Q4 2023 Fortinet Inc Earnings Call

Okay.

Speaker Change: Good day, and thank you for standing by welcome to the Fortinet fourth quarter 2023 earnings announcement.

Operator: Good day, and thank you for standing by. Welcome to the Fortinet fourth quarter 2023 earnings announcement. At this time, all participants are in a listen-only mode.

Speaker Change: At this time all participants are in a listen only mode.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising that your hand is raised.

Speaker Change: After the speaker's presentation, there will be a question and answer session.

Speaker Change: To ask a question during the session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised.

Operator: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your host today, Peter Salkowski, Senior Vice President of Investor Relations. Please go ahead.

Speaker Change: Draw. Your question. Please press star one again.

Speaker Change: Please be advised that today's conference is being recorded.

Peter Salkowski: I'd now like to hand, the conference over to your host today, Peter So Koski senior Vice President of Investor Relations. Please go ahead.

Peter Salkowski: Thank you, Liz. Good afternoon, everyone. This is Peter Salkowski, Senior Vice President of Finance and Investor Relations at Fortinet. I'm pleased to welcome everyone to our call to discuss Fortinet's financial results for the fourth quarter of 2023. Joining me on today's call are Ken Xie, Fortinet's Founder, Chairman, and CEO; Keith Jensen, our Chief Financial Officer; and John Whittle, our Chief Operating Officer.

Peter Salkowski: Thank you Liz 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 financial results for the fourth quarter of 2023.

Speaker Change: Joining me on today's call are Kenzie, Fortinet, founder Chairman and CEO, Keith Jensen, our Chief Financial Officer, and John <unk>, Our Chief operating officer, It's a live call that will be available for replay via webcast on our Investor Relations website.

Peter Salkowski: This is 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 in the fourth quarter of 2023 before providing guidance for the first year, first quarter of 2024 for the full year. We'll then open the call for questions. During the Q&A session, we ask that you please limit yourself to one question and one follow-up question to allow others to participate.

Kenzie: 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 in the fourth quarter of 2023 before providing guidance for the first year first quarter of 2024 and the full year. We'll then open the call for questions. During the Q&A session. We ask that you. Please limit yourself to one question and one follow up question to allow others to par.

Kenzie: Great.

Peter Salkowski: 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 in our most recent Form 10-K and Form 10-Q, for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements.

Ken: Again, I'd like to remind everyone 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 in our most recent Form 10-K and Form 10-Q for more information all forward looking statements reflect our opinions only as of the date.

Ken: This presentation and 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 in our GAAP to non-GAAP reconciliations are located in our earnings press release and in the presentation that accompanies today's remarks, both of which.

Peter Salkowski: Also, all references to financial metrics that we make on today's call are non-GAAP unless stated otherwise. Our GAAP results and our GAAP-to-non-GAAP reconciliations are located in our earnings press release and in the presentation that accompanies today's remarks, both of which are posted on the Investor Relations website. The 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.

Posted on the Investor Relations website.

Ken: Fair 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 and will now turn the call over to Ken.

Ken Xie: We will now turn the call over to Peter. Thank you, Peter, and thank you to everyone for joining our call. In Q4, total buildings grew 8.5% to 1.9 billion, driven by an increased focus on Secure Op, SASE, and improved execution for our sales team, which closed six eight-figure deals across five industry verticals. All six of its transactions, including all three of our SASE, SecureARP, and Secure Networking solutions, are treating our value of an integrated platform and spend across on-premise and cloud, as well as our 40 ASIC technology advantages. Fortinet's total addressable market across secure ops, SASE, and secure networking is expected to increase from $150 billion in 2024 to $208 billion by 2027. Our customer base consists of 76% of Fortune 100 companies, including nine of the top 10 technology companies, nine of the top 10 manufacturers, and nine of the top 10 healthcare companies. Our secure building growth 44%, accounted for 11% of total building, with strong performance on several solutions, including EDR, SIM, email security, and NDR, to automatically detect, investigate, and respond to threats. University building growth 19% accounts for 21% of the total building.

Ken: Peter and thank you to everyone for joining our call.

Ken: Q4, total beauty grew eight 5% to $1 9 billion driven by an increased focus on secure op SaaS and improved execution for our sales team. We closed six eight figure deal across five industry verticals.

Ken: Six of these transactions, including all three of our SaaS stay true up and the secure networking solutions is.

Ken: Treating our value our illiquid platform.

Ken: Spent across on premise and cloud as well as our 40 AC technology advantages.

Ken: Looking at our total addressable market across the queue up and secure networking. It can expect a increase from 150 billion in 2024 to 208 billion by 2027.

Ken: Our customer base consists of 17, 76% of our fortune 100, including nine of the top 10 technology company, none of the top 10 manufacturers and none of the top 10 health care.

Ken: I will stick to our building grow 44%.

Ken: Counted for 11% of total $1 billion with strong performance from several solution, including Edr, Kim email security and MDI to automatically detect investigate and respond to sweat.

Ken: Moving to SaaS, the ability to grow 19%.

Ken: <unk>, 421% of total building, we believe Fortinet is the only company with a unified SaaS solution all illiquid into single 40, Oes not including our four networking security stack consisting of a market, leading SD Wan <unk> secure web gateway Casper.

Ken Xie: We believe Fortinet is the only company with a unified SaaS solution, all integrated into a single FortiOS, not including a full networking and security stack consisting of market-leading SD-WAN, ZTLA, secure web gateway, CASB, and firewall as a service designed for on-premise and cloud. Our food safety solution is gaining momentum quickly as we close our first eight-figure safety deal for 350,000 seeds. In Q4, we added 40 new features to our SETI solution, including support for over 150 POP solutions, 150 POP locations worldwide, and the ability to protect C-HDY. We see a huge opportunity to attach 40 SASE to our tens of thousands of SE1 customers. Security networking accounts for 60% of our buildings and represents our largest addressable market. Garner expects the secure networking market to overtake the traditional networking market by 2030.

Ken: And our firewall as a service designed for on premise and the cloud.

Ken: Our <unk> solution is gaining momentum quickly as we close our first eight figure <unk> deal for <unk> hundred 50 <unk> see.

Ken: In Q4, we added 40, new features to assessing solution, including support for over 150, Pos solution for 150 pop locations worldwide.

Ken: The ability to protect <unk> HD wise.

Ken: We see a huge opportunity.

Ken: 40, <unk> SaaS <unk> SD Wan customers.

Ken: CPU networking accounted for 60% of our building and represent our largest addressable market.

Ken: I expect the secure networking market to overtake the traditional networking market by Qantas 30, Fortinet is the number one network security vendor.

Ken: Over half the global firewall deployment.

Ken: In addition to physical firewall, we offer virtual cloud native and firewall as a service solution.

Ken: Based on our 40 or so I appreciate system consolidate over 30 network domestically to functioning together.

Ken: Converged security and networking require more specialized computing power than traditional networking.

Ken Xie: Fortinet is the number one network security vendor with over half the global firewall deployment. In addition to physical firewalls, we offer virtual, cloud-native, and firewall-as-a-service solutions, all based on our FortiOS operating system, which consolidates over 30 networking and security functions together. Converged security and networking require more specialized computing power than traditional networking. Our 4G ASIC-powered FortiGate delivers 3 to 10X more performance, as indicated by a secure computing region with every new FortiGate product release. The latest FortiASIC SP5 based FortiGate 70G with Duo 5G in recognized format, a secure device within an operational technology environment

Ken: Our 40 AC powered 40, Kate deliver three X more performance.

Ken: To date by secure computing region with every new 40 gig product release.

Ken: <unk> 40, <unk> <unk> based on 40 gig 70 key Skus five G in length of ads format secure device within operation technology environment.

Ken: He is also a great start as a fortune 50 companies and the eighth FIFA are pushing technology deal feature of this new <unk> in the fourth quarter.

Ken: Also included resolve 40 OS operating system, a 40 featured access points controllers.

Recently, we announced a new secured at this point products.

Ken: As the first vendor announced opinions grade Wifi seven product.

Ken: Fortinet has consistently been the <unk>.

Speaker Change: Do you have separate security company and this earnings call wouldn't be complete without a few word about our AI.

Speaker Change: We have invest heavily in AIG across every function and the product for all of our taxi Fortinet has used machine learning and AI to provide advanced threat intelligence across more than 40 product from network endpoint and application security.

Ken Xie: It is off to a great start as a Fortune 50 company, and an eight-figure operation technology deal featuring this new 40-gate in the fourth quarter. Also included with our 4DOS operation system is a 4D-featured access point controller. Recently, we announced a new Secure Access Point product, making us the first vendor to announce a business-grade Wi-Fi 7 product. Fortinet has consistently been an innovative cybersecurity company, and this earnings code wouldn't be complete without a few words about our AI. We have invested heavily in AI across every function and product. For over a decade, Fortinet has used machine learning and AI to provide advanced threat intelligence across more than 40 products in network, endpoint, and application security. Our solution applies AI and machine learning across expanded digital attack surfaces automatically, containing and remediating incidents within seconds, where the industry average for detection and remediation takes several days. We have also been applying Gen AI technology across our entire product line, allowing customers to optimize security effectiveness and operation efficiency. FortiAI is already available on FortiSim and FortiSoar, and more products will be adding this function in the coming months.

Speaker Change: Also new shop by AI and machine learning across expanded <unk> surface automatically.

Speaker Change: Turning and remediation incident lithium second.

Speaker Change: Where the industry average for detection and remediation takes several days.

Speaker Change: We have also been applying AI technology across our entire product line.

Speaker Change: Allowing customers to optimize the security effectiveness and operational efficiency.

Speaker Change: <unk> is already available on 40, <unk> and 40 saw and more product will be adding dysfunction in the coming months.

Speaker Change: Before turning the call over to Pete I would like to thank our employees customers partners and suppliers worldwide for their continued support and hard work.

Thank you Ken and good afternoon, everyone as Ken mentioned billings grew eight 5% driven by improved sales execution and early returns on our SaaS and <unk> investments.

Pete: The quarter benefited from what we saw is a muted seasonal budget flush and certain deals that had pushed from earlier quarters closing in the fourth quarter driving a record six transactions each of which were over $10 million.

Pete: But these exceptionally large transactions secured networking was 75% of the billings mix.

Pete: <unk>, a SaaS fee combined for another 20% plus.

Pete: Illustrating these companies long term commitment to both firewall and consolidation strategies.

Pete: Taking a closer look at three of these eight figure deals.

Pete: One of these deals included mid seven figures for a SEC ops and another mid seven figures for SaaS.

Pete: The SaaS solution covers a planned 350000 user deployment at a top U S School district to.

Pete: <unk> safe learning environment for students regardless of their physical location.

Keith F. Jensen: Before turning the call over to Keith, I would like to thank our employees, customers, partners, and suppliers worldwide for their continuous support and hard work. Thank you, Ken, and good afternoon, everyone. As Ken mentioned, buildings grew 8.5% driven by improved sales execution and early returns on our SASE and SECOF investments. The quarter benefited from what we saw as a muted seasonal budget flush and certain deals that had been pushed from earlier quarters, closing in the fourth quarter, driving a record six transactions, each of which was over $10 million. For these exceptionally large transactions, secure networking was 75% of the billing's mix, while Sec Ops and SASE combined for another 20% plus, illustrating these companies' long-term commitment to both firewall and consolidation strategies. A closer look at three of these eight-figure deals. One of these deals included mid-seven figures for SecOps and another mid-seven figures for SASE. The SASI solution covers a planned 350,000 user deployment at a top U.S. school district to provide a safe learning environment for students regardless of their physical location.

Pete: We won this deal because of our operating system's ability to integrate 30, plus networking and security functions across tech ops SaaS fee.

Pete: Networking into a single unified platform, providing consistent policies and automated responses.

Pete: Our vision encompasses creating a secure foundation for our customers, allowing them to navigate today's evolving digital landscape.

Pete: With confidence, while empowering them to embrace innovation without compromising security.

Pete: Illustrating this vision and another eight figure deal a large U S enterprise selected fortinet to support their hybrid cloud architecture as they transition more of their workloads to the cloud.

Pete: This competitive displacement reduce complexity in our customers' total cost of ownership while.

Pete: Okay, so our ability to consolidate security functions onto our 40 OS platform.

Pete: And a third a figure win.

Pete: Large financial institution in the U S expanded their partnership with us with their first enterprise agreement with Fortinet.

Pete: This includes the recently announced 40 gate rugged 70 G to secure their remote working and ATM environments.

Pete: Built with AI power security the rugged 70 G brings our customers the latest secure networking innovations.

Pete: At the same time, simplifying infrastructure and driving efficiencies.

Keith F. Jensen: We won this deal because of our operating system's ability to integrate 30-plus networking and security functions across SecOps, SASE, and secure networking into a single, unified platform, providing consistent policies and automated responses. Our vision encompasses creating a secure foundation for our customers, allowing them to navigate today's evolving digital landscape with confidence while empowering them to embrace innovation without compromising security.

Pete: In addition to exceeding the customers' performance expectations in a multi vendor bake off we were successful by demonstrating the versatility of our single operating system and 40 OS platform across multiple use cases.

Pete: Over the past several years, we have successfully address large customer buying preferences by increasing our investments in EAA programs.

Pete: In the fourth quarter. These contracts represented nearly 10% of our billings.

Pete: It was a three year CAGR of over 80%.

Keith F. Jensen: Illustrating this vision in another eight-figure deal, a large U.S. enterprise selected Fortinet to support its hybrid cloud architecture as it transitions more of its workloads to the cloud. This competitive displacement reduced complexity and the customer's total cost of ownership while showcasing our ability to consolidate security functions onto our 4DOS platform. And, in a third eight-figure win, a large financial institution in the U.S. expanded its partnership with us with their first enterprise agreement with Fortinet, which includes the recently announced FortiGate Rugged 70G to secure their remote working and ATM environment. Built with AI power security, the Rugged 70G brings our customers the latest secure networking innovation while at the same time simplifying infrastructure and driving efficiency.

Pete: Today with over 35% of our billings beyond traditional and sometimes cyclical firewalls.

Pete: <unk> has become an increasingly diversified business over the past decade.

Pete: Most recently the diversification has included prioritizing investments in SaaS.

Pete: SEC ops and other software and cloud based solutions.

A key element of this diversification is our single operating system strategy.

Pete: POS is the foundation of our comprehensive and innovative solutions that drive the convergence of networking and security while also consolidating multiple security capabilities.

Pete: Attempting to piece together best of breed solutions from multiple vendors can result in significant security gaps slower AI driven technology adoption.

Pete: The slower pace of identifying reporting and resolving security incidents.

Pete: Organizations increasingly recognize that an integrated security solution run by a single operating system is the best way to improve their security posture.

Keith F. Jensen: In addition to exceeding the customer's performance expectations in a multi-vendor bake-off, we were successful by demonstrating the versatility of our single operating system and 40 OS platform across multiple use cases. Over the past several years, we have successfully addressed large customer buying preferences by increasing our investments in EA programs. In the fourth quarter, these contracts represented nearly 10% of our billing, with a three-year CAGR of over 80 percent. Today, with over 35% of our buildings beyond traditional and sometimes cyclical firewalls, Fortinet has become an increasingly diversified business over the past decade. Most recently, this diversification has included prioritizing investments in SASE, SecOps, and other software and cloud-based solutions. The key element of this diversification is our single operating system strategy.

Pete: Consolidation allows security solutions to share data and communicate with each other.

Pete: Reducing complexity improving security effectiveness.

Pete: Even the need for skilled labor and lowering the total cost of ownership.

Pete: Consolidation drove our SEC ops business, a 44% growth.

Pete: With strong growth from Edr Sim E Mail security and MBR.

Pete: Importantly, 94% of our <unk> business with some existing customers as companies look to execute their vendor consolidation strategy with fortinet.

Pete: Digging a little deeper into the 11% of billings that SEC ops contributed to our business.

Pete: The mid enterprise segment is growing the fastest as these companies respond to the cyber security labor shortage.

Pete: And look to reduce complexity.

Pete: Geographically international emerging is leading the way for Cyclops likely reflecting stronger economic conditions and extending the success of their <unk>.

Pete: 22 pilot project.

Pete: Extending the single operating system and consolidation strategy further.

Pete: A single vendor SaaS solution <unk>.

Pete: <unk> increased 19% and accounted for 21% of total billings.

Keith F. Jensen: FortiOS is the foundation of our comprehensive and innovative solutions that drive the convergence of networking and security while also consolidating multiple security capabilities. Attempting to piece together best-of-breed solutions from multiple vendors can result in significant security gaps, slower AI-driven technology adoption, and a slower pace of identifying, reporting, and resolving security incidents. Organizations increasingly recognize that an integrated security solution run by a single operating system is the best way to improve their security posture.

Pete: Our SaaS pipeline is up over 150% as more of our sales reps are building pipeline.

Pete: As expected.

Pete: <unk> segment was the largest mix of safi customers at 55%.

Pete: Increasing eight points quarter over quarter.

Pete: Fortinet has one of the least complex and most customer friendly SaaS pricing models.

Our one bundle and one operating system solution.

Pete: Provides all the standard capabilities, including secure web gateway.

And firewall as a service for secure Internet access.

Pete: Zero Trust network access and SD Wan from our points of presence, providing secure private access as.

Pete: As well as casually and data loss protection.

Pete: Our single vendor SaaS solution also includes integrations of software as a service and for the client.

Keith F. Jensen: Solidation allows security solutions to share data and communicate with each other, reducing complexity and improving security effectiveness. Easing the Need for Skilled Labor and Lowering the Total Cost of Ownership, consolidation drove our SecOps business to 44% growth, with strong growth from EDR, SIM, email security, and NDR. Importantly, 94% of our SecOps business was from existing customers, as companies look to execute their vendor consolidation strategy with Fortinet. Digging a little deeper into the 11% of billings that SecOps contributed to our business, the mid-enterprise segment is growing the fastest as these companies respond to the cybersecurity labor shortage and look to reduce complexity. Geographically, international emerging is leading the way for tech ops, likely reflecting stronger economic conditions in extending the success of their 2022 pilot project. Extending the Single Operating System and Consolidation Strategy further, our single vendor FASCI solution billings increased 19% and accounted for 21% of total billing.

Pete: Which provides the customer with endpoint protection and vulnerability scanning.

Regarding our focus and investments in SaaS and setups.

Pete: Land customers represented 37% of new SaaS customers.

Pete: Over 90% of our global sales force, that's completed mandatory sales training for both SaaS and SEC ops.

Pete: In 2023.

Pete: 60000 customers and partners.

Pete: At least one of our 27 training workshops.

Pete: Lastly, we've increased our worldwide points of presence coverage to over 150 locations.

Pete: Turning now to the quarterly financial results total.

Pete: Total billings were 186 billion.

Pete: Up eight 5% driven.

Pete: Driven by improved sales execution and a strong rebound in the large enterprise segment.

Pete: Together with 6400, new logos.

Pete: On a billings by Geo basis.

Pete: <unk> led the way with mid teens growth driven by strong performance in the U S enterprise.

Pete: In terms of industry verticals government and financial services, each with growth of approximately 25%, where our top two industry verticals, while service provider and retail remained under pressure.

Keith F. Jensen: Our SASE pipeline is up over 150% as more of our sales reps are building pipelines. As expected, the SMB segment was the largest mix of SASE customers at 55%, increasing eight points quarter over quarter. Fortinet has one of the least complex and most customer-friendly SASB pricing models, which is one bundle and one operating system solution, provides all the standard capabilities, including Secure Web Gateway and Firewall as a Service for secure internet access. Zero Trust Network Access and SD-WAN from our points of presence, providing secure private access, as well as CASB and Data Loss Protection.

Pete: The average contract term was 30 months about two months year over year and sequentially.

Pete: Adjusting for the six months eight figure deals the normalized contract term was consistent year over year and sequentially at 28 months.

Pete: Turning to revenue and margins total revenue grew 10% to 142 billion.

Pete: Driven by strong services revenue growth.

Pete: Service revenue of $927 million grew 25%.

Pete: Accounted for 66% of total revenue.

Pete: Mix shift of eight points.

Pete: Service revenue growth was driven by strength in SEC ops SaaS.

Pete: And then other security subscriptions.

Pete: Product bookings were up our product revenue decreased 10% to $488 million due to a tough compare.

Pete: Product revenue grew 43% in the prior year period benefiting from the drawdown of backlog.

Keith F. Jensen: Our single-vendor SASE solution also includes integration to SOC as a service and FortiClient, which provides customers with endpoint protection and vulnerability scanning. Regarding our focus and investments in SASE and SECOP, SD WAN customers represented 37% of new SASI customers. Over 90% of our global sales force has completed mandatory sales training for both SASE and SACBOB. In 2023, 60,000 customers and partners attended at least one of our 27 training workshops.

Pete: Total gross margin of 78, 5% was up 90 basis points in.

Pete: And exceeded the high end of the guidance range by 200 basis points.

Pete: Driven by the increase in service gross margin in the eight point mix shift from product revenue to service revenue.

Pete: Service gross margins were up 140 basis points as service revenue growth outpace labor cost and benefit of the mix shift towards higher margin security subscription services.

Pete: Product gross margins were down 510 basis points as we continued to see margin pressure related to inventory levels and product transitions.

Keith F. Jensen: Lastly, we've increased our worldwide points of presence coverage to over 150 locations. Now, to the quarterly financial results. Total buildings were $1.86 billion, up 8.5 percent, driven by improved sales execution and a strong rebound in the large enterprise segment, together with 6,400 new logos. On a buildings-by-geo basis, the U.S. led the way with mid-teens growth driven by strong performance in the U.S. enterprise. In terms of industry verticals, government and financial services, each with growth of approximately 25%, were our top two industry verticals. However, Wealth Service Provider and Retail remain under pressure. The average contract term was 30 months, about two months year over year and sequentially, although accounting for the six eight-figure deals. The normalized contract term was consistent year over year and sequentially at 28 months.

Pete: Operating margin was very strong at 32%.

Pete: Three five points above the high end of our guidance range and operating income of $454 million plus $40 million above the high end of the implied guidance range, reflecting aggressive cost management.

Pete: Looking at the statement of cash flow summarized on slide 17 and 19.

Pete: Total cash taxes paid in the quarter were $341 million.

Pete: Including $210 million estimated tax payments that were deferred from earlier quarters in accordance with U S and California at one time regulatory relief.

Resulting in free cash flow of $165 million.

Pete: Capital expenditures were $27 million.

Pete: We repurchased approximately $16 8 million shares at a cost of $895 million for an average cost per share of <unk> $53 29.

Moving to an overview of our 2023 full year results building surpassed the $6 billion, Mark totaling $6 4 billion and up 14%.

Total revenue grew 20% to $5 3 billion.

Keith F. Jensen: Turning to revenue and margins, total revenue grew 10% to $1.42 billion, driven by Strong Services Revenue Growth. Service revenue of $927 million increased by 25%, accounting for 66% of total revenue, a mixed shift of eight points. Service revenue growth was driven by strength in SecOps, SASE, and other security subscriptions. Product bookings were up, however, product revenue decreased 10% to $488 million due to a tough compare.

Pete: And we added over 25000 new customers.

Pete: Service revenue grew 28% to $3 4 billion.

Pete: Driven by a 33% increase in security subscriptions.

Pete: Product revenue grew 8% to $1 9 billion on a very tough compare after growing 42% in 2022.

Pete: Gross margin was up 110 basis points to 77, 4% benefiting from the revenue mix shift to service revenue.

Pete: Operating margin also increased 110 basis points to a calendar year record of 28, 4%.

Pete: <unk> operating income of $1 5 billion.

Pete: The GAAP operating margin of over 23% continues to be one of the highest in the industry.

Keith F. Jensen: Product revenue grew 43% in the prior year period, benefiting from the drawdown of backlog. Total gross margin of 78.5% was up 90 basis points and exceeded the high end of the guidance range by 200 basis points. Given by the increase in service gross margin and the eight-point mixed shift from product revenue to service revenue. Service gross margins were up 140 basis points as service revenue growth outpaced labor costs and benefitted from the mixed shift towards higher margin security subscription services. Product gross margins were down 510 basis points as we continue to see margin pressure related to inventory levels and product transitions.

Pete: Earnings per share increased 37% to $1 63.

Free cash flow was a record at over one 7 billion.

Pete: Free cash flow margin was 33%.

Pete: Excluding real estate investments the adjusted free cash flow margin came in at 35%.

Pete: For the year.

Pete: We repurchased approximately 20 million shares at a cost of $1 5 billion.

Pete: For an average cost per share of $55 25.

Pete: And as summarized on slide 20.

Pete: Fortinet has returned five $3 billion to shareholders via share repurchases in the past three years.

Pete: Earlier this year the board increased the share repurchase authorization by an additional $500 million.

Keith F. Jensen: Operating margin was very strong at 32%, three-and-a-half points above the high end of our guidance range, and operating income of $454 million, that's $40 million above the high end of the implied guidance range. Reflecting Aggressive Cost Management, Looking for a statement of cash flow, summaries on slides 17 and 19. Total cash taxes paid in the quarter were $341 million, including 210 million estimated tax payments that were deferred from earlier quarters in accordance with U.S. and California one-time regulatory relief.

Pete: Bringing our remaining share repurchase authorization to approximately $1 billion.

Pete: Moving onto guidance.

Pete: As we look to 2020 for several factors impact guidance, including the firewall industry cycle remnants of 2022 and 2023 supply chain activity.

Pete: In customer buying behavior.

Pete: Prior firewall product lifecycle cycles have lasted approximately four years with eight quarters of higher growth followed by eight quarters of slower growth.

Pete: Looking at our bookings the current product lines product cycle decline.

Pete: Started approximately four quarters ago in Q1 of 'twenty three.

Pete: Suggesting that we should experienced the bottom of the cycle in early 2024.

Keith F. Jensen: Resulting in free cash flow of $165 million, while capital expenditures were $27 million. We've repurchased approximately 16.8 million shares at a cost of $895 million for an average cost per share of $53.29. Now, moving to an overview of our 2023 full-year results. Billing surpassed the $6 billion mark, totaling $6.4 billion and up 14%. Total revenue grew 20% to $5.3 billion, and we added over 25,000 new customers. Service revenue grew 28% to $3.4 billion, driven by a 33% increase in security subscriptions; product revenue grew 8% to $1.9 billion on a very tough compare after going 42% in 2022. Gross margin was up 110 basis points to 77.4%, benefiting from the revenue mix shift to service revenue. Operating margin also increased 110 basis points to a calendar year record of 28.4%, resulting in an operating income of $1.5 billion. The gap operating margin of over 23% continues to be one of the highest in the industry. Earnings per share increased 37% to $1.63.

Worldwide supply chain challenges resulted in elevated purchasing and record backlog distorting year over year growth comparisons.

Pete: Creating a period of project and product digestion.

The backlog drawdown in the first half of 2023 provided of mid to high single digit percentage tailwind to billings.

Pete: And low double digit tailwind to product revenue growth for that period.

Pete: The year over year product revenue comparisons in the first half of 2024 will be the most challenged.

Pete: While we expect service revenues to grow sequentially in the low single digits in the first quarter.

Pete: And to grow sequentially at low to mid single digits for the remainder of 2024.

Pete: In addition, we expect product revenue growth will continue to be impacted by project and product digestion in 2024.

Pete: And we believe the selling environment should improve in the second half of 2024 and into 2025.

Pete: As a reminder, our first quarter and full year outlook, which are summarized on slides 23, and 24 subject to the disclaimers regarding forward regarding forward looking information that Peter provided at the beginning of the call.

Pete: For the first quarter, we expect.

Pete: Billings in the range of $1 billion $390 million to $1 billion $450 million, which at the midpoint represents a decline of five 5%.

Pete: Revenue in the range of $1 $300 million to $1 billion to $360 million.

Pete: Which at the midpoint represents growth of five 4%.

Pete: non-GAAP gross margin of 76, 5% to 77, 5%.

Keith F. Jensen: Pre-cash flow was a record at over 1.7 billion dollars, and pre-capsule margin was 33 percent, including real estate investments. The adjusted free cash flow margin came in at 35% for the year. We repurchased approximately 20 million shares at a cost of $1.5 billion, for an average cost per share of $55.25.

Pete: non-GAAP operating margin of $25 five to 26, 5%.

Pete: non-GAAP earnings per share of <unk> 37 to 39.

Pete: Which assumes a share count of between 775.

Pete: $785 million.

Pete: Capital expenditures of $220 million to $250 million, including a real estate transaction that closed earlier in the quarter.

Pete: A non-GAAP tax rate of 17% and cash taxes of $30 million.

Pete: For the full year, we expect billings in the range of $6 $400 million to $6.600 billion.

Pete: Revenue in the range of $5 $715 million to $5.815 billion.

Keith F. Jensen: And to summarize, on slide 20, Fortinet has returned $5.3 billion to shareholders via share repurchases in the past three years. Earlier this year, the board increased the share repurchase authorization by an additional $500 million, bringing our remaining share repurchase authorization to approximately $1 billion. Moving on to guidance, several factors impact guidance, including the firewall industry cycle, and remnants of 2022 and 2023 supply chain activity. Customer Buying Behavior Prior firewall product life cycles have lasted approximately four years, with eight quarters of higher growth followed by eight quarters of slower growth. Looking at our bookings, the current product cycle declines started approximately four quarters ago in Q1 of 23, suggesting that we should experience the bottom of the cycle in early 2024.

Pete: Which at the midpoint represents growth of 9%.

Pete: Service revenue in the range of $3 billion $920 million to $3.970 billion, which at the midpoint represents growth of 17%.

Pete: non-GAAP gross margin of 76% to 78%.

Pete: non-GAAP operating margin of 25, 5% to 27, 5%.

Pete: non-GAAP earnings per share of $1 $65 70.

Pete: <unk> assumes a share count of between 785790 $5 million.

Pete: Capital expenditures of $370 million to $420 million.

Pete: non-GAAP tax rate of 17% and cash taxes of $520 million.

Pete: I look forward to updating you on our progress in the coming quarters and I'll now hand, the call back over to Peter to begin the Q&A session.

Peter Salkowski: As a reminder, during the Q&A session. We ask that you. Please limit yourself to one question and one follow up question to allow others to participate operator, please open the call for questions.

Peter Salkowski: As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Keith F. Jensen: Worldwide supply chain challenges resulted in elevated purchasing and record backlog, distorting year-over-year growth comparisons and creating a Period of Project and Product Digestion. The backlog drawdown in the first half of 2023 provided a mid to high single-digit percentage tailwind to billing, and Lowe Double-Digit Tailwind to product revenue growth for that period. Year-over-year product review comparisons in the first half of 2024 will be the most challenging.

Operator: Please standby, while we compile the Q&A roster.

Operator: Okay.

Operator: Our first question comes from the line of <unk> <unk> with Citi.

Citi: Good afternoon, and thank you for taking my question.

Citi: Thanks, I really appreciate you fleshing out the factors that are going to be creating volatility in your top line performance.

Citi: Wanted to focus on.

Citi: How you are able to hold the line on the expense structure in light of the volatility you saw from the revenue and then hold back.

Keith F. Jensen: While we expect service revenues to grow sequentially in the low single digits in the first quarter and to grow sequentially at low to mid-single digits for the remainder of 2024. In addition, we expect Product Liberty Grills to continue to be impacted by project and product digestion in 2024. And we believe the selling environment should improve in the second half of 2024 and into 2025. As a reminder, our first quarter and full year outlook, which are summarized on slides 23 and 24, 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 $1,390,000,000 to $1,450,000,000, which at the midpoint represents a decline of 5.5%, revenue in the range of $1,300,000,000 to $1,360,000,000, which at the midpoint represents growth of 5.4%, non-GAAP gross margin of 76.5% to 77.5%, and non-GAAP operating margin of 25.5 and 26.5. Non-GAAP earnings per share are $0.37 to $0.39, which assumes a share count of between $775 and $785 million.

Speaker Change: I appreciate it.

Speaker Change: How you are able to.

Speaker Change: Managed for profitability and then by extension.

Topline volatility how should we think about the free cash flow cadence against your assumption on the Opex shot chair along with the fact that you have seen a very large deal.

Speaker Change: Positively influenced duration.

Yes.

Speaker Change: Yes, I think kind of going backwards in terms of the very large deals that we've talked about.

Speaker Change: Experience has showed us in the second half or the middle part of last year that were well served not to get too far ahead of ourselves in terms of forecasting those deals.

Speaker Change: And it's difficult to understand when they are actually going to close and what the specific terms are going to be with those so I think we kind of set those aside and you saw that in some of the performance in the fourth quarter.

Speaker Change: The margins I think that sometimes the business model is easier than people think it is when it comes to margin because services provides so much of the business.

Speaker Change: The business model is two thirds services and it's growing at a very rich margin.

Speaker Change: Even in a period of time, where you're going through the firewall cycle refresh cycle Youre still seeing your margins hold up fairly nicely I think theres also significant economies of scale involved in the services line, whether it's the support or the or the security subscriptions.

Speaker Change: And then the last time I would offer is that I think the breadth of both the SEC op solutions in the SaaS solutions together are serving to spread some of the incremental cost for the hosting solutions and bringing those to market.

Speaker Change: Jamie Xolair.

Jamie Xolair: Thank you.

Jamie Xolair: Our next question will come from the line of Hamzah firewall with Morgan Stanley.

Keith F. Jensen: Capital expenditures of $220 to $250 million, including a real estate transaction that closed earlier in the quarter, a non-GAAP tax rate of 17%, and cash taxes of $30 million. For the full year, we expect billings in the range of $6,400,000,000 to $6,600,000. Revenue in the range of $5,715,000,000 to $5,815,000,000, which at a midpoint represents growth of 9%; service revenue in the range of $3,920,000,000 to $3,970,000,000, which at a midpoint represents growth of 17%; and non-gap gross margin of 76 to 78 percent. Non-GAAP operating margin of 25.5 percent to 27.5 percent. Non-GAAP earnings per share of $1.65 to $1.70, which assumes a share count of between $785 and $795 million.

Hamza Fodderwala: Good evening. Thank you for taking my question.

Hamza Fodderwala: Ken.

Hamza Fodderwala: Over the last several years, we've seen some pretty significant increases in.

Hamza Fodderwala: In network traffic, whether it be more cloud adoption.

Hamza Fodderwala: More work from home et cetera.

Hamza Fodderwala: That's a pretty healthy firewall refresh over the last several years.

I'm curious and I know, it's very early innings, but how do you see sort of the adoption of generative AI.

Hamza Fodderwala: Particularly in some of these hybrid context.

Hamza Fodderwala: Impacting network traffic going forward and do you think that there is.

Hamza Fodderwala: Quaintance.

Hamza Fodderwala: More firewall refresh to secure that growing network traffic. Thank you.

Speaker Change: Long term definitely we see the increase of traffic the law and also we're also made.

Speaker Change: A lot of security operation.

Speaker Change: Yes.

We also see the.

Speaker Change: The refresh of the final cycle, we can provide some kind of solid data there.

Speaker Change: But we also see a lot of new opportunity.

Speaker Change: We'd now comments a refresh like we mentioned in our script.

Speaker Change: Some of the Ot technology area and you've been supporting some will fall and also some other pressing internal segmentation.

Peter Salkowski: Capital expenditures of $370 to $420 million, a non-GAAP tax rate of 17%, and cash taxes of $520 million. I look forward to updating you on our progress in the coming quarters, and I'll now hand the call back over to Peter to begin the Q&A session. Thank you. As a reminder, during the Q&A session, we ask that you please limit yourself to one question and one follow-up question to allow others to participate. Operator, please open the call for questions. As a reminder, to ask a question, you'll need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again.

Speaker Change: Facing traditional switch now.

Speaker Change: And then with security firewall.

Speaker Change: Call the convergence also.

Speaker Change: Studying.

Speaker Change: More and more adopted by that that would be kind of price.

Speaker Change: So that is also the new market the compare for.

Speaker Change: <unk> traditional firewall, but I agree with you.

Speaker Change: The next phase connection.

Speaker Change: Rafi will be equally as a specialty multi last will be coming online and also more people work remotely.

Speaker Change: And the same time the AI.

Speaker Change: <unk> also.

Speaker Change: Kind of.

Speaker Change: Generate quite a lot of additional data, which also kind of a need to be secure so we see that.

Speaker Change: Pretty pretty good potential for development growth.

Fatima Boolani: Please stand by while we compile the Q&A roster. Our first question comes from the line of Fatima Boolani with Citi. Good afternoon.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question will come from the line of Brian Essex with J P. Morgan.

Brian Your line is now open.

Keith F. Jensen: Thank you for taking my questions. Keith, I really appreciate you fleshing out some of the factors that are going to be creating volatility in your top line performance. But what I wanted to focus on was how you are able to hold the line on the expense structure in light of these volatilities, both on the revenue and billing front. So if you can help us appreciate how you're able to manage for profitability and, then by extension, these top-line volatilities, how should we think about the free cash flow cadence against your assumptions on the OPEC structure, along with the fact that you have Thank you. Yeah, I think kind of going backwards in terms of the very large deals that we talked about, you know, I think experience showed us in the second half or the middle part of last year that we're well served, served not to get too far ahead of ourselves in terms of forecasting those deals. And it's difficult to understand when they're actually going to close and what the specific terms are going to be with those. So I think we have kind of set those aside. And you saw that in some of the performances in the fourth quarter.

Brian Essex: Great. Thank you very much and thank you for taking the question I.

Brian Essex: I guess, maybe for Ken could you dig in a little bit to the SaaS performance of the quarter, if I recall, correct and I don't know what.

Brian Essex: What kind of metrics you can break out to give us a little bit more color behind that but if I recall, you were doing quite well with kind of the SD Wan component.

Brian Essex: And we're trying to kind of pivot to better penetrate the secure service component, maybe a little bit of color as you've pivoted towards.

Brian Essex: I guess, focusing a little bit more on SEC ops in SaaS.

Brian Essex: What is the nature of the deals look like this quarter, what you see in the pipeline for SaaS are you getting better traction with secure Subic Reg.

Brian Essex: And does that include SD Wan or is it relatively agnostic to SD Wan. Thank you.

Brian Essex: You probably recall in the.

Brian Essex: Last earnings call, we starting more focus on SaaS UCT off and sat in tracking that separately.

Brian Essex: And.

So Keith also mentioned 90% of all fuel.

Brian Essex: Salesforce also been trained certified for SaaS is a crop and also all of the six eight figure deal.

Keith F. Jensen: In terms of margins, you know, I think that sometimes the business model is easier than people think it is when it comes to margin because services provide so much of the business. You know, if the business model is two-thirds services and it's throwing out a very rich margin, even in a period of time when you're going through the firewall refresh cycle, you're still seeing your margins hold up fairly nicely. I think there are also significant economies of scale involved in the services line, whether it's the support or the security subscription. And then, lastly, I would say that I think the breadth of both the SECOP solutions and the FASCIS solutions together is serving to spread some of the incremental costs for the hosting solutions and bringing those to market. The TV is still there.

Brian Essex: Going out of Sui secure networking SaaS and the secure up so we can see is that.

Brian Essex: On a fast turn especially during the current.

Brian Essex: The environment refresh cycle.

Brian Essex: We can see the.

Brian Essex: The SaaS, we can smoke consumption model and also secure off which can lower operation cost.

Brian Essex: Couple of grow faster than the traditional secure networking area.

Brian Essex: So thats, where it will be kind of.

Brian Essex: Direct some focus resource more focus on these three areas, we see a pretty huge success.

Brian Essex: The pipeline and also.

Brian Essex: Even the deal we close some of the first.

Brian Essex: And keep a SaaS deal.

Brian Essex: It also makes us feel pretty exciting items.

Brian Essex: We don't see we have some advantage actually.

Ken Xie: Thank you. Our next question will come from the line of Hamza Fodderwala with Morgan Stanley. Ken, you know, over the last, you know, several years, network traffic, Clouderdog, More work from home, et cetera, and that's led to a pretty healthy firewall refresh over the last several years. I'm curious, and I know it's a very early...

Brian Essex: Leverage.

Brian Essex: The SD Wan huge deployment, we have our firewall hinky appointment and also the Sim.

Brian Essex: Single OS based SaaS solution.

Brian Essex: Great.

Brian Essex: All of the SaaS functions into a single Pos which is a huge advantage.

Brian Essex: Whether the customer himself I'll, even for some service provider.

Ken Xie: But how do you see sort of the adoption of generative AI, particularly in some of these hybrid contexts? Impacting network traffic going forward, and do you think that's going to incent more firewall refresh to secure that growing network traffic? Uh, in the long term, definitely, we see that Gen-AI will increase network traffic a lot and also automate a lot of security operations. We also see the...

Offered a SaaS service to their customer base.

Brian Essex: Yes.

Brian Essex: Pretty strong growth.

Brian Essex: It's a pretty putting pretty good what we have.

Speaker Change: Yes, Brian I would kind of follow that up with.

Speaker Change: Similar to the results if you will of what Ken just talked about and to your point I think youre kind of asking us.

Speaker Change: If you take if you focus more on the FSC element of SaaS unless on SD Wan what does that mean.

Speaker Change: I think that we have a pretty interesting first with horserace developing internally. If you look at which you would probably think of as the SFC component and the SEC ops business, both growing in the 40% range.

Ken Xie: The refresh of the file cycle, we do provide some kind of historic data there, but we also see a lot of new opportunities. We now come to the refresh, like we mentioned in the script, some of the OT technology area and even support some work from home, and also some other enterprise internal segmentation, replacing the traditional switch with a network security firewall that we call the convergence. It's also starting to get more and more adopted by big enterprises, so that's also a new market compared to the traditional firewall. But I agree with you, the next phase of connection, the traffic will keep increasing, especially more devices will be connected online, and also more people will work remotely. And at the same time, AI also kind of generates quite a lot of additional data, which also kind of needs to be secured.

Speaker Change: <unk> one the quarter, we will see how SaaS he does but theyre very very close at this point in time in terms of growth and then I think the other metric we gave when we talked about the pipeline growth and that's 150% would really be around what you would think of as the SSC components.

Speaker Change: Got it that's really helpful. We will keep it to one and keep it efficient, but thank you so much I.

Speaker Change: Appreciate it thank.

Speaker Change: Thank you.

Speaker Change: Okay.

Speaker Change: Thank you.

Speaker Change: Our next question will come from the line of Cal Leone with Bank of America.

Cal Leone: Hi, guys.

Cal Leone: I'll ask.

Cal Leone: Two questions together.

Cal Leone: Capex is going up materially next year.

Cal Leone: Sure.

Cal Leone: What is the outlook for free cash flow margin, what happens to free cash flow. This year can you actually drill down to the Capex what drives the increase and then what happens to free cash flow margin.

Cal Leone: The second question I have is on the business.

Cal Leone: This quarter.

Cal Leone: Billings were supposed to be weak, but theyre very strong.

Cal Leone: Next quarter.

Cal Leone: We expected roughly five 6% declines and Thats. What you are guiding to so that means maybe there was some pull forward but.

Cal Leone: Kind of in line ish so.

Cal Leone: What happens this quarter.

So strong versus expectations, what drove the strength and why.

Speaker Change: Why don't proceed.

Speaker Change: Can you answer the next quarter. Thanks.

Speaker Change: You want to Capex or deals.

Cal Leone: Yes.

Speaker Change: Hi, Paul how are you thanks for calling in.

Paul: On Capex I think will continue to build out.

Paul: Things that we need for our engineering team as we look forward.

Brian Essex: So we see pretty good potential for long-term growth. Our next question will come from the line of Brian Essex with J.P. Morgan. Brian, your line is now open.

Paul: Thats places to work in labs, and so forth. So I think youre seeing an element of that but also our ability to continue to deliver hosted the wide range of hosted solutions. I think those are the things that are driving capex.

Brian Essex: Great, thank you very much. And thank you for taking the time to answer the question. I guess, maybe for Ken, could you dig in a little bit to the staffing performance of the quarter, if I recall correctly, and I don't know what kind of metrics you can break out to give us a little bit more color behind that, but if I recall correctly, you're doing quite well with kind of the SD-WAN component, and we're trying to kind of pivot to better penetrate the secure service edge component. Maybe a little bit of color as you've pivoted towards, I guess, focusing a little bit more on SecOps and SASE.

Paul: As we've said before we know that there is a bias here of making real estate investment decisions. So that pie is a long term investor and with that.

Paul: ROI over a longer period of time is always it's always been very enticing to us.

Paul: And I think your second question on.

Paul: The spike that we saw in performance, we are very pleased with in the fourth quarter.

Paul: And then how does that what does that translate to in the first quarter. A couple of things. One is as we talked about during the call. The comps in the first quarter of 2024 are probably among the most challenging on the billings line and the product revenue line that we think we're going to see.

Paul: And then I think also the read through on doing six eight figure deals in the fourth quarter and being a record.

Ken Xie: What does the nature of the deals look like this quarter? What do you see in the pipeline for SASE? And are you getting better traction with Secure Service Edge? And does that include SD-WIN, or is it relatively agnostic to SD-WIN?

Paul: Honestly put a lot of tailwind to that fourth quarter number.

Paul: We like eight figure deals, but I don't know that were really in the business of forecasting them each and every quarter as we go forward.

Paul: Also we kind of own probably high percentage off some infrastructure some real estate than some of our competitors.

Ken Xie: Thank you. I think you probably can recall on the last earnings call, we started focusing more on SASE Secure Op and started tracking that separately. And also, during Keith's script, we also mentioned 90% of our salesforce is also being trained and certified for SASE Secure Op. And also, all six eight-figure deals, including all three, Secure Networking, SASE, and the Secure Op. So, we do see it grow faster, especially during the current kind of environment of the refresh cycle. We do see the SASE, which is more of a consumption model, and also Secure Op, which can lower the operation cost, probably grow faster than the traditional Secure Networking area.

Paul: Gave us a much lower cost operation cost going forward.

Paul: Also helping drive the future growth, especially on a service like SaaS.

Paul: And that's also will give us a better margin Montana.

Free cash flow.

Paul: So if you can maybe because your stock trades on free cash flow should we expect free cash flow to go down or is it.

Is it can you offset the increase in capex with something else.

Paul: Obviously, theres a lot of levers that come into free cash flow.

Paul: I think that.

Paul: When we look at in terms of where the street was for free cash flow in 2024 for the full year.

Paul: I think thats in the ballpark of this early stage, we don't really guide to free cash flow as you know.

But I think the puts and takes one is capex, which is not all that far away from what we saw in 2023.

Paul: But then you have the operating profits.

Paul: <unk> scrubbed et cetera, all the components that go into it.

Ken Xie: So, that's where we kind of redirect some focus, resources, more focus on these two areas. We see pretty huge success in growing both the pipeline and also even the deal. We closed some of the first eight-figure SASE deal, which also makes the field pretty excited. I think we have some advantages, actually, leveraged whether the SD-WAN huge deployment. We have all the firewall huge deployments and also the single OS-based SASE solution, which integrates all the SD-WAN, all the SASE functions into a single 40 OS, which is a huge advantage for whether the customers themselves, or even some service providers, offer the SASE service to their customer base.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question will come from the line of Gabriela Borges with Goldman Sachs.

Gabriela Borges: Good afternoon. Thank you.

Gabriela Borges: To better understand the sassy dynamics that you're seeing at the lower end of the market versus the higher end. So maybe any commentary on the SMB part of the SaaS pipeline, what youre seeing in terms of willingness and readiness to convert.

Gabriela Borges: You're seeing in terms of competition and what are you seeing in terms of average deal sizes in terms of uplift when you get a SaaS deal versus a regular firewall deal. Thank you.

Speaker Change: Yes, <unk>, it's pretty interesting.

Speaker Change: We do quite well in the SMB market, even for the traditional firewall.

Other than any other competitors.

Keith F. Jensen: So, it's a big advantage. Pretty strong growth. We see it's a pretty, pretty, pretty good move.

Speaker Change: But also SMT has a pretty low percentage of our customer actually using any network security because.

Speaker Change: Whether the management Casas and monitor.

Keith F. Jensen: Yeah, Brian, I would kind of follow that up with some of the results, if you will, of what Ken just talked about. And to your point, I think you're kind of asking us, if you take, if you focus more on the SSE element of SASE and less on SD-WAN, what does that mean? And, you know, I think that we have a pretty interesting horse race developing internally if you look at what you probably think of as the SSE component and the SECOPS business, both growing in the 40% range. SecOps won the quarter.

Speaker Change: People costs, all these kind of things.

Speaker Change: So thats, where SaaS E a pie.

Speaker Change: Definitely help in some SMB customer.

Speaker Change: But also.

Speaker Change: We see kind of.

The longtime combined both mitral will for home were pretty strong.

Speaker Change: We have to go in the retail branch office solution, they're also helping us kind of.

Speaker Change: Mike.

Speaker Change: While in SMB and also the new product refresh which language ISP five.

Speaker Change: Only halfway probably towards the second half of this year, we have a more product come in using the new ICP. That's also achieving a has a position there.

Speaker Change: Yes.

Speaker Change: Like I say it is.

Speaker Change: That is more kind of consumption model carve out environment, probably be more attractive compared to a capex model.

Keith F. Jensen: We'll see how SASE does, but they're very, very close at this point in time in terms of growth. And then I think the other metric we gave, we talked about pipeline growth, and that 150% would really be around what you would think of as the SSE component. Scott, that's really helpful. We'll keep it to one and keep it efficient. But thank you so much, both of you.

Speaker Change: So thats, where we see.

Speaker Change: Both SMB enterprise I think it will have some more interest.

Speaker Change: Completed kind of Opex model maybe.

Speaker Change: Maybe Keith and.

Speaker Change: Johnny.

Speaker Change: I would just say that.

Speaker Change: Success, we had in enterprise since John what Oh by the way.

Speaker Change: With the number of eight figure deals.

Speaker Change: Moving over a half million.

Speaker Change: Customers out there.

Speaker Change: It really bodes well both in enterprise and in the S&P market because we've got so many customers out there that are testing.

Tal Liani: Appreciate it. Thank you. Our next question will come from the line of Tal Liani with Bank of America. All right, guys. I'll ask two questions. Um, CAPEX is going up materially next year. http://www.fortinetinc.com, Hawaii. Wait, wait. Do you want to take CapEx or deals? Hi Tal. How are you.

Speaker Change: And so many customers that are providing feedback along the way to improve our products.

Speaker Change: It's a real testament to the products that give us both enterprises and the SMB comfort and buying our products going forward and you can kind of put yourself into a customer's shoes and say okay. Some of the most discerning customers are spending eight figures on these products and services.

Speaker Change: And we have strict in F&B and up market I think that bodes really well for kind of the smaller segments of the market and the larger segments of the market going forward I think thats a real headline from this quarter in terms of the real success, we had with some of the most discerning customers out there.

Keith F. Jensen: Nice. Thanks for calling in. On CapEx, you know, I think we'll continue to build out both things that we need for our engineering team as we look forward and, you know, the best places to work and labs and so forth. So I think you're seeing an element of that.

Speaker Change: Thank you for the color.

Speaker Change: Okay.

Speaker Change: Thank you.

Our next question will come from the line of second <unk> with Barclays.

Ken Xie: But also, you know, our ability to continue to deliver a wide range of hosted solutions. I think those are the things that are driving CapEx. And as we said before, you know, we know that there's a bias here of making real estate investment decisions that I, as a long-term investor, and with that, you know, the ROI over a longer period of time is always very, it's always been very enticing to us. And I think your second question on, you know, the spike that we saw in performance that we were very pleased with in the fourth quarter, and then A couple of things. One is, as we talked about during the call, that the comps in the first quarter of 2024 are probably among the most challenging on the billings line and the product revenue line that we think we're going to see. And then I think also, you know, the read through on doing six, eight-figure deals in the fourth quarter and being a record obviously put a lot of tailwind into that fourth quarter number.

Second: Okay, Great Hey, guys. Thanks for taking my questions here and well done.

Second: Keith maybe for you I just wanted to talk about the shape of billings a little bit here in 2024.

Second: I think at the midpoint for this year billings is about 2% give or take at the midpoint, how should we sort of think about the exit rate on billings. This year I know that was something we talked about in prior quarters Im not sure. If that's something that we can that we can just revisit and then maybe relatedly. How it was great to get the segment detail by the way across the three.

Second: How are we sort of thinking about the rough growth ranges for those three segments as part of the Sky.

Second: Yes, I think on the billings.

Second: Trend, if you will I would.

Speaker Change: Go back to our prior comments or conversations about the backlog created a headwind if you will in the first half of the year and I think you heard some of the tone of that if you will right before I gave the guidance this year and that would suggest that our expectations are that.

Speaker Change: Billings growth rates should be improving as we move through on a quarterly basis as we move through the year.

Speaker Change: I think we probably made it a little bit tougher on the sales team for the fourth quarter of 2024 by having such a strong fourth quarter of 2023.

Keith F. Jensen: We like eight-figure deals, but I don't know that we're really in the business of forecasting them each and every quarter as we go forward. Also, we kind of own a high percentage of some infrastructure, some real estate, and some of our competitors that actually give us much lower operating costs going forward, which also will help you drive future growth, especially on a service like a SASE. And that will also give us a better margin long term. Well, you know, obviously, there's a lot of levers that come into free cash flow. You know, I think that where we look at in terms of where the street is for free cash flow in 2024 for the full year, I think that's in the ballpark at this early stage. We don't really guide to free cash flow, as you know, but I think the puts and takes, one is CapEx, which is not all that far away from what we saw in 2023, but then you have the operating profits, you know, the building screw-ups, etc. You know all the components that go into it.

Speaker Change: I think they're going to they're going to do pretty well there.

Speaker Change: And then I'm sorry, the second part of the question socket was.

Speaker Change: Just on the three segments right secure networking SaaS <unk> and SEC ops. It was helpful to get sort of the growth ranges for this quarter I'm not going to hold you to it but how do you think about sort of the relative growth rates for those three segments. This year.

Speaker Change: And maybe I'll answer that in the context of average contract term of duration, because I know, there's a lot of concern or questions have been raised about.

Speaker Change: That shortened the contract term and you heard that.

Speaker Change: The data that we gave during the call.

Speaker Change: These two segments, we have a business that basically runs on.

Speaker Change: The average contract terms of call. It two years, two and a quarter. If you will a SaaS tech ops business.

Mix would probably be billing one year in advance when you look at the competitors and so forth. So that kind of give you the rate it's going to take a while for SaaS and <unk> to really impact that contract term or duration and I think the read through to that in terms of.

Speaker Change: We're excited about the opportunity with SaaS and Sac ops, if we have outsized growth there will be very pleased with it but I don't know that we're hanging our hat on something.

Gabriela Borges: Thank you. Our next question will come from the line of Gabriela Borges with Goldman Sachs. Good afternoon.

Completely out of the realm of reality, if you will for 2024 for SaaS Hirose hiccups.

Speaker Change: For the <unk> segment.

Ken Xie: Thank you. I'm looking to better understand the SASE dynamics that you're seeing at the lower end of the market versus the higher end. So maybe some commentary on the S&B part of the SASE pipeline, what you're seeing in terms of willingness and readiness to convert, what you're seeing in terms of competition, and what you're seeing in terms of average deal sizes in terms of uplift when you get a SASE deal versus a regular firewall deal. Thank you. SMB is pretty interesting,

Speaker Change: I don't have the latest market data buffer in Q3.

Speaker Change: The firewall market is kind of flat year over year Q4, we probably will bring to our company and reporting.

Speaker Change: We do see probably under some pressure.

Speaker Change: Especially the first half of this year.

Speaker Change: But I do believe the lump Hong Kong, where it be installing a quite well because the company also need manage magna cum application level, which is high for.

Ken Xie: We do quite well in the SMB market, even for the traditional firewall, bigger than any other competitor. But also, SMB has a pretty low percentage of customers actually using any network security because whether it's the management costs or some other people's costs, all this kind of stuff. So that's where SASE is applied there, definitely helping some SMB customers, but also we see kind of the long-term combined both where they work from home, we're pretty strong, like a couple of years ago, in the retail branch office solution there, also helping us kind of like doing well in SMB. And also, the new product refresh, which leveraged SP5, we're only half the way, probably towards the second half of this year, Yeah, it's a kind of, like I said, SASE is more of a consumption model in the current environment, probably more attractive compared to a CapEx model.

Speaker Change: Using our security and to do that.

Speaker Change: So thats, where long term, we do see the <unk>.

Speaker Change: Firewall market out of network security market and will continue to grow and I feel probably around 10% year on year in the next maybe three to five years.

Speaker Change: SaaS and <unk>.

Speaker Change: <unk>, maybe smaller base, which also grow faster and we also have a lot of existing customer.

Speaker Change: I wanted to talk about this together with us they probably already.

Speaker Change: Pharma customer by customer.

Speaker Change: About the additional.

Speaker Change: Pollution and additional product so that we see that the other sector grow faster than <unk>.

Speaker Change: Comprehensive reach and probably will continue to grow faster in the next few quarters.

Speaker Change: Very helpful. Thanks, guys.

Speaker Change: Okay.

Speaker Change: Thank you.

Speaker Change: Our next question will come from the line of Ann.

Ann: Andrew Nowinski with Wells Fargo.

Ann: Great. Thank you all for taking the questions. So I was just wondering if you could and we've talked a lot about your other pillars. I was wondering if we could touch on SEC ops and maybe what's driving that is that related to the recent SEC regulation.

John Whittle: So that's where we see both SMB enterprises, they do have some more interest in doing this kind of OpEx model. Maybe Keith and John, any additional? I would just say that the success we had in enterprise, this is John Whittle by the way, with the number of eight-figure deals and having over a half million customers out there, really bodes well both in enterprise and in the F&B market because we've got so many customers out there that are testing. Fodder, so many customers that are providing feedback along the way to improve our products that it's a real testament to the products and gives both enterprises and the S&B comfort in buying our products going forward. And you can kind of put yourself into a customer's shoes and say, okay, some of the most discerning customers are spending eight figures on these products and services. And we have strength in S&V and the upmarket.

Andrew James Nowinski: And then second I was wondering if you look at your billings guidance for the year, where do you see the most risk as it relates to that guidance in terms of the three pillars and the performance you are expecting from those three pillars.

Andrew James Nowinski: Yes.

Andrew James Nowinski: We are helping customer.

More like.

Andrew James Nowinski: Better security and a more efficient and also lowered the total management cost.

Andrew James Nowinski: I need to have a multiple solution multiple product integrate together ultimately took Andrew.

Andrew James Nowinski: So thats, what we see.

Andrew James Nowinski: During the current environment, a lot of our company and big or small they do see the opportunity.

Andrew James Nowinski: Already area, the probably it's market.

Andrew James Nowinski: Investment here and also we do see the emerging off.

Andrew James Nowinski: Networking and security together, which also CTO are playing out quite important at all to make sure that operation can be all put together, which we had lead in this area.

John Whittle: I think that bodes really well for kind of the smaller segments of the market and the larger segments of the market going forward. I think that's a real headline from this quarter in terms of the real success we had with some of the most discerning customers out there. Thank you. Our next question will come from the line of Saket Kalia with Barclays. Okay, great.

Andrew James Nowinski: So thats wants to queue up we see a pretty strong growth.

Andrew James Nowinski: The SaaS is more of a consumption model. We also see cannot see the clear on biomass.

Andrew James Nowinski: The cost could be a little bit higher than the appliance.

Andrew James Nowinski: But.

Andrew James Nowinski: That is give the customer flexibility and so thats, we see that.

Andrew James Nowinski: Jonathan.

I think for <unk>.

Saket Kalia: Hey guys, thanks for taking my questions here and well done. Keith, maybe for you, I just want to talk about the shape of billings a little bit here in 2024. I think at the midpoint for this year, billings is about 2%, give or take at the midpoint. How should we sort of think about the exit rate on billings this year? I know that was something we talked about in previous quarters, but I'm not sure if that's something that we could just revisit. And then maybe relatedly, it was great to get the segment detail, by the way, across the three segments. How are we sort of thinking about the rough growth ranges for those three segments as part of this guide?

Andrew James Nowinski: What we're seeing is the threat landscape out there is driving a lot of the customer behavior as well as you see these ransomware attacks.

Andrew James Nowinski: That are really debilitating to customers and so prevention is important but time to detection and time to remediation is critical.

Andrew James Nowinski: It's real money and these are these are really important issues for our customers.

Andrew James Nowinski: And also I would note we've really been building. This this solution over many many years, but we really just.

Andrew James Nowinski: Started to focus on it.

Andrew James Nowinski: As a separate pillar three months ago, and then we had a record Q4, and so I think that degree of focus internally coupled with how we can actually help our customers putting our customers first.

Andrew James Nowinski: Really is driving a lot of success there.

Andrew James Nowinski: And that new focus.

Keith F. Jensen: Yeah, I think on the billings trend, if you will, I would go back to our prior comments and conversations about, you know, the backlog created a headwind, if you will, in the first half of the year. And I think you heard some of the tone of that, if you will, right before I gave the guidance this year. And that would suggest that, you know, our expectations are that, you know, billing growth rates should be improving as we move through on a quarterly basis as we move through the year. I think we probably made it a little bit tougher on the sales team. for the fourth quarter of 2024 by having such a strong fourth quarter of 2023.

Andrew James Nowinski: Pretty much sticking to the plan. The plan is working we're sticking to the plan.

And so we see a lot of opportunity there.

Andrew James Nowinski: Yes.

Speaker Change: Thank you.

Speaker Change: Our next question will come from the line of Brad Zelnick with Deutsche Bank.

Great. Thank you so much I think I've got one for Jon and one.

Brad Zelnick: One for Keith first just for you John given your recent appointment as Fortinet. Its first ever CLO can you talk about your perspective stepping into the role and how you plan to help drive Fortinet business forward.

Brad Zelnick: Keith for you in your guidance comments, you said for the full year.

Keith F. Jensen: You expect the selling environment.

Keith F. Jensen: To improve in the back half and into 2025, and I'm, not saying I disagree with you, but I'm just curious why do you say that and if it is just relative to the comments that you also made on the firewall cycle dynamics or something else.

Keith F. Jensen: But I think they're going to do pretty well there. And then I'm sorry, the second part of the question socket was just on the three segments right, secure networking, sassy, and sec ops. It was helpful to get sort of the growth ranges for this quarter. I'm not going to hold you to it, but how do you think about sort of the relative growth rates for those three segments this year? And maybe I'll answer that in the context of average contract term or duration, because And you heard the data that we gave during the call.

Keith F. Jensen: More broadly in the economy that you are expecting thanks.

Speaker Change: Great. Thanks for the question.

Speaker Change: Im really excited about the role I've been working here for <unk>.

Speaker Change: 17 years through a lot of growth and my focus over the 17 years has really been learning from Ken and Michael and the team.

Speaker Change: Like NBA on steroids and out of their brilliant business people. In addition to focusing on the innovation and the technology, which I think is a core differentiator for Fortinet. We are in an innovation first company.

Speaker Change: And I think our culture is really around what I call almost a straightforward meritocracy and Ken and Michael drive this throughout the organization and its very straightforward. It's work hard work smart innovate and put the customer first and deliver results and so I really I really like the culture, obviously I've been here.

Keith F. Jensen: You know, these two segments, you know, we have a business that basically runs on, average contract terms we call it two years two and a quarter if you will a SASE and SECOPS business mix would probably be billing one year in advance when you look at the competitors and so forth so that kind of gives you the range it's going to take a while for SASE and SECOPS to really impact that contract term or duration and I think the read-through of that in terms of you know we're excited about the opportunity with SASE and SECOPS if we have outsized growth there we'll be very pleased with it but I don't know that we're hanging our hat on something completely out of the realm of reality if you will for 2024 from SASE or SECOPS. Yeah, for the three segments, I don't have the latest market data, but from Q3, the firewall markets kind of flat over here. Q4, we probably wait out company reporting. But we do see probably still under some pressure this year, especially the first half of this year.

Speaker Change: <unk> 17 year, some people say I need to get more creative with my career, but are really.

Speaker Change: It really gets me excited.

Speaker Change: Make a difference and it's a positive difference we're protecting our protecting our customers. So they can get about their business. So I really like that and in terms of how I can contribute.

Speaker Change: Up until now are focused on legal and Corp Dev.

Speaker Change: I'm, taking over corporate real estate.

Speaker Change: <unk> systems manufacturing and logistics.

Speaker Change: And so I have a broad set of set of responsibilities. I also have always worked very closely with the sales team I will not be managing the sales teams, but I will continue to work closely teamwork is one of our top three culture items here and we're not really boxed in here in a way, we're really work together and so we've got the <unk>.

Speaker Change: <unk> sales leaders and I look forward to working with them and we've got a huge opportunity to grow we want we want to grow.

Ken Xie: But I do believe the long-term convergence story will hold quite well because the company also needs to manage the kind of application level, which is how to use network security to do that. So that's where, long-term, we do see that the firewall market or the network security market will continue to grow, I feel, probably around 10% year over year in the next maybe three to five years. SaaS and secure operations come from maybe a smaller base, which also grows faster. And we also have a lot of existing customers who want to adopt all this together with us. They probably already are firewall customers, D1 customers.

Speaker Change: After that opportunity by putting the customer first I want to support that and to the extent that can help the team I want to do that.

Speaker Change: <unk> question earlier, we're also very disciplined on the cost side and as Keith said, we have the services model, where we have a lot of visibility based on the deferred revenue.

Speaker Change: On the top line, but we also are very disciplined kind of managing and monitoring the costs on a real time basis.

Speaker Change: Sometimes you can control the costs more quickly than other things and so what.

Speaker Change: What I've noticed is we're very good at kind of managing that on a real time basis, and we will continue to do that as well.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Welcome Jeff Thank you.

Jeff: Thank you John and Jay will also help us form the company culture on <unk>, which is the teamwork and also.

Ken Xie: They can easily adopt additional solutions and additional products. So that's where we see the other two sectors grow faster than the company average and probably continue to grow faster in the next few quarters. Very helpful, thanks guys.

Jeff: <unk> also our emulation, so we're continuing to maintain its culture.

Jeff: Keeping growing the company again.

Jeff: And then quickly Brian.

Brian Essex: Yes, obviously, the view of the firewall cycles Hasnt, so part of it but I think probably more to the point that the digestion of products and projects and if you look back on where the peak was a firewall purchasing and you kind of play that out you should be coming to its logical end of deployment cycles.

Andrew James Nowinski: Thank you. Our next question will come from the line of Andrew Nowinski with Wells Fargo. Great, thank you all for taking the questions. So I was just wondering if you could, and we've talked a lot about your other pillars, I was wondering if we could touch on SecOps and maybe what's driving that. Is that related to the recent SEC regulation?

Speaker Change: Great. Thank you guys.

Speaker Change: Thank you.

Speaker Change: Our next question will come from the line of Keith Bachman with BMO.

Keith Bachman: Hi, many thanks.

Ken Xie: And then second, I was wondering, you know, if you look at your billing guidance for the year, where do you see the most risk as relates to that guidance in terms of the, you know, the three pillars and the, you know, the performance you're expecting from those three pillars? Yeah, the secure ops is actually helping customers more, like better security and more efficient, and also lower total management costs. That's where I need to have multiple solutions, multiple products integrated together, and automated together. So that's what we see.

Keith Bachman: And Keith Thank you again for the disclosures on the segments within billings, it's very helpful to.

Keith Bachman: Two questions. One is on strategy and one is on guidance Ken on the strategy question.

Keith Bachman: I wanted to ask you on your perspective on the unified SaaS E X, excluding the SD Wan and checkups.

Keith Bachman: Two broad variables that I think about one is go to market one is product or R&D, you've clearly increase the go to market efforts surrounding.

<unk> I'm wondering do you feel the need to also incrementally focus on the product side or incremental R&D. If you will to strengthen the portfolio.

Ken Xie: And also, we do see the merging of networking and security together, which also secure ops plays a quite important role to make sure the two operations can be operated together, which we are needing in this area. So that's where we see pretty strong growth. SASE is more like a consumption model.

Keith Bachman: For things such as improving your positioning within the Gartner Magic quadrant, or however, you want to think about it. So is it is it more go to market that you are thinking incremental efforts or it's both are incremental.

John Whittle: We also see kind of feed the current environment well. Even though the cost could be a little bit higher than the appliance, but it gives the customer flexibility. And so that's where we see the general answer. And I think for SecOps, you know, what we're seeing is that the threat landscape out there is driving a lot of customer behavior as well. You know, you see these ransomware attacks that are really debilitating to customers.

Speaker Change: Both the R&D side and as well as the go to market and just in the interest of time I'll ask my second question.

Speaker Change: Keith on the guidance it just given the performance in the quarter and I'm really focused on the year not the March quarter. It does seem very conservative very much outperformed your expectations associated with the December quarter.

John Whittle: And so prevention is important, but time to detection and time to remediation is critical, and it's real money. And these are really important issues for our customers. And also, I would note, we've really been building this solution over many, many years. But we really just started to focus on it as a separate pillar three months ago, and then we had a record Q4.

Speaker Change: And.

Speaker Change: <unk> for kind of 2% and even if you normalize for the backlog burn is sort of mid single digits, maybe a little bit better than that.

Keith: So I guess I'm, just trying to reconcile but it seems like very conservative guidance and perhaps the way to ask the question is how do you think about the product side as we get to the back half of the year do you think that industry demand returns to normal levels or do you still think there is some pressure on the product side or anything else.

John Whittle: And so I think that degree of focus internally coupled with how we can actually help our customers, putting our customers first, really is driving a lot of the success there, and that new focus. You know, we're pretty much sticking to the plan. The plan's working. We're sticking to the plan, and so we see a lot of opportunity. Thank you. Our next question will come from the line of Brad Zelnick with Deutsche Bank. Great! Thank you so much. I think I've got one for John Whittle and one for Keith.

Speaker Change: I want to draw comments are associated with what seems to be conservative Billings guide. Thank you very much.

Speaker Change: Yes, good question about SaaS.

Speaker Change: Definitely we want to do both even even more than that.

Speaker Change: So we definitely see the opportunity changing our go to market strategy, because a few months ago, where multi pinned on the service provider carrier tries to SaaS helps them due to SaaS is always multiple to market directly itself in the same time, what can we sell in a service provider, but also more important.

Brad Zelnick: First, just for you, John, given your recent appointment as Fortinet's first ever COO, can you talk about your perspective stepping into the role and how you plan to help drive Fortinet's business forward? And Keith, for you, in your guidance comments, you said for the full year that you expected the selling environment to improve in the back half and into 2025. And I'm not saying I disagree with you, but I'm just curious why you say that.

Speaker Change: Internal R&D.

Speaker Change: Total investment in the infrastructure like we mentioned now we have over 150 pump worldwide.

Speaker Change: Probably can match and the other competitor at the same time the function.

Speaker Change: <unk> also put out a SaaS in a single OLS and then amount of functions that are using ASIC law salaried and Thats also make our SaaS solution much better more advantage compared to competitors and ophthalmology easy to deploy more easy to manage and.

John Whittle: And if it's just relative to the comments that you also made on the firewall cycle dynamics, or if it's something else, you know, more broadly in the economy that you're expecting. Thanks. Thanks for the question. You know, I'm really excited about the role I've been working here for 17 years through a lot of growth, and my focus over those 17 years has really been learning from Ken and Michael and the team. It's like an MBA on steroids, you know; they're brilliant business people, in addition to focusing on innovation and technology, which I think is a core differentiator for Fortinet. We are an innovation-first company, and, you know, I think our culture is really around what I call almost a straightforward baritocracy, and Ken and Michael drive this throughout the organization. It's very straightforward.

Speaker Change: So we see definitely a huge opportunity for SaaS is not using.

Speaker Change: Using a traditional cloud approach, but also on premise chassis. The provost assay. So we see a lot of opportunity.

Speaker Change: For SaaS going forward, both on the technology, which we also market innovation developing technology.

Speaker Change: Same time that go to market strategy. Once we focus we see huge next has behind.

Speaker Change: And just on the guidance Keith.

Speaker Change: At the thought after a kind of a tough middle of the year last year for us. So for me I think keep in mind that we do probably have between $150 $200 million.

Speaker Change: Headwinds related to backlog our year over year comparisons if you will the backlog impact.

John Whittle: It's work hard, work smart, innovate, and put the customer first and deliver results. And so I really, I really like the culture. Obviously, I've been here 17 years; some people say I need to get more creative with my career.

Speaker Change: In the year I think also in some of the commentary that we provided right before our guidance when we talked about the relative impact specifically to product revenue and what you should see from service revenue for the year, you can kind of get a sense of what we're thinking about for product revenue.

John Whittle: But it really gets me excited to make a difference. And it's a positive difference. You know, we're protecting our customers so they can go about their business. So I really like that. And in terms of how I can contribute.

Speaker Change: I think we do see that some opportunities on the service revenue line with things that come from second half of SaaS fee in the year.

Speaker Change: But I think all in all I think where we're at right now in terms of the full year guidance number is an appropriate number for us.

John Whittle: Up until now, I've focused on legal and corp dev. I'm taking over corporate real estate. I'm adding systems, manufacturing, and logistics. And so I have a broad set of responsibilities. I also have always worked very closely with the sales team. I will not be managing the sales teams, but I will continue to work closely with them.

Speaker Change: Okay, Alright, many thanks congratulations guys.

Speaker Change: Yes.

Speaker Change: Thank you.

Speaker Change: Our next question will come from the line of <unk> Kidron with Oppenheimer.

Kidron: Thanks, Hey, guys.

Kidron: A couple from me first.

Kidron: On the comp side.

As you move into 'twenty four can you share a little bit more color on the changes, you're making or have made cordero.

John Whittle: Teamwork is one of our top three culture items here. And we're not really boxed in here in a way, you know; we really work together. And so we've got great sales leaders, and I look forward to working with them. You know, we have a huge opportunity to grow. We want to grow and capture that opportunity by putting the customer first. I want to encourage that. And to the extent that I can help the team, I want to do that.

Kidron: Sales comp and what kind of incentives have you laid in place.

Kidron: In a way that's different to 'twenty three.

Kidron: And then on the competitive front, just given where your position on an SEC ops.

Kidron: And SaaS I think you've talked about kind of more enterprise on the tech ops and more SMB is the largest category in SaaS.

Kidron: Can you talk specifically on who do you see more of this.

Ken Xie: To take Fatima's question earlier, we're also very disciplined on the cost side. And as Keith said, you know, we have this services model where we have a lot of visibility based on the deferred revenue on the top line, but we are also very disciplined at kind of managing and monitoring the costs on a real-time basis. And, you know, sometimes you can control the costs, you know, more quickly than other things. And so what I've noticed is that we're very good at kind of managing that on a real-time basis, and we'll continue to do that as well. Welcome, John. Thank you. Thank you, John.

Kidron: Competition in those categories because.

Kidron: You don't seem to kind of stressing tire.

Kidron: Customer profile, so or regions frankly, so wed love to get a little bit more color into what do you see more versus less in those categories. Thank you.

Kidron: Yes.

Speaker Change: Yes, we can.

Speaker Change: We're keeping improving.

Speaker Change: The sales comp plan and also try to line up with the company goal and what's the.

Speaker Change: The fuel cells and also how we can kind of tie together and success together.

Speaker Change: There's some some modification of the compliant which.

Keith F. Jensen: And John also helped us form the company culture at our beginning, which is teamwork, and also openness, and also innovation. So we'll continue to maintain this culture and keep growing the company together. And then quickly, Brad, on the other hand, I mean, obviously, the view of the firewall cycles has some part of it, but I think probably more of the point is the digestion of products and projects. And if you look back at where the peak was of firewall purchasing and you kind of play that out, you know, you should be coming to this logical end of the deployment cycle. Great, thank you, guys.

Speaker Change: Towards the company long time, both on the growth on the margin and also an effect on some kind of.

Speaker Change: Our service space.

Speaker Change: Kind of model there behind.

Speaker Change: And also kind of keeping invest in the sales force and also kind of making the structure.

Speaker Change: Accretion that's out of the area and also training the sales make sure.

Speaker Change: A lot of a new era when can the SaaS you see Q2 did a lot of training. That's also the big enhancement will be kind of a.

Speaker Change: Nichols right now.

Keith Bachman: Thank you. Our next question will come from the line of Keith Bachman with BMO. Hi, many thanks.

Speaker Change: Yes, I'd, probably add to that and it's all just a couple of things on the comp plan conversation. This is the time of year, where it comprehends go out.

Keith Bachman: And Peter and Keith, thank you again for the disclosures on the segments within billing. It's very helpful. Two questions.

Speaker Change: Every company makes seems to make some changes I think the real thing that jumps out at me. This year is that I think after the 2023 results. The quotas are probably a little bit lower on an individual basis and they have been in the past and we've probably put some things to work in the other direction on it.

Ken Xie: One is on strategy and one is on guidance. Ken, on the strategy question, I wanted to ask you your perspective on the unified SASE excluding SD-WAN and SEC-OPS. There are two broad variables that I think about.

Speaker Change: But to <unk> point, we really want to make sure that we're investing and building on this sales team.

Keith F. Jensen: One is go-to-market, and one is product or R&D. You've clearly increased the go-to-market, marketing efforts surrounding unified SASE and SEC-OPS. I'm wondering, do you feel the need to also incrementally focus on the product side or incremental R&D, if you will, to strengthen the portfolio for things such as improving your positioning within the Gartner Magic Quadrant or whatever you want us to think about it? So is it more go-to-market that you think of as incremental efforts, or is it both, both the R&D side and as well as the go-to-market? And just in the interest of time, I'll ask my second question. Keith, on the guidance, it's just given the performance in the quarter, and I'm really focused on the year, not the March quarter. It does seem very conservative. You very much outperformed your expectations associated with the December quarter. And you're guiding for a kind of 2%. And even if you normalize for the backlog burn, you're sort of mid-single digits, maybe a little bit better than that. And so I guess I'm just trying to reconcile that it seems very conservative. Thank you very much.

Speaker Change: Making the adjustments in the quota for 2024 I think is appropriate.

Speaker Change: On the SMB and SaaS <unk> pardon me.

Speaker Change: <unk> and SEC ops conversation and I think it goes back to <unk> question before.

Speaker Change: At this stage, we are really shaping up in terms of having different customer mixes. The SMB portion of SaaS. He was about 55% of the business.

Speaker Change: And we're not surprised to see us having very very early success there.

Speaker Change: We're pleased with the with the development and the feedback we're getting from third parties about the success of SaaS product, but that together with our SD Wan customers is the logical place to see success on the flip side Tech ops.

Speaker Change: The opposite with large enterprises, providing about 55% of the business and I think the read through to that is all about consolidation.

Speaker Change: Are you really going to have successes.

Speaker Change: And it ties into the mix of repeat customers I E. Firewall customers are now buying <unk> products being very very high and Thats, what we would expect that both of those business segments.

Speaker Change: Maybe before.

Speaker Change: And also sometimes even four partner.

Speaker Change: So I'll switch solution secure networking SaaS.

Ken Xie: Yes, a very good question about SASE. Definitely, we want to do both, and even more than that. So we definitely see the opportunity to change our go-to-market strategy because a few months ago, we were more dependent on the service provider carrier trying to do SASE, and helping them to do SASE. Now it's more go-to-market, direct ourselves, and at the same time, working with our service provider. But also, more important, really, internal R&D and internal investment in the infrastructure. Like we mentioned, now we have over 150 POP worldwide and probably can match any other competitor. At the same time, the function, the innovation, and also put all the SASE in a single OS, and then a lot of functions that are using ASIC will accelerate.

Speaker Change: They've got a more comp compared to only sell one or two solution.

Speaker Change: That's the additional incentive.

Speaker Change: Some of them.

Speaker Change: Maybe as a follow up Keith how much of the opportunity here and say cups and SaaS is outside of your customer footprint is the vast majority of traction here just with your existing installed base or it also pulls you outside.

Speaker Change: Yes.

Speaker Change: As John pointed out we have over 500000 customers. So I'm, okay with your installed base right.

Speaker Change: And then I think that's anything new.

Speaker Change: Several years, we've talked about new logos, representing large numbers hundreds of thousands of new logos, but they've never really been more than 10% of the business. So I don't think that this is really going to change with that I expect that the firewall is such a compelling product because of the price performance advantage because of how more and more security have embedded into.

Ken Xie: And that also makes our SASE solution much better, more advantageous compared to other competitors, and also more easy to deploy, and more easy to manage. So we see that's a huge opportunity for SASE. It's not just SASE using the traditional cloud approach, but also on-premise SASE, the private SASE.

Speaker Change: The operating system and the ASIC empowers that that I'm not a sales force if I was I'd probably be looking for those opportunities and the white space accounts and then you work them like any other enterprise companies to come back and sell more into that company and Thats really what youre seeing with the SEC ops of SaaS products that Ken and John Im talking about.

Ken Xie: So we see a lot of opportunity for SASE going forward, both in the technology, which we also work on innovation, developing technology. At the same time, the go-to-market strategy, once we focus, we see huge success behind it. And just on the guidance, Keith, I appreciate the thought after kind of a tough middle of the year last year for us, or for me. I think you should keep in mind that we do probably have between $150 and $200 million.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question will come from the line of Adam Tindle with Raymond James.

Adam Tindle: Okay. Thank you let me see if I can get everybody involved here.

Adam Tindle: So Ken.

Adam Tindle: Ken I wanted to start with SaaS and SEC ops was obviously a key pivot point on the last call as you focus on that more internally could you summarize your competitive advantage technologically in those areas and John logistics from a sales perspective, I know that's been kind of kicked around 8% of quota retirement might be real.

Keith F. Jensen: Headwinds related to backlog or year-over-year comparisons if you want a backlog impact in the year. I think also about some of the commentary that we provided right before guidance where we talked about the relative impact, specifically product revenue and what you should see from service revenue for the year. You know, you can kind of get a sense of what we're thinking about for product revenue. I think we have some opportunities on the service revenue line with things that come from SECOP and FAFSA during the year. But all in all, I think where we're at right now in terms of the full year guidance number is an appropriate number for it. All right.

Adam Tindle: Weighted to those areas what did you land on for logistics and lastly for Keith.

Adam Tindle: Expectations for sales productivity as a result of that pivot towards SaaS SEC ops. Just wondering your early observations on what you've seen because it looks like you do expect total margin is down but I think it's somewhat related to gross margin not much efficiency drain. So just what youre seeing from a sales productivity perspective, as you pivot to those areas. Thank you.

Speaker Change: Yes for SaaS, we are the only company. We believe has the all of the SaaS function as the land.

Speaker Change: All of the Mega pads to be flat for our survey, it's all in a single operating system.

Keith Bachman: Many thanks. Congratulations, guys. Thank you. Our next question will come from the line of Itay Kedron with Oppenheimer. Thanks, you guys. A couple for me.

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Speaker Change: Platform out there.

Speaker Change: So that's a huge advantage both with our customer for the service provider.

Itay Kedron: First, on the comp side. As you move into 24, can you share a little bit more color on the changes you're making or have made to the sales comp, and what kind of incentives have you put in place in a way that's different than 23? And then on the competitive front, just given your position on SecOps and SASE, I think you've talked about kind of more meat enterprise on the SecOps side, and more SMB is the largest category in SASE. Can you talk specifically about who you see more as competition in those categories? Because you don't seem to kind of stretch the entire customer profile or regions, frankly. So we'd love to get a little bit more color into who you see more versus less in those categories.

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Great automate much better than other competitor more comp acquisition, which is a separate product that's more difficult to integrate ultimately took andrea so thats a huge advantage we have when you recall that.

Speaker Change: Monarch of fabric approach I've been doing now for 10 years, when you put a successful but now we have the same plan, which customer wants to hear is a secure op, which they see the huge advantage. That's why I have a huge growth going forward and also the field training.

Ken Xie: Thank you. Yeah, we kind of keep improving the sales comp plan and also try to line up what's the company goal and what's the field sales and also how we can move kind of a tie together and success together so that there's some modification of the comp plan that moves towards the company long term, both on the growth of the margin and also reflect more on some kind of a service-based kind of model there behind. So that that and also kind of keeping investing in the sales force and also kind of making the structure more efficient than other areas and also training the sales force because there's a lot of new areas where the SaaS UCQR does need a lot of training.

Speaker Change: So kind of help a lot. So thats. The advantage we have weathered a SaaS <unk> approach can use Etfs salaried and then the secure Apis integrate automate together much better than our competitors gave us huge advantage.

Speaker Change: Yes.

Speaker Change: Okay and in terms of the quota retirement question Keith May have additional comments on that but theres really no change there.

Keith: Yes, I think Ot and tab numbers are targeted very much the same I think on sales productivity.

Keith: Terms of what we saw in 2023 as we move through the year, obviously productivity kind of came down it seems to have leveled off now as we exit 2020, 2023 and I think that the modeling. If you will is pretty much a similar expectation for 2024 in terms of where we exited 2023.

Ken Xie: That's also the big enhancement we are kind of going on right now. Yeah, I'd probably add to that as well, just a couple of things on the comp plan conversation. You know, this is a time of year where comp plans go out. And, you know, I think every company seems to be making some changes. I think the real thing that jumps out at me this year is that, after the 2023 results, quotas are probably a little bit lower on an individual basis than they have been in the past. And we've probably put some things to work in the other direction on that. But to Ken's point, you know, we really want to make sure that we're investing in building this sales team. And, you know, making the adjustments in the quota for 2024 is, I think, appropriate.

Keith: On the.

Keith: Part of that.

Keith: I think in terms of what SaaS handset costs dramatically change those numbers.

Keith: Got it got it kind of go back to the earlier conversation about contract term sure at some level at the mix shifts and becomes 50 50 or 64 to go. The direction. Then we probably have something to talk about although I, probably we talk a lot more about the fantastic growth in the <unk> SaaS.

Keith: Then the fact that I have to pay salespeople to make that growth happen.

Keith F. Jensen: You know, on the SMB and SASE, or, pardon me, the SASE and SecOps conversation, and I think it goes back to some of Gabriela's questions before, you know, at this stage, they're really shaping up in terms of having different customer mixes. The SMB portion of SASE was about 55% of the business, and we're not surprised to see us having very, very early success there. We're pleased with the development and the feedback we're getting from third parties about the success of the SASE product, but that, together with our SD-WAN customers, is the logical place to see success. On the flip side, SecOps is almost the opposite, with large enterprises providing about 55% of the business, and I think the read-through to that is all about consolidation, where you're really going to have successes, and it ties into the mix of repeat customers, and the firewall customers are now buying the SecOps products, being very, very high, and that's what we would expect out of both of those business segments.

Keith: That concludes today's question and answer session I would like to turn the call back to Peter Stakhovsky for closing remarks.

Peter Salkowski: Thank you Liz I'd like to thank everyone for joining today's call Fortinet will be attending an investor conference hosted by Morgan Stanley during the first quarter. The Fireside chat website link will be posted on the events and presentation section of Fortinet Investor website.

Speaker Change: Starting soon do you have any questions. Please feel free to reach out have a great rest of your day. Thank you.

Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.

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Speaker Change: Okay.

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Keith F. Jensen: Yeah, for all three sales, and also sometimes for partners, if they sell all three solutions, secure networking, SaaS, and secure operations, they get more comp compared to only selling one or two solutions. So that's the additional incentive we offer to the partners. Maybe as a follow-up, Keith, how much of the opportunity here in SecOps and SaaS is outside of your customer footprint? Is the vast majority of traction here just with your existing install base, or does it also pull you outside?

Speaker Change: Okay.

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Keith F. Jensen: Yeah, given, as John pointed out, we have over 500,000 customers, so I'm okay with the installments, right? And I don't think that's anything new. For several years, we've talked about new logos, you know, representing, you know, large numbers, you know, hundreds, thousands of new logos, but they've never really been more than 10% of the business. So I don't think that this is really going to change with that. I expect that. The firewall is such a compelling product because of the price or performance advantage because of how more and more security has been embedded into the operating system and the Basic empowers that. You know, I'm not a sales person. If I were, I'd probably be looking for those opportunities in the white space accounts. And then you want them, like any other enterprise company, to come back and sell more into that company.

Speaker Change: Yes.

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Keith F. Jensen: And that's really what you're seeing with the SecOps and SASB products that Ken and John have been talking about. Thank you. Our next question will come from the line of Adam Tindall with Raymond James. Okay, thank you. Let me see if I can get everybody involved here.

Adam Tindall: So, Ken, I wanted to start with SASE and SecOps was obviously a key pivot point on the last call. As you focus on that more internally, could you summarize your competitive advantage technologically in those areas? And John, logistics from a sales perspective. I know it's been kind of kicked around that a percent of quota retirement might be related to those areas. What did you land on for logistics?

Speaker Change: Okay.

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Ken Xie: And lastly, for Keith, expectations for sales productivity as a result of that pivot towards SASE and SecOps. Just wondering your early observations on what you've seen, because it looks like you do expect total margins to go down, but I think it's somewhat related to gross margin, not much of an efficiency drain. So, just what you're seeing from a sales productivity perspective as you pivot to those areas. Thank you. Yeah, for SASE, we are the only company we believe has all the SASE functions, SD-WAN, all the, like, CASB, web, file service, all in a single operating system, can be deployed on-premise, using AC for SASE, using CloudForm right there. So that's a huge advantage, both for the customer and for the service provider. I think on the secure ops side, we also internally develop most of the product, whether from endpoint or from all these different, like, email application, web, all these things, because when we internally develop, it integrates and automates much better than other competitors, more comfortable acquisition, which is a separate product that's more difficult to integrate and automate together.

Speaker Change: Okay.

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Ken Xie: So those are the two huge advantages we have. We usually call the secure ops approach more like a fabric approach. We've been doing that for 10 years, which is pretty successful, but now we have the same term that customers want to hear is a secure operation, which they see as a huge advantage. That's why we have huge growth going forward, and also the field training helps a lot. So that's the advantage we have, whether the SASE single OS approach, I can use AC to accelerate, and then the secure op is integrated, and automate together much better than other competitors, giving us a huge advantage. In terms of the quota retirement question, you know, Keith may have additional comments on it, but there's really no change there. Yeah, I think OTE and the numbers targets are very much the same.

Yes.

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John Whittle: I think on sales productivity, you know, in terms of what we saw in 2023, as we move through the year, obviously, productivity kind of came down, but it seems to have leveled off now as we exit 2024 and 2023. And I think that the modeling, if you will, is pretty much a similar expectation for 2024 in terms of where we exited 2023. On the other hand, there's another part of that. I think in terms of whether SASE and SECOPS would dramatically change those numbers, I kind of go back to the earlier conversation about contract terms. Sure, at some level, if the mix shifts and becomes 50-50 or 64 to get a direction, then we probably have something to talk about, although I'd probably be talking a lot more about the fantastic growth in SECOPS and SASE than the fact that I had to pay sales people to make that growth

Speaker Change: Thank you.

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Keith F. Jensen: That concludes today's question and answer session. I'd like to turn the call back to Peter Salkowski for closing remarks. Thank you, Liz. I'd like to thank everyone for joining today's call. Fortinet will be attending an investor conference hosted by Morgan Stanley during the first quarter.

Speaker Change: Yes.

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Peter Salkowski: The Fireshare Chat website link will be posted on the events and presentation section of the Fortinet's investor website starting soon. If you have any questions, please feel free to reach out. Have a great rest of your day. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Emergency Alarm ? ? ? ? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ??

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