The paragraph is an introduction to Fortinet's First Quarter 2025 Earnings Conference Call. The operator welcomes participants and introduces Aaron Ovadia, Senior Director of Investor Relations, who outlines the agenda for the call. Notable Fortinet executives, including Ken Xie (Founder, Chairman, and CEO) and Keith Jensen (CFO), are mentioned. It is announced that Keith Jensen will step down as CFO on May 15th, with Christiane Ohlgart taking over. Ken Xie will kick off the call with an overview of the business, followed by Keith reviewing financial results, and Christiane providing future guidance. A Q&A session will follow, allowing participants to ask questions with a request to limit them to one question and one follow-up. Lastly, the importance of forward-looking statements and their associated risks are noted, with a reference to relevant SEC filings for more information.

The paragraph presents statements from a corporate call, emphasizing the company's strong first-quarter performance, including a 14% revenue growth, a record operational margin of 34%, and a substantial free cash flow of $783 million (51% margin). The company highlights its leadership in the firewall market, SD-WAN, and OT security, alongside significant growth in secure operations and unified SASE with over 110% growth. The SASE business alone accounts for 25% of the company's operations, signaling confidence in becoming a market leader due to their innovative, single OS platform. The paragraph concludes with recognition of their industry-leading FortiGate firewall and FortiOS, which marks the start of many customer engagements with the company's offerings.

The paragraph describes the growth and integration of Fortinet's SD-WAN and FortiSASE solutions among large enterprise customers, highlighting a significant adoption rate of 73% for SD-WAN and a 10% quarterly increase in FortiSASE penetration. Fortinet's unique position as the only vendor offering organically developed core SASE capabilities within a single operating system is emphasized, providing integrated security and networking solutions that reduce complexity and operational costs. The company also offers a Sovereign SASE solution for highly regulated sectors, enabling compliance with data residency requirements. Additionally, AI-driven security operations are growing, now accounting for 10% of the business, with expectations that OT security and AI will drive future growth over the next five years.

Fortinet is the only leader in the Westland advisory report due to its significant investment and specialized solutions, positioning it for ongoing growth. The company has been developing AI capabilities for over 15 years and holds more than 500 AI patents. Their AI technology is integrated into various products, including FortiAI Assist, FortiAI Protect, and FortiAI Secure AI. Fortinet announced the FortiGate 700G series, a high-performance firewall for mid-sized businesses, which offers superior performance and energy efficiency. The FortiOS is the only OS recognized across five secure networking Gartner Magic Quadrants. The company's strong growth is supported by employees, customers, partners, and suppliers. Financial highlights include a record operating margin of 34% in the first quarter, total revenue growth of 14%, and a 12% increase in product revenue, with new customer acquisitions up by 14%.

The financial results show significant growth, with total billings increasing by 14% to $1.6 billion, driven by strong performances in unified SASE and AI-driven SecOps, both of which have seen notable increases in their respective shares of total billings. RPO and current RPO have also grown, while unified SASE and SecOps ARR rose significantly to a combined $1.6 billion. Total revenue increased by 14% to $1.54 billion, with product revenue up 12%, led by the growth in FortiGate hardware and software licenses. Service revenue and billings grew by 14%, contributing 70% of total revenue. The company achieved total gross and operating margin improvements, with product gross margin benefiting from normalized inventory-related charges and service gross margin remaining stable despite increased costs. Overall, the report highlights a robust financial performance with record-setting operating margins.

The paragraph discusses the financial performance and strategic successes of a business. The company exceeded its guidance range by 320 basis points, aided by strong gross margins, FX tailwinds, and cost efficiencies. Record free cash flow of $783 million was reported, with a free cash flow margin increase to 51%. Adjusted free cash flow was $839 million, with infrastructure investments decreasing due to reduced real estate spending. The company didn't repurchase shares in the first quarter but did buy back 4.6 million shares for $401 million in April, leaving $1.6 billion authorized for share buybacks. Christiane Ohlgart highlights strong customer adoption driven by innovation and customer-centric strategies, with leadership in firewall, SD-WAN, OT security, and growth in SASE, underscoring confidence in becoming a top player in the SASE market.

The paragraph highlights the strong growth and market penetration of Fortinet's SSE (Secure Service Edge) solution, particularly among their existing SD-WAN customer base. FortiSASE is noted as the fastest-growing SSE solution, with increased adoption reflected by significant ARR and billings growth. The typical customer journey begins with purchasing a FortiGate firewall, then expanding to SD-WAN and SASE solutions. The paragraph also emphasizes the advantage of FortiOS and FortiLink technology, which aid seamless management across the company's products. Two customer case studies are mentioned, showcasing the adoption of Fortinet's solutions by a government securing a 6,000-user hybrid workforce and an educational provider with 40,000 users, both choosing Fortinet for its cost-effectiveness, integrated security platform, and superior performance over competitors.

The paragraph discusses the transition of a large multinational manufacturing company to FortiSASE due to performance issues with their previous vendor, highlighting key factors like ease of use, integration with Fortinet's Security Fabric, and scalability. This transition led to improved performance and security. Fortinet secured a significant 7-figure deal by replacing the legacy SD-WAN provider, emphasizing the simplification, cost reduction, and integration benefits of FortiOS. Additionally, a Fortune-500 company signed an eight-figure deal, with Fortinet's FortiGate installations expanding by over 80% in three years due to robust support and integration capabilities. Overall, larger enterprises saw a 30% growth, with significant increases in high-value deals. EMEA showed strong performance, driven by international growth, with financial services and government sectors leading with over 20% growth. Finally, the paragraph hints at the upcoming discussion on the U.S. tariff situation.

The paragraph discusses the company's current situation regarding tariffs and demand for its cybersecurity solutions. Despite geopolitical uncertainties, demand remains strong with growing pipelines and stable sales cycles. U.S. tariffs are not expected to significantly impact operating margins in the second quarter, as they only affect a few components, primarily hardware sales to U.S. customers. The international hardware sales are not impacted by U.S. tariffs. The company's second-quarter and full-year outlooks are consistent with earlier guidance, considering potential risks due to the geopolitical environment. A firewall upgrade cycle is expected to pick up in the second half of 2025. Additionally, the U.S. dollar has weakened more than anticipated since the 2025 guidance was issued.

The paragraph provides financial projections for the company's second quarter and full year, highlighting expectations for operating margins, billings, revenue, and non-GAAP earnings per share. Despite foreign exchange (FX) challenges, the company raises its full-year operating margin guidance due to first-quarter performance and efficiency expectations. The company anticipates achieving its "rule of 45" for the sixth consecutive year. For the second quarter, the company expects billings and revenue growth of around 12% to 13%, with non-GAAP gross and operating margins outlined. Full-year projections include similar growth rates for billings and revenue, with specific expectations for service revenue, infrastructure investments, and tax rates. Aaron Ovadia then transitions the call to a Q&A session.

During the Q&A session, participants are reminded to limit themselves to one question and one follow-up question to allow fair participation. Brian Essex from JP Morgan asks about the dynamics behind the maintenance and services revenue, noting a sequential decline when an acceleration was anticipated. Christiane Ohlgart explains that the quarter-over-quarter decline is partly due to Q4 having two more days than Q1, which affects daily revenue rates. The growth of acquired entities also takes time to impact revenue streams. Ohlgart and Ken Xie express confidence in future growth, highlighting strong current RPO and FortiGate growth, which will drive future service revenue, along with new services being added on top of FortiOS.

In this paragraph, Tal Liani from Bank of America questions the company's slightly lower guidance for the next quarter, despite previous expectations that demand would be stronger. Ken Xie responds that while they do not plan to alter prices due to tariffs, uncertainties such as geopolitical factors are causing them to be cautious. Christiane Ohlgart adds that while there has been good sales momentum and closing rates, the company's sales teams are hesitant to increase expectations due to these uncertainties, leading them to adopt a conservative approach in their guidance.

In this article paragraph, Gabriela Borges from Goldman Sachs questions Christiane Ohlgart about the hesitancy in purchasing Fortinet products, citing similar concerns reflected in the headlines. Christiane responds by mentioning positive feedback from recent events and channel activities, highlighting optimism despite ongoing macroeconomic uncertainties. Although there is some hesitancy until purchase orders are finalized, no significant delays have occurred yet. Gabriela accepts the response. Keith Weiss from Morgan Stanley then inquires about Fortinet's confidence in achieving a stronger second half performance, questioning potential risks associated with product cycles and delayed purchases.

In the paragraph, Christiane Ohlgart and Ken Xie discuss their confidence in stronger performance in the second half of the year, driven by the release of next-generation products that enhance cost efficiency and security. They highlight the growth of their FortiGates and OT products as evidence of their success, particularly in the enterprise sector. Ken Xie outlines their strength in three areas: secure networking, unified SASE, and Secure Op, where they are gaining market share and leading the industry. Despite these positive developments, there is uncertainty about overall market growth in the future.

The paragraph is from a Q&A session during a financial call discussing Fortinet's recent performance and market position. Keith Weiss and Shaul Eyal are analysts asking questions to Fortinet executives, Ken Xie and Christiane Ohlgart. The executives discuss the uncertain market conditions but express confidence in maintaining and gaining market share due to their technological advantages. They acknowledge the company's robust performance amidst macroeconomic challenges and elaborate on the increasing number of large transactions, particularly driven by SD-WAN deployments. Christiane explains that while SD-WAN is often the starting point, customers usually purchase additional solutions, indicating a broader buy-in into Fortinet's platform. Rob Owens asks if these large deals were anticipated in the company's first-quarter pipeline, referencing potential pull-forwards mentioned in a previous quarter.

The paragraph consists of a discussion during an earnings call, focusing on recent transactions and the impact of tariffs on hardware sales. Christiane Ohlgart clarifies that recent deals closed as expected before the end of March, and there are currently no delays in transactions. An unidentified analyst asks about the impact of tariffs on U.S. hardware sales and the company's efforts to mitigate these effects. Ohlgart responds that there has been no significant tariff impact in Q1 or expected in Q2, as few products are affected. Ken Xie adds that the company can relocate manufacturing and maintains more inventory, providing a buffer against potential tariff impacts. Saket Kalia from Barclays then asks a follow-up question.

The paragraph discusses the impact of tariffs on Fortinet's business, with Christiane Ohlgart and Keith Jensen addressing inquiries about potential price increases. They explain that there hasn't been a noticeable acceleration in deals or immediate price hikes due to tariffs, as these impacts are not reflected in the income statement immediately and do not significantly affect Fortinet's pricing model. Saket Kalia then asks about the company's SaaS business, inquiring about the types of solutions Fortinet's FortiSASE typically replaces for customers, such as VPN hardware or secure web gateways.

In the paragraph, Ken Xie discusses the company's strategy and competitive advantages in the SASE (Secure Access Service Edge) market. He highlights three key differentiators: the integration of SASE into a single OS platform, partnerships and initiatives to work with service providers for private SASE solutions, and the development of global secure infrastructure. These factors have enabled the company to replace traditional VPNs and compete effectively with other SASE providers, particularly in large enterprise sectors like finance and healthcare. Xie notes significant growth in these areas and the ability to penetrate small to mid-sized businesses seeking zero trust network (ZTN) solutions.

In the paragraph, Patrick Colville from Scotiabank asks about the sequential decline in service revenue, attributing part of it to fewer days in the fiscal first quarter due to the leap year. He questions why this dynamic wasn't observed in previous leap years. Keith Jensen responds that they had a similar conversation in 2021 following the last leap year, which had affected year-over-year comparisons. He explains the natural decline from Q4 to Q1 due to fewer days and acknowledges the impact of customers refreshing appliances and subscriptions. Jensen mentions the guidance-setting process in the current environment, suggesting caution in not fully passing on any revenue beat in guidance.

The paragraph discusses the current state of a company's upgrade cycle compared to six months ago, emphasizing significant improvement. It mentions that channel checks and surveys confirm this progress, and there is no indication that customers plan to change their design architecture away from the company's solutions. The guidance is based on various factors, including input from sales teams and expectations for service acceleration through new channel programs. However, the company has not yet reached its desired growth rate partly due to churn among some acquired customers. Patrick Colville appreciates the insights from Keith and Christiane, and the conversation shifts to a question from Shrenik Kothari.

The paragraph covers a discussion in a conference call where Keith and Christiane mention EMEA's strong performance with mid-teens growth due to factors other than tariff pull-forwards, including telco partnerships and demand for sovereign SASE. Christiane Ohlgart highlights the opportunity in operational technology (OT) in EMEA and modernization efforts in APAC, particularly in the government sector. Shrenik Kothari asks about new customer growth, noting a 14% year-on-year increase, and inquires whether new customers are mainly first-time Fortinet users or expansions of existing accounts. Christiane notes that most new customers are smaller ones starting with FortiGate, despite some large new logos. Finally, Brad Zelnick from Deutsche Bank prepares to ask a question regarding past discussions about investment in various forms of enablement.

The paragraph involves a discussion among executives about their company's market positioning and competitive landscape. Christiane Ohlgart addresses how they are not seeing significant competition in their end-of-support cohort despite competitors discussing it. She highlights the potential to expand on SASE and other products in the lower end of the market, aided by channel incentives. John Whittle and Keith Jensen mention that recent mergers and acquisitions are not materially affecting their financials, aligning with their initial guidance. Christiane adds that the acquired entities are currently operating independently as they develop integration strategies for service providers. Ken Xie notes that co-developing new products leveraging specific technologies is a long-term goal, suggesting a timeline of 1 to 2 years. The paragraph concludes with a transition to a question from Adam Borg.

In the paragraph, there is a conversation between an unidentified analyst and company representatives, including Ken Xie, Christiane Ohlgart, and Keith Jensen, about an upcoming firewall refresh cycle. Christiane explains that smaller customers are buying more firewalls, while larger customers' purchases depend on their strategies, such as consolidating on bigger FortiGates or continuing with similar next-generation models. Keith adds that tracking the refresh cycle has become challenging because deal sizes are larger, as customers are purchasing additional products for new use cases beyond just replacing old models. Overall, they note that the deal sizes are increasing, which is a positive development.

The paragraph discusses Fortinet's introduction of new products, including the FortiGate 700G, and mentions plans for additional releases later in the year and next year. The goal is to improve upon existing products and align with customer needs. An unidentified analyst appreciates the update and asks Ken Xie about Fortinet's acquisition of Next DLP and its impact on their data security offerings. Ken Xie highlights that the acquisition enhances their SASE solutions and can be sold separately to boost data security for enterprises, particularly in sectors like finance, government, and healthcare. John Whittle adds that the integration is being scaled effectively in large enterprises. Junaid Siddiqui from Truist prepares to ask the next question.

In the paragraph, a question is posed to John Whittle about the CNAPP market and Lacework's position, mentioning a competitor that has conceded to a partner. Whittle acknowledges the disruption caused by the Wiz Google development and sees significant opportunities in the market for Lacework. He notes that while Lacework has a strong solution, they need to refine their sales strategy. The market has a large total addressable market (TAM) and faces disruption, but it's a promising opportunity. Subsequently, Keith Bachman from BMO inquires about spending sensitivities for Fortinet, specifically regarding secure networking, unified SASE, and SecOps. He raises concerns about potential deal elongation, particularly around subscription services versus hardware, and possible weaknesses in unified SASE and/or SecOps, though he believes SD-WAN might be unaffected.

The paragraph discusses the spending sensitivities in the tech industry during economic downturns, highlighting that companies tend to defer infrastructure and hardware upgrades. However, Ken Xie sees opportunities for gaining market share through strengths in network security, secure networking, Unified SASE, and SecureOp. Despite slower overall market growth, there is potential for growth due to unique advantages such as secure networking and convergence. The company continues to invest in growth areas for long-term success, noting recent improvements in billing growth and FortiGate performance as positive indicators.

In the paragraph, company representatives discuss their competitive positioning in the market, noting that some smaller competitors are weakening while larger players are shifting focus. They emphasize their belief in having a superior product across three market pillars, leading to increased market share. Reflecting on past growth during uncertain economic times, they express confidence in leveraging current opportunities, particularly as customers increasingly adopt hybrid solutions combining on-premises and cloud technologies. The call ends with a reminder of upcoming investor conferences hosted by JPMorgan and Bank of America.

The paragraph invites the reader to ask any follow-up questions and wishes them a great day.

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