Fortinet Inc Q3 2024 Earnings Call Summary

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

Question: Hamza Fodderwala - Morgan Stanley - Analyst : Great. Good afternoon. Thank you for taking my question. Ken, I couldn't help another thing in your investor presentation, you talked about a market that you see over $200 billion, growing 12% over the next 4 years. 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 07, 2024 / 9:30PM, FTNT.OQ - Q3 2024 Fortinet Inc Earnings Call Obviously, a big chunk of that growth is driven by the SASE market and your share gain in there. I'm curious if you could talk a little bit more about Fortinet's approach in terms of sovereign SASE. How is that differentiated versus some of the competitors out there? And what is it that you're doing differently, particularly for those highly regulated verticals out there? Thank you.

Question: Hamza Fodderwala - Morgan Stanley - Analyst : Thank you.

Question: Brian Essex - JP Morgan - Analyst : Hi. Good afternoon. Thank you for taking the question. I'll stick to one topic. I guess either Ken or Keith, could you dig into the commentary around the firewall refresh cycle that you provided? So with respect to conversations you're having with customers, and maybe with a little bit of color what you've seen historically, how far before the renewal point do customers tend to refresh? And do you have any insight into the mix of F&B, large enterprise service provider, retail? And what the timing and the magnitude might be, whether this might be a first-half event, second-half event? Any kind of insight you could provide would really be helpful. 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 07, 2024 / 9:30PM, FTNT.OQ - Q3 2024 Fortinet Inc Earnings Call

Question: Brian Essex - JP Morgan - Analyst : Or by vertical, I think you've mentioned before that you need large enterprise retail and service provider in order to recover. So if you have any insight there, how that -- how their cycles and spending patterns may impact, that would be helpful.

Question: Brian Essex - JP Morgan - Analyst : Got it. Super helpful. Thank you so much.

Question: Fatima Boolani - Citi - Analyst : Hello. Good afternoon. Thanks for taking my question. Ken, a question for you. There was a discount about the routes to market in terms of gaining your market share within the SASE universe. And one of those important routes is leverage our installed base by converting and migrating a lot of the SD-WAN customers. So my question for you is, how should we think about potential for the cannibalization of some of your refresh potential as that migration journey transpires from SD-WAN to SASE? And then I just have a follow-up for Keith if I may.

Question: Fatima Boolani - Citi - Analyst : Thank you, Ken. And just, Keith, for you to double back on the end of support analysts around the refresh that you're talking to and telegraphing for 2026. Any way you can give us a lens on either the proportion of the shipment footprint or the installed base footprint or the customer footprint that this applies to in the aggregate? Thank you.

Question: Fatima Boolani - Citi - Analyst : Thank you.

Question: Saket Kalia - Barclays - Analyst : Awesome. Hey, guys. Thanks for taking my questions here. Maybe for Keith or Christiane, I think we mentioned a SaaS Solutions ARR growth number in the prepared remarks. Could you just remind us, is that an organic or inorganic number? And maybe just touch on what are the solutions that are driving that growth?

Question: Saket Kalia - Barclays - Analyst : Got it. Keith, maybe for my follow-up for you. Just to shift gears a little bit, it was great to see the profitability again. Could you just remind us -- you mentioned something about being onetime in nature in the quarter. It sounded small, but could you just remind us what that was? And more importantly, do you think about this as a more sustainable level of profitability?

Question: Saket Kalia - Barclays - Analyst : And anything on sort of the sustainability of that margin? And if that's pulling anything from the analyst day, I totally understand. But I wanted to make sure the question was asked. 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 07, 2024 / 9:30PM, FTNT.OQ - Q3 2024 Fortinet Inc Earnings Call

Question: Saket Kalia - Barclays - Analyst : Very helpful. Thanks.

Question: Tomer Zilberman - Bank of America - Analyst : Hey, guys. You have Tomer Zilberman on for Tal Liani. Just wanted to ask about the billings guidance for next quarter. The organic billings ex Lacework and Next DLP came in well below Street expectations. Just wanted to ask where you see the weakness and how you measure that against the comments of seeing stable firewall demand this quarter and the expected refresh cycle in 2025.

Question: Tomer Zilberman - Bank of America - Analyst : Got it. And maybe to follow up, asking more generally about the competitive landscape. We've seen over the last couple of quarters some of the larger vendors are now focusing even more on discounting, bundling and vendor financing. So how do you see the competitive landscape? Do you see pricing pressure because of that? And how are you participating with that as well?

Question: Tomer Zilberman - Bank of America - Analyst : Got it. Thank you very much.

Question: Gabriela Borges - Goldman Sachs - Analyst : Hi. Good afternoon. Thanks for taking my question. Keith and Ken, I wanted to ask you about the go-to-market. And more specifically, I think it's been about a year since you upleveled your sales force around SASE. What are some of your learnings? What do you think is working well? And what do you think is incrementally a focus as we go into 2025 where you think you can maybe up level some more? Thanks.

Question: Gabriela Borges - Goldman Sachs - Analyst : Absolutely. Good stuff. Thank you.

Question: Shaul Eyal - TD Cowen - Analyst : Thank you. Good afternoon, guys. Ken or Keith, in your press release, you're talking about Fortinet being well positioned to lead in its three core growth barriers and drive sustained growth. Keith, again, I don't want to spoil the Analyst Day front run it in advance. But sustained growth, what are we talking here? Low teens, mid-teens? Any color will be highly appreciated. 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 07, 2024 / 9:30PM, FTNT.OQ - Q3 2024 Fortinet Inc Earnings Call

Question: Shaul Eyal - TD Cowen - Analyst : Thank you.

Question: Rob Owens - Piper Sandlin - Analyst : Great. Thanks for taking my question. Keith, I wanted to I guess, double back on your comments around Q4 and some of the chunky yielding up for the final month of the quarter, giving you a bit of caution. Was that not in your purview, I guess, when you were looking at the setup for the second half before? Have these things somewhat slipped relative to maturation, your ability to get them across the line? Just curious why the additional conservatism around them now. Thanks.

Question: Catharine Trebnick - Rosenblatt - Analyst : Hi. Catharine Trebnick here. Can you discuss how your virtual firewall is performing this quarter or the trends for and competitively, we've been picking up that Microsoft and Google have been doing a really good job with their virtual firewall. So how is that standing competitively with you? Thank you.

Question: Adam Borg - Stifel - Analyst : Great, and thanks much for taking the question. Maybe for Ken, just on the Lacework FortiCNAPP offering now. I'd love to hear a little bit about initial customer feedback, partner feedback and kind of near-term R&D and sales and marketing priorities. Thanks so much.

Question: Adam Borg - Stifel - Analyst : That's great. And maybe just as a quick follow-up. Just on the government vertical. Obviously, 3Q is important for the US. Fed, I know the Fed is a little bit smaller of a vertical for Fortinet. But maybe talk about the government vertical more broadly in the quarter and how you think about it in coming periods. Thanks so much.

Question: Adam Borg - Stifel - Analyst : Great. Thanks again.

Question: Joe Vandrick - Scotiabank - Analyst : This is Joe Vandrick on for Patrick Colville. Can you just talk more about how you're enabling or incentivizing partners to kind of lead with Fortinet SASE when they may already have existing relationships with more established vendors in this space? Thanks.

Question: Joe Vandrick - Scotiabank - Analyst : Got it. Thanks, Ken.

Question: Joseph Gallo - Jefferies - Analyst : Hey, guys. Thanks for the question. It was great to see the OT grew 19% billings growth. How should we think about sustainability of that business? And then are there any changes in that competitive landscape?

Question: Joseph Gallo - Jefferies - Analyst : And then maybe just to double-click on retail and some of the verticals. It was great to see that that grew for the first time, I think, six quarters. Now that we're post-election? Like are there any verticals that you expect to rebound? Or are there any changes going forward over the next couple of quarters that we should expect? Thank you.

Question: Keith Bachman - BMO - Analyst : Hi. Many thanks. Good evening. I wanted to ask two questions, sort of a micro and a macro and I'll just ask them concurrently in the interest of time. Keith, just on the SaaS penetration. You indicated on slide 9, about 45% is with large enterprise. If you took out the SD -- and it's a very impressive figure. If you took out the SD-WAN. What would that penetration rate or share look like in terms of customer type? I'm just -- I'm trying to understand the SD-WAN versus the other bucket. And then the second question is a broader question, but how are you thinking about Europe as you look out over the next quarter or two? I know it's T plus 1 in terms of the election and what economic growth may be as a consequence. But just how are you looking at Europe over the next couple of quarters, not just in Q4? And that's it for me. Thank you.

Question: Keith Bachman - BMO - Analyst : Yeah. Yes. That's what -- sorry, that's what I meant, but what would the -- just a mix of customers, if you took out SD-WAN of the SASE piece alone?

Question: Keith Bachman - BMO - Analyst : Okay. Thank you.

Question: Junaid Siddiqui - Truist Securities - Analyst : Hello. Great. Thank you for taking my question. I just want to drill down in your hardware appliances. And if you can maybe just give us a little bit more color how the high-end family performed versus the midrange and the lower end. Thank you.

Question: Junaid Siddiqui - Truist Securities - Analyst : Great. Thank you.

Question: Gray Powell - BTIG - Analyst : Great. Thanks for working me in. I appreciate it. So yeah, it was really helpful to see the product level is growth rate disclosures on the slide deck. Within universal SASE, could you maybe give us a ballpark sense as to how fast the SD-WAN piece is growing? My understanding is that that's probably been under pressure over the last 18 months. So I guess my question is really like, do you see potential for that product to reaccelerate, particularly as VMware customers start looking for alternative solutions? Thanks.

Question: Gray Powell - BTIG - Analyst : Understood. All right. Thank you very much.