Fortinet Inc at Goldman Sachs Communacopia + Technology Conference Transcript

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

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : So John, I want to start on one of the themes that's consistently coming up, both in your conversations and in the broader industry, which is consolidation. And for the last decade, we've consistently heard that there is a trend towards consolidation. My question for you is, what's different today versus 10 years ago when you first joined Fortinet? Are you actually seeing a change in momentum? Or is it more of a continuation of a trend?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : That makes sense. And I think one of the more interesting convergences is between classic networking security and class networking. And many investors, I think, have spent time understanding Fortinet's differentiation on the network security side. What I'd love to hear you talk about is why you are different on the networking side and some of the core networking IP that you've built that allow you to really be strongly positioned from a competitive standpoint as the networking TAM becomes the secure networking TAM?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : What is the barrier to entry for the Ciscos, the Aristas, the traditional networking companies on the access plane and switching and routing side? What is the barrier to entry for those companies to invest more in security because they do talk about it in their R&D road maps?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : That makes sense. So I want to ask a little bit about how you think about the value creation in secure networking from software versus hardware. And the baseline that we have is when we think about the firewall market, you sell a hardware appliance and then you sell this really rich mix of attached subscriptions and services on top of the firewall. And that leads to the business model that you have today. If I think about the classic networking market, it's been much more hardware-based, but not the same type of service-as-a-software attach. As you see conversions, do you think or are you seeing evidence that you can actually sell a similar mix of software on top of things like SD-WAN and Securitas relative to the mix that you've already realized in firewalls? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 05, 2023 / 10:05PM, FTNT.OQ - Fortinet Inc at Goldman Sachs Communacopia + Technology Conference

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : It's a nice segue into some of the product development that you're doing on the SASE side. So when we met about a year ago, we talked a little bit about the room for integration to be truly outstanding on single vendor SASE. And Gartner came out recently and named Fortinet as a challenger in the single vendor SASE Magic Quadrant. So help us understand from a technical standpoint, what are the next big or minor improvements that you need to achieve in your SASE solution to get to the next stage of integration?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : So what are some examples of 1 or 2 of the features that are next on the road map that will get you further up the Magic Quadrant?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Absolutely. I want to ask about SASE as a product cycle. And when you think about where you're spending time with customers today, is it fair to say that next-generation or more advanced SASE architectural adoption is happening more in a large customers? Give us a sense for if you were to think about your installed base, where are you seeing the most traction with SASE today?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : So maybe we then talk about the go-to-market piece of it. So the success that you're having or that it sounds like you're having with the mid-market today. Does that involve building champions across more than just the classic network security champion? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 05, 2023 / 10:05PM, FTNT.OQ - Fortinet Inc at Goldman Sachs Communacopia + Technology Conference

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : So then similar question for Keith, please.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Okay. So interesting. So is it fair to say that as you move up to larger customers, you'll have already made progress or already have a playbook for engaging with both the CIO and the CISO?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : So it also leads into a third piece of security, which is cloud. Maybe help contextualize cloud security for us in the context of SASE and network. Is there -- how do you cross-sell cloud into your existing installed base? Do you feel like you already have the relationships and the buying motion to be able to do that?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : When you look at your cloud portfolio today, is there a way to think about how the mix evolves between something like virtual firewall versus cloud workload protection or cloud security posture management? Are there pieces that you feel are missing today and other pieces that you feel are particularly strong?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : And so is there any reason Fortinet can't consolidate those 8 firewalls? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 05, 2023 / 10:05PM, FTNT.OQ - Fortinet Inc at Goldman Sachs Communacopia + Technology Conference

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : It's a good opportunity for me to ask on virtual firewall in particular, which is what are the logical use cases that you're seeing for virtual firewall today? And how do customers use Fortinet virtual firewall alongside perhaps firewall functionality provided by the hyperscaler provider that's inbuilt?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : So I want to come back to the product questions. We're going to change gears for a few minutes and talk about the model and the demand environment into that cost. So Keith, when we've looked at periods on our security normalization in the past, it typically takes more than 1 quarter to level set. And so help us understand some of the changes you're making to your assumptions for forecasting in the back half. And help us understand why seasonal 3Q billings guidance makes sense in the context of some of the volatility that you saw in the back half of June and having to potentially make changes to how you're sanitizing the pipeline and some of the sales force productivity metrics?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : So we experienced this dynamic across broader software companies last year, where as the buying environment got more challenging, it became -- or they became more dispersion in sales force productivity and sales force performance where companies have to do more to help their salespeople navigate a tougher buying environment. What are some of the things that you're working with the sales force on today to help them navigate a tougher buying environment?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Keith, I'm hoping you can comment on some of the industry headlines on some of the near-term changes you've made in realignment in your sales force around a reduction in force?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : And did I catch a comment right. Did you say that there is a potential for larger changes to the sales force over the long term? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 05, 2023 / 10:05PM, FTNT.OQ - Fortinet Inc at Goldman Sachs Communacopia + Technology Conference

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Okay. Thank you for clarifying. Okay. The months of July, August and beginning of September, any color on what you're hearing on the ground and particularly on trends on willingness to invest and to close deal pipeline relative to what you saw in the last 2 weeks of June?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Fair enough. Okay. I'm going to pause for a moment, questions from the audience. Please. I can repeat your question. Unidentified Analyst Okay. John, I actually wanted to kind of go back to a previous comment you made around how the mid-market is convinced the convergence of SD-WAN or SASE is kind of where to go. I'm curious to see what proof points you guys have to kind of give you conviction around that statement? And maybe help me understand why Fortinet as some other converged vendor will be best suited there?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : John, I'd welcome your thoughts on how you see Microsoft as a competitor over the long term.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : How do you think about the strategic importance of network versus identity? And the reason I ask is, in a more distributed world where IP addresses are less helpful, do you see policy being enforced more from the identity layer versus the classic network infrastructure layer?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Good stuff. John, thank you for the technical detail. Keith, thank you for the color on the model, and we appreciate your time. Thanks, everyone, for joining us.