Q1 2025 Fortinet Inc Earnings Call
Thank you and good afternoon, everyone. This is Aaron Ovadia, Senior Director of Investor Relations at Fortinet. I am pleased to welcome everyone to our call to discuss Fortinet's financial results for the first quarter of 2025.
Joining me on today's call are Ken Xie, Fortinet Founder, Chairman, and CEO , Keith Jensen, our CFO , Cristiana Ohlgart, our CAO, and Sales Operations Leader, and John Whittle, our COO.
Speaker Change: As a reminder, Keith will be stepping down from the CFO role on May 15th, and Christiana will take over as our next CFO [inaudible]
Speaker Change: Ken will begin our call today by providing a high level perspective on our business [inaudible]
Ken Xie: Keith will then review our financial results for the first quarter of 2025 and Christiana will provide a forward-looking view, including guidance for the second quarter and updating the full year. We will then open the call for questions.
Speaker Change: 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.
Speaker Change: 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 [inaudible]
Speaker Change: Our subject to risks and uncertainties which could cause actual results to differ materially from those projected.
Speaker Change: Please refer to our SEC filings, in particular their risk factors in our most recent form 10K, and form 10Q for more information.
Speaker Change: All four looking statements reflect our opinions only has a bit of this presentation and we undertake no obligation and specifically to disclaim any obligation to update for looking statements.
Also...
Speaker Change: All references to financial metrics that we make on today's call are non-GAAP unless otherwise stated. Thank you, David.
Speaker Change: Our gap results and gap to non-GAAP reconciliations are located in our earnings press release and in the presentation of the company today's remarks, both of which are posted on our investor relations website
Speaker Change: As a reminder, if this is a live call, it will be available for replay via webcast on our Investor Relations website .
Speaker Change: The prepared remarks will also be posted on the quarterly earning section of our IR website
Speaker Change: Lastly, all references to growth are on a year-over-year basis unless noted otherwise. I will now turn the call over to Ken.
Ken Xie: Thank you, Aaron, and thank you to everyone for joining our call. We are pleased with our strong performance in the first quarter. Successfully balancing growth and profitability, including building a revenue growth of 14%. Record, first quarter of rich margin of 34%. We are pleased with our strong performance in the first quarter.
Ken Xie: Record, Free Cash Flow of a $783 million, a margin of 51% [inaudible]
Ken Xie: and strong growth in secure operations and unify sassy with security service age building growth of over 110%, which drove our unify sassy bullying growth to 18%, accounting for 25%
Aaron Ovadia, Keith Jensen
Ken Xie: Fortinet leadership in innovation and a long-term investment is evident in a market position as the number one de-poet viral vendor worldwide. A market leader in HD1 and OT security, and with our strong society strategy and growth, we are confident we'll be number one in this space as well. [inaudible]
Ken Xie: The strong momentum behind our Unified Sassy Pillar underscored a value customer place on our single OS platform.
Ken Xie: The typical sassy journey begins with a customer initial purchase of Fortinet, industry leading, basic-based footage firewall, powered by Fortinet OS.
Ken Xie: From there, the majority of the large enterprise customers expand into SD1 before progressing into a 40-size solution
Ken Xie: This expansion past continued to grow, 73% of large enterprise customers have now adopted our S.D.1 solution and have to add their begin a well-position to transition to Fortissasi.
Ken Xie: With a 40% penetration among large enterprises increasing nearly 10%, quarter over quarter to 11%.
Aaron Ovadia, Keith Jensen
Ken Xie: We remind the only vendor to have organically developed all of the core SARS-C capability within a single operating system for the OS. Included in action firewall, SD1, ZTNA, secure upgrade way, Caspi, and DLP technologies.
Ken Xie: This native integration of networking and security reduce the capacity and operation cost, where enhancing user experience and ensuring secure across both on-premise and cloud environments.
Ken Xie: In addition to our traditional sassy offering, we also offer solvent sassy, tailored solution for large enterprise and service providers that require full on premise or in-country control of their data
Ken Xie: We solve and sassy, customers can deploy for disaster within your own data centers, ensuring that our data is processed is closely through customer owned or country-specific locations to meet compliance requirements by country or industry regulations. Thank you very much.
Ken Xie: This approach accelerates the performance of 48th technology and is well suited for highly regulated sectors such as finance, garment, and healthcare and healthcare.
and Aaron Ovadia.
Speaker Change: A.I. Trebnick's operation building increased by 29%, accounting for 10% of our business. [inaudible]
Speaker Change: As customers continue to consolidate multiple security vendors out of Intergrade and ARHL's 40-fabric solution.
Speaker Change: Looking ahead, in addition to Sasi and Sikir Op, we expect OT security and AI to be key growth drivers over the next five years
Speaker Change: In OT Security, a rapidly expanding market driven by a surge in connected devices.
Speaker Change: Fortinet is recognized as the only leader in the Westland Advisory Report, supported by over a decade of strategic investment and specialized solution positionals for continued growth.
Speaker Change: We also continue to invest in our AI capabilities, which we've been developing more than 15 years ago, and now hold over 500 issues and pending AI patents, more than any other competitors [inaudible]
Speaker Change: With our AI technology now integrated into a dozen products, new AI capabilities like Food AI Assist for automated security tasks.
Speaker Change: Fortier Protect, Fortight Events, Threat Detection, and Fortier Secure AI for Protecting AI Infrastructure.
Speaker Change: Today we announced the 40k 700G series, a high performance firewall for mid-sized spinners and dispute enterprise.
Speaker Change: Powered by a Ford A6 technology, which delivered a 5-to-10X performance advantage over competitors, and the 40OS, the only operating system recognized across five secure networking gun and magic quadrants. [inaudible]
Speaker Change: This approach significantly lowers total cost ownership and complexity while reducing energy consumption and drive Fortinet's continued strong growth and market share gain in secure networking.
Speaker Change: I would like to thank all employees, customers, partners, and suppliers worldwide for their continuous support and hard work. I will now turn a call over to Keith and Christiane. [inaudible]
Speaker Change: Thank you, Ken. Thank you, Aaron. Welcome, Christiane, and good afternoon everyone. Let's start with the key financial highlights from the first quarter before handing the call off to Christiane for a more detailed and forward-looking view.
Speaker Change: We deliver strong performance and top line results that approach the high end of our guidance range, together with record first quarter operating margin of 34%.
Speaker Change: Total revenue grew 14%, given by strong product and service revenues, with product revenue growth of 12%
Speaker Change: Innovation, new logos increased 14% to over 6,300, driven by continued worldwide investments in our channel partners.
Looking at our financial results in more detail. [inaudible]
Speaker Change: Total Billions Group 14% to 1.6 Billion, driven by 18% growth in Unified Sassy, and 29% growth in AI-driven
Speaker Change: Unified Sassy and Sack Ops, now account for 25% and 10% of total billings, respectively, up 1.1 each [inaudible]
Speaker Change: RPO grew 12% to 6.5 billion, well current RPO grew over 15% to 3.4 billion [inaudible]
Speaker Change: Unified Sassy and Psychops ARR, increased 26% and 30% respectively, reaching a combined ARR of 1.6 billion.
Speaker Change: Training to Revenue in margins, Total Revenue Group 14% to $1.54 billion
Speaker Change: Product Revenue increased 12 percent to 459 million, driven by growth in both hardware and software solutions. [inaudible] for joining us today, and thank you very much
Speaker Change: Fortigate Hardware revenue grew in the mid teens, pacing total product revenue growth, giving my strong performance in low end and high end models. [inaudible]
Speaker Change: It's supported by early mover, large enterprise customers upgrading their firewall infrastructure.
Speaker Change: Software License Revenue, grew in the mid teens, and represented a high teens percentage of total product revenue, driven by on-prem time-based software license growth of over 30 percent.
Speaker Change: Service revenue of 1.08 billion through 14% to 70% of total revenue.
Speaker Change: Security subscriptions revenue increased 16 percent, while support to related service revenues increased 12 percent.
Speaker Change: Total Gross Margin increased 380 basis points to 81.9% and exceeded the high end of the guidance range by 90 basis points.
Speaker Change: Product gross margin of 67.7%, increased 1200 basis points, as inventory related charges normalized, from the highly elevated levels we saw in the first half of 2024. [inaudible]
Descended approximately 1,300 basis points to product growth margin.
and approximately 400 basis points to total gross margin.
Speaker Change: Service gross margin of 87.8% was down just 10 basis points.
Speaker Change: As we successfully absorbed increased costs associated with the expansion of host security solutions.
Speaker Change: Operating margin increased 570 basis points to the first quarter record of 34.2% .
Speaker Change: And with 320 basis points above the hand of our guidance range, reflecting the strong growth margin.
and FX Tailwind of around at a hundred basis points. [inaudible]
and coughs efficiencies in the business.
Speaker Change: Looking to the same in the cash flow, some rights on slides 18 and 19. Free cash flow tends to be seasonally strong in the first quarter. It was a record $783 million.
Well, a free cash low margin was 51% of six points. [inaudible]
Speaker Change: Josephree Cashlow, was $839 million, representing a margin of 54% . . .
Speaker Change: The infrastructure investments were $67 million, down $155 million due to a lower level of real estate investment, cash taxes were $27 million.
Speaker Change: Average contract term was 27 months, roughly flat year over year, and down two months quarter over quarter [inaudible]
Speaker Change: And while we did not repurchase shares during the first quarter, we did repurchase approximately 4.6 million shares for a total of $401 million during the month of April . [inaudible]
Speaker Change: We're made sure by a back authorization as of today is approximately 1.6 billion.
Speaker Change: Now turn the call over to Christiane on it, to share a few significant wins from the first quarter, as well as our more forward-looking view, including business conditions in the second quarter and four-year guidance.
Thank you, Keith.
Ken Xie: As Ken mentioned earlier, the noteworthy headline in this uncertain macroeconomic environment is that customer adoption of our solutions is accelerating and accelerating.
Ken Xie: This momentum is driven by two key factors. One, our decades-long innovation leadership, and two, our competitively differentiated dedication to putting the customer first.
and Aaron Ovadia.
Ken Xie: Together, this creates a powerful network effect with some of the most discerning organizations rapidly adopting Fortinet's solution at scale.
Ken Xie: This is exemplified by Fortinet being the number one solution at Firewall, as well as a leader in SD1 and OT security [inaudible]
Ken Xie: Also, our leading sassy strategy is driving strong growth, reinforcing our confidence in becoming the number one player in the sassy market.
Ken Xie: Building on this momentum, our SSE solution is gaining strong traction fueled by continued success in upselling SSE to our large SD1 customer base.
Ken Xie: With both ARR and Billings' growth at over 100%, we believe Fortissasi is the fastest growing SSE solution at scale in the market.
Ken Xie: As shown on slide 7, the typical 40 sassy journey begins with a customer purchasing our market leading 48 firewalls, followed by an expansion to SD1 and then onto our single vendor sassy solution.
Ken Xie: Our adoption of SD1 and SSE continues to grow with our large enterprise expansion penetration rates increasing to 73% and 11% respectively with the SSE penetration rate growth increasing nearly 10% quarter over quarter
Ken Xie: In addition, a second customer buying journey illustrates the growing convergence of security and networking. It two starts with our 48 firewalls and expands to us which is in excess points.
Ken Xie: The key to this expansion is 40OS 40-link technology, which enables seamless management of our switches and access points through our unified operating system The key to this expansion is 40OS 50OS 50OS 50OS 50OS 50OS 50OS 50OS 50OS 50OS
Our increased penetration rate show the success of this strategy.
Ken Xie: Now I'd like to review some deals that showcase our Sasi adoption and customer expansion.
Ken Xie: In an eight-figure displacement deal, an international government purchased our SD-WAN solution, as well as our 40-Sazi solution, to secure the hybrid workforce of 6,000 users
Ken Xie: This customer chose Fortinet for its ability to deliver flexible and consistent security enforcement, ensuring secure access to balls on premises and cloud applications, while maintaining a seamless user experience. This customer chose Fortinet for its ability to deliver flexible and consistent security enforcement.
Ken Xie: By harnessing the power of our 40 OS, we delivered superior performance over the competition, reduced total cost of ownership and effectively consolidated multiple security functions into a single integrated platform.
Ken Xie: In another saucy win, we replace the incumbent vendor at an international education provider, which chose 40 saucy for their 40,000 users
Ken Xie: The decision to transition to 40-SASI was driven by ongoing performance challenges with their previous SASI vendor.
Ken Xie: Keith to this win included 40 salsies of youth, seamless integration with the Fortinet security fabric, and proven scalability across their SD1 sites.
Ken Xie: Based on the success from their proof of concept, this customer will benefit from improved performance, consistent security for users everywhere, and greater operational efficiency.
Ken Xie: In a seven-figure deal, a large multinational manufacturing company selected our SD-WAN and multiple
Ken Xie: Fortinet Displaced, the Legacy SD-RAN provider by demonstrating how 40OS simplifies operations, reduces total cost of ownership and unifies security and networking functions on a single platform.
Ken Xie: The integrated nature of 4DOS also enables seamless alignment with the company's existing 4DNet security infrastructure, establishing a strong foundation for future projects . . . .
Ken Xie: Lastly, a Fortune 500 company signed an eight-figure deal that spends all three of our pillars. First.
Ken Xie: Over the past three years, they've expanded their 40-gate install base by more than 80 percent, driven by our world-class support for their data centers and branch locations [inaudible]
Ken Xie: As well as the automation and seamless integration enabled by our 40S operating system [inaudible]
Aaron Ovadia, Keith Jensen
Speaker Change: Rounding out the Billings Commentary. Large enterprise was our top performing customer segment with growth of around 30%.
Speaker Change: The number of deals greater than 1 million were up 30%, including three eight-figured deals this quarter, up from one during the same period last year [inaudible]
Speaker Change: Emea was our best performing geography driven by mid-teen scrolls from international emerging
Speaker Change: Among our top five verticals, financial services and worldwide government led the way with growth of over 20 percent.
and Aaron Ovadia.
Speaker Change: Before moving on to guidance, I'd like to spend a few minutes discussing the current US terror situation.
Speaker Change: The U.S. terrorist situation landscape is evolving rapidly and our comments on this call reflect the information currently available to us.
Aaron Ovadia, Keith Jensen
Speaker Change: Despite the current geopolitical uncertainties, demand for our cyber security solutions remains strong.
Speaker Change: Our pipeline continues to grow and we are not seeing signs of near-term erosion. Additionally, our close rates remain robust and sales cycles are tracking within our normal historical range We are not seeing signs of near-term erosion. We are not seeing signs of near-term erosion.
Speaker Change: For the second quarter, we do not expect U.S. tariffs to have a meaningful impact on our operating margin, as only a few components are subject to tariff charges.
Speaker Change: Should tariffs increase in the future, we expect any residing impact on our operating margin to be limited to hardware sales to US customers.
Speaker Change: As long as our international hardware sales do not flow through the US, they are not subject to US import tariffs [inaudible]
Moving on to guidance.
Speaker Change: As a reminder, our second quarter and full year outlook, which are summarized on slides 21 and 22 are subject to the disclaimers regarding forward-looking information that Aaron provided at the beginning of the call
Speaker Change: While our business remains strong and we outperformed on the top line in the first quarter with continued confidence in our ability to execute, we recognize that our customer's investment decisions can be influenced by the broader economic outlook. [inaudible]
Speaker Change: As a result, we are maintaining our full-year billings and revenue guidance ranges to account for potential top-line risks associated with the evolving geopolitical environment
Speaker Change: Regarding the record firewall upgrade cycle that we've spoken about previously, we continue to expect the firewall upgrade cycle to gain momentum in both purchasing and planning activities in the second half of 2025 .
Speaker Change: Looking at the bottom line, the US dollar weakened more than anticipated from early February when we first issued our 2025 guidance.
Speaker Change: As a result, we expect an operating margin headwind of approximately 120 basis points to the second quarter and approximately 90 basis points to the full year, which is factored into today's outlook
Speaker Change: Despite the FX headwinds, we are raising the midpoint of our full-year operating margin guidance as a result of our first quarter-out performance and expected efficiencies in the business.
Speaker Change: Our continued business momentum and strong execution gives us confidence that we are on track to achieve the rule of 45 for the sixth consecutive year.
Speaker Change: For the second quarter, we expect Billings in the range of 1.685 billion to 1.765 billion, which at the midpoint represents growth of 12 percent . . . .
Speaker Change: non-GAAP Cross margins of 80 to 81%, non-GAAP operating margins of 31.5 to 32.5%.
Speaker Change: Non-gab earnings per share of 58 to 60 cents, which assumes a share count between 773 and 777 million.
Speaker Change: Infrastructure investments of 180 to 200 million, a non-GAAP tax rate of 18 percent, and cash taxes of 230 to 255 million.
Speaker Change: For the full year, we expect Billings in the range of 7.2 billion to 7.4 billion which at the midpoint represents growth of 12 percent.
Speaker Change: Revenue in the range of 6.65 billion to 6.85 billion, which at the midpoint represents growth of 13%.
Speaker Change: non-GAAP earnings per share of $2.43 to $2.49, which assumes a share count of between 769 and 779 million.
Speaker Change: Infrastructure Investments of 380 to 430 million, non-GAAP Tax Rate of 18% . . .
and cash taxes of between 525 million and 575 million.
Speaker Change: I will now hand the call back over to Aaron to begin the Q&A session. Thank you, Christiane. As a reminder during the Q&A session, we ask that you please limit yourself to one question and one follow-up questions to allow others to participate. Operator, please open the line for questions.
Speaker Change: Thank you. If you would like to ask a question, please click on the raise hand button at the bottom of your screen. When it is your turn, you will hear your name called and receive a message on your screen, notifying you that you may unmute yourself. We'll allow a moment for the cue to form. We'll allow a moment for the cue to form.
Speaker Change: Our first question will come from Brian Essex, the JP Morgan, please unmute your line and ask your question for the next question.
Thank you very much.
I get after you hear me okay?
Yes.
Speaker Change: Great, great. Thanks for taking a question and congrats on the results for the quarter. I guess maybe for for
Speaker Change: Keith, maybe, or Christiana, could you unpack the dynamics behind the meeting and services revenue? Just trying to understand, it's a segment that I think we were expecting to kind of accelerate the client sequentially, so just trying to understand some of the puts and takes behind that and how you expect that to. [inaudible]
Christiana Allgaard: So, I think there are a couple of aspects that you touched on. One is the quarter-over-quarter slide decline is really affected by the Q4 having two more days than Q1 and that affects the daily rate going into revenue. Of course, we would have expected it slightly. Thank you.
Christiana Allgaard: Better acceleration, but there's a little bit more time that we need to grow our acquired entities.
Christiana Allgaard: and their revenue streams, so that's impacting Q1 service revenue predominantly.
Speaker Change: Is there a dynamic here between four of our bullies here that we need to think about?
Aaron Ovadia, Keith Jensen
Speaker Change: I would say current RPO is still strong, so I mean we have confidence in the growth.
Speaker Change: Couple point above, before the 2000, kind of a 40-year-old's average, so we see a pretty good sign, plus we sat in the most service on top of the 40OS, and that's also what drives the future service revenue. [inaudible]
Gregg, Ken Fashana, and Keith, thank you so much.
Aaron Ovadia: and Aaron Ovadia. Thank you. Thank you. Thank you. Thank you.
Speaker Change: Tal Liani, you are free to unmute your line and ask your question. Thank you very much.
There we go. Can you hear me?
Yes, please.
Okay, thank you Um
Speaker Change: We spoke about, in earlier quarters, we spoke about end of service, coming, bringing demand forward even in the last quarter you said that demand is going to come this next four, five, four quarters, it's going to come this year instead of next year [inaudible]
Speaker Change: So the question I have is why are we seeing some lightness in the guidance for the next quarter? Why don't we see...
Speaker Change: the demand coming forward to the next quarter. Can you just speak about the drivers? I just compare your numbers, your guidance to the consensus. And I'm trying to understand why don't I see already strength.
Speaker Change: Especially a head of a tariff increase that is going to increase the prices, likely increase the prices for everyone, thanks
and Aaron Ovadia. Thank you.
Aaron Ovadia, Keith Jensen
Speaker Change: I don't think we, like we mentioned in the tariff, I don't think we plan to change in the price and the current condition. On the other side, there's still some uncertainty, so we try to be kind of a little bit careful, but we do see...
Speaker Change: The customer liked the solution we had, and just some kind of geopoliticals and also some other part, just include some kind of uncertainties, or we try to be a little careful, probably, for some keys, you know this better. [inaudible]
So I would say, um...
We saw good close rates and I'm a good...
Speaker Change: Linearity and Q2 in April , so it gives us confidence, but we also are tied a little bit by the expectations that we get from our sales teams. So we see good momentum. Adam.
Speaker Change: to go up in their expectations for us. And so I think that's where we'd rather be careful with the guidance and then hopefully are going to meet our numbers.
Got it. Thank you.
Speaker Change: Our next question comes from Gabriela Borges, with Goldman Sachs, please unmute your line and ask your question for the next question.
Gabriela Borges: Hey, good afternoon. Thank you. Maybe Christiane, I'll pick up right where you left off on sales being hesitant.
Clearly we're all seeing similar headlines as you are.
Gabriela Borges: Maybe just tell us specifically, what are some of the conversations that sales is having from customers? What are the reasons they're hesitant to commit to purchasing Fortinet? And how are you thinking about maybe some of that hesitancy getting resolved? Is it maybe when we run into the lead time situation for the end of life? What are you thinking about?
Gabriela Borges: How do you think about that flowing through over the next few quarters? Thank you . . . .
Aaron Ovadia, Keith Jensen
Speaker Change: We had a number of events in Q2 and we get really good feedback, so I think it's going to resolve. We have good channel activity, we have good channel programs and I think some of you may have seen that in channel checks also that they are positive about 40 nets.
Speaker Change: program, so I think it just needs to with all the macro news that are.
Speaker Change: Coming in every day, and then don't turn out as bad as there are there is hesitancy because until the PL is in. [inaudible]
Speaker Change: It can't get delayed. We are positive. I think you saw it from my comments. We haven't seen delays yet, but we don't know what happens over the next two months or the rest of the year. [inaudible]
Professor, thank you.
and Aaron Ovadia. Thank you. Thank you.
Speaker Change: An next question will come from Keith Weiss from Oregon Stanley. Please unmute your line and ask your question.
Keith Weiss: Thanks so much. Thank you for taking the question. Mick, you're carrying on with that line of thought, if you will.
Thank you very much.
Keith Weiss: What could you guys confidence that you're still going to be able to perform to like this stronger second half pick up?
Speaker Change: I get into the product cycle going on and people have to start preparing the end of life but...
Keith Weiss: Is there no risk there of potentially people kind of sweating the acid or pushing it, pushing it out?
Speaker Change: I guess that's just a question though that like where do you stem confidence though that the second half will be stronger and how much of that second half strength is implied in the guide right now? [inaudible]
and Aaron Ovadia.
Speaker Change: I mean, the second half strength is implied in the guide because we have, we have...
Aaron Ovadia, Keith Jensen
Speaker Change: I think significant improvement of total cost of ownership and security compared to what customers bought eight, nine, ten years ago [inaudible]
Speaker Change: And we see the activity going on, especially in the enterprise. Yeah.
Speaker Change: I think we mentioned in our prepared remarks that 40 gates go faster than the rest of product revenue, which I think is a testament to the strength that we are seeing. The same is true for OT, and so we are confident.
Speaker Change: Oh, in this room, more so, maybe then, say it's when they talk to customers and need to put a commit on their pipeline now.
Speaker Change: Yeah, that's where we kind of measured the growth in the three different pillars. So if you look at the secure network in that traditional area, we are very strong, but only one result is ASIC technology solutions, single 40 OS.
Speaker Change: So we continue gaining market share even when we are the number one leader there And then the union versus if we also believe we are like a top three top two player and then also grow faster than any other player [inaudible]
Speaker Change: And we'll be the leaders. And so each of these, also the secure up, which we grow like a 29% . . . .
Speaker Change: Also probably faster than most other player of a similar size, so that's where each dispute over keeping getting market share, just where not quite share the overall market.
Speaker Change: Gross, later this year next year, we'll be continuing the hold-off for whatever, some, some, some, some forecast forecast.
Speaker Change: Khandaba, has a little bit, and certainly there, I know a lot of people talk about security, a little bit more sticky and more resistant compared to Samardry, but they do have some impact, so we try to be careful and by the same time
were hoping to overachieve all this guidance.
Speaker Change: God, it makes sense, thank you, thank you, Keith Thank you, thank you, thank you,
and Aaron Ovadia. Thank you. Thank you.
Speaker Change: Our next question will come from Shaul Eyal with TD Cohen. Please unmute your line and ask your question.
Speaker Change: Thank you, good afternoon everybody, and congrats on Solicitoro Bizloves. [inaudible]
considering the going macro. [inaudible]
Speaker Change: The number of a bigotransactions have been on the rise over the past two quarters. When we unpack...
Speaker Change: It was transactions, and I know they could differ from one another.
Speaker Change: They were presented about the entire Fortinet platform, the stack, to include S1 and Sassil. What's driving those large transactants predominantly from these product perspectives? Thank you.
Thank you.
Speaker Change: So a significant driver for these large transactions is SD-WAN deployments and enterprises.
Speaker Change: And so typically, that's the starting point, but then as we mentioned, the customers are buying into the fabric and are buying additional solutions in addition to SD1.
and Aaron Ovadia.
You're going to have a great day.
Speaker Change: Our next question will come from Rob Owens with Piper Sandler. Please then meet your line and ask your question in the next question.
Go to Beadaholique.com for all of your beading supply needs!
Speaker Change: Great, thank you very much, follow on with Shaul Eyal's question, they're just around these large deals, were they?
Aaron Ovadia, Keith Jensen
Speaker Change: Paul Forward, relative to the end of life. So, Currice, if this was a similar experience with the larger transactions, or was it more wall-wall SEWAN deployment or global SEWAN deployment, like you spoke to, just more colors be great. Thanks.
So now these were transactions that were in the pipeline. The pipeline.
Speaker Change: And Closed, as expected. So I think this is where our remarks came in. We do not see deals pushing out yet.
but these deals also closed.
before the end of March, mostly. [inaudible]
Aaron Ovadia, Keith Jensen
All right, thank you.
Speaker Change: Our next question comes from Eric Heath, with Keith Bach, please unmute your line and ask your question for the next question.
and Aaron Ovadia. Thank you. Thank you.
Hi, this is Shrenik Koshep, on for Eric Heath.
Speaker Change: During your proposal Mark, you talked about how a church would impact our garcials to U.S. customers. [inaudible]
Are you able to quantify that impact to my dream? [inaudible]
Speaker Change: Sprung Terps, and also could you talk to some steps you might be taking to involve your supply chain committee papers and facts?
So...
Speaker Change: We did not mention that we have impact from tariffs in Q1, right? So, we don't expect any impact from tariffs in Q1 or significant impacts in Q2 because only very few of our products are subject to tariffs. So, we're going to start with the next one. We're going to start with the next one. We're going to start with the next one.
Speaker Change: and then it's only a small portion that actually gets imported into the U.S. for U.S. customers. Thank you very much.
Speaker Change: Yeah, the other part is really because we design from ASIC shape to the system.
Speaker Change: To all the OS and the service, we'll be able to relocate where we can manufacture . . .
Speaker Change: That's also because we also tend to have a little more inventory than some other company so that's also gave us some buffer So far we don't see the impact of tariff yet [inaudible]
Thank you.
Speaker Change: Our next question will come from Saket Kalia with Barclays, please unmute your line and ask your question [inaudible]
Great, thanks for taking my questions here.
Christiane Allgaard: Christiane, maybe for you, just to stay in that topic, just from a different angle. .
Speaker Change: Can you just talk about whether there was any changing behavior from channel partners this quarter ahead of tariffs? I think some industries out there, just some earlier purchasing ahead of potential price increases. Did Fortinet see any of that this quarter? Yeah.
Speaker Change: We got questions about whether we would increase our prices, but we did not see specific acceleration of deals.
Speaker Change: And Saket, maybe I'll just kind of fill in some of that to build on what Christiane just said and understanding what one really art terrorist impacting our business today.
Speaker Change: And the first place that you'll see there would be in cash flow. You won't see it in the income statement because of how cogs has recognized or got purposes.
Speaker Change: for several quarters, so you really should just kind of assume there really isn't an impact on tariffs.
Speaker Change: in that regard. I think the other thing that you're probing out as a group is, you know, do we see pull forward as we saw in other industries? And the answer to that is no, not really. And again, because...
Speaker Change: In our business model with our pricing advantage, this really not under the gun, we're not raising prices immediately if we had tariffs because it will not hit our P&L for an extended period of time, if that helps.
Speaker Change: Yeah, that does help super helpful. If I can sneak in a follow up, maybe for Ken, just to zoom out a little bit from the terror discussion, you know kind of it was great to see the unified fast business just continue to scale. Thank you very much.
Speaker Change: Can you just talk about, and there were some great deals that were called out in the prepared remarks? Can you just talk about what solutions you're typically replacing at these customers? I mean, is it primarily VPN hardware, or is it secure web gateways, or is it other solutions that that that Fortissaz is able to replace? [inaudible]
Speaker Change: I think we see both replacing some some traditional old like VPN but also replace some other SASE player competitors because we talk about for a few quarter we have like a three key differentiation in a SASE.
Speaker Change: First off, Sass is integrated into the single OS platform, which none other player had that. So that was very easy for the traditional customer, which we are the number one in the firewall space. [inaudible]
Speaker Change: Over half the global deployment, they can easily add a SASC service, add IC1 service to the current box, the current OS there.
Speaker Change: So that's probably over 90% growth come from this. And then the second also definition, kind of also our early strategy we try to work with a lot of carrier service provider and then since they are more little bit slow so we decided to do ourselves like 18 months ago. Thank you very much.
Speaker Change: So now we still see the service provider and also a lot of a bigger enterprise customer, especially a finance service healthcare, they still want to do their own private sassy, solving sassy . . .
Speaker Change: So, their interest got higher and higher, so we started working with them, they started to see the real deployment of a solvent sassy, which we can have a...
Speaker Change: Bill Deer, Dezasi Solution, in their own data center, just a few bars, can give them all the solution they need, supporting like 100,000, 10,000 customer, their user there.
Speaker Change: And then the third one, really, the global infrastructure we build out with a lot of our own kind of security technology also gave us a positive advantage, and also gave us more secure solutions than some other chassis players [inaudible]
Speaker Change: So that does, I see both the traditional VPN replacement and also like in Christiane as a remark, we also replace a few sassy player, that's a lot of a big enterprise area. So we see like...
Speaker Change: Like the traditional one, probably more penetrating into the small S&P area, some mid enterprise, which they also see the SaaS-equipped and some kind of ZDN solution. But in the big enterprise, we started replacing a lot of other SaaS player.
Very helpful, thanks guys Thank you [inaudible]
Speaker Change: Our next question will come from Patrick Colville, which goes to bank. Please unmute your line and ask your question
and Aaron Ovadia. Thank you. Thank you.
Patrick Colville: Thank you so much for taking a question. I guess I want to just go back to Keith and Christiane about the service revenues down to sequentially. Christiane mentioned this was because it had two fewer days. Thank you so much.
Aaron Ovadia, Keith Jensen
Patrick Colville: Good and explanation to be that this is customer's refreshing appliances, and then not adding new descriptions, the description that there's these descriptions, and that's policy is dynamic. Thank you.
Patrick Colville: Patrick, I'm going to jump into some of that with historical nature, so we actually did have this same conversation in 2021, I believe it was coming off of a...
Patrick Colville: Leapier as well because when you're doing year-over-year counts, right? So that was the unusual thing. I'm just, it does seem that I forgot about that sometime in the last three years that bites me in the <expletive> .
Christiana Allgaard: And then from Q4 to Q1, you do just have the natural decline of two days, two days and 92 days call it 2%, which I think is what Christiane is talking about. And then you are going down a path of customers refreshing on the service revenue. Thank you.
Speaker Change: I love that we were cutting out a little bit, but maybe a comment I'll offer in Christianity can correct me is that...
Speaker Change: The conversation about the guidance-setting process and what we're seeing about pull-forward and such.
Speaker Change: I think in this environment where the guide ends up is a bit of an observer to the guidance and not a participant, I think it was prudent in terms of not passing through the beat if you will.
Speaker Change: I think that when you, the conversations that Christiane was making reference to with channel partners and end users, if you compare where they are today on the upgrade cycle versus where they were six months ago, it's night and day, and with our own sales team, I mean this is you're getting into child checks, you're getting into surveys. You're getting into surveys.
Speaker Change: It's real. We're picking up in the account plans as well.
Speaker Change: We are not seeing any signs to this point. Customers are suggesting they're going to change their design architecture that has not come up, but we've lost the deal because they're going to a sassy solution that they did. I think that the team here would move them in that direction or their own product. [inaudible]
Similarly, you're not seeing competitive placements against us. So...
Christiana Allgaard: I think those are the considerations that went into the guidance setting process but I'll let Christiane come back and make sure I haven't committed her to something she doesn't want to be committed [inaudible]
Christiana Allgaard: Keith is right, there are a lot of factors. [inaudible]
why we guided
Christiana Allgaard: The way we guide it from what we can see and what we get from the sales teams, right?
Christiana Allgaard: Also, don't forget the each fiscal year, you start rolling out new channel programs and it takes a little bit of time until you see how these are picked up, right? So we expect
Christiana Allgaard: Service Acceleration through our channel programs and we expect improvements. But from a quarter of a quarter perspective and from a growth rate, we were not there where we wanted to be. And partially it's also due to a little bit more churn on some some acquired customers. [inaudible]
and Aaron Ovadia. Thank you. Thank you.
Speaker Change: Okay, very helpful. Thank you so much for that. I hope you have a vision.
Keith Jensen: Aaron Ovadia, Keith Jensen, Aaron Ovadia, Keith Jensen, Aaron Ovadia, Keith Jensen, Aaron
Speaker Change: Our next question will come from Shrenik Kothari with Baird. Keith, unmute your line and ask your question again.
Yeah, thanks. Can you guys hear me all right? Yeah
Thanks for watching!
Speaker Change: Great, so Keith and Christina, you mentioned me, I was your best performing duo.
with Mitteens Grove, and Potter, like momentum there, clearly a tailwind. [inaudible]
Speaker Change: And you also made it clear that the tariffs both forwards are not really a dynamic, so just curious what is a private spread out there? I mean, I know Ken mentioned about the talcopotterships and shaping demand for sovereign sassy, just curious if you can elaborate a little bit there and an impact are you also starting to see traction from other modernization initiatives around OT or AI stock deals as well? Yeah.
I think I had a good follow up. [inaudible]
so
In EMEA, specifically in internationally emerging use
Speaker Change: We see your question on modernization, we see that in APEG as well, and we had good wins there in government as well as in other areas.
Speaker Change: God, and just could follow up on the new logos, it was pretty solid, 14% you're on your, just to say how much of a-
Speaker Change: Sassy Secops, Growth is now driven by first-time Fortinet customers versus expansion from your existing install base. Are these newer modules landing early in the deals, or are they still largely dependent on the rank ring for the gate deployments? Thanks a lot.
Speaker Change: I would say the majority of our new customers are smaller customers as you can tell by the number of customers. We had some nice large new logos but most of the smaller customers do start with the Fortigate. [inaudible]
Aaron Ovadia, Keith Jensen
Bye, thanks.
Speaker Change: Our next question will come from Brad Zelnick, but do you think please unmute your line and ask your question?
Great, thanks so much. Can you guys hear me? Thank you.
Awesome, thank you.
Speaker Change: Last quarter I think it was you talked about investments that you were making in various forms. [inaudible]
of Enablement, Silver to Channel and your Direct Sales.
Speaker Change: would be oppositely positioned to capture the refresh opportunity. How is that progressing? And what have you seen over the past few months in terms of your competitors trying to capitalize on this end of service event that's coming up? Thanks so much.
Speaker Change: We don't really see, I think our competitors are talking about it, but we don't really see competition in our end of support cohort.
and the incentives from that.
Speaker Change: Yeah, I mean, there are a number of channel incentives to execute on new product combined with more services, right? So especially in the lower end of the market, I think the opportunity is huge to expand on Sasi and other products. And we have multi-product incentives with the channel partners. Thank you very much.
and Aaron Ovadia. Thank you. Thank you.
Speaker Change: Thanks for that. If I could maybe just ask one follow-up. I think this is the first quarter where you now have links is consolidated. I assume it's not all that material but is there anything just to call out that we should consider when we think about the trends going forward in terms of contribution and flow through to the financials. Thanks again. Yeah.
Speaker Change: Yeah, I mean, oh, this John Whittle, I would say it's immaterial. I don't think there's anything to really factor in there [inaudible]
Aaron Ovadia, Keith Jensen
Speaker Change: I think the first quarter guide we provided what we thought the impact would be from the M&A's, and I think we were in line with that. And we'll call it right away.
Speaker Change: And right now we are letting them run on their own
Speaker Change: strategy while we are creating our internal integration play for service providers.
So it's a lump per gross potential, but it's not shorter. [inaudible]
and Aaron Ovadia.
Dr. Jensen, Dr. Jensen,
Awesome.
and Aaron Ovadia.
Speaker Change: Our next question will come from Adam Borg with Psyphal, please unmute your line and ask your question for the next question.
This is Peter Weed for...
Great, can you hear me okay?
Yes, please.
Great, thank you so much [inaudible]
Just maybe, Christiane, on the upcoming repressed cycle. [inaudible]
Speaker Change: Any way to talk through some of these assumptions, both in terms of, hey, the number of firewalls we expect to be refreshed will be, you know, the same more fewer than what they had previously. Obviously I'm assuming the performance of the models will be greater given these are old models. And I know you talked about it a few minutes ago, but maybe talk a little bit more about are you expecting any type of shift toward virtual or sassy from physical as part of this refresh. Thanks so much.
Aaron Ovadia, Keith Jensen
Speaker Change: So what we are seeing so far, the customers that have EOS devices,
The smaller customers are buying more.
The larger customers who had large...
Large Fortigates,
Speaker Change: It depends on the strategy and depends on whether they are consolidating on bigger forty gates or buying pretty much a similar amount of the same next generation model So I don't think on the enterprise side in the data center appliance you see one strategy, it depends on customers [inaudible]
Speaker Change: In the MSE, in the small customer cohort, what we see is that they are buying more of what they had previously.
Speaker Change: Yeah, interesting conversation, Christiane, I was showing with me right before this call was that...
Speaker Change: One of the challenges in tracking the refreshes, not just that they're out there in Sancae, I have 10 products that are going into service, but as you pointed out, they have those 10 plus they're buying for other use cases at the same time. The deal sizes are getting bigger, but it's a little bit blurrier in terms of how much of that as the old product versus a new use case, as you go forward. But I would say that the deal sizes, she's quite pleased with. [inaudible]
and Aaron Ovadia. Thank you.
Speaker Change: Oh, sorry. Also, on the port side, we keep in developed new products like the one we announced today, the $4700G.
Speaker Change: So there's a few more contours later this year, next year [inaudible]
Speaker Change: So that's where we try to time in some of the replacement from the portal site and then try to make sure the new portal is way better than the old one. So that's where sometimes they also try to see, it's still, most of the customers probably still one years away, so they still have some time to...
tool, you've got to do it.
Thank you for watching. See you next time.
Speaker Change: That's great. I really appreciate the color there. And maybe just for Ken, a bigger picture question. You know, in our fieldwork data security just continues to come up as a really important priority. I know late last year, or I think it's back in August , you guys acquired next CLP. I'd love to talk a little bit more about early feedback on that on that acquisition and how you're thinking about the broader data security opportunity for Fortinet. Thanks so much.
Speaker Change: Yeah, that's a great acquisition technology for the DLP, not only hands the SAC we have, but also can be sell separately to hands a lot of a big enterprise, the data security, the data leakage size, so we see...
Speaker Change: It's a work at Nampordak and a team, and so it's a, I thought I was with you.
Speaker Change: Now, they're kind of more kind of looking at how to secure the data. That's also the reason we kind of set in pushing some of solvents that I see some other especially in the finance service area in the government in healthcare. Thank you.
Speaker Change: So the data is super important, so it's a it's a it's a work at a solution there [inaudible]
Speaker Change: And we're also seeing that being rolled out at scale at large enterprises [inaudible]
Speaker Change: And we just have to accelerate that, but it's working well at scale at large enterprises.
John Eyal, John Eyal, John Eyal,
Speaker Change: Our next question will come from Junaid Siddiqui, please, with truest, please, unmute your line and ask your question for the next question will come from Junaid,
John Dezort, John Dezort, John Dezort, John Dezort
Hi, can you hear me?
Yep.
Speaker Change: Yeah, great, thank you. Yeah, just had a question on the CNAP market, and you know, the direction that you're seeing in lace work.
Speaker Change: You know, one of your competitors has effectively cheated that space to a partner of yours. How do you see that mark shaping up and you know who you're seeing from a competitive perspective and are you differentiating from some of those competitors? Thank you. Thank you.
Speaker Change: So I think we see opportunity with the Weiss Google development. I think that disrupts the market fairly significantly.
Speaker Change: And so we see significant opportunity there, we think the lacework solutions are very good solution. I think we just have to, you know, the new sales motion for us a bit, and so we need to focus on that, so we'll just take a little bit of time.
Speaker Change: But we see it as a good opportunity, big market, obviously huge tam, and a lot of disruption in that market. And that solution just got a good rating. It's a very good solution. We just need to kind of refine the sales approach of it. Thank you very much.
Great, thank you.
Speaker Change: Our next question will come from Keith Bachman with the ML, please unmute your line and ask your question for the next question.
Kate Bachman: Thank you very much. I wanted to ask a little bit about [inaudible]
You're networking, you know, if I just ask you and check ups
Kate Bachman: As you think about over the next number of quarters, is there any comment when you hear feedback from the channel on deal elongation? Is it more in fact on the subscription side than the hardware side? [inaudible]
Kate Bachman: With, you know, maybe users not wanting to sweat their assets for regulatory reasons, or compliance reasons, or governance, or what have you.
Kate Bachman: and is there thereby a risk of some crowding out, if you will, on Hardware Refreshes that perhaps are ongoing, that make-
Kate Bachman: They cause some weakness in the unified sassy and or sack ops. I think Sassy Wann probably not, but just talk about the buckets of spending in terms of...
Kate Bachman: Sensitivities as we go out over the next number of quarters, whether be dealongations or what have you, thank you and Keith, certainly all the best to you. Thank you.
Thank you. It's a good question.
Kate Bachman: Yeah, I mean, industry like over 30 years, see a few up and down in the economy in the big environment. So you're doing the down part, they tend to slow down some of the infrastructure change in all the hardware purchase. [inaudible]
and then try to make a stretch whatever the scenes they have.
Kate Bachman: So there's some uncertainty right now, I feel, but it's on the other side [inaudible]
Kate Bachman: because the strength we have, whether in the network security or secure networking, and also the [inaudible]
Kate Bachman: So we see that's also the opportunity during the downturn to get market share quickly.
Kate Bachman: because we feel we are better positioned in the competitor so even the overall market may grow a little bit slow but also that's the opportunity to gain a more market share quickly. [inaudible]
Kate Bachman: because in each category we have pretty unique advantage, like security networking is really carried out convergence and also leverage of ASIC and the single OS, the same thing I mentioned earlier about Unified Sassy, and then you see the security also grow like a 29%
Kate Bachman: That's how we're continuing to keep investing in the growth and also do some long-term investment to keep in driving the next five to ten years, long-term growth. Both will benefit the space and benefit the customer and also a partner.
Kate Bachman: So that's where we look at this, but also the last quarter we also see probably the building growth also the first time.
Speaker Change: Better than the last six, seven quarter, probably seven quarter, and especially the 42nd even grow better. So that's, I see, it's a good sign on the strengths we have.
Speaker Change: May be summer because we call it upgrade of all coral fresh, but on the other side we do see some smaller player in the space, whether secure networking, some other ones get a week and a week or so, we do see some take their market sure. [inaudible]
Speaker Change: John McKeese, I would just say, like Ken said, Q1, we felt good about the growth in Q1, the economy, the geopolitical environment was already kind of a bit uncertain, and then also in 2008, 2009 through the financial crisis.
Speaker Change: We were private at the time, but had good growth through that, and then it was one of the first companies to go public after that based on good growth through that crisis as well, so I think Ken...
Speaker Change: Ken has always focused on never let the opportunities from a good challenge pass you by and so we'll look at this from an opportunistic standpoint.
Speaker Change: I would just add one comment as well and I think what we heard from our customers at our customer events at RSA
Speaker Change: Most of them are going hybrid, they will have on prem. And so they will have on prem.
Devices
Speaker Change: They will have some cloud devices, they will have some public cloud and I think that's our opportunity because we play in all markets and they can leverage the OS and I think that's the feedback that we got [inaudible]
So, from our perspective, we are right positioned.
and Aaron Ovadia.
Okay, thank you
Speaker Change: This concludes our question and answer session. I will now hand it back to Aaron Ovadia for closing your marks in the next session.
Aaron Ovadia: Thank you, I'd like to thank everyone for joining today's call. We will be attending investor conferences hosted by JP Morgan and Bank of America during the second quarter
Aaron Ovadia: The Fireside Chat webcast links will be posted on the events and presentation section of our Investor Relations website. If you have any follow-up questions, please feel free to contact me. Have a great rest of your day!