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    Fortinet Inc (FTNT)

    Q1 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$58.10January 1, 2024
    Final Price$67.82April 1, 2024
    Price Change$9.72
    % Change+16.73%

    What went well

    • Strong customer interest in AI solutions like FortiAI, which are helping customers manage operations more efficiently and drive additional services and products. Fortinet is charging for these AI offerings separately, indicating a new revenue stream.
    • Growing adoption of SD-WAN and SASE solutions, as customers seek cost savings of about 50% compared to traditional networking functions. This leads to customers converting to SD-WAN and adding additional SASE functions, contributing to revenue growth.
    • Increasing traction with Enterprise Agreements (EAs) among enterprise customers, resulting in larger deals and longer-term relationships. Customers are consolidating their security solutions with Fortinet, reflecting confidence in the company's technology and support.

    What went wrong

    • Decrease in Large Deals: The company had only one 8-figure deal this quarter compared to six last quarter, indicating a potential slowdown in large enterprise sales.
    • Delayed Refresh Cycles: Due to the economic slowdown and high interest rate environment, some customers are stretching the lifespan of their current products, delaying refresh cycles and potentially impacting future sales growth. Ken Xie mentioned that the refresh probably would still need some time to come.
    • Geographic Slowdown: The company experienced deceleration in key geographies, with Europe being a bit light, and APAC shrinking this quarter, partly due to currency impacts like a strong U.S. dollar against the yen affecting Japan, their biggest APAC market.

    Q&A Summary

    1. Firewall Market Recovery
      Q: When will firewall demand recover, and will market share gains continue?
      A: Management expects the firewall market to recover in the second half of the year, with early signs of recovery already visible. They believe they will continue gaining market share due to their product's strong performance and competitive advantages.

    2. Pricing Strategy and Margins
      Q: How is Fortinet approaching pricing and margins amid cross-selling?
      A: Fortinet maintains a consistent pricing strategy focused on healthy gross margins for both the company and partners. They have adjusted prices back to pre-pandemic levels after supply chain costs normalized but haven't seen any pricing pressure or discounting from competitors.

    3. SASE Traction and SD-WAN Conversion
      Q: What is driving SASE growth, and how significant is SD-WAN conversion?
      A: SASE growth is significantly driven by existing SD-WAN customers, with 81% of SASE billings coming from them. The pipeline for Unified SASE grew by 45%, and the SSE pipeline grew over 150%, showing strong customer interest.

    4. Large Deal Impact and Enterprise Health
      Q: How are large deals affecting growth, and what is the outlook for enterprise?
      A: Large deals cause variability in growth rates due to their timing. Management noted fewer eight-figure deals this quarter compared to last, affecting growth metrics. However, they feel good about the enterprise pipeline and expect strong performance in upcoming quarters.

    5. Geographic Performance
      Q: Can you explain the deceleration in Americas and APAC regions?
      A: The Americas saw some impact from fewer large deals, while APAC experienced pressures due to currency fluctuations, especially in Japan. Europe was slightly weaker, but SMB performance remained resilient overall.

    6. Share Buyback and M&A Strategy
      Q: Why didn't you repurchase stock this quarter, and any changes in M&A approach?
      A: The company remains opportunistic with buybacks and did not see an opportunity this quarter. There is no change in M&A strategy; they continue to consider strategic tuck-in acquisitions and see many opportunities in the security space.

    7. Receivables and DSO Performance
      Q: What drove the improvement in DSOs, and any changes in working capital?
      A: The decrease in Days Sales Outstanding (DSO) was due to fewer large deals closing late in the quarter compared to last quarter. There is no significant change in working capital management.

    8. Enterprise Agreements Strategy
      Q: How is the Enterprise Agreements strategy progressing?
      A: Enterprise Agreements are gaining traction, especially with larger customers seeking long-term relationships and product consolidation. This leads to bigger deals and more committed customers.

    9. AI Initiatives and FortiAI
      Q: What's the status of FortiAI and its impact on revenue and margins?
      A: FortiAI is generating strong customer interest, with AI capabilities built into various products. It's still in early stages but is expected to drive additional services and products without negatively impacting gross margins.

    10. Days to Register Metrics
      Q: Is there seasonality in the days to register metric, and what's the outlook?
      A: There is no significant seasonality in days to register. The metric has returned to normal levels after supply chain issues resolved, indicating that the digestion period is over. They expect it to remain stable moving forward.

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