Fortinet(FTNT) - 2024 Q3 - Earnings Call Transcript

Financial Data and Key Metrics - Total revenue grew 13% YoY to $1.508 billion, driven by 19% growth in service revenue and a return to product revenue growth [7][20] - Service revenue accounted for 69% of total revenue, reaching$ 1.034 billion, with SaaS solutions driving growth [20] - Product revenue increased 2% to $474 million, marking the first positive growth in five quarters [20] - Gross margin reached a record 83.2%, up 630 basis points, with product gross margin at 71.6% and service gross margin at 88.4% [23] - Operating margin increased 130 basis points to a record 36.1% [24] - Free cash flow was$ 572 million, representing a margin of 38% [26] Business Line Performance - Unified SASE billings grew 14%, accounting for 23% of total business, driven by strong demand for SSE and cloud technologies [7][15] - Security Operations billings grew 32%, outpacing the overall market and representing 10.5% of total business [7][11] - Secure Networking returned to positive growth, driven by market share gains [7] - OT billings in the manufacturing vertical grew 119%, while retail billings returned to growth after six quarters, up 9% [19] Market Performance - EMEA was the best-performing geography with double-digit growth [18] - Large and mid-enterprises represented 91% and 76% of SASE and Security Operations billings, respectively [17] - Manufacturing and retail verticals showed strong growth, with manufacturing billings up over 20% and retail billings up 9% [19] Strategy and Industry Competition - The company continues to leverage its single operating system (FortiOS) and proprietary ASIC technology to deliver superior performance and cost efficiency [8] - Fortinet is expanding its Security Operations portfolio with new solutions targeting a $20 billion market opportunity [11] - The company is investing in GenAI solutions, with FortiAI expected to be announced in early 2025 [12] - Fortinet is positioned to lead in the SASE market, with a focus on sovereign SASE for service providers and large enterprises [9][10] Management Commentary on Operating Environment and Future Outlook - Management highlighted the recovery in the firewall market, with a record number of FortiGate devices expected to reach end-of-support in 2026, driving a refresh cycle starting in 2025 [31] - The company raised its full-year revenue and operating margin guidance, expecting to achieve its seventh consecutive year of exceeding the rule of 40 [14] - Management expressed confidence in the company's ability to grow faster than the market, particularly in SASE and Security Operations [12][39] Other Important Information - The company completed acquisitions of Lacework and Next DLP, which contributed to billings and revenue growth in Q3 [25] - Share buybacks totaled$ 600 million in Q3, with the Board increasing the share repurchase authorization by an additional $1 billion [28] - The company will host an Analyst Day on November 18 to provide updates on its strategy and mid-term financial model [97] Q&A Session Summary Question: Differentiation in Sovereign SASE - Fortinet's sovereign SASE offering is differentiated by its single operating system (FortiOS) and ability to run SASE functions on-premise and in the cloud, providing data privacy and local processing capabilities [38][39] Question: Firewall Refresh Cycle - The company expects a significant refresh cycle starting in 2025, driven by the end-of-support for a record number of FortiGate devices in 2026 [42][43] Question: Cannibalization Risk from SD-WAN to SASE Migration - Management does not see significant cannibalization risk, as SASE complements existing SD-WAN and firewall deployments, with additional service opportunities [48][49] Question: Organic ARR Growth Drivers - Organic ARR growth is driven by solutions like FortiEDR, FortiClients, and FortiNDR, with a 74% growth rate in SaaS solutions [53] Question: Sustainability of Profitability - Excluding one-time benefits, product gross margin would have been 68.4%, with operating margin at 35.1%, indicating sustainable profitability [54][56] Question: Competitive Landscape and Pricing Pressure - Discounting remains stable, with no significant pricing pressure observed, and the company continues to invest in growth opportunities [59][60] Question: Go-to-Market Strategy for SASE - The company has made significant progress in its SASE go-to-market strategy, with strong customer adoption and pipeline growth [62][63] Question: Lacework FortiCNAPP Feedback - Initial feedback on the Lacework FortiCNAPP offering has been positive, with strong integration and competitive differentiation [80][81] Question: Government Vertical Performance - The government vertical, excluding the U.S. federal market, showed stable performance, with growth in state, local, and international government sectors [83] Question: OT Business Sustainability - The OT business is expected to sustain strong growth, driven by the increasing need for IoT and edge computing security [85] Question: Hardware Appliance Performance - Mid-range and high-end hardware appliances showed stable performance, with no significant outgrowth in unit shipments [91] Question: SD-WAN Growth Potential - SD-WAN growth is expected to reaccelerate, particularly as VMware customers look for alternative solutions, with renewal cycles starting in 2025 [94][95]