Fortinet Inc at Barclays Global Technology Conference Transcript

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

Question: Saket Kalia - Barclays Capital Inc - Analyst : Keith, I'd love to dig into the three different segments of Fortinet's business a little bit. And I think a good place to start is in secured networking. A lot of talk just about cyclicality in this business and different drivers. But if we think about this market excluding the hardware cyclicality, how do you sort of think about the growth rate here in the medium term? And what are some of the main drivers that you're most excited about in that market, if you will?

Question: Saket Kalia - Barclays Capital Inc - Analyst : Super helpful. Maybe the -- right, so that's kind of the normalized growth rate. I think that -- or the components of a normalized growth rate, Keith, I think you gave a lot of helpful information around this idea of a firewall upgrade cycle here in 2025 as a result of maybe some end of support in 2026. Rate is another driver, maybe a little bit more of a cyclical driver, but can you just remind us how big that cohort is and how much it could add to sort of incremental product billings over the next year or two?

Question: Saket Kalia - Barclays Capital Inc - Analyst : I think that's a great dovetail for you, Michael. I mean, I think there's been a conversation just around whether future firewall cycles could be impacted by form factor shifts, right, and growing adoption of kind of SASE and SSD solutions. What's your view there? And I mean, I guess the question is are you seeing SASE take share from the existing hardware firewall market, whether it be branch or data center or any form factor shift, right, so virtual as you think about, again, that big cohort that comes up for refresh.

Question: Saket Kalia - Barclays Capital Inc - Analyst : Yeah. Absolutely. Maybe that's a good natural segue just into the second pillar of the business, right, which is Unified SASE. And maybe build a little bit of what you said with the technical question. I think it's really interesting when Fortinet talks about SASE, it's something that turns on within minutes, right? But when other vendors talk about it, SASE sounds like something -- a lot more of an architectural shift. How do you think about the differences there, Michael?

Question: Saket Kalia - Barclays Capital Inc - Analyst : Yeah, that does. That does actually Keith, maybe for you, can you just remind us how big your SASE business is? And how much of it is maybe coming from SD-WAN versus SSE and whether that's a mix that's going to evolve over time?

Question: Saket Kalia - Barclays Capital Inc - Analyst : Yeah, absolutely. Michael, maybe just to stay on SASE because I think this is really the future, I think, of network security in a lot of ways. Maybe just to stay on SASE, what benefit do you think the firewall vendors have here versus the pure SASE vendors that the pure SASE vendors are trying to displace the firewall, right? Firewall vendors, right, have a natural advantage as well. How do you think about that natural advantage within SASE or SSE?

Question: Saket Kalia - Barclays Capital Inc - Analyst : Yeah, so interesting. Keith, when it comes to building out your infrastructure for SSE. I think you and Ken have talked about some of the longer-term cost advantages of building out your own PoPs as opposed to maybe using a public cloud provider like GCP, you can use it, of course, to accelerate some things, right, but I think there's a clear preference right for kind of owning that, if you will, long term. Can you just remind us maybe how many PoPs you've built so far? And how we should think about sort of the CapEx moving forward as that coverage expands.

Question: Saket Kalia - Barclays Capital Inc - Analyst : Yes, absolutely. Michael, we talked about two of the three pillars. I want to make sure we talk about the third one briefly, which is just on the SecOps side. I think an interesting point that we took away from the Analyst Day was sort of the opportunity to use Fortinet's data, like as a starting point to sell more services kind of across the portfolio. Can you just talk a little bit about that cross-sell opportunity and how you can use that data like as maybe a stepping stone, right, to show customers the broader portfolio.

Question: Saket Kalia - Barclays Capital Inc - Analyst : Got it. Got it. I'm going to move to some financial questions here for Keith. But before we do that, any questions here from the audience? Keith, maybe for you. I mean, I'd love to spend a little bit of time just on the three- to five-year targets you provided at Analyst Day, which was a really useful event, by the way. And maybe we could just start with top line, right? I think we said we expect greater than a 12% CAGR on billings and revenue, you correct me there if I'm wrong. But I'd love if you could just walk us through some of the higher-level assumptions, right, that are underpinning that growth target. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 11, 2024 / 9:55PM, FTNT.OQ - Fortinet Inc at Barclays Global Technology Conference

Question: Saket Kalia - Barclays Capital Inc - Analyst : Absolutely. To your point, just on profitability, I think one of the most surprising points over the last couple of quarters has been just better gross margin, right, particularly on the product line. As I think about it, it felt like some of the higher value that you've delivered in prior years, along with the supply chain-driven costs that have gone down, it sort of felt like those two things combined for that better product gross margin. Maybe -- first of all, is that the right way to think about it? And how do you think about product gross margins going forward as we get into the thick of that product refresh that you just talked about?

Question: Saket Kalia - Barclays Capital Inc - Analyst : Yes. No, that's all that's a really helpful framework. Maybe, Michael, for you, I mean, as founder of the business, I mean, you've seen so many refresh cycles. What's different about this refresh cycle just from your perspective? Open ended question, out of curiosity.

Question: Saket Kalia - Barclays Capital Inc - Analyst : Yes. Yes, absolutely. Keith, maybe back to you from a margin perspective. You raised your long-term operating margin target to 30% plus, up from 25% plus prior. And you've seen some really impressive outperformance on margins this year, like in product gross margins, right, as we discussed. What's interesting is that your margins are actually higher than 30%, that 30% target right now. And so just maybe back to the question. How do you sort of think about the puts and takes to the 30% given need to invest. I mean, the channels that you've built and just the sheer scale of the business.

Question: Saket Kalia - Barclays Capital Inc - Analyst : Absolutely. Absolutely. I mean maybe the last question I'd like to end with here, right? We've been trying to ask all our management teams. It's a really broad and kind of open-ended question. But as you kind of get into planning for next year, what are you hearing from salespeople and internally to the extent you spend time with customers, how are people feeling about sort of their willingness to invest in security next year? How do you feel about that spending environment? Mike, why don't we start with you?

Question: Saket Kalia - Barclays Capital Inc - Analyst : Keith, anything you want to add to that?

Question: Saket Kalia - Barclays Capital Inc - Analyst : Absolutely. Well, Michael, Keith, thank you so much for the time. Very educational. I really appreciate it. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 11, 2024 / 9:55PM, FTNT.OQ - Fortinet Inc at Barclays Global Technology Conference