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 - Analyst : Michael, I wanted to start with a little bit of a conversation on the architecture and multiple conversations with Fortinet start with a stick. But I actually want to put basic aside for a moment, when you look holistically at the market share that you're gaining in secure networking, what are some of the IP advantages and some of the technology decisions that you've made with the company that you'd highlight as driving some of that strength in addition to the SEC, which I think is better. Michael Xie - Fortinet Inc - Chairman of the Social Responsibility Committee, Chief Technology Officer, Founder, Founder, President, And Chief Technology Officer ( CTO ), Member of the Audit Committee, Other Sure. So I think for now, we are both proud. And also we felt very effective that we have what we call a full stack. So obviously, when people talking about software stack, we actually extend that to the basically the hardware stack as well. But then we can talk about that later. But the fact is in our business in cybersecurity, and we are essentially driven by two things. One is how the attackers kind of fine. And like a lot of it is to bridge into the enterprise network and because of the ever-expanding attack surface that basically evolved from the operating system to like the cloud into IoT, all the devices. And I think second is more about compliance or how BCIOL.s or cycles wanted to build up their infrastructure to defend against potential breaches? Yeah, that basically requires us to have the stock component. It can be deployed both in the cloud on prem and cover pretty much all of the assets from IoT devices to storage. And so I think like over the years, we've seen that is to like driving factors continuing to push the boundaries of the attackers. I've evolved into very sophisticated and especially these latest and possibly nation-state sponsored attackers, very super sophisticated. And also, I think for a lot of the enterprise side so CEOs, they have gone over the time started to adopt a very effective. I guess we call it the architectures or enterprise models where they can have layered defenses. And then they can use very effective security operations to basically discover the breaches and defend against those breaches. So our business essentially is to build up the full stack to support the need today of what could be very international global enterprise with a very distributed footprint and with assets everywhere. But yet they wanted to secure every single one of them against this attack so I think of the 10,000 foot have sort of a technology architecture we're building. 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 09, 2024 / 4:30PM, FTNT.OQ - Fortinet Inc at Goldman Sachs Communacopia & Technology Conference

Question: Gabriela Borges - Goldman Sachs - Analyst : Wanted to also ask a question from a customer-facing standpoint. So Michael And Keith, you're talking to at the enterprise level, Fortune 500 Global 2000 companies that have roadmaps for their own adoption of generative [AVI] and AI. How does those conversation intersect with customer plans on security, meaning does it change the type of security that they're looking for or the amount of product that you can sell into the customer. Michael Xie - Fortinet Inc - Chairman of the Social Responsibility Committee, Chief Technology Officer, Founder, Founder, President, And Chief Technology Officer ( CTO ), Member of the Audit Committee, Other And I think I'll just maybe comment on the technology side of it is keep that more on the financial side. I think on the enterprise large enterprises. I've spoken through a lot of the so I feel like missionaries and I think almost all of them have very big plan on a, I think, at least for the long term. And in the near term, obviously, there's a security they want to talk about, for example, like the data points, I mean, or how do they secure that data center to get things started. So we obviously, we're looking at I think right now the most relevant technologies still European very fast data center firewall as well as the data protection. But I think over time, we'll win things started going mainstream. I think there will be a lot more challenges of how to protect these really global enterprise for the plan that they plan to put in place. I mean, there's still plenty of challenges, obviously, to be worked out. 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 09, 2024 / 4:30PM, FTNT.OQ - Fortinet Inc at Goldman Sachs Communacopia & Technology Conference

Question: Gabriela Borges - Goldman Sachs - Analyst : Keith, I wanted to stay on the topic of demand and specifically a comment from the earnings call around firewall refresh being more likely in 2025 than it has been in 2024. Maybe talk to us a little bit about some of what you're seeing in the pipeline and indications for refresh into next year and some of the basis behind that?

Question: Gabriela Borges - Goldman Sachs - Analyst : It's interesting that you called out the [juxtaposition] between what you're seeing in the pipeline and what you're reading with respect to the broader economy and the how do you think about the way that plays out into the end of the year. And the one hypothesis I wanted to ask you about it. If you have a budget that's up for the year and you're intending to spend $100,000 on network security in the first half comes in seasonally weaker. Does that then set you up for a stronger budget flush as you go into the mix?

Question: Gabriela Borges - Goldman Sachs - Analyst : I want to stay on this idea of pushing the boundaries on features and SAP. So let's talk a little bit for us from a product standpoint, Michael, when I think about formats, progress and SASE started out with an incredibly strong SD-WAN solution, and you've been building out the various pieces of that to get to a strong single vendor SAP solution for this year. Where do you think you are in terms of integration on single vendor SSD and other a couple of product milestones that you'd call out in the roadmap that will catalyze the next phase of adoption. Michael Xie - Fortinet Inc - Chairman of the Social Responsibility Committee, Chief Technology Officer, Founder, Founder, President, And Chief Technology Officer ( CTO ), Member of the Audit Committee, Other I'm sure I think the summary of my favorite topics is that having both. So you don't have a lot of customer interest that obviously we have other activities inside of companies around the development and features. So I think one thing kind of unique for Fortinet is that we build a lot of things organically and grow, which is why the single chassis for us is a much easier problem to solve. We have all the components, the firewall and SD-WAN. And what we need to do is essentially we can operate starting infrastructure we have a partnership with Google Cloud almost, I think, more than a year ago, which will provide us with a quick access to a lot of the data centers around the world sending the traffic much faster than, as you know, just the traditional ISP. And you combine that with our own California owned and built data centers, we have like live coverage of the networks. And what makes it easier for us is like a lot of the companies that they tried to say, okay, SASE has cloud-only called native. They build specific software to run in that cloud environment. But then what we did is we just take the FortiGate and it's both VM and hardware. And then we put in the data centers and that basically because we have the whole stack. So that carries most of the computation know by itself. And we also we definitely we don't want to stop at just the sort of offer the SIC has traditionally defined our internal culture if you want to continue to innovate. And what we find is like if you look at the traditional on-prem protection, right, SD-WAN firewall versus SRC and using our terminology. The only difference is that the social network is we operate. We administrator everything for the customers. 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 09, 2024 / 4:30PM, FTNT.OQ - Fortinet Inc at Goldman Sachs Communacopia & Technology Conference I mean they still have some flexibility in the sort of configuration, but on-premise, they own hardware, they operate and then but what about that large gap between, right? So I think for us like we've been sort of filling that gap with our technology that sort of enabling, for example, our partners to offer SIC like capabilities. And we've seen large enterprise, they wanted to offer Saatchi themselves and so we've been doing that since we started the SASE journey. And I think fortunately, Gartner came out with a terminology just about a couple of months ago because we call this privacy policy, we've tried to call it something else then I think we go with Gartner some largely because of Sovereign SIC, right? Because essentially what it is is sort of between the traditional policy and on-prem. It basically allows a like a solver in some entities, whether it's enterprise or MSSPs to operate that security network and then basically either sell the tour offering to the end user, just like the way that you're going to kind of any thoughts you have? So we tried to continue to innovate just technology, the business model and then I think a lot of the customer would find there's various a degree of adoption they can they can get into by having all these different models that we cannot.

Question: Gabriela Borges - Goldman Sachs - Analyst : And Keith, as you see our customers look to [SAP], is there a way to think about which cohorts in our base and most likely to adopt for us who are most likely adopting for us today. And we're about a year on now from the wholesale education that you did with the sales force to be able to go to market in a more holistic way. So talk to us a little bit about how that's going and maybe a little bit on how deal sizes change when you successfully cross-sell? 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 09, 2024 / 4:30PM, FTNT.OQ - Fortinet Inc at Goldman Sachs Communacopia & Technology Conference

Question: Gabriela Borges - Goldman Sachs - Analyst : Keith, I hear your competitors talk about changing their pricing models. And what I mean by that is more flexible commitment terms, more flexible bundles, enterprise license agreements, as I said before, and that portfolio has broadened which of those types of pricing models make the most sense for your customer base and other things that you're exploring to make it easier for customers to buy?

Question: Gabriela Borges - Goldman Sachs - Analyst : I wanted to spend a few minutes on margins, both at the gross level and the operating level. So the gross margin question is every quarter you publish the pie chart showing your share of secure networking is growing and specifically around how we can look at market share and network switches and access plans and some of the networking components that you sell historically that has been a lower gross margin business for your competitor than firewalls or cures. How do you think about the potential. How do you defend against this or a structural headwind to your gross margin as that piece of your business grows?

Question: Gabriela Borges - Goldman Sachs - Analyst : And Keith, on the operating margin outperformance from 2Q, circa 900 basis points. Two-part question. One is how do you think about the quantum of investment that you're going to make into 2025 trading off growth versus margins? And two is the longer-term margin model. You've talked about that a couple of years ago, over 25% long-term, you're already in the low 30s. What's the limiting factor to potentially doing north of 30 north of 40 in the long-term model as well.

Question: Gabriela Borges - Goldman Sachs - Analyst : And maybe we'll end on a cloud question, and I'll make it a little bit of an R&D allocation question, which is you have your core businesses today have emerging businesses like cloud, EDR, what you're doing in the SoC, there's a lot of different elements of the security stack you could choose to invest in. So Michael and kit fee, both. How do you think about the incremental R&D investment allocation and where is it going? Michael Xie - Fortinet Inc - Chairman of the Social Responsibility Committee, Chief Technology Officer, Founder, Founder, President, And Chief Technology Officer ( CTO ), Member of the Audit Committee, Other And I think we were like number one is we are a very innovation driven company. So culture built on innovation. And then when we see a technology, whether it's cloud DVR or even like switch MAP, that combined with the whole security fabric, which we call the other elements of the we offer together that would make sense for customers to adopt and protect his assets and build our infrastructure. And we'd never hesitate we would go out whether to acquire will grow and continue to to offer that. And but I think on the other hand, as keys can attach, we're also very disciplined like we wouldn't spend, though I think some of the crazy was like tens of millions of dollars to talk like one person to us to work on the products. I just based on the promise like we can do that. So I think we're going to continue to operate in a very disciplined way and then we will make steady growth in the R&D investment.