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][13] - Unified SaaS billings grew 19%, while SecOps saw a 33% increase [11][12] - Operating margin reached a record 37%, with total gross margin at 81.6% [18][19] Business Line Data and Key Metrics Changes - Unified SaaS and SecOps now account for 26% and 11% of total billings, respectively, reflecting a combined increase of three percentage points [11] - Product revenue increased by 18% to $559 million, driven by strong performance in multi-product deals and operational technology security [14] - Service revenue grew by 13% to $1.17 billion, indicating a healthy demand for services [14] Market Data and Key Metrics Changes - EMEA led revenue growth, followed by APAC and the Americas [13] - The number of deals greater than $1 million increased by 26%, with their total dollar value growing by over 30% [12] Company Strategy and Development Direction - The company 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 [6][8] - Continued investment in cloud delivery infrastructure and strategic partnerships is planned to enhance market presence [23] - The rise of AI is expected to drive demand for Fortinet's solutions, particularly in securing AI workloads [23][106] 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 growth in demand for cybersecurity solutions [22] - The company anticipates product revenue growth to remain solid, driven by multiple growth drivers including new features and customer upgrades [67][113] Other Important Information - Free cash flow reached $568 million, with adjusted free cash flow up to $646 million, representing a margin of 37% [18] - The company repurchased 23.3 million shares for an aggregate purchase price of $1.83 billion, reducing the total share count by approximately 3% [19] Q&A Session Summary Question: Product revenues went up 18%, below expectations. What are the drivers? - Management attributed growth to strong demand across various segments, including SaaS and operational technology, rather than end-of-service upgrades [27][30] Question: Why is the guidance for next quarter less inspiring? - Management indicated that service revenue is a leading indicator of future performance, and product revenue growth is expected to positively impact service revenue in the future [33][34] Question: What is the trajectory of services growth in the next 12 months? - Management expects service revenue growth to improve in the second half of 2026 due to increased product sales and customer behavior [41][42] Question: Can you elaborate on the eight-figure deal with the police force? - The deal involved a combination of product and services, with a focus on sovereign SaaS to meet local data governance requirements [47][48] Question: What is the rate of SaaS penetration from the SD-WAN install base? - Management noted that 15% of large enterprise customers are now using Fortinet SaaS, indicating strong adoption and growth potential [60][61] Question: How is the company positioned in the operational technology security market? - Management highlighted significant growth potential in OT security, with a unique approach to securing diverse devices across various industries [77] Question: What are the growth drivers for product revenue next year? - Management is confident in continued product growth driven by new features, customer upgrades, and strong demand in operational technology [67][113]

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]