Fortinet Inc Fireside Chat Hosted by Goldman Sachs Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Good stuff. Well, with that, Ken, Christiane, thanks for your time today. I wanted to start on 2Q. So maybe just level set us on the quarter. We have all your prepared remarks from the earnings call. If you were to put it simply, where do you think things went better in 2Q? And where do you think things may be disappointed relative to your expectations? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 25, 2025 / 2:30PM, GS.N - Fortinet Inc Fireside Chat Hosted by Goldman Sachs

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Yeah, absolutely. I want to come back to that sales capacity comment but maybe let's spend a few minutes upfront on the firewall refresh. So Ken, you've seen firewall refresh cycles through many, many years now. Tell us a little bit about this 2026 cohort. Why was this a cohort that you wanted to feature at the Analyst Day? What is unique about 2026 relative to some of the other cohorts?

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Yeah, absolutely. Okay. So tell us a little bit more about your methodology. How did you calculate the number of units? And how did you calculate that dollar amount that's associated with the 2026 refresh cohort?

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Yes. Okay. So maybe just a clarification here. How -- what is the scenario where a device would be pinging and showing signs of life and being available. But in reality, it's possible that the device was already replaced. How does that happen?

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Yes. Yes, this makes sense. Okay. So I want to close the loop on two comments from the earnings call. Christiane, one was your comment that we are 40% to 50% through the 2026 end of service upgrade cycle. Understanding all the caveats on you don't have perfect visibility, tell us how you arrived at that conclusion and why those numbers are meaningful? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 25, 2025 / 2:30PM, GS.N - Fortinet Inc Fireside Chat Hosted by Goldman Sachs

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Yes. And so to the extent you're willing to share, you think it's a relevant question, the original $400 million to $450 million revenue opportunity that you talked about, Ken had also said on the earnings call, well, it could be less than 10% of product. So if we connect those dots as analysts, my takeaway was, well, actually, the original number was probably overstated. So maybe tell us, would you agree with that conclusion? Or is there another way that we should be looking at it? And how do we think about the right size of the opportunity today, understanding that there are a lot of other things that we'll talk about that are drivers of growth?

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : And Christiane, your comment on 40% to 50%, that already takes into account your learnings from the past two quarters where perhaps you've gone to upgrade an end of service unit and found that actually it wasn't really eligible for upgrade because of all the reasons we've already discussed. It may have already been upgraded.

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Yeah. Okay. Okay. So maybe then talk to us a little bit about the 2027 cohort because we've talked about 2027 also having a volume of business associated with end of service. Having already discovered or having all the learnings from the 2026 cohort, how are you now thinking about the 2027 cohort? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 25, 2025 / 2:30PM, GS.N - Fortinet Inc Fireside Chat Hosted by Goldman Sachs

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Yes, yes. And so then tell us a little bit about your conversations with the 2021, the 2020 -- I think it was 2020 and 2021, maybe some quarters in 2022 where you had really, really healthy product revenue growth. Tell us a little bit about your conversations with those customers, particularly at the high end, maybe where you have more visibility. When do you think those customers will start contributing to the refresh cycle because they have 2021 era boxes that are ready for refresh, independent of any end of service?

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Yeah. Yeah, absolutely. So I want to hit a couple of questions from the audience here. So is there a risk that there has been a change in your market share positioning at the low end? Meaning is it possible that the refresh opportunity tied to the 2026 cohort is smaller than you expected because of market share changes? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 25, 2025 / 2:30PM, GS.N - Fortinet Inc Fireside Chat Hosted by Goldman Sachs

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Yeah, absolutely. And we touched on the second question here on the earnings call, this idea of excess capacity. More specifically, is it possible that parts of the firewall refresh cycle are being driven by customers realizing that they had too many boxes, essentially customers realizing that they actually need fewer firewalls and the end of support process highlighted that fact. Ken, you had started talking about this on the earnings call. Maybe a few more comments here would be really helpful.

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Yeah, yeah. Okay. So I want to come back to -- there were a few comments earlier talking about visibility. And I'll ask this question as a two parter. One is, how is your channel, your partners, your distributors, how are they engaging with you now on the refresh? And what has the response been to some of the comments that we've heard over the last three months on the opportunity perhaps being smaller? And then very much related to that, are there steps you can take as a company to tighten up the reporting between the support system, the distributors, the resellers to essentially give you more visibility in the forecasting process and give your partners more visibility?

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Yes.

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Yes. Yes. Well, maybe this is a good time to come back to Ken, one of your opening comments, which was, we could be investing more from a sales capacity growth standpoint. And clearly, we saw in the market all the overperformance on operating margin last year. And I think you've been consistent in messaging part of that margin will go towards investing in sales capacity. So give us an update on how you're planning and how you're tracking for sales capacity adds this year and what that means from a [ramp to rep] standpoint?

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Yes. Yes, very helpful. Okay. So I want to come to SASE in a little bit more detail. So you talked about the new gen SASE firewall. I'm getting a few questions from the listeners from the investing base on how to think about SASE. So a couple of questions embedded here. One is, how are you seeing SASE deployed at the branch level versus the physical firewall? To what extent can traffic be offloaded from the physical firewall to the SASE deployment? And maybe as part of this, we can talk about new gen SASE.

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : So I think this leads nicely into a question on deal sizes and unit economics because one of the points that you're making here is that the amount of functionality that the customer buys from Fortinet goes up. So I think this question is for both of you. Could you talk a little bit about the unit economics of an SSE product versus a firewall equivalent? If the ASP on SSE is around $40 per user per month, is there enough margin in SSE to replace the firewall margin as customers upgrade? Now I think, Ken, what you're alluding to is you may actually keep the firewall in certain instance and add the SSE as a complement. So I would love to get both of your comments here. Anything on deal sizes, anything on unit economics?

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Yes. Yes. Okay. I want to bring some of these points together in a discussion about growth rates, and then we can also spend a little bit of time on M&A. So the long-term target from the Analyst Day is to grow revenue at over a 12% CAGR over the next three to five years. Your 2025 number, your estimated guidance for the full year is for 13%. So maybe just wrap some of these points together. For 2026 specifically, it's too early to guide, but help us understand directionally how to think about drivers of 2026 product revenue growth, excluding any impact from macro. So what are the scenarios where 2026 revenue growth is stronger than 2025? And maybe we take it as product versus subscription separately?

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : And Christiane, on the subscription revenue in particular. So subscription revenue has been decelerating for three quarters now. I think you mentioned specifically some churn in the Lacework acquisition in the first half of the year. Maybe just clarify for us, do you feel like you've now got to the point where churn tied to Lacework is stable? And it sounds like what you're messaging here is you have more opportunities to engage across things like IoT, EDR, SOC on the subscription side. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 25, 2025 / 2:30PM, GS.N - Fortinet Inc Fireside Chat Hosted by Goldman Sachs We've already talked about SASE. Those drivers, should we be rolling this up together such that as the emerging products get bigger in scale, it drives reacceleration for the subscription revenue line? How do you think about that?

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Well, maybe this is the opportunity to ask about acquisitions. So if I think about the players at scale in security over the last couple of years, we've just had Palo Alto announced its plans to acquire CyberArk. We know that Microsoft has become more of a force and prioritize security within their own customer relationships over the last four years. So I think for both of you, how do you think about the potential for Fortinet doing a larger scale M&A deal? Is that part of what you think would fit with your DNA? Or do you feel like it's necessary given that you've got these two big competitors at very big scale?

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : And Ken, specifically because we've spent so much of the last 40 minutes talking about SASE, what do you think the role for privileged access identity is within networking security and within SASE?

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : The other question that I think relates here to longer-term growth rates is on the cyclicality of the business as a whole. And we talked a little bit about the 12% plus target, meaning if the industry is growing 12% more than Fortinet should be able to outgrow the industry through share gains. Do you think the industry is becoming less cyclical because of all of these dynamics, and we've spent a lot of time here as well on going from a conversation that's based less on end of support, end of life and more based on new technology functionality and more of an offensive competitive positioning. So I'll pose the question, do you think the industry is becoming less cyclical? And how does that inform the way you think about things like adding sales capacity? Is there more consistency to the margin expansion or the growth algorithm if the industry is becoming less cyclical?

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Fantastic. Well, I think that's an excellent place to end it. I know we covered a lot in 45 minutes. So thank you so much for sharing with us some of your updated thoughts on these topics. We're very much looking forward to continuing the conversation in September on the ground in Communacopia. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 25, 2025 / 2:30PM, GS.N - Fortinet Inc Fireside Chat Hosted by Goldman Sachs And thanks to everyone for joining us today. Thanks specifically to the Fortinet team, Ken, Christiane, Aaron, thanks so much for making this happen. We really appreciate it.

Question: Gabriela Borges - Goldman Sachs Group Inc - Analyst : Have a great week. We'll talk soon.