Q2 2025 Fortinet Inc Earnings Call
Hello and welcome to 14x second quarter 2025 earnings conference call.
At this time, all participants are in a listen-only mode. After the speaker's presentation, we will conduct a question-and-answer session. Please be advised that this call is being recorded. I would now like to hand the call over to Aaron Ovadia, Senior Director of Investor Relations. Please go ahead.
Thank you and good afternoon, everyone. I am pleased to welcome you all to our call to discuss Fortinet's financial results for the second quarter of 2025.
For me, on today's caller, Kenzie, for tonight's founder, chairman, and CEO, Christiane Ohlgart, our CFO, John Whittle, and our COO.
Kim will begin our call today by providing a high-level perspective on our business.
Christiane will then review our financial results for the second quarter of 2025 before providing guidance for the third quarter and updating the full year.
You will then open the call for questions.
During the Q&A session. We ask that you please limit yourselves to 1 question and 1 to follow up question to allow others to participate.
Before we begin, I'd like to remind everyone that on today's call, we will be making forward-looking statements and these 4. 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 of particular, their risk factors in our most recent form, 10K and form 10 Q for more information.
to update for it, but the statements
Also all references to financial metrics that we make on today's call are non-gaap unless stated otherwise.
Our Gap results and gaap to non-gaap, reconciliations are located in our earnings press release. And in the presentation, that accompany today's remarks, both of which are posted on our investor relations website,
As a reminder, this is a live call. That will be available for replay via webcast on our investor relations website. The prepared remarks will also be posted on the quarterly earnings section of our IR website following today's call. Lastly, all references to growth are on a year-over-year basis unless noted, otherwise, I will now turn the call over to Ken
Thank you, Aaron. And thank you to everyone for joining our call. Uh, we are pleased with our strong second quarter performance.
Beijing, both are building and operation margin guidance. Building on this business, momentum. We are reaching our 4-year building Outlook.
In the second quarter building, grow by 15% and the revenue growth by 14%.
And we are achieved the strong non-cap operation margin of a service, 3%.
A strong Topline result were driven by continued momentum. Among large Enterprise customers with a total value of a deal over 1 million increased by more than 50%.
This growth reflects the strength and value of our innovation, the recent global demand for integrated solutions, and the impact of a go-to-market investment.
Additionally, our recent investment in the fast. Growing Market of unified sassy and AI driven secure. Operation are continuing to deliver strong return, as building for both grow over, 20% to a combined, 35% of a total buildings.
Fullness strong momentum in Sassy has been recognized by industry analysts, as we are, recently named a leader in the 2025 Ghana magic quadrant for sassy platform.
While also ranking, number 1 in the secure Branch Network motivation case.
We had the only vendor in the report that is also recognized in 5 different level security magic quadrant which all run on a unified 40 OS.
We continue to be the only vendor that has developed all core SASE capabilities in a single operating system. The 40 US features include Nation, Firewall, SD-WAN, ZTNA, Secure Web Gateway, and DLP.
This native integrate of a Nation Fire War HD1 and Sassy has become the new generation sassy firewall.
Making it easy for customer to adopt an upgrade while reducing capacity and operation cost.
Enhancing user experience and ensure integrated hybrid secure, access across both on premise and Cloud environment.
all success in unified s, you reflect the value customer place in our new generation SI firewall, beginning with their investment, you know, industry leading for the gate firewall, build on our 486,
From their largest enterprise expanding into our secure SD-WAN capability before advancing to our 40S solution.
As a result 13% of a large Enterprise customer have purchased for the Sassi and increase over 60% year-over-year. Furthermore, we have invest around 2 billion
dollar to build and operate a global owned infrastructure. Spending around 5 million square feet across data centers. Now, and socks, customer supporting centers executive briefing centers and the research and development facility.
This large school food. Point, give us a competitive advantage in delivering, 40 Sasse, 40 cloud and other cloud services by owning and managing our infrastructure, we ensure better customer experience better cost efficiency, strong data sovereignty, and high performance and scale.
We also leverage our 46, technology to provide enhanced security and better management across our SAS services.
Today, we are announced we are expanding our 40 Cloud offering with 3, new Services, the 40 identity, 40 drive and 40 connect these Services natively integrate into the 1449 security fabric. Providing centralized visibility consistent, policy enforcement and real time threat protection across users devices applications data and AI agents.
In OT security.
We are recently named the overall leader in the Westland advisor it and OT now protection, platform Navigator, 20, 2025 report.
for the third time in a row,
earning the highest ranking in both strategic Direction and the technical capability.
We continue to invest in our AI, which we begin developing more than 15 years ago and hold over 500 issued and padded uh, pending AI pattern more than any other competitors.
Our latest AI Innovation including 48i protect for advanced threat detection, 40 assists for automating, security, tasks, and 48 are secure AI for protecting AI infrastructure.
As a result of our investment and recent innovations, our AI item solutions are the fastest growing part of our business.
I would like to thank our employees, customers partner and suppliers worldwide for the continuous support and hard work, and will not turn the call over to Christian.
Thank you, Ken.
Delete our Billings and operating margin guidance for the second quarter and raised our full year Billings Outlook.
Total billing screw by 15% to 1.78 billion driven by 21% growth in unified czasie and 31% growth in secops.
unified sassy and SEC Ops, no account for 24% and 11% of total Billings respectively up 1 Point, each
The vertical with, arguably the most sophisticated and Discerning security purchases, led the way with Billings growth of over 30%.
In addition, we continue to expand our customer base over 6,900, new organizations shows our unified single for dos platform to power their cyber security strategy.
The robust growth in new customers is a clear Testament to our strong position in the SMB Market driven by the continued commitment and loyalty of our Channel partners.
Total RPO grew by 12% to 6.64 billion, while current RPO Group by 15% to 3.45 billion.
With regards to our unified sassy increased by 22% to 1.15 billion and secops increased by 35% to 463 million.
Within unified sasi. 40 sasi, our SSE solution, delivered, strong results. With our growth of over 100% while the customer base expanded by 65%
Furthermore adoption momentum has remained strong as 13% of our large Enterprise customers have purchased 40, Sasse highlighting our continued expansion of 40 sassy in our customer base.
As a reminder, the typical customer journey begins with a purchase of all 408 firewalls from their customers. They often expand to our integrated secure SD-WAN solution before adopting our single vendor SASE offering, reflecting the growing convergence of security and networking.
Over 50% of our 40. Sasse customers also, leverage our sd1 solution.
When 90% of our large Enterprise for disaster, customers began their Journey with sd1 reflecting the value of our integrated platform approach, and the convergence of security and networking.
Total revenue grew by 14% to $1.63 billion, led by a major growth of 18%, while the Americas and APAC both grew 11%.
product Revenue increased by 13% to 509 million benefiting from upgrade buying and strong growth in operational. Technology.
We saw growth in all goes as we continue to lead, the cyber security industry and product Revenue.
Software, licensed Revenue grew at a high teens rate and accounted for a high teens percentage of total product Revenue.
Solutions and benefit from our strong track record of innovation.
Now, I'd like to highlight some 7 figure deals that demonstrate how customers are adopting for the sasi. Consolidating, networking and security and expanding their overall footprint with 40 net.
First, an educational institution in APAC purchased solutions across all three of our pillars, including the SASE for 3,000 users. This customer chose Fortinet over the competition for our simplified, flexible, and consistent security enforcement, enabling secure access to both on-premises and cloud applications while delivering a seamless user experience.
By leveraging, 40 and 40 sasi, the school achieved Superior performance reduced total cost of ownership and simplified operations through our Integrated Security platform.
next, in an expansion and displacement deal, a leading retailer with 1,700 locations significantly increased their investment in, 14et purchasing Solutions, across all 3 pillars, including 40 APS for the switches and 40, AI Ops
Already 408 customer with firewalls deployed at every location, the retailer selected, 40 APS for all sites and 40 switches for 600 locations with a remainder plan for early 2026.
This customer chose 14 at 4 Integrity, 40 OS operating system which enables seamless convergence of networking and security. As part of the deployment, they adopted 40 AI Ops to proactively manage their access points. And switches leveraging, our AI driven capabilities to improve operational efficiency.
In another large deal. A top us School District expanded its footprint with the purchase of 40 Gates, 40 switches and 40 APS as part of a 350 plus side. Refresh.
and more efficient, upgrade cycles all managed through our unified 40 OS platform.
Lastly a technology company upgraded, a portion of their high-end firewalls, as a result of the upcoming 2026. End of support, deadlines, and expanded their deployment with additional, 40 gate, appliances in the data center,
They selected 49 for our 4 to operating system which enables streamlined operations while delivering a lower total cost of ownership.
Turning to margins and cash flow.
Total gross margin increased by 10 basis points to 81.6% and exceeded the high end of the guidance range by 60 basis points, due to strong, execution and cost control.
Product cost margin of 67.8% increase by 180 basis points as inventory related charges normalized.
Service growth margin of 87.8% was down by 80 basis points due to increased investments associated with the expansion of our hosted Security Solutions.
Operating margin of 33.1% decrease by 200 basis points. While being 60 basis points above the high end of our guidance range, the year-over-year decline reflects increased investments in sales head, count the absorption of costs from recent acquisitions and foreign
Exchange. Headwinds stemming from a weaker US dollar as most of our operating expenses are denominated in foreign currencies.
Free cash flow was $284 million, and adjusted free cash flow was $428 million, up $104 million.
Cash generation. In the first half of the year was very strong with adjusted free cash flow. Reach reaching 1.27 billion representing a margin of 40% year to date.
Infrastructure investments were $168 million, up $145 million. As we continue to build out our infrastructure footprint to support Dassey for the cloud and other services.
6 billion years of 1 million in the second quarter. The remaining share buyback. Authorization as of today, is approximately 1.6 billion.
Before moving on to guidance, I'd like to provide an update on our firewall upgrade cycle and the broader macro macro environment.
During our analyst day. Last November we shared that approximately. 650,000 firewall units will reach end of service. By the end of 2026, followed by another cohort of 35000 low-end units in 27.
While the 2027 cohort is less significant than the 2026 Court, in terms of product Revenue due to its lower price point.
firewall, upgrade discussions, offer valuable opportunities to engage with both our customers and channel Partners allowing us to showcase our ongoing innovation in 40 OS,
The upgrading to our new generation sassy firewalls customers gain, enhanced security capabilities and benefit from our unified platform approach.
We estimate that we are approximately 40 to 50% of the way through the 2026 upgrade cycle. At the end of the second quarter, based on the remaining active units and service contracts. And we expect continued upgrade activity for the remaining devices over the next 6, quarters, our focus and open communication regarding the refresh allows allow us and our
Channel Partners to have conversations with our customers around. Both the upgrade and the customers overall security strategy benefiting us longer term.
Despite ongoing uncertainty surrounding terrorists and the global economic Outlook, we have not experienced a negative impact on our business.
The cyber security market and the demand for our Solutions remain strong and resilient.
Now, moving on to guidance.
As a reminder, our third quarter, and fully your outlooks which are summarized on slide, 17 and 18 are subject to the disclaimers regarding forward-looking information that Aaron provided at the beginning of the call.
For the third quarter, we expect billings in the range of $1.76 billion to $1.84 billion, which at the midpoint represents growth of 14%.
Revenue is expected to be in the range of $1.67 billion to $1.73 billion, which at the midpoint indicates a growth of 13%.
Non-gaap growth, margins of 80 to 81% non-gaap. Operating margin of 32.5 to 33.5%
Non-gaap earnings per share of 62 to 64 cents.
A share count between 772 million and 776 million.
Infrastructure Investments of 110 to 130 million.
In non-gaap tax rate of 18%.
Cash taxes of 60 to 90 million.
As a result of our strong results in the first half of the year, we are pleased to have raised the midpoint of our fully billing guidance by 100 million.
We maintained our total revenue guidance, while adjusting the revenue, mix by shifting 50 million from service to product Revenue.
Despite this shift towards product revenue for the full year, we maintained our gross margin range and slightly increased. Our operating margin guidance, midpoint we continue to remain on track to achieve the rule of 45 in 2025 for the 6 consecutive year.
For the full year, we expect Billings in the range of 7.325 billion to 7.475 billion US Dollars which at the midpoint we present growth of 13%.
revenue and the range of 6.675 billion to 6.825 billion US Dollars which at the midpoint we presents growth of
30 service Revenue in the range of 4.55 billion to 4.65 billion. Which at the midpoint we present growth of 14%.
non-gaap gross margin of 79 to 81% non-gaap operating margin of 32 to 33.5%
non-gaap earnings per share of 2.47 to $2.53, which is fumes a share count of between 773 and 7777 million.
Infrastructure. Investments of 382 to 430 million.
Between 400 million to 450 million, which is 125 million lower than our prior expectation. Primarily due to new tax law changes.
I now hand the call back over to Aaron to begin the Q&A session. Thank you, Christiana. As a reminder during the Q&A session. We ask that you please limit yourself to 1 question and I want to follow up questions to allow others to participate.
A greater, please open the line for questions.
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 will allow a moment for the Q to form.
Our first question will come from Shore from TD Cohen?
You may now unmute and ask your question.
All right. Thank you very much. Uh, good afternoon, Pim. Congrats on the improved outlook for the year.
Um Channel Christian. Um, 1 of the questions, we are constantly receiving from investors. Uh, is whether a sales of 40 South people country cannibalized the core of client's business, but but it would appear, we're currently seeing Tailwind across both, uh, these segments. Can you help us maybe reconcile uh, these views.
Uh, yeah, I think probably we do. See customer.
expanding beyond the traditional firewall and but also traditional firewall sue, the
The important, uh, control Point, uh, for all this traffic, uh, especially within the Enterprise within the data center on other side. Uh, some supporting water work for a home, or traveling, or some other brand office. Uh, that's also kind of a certain sassy some, uh, and special certain like, uh, like otlt, uh, use case we see Way Beyond the traditional 91 security there. Uh, so we, we don't see Saucy replacement firewall. We just see, it's keeping enhancing, that's what we call the sassy firewall. It's really the far away itself. Need to keep in adding new function like from 25 years ago when we started for that. Uh, the new generation firewall will add like a application control, like a intrusion prevention, like antivirus in the traditional for our VPN. Now the traditional firewall need additional like a sassy function together with some other Edge device like a 48.
For the switch. And also I'm Point device and also the cloud, uh, deployment. So that's formed the the whole uh, protection infrastructure, which is really uh, a much better security, uh, for the Enterprise user.
And let me add to to what Kendra said in our win loss analysis. We see very little reason codes for um customers moving to the cloud and not not continuing to buy. So um I think it's it's an expansion, it's not a replacement sale.
And and to your point we see both markets growing. And then, if you look at the market share, they're very fragmented markets on the firewall side. And so, we can grow both by the market growing on the firewall side and expanding our market share, um, by taking business from other competitors.
Understood, um, and Christian. Thank you so much for the color about when we send, uh, in the reference cycle, maybe a little bit of a long-term view can already touching on the fiscal 27 cohort of products that will be refreshed. Um, are there any specificities associated with those family of products? As we think about the 2027, which is coming to a renewal or a refresh?
Yeah, I think I've shared that in previous meetings potentially the the 3 the 2027 cohort is the low end of the the low end. So it's not it unit wise, it's significant.
product Revenue wise, it's not as significant, but that's why we included the
um,
The message in my remarks is significant because we can talk to a lot of customers about where the security is going, right? And so that's where it provides a lot of upsell potential for us.
Got it. Thank you so much.
Great. Good afternoon and thank you for taking the question. Um, maybe Cristiano. I was you know what the, you know, Services dive into a little bit. Um it's great to see the upside in the quarter, you know, particular with regard to product Billings um and this quarter. But how should we um I guess what can we take away from the services side and what's embedded in the guidance through the year given?
you know, the the strength that you're seeing in this quarter,
so,
if the the services
and takes a little bit longer, right? And, and that's what we're seeing based on the remaining waterfall. We are pleased with our current RPO growth, but for the rest of the year, we we decided to be prudent take the midpoint down, but, um, we believe that we are not, uh, that we are confident that the product revenue is going to be stronger for the rest of the year based on the pipeline. Yeah, also, uh, probably last quarter is the first time in the last few years, the product Revenue growth starting faster. Now, uh, it's more like a 4 years ago like 2021, uh, not on the product Revenue growth of our fast and then that's give us a kind of benefit. In the last few years. The service Revenue still maintain pretty healthy level. Even the product Revenue going down in the last 1 to 2 years. Now, we see the product Revenue, starting our accelerating
In which will be the leading indicator for the future service Revenue. Uh which we also feel since starting to turn around especially in both the product revenue and also the service venue starting. Kind of instead of keeping dropping gradually uh probably will be starting taking up now.
Do you have the, the split for the guard or care? And is this a component of? Like if you if you have a refresh,
You know, obviously the, you know, are, is it the customers aren't completely replacing their subscription Revenue? Um, you know, there's they're just extending their subscription Revenue with
Maybe less upside to that Revenue line item.
You know what I mean? So, you have a new box but the same attached revenue, correct?
So that that's part of it. I think there's there's part of it that that
um,
The.
Devices that they're using to replace that they may use a higher box but they can consolidate 1 to 2 boxes, right? So, so it's, it's different components that, that, um,
That sector into the service revenue attached to the boxes. And this is where it's so critical for us to upsell, not only SaaS, but all our other revenue streams that benefit the customer.
But that's super helpful color. Thank you so much.
And based on the customer Journeys, you, you can see the customer Journeys work, right? The upsell is working, it's just not, not necessarily, um, at the same point in time when they buy a variable,
I understood.
Next question.
Comes from tolani with Bank of America. Please go ahead.
Ah, here we go. Now and I'm using myself. Can you hear me? Yep. Yep, that's good.
Okay, sorry.
Um,
the um, sassy the profile of sassy customers. What is it? Meaning are these these placements or existing vendors? Let's say, a customer has the scalar or Palo Alto and you're just placing them in.
Uh, both, uh, from our current customer base, uh, a lot of them, they do. See the new operation system, gave them the sassy capability, uh, both the software and Hardware. So that's where uh, they started unable to sass. You can see the, the slides 4 in the presentation
Amazing competitor. Uh, because we also, because we offer all these kind of integrated sasi solution, and some of our partner, especially service provider also like this, kind of a single OS solution. Uh, so basically, just like how next and far was, then replacing the traditional firewall, The Sassy fire was starting replacing. Not just nextg fire or, but also on the sassy because a lot of customers, they view, sassy just like a few years ago, like some box, like a 20 years ago, intrusion, prevention, starting from separate solution. Now, they want to have a in solution with whatever the network security infrastructure technology, they have. So once the integer solution in place, uh, the single solution starting kind of a lost last year age, and also starting kind of a huge disadvantage for actual management costs uh, for, for all the actual costs basically. Uh, so that that that's we see a lot of
Customer love the genuine Love of All This success, if our solution and without Integrity solution together. So that's we see. Both the current customer base and a lot of other customer from competitor. Uh, quickly adopt this new solution and, uh, this is the fast growing part of our business right now.
You said in the past, that 95% of the customers are existing file, customers is still the case.
Uh, pretty much. Yeah, yeah, over 90%. Come from the current customer base, uh, but we do see, uh, some other customer, which using a competitor's solution. Also changing to our solution.
Um, if I can squeeze in 1 more, it's not, we can, we can move on, but I want to ask about the margins. You said in the past, if you want to invest, what is the margin Outlook? And where is the balance between Investments and more than outside?
Uh, yeah. We we like to play the long-term game. Uh, the same just like, uh, the sassy as as we did in the in the far World Market, which were the only 1 building Asic chip
So, for SASE, we, uh, we also invest in the infrastructure which has a much better cost advantage. Also, it's more secure compared to leveraging some other third party. Uh, so that, that's where we do believe if a long-term SASE, uh, kind of our own infrastructure that can handle 70% of traffic, then 30%, uh, in certain locations, still using third party, that would be the best, uh, cost model. Uh, even in the first few years, it may need a small investment, but long-term both the customer or partner and ourselves will benefit. Uh, so that's where, uh, we do believe.
Policy margin and uh, and this model, long-term game will also benefit, uh, both uh, our self and our customer, uh, both short and long term.
Thank you.
Our next question comes from Gabriela Borges, with Goldman Sachs, please go ahead.
Hi, good afternoon. Thank you Ken and Christian. I wanted to follow up on your prepared, remarks that we are 40 to 50% through the 2026. Refresh cohort. When I wanted to understand this, how to think about your growth rate through Cycles, because if I can pay your billing growth, what you're guiding to this year, it's about similar to what you guided to and what you achieved in 2023. The 2025 is a really big or a larger than normal refresh cohort. So I wanted to better understand, why are we not seeing more upside in the numbers this year, from the refresh cohort and the comment earlier on potentially consolidating down boxes, is it possible that perhaps customers have excess capacity in their networks from a 2021 Co type elevated. Throughput environment would love to get your thoughts. Thank you.
Gabriella. Good points. I think we need to look at it by 40 gate model. Yeah. And and the the large
Um, firewalls that are end of um support. We have a really good reporting and handle on because we know where they are. These are, these are all ways with Enterprise customers, right? We have a good handle on the lower end of the firewalls where, where it's with Enterprise customers and in retail or other scenarios, OT scenarios where it it's harder for us to predict
Uh, it's replacing some of the EOS models. Um we are comfortable with with our um guidance. Um but yeah, the Expectations by the street might have been a little bit higher but we said we are outperforming the market.
And and it was baked in, right? So we we've been consistent in our in our messaging here.
Yeah. Also the
Uh, the, the refresh upgrade of the product or the next year, is the product. You would have been, uh, like, uh, like, uh, 12 to 15 year, uh, after we introduced the product. Uh, it's not a product like, uh, 4 or 5 years ago, when the supply chain issue happened. But if you compared to like, um, like a 10 12, 15 years ago, uh,
the business size probably like, uh,
Current size probably 5 times, maybe even 10 ton larger.
so that, that, that that's where the um,
You know the upgrade refresh. We do see it's a it's a it's a very different than the supply chain. Uh uh uh issue few years ago, uh it's a it's a it's a much older product. Uh we usually what after we introduced a new product they use every selling maybe like 7 8 years and then after we stopped selling, we still supporting 5 additional year for the service after 5 additional years stopped shipping but we do support service.
Then the customer reached to the end of a service. Uh so that's really probably average maybe like 12 to 15 years after the product been introduced. Uh so that that that that's the since we we kind of try to help in customer to upgrade and uh uh. So like I said it's even we have a large number of product that that's you. The size is we have like 12 15 years ago
I would also say we have we have additional incremental Tam to address going forward with sassy and SEC Ops where those are becoming meaningful parts of our business. So if you look at historical results,
They were more focused on the firewall, but those are becoming real growth drivers for us.
Thank you for the caller, Christian, maybe it's the follow up your commentary last quarter on hesitancy, in the sales force and when some of the sales force conversations, I think today, you said macro didn't have an impact on the business. So maybe just reconcile those 2 data points. Are you still seeing hesitancy is the hesitancy gone? Thank you.
I would say that.
we've seen that we are resilient despite macroeconomic uncertainty.
And, and the pipeline for the rest of the year and the sales confidence is is good.
so that's where, um,
we are, we are confident to, um, raise our billing guidance,
Thank you for the book.
Our next question comes from Rob, Owens with Piper Sandler, please go ahead.
Great. Thank you for uh, taking my question, love for you. Expand a little bit on the OT opportunity because I don't think I recall anything from your prepared. Remarks just in, in, in terms of what you're seeing there, both either increased competition or is this opportunity also playing into the refresh cycle. Thanks.
Uh yeah, that's in my comment there. The otic growing over 20% uh continue to be 1 of the fast growing are for us. And also weird only uh leader in the Westland uh the otlt security report.
Uh, so that's where, uh, we see huge potential. Uh, and all she need to have a special product, or even special software to handle. We invest in this area for, like, more than 10 years. Uh, we don't see much other competitor, uh, invest as we are so early. So, broadly in the OT security. Uh, so we do see, uh, we do believe this is still a is a strong growing area going forward.
And when you, when you break down that over 20% is that consistent internationally with domestically? Can you give me a view across the various theaters?
I think it's pretty consistent. Yeah. We we are we are strong in OT across the board. Um, EMA has always been leading, um, in OT for us. Um,
part of the 2026 cohort, um, benefiting from that
But we we see, we, we just see expansion and also, um, the thought leadership that we've always had an OT and and bringing this to the Forefront of our customer as as an important security area, I think has helped us a lot.
Thank you.
Our next question comes from. G from truist. Please go ahead.
Uh, can your status business, uh, you know, continues to show a lot of momentum. Uh, could you just talk about how your Sovereign status in solution is tracking? And you know how that's different from some of the, from what your competitors are doing in that space. Um, and you know, how important of a differentiator, you think that is in furthering your competitive mode in sassy.
Yeah, that that's a great question. Thanks a lot. Is a, uh, that that's also kind of a, my thinking, in your early days, uh, I do believe a sassy learned her. The service provider carrier, will play more important role just like how they did like uh 1520 years ago in the in the network security. Uh but somehow they're moving kind of slow uh in the last few years, that's the reason we we started larger on Saturday, almost 2 years ago.
Uh, but we do working with a lot of care, service provider, uh, they do start in launch their own kind of sassy service now. Uh, leverage both their infrastructure, their their close relation with with local customer there.
Uh, so we do believe that will be the long-term Trend because, uh, a lot of customer. Uh, if not the most, uh, they do concern, uh, who will be process, their data where the data being secure processed, uh, so that's where Leverage The the local service provider, uh, kind of solvent Solution. That's all the service provided special Telecom service provider. They love it a lot, uh, even their little bit slow on adopting all this sassy solution there. But I do see there are very strong, uh, support in The Sovereign sassy, uh, that. That's 1 of the key Advantage we have because we, we can have all the sassy functions in the same OS, which they can deploy locally, whether in their own infrastructure. Some also in the customer Prime is there. Uh, so that's a huge Advantage, uh, then some other sassy players. So we do see that that moment and studying our accelerating now. Uh, that's including the, the telecon area studying kind of also uh, go back to to grow
Probably about average now. So, that that's a strong, um, area. I do believe, probably in the next few years, uh, in the Sachi Market, the solvent Sachi probably can be taken almost half the market share uh compared to This Global cloud-based sassy. So that's I do, I still believe long term that's the long-term Direction. Even short-term there are some some kind of changing back and forth but long-term solvency I do believe will be the the longterm solution.
Great. Thank you. Thank you.
Our next question comes from, Patrick Koval with Scotia Bank, please go ahead.
Oh terrific. Thank you for taking my question. Um, I guess Ken and Christina. I just want to Circle back to the firewall, upgrade comments. Um, I mean very helpful disclosure that we're 40 to 50% through the 2026 upgrade cycle.
And that.
The 2027 end-of-life cycle is a kind of lower throughput devices.
I guess the question we're getting from investors in that in our inbox over the last half an hour is um you know what should we be excited about um Beyond this upgrade cycle. Um, you know what is going to continue momentum when these Tailwinds which you know are clearly benefiting numbers now
And you guys are executing very well in a tough environment, but if we look Beyond 2026 upgrade and 207 upgrade, you know, what can continue this. You know, rocket ship momentum.
Partner and also customer uh for this new sassy firewall solution, which is where they give them better security and also um kind of a much better total cost of ownership also.
And let me add to that. I I think, when we talk about the app refresh cycle, we're only talking about the forced refresh due to end of support, but um, as Gabriela pointed out, there's the co co cycle as well that it's not not end of support yet, um, but it's going to be 5 6, 7 years old and in a year or 2, so that
With security and with the additional functionalities that that that are part of.
Um, the firewall and also the additional Network um requirements that you have with running.
Cgpt AI, you name it. Um, we believe there is um there are going to be enough Tailwind for us to continue to grow.
Yeah, I think the Ken's Point um cloud services that's growing really really fast and we view that as largely an incremental, additional total addressable market for us and like Ken said that, it's it's what we have in sassy right now and you can layer on additional cloud services over time. So that should be high growth and we really like our model of the, the common operating system between firewalls as the SD.
When we think that firewall Market will continue to grow naturally as well, and we'll take market share there, too, but we've got all these other additional growth drivers, in terms of sassy and suck offs, which are new Tam, and really becoming meaningful to our business and our high growth. Yeah, again, a few we probably, uh, little bit over,
Uh, let's discuss this refresh upgrade. This device has been around for about 12 to 15 years now, so it's definitely time.
Our size probably 1 fit or 1 tons of our current size. Uh, even all this product been being kind of refreshed or upgrade within like, 1 or 2 years, still not much, uh, Business Pack. So that that's a few, the more important things is really uh we leverage this opportunity to introduce customer with a new uh 40 OS, new, our upsell cross sale. Uh so to measure the the percentage of some old device been there, like a 12 15 years ago, uh, probably much less important, uh, than helping customer to upgrade to the new security infrastructure and also the business impact, uh, for the old device, also much smaller percentage than the total business we have today.
Okay. Okay, very very helpful. And I guess I mean Ken you've been
a thought leader in security for, you know, for many many years when we think about agentic, AI security, I guess how are you thinking about that domain and foret position, um, as a vendor that can help, you know, in athentic, AI security,
uh, yeah, I do believe, uh, like, uh, keeping things for probably 10 years, uh, whether the the agenda AI or the device security setting that more and more important, uh, then some, uh, the people human security, which people access
Uh, right now, the device even the, the agent probably already, like a 10x more than, uh, the people, uh, access all these, uh, information internet, all the data there. Uh, so that's where we invest in this area for more than 10 years and, uh, has a multiple angle to address the as security, including identity AI, including all these OT iot device security. Uh, so that that's why we feel will be huge Market potential. Uh but also kind of uh uh need to address this instead of uh, like a bow down. Some of the old solution need to be integrate together. Uh, so example, whether that AI you want to
I'm off the current solution, so we do believe there's a long term integrate solution, uh, will be the key to address is Gen AI at the same as like a it or iot solution security there.
Our next question comes from sacket Kalia with Barclays. Please go ahead.
Okay, great. Hey guys, thanks for taking my questions here, Christian, maybe for you 40 to 50% through the upgrade cycle. Can you just talk about sort of what that Cadence is is going to look like this year. I mean I think that intra quarter we were talking about 25 in terms of the percentage of that of the cohort that that we're through.
Good question. Um,
We've been.
if you look at our our, um, updated
um,
You see that we believe there are strengths in the product for the rest of the year.
Where we exactly end is, is hard to say. Because, um,
There. Of course it's not only upgrade um refresh product that we are planning to sell, so, uh, but I think we, we will get through those Cycles faster than we expect.
Got it, got it. That makes sense. Maybe the follow-up is, you know, I think you you're hearing the questions, just about sort of what's, what's the growth going to look like here after the upgrade cycle? And, of course, you know, it's 4 to sassy. It's, it's setups. I'm trying to think if we've talked about this before, but have you can, can we can we touch on sort of what percentage of the services Revenue kind of comes from from from those 2, businesses versus attached subscription because just to the earlier Point that's that's really that that mix shift, that has to happen. So any color that you could sort of give on where on where we are in that kind of mix shift, within services,
you mix shift between
40 care and and security subscriptions.
Uh yeah, yeah, well maybe maybe, maybe, maybe more specifically attached attached, sort of subscriptions and maintenance versus versus Fortis sassy and and SEC up. So, you know, maybe firewall versus non-fire wall in, in more, lay terms.
The, the non-attached subscriptions are growing faster.
Got it. Yeah, Yeah, Yeahs on the uh, on the attached pod. Uh the server is also starting to have a more high percentage. Um uh because uh we offer more Service. Uh whether I see 1 Sasse definitely, there's a more service more function behind. Uh so that's also setting at uh higher percentage compared to the hardware.
Uh, so that that that's both side, there's a some additional Service uh, like, uh, we launched the 3, uh, 40 cloud service, uh, the 40 identity 40, uh, Drive 40 409. That's a new Service attached. But there's also a touch Service uh, which has a more higher um uh uh reach or percentage, uh, compared to the hardware, uh, how our side of it.
Very helpful. Thank you. Yeah, thank you.
Our next question comes from shrenik cossari with bad. Please go ahead.
Hey uh, can you guys hear me? All right, so uh, just a quick question on, on the go to market. Uh, you guys have been pushing towards platform adoption, and and multi-product
He didn't talk a little bit about how the child incentives.
Are moving towards uh kind of achieving your, your internal targets. I mean, in terms of the rewarding models that are favoring
platform cross sell or or pure volume, uh, can you just give us an update on on what's been most effective?
Uh, in driving that uh where are the areas where you're still working on?
Yeah, would really appreciate that.
Yeah, traditionally we are we are more Channel focused company. Uh, now in the last few years, we most starting investing like direct marketing, direct sales, especially to all these big Enterprise. Uh, so you can see the whether the bigger deal and the bigger Enterprise sales grow, while we're strong like a 40, 50% uh that's all come from all this. Uh direct touch approach and also you know, with Solutions selling platform like a multiple port instead of a single product
Uh, how to how to sell this multiple solution, uh, multiple product, uh, together into a, into a integrated solution there. Uh, including whether the size is 1 including the secure op. Uh, so that's also kind of a leading to the, the AI part of story, which we believe is a fast growing part of our business there. Uh, even we only introduced for a few years, uh, but that's AI. Uh, kind of based secure up and also like a secure infrastructure, uh, the to the a 40 AI assist 48, protective of of this, AI driven operation, the soft Mark Operation Center there. Uh, so that's what we do see is that it's kind of a integrated solution without kind of us to up, that's become a fast growing part of business right now.
And to answer your question on the channel incentives, they are exactly, um, aligned around multi-product
um, so we, we make sure that that the channels, um, introduces new products, and that that for that they get higher, um, back and rebates,
Our next question comes from Eric Heath with Key Bank. Please go ahead.
Hi, good afternoon. Can you hear me?
Yep. Yep. Okay.
Great, thank you. Um, just just to come back to the the comments and the refresh cycle 1 more time, and I'm sorry for believer in this point. But if I'm understanding this correctly, you've done well in excess of a hundred million dollars in refresh activity and the past 2, or 3 quarters, which would suggest product Revenue. Excluding this refresh benefit has been flat to negative in the last couple of quarters. So, can you just help me understand why the underlying firewall demand isn't stronger?
Uh, I would not say will be negative. It's continued to refresh, but because it's so such a small percentage of the overall business. That's the reason we gave a additional, uh, like a building guidance, uh, for the rest of the year, uh, on top of what we already overachieving q and Q Q2. Uh, so that's just keeping. Uh, we believe whether the market and also a solution is, is a much better. Uh, we're not too much counting on the on the refresh. It's a very small percentage. Uh, we just using the wheel to calculate whether internally or incentive the channel.
Uh, to helping customer to upgrade and especially for the new sassy firewall. So that's where we kind of. We do give a much more number measurement. Uh, sometime could be a little bit confusing but I I, I do believe it's the way we try to uh help in the customer partner to upgrade to the new sassy firewall. Uh instead of uh have a 2 big business impact uh because uh like I said, the end of a service, that's the product been there. 12 15 years ago as a pretty small percentage of our total business,
Our last question comes from Andrew Newinski with Wells Fargo. Please go ahead.
Okay, thank you for squeezing me in. Um, I'm wondering, you know I'm still a little bit unclear on my services. Revenue growth is decelerating so much you know, looking back over the last call at 4 quarters. Um and then also going forward um and I'm wondering if you could just provide any color around, you know what's what's really driving that deceleration and then you know, related to that
Why is your unified sassy that has so much momentum right now? Why why would that be flat sequentially in Q2? Because it looked like it was about 1.15 billion in Q2 and the same thing that you had in your slide deck in q1. So just wondering if you could comment on, um,
You know, I know on a year-over-year basis as well, but on a sequential like why would it be flat? Thank you.
Uh, yeah, go ahead on sequence to answer your your second question for sequentially. Um, it it's flat because there there are a number of products. Some of them have not been growing. Yeah, or turning a little bit and while unified sassy, uh, well, SSE has been growing um, nicely and is offsetting that. So that that's part of this, um, on the service Revenue growth,
um,
Did and and and they have come. So we've recognized service Revenue. Oh, over the last couple of years, um, benefiting from that growth and now
The product revenue and the service Revenue are aligning more with our billing growth. And and so we, we need to grow faster and we are planning to grow faster, to drive that both, both revenue streams up. Yeah.
Yeah. The service Revenue? Yeah, the service line. If you looking like a 3 4 years ago, uh, the product Revenue grow, like a, 3040, uh, some quarter, maybe even close to 50%. That's Drive the service Revenue, because service turn every like 30 minutes, 29, 30 months. Uh, so that's need to be recognized. Uh, doing that like uh, like 2 and a half 3 year period.
Uh, on the other side, I keeping refer back to the, to the presentation. Number 4, number 4. Uh, which is really, uh, uh, uh, the sac part of a sassy growing very, very strong, uh, because unified s is also including the sd1. You can see sd1, we already have a pretty good penetration rate in the Enterprise. That's where customer most starting. Adopt Beyond sd1 starting quickly. Adopt The Sassy now. Uh, so that's where the, the growth still, very strong. So we do believe. So we, We Are The Number 1 firewall. Number 1. I see. When we do, believe, we end up with Sassi within the next few years because
And also can very easily for the current customer base to up to to upgrade to the sassy which not other sassy player has this huge customer base and also our own infrastructure give us cost Advantage. So all these 3 advantage of assassin, not our competitor. That's we do believe will be the number 1 sassy player in the next few years.
Okay, so I say, we, we focus on the value to the customer and we've got 800,000 customers, and that path to Value from firewall to SD win to sassy with the integrated single operating system approach.
It's really pretty straightforward. And so we see a huge opportunity for their products, and with new sales of SASE, that’ll be a real growth driver for us.
This concludes our Q&A session, I will now hand it back to Iran, ovadia for closing, remarks.
You would like to thank everyone for joining today's call. We will be attending investor conferences hosted by Deutsche Bank, City and Goldman Sachs during the third quarter,
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If you have any follow-up questions, please feel free to contact me. Have a great rest of your day.