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Fortinet(FTNT) - 2024 Q1 - Earnings Call Transcript
FTNTFortinet(FTNT)2024-05-02 22:19
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Financial Data and Key Metrics - Q1 2024 operating margin increased by 200 basis points to a record 28.5% [8] - Record cash flow from operations of 830million,withanadjustedfreecashflowmarginof61830 million, with an adjusted free cash flow margin of 61% [8] - Billings of 1.41 billion and revenue of 1.35billionwerewithinguidanceranges[14]−Freecashflowwas1.35 billion were within guidance ranges [14] - Free cash flow was 609 million, representing a 45% free cash flow margin [14] - Total revenue grew 7% to 1.35billion,drivenbyservicerevenuegrowthof241.35 billion, driven by service revenue growth of 24% to 944 million [20] - Product revenue decreased 18% to 409million,impactedbybacklogfulfillmentintheprioryear[20]−Totalgrossmarginof78.1409 million, impacted by backlog fulfillment in the prior year [20] - Total gross margin of 78.1%, up 180 basis points, with service gross margins at 87.9%, up 200 basis points [21] Business Line Data and Key Metrics - Unified SASE and SecOps accounted for one-third of Q1 billings, with unified SASE alone contributing 24% [8][9] - Existing customers delivered over 90% of SecOps and unified SASE billings, with large and mid-enterprises representing 78% and 84% of billings, respectively [15] - SMB was a top-performing customer segment, while international emerging markets were the best-performing geography [19] - Service provider and worldwide government experienced the highest growth, while retail and financial services were more challenged [19] Market Data and Key Metrics - International emerging markets were the best-performing geography [19] - The three largest industry verticals were worldwide government, service providers, and financial services [19] - Europe was slightly weaker in the quarter, particularly in the enterprise segment, which impacted billings performance [32] Company Strategy and Industry Competition - The company is focused on investing in the fast-growing unified SASE and SecOps markets, which combined accounted for one-third of Q1 billings [8] - Fortinet's unified SASE solution is differentiated by its integration into a single operating system (FortiOS) and its ability to be deployed on-premise or in the cloud [9][10] - The company is leveraging its FortiOS and FortiASIC technologies to gain market share in security networking, with large enterprises increasingly adopting its solutions [8] - Fortinet is recognized in five Gartner Magic Quadrants, including secure service edge, SD-WAN, and network firewall, all running on a single operating system [10] Management Commentary on Operating Environment and Future Outlook - Management noted that high interest rates are causing enterprises to favor OpEx over CapEx for networking security projects, leading to a shift in focus towards SASE and SecOps [34] - The company expects the firewall digestion cycle to be completed by the second half of 2024, with signs of a more normalized firewall market emerging [27] - Fortinet is optimistic about its pipeline growth, particularly in SASE and SecOps, with pipeline growth of 30% for SecOps and over 45% for unified SASE [15] Other Important Information - The company announced the industry-first IoT security generative AI assistant, FortiAI, which supports 30-plus languages [11] - Fortinet launched the FortiGate 200G, a mid-range firewall powered by a new SD FortiASIC, offering 3 to 10 times the performance of competitors [12] - The company has a remaining share buyback authorization of 1 billion, with 5.3 billion repurchased over the past four-plus years [22] Q&A Session Summary Question: What drove the billings performance in Q1, and what gives confidence in the guidance for the back half of the year? - Billings were slightly weaker due to softness in Europe, but the pipeline and hygiene improvements give confidence in the full-year outlook [32] - High interest rates are causing enterprises to favor OpEx over CapEx, leading to a shift towards SASE and SecOps [34] Question: How does the company think about pricing strategy and discounting for cross-selling? - The company maintains a consistent pricing strategy, focusing on healthy margins for both the company and its partners [37] - Pricing adjustments were made to reflect pre-pandemic levels after supply chain costs normalized [37] Question: Can you provide more color on SASE traction and customer segmentation? - Existing customers accounted for over 90% of SASE and SecOps billings, with large and mid-enterprises dominating [39] - 81% of unified SASE billings came from existing SD-WAN customers [42] Question: Can you elaborate on geographic performance and pipeline growth for secure SD-WAN? - SMBs performed strongly, while Europe was slightly weaker in the enterprise segment [46] - The pipeline for secure SD-WAN is growing, with large enterprises showing strong interest [48] Question: What are the signs of recovery in the firewall market, and how does it impact market share? - The firewall market is showing signs of recovery, with customers completing the inventory digestion process [55] - Fortinet continues to gain market share due to its strong performance and differentiated offerings [54] Question: How should we think about the refresh cycle for firewall appliances? - The refresh cycle is expected to begin as customers complete the digestion process and look to upgrade to newer, more efficient products [67] - New areas like OT and IoT security are driving growth, with customers increasingly adopting Fortinet's solutions [68] Question: What is the approach to share buybacks and M&A? - The company remains opportunistic with share buybacks, having repurchased 5.3 billion over the past four-plus years [75] - M&A is considered strategically, with a focus on tech and talent tuck-ins [76] Question: Can you provide an update on headcount plans and OpEx? - The company continues to invest in R&D and field sales engineering while maintaining a balanced approach to hiring [80] - The shift towards higher-margin services is making margin targets more achievable [81] Question: How is the receivables drawdown and DSO performance being managed? - DSOs improved due to the timing of large deals, with one eight-figure deal closing earlier in the quarter compared to six in Q4 2023 [84] Question: How is the partner community managing the CapEx to OpEx shift? - Large distributors and resellers are offering financing programs, with Fortinet providing extended payment options for larger deals [86] Question: Can you discuss the enterprise agreement strategy and go-to-market efforts? - Enterprise agreements are growing, particularly with larger customers looking for long-term relationships and product consolidation [89] - The FortiPoints program has been well-received, driving customer engagement [90] Question: How is FortiAI being monetized, and what is the impact on gross margins? - FortiAI is being charged separately and is additive to existing products, with early interest from customers [102] - The impact on gross margins is still in the early stages, with material benefits expected in the future [101]