Q4 2022 Fortinet Inc Earnings Call

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

Thank you for standing by and welcome to the Fortinet fourth quarter earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation there'll be a question and answer session.

Ask the question at that time, Please press star one one on your touch tone telephone.

As a reminder, today's call is being recorded.

I would now turn the conference or to your host Mr. Peter <unk> senior.

Senior Vice President of Finance and Investor Relations. Please go ahead.

Okay.

Thank you Valerie and good afternoon, everyone. This is Peter <unk> Senior Vice President of Finance and Investor Relations at Fortinet I am pleased to welcome everyone to our call to discuss Fortinet.

Actual results for the full year and fourth quarter of 2022 speakers on today's call are kenzie, Fortinet founder Chairman and CEO and Keith Jensen, Our Chief Financial Officer was a live call that will be available for replay via webcast on our Investor Relations website.

Ken will begin our call today by providing a high level perspective on our business. Keith will then review our financial and operating results for the full year and fourth quarter of 2022 before providing guidance for the first quarter of 2023 and the full year. We will then open the call for questions before we begin I would like to remind everyone that on today's call. We will be making forward looking statements and these forward looking statements are subject to risks and.

DS, which could cause actual results to differ materially from those projected.

Please refer to our SEC filings in particular the risk factors.

Form 10-K, and Form 10-Q for more information.

Looking statements reflect our opinions only as of the date of this presentation that we undertake no obligation and specifically disclaim any obligation to update forward looking statements also all references to financial metrics that we make on today's call are non-GAAP unless stated otherwise are.

Our GAAP results and GAAP to non-GAAP reconciliations are located in the earnings press release and in the presentation that accompanies today's remarks, both of which are posted on the Investor Relations website Ken.

In Keith's prepared remarks for today's earnings call will be posted on the quarterly earnings section of our Investor Relations website immediately following the call lastly, all references to growth are on a year over year basis, unless noted otherwise I will now turn the call over to Keith.

Thanks, Peter and thank you to everyone for joining today's call.

Outstanding full year and fourth quarter 2022 results.

For the full year revenue growth accelerated to 32%, we continued to gain market share in our cyber security industry with customers increasingly recognizing.

Great on a single platform approach.

With acuity delivers a low total cost of ownership and agreement return on investment than competing solutions.

On a revenue growth of 42% was lost strong, making fortinet a leading company.

A company in the cyber security industry with total product revenue of $1 8 billion.

Hi, Stephen and <unk> together accounted for over 25% of total bookings and our goal is to keep growing and achieving number one market share in our firewall.

SD Wan and <unk> secured a market over the next couple of years.

For 20 years Fortinet has lead long term strategies and investment around the convergence of metalworking that security.

Yesterday, we announced our fifth generation 40 security processor the <unk> Fi.

This new ISO C pace for the ASIC has secure computing power, reaching four major analysis functions like firewall VPN. So important that our 17 232 times greater than the average of our competitors similar model using general purpose Cpus.

On the <unk>, the <unk> chip as evolution of applications for 14.

Such as new class SaaS, <unk> and IC branch.

With much better performance high efficiency.

According to the most recent IDC data LTE unit shipment of firewall appliance Fortinet hold a number one unit shipped market share position and a 48%.

Providing fortinet.

The economy of scale position us well, making it difficult for competitors to develop their own legacy technology due to a high entry barrier and significant investment that is required.

40 leases huge security company empower at events.

Vantages April for the Oes to integrate most accretive functions and applications than our competitors.

With much better performance at much lower energy consumption.

Zone in a much lower total cost of ownership while.

By offering easier operations for our customers.

For example, a recent.

The report highlighted that customers deploying fortinet secure SD Wan solutions.

<unk> <unk> hundred percent return on investment over three years with a payback period of only eight months.

Fortinet substantial installed base.

With each function able us to offer additional stickier services and <unk>.

Integrate and automate 40 fabric partner solutions.

We recently announced several new.

And services that help iso's team reduced the optimization cyber risk.

More efficient in handling cyber security issues.

Networking and security continue to converge on consolidate we believe we are well position to achieve our 2000 22025 building pocket over $10 billion.

Before turning the call over to Keith I would like to thank all I'm, calling.

These customers partners and suppliers worldwide.

Continue to support and hard work.

Thank you Ken and good afternoon, everyone.

If you look back at 2022, we see the success of our strategy to lead in convergence and consolidation as well as the combined power of our ASIC technology with our integrated operating system combined.

Combined these efforts are driving our strong financial results.

There's been an explosion of devices that must be connected to the cloud data center and edge compute as.

As a result, the infrastructure has expanded to support secure connectivity via distributed firewalls.

There is no longer feasible to overlay security on top of networking in the data center, they must be deployed as a converged solution.

Firewall if needed to work seamlessly with networking and security applications across our company's entire infrastructure.

Fortinet is leading the convergence trend with a wide range of technologies, including network firewall secure SD Wan <unk> and Ot security all embedded in our single operating system delivered as hardware software cloud and as a service.

Traditional CPU based solutions are very inefficient supporting both networking and security.

That's why Fortinet developed proprietary ASIC technology to build an application specific solution.

Yesterday as Ken mentioned, we announced our next generation ASIC to 40 security processor or 45.

Which allows lionsgate convergence of networking and security at every network edge.

The new seven nanometer technology combines existing NP seven technology with new content processor capabilities.

Our enhanced platform suite of integrated products is delivering on customer demands for convergence vendor consolidation ease of management and lower operating costs.

The success of this strategy is evident in our full year 2022 results and I'll start there.

Billings passed a $5 billion, mark totaling $5 6 billion and growing 30, 34%.

While revenue totaled $4 4 billion with growth accelerating to 32%.

The fifth consecutive year of revenue growth of 20% or more.

Driven by strong demand for our fabric and cloud security solutions enhanced platform technology billings and revenue.

<unk> increased over 40% to $1 8 billion and $1 5 billion respectively.

And despite a challenging global supply chain environment product revenue growth came in at 42%.

Our highest annual product revenue growth rate in over 10 years.

Our product revenue growth was driven by the combined but excuse me by the continued growth of our firewall use cases.

And the addition of over 23000 new customers.

Service revenue was up 26% to $2 6 billion, resulting in three consecutive years of accelerating service revenue growth rates.

Gross margin was strong at 76, 3% and operating margin outpaced our initial expectations decreasing 110 basis points to a new fortinet record high of 27, 3%.

Our GAAP operating margin of 22% is one of the highest in the industry.

And we continued our streak of being GAAP profitable every year of our 14 year history as a public company.

Earnings per share increased 49% to $1 19.

Free cash flow was a record at $1 45 billion pre.

Free cash flow margin was 33% and adjusted for real estate investments the free cash flow margin came in at 37%.

And for the year, we repurchased approximately 36 million shares at a cost of $2 billion.

Total deferred revenue increased 34% to $4 6 billion.

Short term deferred revenue increased 32% to two.

235 billion.

Quarterly contract terms throughout the year were consistent with the year earlier periods, including the fourth quarter at 28 months.

Before moving onto our Q4 results I would like to summarize our enterprise success and highlight a few of seven figure deals from 2022.

We saw great success during the year with our strategy to expand further into the large enterprise segment is.

As the number of deals over $1 million increased over 55% to a record 546 deals.

And buildings on these deals increased by over 70%.

So if we look at a few of our large deals of the year.

Let's start with the competitive upsell deal.

Net displaced 11 different vendors by consolidating the customers network the security functions on our security fabric.

This worldwide wholesaler previously purchased secure SD Wan and 40 proxy.

Next on the list was a centralized network security solution that could be managed and deployed to its 400 global locations.

This customer chose chose Fortinet security fabric.

For its flexible and integrated solution across multiple scenarios.

Moving to work from anywhere perimeter security and data center segmentation.

And another upsell deal a leading global manufacturer was spun off and had a stand up their security and networking infrastructure separately.

The newly created infrastructures included remote access SD Wan application delivery control authentication endpoint email protection and switching.

Keys to our wind included our zero trust capabilities.

Our cloud first SD Wan strategy.

And the ease of integration that convergence across our platform suite.

Lastly, and a new logo win.

A large U S retailer with over 500 locations with struggling with a total cost of ownership of their legacy security architecture.

Key to this win included delivering a single pane of glass versus the multiple consoles that we're using and.

And replacing the competitors' firewalls with our 40 gigs delivering urs filtering Wi Fi security and edge router replacement.

Paul on a unified and integrated 40 OS platform.

This customer reported anticipated savings of $29 million over five years.

Turning to Q4 results, both billings and revenue delivered new records with billings of $1 7 billion in revenue of $1 3 billion.

Both metrics increased over 30%.

The strong fourth quarter revenue performance reflects solid customer demand across both our core and enhanced platform technologies.

In the fourth quarter, we added over 6200, new logos, another new Fortinet record rich.

Reflecting the support of our channel partners the leverage they bring and the breadth of our worldwide customer base.

Taking a closer look at the fourth quarter billings growth of 32% was driven by a 40% increase in enhanced platform technology billings.

Which accounted for over one third of total billings.

Total revenue growth of 33% was driven by strong demand for core and enhanced technology platforms.

Which increased 26% and 47% respectively.

Product revenue grew 43% to $540 million.

Service revenue was up 27% to $743 million driven by strong product revenue growth and strengthen our security subscriptions.

Short term deferred revenue grew 32% and represents eight consecutive quarters of accelerating growth rates.

Total gross margin of 77, 6% was driven by a 310 basis point increase in product gross margin to 65, 2%.

Several factors converged to drive our record high quarterly product gross margin, including legacy pricing actions easing supply chain cost pressures and improve discounting.

Service gross margin of 86, 7%.

<unk> down 40 basis points due to increased labor cost and our expansion in cloud services and the related hosting costs.

Operating margin of 32, 5% was up 400 basis points year over year due to the strong gross margin performance and FX benefit.

Looking to the statement of cash flow summarized on slides 11 and 12.

Free cash flow was $497 million.

Adjusted free cash flow, which excludes real estate investments was $510 million.

Representing a 40% adjusted free cash flow margin.

Cash taxes were $63 million.

Capital expenditures were $31 million, including 13 million for real estate investments.

DSO increased 14 days sequentially and year over year to 89 days also impacting service revenue growth.

Moving to guidance.

We believe the continued innovations we've made in building our platform enables our customers' digital transformation journey.

And as Ken noted customers are increasingly recognizing how fortinet is integrated and single platform approach to security can deliver a lower total cost of ownership.

Return on investments than competing solutions.

Now I'd like to review our outlook for 2023 summarized on slide 15, which is subject to the disclaimers regarding forward looking information that Peter provided at the beginning of the call.

For the first quarter, we expect billings in the range of $1 billion $415 million to $1 billion $465 million.

Which at the midpoint represents growth of 24%.

Revenue in the range of $1 billion $180 million to $1 billion $220 million.

Which at the midpoint represents growth of 26%.

non-GAAP gross margin of 75% to 76%.

non-GAAP operating margin of 23% to 24%, which at the midpoint represents an increase of 150 basis points.

non-GAAP earnings per share of.

27 to 29.

Which assumes a share count of between 795 and $805 million.

Capital expenditures of $80 million to $110 million non.

non-GAAP tax rate of 17%.

Cash taxes of $20 million.

And should also note that first quarter guidance assumes backlog decreased slightly during the quarter.

For the full year, we expect billings in the range of $6 billion $710 million.

The $6 billion $790 million.

Which at the midpoint represents growth of 21%.

Revenue in the range of $5 $370 million to $5 billion $430 million, which at the midpoint represents growth of 22%.

Total service revenue in the range of $3 billion $335 million to $3 billion $365 million.

Which at the midpoint represents growth of 27%.

And employees and implies a fourth consecutive year of accelerating service revenue growth.

The service revenue guidance also implies product revenue growth of 15%.

non-GAAP gross margin of 75% to 76% non.

non-GAAP operating margin of 25% to 26%.

non-GAAP earnings per share of $1 39 to $1 41, which assumes a share count of between $805 to $815 million.

Capital expenditures of $400 million to $450 million due to continued investments in cloud data centers and facilities.

non-GAAP tax rate of 17%.

Cash taxes of 375 million.

Split somewhat evenly between the first and second half of the year.

The increase in cash taxes reflects recently effective R&D capitalization and amortization requirements.

The full year estimate assumes backlog approaching historical levels by the end of the year.

Cyber security, but not immune to economic slowdowns is expected to remain a comparatively safe harbor and.

And with a strong business model and history of execution, we are confident that our market share gains will continue.

We remain on track to achieve our 2025 financial targets, which include billings of $10 billion.

Revenue of $8 billion.

non-GAAP operating margin of at least 25% and adjusted free cash flow margin in the mid to high 30% range in 2025.

And with that I'll now hand, the call back over to Peter to begin the Q&A session.

Thank you Keith.

Operator.

Please open the call for questions. Just one reminder to the participants during the Q&A. We ask that you. Please limit yourself to one question and one follow up question to allow others to participate.

Open up the call. Please thank you.

Again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your Touchtone telephone again to ask a question. Please press star one line one moment please.

Our first question comes from Brian Essex of Jpmorgan. Your line is open.

Great. Thank you good afternoon, and thank you for taking the question and congrats on solid results and a solid guide I guess.

Given that we heard from one of your peers last night and they were.

I guess markedly more.

Conservative or cautious on the on the macro and you seem to be maybe for <unk>.

Keith could you help us understand what youre seeing in the market from a macro perspective, how enterprises are spending.

And.

How does that how does any changes in the quarter relative to initial expectations Pan out with regard to demand.

We're seeing sales cycles, we're hearing about sales cycles elongated and budget scrutiny.

Ongoing what are you seeing on your side.

Got it.

Question on <unk>.

Asthma partner.

Our bodies are tight.

But what that solution. It has a bedroom cost our total cost of ownership and also.

Even cost savings for some divestiture SD Wan solution.

Same time, we do see the.

Use case a firewall.

Expanding much broader than before speaking of Fortis Ot's acuity some out of the area, which are put in March I say, none with acuity, maybe the only solution to secure some of these OTT O T O.

OTT area so.

So that's what we see.

Demand is still pretty strong and so we are probably we're keeping gaining more market share you need to model a fragmented market.

Yes.

Yes, Thanks, Ken spot.

Spot on with that I would also add look I think we're all sensitive to the overhang from the macro environment and what that May mean.

Great.

But when we look at our internal numbers, whether it's pipeline growth and even if we compare with pipeline growth is today versus a year ago, it's even up from there.

In terms of percentage growth rates.

The use cases and I think in this environment.

The savings that we offer and the ROI that we provide in some of the case studies that we provided on the call. There are examples of that.

Particularly we are continuing to benefit from that and we do see continued opportunities for market share gains even in this environment.

Got it and then maybe just a quick follow up Keith.

Do you think about the level of conservatism in your fiscal 'twenty three guide I mean stronger than I think some had expected.

The question Tomorrow, how much conservatism is in there.

What gives you confidence in.

Hitting that kind of level of performance, particularly with regard to billings.

And then any change to your 2025 targets as you kind of look at the strength that youre seeing in the market from here on out.

Yes, I think that.

The approach that we take if you will is consistent with this time around with.

What we've done in prior years, but would certainly added conservatism and if it reflect what's happening or what may happen with the with the macro environment and first and foremost we start with the pipeline and looking at the pipeline growth there.

And the kind of the timing of the pipeline and making sure that we have deals that are teed up for the middle of the year and perhaps even into the second half of the year.

So there is ample opportunity. There you also want to make sure that you've got sales productivity numbers that makes sense and sales capacity numbers that makes sense I.

I think there will be some some tailwind from the backlog, which I commented on in the comment that we're going to get some benefit from that as it continues to burn down.

But keep in mind that.

We have seen some changes in cancellation rates and I think we've added a significant amount of conservatism there around cancellation rates.

Again, so I think it's really about the pipeline as the tailwind that we have and it would take us the advantages that we're offering a total cost of ownership in this environment.

Okay. That's super helpful. Thank you very much.

Thank you one moment please.

Our next question comes from the line of <unk> <unk> of Citi. Your line is open.

Hey, good afternoon, and thank you for taking my question.

Keith for you just with respect to the services revenue guidance at 27%.

Not a material difference from the cadence you've been running at this year and I'm curious what sort of inputs.

In bad that revenue segment for you and I ask because.

We have the dynamic of some of your customers delaying their subscription registrations over the course of 'twenty Q.

And then you also have the dynamic of a lot of your customers not having realised the pricing increases that you.

Is that in the last 12 to 18 months. So I'm curious as to why with those positive inputs you, we wouldn't see better services growth and what's sort of.

Things that Youre being conservative about there and then a quick follow up please.

Yes, I think it kind of goes back to Brian's question, a moment ago in terms of the level of conservatism and caution that's in the guide and I know that historically I have often complained that I don't get much room in the services line from where the consensus is versus what I am forecasting.

27% number I think thats pretty much right on top of where the street is that for the full year and I think in this macro environment I think thats a great a good place for us to be at this point in the year for full year guidance.

Understood and any commentary on the operating margin and operating profitability performance because we are seeing.

Compression into next year.

And quarterly basis, but anything to be mindful of there as it relates to maybe onetime items that are appealing out just yet perhaps why not see better follow through in profitability and thats. It from me. Thank you.

Yes, I think our guidance is pretty much in sync with where we are historically at this point in time and consistent with what we've talked about the 25% margin number, but I think that.

But you're maybe suggesting a referring is really it's all about FX. If you will when you look at 2022 compared to 2023.

We had a nice benefit from FX in 2022, and I think in terms of what our assumptions are for 2023 like the rest of the people we read the economic reports from the big banks and so forth and what the dollar is expected to do and I think we've really pulled out a lot of that benefit by the end of this year. So youre not really going to see that in the year on year comparison.

Thank you one moment please.

Our next question comes from the line of <unk> Kalia of Barclays. Your line is open.

Okay, Great Hey, guys. Thanks for taking my questions here.

Maybe maybe.

First for maybe a question for both Ken and Keith.

Clearly SD Wan and <unk> are becoming a bigger part of the business.

And that too with higher growth rates and so maybe maybe the question is how do you folks think about the growth rate.

Our runway for growth.

<unk> two businesses either separately or together over the next couple of years.

As part of the total gross equation or a part of the $10 billion goal. However, you want to think about it but I'm really curious about that SD Wan and Ot part of the business that's been doing so well.

Okay.

I think theres a coupon.

I totally agree with you.

And the OTT market growing faster than the network average.

And.

On the other side.

We do believe our solution has huge advantage compared to other competitors.

So both SD Wan Ot market is still pretty good.

Fragmented and.

Compared to a homegrown.

Solution and elaborate discipline as a company empower so all of that advantage in March huge compared to other competitors.

Some more modern account proposition.

And at the same time, they don't have the add anything comp towards the increased speed lower costs on the pulp consumption. So that's one.

We're keeping growing above the market.

About the market growth rate.

Deepa research about how the market growing.

<unk> is a fast growing market compared with our cyber security space and will be a lot of potential going forward.

Got it got it very helpful. Keith maybe just a quick follow up for you.

Great great to see the billings duration stay roughly similar I am curious if you could just talk anecdotally or just or just specifically just around how youre thinking about billings duration here in 'twenty three.

And what did that has been something that you feel like customers have pushed on given the interest rate environment that we're in.

Yes, I don't think there were really seeing customers push on the term obviously at 28 months to eight months, which is kind of in keeping where we've been historically.

So I do think in the fourth quarter, we certainly had conversations with customers that were I think perhaps even more focused on <unk>.

Cash flow if you will than they were on discounting in terms of extended payment terms is that sort of thing. So if I were to look at that what I'm hearing back from customers. It was all about cash protection.

And with that.

I assume if I were trying to do a lot of five year deals or something like that I might have felt more pressure, but given the SMB mix of our business and our partner footprint. It obviously didn't come through in the numbers really.

Yes, absolutely great to see thanks, guys.

Thank you one.

One moment please.

<unk>.

Our next question comes from the line of Harry Potter Rolla Morgan Stanley . Your line is open.

Hey, guys. Thank you for taking my question good evening.

Keith I wanted to clarify something you said about the cancellation rates I think you mentioned that youre seeing some changes there can you maybe elaborate on that a little bit I think like the past few quarters has been around four 5% just if you could provide any more color on that comment.

Yes, we did see a tick up to if you want to call. It mid single digits. In Q3, we saw it ticked up to high single digits and fourth quarter.

In the fourth quarter and.

We anticipated this particularly as the backlog starts to shift its mix as the firewalls.

There is still a significant amount of firewalls in the backlog, but it really now is tilted towards the network equipment switches in the access points.

And so as you would expect one last comment on that as we see the shift in the mix and the backlog as well as the pick up in the cancellation rates I would also offer that as part of the guidance setting process I think we've taken a.

Fairly conservative approach to cancellation rates are what they how they may impact 2023 or said another way, we're not expecting all the backlog that exist at the beginning of the year to convert in 2023, because we think there'll be some cancellations.

Got it and just maybe a follow up for Ken.

I think SD Wan is now nearly $1 billion business for for Fortinet, which is quite remarkable because you just started selling it I think maybe four years ago.

Curious as more of that base starts to come up for refresh what other monetization drivers do you see.

For SD Wan, whether it be attaching more services or perhaps increasing the price points I'm curious, how you're thinking about that.

Yeah definitely most service.

And on the OLED service <unk>, because <unk> has all of the security function.

And also a lot of I E.

<unk> point case.

Whether supporting work from anywhere.

I mean, we're all kind of harping on the price of reducing total costs.

Often are working all of these changes we don't see a lot of additional services. They need at the same time, we also see the service provider starting more working together with US all for some quite additional service beyond the traditional IC brands. So that's also helping cloud service going forward.

Thank you.

Okay.

Thank you.

One moment please.

Our next question comes from the line of Brad Zelnick of Deutsche Bank. Your line is open.

Great. Thank you very much and congratulations on.

Just blow out results in guidance nice job.

My first question is just around the new ASIC 45 can you remind us what if any impact we might expect in terms of customer purchasing patterns than what you've seen in the past and the extent, perhaps it can drive accelerated demand and or maybe the risk of trade down effect and I've got a follow up thanks.

Hello, everyone.

I think it may be one to two year refresh.

Product.

And.

We're having quarterly tender booties, one or two products, whether leveraged new we've seen call.

CPE loss amount of network chip.

<unk>.

I don't fear will be significantly impact.

The result will be more smooth transition.

You can see acuity deployment is.

It's kind of a take long.

Designing evaluate deploy.

And also one of our long sale cycle and same time the lifecycle for the part also tend to be quite long seven to 10 years.

So thats, where the basic definitely <unk> definitely will help in the same time, that's huge advantage compared to I guess in general purpose CPU, So that's where we're keeping gaining market share.

But considering the switching cost conferred long cycle sales cycle and deployment cycle.

And also we also needed to <unk>.

<unk> new product, which also is a few months three to.

Six months as I can see.

It won't be like that.

Long term positive impact instead of a short time.

Yes, Brad I would only offer again for context I think that this is what <unk> been 20 generations of trips just following that with a content processors network processors.

Systems on a chip and I think that.

Ken or Michael is actually showing the ability to transition through those generations of chips and if you look back of the financials I think its a little bit difficult to find the year that for a period of time, we really saw a spike because of the new chip is a much more long term plays and I think that.

The approach here is to execute it in a smooth fashion over a number of years.

Thanks for the reminder, and Keith can you just expand on your comments around dsos being up sequentially year on year and the impact of services revenue and related to that I recall, you had a change in policy around subscription Activations is that also impacting services revenue any help there would be great. Thanks.

Yes.

<unk> activation policies started February last week I believe February one.

So it will start to see that going forward, what I was referring to is the.

Dsos will be all about linearity right. That's what it gives you insights to see my DSO go from call. It 75 days to $89 90.

And kind of start doing the math, there and see Thats, a 20% increase in DSO and it's really driven by how linearity came through in the quarter and linearity. So are shifting that much we lose the opportunity to gain service revenue from sales early in the quarter that would normally activates so we really didn't get a lift service revenue from in quarter deals the way that we would have expected because.

Linearity.

Thank you.

One moment please.

Next question comes from the line of Shah of.

Of Cowen Your line is open.

Thank you good afternoon, and congrats on the great performance and guidance.

Keith given the slightly lower than expected.

<unk> service revenue.

How should we be thinking about the first quarter service revenue growth.

Yes, I think that we've tried to.

We remain true full to our faithful to the notion of providing service revenue guidance for the full year.

Are you going to kind of let the street work out the numbers from from that point going forward.

I think that.

Certainly as we kind of look at laying out the year and with the backdrop of the macro.

We're all concerned about I don't think we really wanted to push too hard on some of the metrics that we didn't need to push on and I think where we ended up with is pretty consistent in the quarter with our consensus when we look at our internal allocations between product and service revenue.

Understood and maybe one more.

As we think about the non-GAAP operating margins and really great performance.

Should we be thinking of the target to be some sort of an average of 25%.

Over the period or.

Or a floor of 25% over the course of the next few years.

I'm going to answer yes.

Yes, we should be thinking about one of those two ways.

Alright, thank you so much.

Thank you one moment please.

Our next question comes from the line of Adam Borg of Stifel. Your line is open.

Awesome. Thanks, so much for taking the questions maybe.

Maybe for Canada, Keith just on sales head Count you know, obviously you guys have been aggressively growing.

Sales and marketing headcount of recent years and it's nice to see the enterprise success, you've talked about just curious where we are and salesforce productivity and how we should think about sales headcount growth and even overall headcount growth in 23, and I have a follow up.

We will continue <unk> <unk>, we one who T T. The frequency at least not dropping the frequency for.

For themselves Martin and the <unk> the the infrastructure supporting we will continue to need to make.

So that's why we do we expect us the the pump icon, while keeping the increase but probably the right I've. Just spent the last few years will be below the.

The top of the increase.

Yeah, I think I would.

This is going can't comment one another notice that we do track tenure, we talked about it last quarter 10 year it'd be people that have been here for say 10 or people who are there for more than six months.

Commented last quarter. The tenured was up I think eight points, what's actually move back to historical norms now and.

Tenure is kind of a key component of productivity has received as we go forward.

Got it and maybe just a quick follow up just on the afforded gate and submitted hi, it's nice to see really strong mid range growth is interesting at the high end with bye Bye math with the lowest mixed in 2017, just curious anything to comment there. Thanks so much.

Not sometimes depend on.

Meg Parodos all backlog.

I think that's probably the average is still pretty similar we don't see.

But sometimes from quarter to quarter as me change Elizabeth.

But I can see the total mix to pretty much the same.

Yeah, I think that's one of the challenges you have in the current environment would supply chain was was really doing funny things would be willing to delivery and we don't give you a lot of insight orders that we were taking in but we provide buildings numbers, you'll get some distortion. There just simply based upon what's available specifically, we saw a significant amount of availability of the 100 F products. If you will which are a mid range.

<unk> and you are seeing the availability come came in the fourth quarter and it's shifted that mixed in the way you just described it.

Thank you.

One moment please.

Our next question comes from the line of a tie Liana Bank of America and your line is open.

Hello, Thank you.

It is going to be one they call that the no one is going to butcher my name and I'm going to be very happy but.

[laughter] [laughter].

I need to ask you.

Two things first of all.

Could you provide or a backlog for 40 or anything about it I'm trying to calculate the bookings for for the year and what happens to bookings and.

Any any color on backlog would be great.

And the second question.

A few people ask you about the services growth for next year I Wanna ask you about the product growth.

The product growth is going from 42% to 15%. If my math is right from last year at the next year this year.

And.

On the other hand, your commentaries positive there's more activity there's more product sales. So can you take us through the dynamics so product growth.

And also the connect.

Connection the relationship between services and products.

<unk>.

I'll start with the last one first if you will I think that.

I think we are very.

Excited about the opportunities in front of us.

In terms of another company is executing.

But we are certainly also very cognizant of the unknown of the macro environment.

And I think there's just an opportunity here in terms of how we guide for the full year to really begin concerns around the the macro.

And how it may manifest in the coming months coming quarters. So I think you're seeing that and that kind of made a comment earlier that historically, it's been tough for me to to.

Can be somewhat cautious on service revenue because it's so visible we're looking at a short term deferred revenue in the conservatism oftentimes ends up in product revenue I think there's still an element of that in this conversation.

Yeah, I think for the backlog in like what I've said and lost one of the quarter.

Continuing shift into the network error network in the Wifi.

<unk> products.

Today, most of backgrounds neutral come from.

<unk> site on the web site.

Which has a higher concentration rates and.

So that's where we.

Jesus mentioned, we take the police.

When this party conservative that definitely pretty good estimate what will the impact of the whole year.

All of these.

That lasts for the product revenue.

Revenue definitely we see.

Probably.

Going for the benefit of the new ANC can also some of the new products.

Will help in and also some of the case.

The use case in addition to use the case of the firewall definitely also will help him.

But it will take some time, so that's where we tend to be more careful.

Cancel.

To to forecast at the same time.

We do see <unk> we.

We still have a huge advantage compared to other competitors.

Because of the investment we made in the in the <unk>.

<unk> and how we made a mistake give us heated advantage of the total cost of ownership toward continual keeping gaining market share in this space.

And do you provide some.

Numbers about the backlog or maybe how material it is to revenues.

As a percentage of revenues.

I think he said.

It's been.

Difficult to forecast in same time.

With the changing consultation and also most of the backlog related networking Wifi.

Pricing not a core product that's what our since last quarter. We no longer provides a detailed backlog dance with you that that could be really believes leading nuclear keeping providing that.

I think we can offer you some directional comments here.

So the headlines would be the backlog was up year over year quarter over quarter. It was down.

But as you start taking through how to treat the backlog in terms of doing your own models going forward again, we would come back and remind you of a couple of things that we expect the cancellation rates are going to increase in that space into our guidance.

As we look at things.

And when we say return to historical norms common.

Commentary.

I think we probably would have three years ago at backlog for professional services and training that may have been in the 30 million dollar range. So.

Maybe with growth now you're probably looking at a steady state that could get you over $40 million to $50 million. So.

Just a note of caution they'll just take all that backlog and assume it's all going to convert into village in revenue in 2023, given those dynamics.

Got it thank you.

Uh-huh.

Yeah.

One moment please.

Our next question comes from the line, it's Hi, Katrin Oppenheimer. Your line is open.

Thanks, Hey, guys past quarter.

I was wondering if you could do a little bit of a deeper guy for us into a D enhanced.

Part of your business, if there's a way for you to kind of break it down a little bit for us byproduct and perhaps shrank order for us.

<unk>, which are are are growing above the average 40 category and below the average for to go to glory would just like to get a little bit more color.

To the change it makes it <unk>.

Yeah, I don't know that I've really seen a change in the mix. If you will I think the when you look at the the manage what we call a 40 manager 40 analyzer.

The original machines are doing very very well.

And then as you start looking at the tail of the fabric products in the <unk> in the areas of AVR, and monitor and Sam and sore and so forth.

I think that they're smaller dollar totals, but sometimes very dramatic and exciting growth rates.

So I want to be a little careful about getting painting anybody in too great a light in terms of their contribution because everybody is contributing.

Certainly the networking equipment part of the business is done very very well and is a key component of this convergent story that we've talked about it and it remains.

Probably about a third of the fabric business.

Excellent and then just going back to the cancellation rate just to make sure I understand this.

How much of this is tied into supply chain, meaning of supply chain isn't getting better availability is no longer issue customers are less perhaps interested in getting too far ahead in line and waiting for product how much of that is is a factor in the in this.

Play Chen environment definitely have some improvement form that working for the Wifi.

That's where some time <unk>.

Customer they may have a multiple of older to see which vendor can deliver.

Because a lot of networking equipment <unk> pretty standard product.

For us we go out and buy some security functions in there.

But it sometime customer just come out of the way so that's where we see maybe a higher concentration reed.

With I think right now the the overall supply chain.

I think that's important.

Alright, thank you.

The conversation in a cancellation rates.

<unk>, Yeah, we started with a <unk> single digits.

As we built into the guidance. It is a multiple there'll be built under the guidance of what we just saw on the fourth quarter, what we actually get out of it we will speak with a reason to be so cautious about it is what can talk to me about.

Knew that we have that advantage with firewalls and dealing with our suppliers and our vendors and we thought we'd be successful in pushing down that component of backlog first and indeed the mix has shown that I think is now something on the order of about 75% 70, 525 between networking equipment and fire walls still far walls in the mix.

But it's Kansas wanting out is there.

Maybe more risks with that networking equipment of cancellations.

As we go forward and particularly as the backlog deal for those elements continued to age out a little bit.

As we move through this process.

In terms of continuing supply chain challenges not.

Not quite sure I was making the link on that I don't.

I guess I would have an impact on the continuing build a backlog, but as we said in our comments, we really expect to get to a backlog number by the end of this year, that's much closer and.

Much more closely aligned with our historical norms.

Pretty good thanks, good luck.

Yeah.

Thank you one moment please.

Our next question comes from the line of Andrew and the Winski Wells Fargo. Your line is open.

Okay. Thank you just two quick questions first I Wanna ask a question on a Mia you've had five quarters now accelerating growth in Europe and that seems to defy the macro trends that we.

Consistently hear about in Europe , just wondering if there's something specific in your portfolio that might be driving that strong growth in Europe .

We definitely have a pretty long tenure and.

<unk> and the same time.

The <unk> the <unk>.

<unk> will also expand claywell.

You won't be some some symptoms country, there and some of the <unk>.

Service provider carrier maybe more.

Compared to some some some bigger service provider, whether USA moving some new solutions.

Including some <unk>. So that's what we continue to see some some good gross there.

So we kind of sub pressingly, even during the recession the icmp sector.

Growing <unk>.

Compared to some enterprise.

More about a home to lower the cost of ownership protect some of their own kind of a profit margin, but SNB. They do see the the important services Kennedy, especially you know that somewhere.

Study more target us empty right now so we do see quite strong grossing in SMP and that's also will help in some regions.

Got it Okay, and then I wanted to ask about gross margins are you talked about easing cost pressures and lower discounting as some of the levers that drove that's better than expected gross margin.

I guess number one how sustainable do you think those factors are as we look into a physical twenty-three and then when you're watching the basic like you did.

Really.

Is that a headwind too gross margin initially.

Yeah, I think the contributing to talk about price benefits.

The discounting and some using of the impact of the supply chain.

I think the price benefit is something that will obviously stay with us in the future.

You still get a tailwind from that however, discounting.

And supply chains.

Cost savings for lack of a better term.

That's really relate to.

Our history of price increases and I think we kind of recent very kind of maybe the highest high watermark in terms of being having price increases covering those costs and that will start to settle back down to a more normalized pattern going forward.

Meaning that will still have an inflationary cost increases, but we've really slowed down on the price benefits the price increases so net net.

This increases continue discounting and supply chain benefits may not.

Okay got it thank you I think.

Thank you one moment please.

Our next question comes from the line array Mcgough, a Guggenheim partners. Your line is open.

Hi, Thanks, maybe for Ken or Keith <unk>.

The last time, we saw product growth accelerate for two years was was back in 2014 and 15, you had to really strong years of product growth and that was followed by a a pretty sharp deceleration of growth over the next two years and I understand the business is a lot different than it was back then but there does seem to be some similarities or at least how it relates to the macro environment.

<unk> and your results, obviously point to you guys navigating at the macro quite well, but you did reiterate your twenty-five guidance, which I believe implies mid teens product growth. So I guess the question is why should we think this time. It's different is it is it just that you have a significantly larger portfolio of solutions as it broader acceptance from customers.

Willing to consolidate networking and security functionality any comparisons or contrasts you can provide specifically as it relates to product.

Growth versus you know if you will the previous cycle would be helpful.

2014 2015.

The outbreak of a legit copy.

Pocket are Sunni case, which a lot on the price for the operators on the traditional.

Thanks, and praise Firewater Nexium firewall.

Including some.

<unk> so.

So that's where it's more like kind of refresh.

The price of the area. So we can see some strong growth. After this at a separate issue and then but this time, we see there is a few tunes wines rally during the pandemic and there's a new infrastructure needed to build upon hearing will claw homeless anywhere.

Grandson will attack.

Broadly heat the whole industry.

And out of heartedly, keeping seen the convergence, we just lacked the iced tea when the five G. The Wifi announcer internal segmentation. So that's a much broader used keys after firing with the appointment also including key and a lot of multi must be connected so a few of these times already.

Kind of a more broad.

So I will use case.

Applied to the whole infrastructure, that's where we kind of more emphasize the conversions.

And so it's a bit different than the last last time.

Eight nine years ago. So.

So that's what we feel these come probably will be more smooth transition because traditional firewall whenever it will not go away and the same time as a more use case can emergency included transition on that one can carrier expand into the <unk> 100 area I will help in keeping driving the plot put out revenue growth and.

Followed by the additional service revenue.

So thats that since we were planning.

But that's helpful and if I could maybe a follow up you talked a little bit about the momentum in large deals and enterprise deals in 22, but given the macro environment could you compare and contrast, maybe keith or can behavior, you're seeing from larger customers and maybe those on the small on the <unk>.

All our end of the spectrum.

Are you seeing more deal delays up market more print city you consolidate functionality at the lower end anything any more color would be helpful.

Yeah, it's definitely hop in the customer.

Lower the total cost of ownership both on the mend and the cost and also the unemployment service costs.

We have here that advantage over competitors.

So that's where we see a lot of.

B the enterprise customer they definitely want to when they see the renewal when they see all these.

Additional protection for the infrastructure the doses.

Like how to have a better total cost of ownership around the same time.

Language a single.

Nuclear comparable ultimate possible offer benefit cute and now working together.

There's a trend to merge the traditional now operating <unk> some maintenance on the stock and knock kind of combine to graduate and also converge off the traditional networking community to graduate so we do see some trim happening and that'd be the enterprise and which we.

Kind of given up with technology in London.

<unk> investments that and see.

I mean <unk> benefits local within trend.

Yeah great.

Yeah go ahead and get on with decorating up like everybody else I mean, you're reading about fuel talking about deals taking longer to get across the finish line and.

More approvals and so forth and I don't I don't think we are immune to that by any stretch of the imagination.

Keep in mind as we're going through.

The world moving through this at the same time before and that's kind of.

Expanding from just 70 figure deals and I think we talked about 540 670 figure deals or more of last year I remember correctly.

A huge number the now adding more and more a figure deal. So I think we're probably see huge opportunities, but we're also getting exposed to how 'bout approval process works and how we manage with our sales team our customers through that process.

Great. Thanks, and thanks for the color and congrats on the strong results.

Thank you one moment please.

Our next question comes from the line of Adam 10 dollar Raymond James Your line is open.

Okay. Thanks, Good afternoon, Keith I wanted to start with pricing I think we picked up if we got this right another pricing increase announced in January effective in February .

If you could touch on the the rationale an early response to that where are we in elasticity of demand and thinking forward. Obviously costs are ultimately going to normalize hopefully in your model what would be the strategy for you once costs normalize, which you've reduced price or capture margin. Thanks.

Thus far first of all I think we'll continue to monitor the market and make the appropriate adjustments there.

I don't know.

Seeing and pleasure to go backwards is probably not something that's happened a lot of history, but it could happen I guess.

Those are the most recent price increases we talked about it's almost a non event to me.

Extremely low single digits gross and after discounting if a fraction of an interest point.

Got it Okay, and then maybe just as a follow up or can I wanted to ask on sassy competition. When when your main competitors has said they've integrated there sassy offering with S. D Wan and secure web gateway in particular, they are pushing that sales motion across the entire sales force now as we can.

[noise] about Fortinet, obviously, very strong and SD ran but that secure web gateway or proxy peace is perhaps not as prevalent or a different strategy. It's clearly not impacting your unit market share at present, but just thinking forward to competing and differentiating and sassy now that your competitors really pushing that motion across the entire salesforce. Thank you.

Yeah.

One strategy is that good you can see in the last few years.

First we went to have a sassy integrating the scene system the same O S, including out as D. One audit sassy function.

<unk> can be more easily rather deploy and also working with service provider to navigate influenced structure.

Well for the sassy.

Different than some of the <unk> right now in the market. So we do believe it is.

Highly greed.

Single system, otherwise won't be more efficient and same time.

Will be more secure and.

So not not someone keeping building.

<unk>, a new 40, <unk> and also the new 40 O S psychologist.

Psychologist.

Development lately.

Into that.

Solution.

Same time, we keep them working closely with pretty much all the terrorists service provider even compromise.

To offer nasty together and that's also Olympic different strategy compared to some other sassy player. So we do believe lump on leverage or influence structure. None of them service provider telecom provider has will be much more efficient than the profit model compared with some of the sassy.

Solution cannot.

Keeping lucy mining will be difficult to last long.

So that's why we will keeping you from asking this area and also we want to be a long term planning this space.

Who will be.

Keeping.

<unk>.

Internal Alicia Nandi and.

Keeping driving this space.

Very helpful. Thanks, and congrats on the year.

Thank you.

Thank you one moment please.

Next question comes from the line have been by one of Cleveland Research on line is open.

Good afternoon, Thanks for taking my question.

Could could you share a little bit of what is happening with respect to the cloud infrastructure build out tell us a little bit about what you're doing where you are in the progress and.

Customer response, thus far and then I had a follow up networking category.

Yes, we continue keeping building.

The infrastructure, including the cloud of.

Our strategy Liberty.

Clear.

<unk> filled out all self.

We you can see the math means someone a real estate.

<unk> I also go to like a data center infrastructure.

Give us a much better <unk>.

Cost and also a more long term benefit just like hobby.

I think <unk>, maybe early real estate kind of benefit out of office cost Granville cost. So that's why we're using the cost <unk> from rental keeping invest into some some more downtown port structure rules.

Real estate, we do see that will have to continue with the company long time.

But.

The same palm Mac I said also ponder what can we as a kind of service providers auto strategy we have.

<unk> infrastructure.

So that's also make a win win both party will benefit and won't be profit. That's also the strategy behind them.

And within that 10 could you speak to is it is it purely cost is latency part of the narrative it being closer to your customers.

Broader strategy within it.

Not just the but also will make it easy for many easy to scale.

Somewhat of sassy solution I do believe some bigger customer they may even even to themselves. So.

So if you can integrate most assertive function to the same mobilized into the same system. So that the <unk> <unk>.

Long term strategy, we have and also working with service providers are unimportant plus.

Okay.

And then my last one.

What are your thoughts on the the traditional campus networking opportunity that that'd be land market.

How do you think about wallet share opportunity and the ability to to displace more of the incumbent there and that's it for me. Thank you.

That's kind of the.

The thing can we have black over 2030 is whether it is a convergence.

All the networking and I won't be in our security I think <unk>. Good example, sofa security solution will be at most.

<unk>, mostly cure and I guess a lot of additional service we can apply to connect you with them which is.

What are the offer of a free we are not not kind of.

There yet but.

By the same team will not underwater technology.

So we feel is a huge potential and but also.

Mmm acute in the network environment, Matthew made a huge company empower we just compound <unk> we made.

Which also will take a long time.

See the return on investment.

That's where we kind of made a bumpy 120.

23 years ago. So when we established the heck, we really need to.

<unk> and and planning all these that kind of.

<unk> not working now our security to get here so.

The new AC Cubism coming at some point the fifth generation that license the chip, which also.

Including somebody mentioned, eliminating the ninth generation Melba Clinton process on the sandwich generation novel participating.

There was a lot of them Multicore CPU.

Continuing to develop technology and eventually it will be.

More broadly beyond the traditional metal security.

Thank you.

I'd like to turn the call back over to Peter Stakhovsky for any closing remarks.

Thank you I would like to thank everyone for joining today's call afford it at will be attending investor confidence is hosted by Byrd and Morgan Stanley during the first quarter of higher Sanchez webcast link will be posted on the events and presentations section afforded us Investor Relations web site for the Morgan Stanley confidence.

Oh up questions. Please feel free to contact me have a great rest of your day. Thank you.

Thank you ladies and gentlemen does that conclude today's conference. Thank you all participating you may now disconnect have a great day.

The conference will begin shortly to raise and lower yohan. During Q&A you can dial 911.

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Thank you for standing by and welcome to the Fortune that fourth quarter earnings Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question at that time. Please press star one on your Touchtone telephone as.

As a reminder, today's call is being recorded.

I would now turn the conference or do you host Mr. Peter <unk> Senior Vice President of Finance and Investor Relations. Please go ahead.

Okay.

Thank you Valerie and good afternoon, everyone. This is Peter talk ask you senior Vice President of Finance and Investor Relations at Fortinet I am pleased to welcome everyone to our call to discuss Fortinet.

Financial results for the full year and fourth quarter of 2022.

On today's call are kenzie, Fortinet, founder Chairman and CEO and Keith Jensen, Our Chief Financial Officer was a live call that will be available for replay via webcast on our Investor Relations website, Ken will begin our call today by providing a high level perspective on our business. Keith will then review our financial and operating results for the full year and fourth quarter of 2022 before providing guidance for the first quarter of 'twenty.

23, and the full year, we'll then open the call for questions before we begin I'd like to remind everyone that on today's call. We will be making forward looking statements and these forward looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected.

Please refer to our SEC filings in particular the risk factors.

<unk> Form 10-K, and Form 10-Q for more information.

Forward looking statements reflect our opinions only as of the date of this presentation that we undertake no obligation and specifically disclaim any obligation to update forward looking statements also all references to financial metrics that we make on today's call are non-GAAP unless stated otherwise our GAAP results and GAAP to non-GAAP reconciliations are located in the earnings press release and in the presentation that accompanied.

Today's remarks, both of which are posted on the Investor Relations website.

Get in Keith's prepared remarks for today's earnings call will be posted on the quarterly earnings section of our Investor Relations website immediately following the call lastly, all references to growth year on year over year basis, unless noted otherwise I will now turn the call over to Keith.

Yes.

Thanks Peter.

Thank you to everyone for joining today's call.

Our outstanding full year and fourth quarter 2022 result.

For the full year revenue growth accelerating to 32%, we continued to gain market share in the cyber security industry with Kosmos increasingly recognizing how fortinet.

Not a single powerful approach.

With acuity delivers a low total cost of ownership and a greater return on investment than competing solutions.

On a revenue growth of 42% with strong making it one of the leading.

The company in the cyber security industry.

Product revenue of $1 8 billion.

Hi, Stephen and <unk> together accounted for over 25% of the total bookings.

Our goal is to keep growing and achieving the number one market share in our firewall secure SD Wan and Ot security market over the next couple of years.

For 20 years Fortinet has lead launch strategies and investment on the convergence of metalworking that acuity.

Yesterday, we announced our fifth generation 40 security processor the <unk>.

This new <unk> paid for the ASIC has secure computing power, reaching four major analysis functions like firewall VPN. So important that our 17 232 times greater than the average of our competitors similar model.

In general purpose Cpus.

On a <unk> chip acceleration of applications for 14.

Neil class SaaS, <unk> and IC branch.

With much better performance high efficiency.

According to the most recent IDC data LTE unit shipment of firewall appliance Fortinet hold the number one unit shipped market share position and a 48%.

Providing fortinet.

Economy of scale position as well as making it difficult for competitors to develop their own logistics technology due to a high entry barrier and significant investment that is required.

40 leases huge security company and power.

Advantages able for the Oes to illiquid, most accretive functions and applications than our competitors.

With much better performance at much lower energy consumption.

Resulting in much lower total cost of ownership, while offering easier operations for our customers.

For example, a recent <unk>.

The report highlighted that customers deploying fortinet secure SD Wan solutions.

Chief C, 100% return on investment over three years.

Payback period of only eight months.

Fortinet substantial installed base.

With each function able us to offer additional stickier services and.

Integrate and automate for the hybrid cloud solutions.

We recently announced several new.

Services that help our associate team.

The optimization cyber risk.

More efficient in handling cyber security issues.

Networking and security continue to converge and consolidate we believe we are well position quad <unk> Clearnet 25 billion in pocket over $10 billion.

Before turning the call over to Pete I would like to thank our employees customers partners and suppliers worldwide.

Continue to support and hard work.

Yes.

Thank you Ken and good afternoon, everyone.

We look back at 2022, we see the success of our strategy to lead in convergence and consolidation as well as the combined power of our ASIC technology with our integrated operating system combined these.

These efforts are driving our strong financial results.

It's been an explosion of devices that must be connected to the cloud data center and edge compute.

As a result, the infrastructure has expanded to support secure connectivity via distributed firewalls.

There is no longer feasible to overlay security on top of networking in the data center, they must be deployed as a converged solution.

<unk> Lee to work seamlessly with networking and security applications across the company's entire infrastructure.

Fortinet is leading the convergence trend with a wide range of technologies, including network firewall secure SD Wan <unk> and Ot security.

All embedded in our single operating system delivered as hardware software cloud and as a service.

Traditional CPU based solutions are very inefficient supporting both networking and security.

That's why Fortinet developed proprietary ASIC technology to build an application specific solution.

Yesterday as Ken mentioned, we announced our next generation Asics 40 security processor or 45.

Which allows lionsgate convergence of networking and security at every network edge.

The new seven nanometer technology combines existing NP seven technology with new content processor capabilities.

Our enhanced platform suite of integrated products is delivering on customer demands for convergence vendor consolidation ease of management and lower operating costs.

The success of this strategy is evident in our full year 2022 results and I'll start there.

Buildings passed a $5 billion, mark totaling $5 6 billion and growing 30, 34%.

While revenue totaled $4 4 billion with growth accelerating to 32%.

The fifth consecutive year of revenue growth of 20% or more.

Driven by strong demand for our fabric and cloud security solutions enhanced platform technology billings and revenue.

Both increased over 40% to $1 8 billion and $1 5 billion respectively.

And despite a challenging global supply chain environment product revenue growth came in at 42%.

Our highest annual product revenue growth rate in over 10 years.

Our product revenue growth was driven by the combined but as we think about the continued growth of our firewall use cases.

And the addition of over 23000 new customers.

Service revenue was up 26% to $2 6 billion, resulting in three consecutive years of accelerating service revenue growth rates.

Gross margin was strong at 76, 3% and operating margin outpaced our initial expectations, increasing 110 basis points to a new fortinet record high of 27, 3%.

Our GAAP operating margin of 22% is one of the highest in the industry.

And we continued our streak of being GAAP profitable every year of our 14 year history as a public company.

Earnings per share increased 49% to $1 19.

Pre cash flow was a record at $1 $4 5 billion.

Free cash flow margin was 33% and adjusted for real estate investments the free cash flow margin came in at 37%.

And for the year, we repurchased approximately 36 million shares at a cost of $2 billion.

Total deferred revenue increased 34% to $4 6 billion.

Short term deferred revenue increased 32% to $3 5 billion.

Quarterly contract terms throughout the year were consistent with the year earlier periods.

Including the fourth quarter at 28 months.

Before moving onto our Q4 results I would like to summarize our enterprise success and highlight a few of seven figure deals from 2022.

We saw great success during the year with our strategy to expand further into the large enterprise segment.

There is a number of deals over $1 million increased over 55% to a record 546 deals.

In buildings on these deals increased by over 70%.

If we look at a few of our large deals of the year.

Let's start with the competitive upsell deal.

Net displaced 11 different vendors by consolidating the customers network security functions on our security fabric.

This worldwide wholesaler previously purchased secure SD Wan and 40 proxy.

Next on the list was a centralized network security solution that could be managed and deploy to its 400 global locations.

This customer chose chose Fortinet security fabric.

Sure, it's flexible and integrated solution across multiple scenarios.

Work from anywhere perimeter security and data center segmentation.

And another upsell deal a leading global manufacturer was spun off and had to stand up their security and networking infrastructure separately.

The newly created infrastructures included remote access SD Wan application delivery control authentication endpoint email protection and switching.

Key to our win included our zero Trust capabilities.

Our cloud first SD Wan strategy.

And the ease of integration that convergence across our platform suite.

Lastly, and a new logo win.

A large U S retailer with over 500 locations, we're struggling with a total cost of ownership of their legacy security architecture.

Key to this win included delivering a single pane of glass.

As the multiple consoles that we're using.

And replacing the competitors' firewalls with our 40 gig delivering urls filtering Wi Fi security and edge router replacement.

Paul on a unified and integrated 40 OS platform.

This customer reported anticipated savings of $29 million over five years.

Turning to Q4 results, both billings and revenue delivered new records with billings of $1 7 billion in revenue of $1 3 billion.

Both metrics increased over 30%.

The strong fourth quarter revenue performance reflects solid customer demand across both our core and enhanced platform technologies.

In the fourth quarter, we added over 6200, new logos, another new Fortinet record.

Reflecting the support of our channel partners the leverage they bring and the breadth of our worldwide customer base.

Taking a closer look at the fourth quarter billings growth of 32% was driven by a 40% increase in enhanced platform technology billings.

Which accounted for over one third of total billings.

Total revenue growth of 33% was driven by strong demand for core and enhanced technology platforms.

Which increased 26% and 47% respectively.

Product revenue grew 43% to $540 million.

Service revenue was up 27% to $743 million driven by strong product revenue growth and strengthen our security subscriptions.

Short term deferred revenue grew 32% and represents eight consecutive quarters of accelerating growth rates.

Total gross margin of 77, 6% was driven by a 310 basis point increase in product gross margin to 65, 2%.

Several factors converged to drive our record high quarterly product gross margin, including legacy pricing actions easing supply chain cost pressures and improve discounting.

Service gross margin of 86, 7%.

<unk> down 40 basis points due to increased labor cost and our expansion in cloud services and the related hosting costs.

Operating margin of 32, 5% was up 400 basis points year over year due to the strong gross margin performance and FX benefit.

Looking to the statement of cash flow summarized on slides 11 and 12.

Free cash flow was $497 million.

Adjusted free cash flow, which excludes real estate investments was $510 million.

Representing a 40% adjusted free cash flow margin.

Cash taxes were $63 million.

Capital expenditures were $31 million, including 13 million for real estate investments.

DSO increased 14 days sequentially and year over year to 89 days also impacting service revenue growth.

Moving to guidance.

We believe the continued innovations we've made in building our platform enables our customers' digital transformation journey.

And as Ken noted customers are increasingly recognizing how fortinet integrated and single platform approach to security can deliver a lower total cost of ownership.

Rate of return on investments than competing solutions.

Now I'd like to review our outlook for 2023 summarized on slide 15, with just two disclaimers regarding forward looking information that Peter provided at the beginning of the call for.

For the first quarter, we expect billings in the range of $1 $415 million to $1 billion $465 million.

Which at the midpoint represents growth of 24%.

Revenue in the range of $1 billion $180 million to $1 billion $220 million.

Which at the midpoint represents growth of 26%.

non-GAAP gross margin of 75% to 76%.

non-GAAP operating margin of 23% to 24%, which at the midpoint represents an increase of 150 basis points.

non-GAAP earnings per share of <unk> 27 to 29.

Which assumes a share count of between 795 and $805 million.

Capital expenditures of $80 million to $110 million.

non-GAAP tax rate of 17%.

Cash taxes of $20 million.

And should also note that first quarter guidance assumes backlog decreased slightly during the quarter.

For the full year, we expect billings in the range of $6 billion $710 million to $6 billion $790 million, which.

Which at the midpoint represents growth of 21%.

Revenue in the range of $5 $370 million to $5 billion $430 million, which at the midpoint represents growth of 22%.

Total service revenue in the range of $3 billion $335 million to $3 billion $365 million.

Which at the midpoint represents growth of 27%.

And employees and implies a fourth consecutive year of accelerating service revenue growth.

The service revenue guidance also implies product revenue growth of 15%.

non-GAAP gross margin of 75% to 76% non.

non-GAAP operating margin of 25% to 26%.

non-GAAP earnings per share of $1 39 to $1 41, which assumes a share count of between $805 to $815 million.

Capital expenditures of $400 million to $450 million due to continued investments in cloud data centers and facilities.

non-GAAP tax rate of 17%.

Cash taxes of $375 million.

Split somewhat evenly between the first and second half of the year.

The increase in cash taxes reflects recently effective R&D capitalization and amortization requirements.

The full year estimate assumes backlog approaching historical levels by the end of the year.

Cyber security, but not immune to economic slowdowns is expected to remain a comparatively safe harbor.

And with a strong business model and history of execution, we are confident that our market share gains will continue.

We remain on track to achieve our 2025 financial targets, which include billings of $10 billion.

Revenue of $8 billion now.

non-GAAP operating margin of at least 25% and adjusted free cash flow margin in the mid to high 30% range in 2025.

And with that I'll now hand, the call back over to Peter to begin the Q&A session.

Thank you Keith.

Operator.

Please open the call for questions. Just one reminder to the participants during the Q&A. We ask that you. Please limit yourself to one question and one follow up question to allow others to participate.

Open up the call. Please thank you.

Again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your Touchtone telephone again to ask a question. Please press star one line one moment please.

Our first question comes from Brian Essex of Jpmorgan. Your line is open.

Great. Thank you good afternoon, and thank you for taking the question and congrats on solid results and a solid guide I guess.

Given that we heard from one of your peers last night and they were.

I guess markedly more.

Conservative or cautious on the macro and you seem to be.

First for Ken and Keith could you help us understand what youre seeing in the market from a macro perspective, how enterprises are spending.

And.

How does how does any changes in the quarter relative to <unk>.

Initial expectations Pan out with regard to demand.

We're seeing sales cycles, we're hearing about sales cycles elongated and budget scrutiny.

Ongoing what are you seeing on your side.

Thank you guys.

Sure.

Thank you Beth.

Last month.

Bob is a tight.

But for that solution.

Cost our total cost of ownership and also.

Condo, even cost savings for some divestiture SD Wan solution.

The same time.

You can see.

The use case of firewall expanding much broader than before.

Fortis Ot's acuity some out of the area.

Put in March as a man with acuity, maybe the only solution to secure some of these OTT OTT.

OTT area.

So thats, what we see.

Demand is still pretty strong.

So we are probably we'll keeping gaining more market share.

So a fragmented market.

Sure.

Yes, Thanks, Ken.

And with that I would also add look I think we're all sensitive to that the overhang from the macro environment and what that May mean.

Yes.

But when we look at our internal numbers, whether it's pipeline growth and even if we compare with pipeline growth is today versus a year ago, it's even up from Barrick.

In terms of percentage growth rates.

The use cases and I think in this environment.

The savings that we offer and the ROI that we provide in some of the case studies that we provided on the call. There are examples of that.

We are continuing to benefit from that and we do see continued opportunities for market share gains even in this environment.

Got it and then maybe just a quick follow up Keith.

Do you think about the level of conservatism in your fiscal 'twenty three guide any stronger than I think some had expected.

The question Tomorrow, how much conservatism is in there.

What gives you confidence in.

Hitting that kind of level of performance, particularly with regard to billings.

And then any change to your 2025 targets as you kind of look at the <unk>.

<unk> that youre seeing in the market from here on out.

Yes, I think that the.

Products that we take if you will is consistent with this time around with.

What we've done in prior years, but certainly added conservatism in it to reflect what's happening.

May happen with the with the macro environment.

First and foremost we start with the pipeline and looking at the pipeline growth there and then.

The timing of the pipeline and making sure that we have deals that are teed up for the middle of the year and perhaps even into the second half of the year. So.

So there is ample opportunity there. We also want to make sure that <unk> got sales productivity numbers that makes sense and sales capacity numbers that makes sense.

There will be.

Some tailwind from the backlog, which I commented on in the comment that we're going to get some benefit from that as it continues to burn down.

But keep in mind that.

We have seen some changes in cancellation rates and I think we've added a significant amount of conservatism there around cancellation rates.

Again, so I think it's really about the pipeline as the tailwind that we have and it would take us the advantages that we're offering a total cost of ownership in this environment.

Okay. That's super helpful. Thank you very much.

Thank you one moment please.

Our next question comes from the line of with Chemo <unk> of Citi. Your line is open.

Hey, good afternoon. Thank you for taking my question.

For you just with respect to the services revenue guidance at 27% that's not a material difference from the cadence you've been running out this year and I'm curious.

What sort of inputs.

In bad that revenue segment for you and I ask because.

We have the dynamic of some of your customers delaying their subscription registrations over the course of 'twenty Q.

And then you also have the dynamic of a lot of your customers not having realized the pricing increases that you.

Is that in the last 12 to 18 months. So I'm curious as to why with Dell was positive in.

We wouldn't see better services growth on Westwood.

Things that Youre being conservative about there and then a quick follow up please.

Yes, I think it kind of goes back to Brian's question, a moment ago in terms of the level of conservatism and caution that's in the guide and I know that historically I have often complained that I don't get much room in the services line from where the consensus is versus what I am forecasting.

The 27% number I think thats pretty much right on top of where the street is that for the full year and I think in this macro environment I think thats a great a good place for us to be at this point in the year for full year guidance.

Understood.

Commentary on the operating margin and operating profitability performance, because we are seeing.

Quick question into next year.

And quarterly basis.

Thank to be mindful of there as it relates to Q, maybe onetime items that are appealing.

Perhaps.

Why not see better follow through with profitability and Thats. It from me. Thank you.

Yes, I think our guidance is pretty much in St. Louis where we are historically at this point in time and consistent with we always talk about the 25% margin number, but I think that.

But you maybe suggesting a recurring is really it's all about FX. If you will when you look at 2022 compared to 2023.

You had a nice benefit from FX in 2022, and I think in terms of what our assumptions are for 2023 like the rest of the people we read the economic reports from the big banks and so forth and what the dollar is expected to do and I think we've really pulled out a lot of that benefit by the end of this year, So youre not really going to see that in the year ago comparison.

Yes.

Thank you one moment please.

Our next question comes from the line of <unk> Kalia of Barclays. Your line is open.

Okay, Great Hey, guys. Thanks for taking my questions here.

Maybe maybe.

First for maybe a question for both Ken and Keith.

Clearly SD Wan and Ot are becoming a bigger part of the business.

And that too with higher growth rates and so maybe maybe the question is how do you folks think about the growth rate.

Our runway for growth.

Those two businesses either separately or together.

Over the next couple of years.

As part of the total gross equation or a part of the $10 billion goal. However, you want to think about it but really curious about that SD Wan and Ot part of the business that's been doing so well.

Okay.

A coup hot.

I totally agree with you.

The OTC market growing faster than the <unk> average.

And.

Hi.

BD boss solution has huge advantage compared to other competitors.

So both SD Wan Ot market still pretty fragmented.

Compared to a homegrown.

Solution Leverages <unk> company empower so all that went into March March huge compared to other competitors.

Some more modern account proposition.

And at the same time, we don't have that at <unk> com.

To increase speeds our costs on the power consumption so basketball.

We're keeping growing above the market so the market growth rate.

Deepa research about how the market growing.

<unk> is a fast growing market compared with our cyber security space and will be a lot of potential going forward.

Got it got it very helpful. Keith maybe just a quick follow up for you actually.

Great great to see the billings duration stayed rough roughly similar I'm curious if you could just talk anecdotally or just or just specifically just around how youre thinking about billings duration here in 'twenty three.

And what did that has been something that you feel like customers have pushed on given the interest rate environment that we're in.

Yes, I don't think were really seeing customers push on the term obviously at 28 months to eight months, which has kind of been keeping where we've been historically.

So I do think in the fourth quarter, we certainly had conversations with customers that were I think perhaps even more focused on.

Cash flow if you will than they were on discounting in terms of extended payment terms is that sort of thing. So if I look at the what I'm hearing back from customers. It was all about cash protection.

And with that.

I assume if I were trying to do a lot of five year deals or something like that I might have felt more pressure, but given the SMB mix of our business and our partner footprint. It obviously didn't come through in the numbers really.

Yes, absolutely great. Thanks, guys.

Thank you.

One moment please.

Yes.

Our next question comes from the line of Hasnt Fido Rolla Morgan Stanley . Your line is open.

Hey, guys. Thank you for taking my question good evening.

Keith I wanted to clarify something you said about the cancellation rates I think you mentioned that you are seeing some changes there can you maybe elaborate on that a little bit I think like the past few quarters has been around four 5% just if you could provide any more color on that comment.

Yes, we did see a tick up to if you want to call. It mid single digits. In Q3, we saw it ticked up to high single digits and fourth quarter.

In the fourth quarter and.

We anticipated this particularly as the backlog starts to shift its mix as the firewall there.

There's still a significant amount of firewalls in the backlog, but it really now is tilted towards the network equipment at the switches in the access points.

And so as you would expect one last comment on that as we see the shift in the mix and the backlog as well as a pickup in the cancellation rates I would also offer that as part of the guidance setting process I think we've taken a.

Fairly conservative approach to cancellation rates are what they how they may impact 2023 or said another way, we're not expecting all the backlog that exist at the beginning of the year to convert in 2023, because we think there'll be some cancellations.

Got it and just maybe a follow up for Ken.

I think SD Wan is now nearly $1 billion business for us.

For Fortinet, which is quite remarkable because you just started selling and I think maybe four years ago.

<unk> is more of that base starts to come up for refresh what other monetization drivers do you see.

For SD Wan, whether it would be attaching more services or perhaps increasing the price points I'm curious, how you're thinking about that.

Yes definitely more service.

And on the OLED service Flash DRAM, because <unk> has all of the security function.

And also a lot of it.

The point case.

Whether supporting work from.

I'll kind of helping on the pricing reducing total cost.

Often are working all of these changes we do see a lot of additional services. They need at the same time, we also see the service provider.

Starting more working together with us all for some quite additional services beyond the traditional IC brands. So that's also helping clients multiple services going forward.

Thank you.

Okay.

Thank you.

One moment please.

Our next question comes from the line of Brad Zelnick of Deutsche Bank. Your line is open.

Great. Thank you very much and congratulations on.

Just blow out results and guidance nice job.

My first question is just around the new ASIC 40, SP five can you remind us what if any impact we might expect in terms of customer purchasing patterns than what you've seen in the past and the extent, perhaps it can drive accelerated demand and or maybe the risk of trade down effect and I've got a follow up thanks.

Oh.

101.

I think maybe one to two year refresh.

<unk>.

Thus, we're having quarterly tender booties, one core product whether language Neil <unk> call at noon.

CPE last amount of network chip.

<unk>.

I don't fear will be significant impact.

<unk> done off the result will be more smooth transition.

Because the acuity deployment.

It's a kind of a take longer to design evaluate deploy.

And also one of our long sale cycle and at same time, the lifecycle of the part of also tend to be quite long seven to 10 years.

So thats, where the ASIC definitely <unk> definitely will help in the same time, that's a huge advantage compared to I guess in general purpose CPU, So that's where we're keeping gaining market share.

But considering the switching cost confer long cycle SaaS Alcoa deployment cycle.

And also we also need a ton.

<unk> new product, which also is a few months to six months as I can see.

B.

On a more long term positive impact instead of a short time.

Yes, Brian I would only offer again for context I think that this is what <unk> been two generations of trips chest following that with the content processor as a network processor.

Systems on a chip.

I think that probably a lot of.

Ken or Michael are actually showing the ability to transition through those generations of chips and if you look back at the financials I think its a little bit difficult to find the year that for a period of time, we really saw a spike because of the new chip is a much more long term plays and I think that the.

Approach here is to execute it in a smooth fashion over a number of years.

Thanks for the reminder, and Keith can you just.

And on your comments around Dsos being up sequentially year on year and the impact of services revenue and related to that I recall, you had a change in policy around subscription Activations is that also impacting services revenue.

Any help there would be great. Thanks.

Yes, the change in activation policies started February last week I believe February one.

So it will start to see that going forward.

Referring to is the.

DSO is really all about linearity right. That's what it gives you insights to see my DSO go from call. It 75 days to $89 90.

You can kind of start doing the math, there I see thats, a 20% increase in DSO and it's really driven by how linearity came through in the quarter linearity sort of shifting that much we lose the opportunity to gain service revenue from sales early in the quarter that would normally activates so we really didn't get a lift service revenue from in quarter deals the way that we would've expected.

Cuz of linearity.

Thank you.

One moment please.

Next question comes from the line of Charles <unk> of Cowen Your line is open.

Thank you good afternoon, and congrats on the great performance and guidance.

Keith given the slightly lower than expected.

For Q4.

Revenue.

How should we be thinking about the first quarter service revenue growth.

Yes, I think that we.

We remain true full to our faithful to the notion of providing service revenue guidance for the full year.

And can you kind of like the street work out the numbers from that point going forward.

I think that.

Certainly as we kind of looked at laying out the year and with the backdrop of the macro.

That we're all concerned about I don't think we really wanted to push too hard on some of the metrics that we didn't need to push on that I think where we ended up with is pretty consistent in the quarter with a consensus when we look at our internal allocations between product and service revenue.

Understood and maybe one more.

As we think about the non-GAAP operating margins and really great performance.

Should we be thinking of the target to be sort of an average of 25%.

Over the period or.

Or a floor of 25% over the course over the next few years.

I'm going to answer yes.

Yeah.

Yes, we should be thinking about one of those two ways.

Look I think we're driven by by being above 25%.

Operating margin right.

Yes, I think I wanted to just the last few years have taught us is lifestyle of surprises and so locking into a fixed commitment is a little bit.

Yes.

Challenging, sometimes but clearly we manage the business as if it's a floor.

Understood. Thank you so much.

Thank you one moment please.

Our next question comes from the line of.

Adam Borg with Stifel. Your line is open.

Awesome. Thanks, so much for taking the questions.

For Ken or Keith just on sales head count obviously, you guys have been aggressively growing.

Sales and marketing head count in recent years and it's nice to see the enterprise success, you talked about just curious where we are in sales force productivity and how we should think about sales head count growth, even overall head count growth in 'twenty, three and I have a follow up.

Yes.

Harlan.

But the same time, we wanted to.

Keeping the efficiency.

At least not dropping the efficiency.

The sales and marketing.

And at the same time, there's some lost high investment levels on the infrastructure, so quality and we will continue to need to make.

So thats why we do expect that.

Tom behind kind of what's keeping increase but probably at a rig that just like the last few years will be below the top line Chris.

Yes, I think.

This is bill and Kelly comment on another note is that we do track tenure, we talked about last quarter tenure of the people that have been here for say tenured people, but in everyone of the six months.

And I commented last quarter that tenure was up I think eight points its actually move back to historical norms now.

In 10 years kind of a key component of productivity as we see as we go forward.

Got it and maybe just a quick follow up just on the 40 gate entry mid and high it's nice to see really strong midrange growth is interesting at the high end, we buy by math with the lowest mix in 2017, just curious anything to comment there. Thanks so much.

From home depot.

And then.

Part of our backlog.

I think thats, probably the average still put a similar without CE mark.

Quarter over quarter as May change a little bit.

But I can say that total mix skew pretty much the same yes.

Yes, I think thats one of the challenges you have in the current environment with the supply chain was really doing funding things would be willing to delivery and we don't give you a lot of insights to orders that we were taking in but we provide billings numbers you get some distortion there just simply based upon what's available specifically, we saw a significant amount of availability of about 100 F products. If you will which are mid range.

And youre seeing that availability come up came in the fourth quarter and it's shifted that mix in the way you just described it.

Yes.

Thank you.

One moment please.

Our next question comes from the line of Thai Liana <unk> of Bank of America. Your line is open.

Hello, Thank you.

There's going to be when they call that.

No one is going to butcher my name and I'm going to be very happy.

Yeah.

Yes.

I wanted to ask you.

Two things first of all.

Could you provide.

Backlog for <unk> or anything about it I'm trying to calculate the bookings for for the year and what happens to bookings.

Any any color on backlog would be great and the second question.

A few people asked you about services growth for next year I wanted to ask you about the product growth the.

The product growth is going from 42% to 15%. If my math is right from last year at the next year to this year.

And on the other hand your commentary is positive there is more activity. There is more product sales. So can you take us through the dynamics product growth.

And also the <unk>.

Connection the relationship between services and products.

Yes, I'll start with the last one first if you will I think that.

I think we are very.

We are excited about the opportunities in front of us.

How the company is executing.

But we are certainly also very cognizant of the unknown of the macro environment.

And I think there's just an opportunity here in terms of how we guide for the full year to really bake and concerns around the macro.

And how that may manifest in the coming months coming quarters. So I think youre seeing that in that kind of made a comment earlier that historically, it's been tough for me to be somewhat cautious on service revenue because it's so visible but looking at short term deferred revenue and the conservatism oftentimes ends up in product revenue I think there's still an element of that in this conversation.

Yes, I think for the backlog.

What I said in last one.

Quarter.

Continuous shifting towards a network gear networking and Wi Fi.

It's more industry standard product.

But today most of the backlog itself will come from.

And that will decide on Wi Fi side.

Which has a higher cancellation rates and.

So thats, where we think that Keith mentioned, we've taken a pretty.

One is pretty conservative, but that definitely pretty good estimate.

What will be impact for the whole year.

All of this.

The backlog for the product revenue.

Revenue definitely we see.

Comparably.

Going forward the benefit of the new <unk> and also some of the new products that will help.

Also some of the case.

That's a use case that additional use case.

The file will definitely also helping.

But it will take some time, so that's why we tend to be careful.

Careful.

To forecast at the same time.

We do see long term.

We still have a huge advantage compared to other competitors.

Because of the investment we made in England.

In the product and the Hollywood <unk> gave us a huge advantage of that total cost of ownership towards containing keeping gaining market share in that space.

And do you provide some.

Number is about the backlog or maybe how material it is to revenues.

As a percentage of revenues.

Paul.

I think it does.

Large difficult to forecast at the same time.

With the changing cancellation and also most of the backlog related to networking Wi Fi Wi Fi why pricing not a core product. So that's what I assumed last quarter, we no longer provide the details of the backlog that we view that that could be a little misleading equally keeping providing that.

I think we can offer you some directional comments.

All lines will be that backlog was up year over year quarter over quarter. It was down.

But as you start thinking through how to treat the backlog in terms of doing your own models going forward again, we would come back and remind you of a couple of things that we expect the cancellation rates are going to increase and thats baked into our guidance as we look at things.

And when we say return to historical norms in the commentary I.

I think we probably would have three years ago have backlog for professional services and training that may have been in the $30 million range. So.

So maybe with growth now you are probably looking at a steady state that could get you over $40 million to $50 million. So.

Just a note of caution, though just take all of that backlog and assume it's all going to convert into billings and revenue in 2023, given those dynamics.

Got it thank you.

Thank you.

One moment please.

Our next question comes from the line of <unk> Kidron Oppenheimer. Your line is open.

Thanks, Hey, guys nice quarter, Keith I was wondering if you could do a little bit of a deeper dive for us including enhanced.

A part of your business, if there's a way for you to kind of break it down a little bit for us by product and perhaps rank order for us.

Categories, which are growing above the average for the category and below the average for the category. We would just like to get a little bit more color as to the change in mix within that.

Yes, I don't know that Ive really seen a change in the mix. If you will I think the.

When you look at the manage what we call a 40 management for the analyzer.

The virtual machines are doing very very well and.

And then as you start looking at the tail of the fabric products and the all in the areas of Edr and monitor and see them and so on and so forth.

Think that they are smaller dollar totals, but sometimes very dramatic and exciting growth rates.

So I want to be a little bit careful about getting painting anybody to greater light in terms of their contribution because everybody is contributing.

Certainly the networking equipment part of the business has done very very well and this is a key component of this convergence story that we've talked about and it remains.

Globally about a third of the fabric business.

Got it excellent and then just going back to the cancellation rate just to make sure I understand this.

How much of this is tied into supply chain, meaning of supply chain isn't getting better availability is no longer an issue customers are less.

Perhaps.

Interested in getting too far ahead in line and waiting for product how much of that is a factor in this.

The supply chain environment definitely has some improvement for networking for Wi Fi.

We're some time.

Customer they may have a multiple OLED T, which lend attempt delivery.

Because a lot of networking equipment Wi Fi is a pretty standard product.

Even for US we go out and buy some security function data, but it somehow customer cannot wait so that's where we see a little bit higher cancellation rate.

I think right now the overall Pie chart I.

I think it's improving.

Alright, thank you.

The conversation around cancellation rates.

Few things here, Yes, we said it went from mid single digits to high single digits and ended as we built into the guidance. It is a multiple that we built into the guidance of what we just saw in the fourth quarter, what we actually get out of it well see but the reason to be cautious about it as what can stocking about we knew that we had an advantage with firewalls in dealing with our suppliers and our vendors and we thought we'd be.

Successful in pushing down that component of backlog first and indeed the mix has shown that I think is now something on the order of about 75% 70, 525 between networking equipment and firewall still firewalls in the mix.

Good morning out there.

Maybe more risk with that networking equipment of cancellations as we go forward and particularly as the backlog for those elements continue to age out a little bit.

As we move through this process.

In terms of continuing supply chain challenges.

I'm not quite sure I was making the length on that.

Yes, I guess I would have an impact on the continuing build of backlog, but as we said in our comments, we really expect to get to a backlog number by the end of this year, that's much closer to much more closely aligned with our historical norms.

Good thanks, good luck.

Yes.

Thank you one moment please.

Our next question comes from the line of Andrew Nowinski with Wells Fargo. Your line is open.

Okay. Thank you just two quick questions first I wanted to ask a question on EMEA.

Had five quarters now of accelerating growth in Europe , and that seems to defy the macro trends that we consistently.

Consistently hear about in Europe , just wondering if theres something specific in your portfolio that might be driving that strong growth in Europe .

Please.

Definitely have a pretty long 10 year.

The team there and the same time.

The case, the firewall case also expand quite well.

And Youll see some momentum.

In some countries and some of the.

Service provider carrier maybe more.

As compared to Samsung some bigger service provider, whether U S or moving some new solutions.

<unk> some <unk>. So that's what we continue to see some good growth there.

So we kind of sub question.

Even during the recession the SMB sector.

Growing quite strong.

Compared to some on the price.

It's more about how to lower the cost of ownership protect some of their own kind of profit margin, but SMB. They do see the.

The important number cyber security, especially in and around somewhere starting <unk> right now so we do see quite strong growth in <unk>.

SMB.

So that also will help in some regions in Europe .

Got it Okay, and then I wanted to ask about gross margins. So you talked about easing cost pressures and lower discounting as some of the levers that drove that better than expected gross margin.

I guess number one how sustainable do you think those factors are as we look into fiscal 'twenty three and then when you launch new ASIC like you did.

Earlier today is that a headwind to gross margin initially.

Yes, I think you.

You talked about price benefits.

The discounting and some easing of the impact of the supply chain I think the price benefit is something that we'll obviously stay with us in the future.

We should still get a tailwind from that however, discounting.

And supply chains.

Savings for lack of a better term.

Yes, that's really relate to.

Our history of price increases and I think we've kind of reached a very kind of maybe the high high watermark in terms of being having price increases covering those costs and that will start to settle back down to a more normalized pattern going forward.

Meaning that we'll still have inflationary cost increases, but we've really slowed down the price benefits. The price increases. So net net price increases continue discounting and supply chain benefits may not.

Okay got it. Thank you guys. Thank you.

Thank you one moment please.

Our next question comes from the line of Rea Mcdow of Guggenheim Partners. Your line is open.

Hi, Thanks, maybe for Ken or Keith.

Last time, we saw product growth accelerate for two years.

Was back in 2014, and 15, you had two really strong years of product growth and that was followed by a pretty sharp deceleration of growth over the next two years and I understand the business is a lot different than it was back then but there does seem to be some similarities or at least how it relates to the macro environment and your results obviously point to you guys navigating it.

The macro quite well, but you did reiterate your 25 guidance, which I believe implies mid teens product growth. So I guess the question is why should we think this time is different is it is it just that you have a significantly larger portfolio of solutions or is it broader acceptance from customers willing to consolidate networking and security functionality any comparisons.

Or contrast, you can provide specifically as it relates to product growth versus if you will the previous cycle would be helpful.

The <unk> 14 2015.

Yes.

The outbreak of a legendary cognate us Sony case, which a lot of enterprise had operators on the traditional connection based firewall with next Gen firewall.

Including some.

In prevention and some modest gains.

So that's where it's more like kind of refresh.

And the price of the area. So we do see some strong growth opportunities that assembly issue.

But this time, we see Theres a few tenants lines rally during the pandemic as a new infrastructure in the field support here in Oklahoma anywhere and same tunnel ransomware attack.

Probably the whole industry and this other part b keeping themed convergent switches back of ICU and <unk> Wi Fi and also internal segmentation.

It's a much broader used case after firewall deployment also including <unk> and automotive has been connected so we feel these times, it's already kind of.

More broad.

So I would use case.

Prior to the whole infrastructure, that's where we kind of more emphasize to convergence and.

So it's a bit different than the last last time.

Eight nine years ago. So that's the way a few of these come probably will be more smooth transition because the traditional firewall whenever we are not going away and at same time, that's a more use case conversions into the traditional networking area.

The OTC area, our helping keeping driving the product.

Product revenue growth.

By the additional service revenue.

So thats, but since we have that we're planning.

Thanks, that's helpful and if I could maybe a follow up.

You talked a little bit about the momentum in large deals enterprise deals in 'twenty two.

But given the macro environment could you compare and contrast, maybe keith or Ken behavior, you're seeing from larger customers, but maybe those on the small.

Smaller end of the spectrum.

Are you seeing more deal delays upmarket more principally you consolidate functionality at the lower end anything any more color would be helpful.

Yes, it's definitely helping the customer.

Lower the total cost of ownership both on momentum in cost and also on the point of severance cost.

We have a huge advantage over our competitors.

That's why we see a lot of.

Big enterprise customer they definitely want to when they see the renew when they see all of these.

I need to add additional protection for the infrastructure they do see it.

Sure.

How to have a better total cost of ownership at the same time.

I would just single nuclear comparable them ultimately possible offer better security and now working together.

Even with that as a trend, but emerge the traditional now operating team in particular seem to gander.

The stock and now kind of combined together and also comverge off that traditional networking and security together. So we do see some trend happening in the enterprise and which we.

Kind of developed technology and.

And long term investments.

<unk> benefited from a 510.

Yes.

Yes, great.

John will start ramping up like everybody else. I mean, you are reading about people talking about deals taking longer to get across the finish line and more.

More approvals and so forth and I don't think we are immune to that by any stretch of imagination.

Keep in mind as we're going through.

As the world moving through this at the same time Fortinet.

Expanding from just seven figure deals and I think we've talked about 546, seven figure deals or more last year, if I remember correctly.

A huge number to now adding more and more eight figure deal. So I think we're probably seeing huge opportunities, but we're also getting exposed to how that approval process works and how we manage with our sales team our customers through that process.

Sure.

Great. Thanks, and thanks for the color and congrats on the strong results.

Thank you one moment please.

Our next question comes from the line of Adam Tindle, Raymond James Your line is open.

Okay. Thanks, Good afternoon, Keith I wanted to start with pricing I think we picked up if we've got this right. Another pricing increase announced in January effective in February I'm wondering if you could touch on the rationale and early response to that.

Are we an elasticity of demand and thinking forward, obviously costs are ultimately going to normalize hopefully in your model what would be the strategy for you once costs normalize, which you've reduced price or capture margin. Thanks.

Yes, the last part first I mean, I think we will continue to monitor the market and make the appropriate adjustments there.

Seeing inflation go backwards is probably not something thats happened a lot in history, but it could happen I guess.

In terms of the most recent price increase that we talked about it's almost a non event to me it's extremely low single digits growth in FY discounting, it's a fraction of an entry point.

Got it Okay, and then maybe just as a follow up for Ken I wanted to ask on SaaS competition. When your main competitors has said they've integrated their SaaS offering with SD Wan and secure web gateway in particular, they are pushing that sales motion across the entire sales force now as we think about fortinet obvious.

Very strong in SD Wan, but that secure web gateway or proxy piece is perhaps not as prevalent or a different strategy.

Clearly not impacting your unit market share at present, but just thinking forward to competing in differentiating in SaaS you know that your competitors really pushing that motion across the entire sales force. Thank you.

Yes.

All strategies that guide you can see in the last few years.

First we want to have a SaaS.

In the same system, the same OLS, including out SD Wan or the SaaS function.

Making SaaS can be more easily deploy and also working with service provider from heavy duty structure.

Well for the SaaS.

So it's a little bit different than some of the SaaS player right now in the market.

This is.

Highly agreed.

Single system that was won't be more efficient and the same time.

It will be more secure.

So that's one we're keeping building.

We entered a new 40 AC <unk>.

<unk> and also the new 40 OS.

<unk>.

Developmentally reporting into that.

This solution.

Same time, we are keeping working closely with pretty much all the carrier service provider even call provider.

For SaaS together and Thats also inhibit different strategy compared to some other SaaS player. So we do believe long term leverage and infrastructure service.

Service provider cannot compromise will be much more efficient in the profit model compared to some of the SaaS.

Our solutions are paying off.

Keeping losing money, which would be typical to last long.

That's why we will keep you from asking this area and also we want to be a longtime cleanliness space and also will be.

Keeping that keeping that.

Internal innovation R&D and.

And then keeping driving this space.

Very helpful. Thanks, and congrats on the year.

Thank you.

Thank you one moment please.

Our next question comes from the line of Venmo on of Cleveland Research. Your line is open.

Good afternoon, and thanks for taking the question.

Could you share a little bit of what is happening with respect to the cloud infrastructure build out.

Just a little bit about what you're doing where you are in that progress.

Hi.

<unk> response, thus far and then I had a follow up on the networking category.

Yes, we continue keeping building.

Infrastructure, including the cloud also a strategy a little bit differently, how do you.

We plan to build out.

Yes.

You can see the mass media Samuel England State Quest.

Some of them also go to like a.

Datacenter infrastructure.

That will give us much better cost and also more long term benefit just like <unk>.

Thank you Massimo maybe early will benefit all of us.

<unk> cost rental cost so that's why we're using a coffee than we can.

Paul keeping invest into more long term infrastructure.

Real estate, we do see that while keeping painted for the company and on plan.

But it's the.

The same time like I said also partner walking with a carrier service provider as a bundled strategy we have.

Thanks to some of their infrastructure.

So thats also.

When when both parties will benefit that will be profit. That's also the strategy we have.

And within that could you speak to is this is it purely cost as latency part of the narrative it being closer to your customers.

The broader strategy within it.

It's not just <unk>, but also will make it easier to manage easy to scale.

You've been somewhat a SaaS solution to beating some bigger customers. They may event, even to themselves. So if you can indicate that most of this as a function into the same OSB into the same system. So that's a long time.

<unk> strategy, we have and also working with service provider, it's a lot of unimportant plus okay.

And then my last one.

Ken what are your thoughts on the traditional campus.

Working opportunity, but that would be land market.

How do you think about wallet share opportunity and the ability to displace more of the incumbent there and that's it for me. Thank you.

That's kind of.

The thinking we have like over 2013, he is really theres a conversions.

Networking <unk> security.

I think.

<unk>, an example sofa.

Solution will be more.

<unk>, most secure and I guess a lot of additional service we can apply.

Q1, which is.

Wanted to offer a free we are not.

Sure.

There yet.

By the same team under one technology.

So we feel that's a huge potential and but also.

The acuity in the networking environment not need a huge company empower we just compound ASIC them ultimately made which also will take a long time.

You can see the return of investment.

That's why we tend to come at it from day one.

Three years ago. So when we start we think we really need to.

We invest in planning all of these are kind of convergence of our network and our security together so.

So.

The new AC achievement of one example is our fifth generation <unk> chip, which also.

Somebody mentioned im making the ninth generation Melba content processor seven generation now participating.

Schedule with a lot of multi core CPU. So we're continuing to develop this technology and they eventually will be.

More broadly beyond the traditional network security.

Thank you.

I'd like to turn the call back over to Peter Zukowski for any closing remarks.

Thank you Valerie I'd like to thank everyone for joining today's call Fortinet will be attending investor conferences hosted by Baird and Morgan Stanley during the first quarter of higher say Chad webcast link will be posted on the events and presentation section afforded our investor Relations website for the Morgan Stanley Conference.

Follow up questions. Please feel free to contact me have a great rest of your day. Thank you.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.