Earnings call transcript: Fortinet exceeds Q2 2025 EPS forecasts, stock drops

Fortinet reported its second-quarter earnings for 2025, surpassing expectations with an earnings per share (EPS) of $0.64 against a forecast of $0.59, marking an 8.47% surprise. Despite meeting revenue forecasts of $1.63 billion, the company’s stock fell 18.91% in premarket trading. According to InvestingPro data, Fortinet maintains impressive gross profit margins of 81.34% and holds more cash than debt on its balance sheet, demonstrating strong operational efficiency.

Key Takeaways

• Fortinet’s EPS beat expectations by 8.47%, reaching $0.64.
• Revenue matched forecasts at $1.63 billion, growing 14% year-over-year.
• Stock price dropped nearly 19% in premarket trading.
• Strong performance in cybersecurity market, with significant investments in AI and cloud services.
• Revised full-year billings guidance to $7,325-$7,475 million.

Company Performance

Fortinet demonstrated robust performance in Q2 2025, with total billings increasing by 15% to €1,780 million and revenue growing by 14% to €1,630 million. The company’s strategic focus on cybersecurity and AI innovation has positioned it as a leader in the industry. Despite these gains, market reaction suggests investor apprehension about the sustainability of this growth amid broader market volatility.

Financial Highlights

• Revenue: $1.63 billion, up 14% year-over-year.
• Earnings per share: $0.64, exceeding the $0.59 forecast.
• Non-GAAP operating margin: 33.1%.
• Product revenue: $59 million, up 13%.
• Service revenue: €1,120 million, up 14%.

Earnings vs. Forecast

Fortinet’s EPS of $0.64 exceeded the forecasted $0.59, marking an 8.47% surprise. This performance is consistent with recent quarters where the company has consistently surpassed EPS expectations, reflecting strong operational efficiency and market demand for its cybersecurity solutions.

Market Reaction

Despite the positive earnings surprise, Fortinet’s stock dropped 18.91% in premarket trading, falling to $78.32. This decline contrasts with its previous close of $96.58 and suggests investor concerns over future growth potential and market conditions. InvestingPro analysis indicates the stock is currently undervalued, with a PEG ratio of 0.68 suggesting attractive pricing relative to growth potential. The stock’s performance is notable given its 52-week range of $67.97 to $114.82. For deeper insights into Fortinet’s valuation and 12+ additional ProTips, consider exploring the comprehensive Pro Research Report available on InvestingPro.

Outlook & Guidance

Fortinet has raised its full-year billings guidance to $7,325-$7,475 million, reflecting a 13% growth expectation. With a robust financial health score rated as "GREAT" by InvestingPro, and revenue growth of 13.83% over the last twelve months, the company continues to demonstrate strong market momentum. The company anticipates continued strong performance in its SASE and SecOps segments, supported by ongoing investments in AI security and cloud services. The cybersecurity market’s resilience provides a favorable backdrop for Fortinet’s strategic initiatives, with the company maintaining a market capitalization of $73.92 billion.

Executive Commentary

CEO Ken Zee expressed confidence in Fortinet’s future, stating, "We do believe we will be the number one SASE player in the next few years." CFO Christiana Ulgaard added, "The cybersecurity market and the demand for our solutions remain strong and resilient." These statements underscore Fortinet’s strategic focus and market leadership.

Risks and Challenges

• Potential deceleration in service revenue growth.
• Market volatility impacting investor sentiment.
• Competition in the cybersecurity and AI sectors.
• Economic uncertainties affecting IT spending.
• Regulatory challenges in global markets.

Q&A

During the earnings call, analysts questioned the impact of the firewall upgrade cycle and Fortinet’s SASE strategy. Concerns were also raised about service revenue deceleration, while the company highlighted opportunities in AI security and sovereign SASE solutions.

Full transcript - Fortinet Inc (FTNT) Q2 2025:

Conference Operator: Hello, and welcome to Fortinet’s Second Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, we will conduct a question and answer session. Please be advised that this call is being recorded. I would now like to hand the call over to Aaron Ovadia, Senior Director of Investor Relations.

Please go ahead.

Aaron Ovadia, Senior Director of Investor Relations, Fortinet: Thank you, and good afternoon, everyone. I am pleased to welcome everyone to our call to discuss Fortinet’s financial results for the 2025. Joining me on today’s call are Ken Zee, Fortinet’s Founder, Chairman and CEO Christiana Ulgaard, our CFO and John Whittle, our COO. Ken will begin our call today by providing a high level perspective on our business. Christiana will then review our financial results for the 2025 before providing guidance for the third quarter and updating the full year.

We will then open the call for questions. 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 ks 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 that 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 accompany today’s remarks, both of which are posted on our Investor Relations website. As a reminder, this is a live call that will be available for replay via webcast on our Investor Relations website. The prepared remarks will also be posted on the quarterly earnings section of our IR website following today’s call. Lastly, all references to growth are on a year over year basis unless noted otherwise. I will now turn the call over to Ken.

Ken Zee, Founder, Chairman and CEO, Fortinet: Thank you, Aaron, and thank you to everyone for joining our call. We are pleased with our strong second quarter performance beating both our building and operation margin guidance. Building on this business momentum, we are raising our full year building outlook. In the second quarter, building grew by 15% and revenue grew by 14%, and we achieved a strong non GAAP operation margin of 33%. Our strong top line result was driven by continued momentum among large enterprise customers, with the total value of a deal over $1,000,000 increased by more than 50%.

This growth reflects the strength and value of our innovation, the recent global demand of our integrated solution and the impact of our go to market investment. Additionally, our recent investment in the fast growing market of unified SASE and AI driven secure operation continue to deliver strong return as building for both grow over 20% to a combined 35% of total buildings. Fortinet’s strong momentum in SASE has been recognized by industry analysts as we are recently named a leader in the 2025 Gartner Magic Quadrant for SASE platform, while also ranking number one in the secure branch network modernization case. We are the only vendor in the report that is also recognized in five different network security Magic Quadrant, which all run on our unified FortiOS. We continue to be the only vendor that has developed all core SASE capability in a single operation system, the FortiOS, including next gen firewall, SD WAN, ZTNA, secure web gateway, CASB, and DLP.

This native integrate of a next gen firewall, SD WAN and SASE, has become the new generation SASE firewall, making it easy for customer to adopt an upgrade while reducing capacity and operation cost, enhancing user experience and ensure integrated hyper secure access across both on premise and cloud environment. Our success in unified SASU reflect the value customer plays in our new generation SASE firewall, beginning with their investment in our industry leading FortiGate firewall built on our FortiASIG. From there, most large enterprise expanded into our secure SD WAN capability before advancing to our Forti SASE solution. As a result, 13% of our large enterprise customer have purchased FortiSASI and increased over 60% year over year. Furthermore, we have invested around $2,000,000,000 to build and operate a global owned infrastructure, spanning around 5,000,000 square feet across data centers, NOC and SOX customer supporting centers, executive briefing centers, and the research and development facility.

This large scale footprint give us a competitive advantage in delivering Forti SASE, Forti Cloud, and other cloud services. By owning and managing our infrastructure, we ensure better customer experience, better cost efficiency, strong data sovereignty and high performance and scale. We also leverage our FortiSec technology to provide enhanced security and better management across our SaaS services. Today, we announced we are expanding our Forti Cloud offering with three new services, the Forti Identity, Forti Drive, and Forti Connect. These services natively integrate into the Fortinet security fabric, providing centralized visibility, consistent policy enforcement, and real time threat protection across users, devices, applications, data, and AI agents.

In OT security, while we are achieving building growth of over 20%, we are recently named the overall leader in the Westland Advisor, IT and OT Network Protection Platform Navigator 2025 report for the third time in a row, earning the highest ranking in both strategic direction and technical capability. We continue to invest in AI, which we began developing more than fifteen years ago and hold over 500 issued and pending AI patents more than any other competitors. Our latest AI innovation, including FortiAI Protect for advanced threat detection, FortiAi Assist for automating security tasks, and FortiAi Secure AI for protecting AI infrastructure. As a result of our investment and recent innovations, our AI add on solution are the fastest growing part of our business. I would like to thank our employees, customers, partners and suppliers worldwide for their continued support and hard work.

I will now turn the call over to Christine.

Christiana Ulgaard, CFO, Fortinet: Thank you, Ken. Thank you, Aaron, and good afternoon, everyone. As Ken mentioned, Fortinet’s growth and momentum are strong. We beat our billings and operating margin guidance for the second quarter and raised our full year billings outlook. Total billings grew by 15% to €1,780,000,000 driven by 21% growth in unified SASE and 31% growth in SecOps.

Unified SASE and SecOps now account for twenty four percent and eleven percent of total billings, respectively, up one point each. Our strong billings growth was driven by continued momentum in expanding into the large enterprise as the number of deals greater than 1,000,000 increased by 29%, while their total dollar value grew by 51%. Among our top five verticals, financial services, the vertical with arguably the most sophisticated and discerning security purchasers led the way with billings growth of over 30%. In addition, we continue to expand our customer base. Over 6,900 new organizations chose our unified single FortiOS platform to power their cybersecurity strategy.

The robust growth in new customers is a clear testament to our strong position in the SMB market, driven by the continued commitment and loyalty of our channel partners. Total RPO grew by 12% to EUR 6,640,000,000.00, while current RPO grew by 15% to EUR 3,450,000,000.00. With regards to ARR, unified SASE increased by 22% to $1,150,000,000 and SecOps increased by 35% to $463,000,000 Within unified SASE, Forti SASE, our SSE solution, delivered strong results with ARR growth of over 100%, while the customer base expanded by 65%. Furthermore, adoption momentum has remained strong as 13% of our large enterprise customers have purchased Fortisasi, highlighting our continued expansion of Fortisasi in our customer base. As a reminder, the typical customer journey begins with the purchase of our FortiGate firewall.

From there, customers often expand to our integrated secure SD WAN solution before adopting our single vendor SASE offering, reflecting the growing convergence of security and networking. Over 50% of our Forti SASE customers also leverage our SD WAN solution, while 90% of our large enterprise Forti SASE customers began their journey with SD WAN, reflecting the value of our integrated platform approach and the convergence of security and networking. Total revenue grew by 14% to €1,630,000,000 led by EMEA with growth of 18%, while The Americas and APAC both grew 11%. Product revenue increased by 13% to $5.00 $9,000,000 benefiting from upgrade buying and strong growth in operational technology. We saw growth in all geos as we continue to lead the cybersecurity industry and product revenue.

Software license revenue grew at a high teens rate and accounted for a high teens percentage of total product revenue. Service revenue grew by 14% to 1,120,000,000.00 Service billings grew by 17%, our highest growth rate in the past six quarters, reflecting many enterprise agreement renewals as our loyal customers continue to invest in our solutions and benefit from our strong track record of innovation. Now I’d like to highlight some 7 figure deals that demonstrate how customers are adopting Fortisasi, consolidating networking and security and expanding their overall footprint with Fortinet. First, an educational institution in APAC purchased solutions across all three of our pillars, including Fortisasi for 3,000 users. This customer chose Fortinet over the competition for our simplified, flexible and consistent security enforcement, enabling secure access to both on premises and cloud applications while delivering a seamless user experience.

By leveraging FortiOS and Forti SASE, the school achieves superior performance, reduced total cost of ownership and simplified operations through our integrated security platform. Next, in an expansion and displacement deal, a leading retailer with 1,700 locations significantly increased their investment in Fortinet, purchasing solutions across all three pillars, including 40 APs, 40 switches and 40 AI ops. Already a FortiGate customer with firewalls deployed at every location, the retailer selected 40 APs for all sites and 40 switches for 600 locations, with the remainder planned for early twenty twenty six. This customer chose Fortinet for our integrated FortiOS operating system, which enabled seamless convergence of networking and security. As part of the deployment, they adopted FortiAI ops to proactively manage their access points and switches, leveraging our AI driven capabilities to improve operational efficiency.

In another large deal, a top U. S. School district expanded its footprint with the purchase of 40 gates, 40 switches and 40 APs as part of a three fifty plus site refresh, displacing multiple vendors. Already utilizing solutions across all three of our pillars, including Fortisasi, the district continues to invest in Fortinet to drive deeper network segmentation, stronger security outcomes and greater infrastructure resiliency. Due to their continued consolidation on Fortinet products, they are realizing significant operational benefits, including simplified guest access, accelerated deployments and more efficient upgrade cycles, all managed through our unified FortiOS platform.

Lastly, a technology company upgraded a portion of their high end firewalls as a result of the upcoming 2026 end of support deadline and expanded their deployment with additional FortiGate appliances in the data center. They selected Fortinet for our FortiOS operating system, which enables streamlined operations while delivering a lower total cost of ownership. Turning to margins and cash flow. Total gross margin increased by 10 basis points to 81.6% and exceeded the high end of the guidance range by 60 basis points due to strong execution and cost control. Product gross margin of 67.8% increased by 180 basis points as inventory related charges normalized.

Service gross margin of 87.8% was down by 80 basis points due to increased investments associated with the expansion of our hosted security solutions. Operating margin of 33.1% decreased by 200 basis points while being 60 basis points above the high end of our guidance range. The year over year decline reflects increased investments in sales headcount, the absorption of costs from recent acquisitions and foreign exchange headwinds stemming from a weaker U. S. Dollar as most of our operating expenses are denominated in foreign currencies.

Free cash flow was $284,000,000 and adjusted free cash flow was $428,000,000 up $104,000,000 Cash generation in the first half of the year was very strong with adjusted free cash flow reaching $1,270,000,000 representing a margin of 40% year to date. Infrastructure investments were $168,000,000 up 145,000,000 infrastructure footprint to support Fortisasi, FortiCloud and other services. We repurchased approximately 4,600,000.0 shares of our common stock for an aggregate cost of $4.00 $1,000,000 in the second quarter. The remaining share buyback authorization as of today is approximately $1,600,000,000 Before moving on to guidance, I’d like to provide an update on our firewall upgrade cycle and the broader macro environment. During our Analyst Day last November, we shared that approximately 650,000 firewall units will reach end of service by the 2026, followed by another cohort of 350,000 low end units in ’twenty seven.

While the 2027 cohort is less significant than the 2026 cohort in terms of product revenue due to its lower price point, firewall upgrade discussions offer valuable opportunities to engage with both our customers and channel partners, allowing us to showcase our ongoing innovation in FortiOS. By upgrading to our new generation SASE firewalls, customers gain enhanced security capabilities and benefit from our unified platform approach. We estimate that we are approximately 40% to 50% of the way through the 2026 upgrade cycle at the end of the second quarter based on the remaining active units and service contracts. And we expect continued upgrade activity for the remaining devices over the next six quarters. Our focus and open communication regarding the refresh allows us and our channel partners to have conversations with our customers around both the upgrade and the customer’s overall security strategy benefiting us longer term.

Despite ongoing uncertainty surrounding tariffs and the global economic outlook, we have not experienced a negative impact on our business. The cybersecurity market and the demand for our solutions remain strong and resilient. Now moving on to guidance. As a reminder, our third quarter and full year outlooks, which are summarized on Slide seventeen and eighteen, are subject to the disclaimers regarding forward looking information that Aaron provided at the beginning of the call. For the third quarter, we expect billings in the range of $1,760,000,000 to $1,840,000,000 which at the midpoint represents growth of 14%.

Revenue in the range of $1,670,000,000 to $1,730,000,000 which at the midpoint represents growth of 13%. Non GAAP gross margins of 80% to 81%, non GAAP operating margin of 32.5 to 33.5% non GAAP earnings per share of $0.62 to $0.64 which assumes a share count between $772,000,000 and $776,000,000 infrastructure investments of 110,000,000 to $130,000,000 a non GAAP tax rate of 18% cash taxes of 60,000,000 to 90,000,000 As a result of our strong results in the first half of the year, we are pleased to have raised the midpoint of our full year billings guidance by €100,000,000 We maintained our total revenue guidance while adjusting mix by shifting $50,000,000 from service to product revenue. Despite this shift towards product revenue for the full year, we maintained our gross margin range and slightly increased our operating margin guidance midpoint. We continue to remain on track to achieve the Rule of 45 in 2025 for the sixth consecutive year. For the full year, we expect billings in the range of $7,325,000,000 to $7,475,000,000 which at the midpoint represents growth of 13% revenue in the range of $6,675,000,000 to $6,825,000,000 which at the midpoint represents growth of 30%.

Service revenue in the range of $4,550,000,000 to $4,650,000,000 which at the midpoint represents growth of 14%. Non GAAP gross margin of 79% to 81%. Non GAAP operating margin of 32% to 33.5%. Non GAAP earnings per share of $2.47 to 2.53 which assumes a share count of between $773,000,000 and $777,000,000 infrastructure investments of $380,000,000 to $430,000,000 a non GAAP tax rate of 18% and cash taxes of between $400,000,000 to $450,000,000 which is $125,000,000 lower than our prior expectation, primarily due to new tax law changes. I’ll now hand the call back over to Aaron to begin the Q and A session.

Aaron Ovadia, Senior Director of Investor Relations, Fortinet: Thank you, Christiana. As a reminder, during the Q and A session, we ask that you please limit yourself to one question and one follow-up question to allow others to participate. Operator, please open the line for questions.

Conference Operator: Thank you. If you would like to ask a question, please click on the raised hand button at the bottom of your screen. When it is your turn, you will hear your name called and receive a message on your screen notifying you that you may unmute yourself. We will allow a moment for the queue to form. Our first question will come from Shaw Eyal from TD Cohen.

You may now unmute and ask your question.

Shaw Eyal, Analyst, TD Cohen: Alright. Thank you very much. Good afternoon, team. Congrats on the improved outlook for the year. Channel Christian, one of the questions we are constantly receiving from investors is whether sales of FortiSASI potentially cannibalize the core appliance business.

But but it would appear we’re currently seeing tailwinds across both these segments. Can you help us maybe reconcile these views?

Ken Zee, Founder, Chairman and CEO, Fortinet: Yeah. I think probably we do see customer expanding beyond the traditional firewall and but also traditional firewall is still the important control point for all this traffic, especially within the enterprise, within the data center. On the other side, some supporting whether work from home or traveling or some other branch office, that’s also kind of a certain SaaS, and especially certain OT, OT use case, see way beyond the traditional network security there. So we don’t see SASE replacing the firewall. We just see it’s keeping enhancing.

That’s why we call the SASE firewall. It’s really the firewall itself need to keep adding new function. Like from twenty five years ago when we started Fortinet, the new generation firewall add like application control, like intrusion prevention, like antivirus in the traditional firewall VPN. Now the traditional firewall also need additional SASE function together with some other edge device, like a 40 AP, 40 switch, and also endpoint device, and also the cloud deployment. So that’s formed the whole protection infrastructure, which is really give much better security for the enterprise user.

Christiana Ulgaard, CFO, Fortinet: And let me add to what Ken just said. In our winloss analysis, we see very little reason codes for customers moving to the cloud and not continuing to buy. So I think it’s an expansion. It’s not a replacement sale.

: To your point, see both markets growing. And then if you look at the market share, they’re very fragmented markets on the firewall side. And so we can grow both by the market growing on the firewall side and expanding our market share by taking business from other competitors.

Shaw Eyal, Analyst, TD Cohen: Understood. And, Christian, thank you so much for the color about where we stand in the refresh cycle. Maybe a little bit of a long term view, kind of already touching on the fiscal twenty seven cohort of products that will be refreshed. Are there any specificities associated with those family of products as we think about the 2027, which is coming through a renewal or a refresh?

Christiana Ulgaard, CFO, Fortinet: Yeah. I think I’ve shared that in previous meetings potentially. The 2027 cohort is the low end of the low end. So unit wise, it’s significant. Product revenue wise, it’s not as significant.

But that’s why we included the message in my remarks, it’s significant because we can talk to a lot of customers about where the security is going, right? And so that’s where it provides a lot of upsell potential for us.

Shaw Eyal, Analyst, TD Cohen: Got it. Thank you so much.

Conference Operator: Our next question comes from Brian Essex with JPMorgan. Please go ahead.

Brian Essex, Analyst, JPMorgan: Great. Good afternoon. Thank you for taking the question. Maybe, Cristiano, I was wondering if you could tell us, know, what are some of the maybe unpack the, you know, services guidance a little bit. It’s great to see the upside in the quarter, you know, particularly with regard to product billings and services strength this quarter.

But how should we I guess, what can we take away from the services guide, and what’s embedded in the guidance for the year given, the strength that you’re seeing this quarter?

Christiana Ulgaard, CFO, Fortinet: So the services billings to revenue conversion takes a little bit longer, right? And that’s what we are seeing based on the remaining waterfall. We are pleased with our current RPO growth. But for the rest of the year, we decided to be prudent, take the midpoint down, but we believe that we are not that we are confident that the product revenue is going to be stronger for the rest of the year based on the pipeline.

Ken Zee, Founder, Chairman and CEO, Fortinet: Yes. Also, last quarter is the first time in the last few years the product revenue growth starting faster now. It’s more like four years ago, like twenty twenty one. That time, the product revenue grow very, very fast. And then that gave us a kind of benefit in the last few years.

The service revenue still maintain pretty healthy level, even the product revenue going down in the last one to two years. Now we see the product revenue starting accelerating, which will be the leading indicator for the future service revenue, which we also feel since starting turnaround, especially in both the product revenue and also the service revenue starting kinda instead of keeping dropping gradually, probably will be starting to kick in up now.

Tal Liani, Analyst, Bank of America: And do do you have

Brian Essex, Analyst, JPMorgan: the the split FortiGuard, FortiCare? And is this a component of, like, if you if you have a refresh, you know, obviously, like, you know, are is it that customers aren’t completely replacing their subscription revenue? You know, is there they’re just extending their subscription revenue with maybe less upside to that revenue line item?

Saket Kalia, Analyst, Barclays: You know what

Brian Essex, Analyst, JPMorgan: I mean? So you have a you have a new box with the same attached revenue.

Christiana Ulgaard, CFO, Fortinet: Correct. So that that’s part of it. I think there’s there’s part of it that that the devices that they’re using to replace, may use a higher box, but they can consolidate one to two boxes, right? It’s different components that factor into the service revenue attached to the boxes. And this is where it’s so critical for us to upsell not only SASE but all our other revenue streams that benefit the customer.

Brian Essex, Analyst, JPMorgan: Got it. That’s super helpful color. Thank you so much.

Christiana Ulgaard, CFO, Fortinet: And based on the customer journeys, you you can see the customer journeys work. Right? The up upsell is working. It’s just not not necessarily at the same point in time when they buy a firewall.

Brian Essex, Analyst, JPMorgan: Got it. Understood.

Conference Operator: Next question comes from Tal Liani with Bank of America. Please go ahead.

Saket Kalia, Analyst, Barclays: Here we go.

Tal Liani, Analyst, Bank of America: Now I unmuted myself. Can you hear me?

Christiana Ulgaard, CFO, Fortinet: Yep.

Ken Zee, Founder, Chairman and CEO, Fortinet: Yep. That’s good.

Tal Liani, Analyst, Bank of America: Okay. Sorry. The, Sassy the profile of Sassy customers, what is it? Meaning, are these re displacements of existing vendors? Let’s say customer has Zscaler or Palo Alto and you’re displacing them.

Are these do they purchase at the end of a contract that they had before with someone else, or are these completely greenfields that didn’t have anything before now they’re having? I’m just trying to understand where you have success with your SaaS. What is kind of the profile of the deployment the types of deployments you’re seeing? Thanks.

Ken Zee, Founder, Chairman and CEO, Fortinet: Both. From our current customer base, a lot of them, they do see the new operation operation system gave them the SASE capability, both the software and the hardware. So that’s where they started to enable SASE. You can see the slide four in the presentation. That’s how we did in SD WAN a few years ago.

Now the SaaS become a fast growing part of the business there, especially come from the current installation base. But we also see quite a few more successful case replacing competitor because we offer all these kind of integrated SASE solution. And some of our partners, especially service providers, also like this kind of a single OS solution. So starting called the SASE firewall basically just like how next gen firewall started replacing the traditional firewall. The SASE firewall started replacing not just next gen firewall but also the SASE.

Because a lot of customers, they view SASE just like a few years ago, like sandbox, like twenty years ago intrusion prevention starting from separate solution. Now they want to have an integrated solution with whatever the network security infrastructure technology they have. So once the integrated solution in place, the single solution is starting kind of lost their edge and also starting kind of a huge disadvantage for actual management cost for all the actual cost basically. So that’s where we see a lot of customers love the journey, love all this SASE firewall solution with all the integrated solution together. So that we see both our current customer base and a lot of other customer front competitor quickly adopt this new solution.

And this is the fast growing part of our business right now.

Tal Liani, Analyst, Bank of America: You said in the past that 95% of the customers are existing firewall customers. Is this still the case?

Christiana Ulgaard, CFO, Fortinet: Pretty much. Yeah.

Ken Zee, Founder, Chairman and CEO, Fortinet: Yeah. Over 90% come from the current customer base, but we do see some other customer which using our competitor’s solution also changing to our solution now.

Tal Liani, Analyst, Bank of America: Got it. If I can squeeze in one more. If not, we can we can move on, but I wanna ask about the margins. You said in the past that you want to invest. What is the margin outlook, and where is the balance between investments and margin upside?

Ken Zee, Founder, Chairman and CEO, Fortinet: Yeah. We we like to play the long term game. Same just like the SASE as we did in the firewall market, which we had only one built ASIC chip. So for SASE, we also invest in the infrastructure, which has a much better cost advantage, also more secure compared to leverage some other third party. So that’s where we do believe if a long term SASE kind of if our own infrastructure can handle 70% of traffic, then 30% in certain locations still using third party, that will be the best cost model.

Even in the first few years, many of those more investment, but long term, both customer or partner and ourselves will benefit. So that’s where we do believe we have a healthy margin. This model long term gain will also benefit both our self and our customer both short term and long term.

Tal Liani, Analyst, Bank of America: Got it. Thank you.

Conference Operator: Our next question comes from Gabriela Borges with Goldman Sachs. Please go ahead.

Gabriela Borges, Analyst, Goldman Sachs: Hi. Good afternoon. Thank you. Ken and Christian, I wanted to follow-up on your prepared remarks that we are 40% to 50% through the 2026 refresh cohort. What I wanted to understand is how to think about your growth rate through cycles because if I can pay your billings growth where you’re guiding to this year, about similar to what you guided to and what you achieved in 2023.

But 2025 is a really big or larger than normal refresh cohort. So I want to better understand why are we not seeing more upside in the numbers this year from the refresh cohort? And the comment earlier on potentially consolidating down boxes, is it possible that perhaps customers have excess capacity in their networks from a 2021 COVID type elevated throughput environment? Would love to get your thoughts. Thank you.

Christiana Ulgaard, CFO, Fortinet: Gabriela, good points. I think we need to look at it by 40 gate model. And the large firewalls that are end of support, we have a really good reporting and handle on because we know where they are. These are always with enterprise customers, right? We have a good handle on the lower end of the firewalls, where it’s with enterprise customers in retail or other scenarios, OT scenarios, where it’s harder for us to predict.

And we can only track registration rates and similar is in the lower end. And there could be some excess capacity from prior years that has been or that is replacing some of the EOS models. We are comfortable with our guidance. But yes, the expectations by The Street might have been a little bit higher, but we said we are outperforming the market. And it was baked in, right?

So we’ve been consistent in our messaging here.

Ken Zee, Founder, Chairman and CEO, Fortinet: Yes. Also the refresh or upgrade of the product go out of next year is the product you would have been like twelve to fifteen year after we introduced the product. It’s not a product like four or five years ago when the supply chain issue happened. But if you compare to like ten, twelve, fifteen years ago, the business size probably like current size probably five ton, maybe even 10 ton larger. So that’s where the upgrade refresh we do see is very different than the supply chain issue a few years ago.

It’s a much older product. We we introduced a new product, the unit is every selling maybe like seven, eight years. And then after we stopped selling, we’re still supporting five additional year for the service. After five additional years stop shipping, but we do support service, then the customer reach to the end of a service. So that’s probably average maybe like twelve to fifteen years after the product being introduced.

So that’s the things we kind of try to help in customer to upgrade. And so like I said, even we have a large number of product, that’s usually the size of the business we have like twelve, fifteen years ago.

: Would also say we additional incremental TAM to address going forward with SASE and SecOps where those are becoming meaningful parts of our business. So if you look at historical results, they were more focused on the firewall, but those are becoming real growth drivers for us.

Gabriela Borges, Analyst, Goldman Sachs: Thank you for the color. Christian, maybe as the follow-up, your commentary last quarter on hesitancy in the sales force and in some of the sales force conversations. I think today you said macro didn’t have an impact on the business. So maybe just reconcile those two data points. Are you still seeing hesitancy?

Is the hesitancy gone? Thank you.

Christiana Ulgaard, CFO, Fortinet: I would say that we’ve seen that that we are resilient despite macroeconomic uncertainty. And the pipeline for the rest of the year and the sales confidence is good. So that’s where we are confident to raise our billings guidance.

Conference Operator: Our next question comes from Rob Owens with Piper Sandler. Please go ahead.

Aaron Ovadia, Senior Director of Investor Relations, Fortinet0: Great. Thank you for, taking my question. Love for you to expand a little bit on the OT opportunity because I don’t think I recall anything from your prepared remarks. Just in in in terms of what you’re seeing there, both either increased competition, or is this opportunity also playing into the refresh cycle? Thanks.

Ken Zee, Founder, Chairman and CEO, Fortinet: Yeah. That’s in my comment there. The OT growing over 20%, continue to be one of the fast growing air for us. And, also, we’re the only, leader in the Westland, the OT, IoT security report. So that’s where we see huge potential.

And OT need to have a special product, even special software to handle. We invest in this area for like more than ten years. We don’t see much other competitor invest as we are so early, so broadly in OT security. So we do see we do believe this is strong is a is a strong growing area going forward.

Aaron Ovadia, Senior Director of Investor Relations, Fortinet0: And when you when you break down that over 20%, is that consistent internationally with domestically? Can you give me a view across the various theaters?

Ken Zee, Founder, Chairman and CEO, Fortinet: I think it’s pretty consistent.

Christiana Ulgaard, CFO, Fortinet: Yeah. We we are We are strong in OT across the board. EMEA has always been leading in OT for us. And that’s where you also I mean, it’s aligned with the strong revenue growth that we see in EMEA as well, right? So you also, I think, asked whether it plays into the upgrade cycle.

It does. We have a number of rocket devices that are part of the 2026 cohort benefiting from that. But we just see expansion and also the thought leadership that we’ve always had in OT and bringing this to the forefront of our customer as an important security area, I think, has helped us a lot.

Saket Kalia, Analyst, Barclays: Thank you.

Conference Operator: Our next question comes from Janed Siriki from Truist. Please go ahead.

Brian Essex, Analyst, JPMorgan: Great. Thank you for taking my question. Just had a question. Ken, your SaaS business, you know, continues to show a lot of momentum. Could you just talk about how your sovereign SaaS solution is tracking and, you know, how that’s different from some of from what your competitors are doing in that space?

And, you know, how important of a differentiator do you think that is in furthering your competitive moat in SASE?

Ken Zee, Founder, Chairman and CEO, Fortinet: Yeah. That that’s a great question. I like that a lot. It’s a that that’s also kind of my thinking in early days. I do believe with SASE long term, the service provider carrier will play more important role, just like how they did like fifteen, twenty years ago in the network security.

But somehow, they’re moving kind of slow in the last few years. That’s the reason we started launching our own SASE almost two years ago. But we do work with a lot of carrier service provider. They do start and launch their own kind of SASE service now, leverage both their infrastructure, close relation with local customer there. So we do believe that will be the long term trend because a lot of customer, if not the most, do concern who will be processing their data, where the data are being secure, processed.

So that’s where leverage the local service provider kind of solving SASE solution. That’s all the service providers, especially telecom service provider, they love it a lot. Even they’re little bit slow on adopting all this SASE solution there, but I do see they are very strong supporting the sovereign SASE. That’s one of the key advantage we have because we can have all the SASE function in the same OS, which they can deploy locally, whether in their own infrastructure, sometimes also in the customer premise there. So that’s a huge advantage than some other SaaS players.

So we do see that momentum starting accelerating now. That’s including the telecom area starting kind of also go back to grow probably above average now. So that’s a strong area. I do believe probably in the next few years in the SaaS market, the sovereign SaaS probably can be taken almost half the market share compared to this global cloud based SASI. So that’s I still believe long term, that’s the long term direction.

Even short term, there are some kind of changing back and forth. But long term solving SASI, I do believe, will be the long term solution.

Aaron Ovadia, Senior Director of Investor Relations, Fortinet1: Great. Thank you. Thank you.

Conference Operator: Our next question comes from Patrick Colville with Scotiabank. Please go ahead.

Aaron Ovadia, Senior Director of Investor Relations, Fortinet1: Terrific. Thank you for taking my question. I guess, Ken and Christina, I just wanna circle back to the firewall upgrade comments. I mean, very helpful disclosure that we’re 40 to 50% through the 2026 upgrade cycle and that the 2027, end of life cycle is kind of lower throughput devices. I guess the question we’re getting from investors in our in our inbox over the last half an hour is, you know, what should we be excited about beyond this upgrade cycle?

You know, what is gonna continue momentum when these tailwinds,

Ken Zee, Founder, Chairman and CEO, Fortinet: which,

Aaron Ovadia, Senior Director of Investor Relations, Fortinet1: you know, are clearly benefiting numbers now and you guys are executing very well in a tough environment. But if we look beyond 2026 upgrade and ’27 upgrade, you know, what can continue this, you know, rocky ship momentum?

Ken Zee, Founder, Chairman and CEO, Fortinet: Yeah. I believe the excitement will be the the new SASE firewall. So it’s, it’s very different than the traditional next gen firewall. So the customers do need a new function and also address a new infrastructure security need. So that’s the huge opportunity, not just additional product, but also additional servers on top of that, give them kind of a secure whole infrastructure.

So that’s why we started training Salesforce, training partner and also customer for this new SASE firewall solution, which is where it gave them better security and also kind of a much better total cost of ownership also.

Christiana Ulgaard, CFO, Fortinet: And let me add to that. I think when we talk about the up refresh cycle, we’re only talking about the forced refresh due to end of support. But as Gabriela pointed out, there is the COVID cycle as well that’s not not end of support yet, but is gonna be five, six, seven years old in in a year or two. So that with security and with the additional functionalities that are part of the firewall and also the additional network requirements that you have with running ChatGPT, AI, you name it, we believe there is there are gonna be enough tailwinds for us to continue to grow.

: Yeah. I think to Ken’s point, cloud services, that’s growing really, really fast. And we view that as largely an incremental additional total addressable market for us. And like Ken said, it’s it’s what we have in SASE right now, and you can layer on additional cloud services over time. So that should be high growth.

And we really like our model of the the common operating system between firewall, SASE, SD WAN. And we think that firewall market will continue to grow naturally as well, And we’ll take market share there too. But we’ve got all these other additional growth drivers in terms of SASE and SecOps, which are new TAM and really becoming meaningful to our business and our high growth.

Ken Zee, Founder, Chairman and CEO, Fortinet: Yes. Again, a few we probably a little bit over discussed about this refresh upgrade because this device has been there like twelve to fifteen years ago. That time, our size is probably one fifth or one tenth of our current size. Even all this product being kind of refreshed or upgrade within like one or two years, still not much business impact. So that’s a few the more important things really, we leverage this opportunity to introduce customer with a new FortiOS, new hardware, upsell, cross sell.

So to measure the percentage of some old device being there like twelve, fifteen years ago, probably much less important than helping customer to upgrade to the new security infrastructure. And, also, the business impact, for the old device, also much smaller percentage than the total business we have today.

Aaron Ovadia, Senior Director of Investor Relations, Fortinet1: Okay. Okay. Very, very helpful. And I guess I mean, Ken, you’ve been a thought leader in security for, you know, for many, many years. When we think about AgenTic AI security, I guess, how are you thinking about that domain and Fortinet’s position, as a vendor that can help, you know, in AgenTek AI security?

Ken Zee, Founder, Chairman and CEO, Fortinet: Yeah. I do believe, like, keeping since for probably ten years, whether the the agenda AI or the device security setting get more and more important than some the people human security, which people access. Right now, the device, even the the agent probably already, like, 10x more than the people access all this information, Internet, all the data there. So that’s where we invest in this area for more than ten years and has a multiple angle to address the AI security, including agenda AI, including all this OT IoT device security. So that’s what we feel will be huge market potential, but also kind of need to address this instead of bolt on some of the old solution need to be integrated together.

So example, whether you want to check the identity or you want to check the access control, they need to be part of the infrastructure, just like a part of the firewall, part of endpoint, part of edge device instead of a separate solution. So once this solution be integrated together, customers will be have a better management and also better secure infrastructure to address all these gigantic AI, also modern IT IoT device security there. So that’s where the integrated solution address the whole infrastructure will be much better than like a separate solution, which bolt on some of the current solutions. So we do believe this long term integrated solution will be the key to address this giant AI the same as a like a IT or IoT solution security there.

Conference Operator: Our next question comes from Saket Kalia with Barclays. Please go ahead.

Saket Kalia, Analyst, Barclays: Okay. Great. Hey, guys. Thanks for taking my questions here. Christian, maybe for you, 40% to 50% through the upgrade cycle, can you just talk about sort of what that cadence is is gonna look like this year?

I mean, I think that intra quarter, we were talking about sort of a 20% type of number. Maybe the real question is where do we end ’25 in terms of the percentage of that of that cohort that that we’re through?

Christiana Ulgaard, CFO, Fortinet: Good question. If you look at our updated guidance, you see that we believe there is strength in product for the rest of the year. Where we exactly end is hard to say because there of course, it’s not only upgrade, refresh product that we are planning to sell. So but I think we we will get through those cycles faster than we expect.

Saket Kalia, Analyst, Barclays: Got it. Got it. That makes sense. Maybe the follow-up is, you know, I think you you’re hearing the question just about sort of what’s what’s the growth gonna look like here after the upgrade cycle. And, of course, you know, it’s FortiSASI.

It’s it’s SecOps. I’m trying to think if we’ve talked about this before, but have you can can we can we touch on sort of what percentage of the services revenue kinda comes from from from those two businesses versus attached subscription? Because just to the earlier point, that’s that’s really that that mix shift that has to happen. So any color that you could sort of give on where on where we are in that kind of mix shift within services?

Christiana Ulgaard, CFO, Fortinet: You mix shift between FortiCare and and security subscriptions?

Saket Kalia, Analyst, Barclays: Yeah. Yeah. Well, maybe maybe maybe more specifically, attached attached sort of subscriptions and maintenance versus versus FortiSASI and and SecOps. So, you know, maybe firewall versus non firewall in in more lay terms.

Christiana Ulgaard, CFO, Fortinet: The the non attached subscriptions are growing faster, for sure.

Saket Kalia, Analyst, Barclays: Got it. Yeah. Yeah. Also Very helpful.

Ken Zee, Founder, Chairman and CEO, Fortinet: Yeah. On the on the attached pod, the server is also starting to have a more high percentage because we offer more service, whether the SD WAN, SASE, definitely there’s more service, more function behind. So that’s also starting at a high percentage compared to the HAR. So that’s both sides. There’s some additional service, like we launched the three forty cloud service, the 40 identity, 40 drive, 40 connect.

That’s a new service attached. But there’s also a touch service, which has a more higher ratio or percentage compared to the hardware side of it.

Saket Kalia, Analyst, Barclays: Very helpful. Thank you.

Tal Liani, Analyst, Bank of America: Yeah, thank you.

Conference Operator: Our next question comes from Shrenik Kothari with Baird. Please go ahead.

Aaron Ovadia, Senior Director of Investor Relations, Fortinet2: Hi. Can you guys hear me? Alright. So just a quick question on on the go to market. You guys have been pushing towards platform adoption and and multiproduct.

Can you talk a little bit about how the channel incentives are moving towards kind of achieving your internal targets? I mean, in terms of the rewarding models that are favoring platform cross sell or pure volume? Can you just give us an update on what’s been most effective in driving that? Where are the areas where you’re still working on? Yeah.

I would really appreciate that.

Ken Zee, Founder, Chairman and CEO, Fortinet: Yeah. Traditionally, we are we are more channel focused company. Now in the last few years, we most starting invest in, like, direct marketing, direct sales, especially to all these big enterprise. So you can see whether the bigger deal and the big enterprise sales grow rather strong, like 4050%. That’s all come from all this direct touch approach and also integrate solutions selling platform like a multiple product instead of single product.

That’s also needed to train the sales, need to train the partner how to sell this multiple solution multiple product together into an integrated solution there, including whether the SAS, ESD, WAN, including the secure op. So that’s also kind of leading to the AI part of the story, which we believe is a fast growing part of our business there. Even we only introduced for a few years, but that’s AI kind of based secure op and also like a secure AI infrastructure to the AI Forti AI Assist, Forti AI Protect. Israeli customers see the benefit of this AI driven operation, the SOCCOM operation center there. So that’s what we do see is kind of an integrated solution with all this AI enabled kind of secure op.

That’s become a fast growing part of business right now.

Christiana Ulgaard, CFO, Fortinet: And to answer your question on the channel incentives, they are exactly aligned around multiproduct. So we make sure that the channel introduces new products and that for that, they get higher back end rebates.

Conference Operator: Our next question comes from Eric Heath with KeyBanc. Please go ahead.

Aaron Ovadia, Senior Director of Investor Relations, Fortinet3: Hi. Good afternoon. Can you

Tal Liani, Analyst, Bank of America: hear me?

Ken Zee, Founder, Chairman and CEO, Fortinet: Mhmm. Yep. Yep. All good.

Aaron Ovadia, Senior Director of Investor Relations, Fortinet3: Great. Thank you. Just to come back to the comments on the refresh cycle one more time, and sorry for belaboring this point. But if I’m understanding this correctly, you’ve done well in excess of $100,000,000 in refresh activity in the past two or three quarters, which would suggest product revenue excluding this refresh benefit has been flat to negative in the last couple of quarters. So can you just help me understand why the underlying firewall demand isn’t stronger?

Ken Zee, Founder, Chairman and CEO, Fortinet: I would not say it will be negative. It’s continued to refresh. But because it’s such a small percentage of the overall business, that’s the reason we gave additional a building guidance for the rest of the year on top of what we already overachieved in Q1 and Q2. So that’s just keeping we believe whether the market and also solution is much better. We’re not too much counting on refresh.

It’s a very small percentage. We’re just using the wheel to calculate whether internally or incentive the channel to helping customer to upgrade and expect it for the new SASE firewall. So that’s where we kind of we do give a much more number measurement. Sometimes it could be a little bit confusing, but I do believe it’s the way we try to help in the customer partner to upgrade to the new SASE firewall instead of have a too big business impact because like I said, the end of a service, that’s the product in there twelve, fifteen years ago. As a pretty small percentage of our total business.

Conference Operator: Our last question comes from Andrew Nowinski with Wells Fargo. Please go ahead.

Aaron Ovadia, Senior Director of Investor Relations, Fortinet4: Okay. Thank you for squeezing me in. I’m wondering and I’m still a little bit unclear on why services revenue growth is decelerating so much, you know, looking back over the last, call it, four quarters, and then also going forward. And I’m wondering if you could just provide any color around, you know, what’s what’s really driving that deceleration. And then, you know, related to that, why is your unified SaaS, if it has so much momentum right now, why why would that be flat sequentially in q two?

Because it looked like it was about 1,150,000,000.00 in q two and the same thing that you had in your slide deck in q one. So just wondering if you could comment on I know on a year over year basis, was up, but on a sequentially, why would it be flat? Yes.

Ken Zee, Founder, Chairman and CEO, Fortinet: Go ahead, Kristin.

Christiana Ulgaard, CFO, Fortinet: On sequential to answer your second question first, sequentially, it’s flat because there are a number of products. Some of them have not been growing or churning a little bit, while unified SASE while SSE has been growing nicely and is offsetting that. So that’s part of this. On the service revenue growth, I think that what you are seeing is that we had significant deferred revenues that were sold during the COVID period. And they have so we’ve recognized service revenue over the last couple of years benefiting from that growth.

And now the product revenue and the service revenue are aligning more with our billings growth. And so we need to grow faster, and we are planning to grow faster to drive that both revenue streams up.

Ken Zee, Founder, Chairman and CEO, Fortinet: Service revenue, if you’re looking like three, four years ago, the product revenue grow like 30%, 40% some quarter, maybe even close to 50%. That’s drive the service revenue because service turn your average maybe like thirty months, twenty nine, thirty months. So that needs to be recognized during that like two point five, three year period. On the other side, keep referring back to the presentation number four, Slide number four, which is really the SAC part of SASE growing very, very strong because unified SASE also including SD WAN. You can see SD WAN, we already have a pretty good penetration rate in enterprise.

That’s where customer most starting to adopt beyond SD WAN starting quickly adopt the SaaS now. So that’s where the growth is still very strong. So we do believe so we are the number one firewall, number one SD WAN. We do believe we will be the number one SASE within the next few years because we do believe we have a huge advantage on the SASE as in a single OS and also can very easily, for the current customer base, to upgrade to the SASE, which none other SASE player has this huge customer base. And also our own infrastructure give us cost advantage.

So all these three advantage of a SaaS in our competitor had, that’s we do believe will be the number one SaaS player in the next few years.

: Okay. Thank I’d say we we focus on the value to the customer, and we’ve got 800,000 customers. And that path to value from firewall to SD WAN to SASE with the integrated single operating system approach is really pretty straightforward. And so we see huge opportunity both there and with new sales of SASE, and that’ll be a real growth driver for us.

Conference Operator: This concludes our Q and A session. I will now hand it back to Aaron Ovadia for closing remarks.

Aaron Ovadia, Senior Director of Investor Relations, Fortinet: Thank you. I’d like to thank everyone for joining today’s call. We will be attending investor conferences hosted by Deutsche Bank, Citi and Goldman Sachs during the third quarter. The fireside chat webcast links will be posted on the events and presentation section of our Investor Relations website. If you have any follow-up questions, please feel free to contact me.

Have a great rest of your day.

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