Fortinet Inc at Needham Security, Networking, and Communications Conference (Virtual) Transcript

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

Question: Matt Dezort - Needham & Company, LLC - Analyst : It makes total sense. I guess on the margin side, you mentioned sales capacity. I guess, seems like the operating and free cash flow targets are prudent and they leave some room for incremental investments, which you guys talked a little bit about yesterday in terms of adding quota-carrying reps, but also building out your own infrastructure and data centers. I guess maybe talk about some of those investment factors and specifically like what sort of growth should we expect in quota-carrying head count over the next year or two, especially as you roll out SASE and SecOps?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. Yes. It definitely feels like the correct winning strategy for SASE long term. So I appreciate all that color. I guess, Keith, shifting back to billings guidance for Q4. You talked about, I think it's mid-single-digit growth. But on the call, you talked about a subset of large chunky deals, I think, that are just taking longer to mature in Q4. What's the temperature check on the progression of those deals as we progress here through November and into December? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 2:30PM, FTNT.OQ - Fortinet Inc at Needham Security, Networking, and Communications Conference (Virtual)

Question: Matt Dezort - Needham & Company, LLC - Analyst : I guess what's causing that longer maturation process or slower sales cycle? Is it just because these are larger deals that you guys are going after? Is it market driven? Or is it more idiosyncratic because you're also trying to introduce SASE, SecOps and some of these other solutions to customers?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. I guess let's shift gears, I guess, to product revenue, which turned positive, I think, for the first time in a handful of quarters this past quarter, which was very nice to see you're starting to lap some of the backlog headwinds that you guys had. And I think ex backlog, it grew double digits quarter-over-quarter, which was above seasonal norms, right? So really strong sort of product momentum, I guess, what signals in addition to the 40-yard days of service registered statistic that you guys put out there, what else out there do you guys see that gives you confidence that product can return to sustainable positive growth in '25, '26?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. I guess I had a question come in from a client here on some of the larger deals. I guess, are they actually increasing in size while you're going through negotiation? What's the kicker on pricing and discounting as these take longer to mature?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. I guess let's talk about the big end-of-support asset time line that you guys have coming up. You talked about a record number of 40 gates out in the field. I think over 2 times what you guys saw in '21, '22. How often does this base usually refresh before, during or after the end of life support. I know you talked about the bulk of these coming up in the second half of '26 and you expect them to refresh some time before that. But I think refresh cycles have obviously changed dramatically over the past 5 to 10 years. So how do you think about that? And any sort of change in behavior that's contemplated in that sort of thought process versus '21, '22?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it.

Question: Matt Dezort - Needham & Company, LLC - Analyst : Yes. No, I guess staying on that point, Christiane, yesterday, you talked about, I think, $400 million to $450 million of net new product revenue opportunity over the next couple of years coming from that end-of-life support cohort? I guess, how should investors be thinking about that number and the conservatives embedded in that versus past refreshes?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. Got it. I appreciate that color. I guess staying on product and moving a little bit to a different subject within it, what's the status, Keith of channel inventory levels going into Q4? And how do you think about that into next year as you near this refresh, where are channel inventory levels versus pass refresh opportunities?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. Got it. I guess shifting to gross margins, Keith, staying with you, you've had a couple of quarters of record gross margins. Congratulations on that, and product has been particularly strong nearly 72%, I think, this last quarter included a few hundred basis points of one-off supplier renegotiations, I think. How do you think about sustainable product gross margins going forward, especially as we come up on this refresh and software -- as software becomes a bigger piece of the pie? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 2:30PM, FTNT.OQ - Fortinet Inc at Needham Security, Networking, and Communications Conference (Virtual)

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. So that 79% to 80% that you talked about yesterday that was part of the near-term guidance for overall total gross margin?

Question: Matt Dezort - Needham & Company, LLC - Analyst : I guess, what sort of pricing and discounting behavior have you seen in the market in the second half of this year? And how do you think about financing vehicles given most of your competitors have shifted gears towards that? Any new progressions on that front?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. I guess shifting gears towards SD-WAN. You guys are dominant in this market. You have been for the past handful of years. I guess -- how do you think about the large cohort of SD-WAN renewals that you have coming up in '25, '26, I think in '21 and '22, you almost -- you booked close to cumulative $2 billion of SD-WAN bookings. As that comes up for renewal, how do you think about that as a gateway to upsell or cross-sell SASE to your large installed base?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. Yes, I know you guys have put a loantly talked about the progression from FortiGate to SD-WAN to SASE. I guess, to stay on the topic, I want to ask about the SASE multiplier. I know you guys put out some slides yesterday. But as your customers progress through FortiGate to SD-WAN, to SASE, how should we think about the multiplier on an ACV perspective from SD-WAN to SASE, especially given it's kind of a different sale versus SD-WAN, which was majority of a cost savings pitch versus MPLS, right? How do we think about that? You mentioned it's a little bit of a longer transition, but how do we think about your ability to achieve those sort of multiplier effects with SASE pricing?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. I guess staying in SASE, it seems like you guys have a really unique positioning within service providers and sovereign SASE. Maybe just talk about what the size of that opportunity to sell SASE to and through service providers could look light and how that pipeline is sort of maturing for you guys? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 2:30PM, FTNT.OQ - Fortinet Inc at Needham Security, Networking, and Communications Conference (Virtual)

Question: Matt Dezort - Needham & Company, LLC - Analyst : Makes sense. I guess shifting gears to the other hypergrowth segment, SecOps. You guys have talked about strong ARR growth within this segment, Christiane, -- I think for EDR, FortiClient, NDR and cloud have been driving this segment. Where are you seeing the most success within SecOps landing and expanding? And how is that sort of evolving?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. And that makes sense. And maybe double-clicking on FortiEDR. How do you guys think about that as a launching point for next-gen SIM, especially since it seems like that's sort of resonating early with some customers that are looking to maybe think about unwind legacy SIEM solutions. But I guess how do you think about that as a launching point for you guys, what sort of traction have you seen in FortiEDR? And I guess anything new given there was sort of a big event in July, where a competitor had a large outage, has that built any sort of incremental pipeline for you guys? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 2:30PM, FTNT.OQ - Fortinet Inc at Needham Security, Networking, and Communications Conference (Virtual)

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. Makes sense. Maybe John, staying with you on cloud, you guys just bought Lacework, congrats on that acquisition, really exciting to see. How is that integration sort of going? Any updates you can give us either qualitative or quantitative on that integration? And how is pipeline built going so far within your existing base of new logos?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. I guess shifting to some of the vertical conversation. It was great to see the strength this past quarter in manufacturing [NOT]. I think service providers and retail as well, had really strong bounce back quarters. What sort of drove that? Is that early refresh? Is it -- is it share gains or these verticals just finally starting to decide to refresh the equipment? How should we think about some of your key verticals that are set to refresh?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. That makes sense. I guess shifting to public sector. It's obviously a big topic in Q3 with the Fed fiscal year-end. I think historically, you guys have been really strong in SLED in international markets. So I guess -- you also just hired a new leader for your Fed business. So the question, I think, is what's changing with this new leadership within your public sector business. And have you disclosed how big of a pie that federal piece is within?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. I guess shifting gears to AI obviously, a big topic of conversation for investors and everybody within tech. Remind us what you're doing with FortiAI, any early traction on that product you've seen across or you analyzer SIM I know you talked about those, but any of that traction powered by AI? And what sort of mix are you guys using in terms of third-party LOMs and APIs or your own proprietary models?

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. I guess with two minutes left, I'd love to turn it back to you, Keith, John, Christiane, if investors on the call were to take away three things from today or at the Analyst Day yesterday, what would you prioritize in their minds? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 2:30PM, FTNT.OQ - Fortinet Inc at Needham Security, Networking, and Communications Conference (Virtual)

Question: Matt Dezort - Needham & Company, LLC - Analyst : Got it. It makes sense. And with that, I think we're up on time. So John, Christiane, Keith, I appreciate you guys taking the time to join me today. And definitely, a lot of exciting stuff and the headlines for you guys with SASE and SecOps and this large refresh. So I appreciate you taking the time and for all that tuned in, thank you for the questions, and hope you enjoy the rest of the conference.