The paragraph is an introduction to Fortinet's fourth quarter 2024 earnings announcement conference call. The operator explains the procedures for participating in the call, including a question and answer session. Aaron Ovadia, the Senior Director of Investor Relations, introduces the key participants: Ken Xie (Founder, Chairman, and CEO), Keith Jensen (CFO), John Whittle (COO), and Christian Agard (CAO and sales operations leader). Ken Xie will provide a business overview, followed by Keith Jensen discussing financial results and future guidance. The call will conclude with a Q&A session, and a reminder is given that forward-looking statements involve risks and uncertainties. The entire session will be available for replay on their Investor Relations website.

The paragraph provides an overview of a company's financial and operational performance, including references to SEC filings, non-GAAP financial metrics, and forward-looking statements. It mentions strong fourth-quarter results, highlighting a record operational margin of 39% and a total revenue growth of 17%, with product revenue growth of 18%. The company, led by Ken Xie, is achieving robust growth in Unified SaaS and secure operations, particularly with Security Service Edge showing an 85% growth. Their strategy emphasizes a single-vendor SaaS solution, integrating various functionalities like firewalls, SD WAN, VPN, and other innovations into one system, which has been well-received by customers.

The paragraph discusses Fortinet's capabilities and achievements in networking and security. It highlights their SD-WAN solutions for quick certification in cloud or on-premise environments and their support for sovereign SaaS hosting for enterprises. Fortinet leverages AI-powered security and a unified management approach for consistent protection, visibility, and simplified deployment across all locations and devices. They recently enhanced their security portfolio by acquiring Perception Point to expand protection beyond email. Fortinet leads the industry in secure networking, surpassing traditional networking, with significant global market share in firewalls and a unique single operating system across secure networking solutions. Their technology delivers significantly better performance compared to competitors.

The paragraph discusses enhancements in security measures and the reduction of total ownership costs, highlighting developments in operation technology with OT cells reaching nearly one billion in 2024. It introduces new high-performance firewalls and a unified SaaS solution designed for small to medium businesses and distributed enterprises, claiming significantly faster support and improved threat protection. The company has also acquired a share of Linksys to expand security for remote workers, businesses, and consumers. Fortinet was recently recognized by Forbes as one of the most trusted companies, ranking number seven overall and the only cybersecurity company in the top fifty. The paragraph concludes with an acknowledgment of employees, customers, partners, and suppliers for their continued support and a transition to Keith Jensen, who highlights strong financial performance in the fourth quarter, including a 17% revenue increase and the addition of 6,900 new clients through channel partner collaboration.

The financial results show that total billings grew by 7% to $2 billion, with strong growth in security operations and Unified SaaS. ARR for SecOps and Unified SaaS increased significantly, with SSE showing a 96% growth. There was notable success in upselling the SASE solution to customers with existing SD WAN services, as evidenced by a 60% increase in SASE deals and a 90% rise in the pipeline. The adoption of SD WAN by over 70% of large enterprise customers positions them for further expansion to SASE. Large enterprise SASE penetration reached 10%, up by 2% since the prior report. Deals between $5 million and $10 million grew by over 90%, with SMBs and the EMEA region showing strong performance. Government and service provider verticals grew by more than 20%, while financial services faced challenges due to previous significant deals. Overall, total revenue rose by 17% to $1.66 billion, driven by an 18% increase in product revenue and sustained growth in software licenses.

The paragraph details the financial performance highlights of a company, noting that service revenue of $1.09 billion, primarily driven by SaaS and organic services growth, now constitutes 65% of total revenue. Software licenses and SaaS security solutions saw a 41% increase, contributing to an annual revenue of over $1 billion. Total gross margin rose to 81.9%, with product gross margin reaching 69.3% and service gross margin a record 88.6%. Operating margin improved significantly to 39.2%, supported by strong gross margin, positive FX impacts, and revenue overperformance. Acquisitions such as Lacework, NEXBLP, and Perception Point boosted fourth-quarter billings, affecting operating margin less than expected. Free cash flow amounted to $380 million, representing a 23% margin.

The paragraph reports financial results and achievements for a company in 2024. Adjusted free cash flow reached $549 million with a 28% margin. The company experienced lower cash taxes and made significant infrastructure investments. Billings exceeded $6.5 billion, with total revenue growing by 12% to $5.96 billion. Service revenue saw substantial growth, with significant increases in security subscriptions and Unified SaaS services. The gross margin improved by 390 basis points to 81.3%, leading to a record operating income and one of the highest GAAP operating margins in the industry. Earnings per share rose 45%, and free cash flow was a record $1.9 billion. The company exceeded the "rule of forty-five" for five consecutive years and highlighted a key fourth-quarter win with a healthcare provider adopting its services.

The paragraph highlights the efforts of a new leadership team to consolidate security functions onto a single platform, modernize outdated infrastructure, and adopt a SaaS solution using Fortinet's technology. A Fortune 500 retail customer expanded their security infrastructure through a significant SaaS deal, demonstrating the value of consistent security enforcement for both on-premises and cloud applications. Additionally, a major energy company expanded its partnership to secure its global critical infrastructure using Fortinet's solutions. Fortinet, supplying over 50% of global firewalls, plays a crucial role in protecting critical infrastructure amid increasing sophistication in the threat landscape. National cybersecurity agencies consider their partnership vital for safeguarding essential customers and entities.

The paragraph outlines the company's AI solutions for threat intelligence and network management. It highlights FortiGuard's AI-powered security services, which help combat various threats, and describes how AIOps can reduce the time needed to diagnose network issues by monitoring trends and using machine learning. The AI is integrated into multiple network and security operation products. Additionally, the AI-based DLP services prevent sensitive information leakage to AI systems. The paragraph also discusses the anticipation of increased upgrades and cross-sell opportunities, particularly with firewall upgrades expected to gain momentum as end-of-service dates approach in 2026 and 2027. To capitalize on this, the company is implementing initiatives targeting different customer segments, involving sales plays, expanded account plans, channel partner collaboration, incentive programs, and targeted bundle offerings.

The paragraph provides guidance for the first quarter and full year, highlighting expected financial performance metrics. For the first quarter, the company anticipates billings between $1.52 billion and $1.6 billion, revenue between $1.5 billion and $1.56 billion, and a non-GAAP operating margin of 30% to 31%. Non-GAAP earnings per share are expected to be between 52 to 54 cents, with infrastructure investments of $80 to $100 million. For the full year, billings are projected to range from $7.2 billion to $7.4 billion, revenue from $6.65 billion to $6.85 billion, and service revenue from $4.575 billion to $4.725 billion. The non-GAAP operating margin is estimated at 31% to 33%, and earnings per share between $2.41 and $2.47. The performance metrics for Linksys and PerceptionPoint are also mentioned, highlighting expected increases in billings and revenue growth along with decreases in operating margin.

The paragraph discusses financial updates and personnel changes at Fortinet. The company reports a share count between 773 and 783 million, infrastructure investments between 380 and 430 million, a non-GAAP tax rate of 18%, and cash taxes ranging from 525 to 575 million. A personal announcement follows, revealing that after a long career in finance, including 11 years at Fortinet, a current executive is retiring. They will remain through the next quarter earnings call and assist with the transition until June 30th, as Christiana Olgaard prepares to succeed them as CFO in May. The retiring executive expresses gratitude to colleagues and Fortinet's mission, while Ken Xie thanks them for their service and welcomes Christiana to her new role. The paragraph concludes with Ken handing over to Aaron Ovadia for the Q&A session, who reminds participants to limit their questions. The operator then invites questions from the line.

In the paragraph, Jonathan Eisenson fills in for Hamza Fodderwala to congratulate Keith on his retirement and discuss Fortinet's involvement with hyperscalers like Oracle in securing new data centers. Ken Xie from Fortinet highlights the company's development of a secure ASIC processor, which enhances secure computing power compared to general-purpose CPUs and helps with internal segmentation and AI security in data centers. Subsequently, Tal Liani from Bank of America questions the weakened billing guidance and inquires about product revenue performance, noting the current quarter's outperformance and concerns about its sustainability in future quarters.

The paragraph discusses the company's billing performance for the fourth and first quarters. The fourth quarter saw better-than-expected billing, particularly due to successful large deals and growth in product revenue, especially in mid-sized and large firewalls. This performance was attributed to enterprise companies beginning their purchasing refreshes. However, the first quarter is expected to be weaker due to cautious guidance, exposure to recent tariffs, and potential disruptions in multinational markets, particularly in Latin America and Canada, as well as concerns about the US government's impact.

The paragraph discusses the strategy for increasing subscription revenue. Ken Xie and others highlight that while some building projects may be deferred, they are focusing on driving ARRPO and leveraging a unified SaaS approach to secure customers. Gabriela Borges from Goldman Sachs inquires about subscription revenue as hardware comes up for renewal, and Keith Jensen and Christian Agard explain that growing subscription revenue requires upselling more subscriptions or services with the same hardware. Plans and incentives are in place to achieve this growth, and new hardware often has more capacity for additional functions.

The paragraph is part of a financial earnings call where Brian Essex from JPMorgan asks about the billing guidance for the next fiscal year. He acknowledges Keith Jensen's retirement and congratulates Christiana on her appointment as CFO. In response, Christiana Agard explains that the billing and revenue guidance includes two components: product sales and services, with about 10-15% coming from new services. The guidance is based on assumptions presented at the analyst day, emphasizing a significant upsell component.

The paragraph is part of a conversation during a financial call where Christian Agard and Brian Essex discuss the trajectory and growth of product revenue, which is expected to be around ten percent with a moderate billing growth throughout the year. Fatima Boolani from Citi then asks about the impact of tariffs and potential retaliatory policies on demand, seeking further clarification on how these factors are being considered in the company's guidance. Keith Jensen receives congratulations on his departure.

The paragraph discusses the impact of tariffs on a company's supply chain, cost of goods sold (COGS), and gross margin, particularly emphasizing the company's presence in Latin America and Mexico. After tariffs were announced over the weekend, the company quickly assessed the potential effects on these markets and their purchasing behaviors. Issues such as possible disruptions in their US federal sales, due to staffing challenges in the federal government, are also mentioned. Highlighting the company's global footprint, the paragraph notes that around 70% of its business is international and therefore not directly affected by US tariffs. The situation is described as dynamic, with the company cautious about making premature assumptions until more information is available.

The paragraph is part of a Q&A session during an earnings call. Fatima Boolani congratulates Cristiana, and Shaul Eyal from TD Cowen congratulates Keith and Christian on their performance. Shaul asks about the sustainability of their strong US performance into 2025, given previous investments in the region. Ken Xie responds by stating that they began focusing on US enterprise sales over a year ago, enhancing sales capacity, and partnering with channel partners to drive growth. He highlights the potential for continued growth in the US, leveraging resources and facilities, and anticipates the US to be a fast-growing region in the coming years.

In the paragraph, Rob Owens from Piper Sandler Companies asks about the strategic importance of the Linksys relationship. Ken Xie explains that they acquired a 51% share in Linksys around three years ago to align it with their secure networking strategy. Linksys, a leading brand with 25 million active users and 250 million devices shipped over nearly 40 years, offers technology to capitalize on consumer home-based network security. By combining their technology and Linksys's resources, they aim to tap into new markets like supporting work from home and targeting small and medium-sized businesses (SMBs), projecting significant growth over the next 5 to 10 years. The operator then moves on to the next question from Eric Heath with KeyBanc.

The paragraph discusses strategies for managing inventory levels in anticipation of demand, with Keith Jensen noting the preference for achieving inventory turnover rates between two to six times. The discussion also touches upon previous success in managing inventory during supply chain disruptions, like COVID-19, which benefited their income. The goal is to maintain a healthy inventory turnover each quarter. Christian Agard speaks about the product revenue model for 2025, highlighting the importance of refreshing products in the second half of the year and aiming for gradual upgrades rather than sudden spikes to meet customer needs.

In the paragraph, Saket Kalia from Barclays asks about the size of the Latin America (LATAM) and Canada markets in terms of billings and the breakdown of the company's projected 12% growth in 2025 as organic versus inorganic. Christian Agard responds that LATAM and Canada account for about 15% of the total business, with about 1% of the growth expected to be inorganic. Adam Borg from Stifel, through Max, inquires about the potential for SaaS and SecOps billings, which have primarily come from existing customers, to attract new customers by 2025, or whether it will remain an upsell opportunity. Ken Xie answers that much of the growth will come from existing installations, particularly with the NextGen firewall and ST WAN, with over 90% of recent business coming from existing customers with major firewall installations.

The paragraph discusses the advantages of a company's unified operating system, which integrates networking, security, SD-WAN, and other functions, offering ease of upgrades, better performance, integration, pricing, and management. The company sees growth potential, particularly with large enterprises facing issues with other players, and aims to be the leading unified SaaS provider. Keith Jensen emphasizes the importance of reducing complexity and cost, citing a successful sales example where the company not only replaced a competitor's firewall but also secured an SD-WAN and SaaS deal, highlighting their expertise and customer collaboration.

The paragraph discusses the growth and development within the organization, highlighting the contribution of a strong sales team in expanding into organizations focused on consolidation, cost control, and complexity reduction. Ken Xie mentions the company's long-term investments in a single operating system, hardware, and ASIC design, which provide unique advantages and growth potential, particularly in SaaS functions and performance improvements. Shrenik Kothari from Baird asks about the impact of incentives on metrics and deal conversion, to which Ken Xie responds by emphasizing the importance of accelerating training for the sales, technical teams, and partners.

The paragraph discusses the benefits of using a single operating system (OS) for long-term improvements in functionality, security, and upgrading processes. It highlights the advantages of a new software-as-a-service (SaaS) approach, including easier upgrades, shorter sales cycles, and quick ramp-up since its launch. The conversation then shifts to questions from Jun Zhang of Truist Securities, who asks why small and medium-sized businesses (SMBs) are performing well as a customer segment. Keith Jensen attributes success in this area to a mature account program, strong channel partnerships, and effective efforts by Shiana to focus on channel leadership and tailored incentives.

The paragraph discusses the increased collaboration with channel partners and the success of targeted incentive programs, resulting in positive business metrics. Ken Xie highlights the competitive advantage of their product, which integrates nearly thirty functions into a single operating system, offering superior performance and functionality compared to competitors. This technology is particularly beneficial for SMBs and long-term home users, with significant growth potential as many SMBs lack network security. The focus is on making the technology easy to deploy and use, leveraging AI and other advancements, with long-term investment seen as beneficial for future growth.

In this paragraph, Joseph Gallo from Jefferies asks a question about the increase in average deal size for early end-of-life product renewals compared to four years ago, and the potential for cross-selling. Keith Jensen responds by explaining that larger enterprises are renewing first due to advanced purchasing departments and regulatory pressures, while smaller businesses may renew later. He notes that large enterprises often follow a staggered deployment schedule for new equipment across quarters. This renewal behavior is evident in technology and regulated industries, as they swap out mid-major products and adopt new ones over several quarters. Christian Agard then adds to Jensen's response about average deal size.

The paragraph is part of a discussion during a Q&A session, where Ittai Kidron asks questions regarding the upgrade cycle of devices and the company's sales projections. Kidron seeks specifics on the financial contribution from an upgrade in the company's 2025 guidance. Another question focuses on the adoption of Sassy solutions, querying whether it's mainly displacing existing solutions or filling gaps. Keith Jensen responds, explaining the complexities of a two-tier distribution model involving distributors, resellers, and end users. Jensen highlights the challenges in obtaining precise end-user data and emphasizes the significance of collaborating with resellers for accurate data collection.

The paragraph discusses the challenges faced in tracking and reporting device registration, particularly for small and medium-sized businesses (SMBs), and emphasizes the need for collaboration with channel partners to improve these processes. Ken Xie mentions a presentation slide that provides penetration rates for SaaS and ISP markets, noting growth in the firewall and SD-WAN segments, and anticipates further developments in SaaS. He also highlights significant deals involving the replacement of legacy VPN and SaaS providers. Lastly, Ittai Kidron thanks the participants, and Aaron Ovadia announces an upcoming investor conference with Morgan Stanley, with details to be available on Fortinet's Investor Relations website.

The paragraph concludes a conference call, invites participants to ask follow-up questions if needed, and thanks them for their participation before instructing them to disconnect.

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