Fortinet, Inc.

Hello, thank you for standing by and welcome to Fortinet fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Peter Salkowski, Vice President of Investor Relations, Please go ahead.

Thank you, Josh. Good afternoon, everyone. This is Peter Salkowski, Vice President of Investor Relations at Fortinet. I'm pleased to welcome everyone to our call to discuss Fortinet's financial results for the fourth quarter and full year of 2021. Speakers on today's call are Ken Vee, Fortinet's founder, chairman, and CEO, and Keith Jensen, our Chief Financial Officer. This is a live call, and that will be available via replay via our website on our Investor Relations website. Ken will begin our call today by providing a high-level perspective on our business Keith will then review our financial and operating results for the third quarter before providing guidance for the first quarter and full year of next year. We'll then open the call for questions. During the Q&A, we ask that you please keep your questions brief and limit yourself to one question to allow others to participate. Before we begin, I'd like to remind everyone that on today's call, we will be making forward-looking statements, and these forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular the risk factors in our most recent 10-K and Form 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements. Also, all references to financial metrics that we make on today's call are non-GAAP and must be stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations is located in an earnings press release and in the presentation that accompanies today's remarks, both of which are posted on the Investor Relations website. Lastly, all references to growth are on a year-over-year basis unless noted otherwise. I'll now turn the call over to Ken.

Thanks, Peter, and thank you for everyone for joining this call to review our outstanding fourth quarter and four-year 2021 results. For the fourth quarter, bookings increased 49 percent to $1,428,000,000. Billions increased 36 percent to $1,306,000,000. Global G2000 buildings growth accelerated to over 90 percent. Secure S1 buildings was up 67 percent, accounting for 16 percent of total buildings. Total revenue growth, 29 percent to $964,000,000, with product revenue up 31 percent. Our team navigated well through a challenging supply chain environment to deliver outstanding results. For the full year, revenue was $3.3 billion, and the GAAP operation margin was 20 percent. We generated a record of $1.2 billion of free cash flow, and we recorded our 13th consecutive year of GAAP profitability. Three growth drivers convergence of security and networking, vendor consolidation with our security fabric mesh platform, and an elevated threat environment are driving our strong financial results and market share gains. The move to work from anywhere has rapidly expanded the attack surface, which traditional network security firms have to protect. Fortinet's security-driven networking approach converges networking and security, including next-generation firewall, SD-WAN, 5G, ZTNA, and OT to reduce complexity by securing and connecting remote user to advance security and performance and networking speed. Enterprise organizations are increasingly consolidating to a cybersecurity match approach. Fortinet's security fabric platform delivers unparalleled protection through its cybersecurity mesh architecture that provides broad, integrated, and automated protection across multiple edges, from endpoint to data center and hybrid cloud environment. Today, we announce the FortiGate 3000F, the latest FortiGate next-generation firewall powered by Fortinet ASIC MP7 SPU to deliver scalable, high-performance convergence of networking and security for zero-trust edge and core network. The Fortinet 3000i secure computing routine offers an average 5x better performance than competitive offerings. Fortinet recently stood out among 19 network firewall vendors in Ghana's critical capability for network firewall. Evaluated for their performance across non-critical capability, FortiGate solution received overall high score in the enterprise data center, distributed enterprise edge, and SMB use case, and a second high score in public cloud use case. Our FortiGate product is the only leader in both Gartner Magic Quadrant for network firewall and SD-WAN. Over the last several years, Fortinet's industry-leading innovation has transformed our company into one of the most influential and fastest-growing cybersecurity leaders. This, in addition to our growth drivers, strongly positions us to capture market share and move to the next level of growth. Before turning the call over to Keith, I would like to thank our employees, customers, partners, and suppliers worldwide for their continued support and hard work I would especially like to thank our operation team for doing a great job supporting Fortinet's fast growth. Keith.

Thank you, Ken, and good afternoon, everyone. I'll start with a summary of our very strong 2021 performance. Customer demand was strong and broad-based across geographies, customer sizes, industries, use cases, and security solutions, reflecting the three key demand drivers that Ken mentioned, convergence of security and networking, vendor consolidation on our security fabric mesh platform, and the elevated threat environment. Convergence, or security-driven networking, requires integrated security solutions to be delivered at networking speeds across a company's entire threat landscape of edges, including data centers, endpoints, work from anywhere, and clouds, as well as across multiple use cases, such as secure SD-WAN, Wi-Fi, switching, 5G, and OT. The networking speed and computing capabilities of our ASIC-powered FortiGates can be five to 10 times more than competitor firewalls with their off-the-shelf silicon products. Vendor consolidation is driven by customer focus on security effectiveness, performance, and cost management. We deliver vendor consolidation through our security fabric platform and its broad range of products, integrated with a single operating system, offering increased automation. As we saw in 2021, We expect strong customer demand fueled by these key drivers to continue. In turning to our 2021 performance, buildings growth accelerated to 35%, or $4.2 billion, representing our highest annual buildings growth rate in six years. Revenue growth also accelerated, coming in at 29%, representing the fourth consecutive year of revenue growth of 20% or more. And despite the supply chain environment, product revenue growth came in at 37% growth, our highest annual product revenue growth rate in 10 years. Driven by strong demand for our fabric and cloud security solutions, non-FortiGate billings and revenue each exceeded $1 billion for the first time in our history. Non-FortiGate billings increased 46% to $1.25 billion, and non-FortiGate revenue increased 42% to $1.1 billion. Gross margin was 77.5%, and operating margin was 26.2%. Our gap operating margin was 19.5%. It's one of the highest in the industry, and we were gap profitable, as Ken mentioned, for 13 consecutive years. Free cash flow was a record $1.2 billion, exceeding $1 billion for the first time in our history. Free cash flow margin was 36%, and when adjusted for real estate investments, came in at 43%. Total deferred revenue increased 33% to $3.5 billion, and short-term deferred revenue increased 28% to $1.8 billion. We are experiencing exceptionally strong demand, demand that exceeds supply by more than historical norms. As a result, we are expanding our disclosures to include bookings and backlog to provide greater visibility into the strength of our business Bookings represent the value of all orders received from customers. Backlog represents the value of all orders received but not fulfilled. When an order is fulfilled, we recognize both billings and product revenue. Turning to Q4 results, as noted on slide 4, bookings were $1.4 billion, up 49%. On a sequential basis, backlog increased $122 million due to very strong demand. On a year-over-year basis, Backlog increased $150 million to end the year at $162 million. Breaking down the backlog between product and services, approximately 75% relates to future product shipments, while the remaining 25% relates to various services. While it's difficult to forecast if an order might be canceled, several factors support our view that our backlog is strong and should provide a tailwind of growth later this year and into next year. Existing customers account for approximately 90% of our backlog. No single end customer accounts for more than, they say, a low single digit percentage of backlog. Many competitors are also impacted by supply chain constraints. Our products, along with our integrated operating system, are not commodities readily exchanged with offerings from other vendors. We actively manage our own supply chain. And for the most deployed security network solution, it has over one-third of all firewall unit shipments. We are an attractive volume buyer for many suppliers. And lastly, our price or performance advantage may be difficult for our competition to match. And I apologize for the sound in the background. We don't know what's causing it, but I'll continue on. Moving to Q4 billings, at $1.3 billion, Billings are up 36%, which compares to 49% bookings, as we noted earlier. Enterprises favored Fortinet's leading cost for performance and integrated platform. This is especially evident in the five-point increase in the large enterprise billing mix. To add more color to this, we can share global 2000 billings were up over 90%, the third consecutive quarter of accelerating growth. The number of deals over $1 million increased 79%, to 122 deals, breaking the 100-deal threshold for the first time in our history. We saw a record of four low eight-figure transactions in the quarter, all in the Americas.

And lastly... We're going to take one second to see if we can fix the phone line. We think it might be our phone for some reason. We're going to dial back in and be right back. Everybody else, stay put. Be right back.

Please remain on the line. Your conference will resume shortly. Josh, we're back. Can you hear us? Yes, I can hear you. You're in the main room right now, and I can still hear the sound.

That was better, Josh? Yes.

I'm sorry, but the sound is still coming in pretty bad. Okay, we're going to drop this line. I'll call you back.

Okay.

Sounds good. Everybody just hang on, please. Right back there.

Please remain on the line.

Your conference will resume shortly.

Josh, we're back. Can you hear me?

Josh, can you hear me?

Hello, I guess I can hear you, but the noise came back as soon as you got connected again. Yeah, we're on a totally different phone. I'm on my cell phone now. Sounds like it's on your end, guys.

Let me chat with you on the interview, and we'll get this fixed in just a moment.

Okay, put everybody on hold, please. I will put the music hold back in the call.

You are connected at this time, sir. You may proceed.

Josh, are you there?

Okay. All right. We're going to start. Keith's going to back up a little bit. Hopefully you can hear us now. And we'll start where he kind of left off and go from there. Apologies for that.