Fortinet, Inc. (FTNT) Needham Security, Networking, & Communications Conference (Transcript)

Fortinet, Inc. Conference Call Summary Company Overview - Company: Fortinet, Inc. (NASDAQ:FTNT) - Event: Needham Security, Networking, & Communications Conference - Date: November 19, 2024 - Participants: - Keith Jensen - CFO - John Whittle - COO - Christiane Ohlgart - Chief Accounting Officer Key Points Financial Guidance and Growth Targets - Fortinet aims for billings and revenue growth above 12% over the next three to five years, with operating margins above 30% and adjusted free cash flow in the mid to high 30% range [3][4][5] - The growth guidance considers market complexities, including the diversification of product offerings beyond just firewalls to include SecOps and SASE solutions [4] - Operating margins have improved, with a target of 30% being set as a new average, up from a previous floor of 25% [5][6] Sales Capacity and Investments - Fortinet plans to increase its quota-carrying sales representatives and invest in infrastructure, including data centers, to support SASE and SecOps rollouts [7][8] - The company is shifting towards owning its data centers to reduce costs and improve service delivery, moving away from reliance on third-party cloud providers [8][9] Billings and Sales Cycle - Q4 billings are expected to show mid-single-digit growth, although some large deals are taking longer to close due to increased scrutiny and collaboration with existing customers [10][11][13] - The maturation process for large deals is slower, with existing customers being more cautious about timing and readiness for new solutions [13] Product Revenue and Market Trends - Product revenue turned positive for the first time in several quarters, with double-digit growth quarter-over-quarter excluding backlog [14][15] - Fortinet anticipates a significant refresh opportunity in 2026 due to a large number of devices reaching end-of-support, which could generate $400 million to $450 million in new product revenue [21][19] Gross Margins and Pricing Strategy - Fortinet has achieved record gross margins, with product gross margins expected to normalize around 67% and total gross margins between 79% to 80% [24][26] - The company is using discounting strategically to drive customer acquisition, particularly in the US enterprise market [29] SASE and SD-WAN Opportunities - The upcoming SD-WAN renewals in 2025 and 2026 are seen as a gateway for upselling SASE solutions to existing customers [30][31] - Fortinet is focusing on the ease of integrating SASE with existing SD-WAN deployments, although the transition may take time due to competitive displacement [31] SecOps Growth - Strong growth is noted in the SecOps segment, particularly with products like FortiEDR and FortiClient, as the company focuses on expanding its solution suite [36][37] - The integration of AI into products is ongoing, with over 500 AI-related patents, and the company is leveraging generative AI for enhanced security operations [44][45] Public Sector and Federal Business - The federal sector represents about 2% to 3% of Fortinet's business, with a broader government business (including SLED) accounting for 10% to 12% [43] - Recent organizational changes have separated the federal business to enhance focus and responsiveness to the unique needs of government clients [43] Conclusion - Fortinet's strategic focus on growth through product innovation, market expansion, and operational efficiency positions it well for future opportunities, particularly in the SASE and SecOps markets [46]