Business Description
Fortinet, Inc. is a global leader in cybersecurity, offering integrated and automated solutions that provide broad visibility and segmentation of the digital attack surface. The company's primary platform, the Fortinet Security Fabric, delivers automated protection, detection, and response capabilities, catering to a diverse range of customers including large enterprises, communication service providers, government organizations, and small to medium-sized enterprises . Fortinet generates revenue from product sales, primarily through secure networking product lines, and service offerings, which include security subscriptions and technical support .
- Service Offerings - Includes security subscriptions and technical support, driving significant growth through the strength of security subscription services.
- Secure Networking Solutions - Provides high-performance physical and virtual machine appliances designed to secure network infrastructures.
- Unified SASE - Offers a comprehensive approach to secure access service edge, integrating networking and security functions.
- SecOps Technologies - Delivers solutions for security operations, enhancing detection and response capabilities.
- Cloud Security Solutions - Offers protection for cloud environments, ensuring secure cloud adoption and management.
- Professional Services and Training - Provides expert consulting and training services to enhance cybersecurity strategies and skills.
You might also like
Q3 2024 Summary
What went well
- Fortinet reported 19% growth in OT billings and sees a huge opportunity in the OT market, expecting it to be the strongest growing area in the next 5 to 10 years.
- The company's Unified SASE solution is experiencing pipeline growth over 200%, leveraging their position as the #1 in network security firewall and SD-WAN, aiming to become the #1 leader in SASE in the next few years.
- Fortinet anticipates a huge replacement opportunity in SD-WAN as competitors have ceased development, with their internally developed SD-WAN with integrated security offering superior performance and cost benefits.
What went wrong
- Fortinet's guidance for Q4 2024 indicates billings growth of only 5% at the midpoint, suggesting a significant slowdown in growth momentum.
- The acquisitions of Lacework and Ex DLP are expected to decrease operating margins by 230 basis points in Q4 2024, potentially impacting profitability.
- When asked about sustained growth projections, executives deferred providing specifics, possibly indicating uncertainty about future growth rates.
Q&A Summary
-
Firewall Refresh Cycle
Q: When will the significant firewall refresh cycle occur?
A: The end-of-life of many products starts in the second half of 2026, and we don't expect customers to wait until the last minute. The upcoming refresh cycle in 2026 is projected to be more than double the size of 2023 and will include a significant portion of mid-range firewalls, which is unusual and positive. , , -
Billings Guidance and Large Deals
Q: Why is billings guidance below expectations for next quarter?
A: We are seeing some large seven-figure and a few eight-figure deals that are set for the final month of the quarter. These deals need to mature further before we can include them in our guidance. It's prudent to be cautious as the maturation of these larger deals is slower compared to prior periods. , -
Margin Sustainability
Q: Is the recent high margin level sustainable?
A: Excluding a one-time benefit of about $15 million, product gross margin would have been approximately 68.4%, and operating margin around 35.1%. This benefit is unusual, but we feel confident about the profitability of the business and have ample room to invest in growth. , -
SASE Growth and Strategy
Q: How is Fortinet approaching SASE and differentiating itself?
A: We have been investing in SASE for 5 to 10 years, integrating it into the same FortiOS for both on-premise and cloud, offering huge differentiation. Our SASE pipeline is growing strongly, with the SSE pipeline up over 200% and business growing over 100%. We believe we will be the #1 leader in SASE in the next few years. , -
Potential Cannibalization from SD-WAN to SASE
Q: Will migrating SD-WAN customers to SASE cannibalize refresh potential?
A: No, as SASE supports remote environments, whereas traditional firewalls are deployed in offices. Most of our SASE growth comes from existing SD-WAN or firewall customers who require hardware firewalls and SD-WAN layers to support SASE, adding additional services and margins without cannibalizing existing products. -
Competitive Landscape and Discounting
Q: Are you seeing increased pricing pressure from competitors?
A: Discounting remains similar to prior periods. We have ample margin to invest and are encouraging our sales team and channel partners accordingly. We offer incentives to both channel partners and customers to buy more Fortinet solutions, and expect discounting to remain stable. -
Progress in Go-To-Market for SASE
Q: What are your learnings from focusing on SASE go-to-market?
A: Over the past year, we made significant progress in SASE go-to-market. Customers are excited about our architectural design, and the response has been very positive. We leverage our own data centers, offering cost advantages, and support both cloud SASE and sovereign SASE. Our infrastructure can deliver SASE functions at less than half the cost compared to colocation, and only 10%–20% compared to some cloud providers. -
ARR Growth from Solutions
Q: What is driving the strong ARR growth in solutions?
A: The reported growth is an organic number, excluding ARR from acquisitions like Next DLP and Lacework. Including them, year-over-year growth would be 150%. The growth is driven by products like FortiEDR, FortiClient, FortiNDR Cloud, and FortiWeb, comprising both acquired and internally developed cloud solutions. , -
Outlook for Europe
Q: How are you viewing Europe over the next quarters?
A: Europe is performing well; international EMEA was number one, with the U.S. at number two and Europe right behind at number three. Although there are pressures, we aren't expecting an outsized performance but will see how the quarter unfolds. -
OT Growth Sustainability
Q: Is the OT business growth sustainable?
A: Yes, we are very bullish on the OT market and see a leadership opportunity. In some reports, we are noted as the only leader in OT security. We see a huge opportunity as most connections in the next 5 to 10 years will come from devices that have difficulty deploying agent software, requiring network security solutions like ours. -
Virtual Firewall Performance
Q: How is your virtual firewall performing against competitors?
A: Our virtual firewalls have performed very well. They are a component of Unified SASE and our network security portfolio. There is a strong relationship between customers buying both physical appliances and virtual appliances, showcasing our competitive positioning. -
Hardware Appliances Performance
Q: How did high-end, midrange, and low-end hardware appliances perform?
A: Mid-range and high-end appliances have continued to be stable but did not outgrow. We had a little bit more unit shipment in the low end. Overall, performance is steady without any significant jumps. -
Government Vertical Performance
Q: How did the government vertical perform, and what's the outlook?
A: Government vertical, particularly U.S. Federal, is a smaller focus for us. Our government business is more aligned with state and local, as well as international governments. Therefore, we don't see the same impact from the U.S. fiscal year-end as some other companies might. -
Sustained Growth Plans
Q: Can you provide more details on your sustained growth expectations?
A: We'll discuss our growth plans in detail at our upcoming Analyst Day in ten days. We plan to provide more information about our total addressable market and how we aim to grow faster than the market in each sector.
Key Metrics
Revenue by Segment - in Millions of USD | FY 2013 | Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | FY 2014 | Q1 2015 | Q2 2015 | Q3 2015 | Q4 2015 | FY 2015 | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | FY 2016 | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | FY 2017 | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | FY 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Product | 500.7 | 472.6 | 465.9 | 488.1 | 1,927.3 | 408.9 | 451.9 | 473.9 | ||||||||||||||||||||||||||||||||||||||||||||||
Service | 761.6 | 820.2 | 868.7 | 927 | 3,377.5 | 944.4 | 982.4 | 1,034.2 | ||||||||||||||||||||||||||||||||||||||||||||||
- Security Subscription | 421.7 | 457.3 | 494.6 | 524.5 | 1,898.1 | 536.9 | 558.7 | 595.8 | ||||||||||||||||||||||||||||||||||||||||||||||
- Technical Support and Other | 339.9 | 362.9 | 374.1 | 402.5 | 1,479.4 | 407.5 | 423.7 | 438.4 | ||||||||||||||||||||||||||||||||||||||||||||||
- Technical Support | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
- Professional Services and Training | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Ratable and Other Revenue | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Total Revenue | 1,262.3 | 1,292.8 | 1,334.6 | 1,415.1 | 5,304.8 | 1,353.3 | 1,434.3 | 1,508.1 | ||||||||||||||||||||||||||||||||||||||||||||||
Revenue by Geography - in Millions of USD | FY 2013 | Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | FY 2014 | Q1 2015 | Q2 2015 | Q3 2015 | Q4 2015 | FY 2015 | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | FY 2016 | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | FY 2017 | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | FY 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
Americas | 523.5 | 537.0 | 545.6 | 569.1 | 2,175.2 | 557.0 | 595.3 | 624.0 | ||||||||||||||||||||||||||||||||||||||||||||||
- United States | 384.1 | 404.7 | 400.8 | 416.3 | 1,605.9 | 407.1 | 435.7 | 455.1 | ||||||||||||||||||||||||||||||||||||||||||||||
- Other Americas | 139.4 | 132.3 | 144.8 | 152.8 | 569.3 | 149.9 | 159.6 | 168.9 | ||||||||||||||||||||||||||||||||||||||||||||||
- Latin America (LATAM) | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
- Canada | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
EMEA | 478.2 | 506.9 | 512.2 | 575.6 | 2,072.9 | 539.4 | 565.2 | 599.3 | ||||||||||||||||||||||||||||||||||||||||||||||
APAC | 260.6 | 248.9 | 276.8 | 270.4 | 1,056.7 | 256.9 | 273.8 | 284.8 | ||||||||||||||||||||||||||||||||||||||||||||||
Total Revenue | 1,262.3 | 1,292.8 | 1,334.6 | 1,415.1 | 5,304.8 | 1,353.3 | 1,434.3 | 1,508.1 |
Questions to Ask Management
-
The growth in OT billings was 19% this quarter; given the competitive landscape in OT security, how sustainable is this growth, and what strategies are you implementing to maintain or increase it?
-
With mid-range and high-end hardware appliance shipments remaining stable but not showing significant growth, how do you plan to drive growth in these segments, and are you facing any challenges such as market saturation or increased competition?
-
As larger vendors focus on discounting, bundling, and vendor financing, how is Fortinet addressing potential pricing pressures, and what impact do you expect this to have on your margins and revenue growth?
-
Considering that some customers are hesitant to commit to multi-year deals without financing, what steps are you taking to provide financing solutions, and how might this affect your ability to secure longer-term contracts and predict revenue?
-
You aim to become the #1 leader in SASE in the next few years; what challenges do you anticipate in displacing established competitors, and how will you differentiate your Sovereign SASE offerings to capture highly regulated vertical markets?
Past Guidance
Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: Q4 2024 and FY 2024
Q4 2024 Guidance:
- Billings: $1.9 billion to an unspecified upper range, with the midpoint representing growth of 5% .
- Revenue: $1.56 billion to $1.62 billion, with the midpoint representing growth of 12% .
- Non-GAAP Gross Margin: 79.5% to 80.5% .
- Non-GAAP Operating Margin: 33% to 34% .
- Non-GAAP EPS: $0.58 to $0.62, assuming a share count of between 768 million and 778 million .
- Capital Expenditures: $100 million to $120 million .
- Non-GAAP Tax Rate: 17% .
- Cash Taxes: $127 million to $177 million .
FY 2024 Guidance:
- Billings: $6.43 billion to $6.53 billion .
- Revenue: $5.856 billion to $5.916 billion, with the midpoint representing growth of 11% .
- Service Revenue: $4.15 billion to $4.45 billion, with the midpoint representing growth of 19% .
- Non-GAAP Gross Margin: 80.3% to 81.3% .
- Non-GAAP Operating Margin: 32.9% to 33.9% .
- Non-GAAP EPS: $2.20 to $2.28, assuming a share count of between 766 million and 776 million .
- Capital Expenditures: $380 million to $400 million .
- Non-GAAP Tax Rate: 17% .
- Cash Taxes: $550 million to $600 million .
Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: Q3 2024 and FY 2024
Q3 2024 Guidance:
- Billings: $1.530 billion to $1.600 billion, representing growth of 5% at the midpoint .
- Revenue: $1.445 billion to $1.505 billion, representing growth of 10.5% at the midpoint .
- Non-GAAP Gross Margin: 79% to 80% .
- Non-GAAP Operating Margin: 30.5% to 31.5% .
- Non-GAAP EPS: $0.56 to $0.58, assuming a share count of between 767 million and 777 million .
- Capital Expenditures: $40 million to $60 million .
- Non-GAAP Tax Rate: 17% .
- Cash Taxes: $125 million to $145 million .
FY 2024 Guidance:
- Billings: $6.400 billion to $6.600 billion .
- Revenue: $5.800 billion to $5.900 billion, representing growth of 10% at the midpoint .
- Service Revenue: $3.975 billion to $4.025 billion, representing growth of 18% at the midpoint .
- Non-GAAP Gross Margin: 79% to 80% .
- Non-GAAP Operating Margin: 30% to 31.5% .
- Non-GAAP EPS: $2.13 to $2.19, assuming a share count of between 767 million and 777 million .
- Capital Expenditures: $320 million to $360 million .
- Non-GAAP Tax Rate: 17% .
- Cash Taxes: $525 million to $575 million .
Q1 2024 Earnings Call
- Issued Period: Q1 2024
- Guided Period: Q2 2024 and FY 2024
Q2 2024 Guidance:
- Billings: $1.490 billion to $1.550 billion, with the midpoint representing a decline of 1% .
- Revenue: $1.375 billion to $1.435 billion, with the midpoint representing growth of 9% .
- Non-GAAP Gross Margin: 76.5% to 77.5% .
- Non-GAAP Operating Margin: 25.75% to 26.75% .
- Non-GAAP EPS: $0.39 to $0.41, assuming a share count of between 775 million and 785 million .
- Capital Expenditures: $30 million to $40 million .
- Non-GAAP Tax Rate: 17% .
- Cash Taxes: $240 million to $270 million .
FY 2024 Guidance:
- Billings: $6.400 billion to $6.600 billion .
- Revenue: $5.745 billion to $5.845 billion, with the midpoint representing growth of 9% .
- Service Revenue: $3.940 billion to $3.990 billion, with the midpoint representing growth of 17% .
- Non-GAAP Gross Margin: 76.5% to 78% .
- Non-GAAP Operating Margin: 26.5% to 28% .
- Non-GAAP EPS: $1.73 to $1.79, assuming a share count of between 780 million and 790 million .
- Capital Expenditures: $350 million to $400 million .
- Non-GAAP Tax Rate: 17% .
- Cash Taxes: $500 million to $550 million .
Q4 2023 Earnings Call
- Issued Period: Q4 2023
- Guided Period: Q1 2024 and FY 2024
Q1 2024 Guidance:
- Billings: $1.390 billion to $1.450 billion, with the midpoint representing a decline of 5.5% .
- Revenue: $1.300 billion to $1.360 billion, with the midpoint representing growth of 5.4% .
- Non-GAAP Gross Margin: 76.5% to 77.5% .
- Non-GAAP Operating Margin: 25.5% to 26.5% .
- Non-GAAP EPS: $0.37 to $0.39, assuming a share count of between 775 million and 785 million .
- Capital Expenditures: $220 million to $250 million, including a real estate transaction that closed earlier in the quarter .
- Non-GAAP Tax Rate: 17% .
- Cash Taxes: $30 million .
FY 2024 Guidance:
- Billings: $6.400 billion to $6.600 billion .
- Revenue: $5.715 billion to $5.815 billion, with the midpoint representing growth of 9% .
- Service Revenue: $3.920 billion to $3.970 billion, with the midpoint representing growth of 17% .
- Non-GAAP Gross Margin: 76% to 78% .
- Non-GAAP Operating Margin: 25.5% to 27.5% .
- Non-GAAP EPS: $1.65 to $1.70, assuming a share count of between 785 million and 795 million .
- Capital Expenditures: $370 million to $420 million .
- Non-GAAP Tax Rate: 17% .
- Cash Taxes: $520 million .
Competitors
Competitors mentioned in the company's latest 10K filing.
- Aruba Networks, Inc. ("Aruba")
- Check Point Software Technologies Ltd. ("Check Point")
- Cisco Systems, Inc. ("Cisco")
- CrowdStrike Holdings, Inc. ("CrowdStrike")
- F5 Networks, Inc. ("F5 Networks")
- Huawei Technologies Co., Ltd. ("Huawei")
- Juniper Networks, Inc. ("Juniper")
- Palo Alto Networks, Inc. ("Palo Alto Networks")
- SonicWALL, Inc. ("SonicWALL")
- Sophos Group Plc ("Sophos")
- VMware, Inc. ("VMware")
- Zscaler, Inc. ("Zscaler")