings rose by over 20%, retail grew for the first time in six quarters, and the service provider vertical saw its highest growth rate in the same period. Overall revenue increased by 13% to $1.508 billion, with service revenue growing by 19% and product revenue returning to growth. SaaS solutions in SecOps and Unified SASE significantly drove service revenue growth. Product revenue, excluding backlog impacts, grew at double-digit rates sequentially, outperforming historical norms.

The paragraph discusses Fortinet's business performance, emphasizing their focus on solution consolidation and the convergence of security and networking for customers. It highlights the customer journey from using Fortinet firewalls to managing switches and access points with FortiLink technology. It mentions that over 95% of large enterprise customers have purchased FortiGate firewalls, with a 50% switch penetration rate, demonstrating both current success and potential growth. The company saw substantial growth in software license and service revenue, reaching an annual run rate of over $900 million. Fortinet achieved record gross margins, supported by product and service growth, favorable supplier renegotiations, and a shift towards higher-margin services. The operating margin also increased significantly, exceeding expectations.

The paragraph discusses financial metrics and impacts from acquisitions in Q3. Excluding a onetime benefit, operating margins were 35.1%. Acquisitions of Lacework and Next VLP boosted Q3 billings, revenue, and margins. Free cash flow was $572 million, with adjusted margins at 40%. For the first nine months, free cash flow reached $1.75 billion after real estate adjustments. Cash taxes increased significantly due to previous regulatory extensions, while infrastructure investments were $36 million. The average contract term remained at 28 months, and DSO reduced to 62 days. A $106 million gain from the Lacework acquisition impacted GAAP but not non-GAAP financials, increasing GAAP EPS by $0.14 per share. Share buybacks totaled $600 million, with the Board authorizing an additional $1 billion for future repurchases. The paragraph concludes with a note on significant Q3 wins.

The paragraph details several significant business wins for Fortinet, highlighting their FortiSASE and FortiGate solutions. A retail SD-WAN customer expanded their use of FortiSASE to enhance security and operations, while a medical device company replaced their previous system with FortiSASE for improved management, cost savings, and functionality. Additionally, a multinational bank selected FortiGate firewalls for their hybrid architecture, appreciating Fortinet's integrated security features. The text also notes the recovery of the firewall market, with stable metrics indicating improvement, and anticipates a refresh cycle beginning in 2025 for FortiGates reaching the end of their support life cycle in 2026.

The paragraph provides an outlook for the company's financial performance in the fourth quarter and the full year, while reminding that these projections are subject to forward-looking disclaimers. For Q4, the company anticipates billings of $1.9 billion, revenue between $1.56 billion and $1.62 billion (midpoint growth of 12%), and non-GAAP earnings per share ranging from $0.58 to $0.62. The expected non-GAAP gross and operating margins are 79.5%-80.5% and 33%-34%, respectively, with capital expenditures between $100 million and $120 million. For the full year, it forecasts billings of $6.43 billion to $6.53 billion, revenue between $5.856 billion and $5.916 billion with a midpoint growth of 11%, and non-GAAP earnings per share of $2.20-$2.28. Capital expenditures are expected to be $380 million-$400 million, with a non-GAAP tax rate of 17%. The paragraph concludes with Keith looking forward to the company's Analyst Day and progress updates. The Q&A session is then handed back to Aaron.

In the Q&A session, Hamza Fodderwala from Morgan Stanley asks Ken Xie about Fortinet's strategy in the Sovereign SASE market, noting its projected growth and differentiation from competitors. Ken Xie explains that Fortinet has invested heavily in SASE over the past 5 to 10 years, integrating SD-WAN and SASE functions into the same FortiOS for both on-premise and cloud solutions. This approach allows data to be processed and secured locally in a service provider's own data center, offering a significant advantage. Fortinet's differentiators also include being the top company in network security firewalls and SD-WAN.

The paragraph discusses the ease of migrating from traditional firewalls to SASE (Secure Access Service Edge) using a shared operating system, allowing customers to quickly transition with minimal reconfiguration. This has resulted in significant business growth, with expectations to become a leading SASE provider. The conversation then shifts to a discussion on the firewall refresh cycle, where Keith Jensen notes that the end-of-life for certain products will begin in the second half of 2026. He anticipates that larger enterprises will not wait until the last minute to upgrade, and will likely conduct certification and proof-of-concept projects in advance, similar to a pattern observed in 2023 but on a larger scale.

The paragraph discusses the product revenue growth in 2022, noting it was over 40% despite supply chain challenges. It predicts significant growth by 2026, with entry-level and mid-range firewalls playing a key role, which is uncommon but positive. The paragraph mentions the importance of enterprise, retail, and service provider sectors in driving this growth. Large enterprises tend to refresh equipment early due to enterprise agreements and account level support, while smaller customers often wait for contract expirations, leading to refresh cycles around 15 to 18 months.

In the paragraph, Ken Xie addresses a question from Fatima Boolani about the potential impact of migrating SD-WAN customers to the SASE framework on market share and refresh potential. Ken explains that SASE, which supports remote growth and dynamic environments, is primarily derived from existing SD-WAN and firewall customer bases. To support SASE, customers will need hardware firewalls and additional user licenses. He emphasizes their strategy of expanding in three key areas: secure networking, SASE services, and secure operations, aiming to grow faster than the market and increase market share. He also highlights the advantage of integrating SASE technology within the same OS and anticipates that service providers will eventually offer their own SASE solutions.

The paragraph discusses the strong support for service providers building their own SASE infrastructure, highlighting significant growth potential beyond traditional network firewalls. Fatima Boolani asks for more details on the support and refresh plans for 2026, and Keith Jensen mentions that the relevant figures for 2023 and expectations for 2026 will be more than double. Switching to another topic, Saket Kalia inquires about the growth number related to Solutions ARR and whether it is organic or inorganic. Christian Agard explains the growth is organic, excluding acquisitions from Next DLP and Lacework, with key drivers being various Fortinet cloud solutions. Saket then asks Keith about profitability, referencing a onetime factor mentioned in the quarter.

The paragraph features a conversation between Keith Jensen and Saket Kalia about the company's margins and profitability. Jensen explains that without a one-time benefit, the pro forma product gross margin would be around 68.4% to 68.5%, and the operating margin around 35.1%. He mentions that the margins were influenced by traditional inventory calculations and a rare $15 million benefit from Q2 deliverables. Jensen expresses confidence in the company's profitability, highlighting investment opportunities for growth. The conversation then shifts to an unidentified analyst asking about low billing guidance for the next quarter. Despite stable firewall demand and an expected refresh cycle in 2025, organic billings excluding certain acquisitions fell below expectations, leading the analyst to inquire about potential weaknesses in the business.

In the paragraph, Keith Jensen discusses the progress of the fourth quarter, expressing satisfaction with the results of the first month and noting that some substantial deals are expected to mature by the final month. An unidentified analyst inquires about the competitive landscape, specifically regarding discounting, bundling, and vendor financing. Jensen responds that discounting patterns are similar to previous periods, with ample margins allowing for investment in various areas, including sales incentives and partnering. Christian Agard adds that while discounting is expected to remain stable, it varies by product set, with incentives available for both channel partners and customers to encourage purchases. The operator then introduces the next question from Gabriela Borges of Goldman Sachs, focused on go-to-market strategies.

Over the past year, Ken Xie noted significant progress in the SASE SSD market, highlighting the increasing adoption by service providers and strong interest from their existing customer base. This has facilitated additional sales and margins. The technology's advantages, like a single OS and ASIC, allow expansion beyond the traditional SASE market to areas like edge computing and OT/IoT, where significant growth potential exists. Ken expressed confidence in their leadership in the SASE space, similar to their success in the firewall SD-WAN sector. Keith Jensen supported Ken's views, noting increased enthusiasm from customers for their SASE architectural design compared to a year ago.

The paragraph discusses the strategic focus and early success of a company's SASE (Secure Access Service Edge) solution. It highlights the importance of engaging with customers and developing reference clients to boost pipeline and ARR (Annual Recurring Revenue) metrics. Ken Xie emphasizes the company's infrastructure cost advantages, including owning a 3 million square foot data center and advanced OS technology that reduces energy costs. He believes these factors, along with their firewall and SD-WAN customer base, provide a competitive edge. Gabriela Borges points out that although the company started focusing on SASE a year ago, they've seen significant growth and emphasizes the company's capability to execute strategic plans effectively.

The paragraph is part of a financial discussion involving representatives from a company, Fortinet. They discuss their focus on SD-WAN technology starting in 2018, which has led them to become the leader in their field, according to the Garden Magic Quadrant. They also highlight their recent focus on SASE and SecOps with positive results over the past year. An analyst, Shaul Eyal, asks about Fortinet's sustained growth projections, but the company's representatives, Keith Jensen and Ken Xie, indicate that detailed growth expectations will be addressed at the February earnings call and November Analyst Day. They mention that more information is available in investor slides. Another analyst, Rob Owens, inquires about the company's caution regarding Q4 projections and some uncertainties around anticipated yields for the final month of the quarter.

The paragraph features a discussion among company executives about the maturation of large deals and the cautious approach being taken towards them in the fourth quarter. Keith Jensen mentions slower progress in maturing these deals compared to previous quarters and suggests taking a more cautious approach. Ken Xie talks about providing the RPO number for the first time, referencing the need for financing deals that don't involve upfront payments, as highlighted by Christian Agard. Agard explains that some customers are reluctant to sign long-term agreements without financing options. Xie adds that this strategy may have short-term impacts but aims for long-term benefits like improved margins and customer relations. The paragraph shifts to a question from Catharine Trebnick about the company's virtual firewall's performance and its competitive standing, to which Keith Jensen responds.

The paragraph discusses the positive feedback received for the Lacework FortiCNAPP offering. The product is seen as having great potential, with an incremental total addressable market (TAM) of $10 billion. John Whittle highlights the quality of Lacework's product and engineering team, noting that the offering is competitive due to its seamless integration, as it was developed organically rather than through multiple acquisitions. The company is focused on improving the user interface and other areas to enhance competitiveness. Overall, the feedback from customers and partners has been very positive.

The paragraph discusses Fortinet's competitive advantages, emphasizing a broad suite of integrated products compared to single-product vendors. Ken Xie highlights the company's market-leading technology and strong team, leveraging R&D resources for growth in secure applications and the SASE market. There's also mention of the government's vertical market, where Fortinet focuses more on state, local, and international sectors rather than the U.S. federal market. The conversation includes Fortinet's strategy to incentivize partners to prioritize their SASE solutions despite existing relationships with established vendors, with Ken Xie noting that partners in network security and SD-WAN see easy upgrades to Fortinet SASE.

The paragraph outlines Fortinet's competitive advantages and growth opportunities in various market segments. It highlights that while Fortinet is on par with competitors in terms of cost, security, performance, and flexibility, it is easy for customers to migrate to Fortinet. The company has a substantial SMB customer base, which represents a fast-growing area despite currently having limited network security deployment. Additionally, Fortinet feels differentiated in providing services to service providers and big enterprises, especially with solutions like private solvency strategies. The discussion also touches on the industrial operational technology (OT) market, where Fortinet is seen as a leader, anticipating significant growth driven by demand for network security due to the proliferation of connected devices and edge computing over the next 5 to 10 years.

The paragraph features a discussion about potential growth and changes in various market verticals post-election, with emphasis on retail and manufacturing sectors showing signs of growth after a period of stagnation. Ken Xie notes the strong performance of the manufacturing sector in Q3 and anticipates acceleration in post-election properties, while the carrier service provider market is also recovering. Retail experienced significant growth in 2021 and 2022, and a refresh cycle is expected in the coming years. Additionally, Keith Bachman from BMO asks about the specifics of SaaS penetration among large enterprises and seeks clarification on the role of SD-WAN in this context. He also inquires about the outlook for the European market amid post-election economic considerations.

In the paragraph, Keith Jensen discusses the mix of customers for SASE and notes that larger enterprises are more prevalent in this segment, compared to the overall customer base. He mentions that when looking at dollar values rather than customer counts, international regions like EMEA lead in performance, with the U.S. and other European markets following. Despite economic pressures, SMBs continue to perform well. Jensen does not expect significant changes in European performance in the upcoming quarter. An unidentified analyst inquires about the performance of hardware appliances, to which Jensen responds that while mid-range and high-end appliances have remained stable, they have not experienced significant growth. The final question by Gray Powell pertains to product-level growth rate disclosures in the slide deck, which he found helpful.

The paragraph discusses the growth potential of the SD-WAN segment within Universal Sassy, noting that it has faced pressure over the past 18 months. Keith Jensen emphasizes the opportunity for growth by targeting new accounts and leveraging existing penetration in large enterprises, which is around 65-70%. There's an expectation of renewal cycles in 2025-2026 that could favor them given their superior product offering. Ken Xie adds that their SD-WAN solution, which is internally developed with integrated security, offers advantages in terms of technology, performance, cost, and energy consumption. He expresses confidence in the continued acceleration of SD-WAN growth, outpacing the market and capturing more market share amidst a fragmented competitive landscape.

The paragraph summarizes the conclusion of a conference call, where Aaron Ovadia thanks the participants and provides information about upcoming events. Fortinet will hold an Analyst Day on November 18 to mark their 15-year IPO anniversary, during which they will discuss their future cybersecurity vision and strategy updates. Additionally, they will attend investor conferences in the fourth quarter. Interested parties can find the webcast link on Fortinet's Investor Relations website, and Aaron is available for follow-up questions. The operator then concludes the call.

This summary was generated with AI and may contain some inaccuracies.