Fortinet, Inc.

Good day and thank you for standing by. Welcome to the Fortinet Q3 2023 earnings announcement. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you need to press star one one on your telephones. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Peter Sikowsky, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Antoine. Good afternoon, everyone. This is Peter Sikowsky, Senior Vice President of Finance and Investor Relations at Fortinet. I'm pleased to welcome everyone to our call to discuss Fortinet's financial results for the third quarter of 2023. Speakers on today's call are Ken Zee, Fortinet's founder, chairman, and CEO, and Keith Jensen, our chief financial officer. This is a live call that will be available for replay via webcast on our investor relations website. Ken will begin our call today by providing a high-level perspective on our business. Keith will review our financial and operating results for the third quarter of 2023 before providing guidance for the fourth quarter of 2023 and updating the full year. we'll then open the call for questions. During the Q&A, we ask that you please limit yourself to one question and one follow-up question to allow others to participate. Before we begin, I'd like to remind everyone that today's call 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 SECU filings, in particular the risk factors in our most recent Form 10-K and Form 10-Q, for more information. All forward-looking statements reflect our opinions only as of the date of this presentation. I want to take 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 unless stated otherwise. Our GAAP results and our GAAP to non-GAAP reconciliations are located in our earnings press release and in the presentation that accompanies today's marks, both of which are posted on the Investor Relations website. Ken and Keith's prepared remarks today for the earnings call will be posted on the quarterly earnings section of the Investor Relations website immediately following today's call. Lastly, I'll reference the growth that are on a year-over-year basis and what's noted otherwise. I'll now turn the call over to Ken.

Thank you, Peter. Good afternoon, and thank you to everyone for joining our call. In Q3, we exceeded street expectations in operation margin and free cash flow. However, building and product revenue fall below our expectations due to a slowdown in secure networking growth, along with challenges in self-execution and marketing efficiency. In response to the slowdown in secure networking market, we are shifting our marketing and sales teams' focus towards a faster-growing security operation and safety market over the next few quarters, all while maintaining our consistent focus on leading innovation in secure networking and the convergence of security and networking where we have been a leader for 23 years. While we anticipate limited near-term growth in the secure networking market, it is very important for Fortinet as we believe it enables our platform strategy with a massive footprint as the market leader in both firewall revenue and unit shift. The secure networking market is valued at $62 billion and is projected to increase high single-digit annually to $86 billion by 2027. Our consistent focus on innovating our industry-leading 40OS, which supports over 30 network functions, networking and security applications, combined with our ASIC-driven performance capability, which provides 5 to 10x better performance on average than competitors, continues to drive our market share gains. Secure networking remains a vital part of our strategy and a market that we believe will return to double-digit annual growth over time. We have been innovating for some time in the faster-growing segment of secure operations and SaaS. Secure operations, also known as SecOps, is a $46 billion market growing at a mid-teens annually to $78 billion by 2027. Fortinet's SECOP platform is comprehensive and integrated, offering EDR, SIM, SOAR, NDR, and other integrated solutions. Consolidation in a security industry demands seamless integration and underlying security tools. Fortinet's strength lies in its innovation and its ability to enable automation through a high degree of product integration. Our AI and SecOps product empower automatic response within second, all underpinned by a single consolidated management and analytic platform. In addition to SecOps, we have continued to increase our focus on SASE. Our $17 billion market expects to grow at a 20% compound annual growth rate to $36 billion by 2027. We believe Fortinet is the only company with a SASE service solution that can perform all functions in the cloud, all email and pies, all with a common operation system, including full networking and security stack, marketing leading SD-WAN, VTLA, and the management console. Our SASE service solution is supported by Google Cloud. With over 100 worldwide SASE cloud locations, together with our own 30-plus point of presence and our data centers. For our appliance-based use case, we accelerate SASE service function using our ASIC technology. For instance, we recently announced the 4DGate 1.8G with the security processor 5, which supported our full SASE offering, which included SD-WAN, firewall, secure web gateway, big lock prevention, and boost secure computing regions six to 54 times better than our competition. We anticipate that success in SASE market will first come from upselling SASE service to our installed base of tens of thousands of SG-1 customers, and from attracting new customers looking to leverage our single-vendor, integrated SASE service solution. Our industry leadership in both Farooq and SG-1 The two largest components of SASE provide us with a significant competitive advantage. We have a track record of successful execution and believe we are the only company with strong SASE service and the SACOP solution combined in the same operation system. This differentiation sets us apart and provides us with a significant competitive advantage over peers. While we expect top-line growth to be modest for the next few quarters due to challenging security networking comparison and our business transformation realignment towards security operation and SASE, we anticipate growth return to double-digit by the second half of 2024. We remain committed to generating healthy operation margin of 25% or greater in 2024 and 2025. 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. Keith.