Fortinet (NasdaqGS:FTNT) Q3 2025 Earnings Call November 05, 2025 04:30 PM ET Company ParticipantsFatima Boolani - Managing DirectorShrenik Kothari - Sector Head DirectorShaul Eyal - Managing Director of Equity ResearchJohn Whittle - COORob Owens - Head of Technology ResearchGray Powell - Managing DirectorBrian Essex - Executive DirectorKen Xie - Founder, Chairman, and CEOBrad Zelnick - Managing DirectorChristiane Ohlgart - CFOIttai Kidron - Managing DirectorAnthony Luscri - VP of Investor RelationsConferenc ...

Financial Data and Key Metrics Changes - Total billings grew by 14% to $1.81 billion, with revenue increasing by 14% to $1.72 billion [11][12] - Operating margin reached a record 37%, with total gross margin at 81.6% [18] - Free cash flow was strong at $568 million, with year-to-date free cash flow reaching $1.63 billion, up $135 million [18] Business Line Data and Key Metrics Changes - Unified SaaS billings grew by 19%, with Fortinet SaaS billings growth exceeding 100% [5][11] - SecOps billings increased by 33%, contributing to overall growth [11] - Product revenue rose by 18% to $559 million, driven by strong performance in multi-product deals and operational technology security [13] Market Data and Key Metrics Changes - EMEA led revenue growth, followed by APAC and the Americas [12] - 15% of large enterprise customers are now using Fortinet SaaS, representing a 55% increase [6][11] - Operational technology solutions saw over 30% billing growth, indicating strong demand in that segment [10][12] Company Strategy and Development Direction - Fortinet aims to become the number one SaaS market leader in the coming years, leveraging its unique integration of NextGen Firewall, SD-WAN, and SaaS on a single operating system [5][6] - The company plans to continue investing in its go-to-market strategy, including cloud delivery infrastructure and strategic partnerships [23] - Fortinet's leadership in firewall and secure networking is supported by its proprietary ASIC technology, which enhances performance and reduces total cost of ownership [8][9] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in meeting the rule of 45 for the sixth consecutive year, expecting continued strong growth driven by increased cybersecurity spending and vendor consolidation [21][22] - The rise of AI is anticipated to further boost demand for Fortinet's solutions, particularly in securing AI workloads [23][60] - Management noted that product revenue growth is expected to remain solid, with multiple growth drivers identified [43][62] Other Important Information - The company repurchased 23.3 million shares for $1.83 billion in Q3, reducing the total share count by approximately 3% [19] - Infrastructure investments were $88 million, reflecting ongoing efforts to expand data center capabilities [18] Q&A Session Summary Question: What are the drivers behind the product revenue growth? - Management indicated strong demand across SaaS, SecOps, and operational technology as key growth drivers, with the end of service not being a significant factor [24][25] Question: Why is the guidance for next quarter considered uninspiring? - The guidance reflects the impact of service revenue, which is influenced by prior product revenue performance [28][29] Question: What is the trajectory of services revenue growth? - Management expects service revenue growth to improve in the second half of 2026, driven by stronger product revenue [31][32] Question: Can you elaborate on the eight-figure deal with the police force? - The deal involved a combination of SD-WAN and Sovereign SaaS, highlighting Fortinet's unique advantage in providing flexible deployment options [34][35] Question: How does Fortinet plan to leverage its SaaS business? - Fortinet aims to accelerate SaaS adoption by leveraging its existing customer base and enhancing the integration of its solutions [37][39] Question: What is the outlook for product revenue growth next year? - Management remains confident in continued product revenue growth, supported by new technology launches and market opportunities [43][62]

Financial Performance - Fortinet reported third-quarter revenue of $1.73 billion, exceeding the consensus estimate of $1.70 billion [2] - Total revenue increased by 14% year-over-year, with product revenue at $559.3 million (up 18% year-over-year) and service revenue totaling $1.17 billion [3] - Third-quarter billings rose 14% year-over-year to $1.81 billion [3] Earnings Results - The company posted adjusted earnings of 74 cents per share, surpassing analyst estimates of 63 cents per share [2] - Fortinet expects fourth-quarter revenue to range from $1.825 billion to $1.885 billion, compared to estimates of $1.876 billion [5] - Anticipated fourth-quarter adjusted earnings are projected to be between 73 cents and 75 cents per share, exceeding estimates of 67 cents per share [5] Guidance and Outlook - Fortinet narrowed its full-year 2025 revenue guidance to a range of $6.72 billion to $6.78 billion, against estimates of $6.75 billion [5] - The company raised its full-year 2025 adjusted earnings guidance to $2.66 to $2.70 per share, up from previous estimates of $2.47 to $2.53 per share [6] - Analysts are forecasting full-year earnings of $2.52 per share [6] Market Reaction - Following the earnings report, Fortinet shares fell by 10.11% in after-hours trading, priced at $77.30 [6]

Core Insights - Fortinet (NASDAQ: FTNT) reported strong Q3 financials, beating earnings expectations by 17.5% with adjusted EPS of $0.74 against an estimate of $0.63, and revenue of $1.72 billion exceeding the $1.70 billion consensus [2][11] - Despite the strong performance, Fortinet's shares fell by over 10% in after-hours trading, indicating market concerns about future guidance and sustainability of momentum [3][4] Financial Performance - Fortinet achieved a record GAAP operating margin of 32%, with non-GAAP operating margin at 37%, reflecting effective cost management and revenue leverage [4][11] - Operating income increased by 16.2% year over year to $547.3 million, while product revenue surged 18% year over year to $559.3 million, indicating strong customer commitment to core offerings [5][6][11] - Net income, however, declined by 12.2% year over year to $473.9 million, raising questions about higher tax expenses or non-operating charges [7][11] Cash Flow and Capital Expenditures - Operating cash flow rose by 7.8% to $655.2 million, with free cash flow reported at $567.5 million [11] - Capital expenditures surged by 141.6% year over year to $87.7 million, suggesting significant investment in infrastructure for future growth [7][11] - Cash and equivalents fell by 19.8%, and shareholders' equity declined by 19%, warranting further scrutiny on the earnings call [8][11] Growth Drivers - Fortinet's FortiSASE is emerging as a key growth driver in the SASE market, positioning the company to benefit from the shift towards cloud-native security architectures [9][11] - The company launched its Secure AI Data Center solution, addressing the intersection of AI infrastructure protection and enterprise security [9] Market Outlook - For Q4, Fortinet guided revenue between $1.825 billion and $1.885 billion, with full-year 2025 revenue expected to be between $6.720 billion and $6.780 billion [12][11] - Non-GAAP EPS guidance for Q4 is projected between $0.73 and $0.75, indicating a potential deceleration in growth typical for software companies during the holiday season [12] Investor Considerations - Fortinet has consistently beaten earnings estimates for five consecutive quarters, raising questions about the accuracy of market estimates versus management execution [15][11] - The significant valuation discount compared to larger peers, despite superior operating margins, highlights the importance of understanding the sustainability of its margin profile for future stock valuation [16][11]

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Information, statements and projections contained in these presentation slides and related conference call concerning Fortinet's business outlook, the fourth quarter and full year 2025 guidance, and future prospects and expectations are forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding any indications related to future growth and market share gains, our strategy going forward, and guidance and expectations around future financial r ...

Recent Business Highlights • Revenue grew 14% year over year to $1.72 billion • Product revenue grew 18% year over year to $559.3 million • Billings grew 14% year over year to $1.81 billion 1 • Record third quarter GAAP operating margin of 32% • Record third quarter Non-GAAP operating margin of 37% 1 Press Release Fortinet Reports Third Quarter 2025 Financial Results Highlights SUNNYVALE, Calif. - November 5, 2025 - Fortinet® (Nasdaq: FTNT), a global cybersecurity leader driving the convergence of networkin ...

Core Insights - Fortinet reported strong financial results for Q3 2025, with a revenue increase of 14% year-over-year to $1.72 billion, driven by innovation and a customer-first culture [4][5] - The company has established itself as a leader in the SASE market with its FortiSASE solution, which has seen billings grow over 100% year-over-year [5][4] - Fortinet's operating margins reached record levels, with a GAAP operating margin of 32% and a Non-GAAP operating margin of 37% for the third quarter [4] Financial Performance - Revenue for Q3 2025 was $1.72 billion, up 14% from $1.51 billion in Q3 2024 [4][19] - Product revenue increased by 18% year-over-year to $559.3 million [4][19] - Billings grew 14% year-over-year to $1.81 billion [4] - Non-GAAP net income per share is projected to be between $0.73 and $0.75, with a diluted share count of 751 million to 755 million [4] Business Highlights - Fortinet was recognized as a leader in the 2025 Gartner Magic Quadrant for Hybrid Mesh Firewall, ranking highest in ability to execute [5] - The company launched the Secure AI Data Center solution, which offers high-capacity connectivity and up to 69% lower energy consumption compared to alternatives [5] - Fortinet has over 500 issued and pending AI patents, supporting more than 20 AI-driven solutions [5] Guidance - For Q4 2025, Fortinet expects revenue in the range of $1.825 billion to $1.885 billion and billings between $2.185 billion and $2.285 billion [4] - For the fiscal year 2025, revenue is projected to be between $6.720 billion and $6.780 billion, with service revenue expected to be between $4.575 billion and $4.595 billion [4]

Core Insights - Fortinet has launched the Secure AI Data Center solution, the first end-to-end framework designed specifically to protect AI infrastructures, achieving an average power consumption reduction of 69% compared to traditional methods [1][5] - The introduction of the FortiGate 3800G firewall enhances the performance and scalability required for AI workloads, featuring NP7 and SP5 ASICs with 400 GbE connectivity [2][3] - The solution integrates advanced security measures across the entire AI workflow, ensuring data protection, compliance, and performance for high-density GPU environments [3][4] Product Features - The Secure AI Data Center solution combines ASIC-powered firewalls with comprehensive protection for data, applications, and large language models (LLMs), enabling organizations to scale AI securely [3][5] - It enforces zero-trust segmentation and maintains compliance with global standards, ensuring uninterrupted uptime for critical operations [4] - The FortiGate 3800G offers hyperscale throughput of 800 Gbps, with 210 Gbps for IPsec VPN and 200 Gbps for threat protection, supporting 200 million concurrent sessions [8] Market Positioning - Fortinet's Secure AI Data Center solution sets a new benchmark for AI environment protection, emphasizing resilience, trust, and operational simplicity for enterprises [5] - The solution is positioned to address the operational challenges introduced by AI, providing visibility and performance for high-density GPU clusters [6] - Fortinet's offerings are backed by extensive threat intelligence and research capabilities, enhancing the overall security posture for AI workloads [9]

Core Viewpoint - Rosen Law Firm is reminding investors who purchased Fortinet, Inc. common stock during the specified class period of the upcoming lead plaintiff deadline for a class action lawsuit [1] Group 1: Class Action Details - The class period for the Fortinet common stock purchases is from November 8, 2024, to August 6, 2025 [1] - Investors may be entitled to compensation without any out-of-pocket fees through a contingency fee arrangement [1] - A lead plaintiff must move the Court by November 21, 2025, to represent other class members in the litigation [2] Group 2: Law Firm Credentials - Rosen Law Firm has a strong track record in securities class actions, having achieved the largest securities class action settlement against a Chinese company at the time [3] - The firm was ranked No. 1 by ISS Securities Class Action Services for the number of settlements in 2017 and has consistently ranked in the top 4 since 2013 [3] - In 2019, the firm secured over $438 million for investors, showcasing its capability in recovering significant amounts for clients [3] Group 3: Case Allegations - The lawsuit alleges that Fortinet made materially false and misleading statements regarding the business impact of a "record" round of FortiGate unit upgrades, claiming it would generate $400 million to $450 million in product revenue in 2025 and 2026 [4] - Defendants misrepresented the sustainability of the refresh cycle, which was said to consist of old products that were only a "small percentage" of the company's business [5] - The lawsuit claims that when the true details of the refresh cycle were revealed, investors suffered damages due to the misleading information provided by Fortinet [5]