Q3 2025 Fortinet Inc Earnings Call
Speaker #1: Also all references to financial metrics that we make on today's call are non GAAP unless stated otherwise , our GAAP results and GAAP to non-GAAP reconciliations are located in our earnings press release and in the presentation of the accompanying today's remarks , both of which are posted on our Investor Relations website .
Speaker #1: As a reminder , this is a live call that will be updated for replay via webcast on our Investor Relations website . The prepared remarks will be also be posted on the quarterly earnings section of our Investor Relations website .
Speaker #1: Following today's call . Lastly , all references to growth are on a year over year basis unless noted otherwise . I'll now turn over the call to Ken .
Speaker #1: Thank you .
Speaker #2: Anthony . Thank you to everyone joining our call . We are pleased with our excellent third quarter performance driven by strong execution and broad based demand across our of all sizes .
Speaker #2: As we grow faster than the market in all three pillars of our business . As shown on slide four . Building a revenue .
Speaker #2: Both grow by 14% with a record third quarter operating margin of 37% . Unified SaaS building grew 19% , driven by 40 billion growth of over 100% , making us one of the fastest growing SaaS leader and scale our strong growth driven by our key differentiated advantages .
Speaker #2: Fortinet is the only vendor to natively integrate NexGen firewall , SD-Wan , and sassy on a single operating system for the OS . With the flexibility to run both on premise and in the cloud .
Speaker #2: This single OS integration allows customers to expand from our leading firewall , SD-Wan to SaaS in minutes , providing a significant upsell opportunity within our large customer base .
Speaker #2: Our solution also enables sovereign , Sassy for service providers and large enterprises to deploy fully SASE within their own data center for data privacy , plus , Fortinet's investment in own global cloud infrastructure for the cloud delivers long term security , performance and cost benefit , reducing total cost of ownership by roughly one third that of compared to our peers .
Speaker #2: This key advantage have led to our recognition as a leader in the 2025 Gartner Magic Quadrant for SaaS platform . As shown on slide six , our strong leadership position is reflected in customer adoption , with 15% of large enterprise customers now using 40 sassy represent 55% growth , as shown on slide ten .
Speaker #2: Based on this momentum , we are confident in our ability to become the number one sassy market leader in the next few years in secure networking , building growth 10% , outperforming the overall secure networking market .
Speaker #2: Fortuna leadership in firewall is unable by 40 OS , thus , unified networking and security and is accelerated by 48 six with a huge secure computing power .
Speaker #2: Which enable more function and deliver 5 to 10 x better performance than our competitors . While lower the total cost of ownership and energy consumption .
Speaker #2: This security and performance advantage was further validated by Gartner as Fortinet recognized as a leader in inaugural Magic Quadrant for hybrid Mesh Firewall , where we rank the highest in ability to execute .
Speaker #2: Building on this foundation , we recently launched the secure AI Data Center solution , specifically designed for AI workload , where we leverage our ASIC advantage , helping Fortinet capture a massive growth opportunity as customers scale AI globally .
Speaker #2: AI driven , secure OP was the fastest growing pillar in the third quarter , with building growth of 33% . 49th industry leading AI patent portfolio of more than 500 issued and pending AI patents .
Speaker #2: Powering over 20 AI driven solutions as shown on slide 12 , offers the broadest and most integrated AI driven , secure operation portfolio in the industry .
Speaker #2: Food security leadership also extends to operational technology and cyber physical system security , where our solution provide deep visibility , advanced threat protection , and security , connectivity .
Speaker #2: Our technology and critical infrastructure solutions are other significant growth driver for Fortinet , with over 30% building growth . Lastly , as the as a result of our strong growth opportunities that lie ahead , we remain confident that we will continue to meet the rule of 45 and continue to gain market share and outperform the overall market growth in 2025 .
Speaker #2: 2026 and beyond . Consistent with our mid term target provided and last year's analyst . I would like to thank our employees , customers , partners and suppliers worldwide for their continued support and hard work .
Speaker #2: I will now turn the call over to Cristiano .
Speaker #3: Thank you , Ken , and good afternoon , everyone . As Ken mentioned , Fortinet's growth and momentum remains strong and we are very pleased with our third quarter performance .
Speaker #3: Solid operational execution and healthy , broad based demand for our solutions . Total billings grew by 14% to 1.81 billion , driven by 19% growth in unified SOC , 33% growth in Secops , continued growth in sales to large enterprises and robust performance in OT and critical infrastructure .
Speaker #3: Unified Sassy and Secops now account for 26% and 11% of total billings , respectively , up a combined three points and 40 . Sassy delivered exceptional results with billings growth of over 100% , which positions Fortinet as a leader in this space .
Speaker #3: Furthermore , sassy adoption momentum has remained strong as 15% of our large enterprise customers have purchased 40 sassy , an increase of over 55% .
Speaker #3: Highlighting our continued expansion of 40 sassy in our customer base . As I mentioned earlier , continued momentum in large enterprise contributed to a growth in the third quarter as the number of deals greater than 1 million increased by 26% , while the total dollar value grew by over 30% .
Speaker #3: As in prior quarters , operational technology use cases contributed to our success with billings growth of over 30% and broad based demand for both our hardware and software solutions .
Speaker #3: In addition , we continue to expand our customer base . Approximately 6600 new organizations chose our unified single 40 OS platform to power their cyber security strategy , which exemplifies our continued strong position in all segments of the market .
Speaker #3: With regards to IRR , unified , Sassy increased by 13% to 1.22 billion and Secops increased by 25% to 472 million . Total revenue grew by 14% to 1.72 billion , led by EMEA , followed by APAC and the Americas .
Speaker #3: Product revenue increased by 18% to 559 million , benefiting from strong performance in multi-product deals across a variety of use cases and OT security .
Speaker #3: As we continue to gain market share . Fortigate firewalls , networking equipment and software all delivered strong double digit growth with software license revenue up 20% and representing a mid to high teens percentage of total product revenue .
Speaker #3: Hardware revenue growth was broad based , which included growth from ongoing technology upgrades , expansion across products along our various customer journeys , and expansion into new use cases .
Speaker #3: The 2026 end of support cohort was not a significant driver of product revenue growth in the third quarter . Service revenue grew by 13% to 1.17 billion .
Speaker #3: We see our improved product revenue growth and customer expansions in 2025 as leading indicators for improving service revenue growth expected for the second half of 2026.
Speaker #3: Now , I'd like to highlight some key deals that demonstrate our market leadership and variety of use cases that our products are supporting in a competitive win .
Speaker #3: A global Fortune 150 e-commerce company operating a worldwide logistics and fulfillment network expanded its investment in Fortinet with a new AI data center project already leveraging Fortinet firewalls across their data centers and hundreds of warehouses .
Speaker #3: The customer selected Fortinet to secure and optimize their new AI workloads , requiring extreme throughput and reliability . They chose Fortinet for our ASIC based Fortigate architecture , which delivers high performance , low latency and lower power consumption , as well as advanced security that protects AI data flows and models without compromising speed .
Speaker #3: The customer is achieving improved workload control , lower operating costs and is now looking to further expand their data center footprint with Fortinet .
Speaker #3: This customer win highlights the energy consumption advantages of our proprietary ASIC , which has become even more important to our customers in a new era of AI data centers .
Speaker #3: Next , in an eight figure deal , a large city police force purchased Fortinet's SD-Wan , SD branch and Sovereign Chassis , displacing multiple vendors , including their previous provider .
Speaker #3: The customer Sovereign deployment ensures compliance with local data governance requirements , gives full control of critical assets , and resolves performance issues experienced with their prior provider .
Speaker #3: The police force chose Fortinet for its flexible and consistent security enforcement and single operating system. This enabled secure access to both on-premises and cloud applications.
Speaker #3: While supporting a network transformation project that will enhance public safety and trust . In the competitive new customer win and operational technology organization purchased more than ten Fortinet solutions across all three pillars , consolidating multiple security functions onto our single 40 OS .
Speaker #3: Operating system . The customer selected Fortinet for our unified Security Fabric platform , which simplifies operations due to a significant reduction of required integrations , improves visibility , and lowers total cost of ownership with centralized management and streamlined operations .
Speaker #3: They now have the agility and scalability to grow securely and enable their digital transformation . Lastly , a retail organization who has been a long time Fortinet customer , upgraded their Fortigate across more than 10,000 retail locations .
Speaker #3: They continue to choose Fortinet for our stable performance , consolidated for Doe's operating system and highly automated operations . Building on a trusted relationship strengthened by their use of several other Fortinet solutions and our Price and performance advantages , the customer is now expanding their Fortinet footprint by exploring adoption of our Ztna solution to further enhance security and operational efficiency .
Speaker #3: Turning to margins and cash flow . Total gross margin of 81.6% was better than expected , driven by strong execution and cost control .
Speaker #3: Operating margin of 36.9% reached a third quarter record and was up 80 basis points . The increase was primarily due to operational efficiencies and strong cost management , free cash flow was very strong at $568 million , and adjusted free cash flow was six , was up 600 , was 646 million , up 41 million , and present represented a margin of 37% on a year to date basis .
Speaker #3: Free cash flow reached 1.63 billion , up 135 million . Notwithstanding continued investments in data center infrastructure and increased inventory purchases to meet customer demand , infrastructure investments were 88 million , up 51 million .
Speaker #3: As we continue to build out our infrastructure footprint , we repurchased 23.3 million shares of our common stock for an aggregate purchase price of 1.83 billion .
Speaker #3: In the third quarter , which reduced our total share count by approximately 3% in August , our board of directors approved a 1 billion increase in the authorized stock repurchase amount and the remaining share buyback authorization .
Speaker #3: As of today is 796 million . Now moving on to guidance as a reminder , our fourth quarter and full year outlooks , which are summarized on slides 20 and 21 , are subject to the disclaimers regarding forward looking information that Anthony provided at the beginning of the call .
Speaker #3: For the fourth quarter , we expect billings in the range of 2.185 billion to 2.285 billion , which at the midpoint represents growth of 12% .
Speaker #3: Revenue in the range of 1.8 to 5 billion to 1.885 billion , which at the midpoint represents growth of 12% . non-GAAP gross margin of 79 to 80% .
Speaker #3: non-GAAP operating margin of 34.5 to 35.5% . non-GAAP earnings per share of 73 to $0.75 , which assumes a share count between 751 and 755 million .
Speaker #3: Infrastructure investments of 60 to 110 million , a non-GAAP tax rate of 18% . And cash taxes of 66 to 116 million for the full year .
Speaker #3: We continue to remain on track to achieve the rule of 45 for the sixth consecutive year , and expect billings in the range of 7.37 billion to 7.47 billion , which at the midpoint represents growth of 14% .
Speaker #3: Revenue in the range of 6.72 billion to 6.78 billion , which at the midpoint represents growth of 13% . Service revenue in the range of 4.575 billion to 4.595 billion , which at the midpoint represents growth of 13% .
Speaker #3: non-GAAP gross margin of 80.25 to 80.75% , non-GAAP operating margin of 34.5 to 35% , non-GAAP earnings per share of $2.66 to $2.70 , which assumes a share count of between 764 and 768 million .
Speaker #3: Infrastructure investments of 380 to 430 million . non-GAAP tax rate of 18% , and cash taxes of between 400 million and 450 million .
Speaker #3: Looking ahead to the next few years , consistent with the framework that we provided at our Analyst Day last year , we remain confident that we will continue to meet the rule of 45 and expect to grow faster than the market in all three of our pillars .
Speaker #3: Our confidence is supported by both secular and company specific tailwinds . We expect continued strong growth in the demand for our products , driven by increased investments in cybersecurity spend from our customers .
Speaker #3: The convergence of networking and security , and vendor consolidation . We expect to continue to outperform the overall market growth due to continued organic innovation and leadership and price performance , which drives a lower total cost of ownership in network security , including operational technology , as well as unified SASE and Secops .
Speaker #3: We plan to continue to invest in our go to market , including our cloud delivery infrastructure , strategic partner relationships and increased sales capacity .
Speaker #3: Finally , the rise of AI is expected to further increase demand for our solutions due to the need to secure llms and data movement , and we remain committed to continued investments in innovation and the ongoing development of our product portfolio .
Speaker #3: I will now hand the call back over to Anthony to begin the Q&A session .
Speaker #1: Thank you . Cristiano . As a reminder , during the Q&A session , we ask that you please limit yourself to one question and one follow up question to allow others to participate .
Speaker #1: Operator . Please open the line for questions .
Speaker #4: Thank you . If you would like to ask a question , please click on the Raise Hand button at the bottom of your zoom screen .
Speaker #4: 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 .
Speaker #4: We will allow a moment for the queue to form. Our first question is from Tagliani from Bank of America. Please unmute your line and ask your question.
Speaker #5: Hi guys . I want to start from the same line of questions that we had last quarter . Product revenues went up 18% , materially below the street .
Speaker #5: The street expected about $12. What are the drivers, and what is the impact of refreshed product refresh? Product upgrade related to end of service?
Speaker #5: Thanks .
Speaker #2: Yeah , this I think it's driving by the strong demand . You can see there's a few growth drivers I mentioned . So whether the sassy the secure app also ot like grow 30% .
Speaker #2: So that's our growth driver . I don't think the end of a survey is is major growth driver . There . And that's also we probably will stop tracking that .
Speaker #2: It's a kind of a . I put it this way . I just think of some some example for funny . Like it's more like when you buy a new car , you probably would not try to wait your old car totally out of service .
Speaker #2: That . So the reason to buy a new car is more because you're kind of like the new feature , or better performance , or some some other reason instead of a video count how many I mean , how how how old car kind of when will be die out of service .
Speaker #2: So that's what I feel . It's not a growth driver . And the growth driver that's also the reason we're keeping gaining market shares , because the new function we developed and the better hardware , including probably the new A6 next year and and also the new market , we open up that drive the growth .
Speaker #2: Thats where keeping same for for a few years . I do believe the product revenue on average normal case will kind of around 10 to 15% will be kind of a low double digit growth .
Speaker #2: And which matched quite well for the last 16 years since we IPO . And I feel , yeah , product revenue growth , I feel is a kind of normal .
Speaker #6: And this is John Whittle . And just to follow up on what Ken said , what we see is not a shortage of of potential growth drivers and opportunity .
Speaker #6: If anything, the opportunity is so great that we have to prioritize where we drive growth. We've got a track record of growing faster than the market across all three pillars.
Speaker #6: And like both Christiane and Ken mentioned , we're seeing significant growth in unified SaaS sales to large enterprises . OTT and critical infrastructure .
Speaker #6: And so if anything , our challenge is where do we focus on in terms of the growth drivers ? It's not a lack of growth drivers .
Speaker #6: We have a lot of growth drivers out there and just , you know , I talked to a lot of customers . I see just a ton of opportunity out there to grow .
Speaker #6: And we do have that track record of growing faster than the market across all three pillars for some time .
Speaker #2: Yeah, that's where the three pillars we showed in last year's Analyst Day, and also shown on the slides for here.
Speaker #2: So in each pillar we have a huge advantage compared to other competitors . We believe we'll get market share in each pillar . That's the growth driver behind .
Speaker #5: So if that's the case, that's my follow-up. If that's the case, why is the guidance for next quarter kind of uninspiring?
Speaker #5: Revenue growth is slightly below the street . It's less than 12% . What's unique with this quarter versus next quarter or next quarter versus this quarter ?
Speaker #2: I think that's probably more related . The revenue may relate to the service . You can see the last year I put it this way , probably finance know better than me .
Speaker #2: The product revenue is leading indicator of service revenue or average service turn . Probably about 29 months . So last year the product revenue growth like like a -2% , I believe .
Speaker #2: So that's impact . The service revenue for the next probably like 2030 months . That's where we believe maybe to towards the end of the next year , the service revenue starting turn around with this year , product revenue growth pretty strong .
Speaker #2: I believe Q4 last year , we already see some strong turning with the product revenue grew 18% . And also last quarter , Q3 also the product revenue also growth like 18% .
Speaker #2: So that's will be the leading indicator for future service revenue and service revenue , probably day one of the quarter , maybe 90% revenue already .
Speaker #2: Whatever comes in there . So that's probably is the the the revenue total probably a little bit impacted by the service revenue . But with the product revenue starting accelerate , we do believe the future service revenue will be , will be will be better .
Speaker #5: Got it . Thank you .
Speaker #2: Yeah . Thank you .
Speaker #4: Thank you . Our next question is from Fatima Bulani from Citibank . Please unmute your line and ask your question .
Speaker #7: Good afternoon . Thank you so much for taking my questions . I wanted to stick to this discussion area with respect to the services revenue trajectory .
Speaker #7: I think for all of us , very , very familiar with your model , we can appreciate the very attached nature of services , both in the form of subscriptions and support to the appliances .
Speaker #7: But I'm wondering . If you can help put a finer point on what the trajectory of services growth could look like in the next 12 months , and this is just , you know , optically looking at services growth that is decelerated for the ninth consecutive quarter , understanding that there's a 20 to 29 month period in which there's a up , as well as maybe some of the commentary you shared last quarter with respect to a slower billings to revenue conversion as it relates to some of the customer behaviors .
Speaker #7: catch
Speaker #7: So, just wondering if we should think about 13% services growth as trough or near trough, or if that's maybe not the right way to think about it.
Speaker #7: Would appreciate any feedback on that . Thank you .
Speaker #3: You're right . I provided color in my prepared remarks that we
Speaker #3: expect the service revenue growth to improve , to to improve in the second half of 2026 . And the main reason for that is that , as Ken just said , we had negative billings growth last year , which impacts the attach rate .
Speaker #3: And we are now seeing or negative product billings and product revenue . And we are now seeing product pick up so that that is going to attach more services .
Speaker #3: But some of our customers are buying product ahead of the services until they roll them out . And so we we are confident that at the end of in the second half of next year , we will see a pickup .
Speaker #8: Thank you .
Speaker #4: Thank you . Our next question is from Shaul from TD Cohen . If you'd like to unmute your line and ask your question , please .
Speaker #4: Thank you .
Speaker #9: Good afternoon everybody . I had a quick question on that eight figure SD-Wan sassy and some other components transaction with that police force .
Speaker #9: If if you guys can unpack it for us a little bit , how would you characterize probably the SD-Wan being a little bigger than the sassy contribution , or is it vice versa ?
Speaker #9: So any any color you can share with us would be greatly appreciated . Those those eight figures specifically related to sassy right now are a little uncommon .
Speaker #9: So every every piece of color will be greatly appreciated .
Speaker #10: So the .
Speaker #3: Eight figure deal .
Speaker #10: Is a is related .
Speaker #3: To Billings . And so it is a combination of product and services . But we also pointed out they are building out a sovereign sassy .
Speaker #3: So that that means they're buying more product and not the cloud . Not the cloud delivered . Sassy solution . And that's the strength of Fortinet that we we deliver all options to our customers so they can decide whether they want cloud delivered by Fortinet or whether they want to host it themselves and and create their own sassy service that that they have full control over and in the specific case , also meets the local data governance requirements .
Speaker #3: So yes , it's it's less sassy and more SD-Wan and SD branch in that deal .
Speaker #2: Yeah , I think the sovereign sassy is the key reason to win . And also that's a Fortnite unique advantage because where there's some government or sort of big enterprise , they want to keep in the data within their own data center .
Speaker #2: The privacy of some other regulation requirement . That's where like , just like how the , the firewall SD-Wan , we combine all sassy together in the same appliance can be applied in the cloud and also especially attractive for these this kind of like a bigger customer or government or service provider that that's a huge advantage .
Speaker #2: And also some of the functions like SD-Wan also can use AC to accelerate . So that's the advantage we have compared to other sassy provider , which they all have a cloud delivery have to go through their kind of cloud infrastructure process .
Speaker #2: The data , a lot of customers really don't like that . And at the same time , we have a huge customer base .
Speaker #2: So we have almost close 2 million customers . We have like more than half the global firewall deployment . So for all the current customers , very quick , easy to adopt , whether our SD-Wan or sassy .
Speaker #2: So that's the huge advantage . Also , cycle is much shorter . If you remember , we only launched sassy two years ago and and you can see how quickly we ramp up with all this overbuilding dollar business there .
Speaker #2: And still grow . Probably the fast one , among other sassy player with a scale over $1 billion . So that gives us the confidence .
Speaker #2: Will be the leader , number one leader within a few years .
Speaker #9: Thank you for the color . Appreciate it .
Speaker #2: Thank you .
Speaker #4: Thank you . Our next question is from Brian Essex from J.P. Morgan . Please unmute your line and ask your question .
Speaker #9: Great .
Speaker #11: Thank you very much and thank you for taking the question . I guess maybe maybe for Ken . Would love to ask a question on your sassy .
Speaker #11: You guys are a little bit unique in where so much of your sassy business is converting from your , you know , installed base upgrade , whether it's from SD-Wan or or firewall .
Speaker #11: What could you talk about ? The rate of sassy penetration or rate of penetration from sassy into your SD-Wan install base , and what would you need to do to accelerate the the volume of business where you can lead with sassy instead of relying on your installed base ?
Speaker #11: Thank you .
Speaker #2: Yeah , I think yeah , that's leverage our like a number one market share in whether the firewall SD-Wan , we do see the customer much quicker easier to adopt sassy solution .
Speaker #2: Right now we're more tracking the enterprise . That's where the percentage I feel is it's a good representative representation of some customer base .
Speaker #2: We also have a lot of sassy goes through our service provider , goes through our kind of channel partner , which a little bit difficult for us to track in .
Speaker #2: Just like our ICD one . And sometimes we offer SD-Wan for free , which we see we are the number one player in ICD one , and that's also very different than all the other competitor .
Speaker #2: Pretty much all other top , top five , top top ten players . They all come from acquisition . So if they do their sassy , they have to have a separate SD-Wan box .
Speaker #2: And then which we feel much , much kind of a weaker or more difficult to manage compared . We have a single box solution there .
Speaker #2: So that's where I see sassy evolve our quick ramp up . Wherever quick growth . That's why I mentioned the 4,100% . It's a few .
Speaker #2: Put excited about this . This opportunity and all the team , all the field , all the channel partner also like it a lot .
Speaker #2: And also I do believe probably that's the early strategy we have . Eventually the service provider will also pick up the sassy , just like when we IPO like 16 years ago , like 30% or 30% of business come from like a carrier service provider .
Speaker #2: I still believe eventually the telecom service providers and other like cloud provider may also pick up the 40 sassy because it's so easy to to deploy and it's so easy to adopt .
Speaker #2: What's customer need , whether it's a private , sassy or kind of sovereign , sassy and so easy quickly integrate with other security with other networking function .
Speaker #2: But the way we're tracking , we do give every quarter is more based on enterprise , which we like kind of a direct registration and that we can more easily track .
Speaker #2: But the way we're tracking , we do give every quarter is more based on enterprise , which we like kind of a direct have
Speaker #2: But I do believe there's a much bigger base go through service provider goes through channel partner , especially SMB .
Speaker #11: to sassy , like , how much of an opportunity that is ?
Speaker #2: I feel the the slides I showed in the presentation . I believe the slides are . That's a good way to represent . But on the other side , we also keep in gaining market share in firewall keeping , gaining market share in in SD-Wan .
Speaker #2: So I think without installation base you can see slice ten . So now we believe within two years now 15% of the enterprise starting double sassy .
Speaker #2: Yeah . But also we starting to see more and more kind of a new sassy which which is not a firewall as even customer before and also replacing some other sassy player because whether they are solution to complicated to costly , you can see we have a huge cost advantage .
Speaker #2: We also much simple one box solution compared . They have to have A234 box . So that's where we see more and more new case replacing some other as player .
Speaker #11: Okay , very helpful . Thank you .
Speaker #2: Thank you .
Speaker #12: Our next .
Speaker #4: Our next question comes from Gabriela Borges from Goldman Sachs . Please unmute your line and ask your question .
Speaker #13: Hey good afternoon . Thank you . Christiane , you're giving us an early look into directionally services growth . Improving into the back half of 26 because of the strengthened product revenue this year .
Speaker #13: My question is on your visibility into product revenue for next year . Certainly the the year over year growth has been good year to date .
Speaker #13: But on comps that are much lower . So my question for you is how do you think about product growth trajectory into next year ?
Speaker #13: Are there any idiosyncratic drivers, either tied to the COVID cycle or to what you're seeing across your pipeline, that you can give us some color on that we should be aware of as we think about the structure of product growth next year?
Speaker #13: Thank you .
Speaker #3: Yeah . So we we are confident about continued product growth , not only next year . Right . So I think Ken said 10 to 15% is what he he he believes is is a good growth rate because there are multiple growth drivers .
Speaker #3: There is continued upgrade and refresh activity that that is in our installed base . There are additional use cases that that we see .
Speaker #3: And then we also are growing our with new customers and and in OTT and other areas . So from our perspective , we are super confident about continued growth of product as well as attached services .
Speaker #3: And then our Secops portfolio , which is predominantly Non-attached services .
Speaker #2: Yeah , like I mentioned , I feel the growth driver is more whether there's a new function or the new hardware . So in March next year , we are going to launch the 48.0 , which is in the beta process .
Speaker #2: That's where we have a early March . We're hosting Las Vegas . The Accelerate welcome all auto attending like before . That's the new function will drive the the growth also , like I mentioned in your conference .
Speaker #2: So we'll have a new A6 , MPA will also come out next year . Probably like a few times faster , more function almost the same cost .
Speaker #2: That's also a driver additional , especially the data center firewall growth . All this is all growth driver . Plus we see the the sassy customer quite excited or sassy solution compared to other competitors .
Speaker #2: And the OTT is other growth . We see pretty strong . We are probably the only leader in the market which we invest over ten years .
Speaker #2: I think it's of this I believe will keep driving the product revenue growth to double digit .
Speaker #13: Thank you for the color .
Speaker #8: Thank you .
Speaker #4: Thank you . Our next question is from Junaid Siddiqui from Truist Securities . Please unmute your line and ask your question .
Speaker #14: Great . Thank you for taking my question . Yeah . Just wanted to drill a bit on O2 security . That seems to be a continuing driver of growth for you .
Speaker #14: And if I'm not mistaken , I think growth accelerated from last quarter . Could you just talk about some of the factors that are driving that ?
Speaker #14: And , you know , how are you differentiated versus some of the competitors out there ?
Speaker #2: Yeah , the OTT security is really is trying to secure a lot of device , especially whether in like health care , the utility manufacturer and all this is I keep saying probably in the next few years ten times more device will connect online , including a lot of home appliances compared to people secure people can and also most time to security is this device the only way probably goes through security because this device has all different kind of operating system , limited computing power , difficult to install security software on it .
Speaker #2: The network security , probably the way to do that . So that's always a huge , huge potential . But also the difficulty really sometimes they run different protocol may not be a standard as like your laptop or phone kind of a OS or protocol .
Speaker #2: On the other side is need a different kind of physical platform sometime recognize sometime kind of a fitting like a different environment . So that's where we invest long term more than ten years in this area .
Speaker #2: And if you look on the Westland report in the last three years , we are the only leader that's I don't believe it's a huge credential .
Speaker #2: We have a lot of different case , different trial from like how to secure infrastructure to some kind of robot or connected car .
Speaker #2: There's all kind of solution there . Each kind of a unique . But I do believe each can be a huge potential market .
Speaker #2: And we don't see much other player in this space . I do believe it's a huge growth driver for us .
Speaker #4: Our next question comes from Patrick Colville from Scotiabank . Please unmute your line and ask your question .
Speaker #15: Terrific . Thank you for taking my question , Ken . And Christina . I guess the question I'm getting in my inbox is about these , you know , refresh cycles .
Speaker #15: So can you just one more time , just clarify for us why the 2026 end of service cohort was not a contributor for this quarter ?
Speaker #15: And then I just want to talk about the next super cycle . It's 2021 and 2022 . Fortinet had just incredible years , and in Christina's kind of comments , a couple of questions ago , Christina didn't mention , you know , the super cycle refresh as being a driver for 2026 and 2027 .
Speaker #15: So I guess kind of why that absence . Thank you .
Speaker #3: I wouldn't say absence . So we are we we said we are confident with our growth of product into the next years . The upgrade activity , as Ken said , is is a portion of our growth drivers .
Speaker #3: But but it has different reasons . So of course , as we come out with new features and functionality and another version of the OS , there are benefits for customers who purchased a couple of years ago to upgrade their devices .
Speaker #3: And so as as they need more security , more , more speed that will naturally happen . It's it's a growth driver , but there are multiple growth drivers that that contribute to to the overall product growth .
Speaker #2: Yeah . My my that's where every , every earning I kind of talk about the technology , talk about all these new new product .
Speaker #2: I feel that that is the growth driver that's making for the success in the last 25 years , gaining market share . I feel like customer buying or even refresh the product is is a more because you have a more better function than before and and and the faster and the lower cost , that's probably will be the driver just just just suddenly come up using whether you want to buy a car or not .
Speaker #2: It's a more , more exciting by the new car . What was the function feature ? They offer the performance instead of a count on the card total out of service and and , and and and we like I don't know , 1020 years .
Speaker #2: Yeah . If you and also sometime confused about the end of service with the normal refresh end of service also the small part of a refresh , I don't know if the percentage because I don't feel it's important to count that , but I do believe customer kind of upgrade the box is more driven by the by the new function , the new box can supporting and also the additional performance and and also the new new kind of use case like in the OTT in the data center security and also kind of all this AI driven , whether within the AI data center or within the the AI use case or some kind of OT appliance environment .
Speaker #6: And your point is a good one , that the normal refresh that Ken's talking about , which can be four or so years , lines up well with the new technology that we're coming out with early next year , with the new network processor and the new operating system .
Speaker #6: So the fact we didn't stress that does not mean that we we don't think that's an opportunity . It was kind of bundled in with Ken's earlier comments about the new technology that's coming out , which really is driving driven the growth for Fortinet , for 25 years .
Speaker #6: Is that steady technology development that is impactful and people want to refresh their devices because because the technology is so much better .
Speaker #2: Yeah , that's one thing I feel the key differentiation built in the last 25 years really the engineer resource , the innovation capability , we have .
Speaker #2: I feel better than other competitors . So that's where we can keep come up . The new function . And also keep follow the market change .
Speaker #2: Also internally develop all these kind of function . You can look at whether the nitrogen firewall , whether the SD-Wan , whether the chassis and also most secure app AI driven , how this kind of security solution there .
Speaker #2: Most of the all from internal R&D innovation compared to most competitors have the come acquisition . So I feel it's an important to recognize all this internal R&D innovation capability that drive the company .
Speaker #2: Without the new growth and new function to keep customer need , which instead of a depend on acquisition , which has more difficult time to integrate after a few years of these kind of things .
Speaker #2: So that's I feel we have a huge advantage . And also leverage a lot of long term investment , whether from ASIC , Chip , from the OS , from the infrastructure .
Speaker #2: We do believe the company will keeping growing , gaining market share long term . And that's why I'm pretty confident , like what we're keeping , gaining share in all these three pillars .
Speaker #2: Show on the slide for .
Speaker #15: Thank you Ken .
Speaker #2: Thank you .
Speaker #4: Our next question is from meta marshall from Morgan Stanley . Please unmute your line and ask your question .
Speaker #16: Great . I just wanted to ask a question just about the Q4 gross margins . Just wanted to see if there were any headwinds from , you know , any tariffs or componentry costs , increases that were embedded in that guide .
Speaker #16: Thanks .
Speaker #3: No , it's really the mix between hardware and service revenue and and then we had some benefits in , in Q3 from some , some reserve releases .
Speaker #3: So that that we don't expect in Q4 . But it's pretty pretty normalized from a product gross margin versus service gross margin . It's more of a mix .
Speaker #16: Great . Thank you .
Speaker #4: Our next question is from Rob Owens from Piper Sandler . Please unmute your line and ask your question .
Speaker #17: Great . Thank you for taking my question . I was hoping you could parse for us different geos and especially North America , which seem to lag from a growth perspective .
Speaker #17: Was there something unique there to call out during the third quarter in terms of share losses or anything else that might have been weak within this theater ?
Speaker #17: Thanks .
Speaker #3: No , not North America or US was very strong in Q2 . And so it it's there are some some quarters where where big deals come in and then other quarters not not so much .
Speaker #3: So they performed well . No share loss .
Speaker #4: Thank you . Our next question is from Sarkar Kalia from Barclays . Please unmute your line and ask your question .
Speaker #18: Okay , great . Thanks for taking my question here , Christiane . Maybe this maybe this is for you . You know , there's been a lot of focus on the call on services , revenue , understandably so .
Speaker #18: But I'm curious a little bit on services billings in the quarter , just given the strong product result . So can you just talk about whether there was any sort of change in attach rate on appliances , whether we should think about changing attach rates as software becomes a bigger part of of product , or maybe talk about another another item , which is the unattached portion of services .
Speaker #18: Billings . I'm just curious , given the sequential decline in services billings , combined with the really strong product result , what were some of the moving parts that we should consider ?
Speaker #3: So if you look at Q2 , Q2 actually had significant enterprise agreements that we signed . And so we had high services billings and and in Q3 , we some of the products were sold into these enterprise agreements .
Speaker #3: And we also had , as I mentioned earlier , some customers buying hardware ahead of the deployment next year . And , and and so we expect more service billings for this specific hardware purchases in 2026 .
Speaker #3: So it's really more I think you need to look at it more on on a longer term basis . And not just quarter to quarter .
Speaker #18: Okay . Got it . So it sounds like there's a timing element there with services billings and and product . Okay . Got it .
Speaker #18: Very helpful .
Speaker #19: Thank you .
Speaker #4: Our next question comes from Kathari from Baird . Please unmute your line and ask your question .
Speaker #20: Sorry . Thanks for taking my question . So Ken , Christiane , you highlighted the launch of your secure AI data center offering .
Speaker #20: Seems like a pretty foundational growth pillar . So just stepping back a bit , how how large do you think is the addressable opportunity here ?
Speaker #20: And who are you targeting ? Are these the AI native players , cloud providers , hyperscalers or just enterprise data center ? Using the refresh cycles and had a quick follow up .
Speaker #2: I think because of are the only like a network security vendor with our own ASIC , which improved performance a lot , a lot of AI data centers in the high speed environment .
Speaker #2: So we started to see some opportunity there secure within the big data center , especially AI data center . And also there's a lot of talk about how AI , whether the genetic or some other part may be , maybe need some additional screening or security .
Speaker #2: So that's the the , the product where we are launching . And I think still in the early stage , the security never security .
Speaker #2: Usually after the infrastructure being built . But we also engage pretty early . And whether it's AI player or with some data center service provider player , because since we have the highest performance level security solution there , so we kind of start testing , we their , their infrastructure , how to secure AI , especially in the data in the in the agent level .
Speaker #2: So that's still in the early stage . Is is a difficult to estimate . But I do believe eventually can be can be a huge market with AI kind of a explosive growth .
Speaker #20: And just follow for Christian . I know it's still early days , but as a revenue driver , given the inflection we are seeing in AI , I mean , how should we think about the monetization here next year ?
Speaker #20: Is it mostly be still skewed towards , as I said , product and hardware as kind of saying the Asics or should we also think about the services layering on top ?
Speaker #20: What I option unified Secops stuff ? Yeah .
Speaker #3: So now definitely the services piece as well . I would say with regards to AI , the use cases are really broad based .
Speaker #3: If if we secure a an AI data center , it's going to be more more hardware centric . If we secure AI applications , it's going to be more software centric .
Speaker #3: And then of course , we have our own our own AI enabled solutions that benefit from AI and help the customers automate network security or secops .
Speaker #3: So it has a broad implication for us, because it opens up different use cases and different benefits for the customers.
Speaker #2: Yeah , that's where the the AI driven secure operation is . The , the fast growing in the last few quarters . And so over 20 solution probably close to half of all these kinds of security solution .
Speaker #2: And with all this AI kind of assistance operations, we can see it's a pretty fast-growing AI, with the biggest driver for all this growth.
Speaker #20: Thanks a lot .
Speaker #8: Thank you .
Speaker #4: Our next question comes from Ittai Kidron from Oppenheimer and Co . Please unmute your line and ask your question .
Speaker #21: Thanks , guys . I appreciate it . I just want to make sure I understand the linearity of your product billings going forward .
Speaker #21: You talked about services accelerating the second half of next year , but should Billings have the .
Speaker #3: Revenue ? Right . Sorry .
Speaker #21: Sorry to interrupt , but .
Speaker #3: Yeah , that was the .
Speaker #21: Revenue comment .
Speaker #8: Yeah .
Speaker #21: Then if I think about the product revenue , should it have perhaps an inverse pattern just given that at the end of life your meaningfully into it right now and somewhere early mid next year you're largely complete on that front .
Speaker #21: And then it becomes a difficult comp . So is it fair to say that the product growth potentially decelerates in the second half of next year ?
Speaker #3: We . We are confident that that our product revenue growth is . Is solid for next year as well . Yeah . Based on all the growth drivers that we've just provided , we haven't guided for next year yet .
Speaker #3: So from that perspective , I don't I don't want to get ahead . But we are confident with our growth trajectory for product as well as as for services .
Speaker #21: Okay . And maybe then yeah go ahead . Ken .
Speaker #2: Sorry , I kind of go back to the slides for you can see each of this pillar is a big market and it's a still world where frag fragment market and I think any player kind of more than ten , 20% market share is still a huge growth potential to keep gaining market share .
Speaker #2: That's why we do believe in each pillar . We have a unique advantage and we're keeping gaining market share that will continue to drive the the product revenue growth .
Speaker #2: It's a probable not not like when we dominate the market . Then more limit how how how how growth . But this is a more like a greenfield for all three pillar because there are so fragmented .
Speaker #2: And to believe the strong player will keep gaining share . And then that's probably drive the next 5 to 10 year product growth .
Speaker #21: Very good . And then maybe if you could just clarify on the on the billings , what percent of those are still just standalone SD-Wan versus not .
Speaker #2: It's we have some but some . If you look on SD-Wan as a part of the OS function , I think we have a good tracking .
Speaker #2: But sometimes still difficult to be to accurate because sometimes customers can enable SD-Wan and then then keep using it without . Let us know .
Speaker #2: So that's why . But we do believe we are the number one . CD , one player in the market . And and that's also one of the major reasons they select a customer , select of SaaS , because they like , this one .
Speaker #2: And very quickly can migrate to SASE . But as I market itself , kind of a growth , slow down a little bit .
Speaker #2: But we do keep gaining market share . You can look at other hc1 players all come from acquisition , all the top , top five , top ten , pretty much all come from acquisition , which is we see the slow down .
Speaker #2: A lot of developed new function or some have a separate box . So that's where we keep gaining . Market share . But our SD-Wan is a part of the 40 OS .
Speaker #2: So if you buy a firewall, you already have C1 in there.
Speaker #21: Appreciate it .
Speaker #6: Thank you . And referring to the acquisitions , that's creating some disruption in the SD-Wan market , that's opening up opportunity for us where the disruption from the acquisition , plus the customer may have a separate firewall and separate SD-Wan solution , and they come and talk to us about a combined solution that is just a no brainer from a cost effectiveness standpoint .
Speaker #6: So we've had multiple conversations around that , which , you know , we're already in the far upper right quadrant of the Gartner Magic Quadrant for SD-Wan .
Speaker #6: But it feels like with that leadership position and the disruption from these acquisitions and just the compelling value proposition , it's it's a good opportunity for us .
Speaker #21: Thank you .
Speaker #4: Our next question is from Brad Zelnick from Deutsche Bank . Please unmute your line and ask your question .
Speaker #22: Fantastic . Thanks so much for fitting me in . I'm hoping you can help reconcile your comments about growing above market in each of your pillars with 13% IRR growth and sassy this quarter .
Speaker #22: Is there something specific one off we should consider in Q3 ? And as well , it would be great if you can comment on pricing trends and competition that you're seeing in SaaS more broadly .
Speaker #22: Thanks .
Speaker #3: Brad , the unified , sassy IRR as we just said , includes also the SD-Wan . And so I think we are pleased that actually quarter over quarter , we had pretty good IRR growth .
Speaker #3: You know , that it was flat because there's also an element of of the Xenapp component in that IRR . And from that perspective , we're now see positive momentum .
Speaker #3: Yeah .
Speaker #22: Okay . Great . Any comments on especially at the branch when the customer wants a sassy solution , how often is that going out to competitive bid .
Speaker #22: And any changes in win rates and pricing trends ? There . Any color would be great .
Speaker #3: So I would say competitive bids really depend a little bit on the customer size and and the customer type and in government you have more competitive bids than maybe in smaller enterprise customers .
Speaker #3: But large enterprise customers will always go out for , for a competitive solution . I think the key is that that we now have a seat at the table when we talk to our customers and say how easy it is , and to implement sassy and and just extend your policies from the firewall to the sassy platform .
Speaker #3: And and that makes the incremental cost for our customers significantly lower than if , if they if they deploy a third party solution .
Speaker #3: And that's what we also hear from customers that not having to maintain multiple policies is , is the huge operational benefit .
Speaker #2: Yeah , I think there are some sassy player talk about maybe branch Sassy may replace a firewall or some other , which is I don't see that's the case .
Speaker #2: Maybe they're different player they have to use in multiple box for branch like a one for networking device , one for SD , and then the other one .
Speaker #2: Just try to load a sassy there . But for us it's a single box solution with networking with SD-Wan , without a sassy there you can see the example .
Speaker #2: Christiane Ohlgart is a 10,000 retail location . They just use the Fortigate . So deploy is a sassy SD-Wan and the network security solution , and also even to the networking , the Wi-Fi access as controller .
Speaker #2: So that's a huge cost saving and more easy to manage , which compared to competitors have to use in three four different box for networking for one , for some other sassy which we see is a single OS and also we also cannot dominant in in the in the in SMB space .
Speaker #2: So we feel a lot of customer they can work quickly easy adopt this sassy not just SMB , but also work from home .
Speaker #2: We also see some new case to supporting work from home using kind of a home security sassy . There . .
Speaker #22: Very helpful color . Thanks so much .
Speaker #8: Thank you .
Speaker #4: Thank you . Our last question comes from Grapow from Btig . If you'd like to unmute your line and ask your question .
Speaker #23: Okay , great . Thank you very much for working me into the call . I just wanna make sure . Can you hear me ?
Speaker #23: Okay .
Speaker #2: Yeah . Okay .
Speaker #3: Yeah .
Speaker #8: Thank you .
Speaker #23: Okay , great . Hopefully I can ask this question correctly . I just want to make sure I understood some of the commentary during the Q&A .
Speaker #23: All right . So you called out double digit or an expectation for 10 to 15% growth in product revenue for 2026 . During the Q&A .
Speaker #23: And that was in response to a question I'm going to guess there's a reason that that statement was not in prepared remarks . So I guess here's my question .
Speaker #23: Is the 10 to 15% , is that what you really think you're going to do in 2026 as the year plays out ? And I'm asking that because historically , you've given investors a discount when you guide for a new year .
Speaker #23: So I'm not asking for guidance . I'm just asking like thinking of those two things correctly .
Speaker #2: Let me correct a little bit that what I mentioned is really in the last few conference , there's always a question about what's the hardware , what's the product revenue growth .
Speaker #2: My comments always the normal growth rate should be 10 to 15% , not specifically for 2026 . So that's I believe , not just 2026 .
Speaker #2: Also , maybe go further in the next 5 to 10 years . The normal product hardware growth will be 10 to 15% . In the normal case .
Speaker #2: That's also tracking quite well with the last 16 years . So if you look at how Fortinet grows , right . So that's what we do .
Speaker #2: We do believe we have an advantage in the hardware with ASIC. We have a better OS, more integrated than other competitors.
Speaker #2: And that's where we have some big customer base, and yeah, I do believe the product and also the hardware keep growing at 10% to 15%.
Speaker #2: That will be the the normal growth rate for for us . We also we're keeping gaining market share . Maybe the market can grow a little bit slower than that .
Speaker #2: That's why we look at the the combined market growth in the last four . And secure networking may be a little bit slower , but there's also unified sassy and secure secure OP .
Speaker #2: But that's where the combined market growth rate does relate to some of the product . Maybe some of the software . But I do believe the normal case , probably in the next ten , 5 to 10 years , will be between 10 to 15% growth .
Speaker #23: Okay . That's that's really helpful . Thanks for clarifying that .
Speaker #2: Yeah .
Speaker #8: Thank you .
Speaker #4: Thank you . That was our final question . I will now hand it back over to Anthony for closing remarks .
Speaker #1: Thank you . I'd like to thank everyone for joining today's call . We will be attending investor conferences hosted by Wells Fargo , UBS , Nasdaq and Barclays during the fourth quarter , the fireside chat web links , webcast links will be posted on the events and presentations section of our Investor Relations website .