Fortinet, Inc. Q3 FY2025 earnings call

• Strong third quarter performance driven by broad-based demand across all business pillars. - FortiSASE billings grew over 100%, positioning Fortinet as a leader in the SASE space, with 15% of large enterprise customers using FortiSASE, a 55% increase. - Recognition in Gartner Magic Quadrants for SASE platform and hybrid mesh firewall. - Leadership in firewall with over 50% unit market share and highest product revenue among cybersecurity peers. - Launch of Secure AI data center solution for AI workloads, leveraging ASIC advantage. - AI-driven SecOp as the fastest-growing pillar with 33% billing growth, powered by over 500 AI patents. - Strong operational margins: total gross margin 81.6%, operating margin 36.9% (third quarter record), free cash flow $568 million, adjusted free cash flow $646 million. - Continued investment in infrastructure, including $88 million in Q3 for data center build-out, and share repurchases of $1.83 billion for 23.3 million shares.

Total billings grew by 14% to $1.81 billion. Unified SASE billings saw 19% growth, SecOps 33% growth, and OT and critical infrastructure 30% growth. Unified SASE and SecOps account for 26% and 11% of total billings respectively. ARR for Unified SASE increased 13% to $1.22 billion, while SecOps ARR grew 25% to $472 million. Total revenue reached $1.72 billion, up 14%. Product revenue rose 18% to $559 million, and service revenue grew 13% to $1.17 billion. Unified SASE and SecOps now make up significant portions of total billings, with FortiSASE billings growing over 100%, highlighting strong performance in these segments.

• Fourth quarter: Billings expected $2.185B - $2.285B (12% growth), revenue $1.825B - $1.885B (12% growth), non-GAAP gross margin 79%-80%, non-GAAP operating margin 34.5%-35.5%, non-GAAP EPS $0.73-$0.75. - Full year: Billings expected $7.37B - $7.47B (14% growth), revenue $6.72B - $6.78B (13% growth), service revenue $4.575B - $4.595B (13% growth), non-GAAP gross margin 80.25%-80.75%, non-GAAP operating margin 34.5%-35%, non-GAAP EPS $2.66-$2.70. - Confidence in meeting Rule of 45 and outperforming the market with continued organic innovation, investments in go-to-market, and growth in demand for cybersecurity solutions, especially with AI's impact on security needs.

Forward-looking statements are subject to risks and uncertainties outlined in SEC filings, including potential differences between projected and actual results due to various factors not specified in detail in the transcript.

Q: Tal Liani from Bank of America asked about product revenues being below street expectations and the impact of end-of-service refresh.

A: Ken Xie responded that product revenue growth is driven by strong demand across segments like SASE, SecOps, and OT, not primarily by end-of-service refresh. John Whittle added that there are numerous growth drivers rather than a lack thereof.

Q: Fatima Boolani from Citibank inquired about services revenue trajectory.

A: Christiane Ohlgart stated that service revenue growth is expected to improve in the second half of 2026 due to strong product revenue growth this year, as product revenue is a leading indicator for service revenue.

Q: Shaul Eyal from TD Cowen asked about the 8-figure SD-WAN, SASE transaction.

A: Christiane Ohlgart explained it involved more SD-WAN and SD-Branch than SASE, with Fortinet offering options for cloud-delivered or self-hosted SASE. Ken Xie highlighted the Sovereign SASE as a key winning factor.

Q: Brian Essex from JPMorgan asked about SASE penetration from SD-WAN installed base.

A: Ken Xie mentioned FortiSASE grew over 100%, with quick ramp-up due to single-box solution and advantage over competitors, and noted potential growth through service providers and channel partners.

Q: Gabriela Borges from Goldman Sachs questioned product revenue trajectory next year.

A: Christiane Ohlgart and Ken Xie emphasized continued product growth driven by new features, hardware upgrades, OT use cases, and AI-driven solutions, with new FortiOS 8.0 and ASIC set to launch next year.

Q: Junaid Siddiqui from Truist Securities asked about OT security growth.

A: Ken Xie explained OT security has huge potential due to increasing connected devices, network security being the primary protection method for these devices, and Fortinet's long-term investment and leadership in this area.

Q: Patrick Colville from Scotiabank asked about 2026 end-of-service cohort and super cycles.

A: Christiane Ohlgart and Ken Xie stated growth is driven by new functions, hardware performance, and innovation rather than end-of-service, with new technology like FortiOS 8.0 and ASIC driving refresh activity.

Q: Shrenik Kothari from Baird asked about AI data center offering addressable opportunity.

A: Ken Xie said it's early stage but has potential with AI growth, and Christiane Ohlgart noted services also play a role in AI monetization through various use cases.

Q: Ittai Kidron from Oppenheimer & Co. inquired about product billings linearity.

A: Christiane Ohlgart and Ken Xie emphasized solid product revenue growth ahead due to multiple growth drivers and market share gains across pillars.

Q: Brad Zelnick from Deutsche Bank asked about growth above market in pillars and SASE pricing.

A: Christiane Ohlgart mentioned Unified SASE ARR includes SD-WAN, and Ken Xie discussed competitive bids and Fortinet's value proposition with single-box solution and lower operational costs.

Q: Gray Powell from BTIG asked about SASE billings composition.

A: Ken Xie and John Whittle explained SD-WAN is part of FortiOS, with Fortinet gaining market share in SD-WAN due to acquisition disruption and compelling value proposition.