Fortinet, Inc.

Hello and welcome to Fortinet's first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, we will conduct a question and answer session. Please be advised that this call is being recorded. I would now like to hand over the call to Anthony Luskri, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss Fortinet's first quarter 2026 financial results. Joining me on today's call are Ken Zee, Fortinet's founder, chairman, and CEO, Christiana Olgaard, our CFO, and John Whittle, our COO. Ken will begin our call today by providing high-level perspective on our business. Christiana will then review our financial results for the first quarter of 2026. During the Q&A session, we will 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 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 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, 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 unless stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations are located in our press release and in the presentation that accompany today's remarks, both of which are posted on our investor relations website. As a reminder, this is a live call that will be available for replay via webcast on our investor relations website. The prepared remarks will also be posted on the quarterly earnings section of our investor relations website following today's call. Lastly, all references to growth are on a year-over-year basis unless noted otherwise. I will now turn the call over to Ken.

Thank you, Anthony, and thank you to everyone for joining our call. We are very pleased with our excellent first quarter result, exceeding our guidance through strong execution and broader base demand. As a result, building growth 31%, total revenue increased 20%, and the product revenue growth 41%. Non-GAAP and GAAP operating margin were very strong under 36 and 31 percent, with GAAP operation margin and revenue growth total together 51 percent, one of the highest in the industry. We also generate a record $1 billion free cash flow, highlighting the strength and durability of the business model. GAAP earning per share increased 29 percent, demonstrating our commitment to strong shareholder return. The convergence of networking and security approach Fortinet has lead for 26 years. It's accelerating in the AI era. Customers are adopting Fortinet platform with secure networking, unified SASE, secure operation built on a single FortiOS operation system, enabling expanding across many use cases. By delivering all core SASE capability natively integrated in one operating system, our SASE firewall significantly reduced complexity for customers. Innovation such as FortiOS 8.0 with its rich integrated functionality Our 40 ASIC technology, which deliver higher secure computing performance and a significantly lower cost, and our direct supply chain management continue to differentiate Fortnite and support the market share gain as AI drive strong demand for SASE firewalls. Secure networking building growth, 32%, outperforming the broad market. Today, we announced the FortiGate 3500G and 400G deliver significant performance improvement over previous generations. Further strength in finance leadership. OT security are accelerated in a quarter with OT building growth over 70% as customer prioritized on protecting critical infrastructure amid heightened threat. Unified SASE building grows 31%. Our differentiation is powered by three key advantages. Single operation system across NetGen firewall, SD-WAN and SASE. Our own global cloud infrastructure deliver better security and performance and roughly one-third of total cost ownership of peers. And our much larger total addressable market. especially in sovereign and private SASE, which allow customers to deploy SASE in their own environment to meet data sovereignty and regulatory requirements. Beyond secure networking and SASE, AI is rapidly expanding opportunity in security operation, as AI-driven security operation building growth 23%, supported by more than 20 AI-enabled solutions on our platform, as customers consolidate vendor and simplify operations. Finally, given our strong result and confidence in the business, we are reaching our 2026 guidance. We continue to expect balanced growth, strong cash generation, recurring revenue, and a shareholder-focused long-term growth capital allocation strategy, while consistently delivering gap probabilities since IPO. As AI increases the demand for security, Our platform approach continue to differentiate, supported by a strong direct operation model that's able us to turn supply chain challenges into opportunity to get market share. I would like to thank our employees, customers, partners, and suppliers worldwide for their continued support and hard work. I will now turn the call over to Christiana.

Thank you, Ken. And good afternoon, everyone. As Ken noted, we delivered a strong first quarter, exceeding the high end of our guidance across billings, total revenue, operating margin, and earnings per share. The success reflects broad-based demand and strong execution across customer types, industry verticals, our geos, and all three pillars. Total billings grew 31% to 2.09 billion, driven by broad strength across secure networking, unified SASE. Our large enterprise segment was particularly strong. Secure networking billings grew 32%, driven by robust FortiGate demand as customers expanded protection across operational technology environments, contributing to OT billings growth of over 70%. Unified SASE adoption continued to build during the quarter, with billings growing 31%, driven by strength in SD-WAN and FortiSASE. Fortisazi expansion within our customer base also remains strong, with 18% of our large enterprise customers now having purchased Fortisazi, an increase of over 45%. AI-driven security operations billings grew 23%, highlighting our continued platform expansion within our installed base. Turning to revenue, total revenue grew 20% to 1.85 billion, with product revenue increasing 41% to 645 million as customers shifted toward higher performance products. This included a number of AI related deployments where customers invested in FortiGates to support increased throughput, segmentation and security requirements across AI infrastructure. Technology upgrades, upselling and expansion into new use cases drove strong growth in both hardware and software. We again benefited from our strong supply chain execution. Recent pricing changes had a low single-digit impact on product revenue growth. Service revenue grew 11% to 1.21 billion, while service billings growth re-accelerated to 27% and deferred revenue increased 15%, driven in part by SecOps ARR growth. We view service billings growth, deferred revenue, and SecOps ARR growth together with accelerating product revenue as leading indicators of future services revenue. Stepping back, these results reflect both strong execution in the quarter and durable demand drivers that continue to shape customer priorities as customers invest in and upgrade their network security solutions to defend against sophisticated attacks that are growing in both speed and complexity due to the availability of AI tools. AI is expanding the attack surface and increasing performance requirements, which is driving higher and more durable security spent across networking, SASE and security operations. Our strong product revenue and service billing strengths and outlook continue to be driven by key tailwinds, including the ongoing convergence of security and networking, rising customer investments and demand to secure AI infrastructure as traffic segmentation and performance requirements increase. And accelerating IT and OT convergence as customers recognize growing exposure across critical infrastructure. These drivers translated into strong demand this quarter, particularly in large enterprises, where both the number of deals greater than 1 million and total deal value grew over 60%. We saw strong growth in both Europe and the US. Looking ahead, we can see these dynamics reinforced by durable tailwinds that support continued platform adoption over time. Tailwinds include vendor consolidation, ongoing technology upgrade cycles, and the continued expansion of enterprise attack services across cloud, OT and AI environments. In OT specifically, we are seeing strong demand driven by heightened ransomware and nation state activity alongside rapid digitalization as organizations seek to deploy AI. These same dynamics are extending into SASE where customers increasingly require flexibility to meet data privacy, sovereignty, and regulatory requirements. We support both cloud-based SASE and sovereign SASE, enabling enterprises and service providers to deploy SASE within their own data centers when required. Demand for our sovereign SASE continues to be strong, and no major SASE competitor currently offers a comparable solution. Rising cyber risk, heightened regulatory scrutiny, growing data sovereignty requirements by dealing with economic pressures are further accelerating customers to adopt platform-based approaches. At the same time, rapid AI adoption and increased geopolitical uncertainty are expanding the cybersecurity term as organizations prioritize resilience sovereignty and consistent protection across increasingly complex and distributed global infrastructures. Importantly, these trends aligned with the reasons of our platform approach. Our platform approach continues to resonate. Fortinet's platform approach is differentiated because secure networking, unified SASE and AI driven security operations are all built on the single operating system FortiOS. This unified architecture enables customers to deploy security consistently across private, public, and hybrid multi-cloud environments, as well as across hardware, software, and SaaS form factors while supporting seamless expansion across use cases. As AI rapidly expands the attack surface, customers are prioritizing integrated platforms that share telemetry and reduce operational complexity. accelerating vendor consolidation. Against this backdrop, our strong network security foundation remains a core differentiator, driving adoption of SD-WAN, SASE, and security operations and supporting continued wallet share expansion as customers simplify architectures and consolidate vendors. This contributed to growth of 28% in unified SASE and SecOps combined. with momentum continuing across our more services-rich pillars. We are also introducing a new SD-WAN and SASE services bundle designed to broaden adoption and further support services revenue over time. We also benefit from durable competitive advantages, particularly as performance requirements increase. Our proprietary ASIC technology and integrated operating system deliver superior performance and lower total cost of ownership. which is increasingly important in high throughput environments as customers scale AI driven traffic inspection. Finally, customer demand remained broad based across segments, demonstrating the durability of our platform strategy with over 6,600 new organizations selecting our 40 OS platform during the quarter, reinforcing the breadth of demand across SMB, mid-market and enterprise customers. Overall, these results reflect consistent demand drivers and durable long-term trends. As the market continues to evolve toward platform-based security architectures, we believe Fortinet remains well positioned to take share and deliver sustained growth and long-term shareholder value. Now, I would like to highlight some key seven-figure deals that demonstrate our market leadership and customer expansion. First, A cloud infrastructure provider focused on GPU compute for AI workloads selected Fortinet to secure a new AI data center as part of its continued expansion. The customer chose our FortiGates to deliver high performance perimeter protection, segmentation and secure connectivity for a new production environment. The win was driven by Fortinet's ability to provide scalable, high throughput security aligned with the customer standardized architecture. enabling rapid deployment of new capacity as demand for accelerated compute continues to grow. In another AI-related deal, Fortinet was selected for the initial phase of an AI data center project in the Middle East for a leading generative AI company. This win positions Fortinet as a key security partner for next generation AI data center infrastructure. which demands significant scale, performance, and architectural flexibility. The customer selected Fortinet for the strength of our security architecture to address the complexity of securing high performance AI environments. This deployment also reinforces the importance of standardizing Fortinet security solutions to enable consistent, scalable, and efficient protection as AI data center deployments continue to expand. Next, a multinational energy company selected Fortinet to standardize and secure its network through the deployment of our full SD branch solutions across more than 3,000 locations alongside OT security for an additional 300 global sites. The win reflects strong customer confidence in our ability to support large-scale distributed infrastructure environments with a unified approach to networking and security. By consolidating networking and security onto a single platform, the customer simplified operations while improving resilience and highlights Fortinet's ability to scale securely within complex mission critical infrastructure environments. The customer is also exploring an expansion into Fortisazi, highlighting the opportunity to further extend secure access capabilities across the enterprise. Lastly, a global manufacturer selected our 40 SASE solution to secure approximately 40,000 users as part of a strategic initiative to modernize its remote access environment. The win was driven by our lower total cost of ownership and commitment to ongoing feature development, positioning us ahead of the competition. The customer chose Fortisazi for its unified FortiOS platform, which provides a single security policy across Fortisazi and FortiGates, with globally distributed POPs for simpler, consistent protection across on-premises and cloud environments, enabling them to build a scalable security architecture. Turning to margins and cash flow. Non-GAAP gross margin of 81% was better than expected, which is impressive given the strong product revenue growth of 41% and the related mixed shift towards product. Our GAAP gross margin was also strong at 80.3%. Non-GAAP operating margin of 35.8% was a first quarter record up 160 basis points and exceeded the high end of the guidance range, mainly due to better than expected revenue growth and continued cost management. Our gap operating margin of 31.4% continues to be one of the highest in the industry. Non-gap earnings per share increased 41% to 82 cents, while gap earnings per share grew 29% to 72 cents, significantly outpacing our top line growth, reflecting high quality earnings, supported by disciplined stock-based compensation, and continued return of capital over the past year. Free cash flow was a record of 1.01 billion, and adjusted free cash flow was 1.07 billion, up 27%, and represented a margin of 58%. We repurchased 10.6 million shares of common stock for 827 million during the first quarter and added an additional 1.9 million shares for 146 million quarter to date. The remaining share repurchase authorization as of today is approximately 766 million. Now moving on to guidance. As a reminder, our second quarter and full year outlooks, which are summarized on slides 30 and 31, are subject to the disclaimers regarding forward looking information that Anthony provided at the beginning of the call. Consistent with our disciplined and prudent approach to guidance, our strong first quarter execution supports a higher second quarter and full year outlook. We are raising our full year guidance across all top line metrics, including buildings, revenue and service revenue, while managing the second half of the year on a quarter by quarter basis. For the second quarter, we expect billings in the range of 2.09 billion to 2.19 billion, which at the midpoint represents growth of 20%. Revenue in the range of 1.83 billion to 1.93 billion, which at the midpoint represents growth of 15%. Non-GAAP gross margin of 79.5% to 80.5%. Non-GAAP operating margin of 33% to 35%. Non-GAAP earnings per share of 72 to 76 cents, which assumes a share count between 736 and 740 million. Infrastructure investments of 50 to 100 million, a non-GAAP tax rate of 18%, and cash taxes of 160 to 180 million. For the full year, we expect billings in the range of 8.8 billion to 9.1 billion, which at the midpoint represents growth of 18%. Revenue in the range of 7.71 billion to 7.87 billion, which at the midpoint represents growth of 15%. Service revenue in the range of 5.09 billion to 5.15 billion, which at the midpoint represents growth of 12%. We continue to expect services revenue growth to pick up in the second half of the year, driven by accelerating product revenue growth, a key leading indicator. Non-GAAP gross margin of 79 to 81%. Non-GAAP operating margin of 33 to 36%. Non-GAAP earnings per share of $3.10 to $3.16, which assumes a share count of between 743 and 749 million. infrastructure investments of 350 to 550 million, non-GAAP tax rate of 18%, and cash taxes of 400 million to 450 million. I will now hand the call back over to Anthony to begin the Q&A session.

Thank you, Christiana. As a reminder, during the Q&A session, we ask that you please limit yourself to one question and one follow-up question to allow others to participate. Operator, please open the line for questions.

Thank you. If you would like to ask a question, please click on the raise hand button at the bottom of your screen. When it is your turn, you will hear your name called and receive a message on your screen notifying you that you may unmute yourself. We will allow one moment for the queue to form. Our first question comes from Shal Ayal at TD Cohen. Your line is open. Please unmute and ask your question.

Thank you. Good afternoon, guys. Congrats on quarter and the guidance. Christiana, what drove the strength this quarter, but probably more so, what provides you with the confidence in this strong guidance? It would appear that even second quarter could be prudent, to put it very mildly. Just curious, ask your thoughts about it.

Sean, it's a great question. Thank you. A few. First, definitely AI is a tailwind to drive the growth. And for us, we can also invest in AI for like 15 years with over 500 patents and a lot of internal usage and also like building the product. So that's where kind of we prepare for this growth. Also from the operation side, which is whether Direct manufacturer, operation, inventory, all these things. So that's where we see it's an opportunity. And also AI, I keep saying AI accelerate the convergence of our network and network security. Like I mentioned like two months ago in the FUNA Accelerate, which is really a lot of company need to secure their internal network their server, data center, all these things. So that's what we see is that this growth probably will be more long-term. And at the same time, we kind of differentiate ourselves a lot with other competitors. I actually put a slice on the investor presentation, slice 10, go back almost 30 years with all these different point solution compared to all this integrated solution. So Fortinet probably the only company in every major, like a new demand for network security, we kind of in-house develop a solution, including the right now the SASE. And the same time, we kind of also integrate well with all the previous function, and we also keeping improving on all this with our ASIC acceleration, with our own infrastructure. uh to better security lower cost i think all these drive the company keeping gaining market share in the last like 20 plus years so that's i feel this time is that we definitely want to leverage this opportunity and uh whether ai also kind of supply chain and we just feel we we can market share very quickly right now thank you

Our next question comes from Saket Kalia at Barclays. Your line is open, please unmute and ask your question.

Okay, great. Hey guys, thanks for taking my questions here and great start to the year. Ken, maybe for you, the security environment feels different after Mythos. Maybe the question is, because I know you spend a lot of time with customers, what are customers saying to you about how they're reacting? And what parts of Fortinet's portfolio do you think could benefit most?

Uh, I think I, I keep in trying to customer, you need to use your AI to secure AI, uh, all this right there. It's a kind of an interesting, definitely AI, um, exposed a lot of, uh, vulnerability and also you have to react very quickly and leverage AI to react, react, react all this operation. So that's where, like, for long-term, definitely secure operation, which we have over 20 products using AI, building AI. That's really helping the customer. But on the other side, we also feel the AI also, I mean, to meet all this AI demand, also a lot of infrastructure build up. So that's why we see, like, especially we're the only leader in the OT security area. We see the OT grow, like, 70%. It's very, very strong growth because OT really, Like a secure pretty much that the bottom few layer of the AI five layer cake right so whether the energy level infrastructure level only leverage ot security that's where we're probably the only only only leader in that space give us a lot of a strong growth there. On the other side, we also see kind of a customer see the value, starting to realize the value, whether this integrate more function into the single OS and also the ASIC advantage and also the supply chain operation model we have. It's all kind of a long-term investment, but starting paying off now.

Makes sense. Christian, maybe for you, for my follow-up, I'd love to get a little bit of a historical perspective. I think back in the early 2020s, post-COVID, we had the benefit of some early ordering, which then created a bit of an air pocket in later quarters. Maybe the question is, how do you think about how much early ordering maybe helped this quarter? And what gives you the confidence that this also doesn't create an air pocket at some point in the future?

So I think the situation in 2026 is a little bit different from COVID because the threat landscape is accelerating significantly. During COVID, I think there were some new requirements by the companies where they needed to secure remote access and digitize their business a little bit more. Now it's about really a lot of significantly more threats. So I think that the demand for our product is going to continue as the AI data centers are going to be built out as customers are deploying AI internally. So we see significant tailwinds for our business and for our product specifically.

Yes. Also, we put a presentation on the slide 25. You can see during the COVID, we're the one getting a lot of market share compared to all the other peers. So we feel this is an opportunity because we feel our operation model, our long-term investment, uh has much more advantage than any other competitors so we feel this is the same same like a last time i i don't feel anybody can predict how long this this supply chain scenes will last but we feel we have a strong direct cooperation model which much better than pretty much all the other competitors and the same time a lot of long-term investments that didn't show the advantage right now so that you can see the slice 25 showing during the the COVID five, six years ago, we're the one gaining a lot of market share. Even there's some kind of a, we call it a digestion in the 24, early 25, but we still keeping gaining share. And that's where we feel this is the opportunity. We feel it works better for us than other competitors.

Super helpful. Thanks, guys.

Our next question comes from Rob Owens with Piper Sandler. Please go ahead with your question.

Thank you guys for taking my question. And I appreciate the throughput and segmentation arguments relative to AI, but I want to dovetail a bit more on Saket's question just around When you mentioned the 20 or so products that use AI within your portfolio, are there a couple of things that customers are honing in on that are driving that sense of urgency for them right now?

X.Y. Actually Christiana gave a few case about supporting some AI data Center build out all the sense, I think, initially, they probably just like the five layer cake right, you need to. X.Y. Have all these the lower layer build up first from all these energy infrastructure and then secure the data Center. So we see after they build out some kind of AI infrastructure, then the security need to come in, especially when the application is starting to deploy. So we see one company when studying kind of leverage AI, we feel it's a lot of opportunity for secure company to helping the company or customer to really using AI to secure it, I would say, which we feel is kind of ahead of most of our competitors with all this long-term investment, with all the patents, with all this, whether on this side, in the GMA, in the customer supporting, and also in the product. We feel it's a... Like I said, I'm kind of an engineer background. I love all the new technology. That's where in the last 30 years, like I said, in the last 10. So we're the only one internally develop all this new technology, meet all the challenge, integrate together, and compare to most of competitor have to go through acquisition to meet all this new demand. That's actually give us the confidence to continue grow faster, gaining market share.

And then maybe to add to this, I think that what we hear from customers that are not building out their own AI infrastructure that are more on the AI use side, they are most afraid of traffic flows and shadow AI. And so I think that's where a lot of our products can help them as well. And also with the 4D OS. um improvements and upgrades there's there's a lot of interest in in what can can our existing products do and which additional products like for the ai gate can they deploy to have more visibility more transparency and monitoring of the traffic flows i appreciate the color thank you

Our next question comes from Brad Zelnick at Deutsche Bank. Your line is open. Please go ahead with your question.

Oh, excellent. Thank you so much for taking the question. I actually wanted to follow up on what Rob had asked and Ken's comments about the AI data center opportunity. And Christiane, what you shared that was very helpful about the win in the Middle East in securing AI infrastructure. What are you seeing specifically in this market for securing AI data centers? Like, who are you competing with? Who are you partnering with? How long are the cycles? And maybe how much of the pipeline for these opportunities is contributing to the strong guidance that you've given us for the year?

Actually, if you look at the the Fortinet technology, we are the only cybersecurity company to build their own ASIC chip from day one. So that gives us much better performance and lower cost, both on the computing power cost and also energy cost, and also feed all this data center internal segmentation development quite well. None are competitive competing with us, whether on the performance or cost, including the two products we just announced today. And so on average, all the top like 10 function, we yielded like a three to five X better performance for the same cost, same function, and much lower energy consumption. That's fitting quite well for a lot of bigger infrastructure data center build out, and also for a lot of internal segmentation. AI, especially the agent traffic, definitely generate a lot of additional traffic, especially we call the east-wide traffic and all the server or even like a different department, you do need additional security to protect that for the internal segmentation. That's where we see a lot of strong demand in not just data center but also internal segmentation to protect all this or get a better manageability or better visibility for all this agent traffic.

And then Brett, maybe related to your question on what do we see with regards to pipeline building? I think my comments around the customer wins were also about reference architectures and scalability. And most of these providers that are starting to build out data centers, they're creating their kind of reference architecture to um, build out more as the demand increases for their, um, services. And so I think we, we are, we are confident that this creates an, a tailwind for us.

Yeah. Yeah. And also, especially like a lot of, uh, technology, like ASIC, like a system, the hardware is more long-term investment. Compared to some software, some hardware, which most other secure company kind of more focused on that one, the software side, which I feel definitely now is the time to see all this long-term investment benefit, all the hardware ASIC benefit. As customers, I think I appreciate more in the hardware ASIC now.

Thanks, Kenny. It reminds me very much of the heritage of Fortinet and all the early success that you had in the service provider market segment and why it's so important today in AI data centers. Maybe if I could just follow up with one quick follow-up for you, Christiane, just to get your latest thoughts on memory pricing and any further price increases that you might be contemplating throughout the year and maybe specifically what's actually baked into the guidance along those lines. Thanks again. Great job.

So from a guidance perspective, we have baked in a low single-digit amount into specifically into product. And from what are our plans with regards to pricing, I mean, Kenneth said it multiple times that we're trying to maintain gross margins. So as our component costs increase, we are contemplating pricing actions. But we will also bring it down again when we don't have the pressures anymore.

Very helpful. Yeah, the policy we have is not like some other company in using this opportunity to increase margin. We are now, we just want to maintain the healthy margin And when our costs increase, we also do the monthly adjustment. But when the cost coming down, we also adjust lower, just maintain the same margin. That's the policy. Just like five years ago in the last supply chain, and also it's the same policy during this time, the supply chain memory shortage. But for us also, because we have a much bigger quantity than the other competitor, like we have almost 60% market share on the unit shipment of the network security system. which we feel, and also with direct manufacturer operation model, we feel we prepare better, we kind of operate better, we also negotiate better compared to other competitors. So that's why we feel it's a chance to gain market share again like we did five years ago.

Awesome. Thank you.

Our next question comes from Tal Liani with Bank of America. Your line is open. Please unmute and ask your question.

Hello. You got me back. You can't get rid of me.

It's fun to cover the space.

Um, I have, um, Everyone asks about AI. I'm going to ask about the other thing. The most surprising part of your result is actually the billing growth of legacy, 32% year-over-year growth in secure networking. And Check Point, when they reported, they said that their firewall went down or the growth decelerated and the market is weaker. So the question I have for you is, How is your, you know, what are the firewall trends? What drives it? What drives this 32% growth in secure networking building and how sustainable is it? Thanks.

Yeah, actually, I prepared a slice 10 in the presentation just for you. Because it goes back to 70 years. Actually, the most growth on security networking comes from FortiGate. You can see for the network security, every year you need to meet a new function demand requirement. So basically, for us, we are probably the only company in-house keeping meet all this new function development, whether from early day UTM legend firewall, to sandbox, to like SD-WAN, SASE, to today's AI quantum computing, right? So once you kind of come up all the innovation, you also need to integrate. So now the 40 OS 8.0 integrate about 30 function there. But without a certain function, you also need to keep improvement. That's where the ACIC come in to improving the performance and additional computing, secure computing. And at the same time, we also invest in infrastructure to make it more secure and also kind of lower the cost. So that's where I use in a 3i to describe what happened in the network security space in the last 30 years. I feel some of our competitor, they kind of cannot come up that new function quick enough or cannot integrate. They have to go through acquisition to meet all this demand. And they become like a multi-point solution. That's the blue area you can see. There's a lot of companies, including some of our competitors, they have to use multiple solutions to meet one FortiGate solution, FortiOS solution we have, whether the SD-WAN or SASE, some other function there, that there are also still a lot of point solution provider, including SASE, they just cannot offer customer the total security infrastructure, infrastructure security there. So thus we see that the benefit of this single OS with all these integration with all these kind of the new function and improvement, ASIC, all these things, get more like advantage over other player. And this supply chain is the opportunity, is to show that the advantage we have, and that's also the operation model we have. Yeah, that's a come of this slice, kind of using 3i to describe the advantage we have.

And Ken, is there, so how, like 32% growth is very respectable. How sustainable is it? Is there a comparison thing that boost up the, I don't have the slide in front of me, so I don't have the numbers in front of me, but is there an easy comp situation this year that boosts up this growth to 32%? Or is it, there's something more fundamental that could be sustained over time?

So you can look at slides 24 and 25 compared to five years ago. It's pretty comparable. So that time we also grow like a 40 some percent, yeah.

So we can really see interest demand in network security. And the drivers are not only AI. It is consolidation. It is simplicity. It is the security posture across the products that are driving significant interest into that network security portfolio.

Great. Thank you.

Our next question comes from Fatima Bulani with Citi. Please go ahead with your question.

Good afternoon. Thank you for taking my questions. Ken, I wanted to ask you my first question and then I'll follow up with Christiana. We are at a very, very high level in one of the most consequential categories and infrastructure investment cycle across the board. You are clearly seeing the benefits of that, you know, based on the seven figure precedent transactions you talked about related to AI infrastructure build out and some of the responses to earlier questions. I wanted to ask you specifically what the impact is is to your secure networking portfolio and specifically the higher end FortiGate appliances. Should we expect the product mix of the business to trend towards some of the very, very high end SKUs as you support the infrastructure build out and the secure infrastructure build out opportunities ahead? And then my follow up for Christiana is, you related to the product growth upswing and presumably the higher end mix of product and appliance uptake from your FortiGate portfolio. Why aren't we seeing maybe a more visible, bigger catch up on the services side? And I guess to ask it more simply, when I look at your services revenue guidance, you've only really tightened the range of bringing the low end of the services revenue up. So I'm just wondering if to the extent you are seeing a better product mix shift, why we wouldn't see an even better attach on the services revenue. Thank you so much.

It's a great question. Yeah, definitely, Fortinet has more advantage in the high end with its own ASIC solution. It's a much better performance, much lower cost, both on the on the product and also on the energy cost there. So that's we see pretty strong growth in the high end. But at the same time, you can look on the unified SAS, you also grow like 31%, and also Q4 LASI grow 40%. That's more dry by the SD-WAN low end. That's also the reason we kind of launched a new bundled service to accelerate both the current customer and also the new customer adopt SD-WAN and SASE. I also put a slide down there, try to give the number there. It's a one of slides also you can see the bundle is very, very attractive for the customer to adopt the new SASE and SD-WAN service. There is a slide 14 actually. So that's at least all these different incentives there for both current customer and also the new customer there. So that's why I feel the growth, like both high and also low end, but low end more driven by the SD-1 San Jose side, high end definitely more data center. But data center also I feel once more AI data center build out, it's still in the very early stage. And also once the application starting, leverage AI, that will be very long-term growth going forward. It's just starting kind of a very early run pop stage. But definitely on the other side, we see also the growth was strong in the SD-WAN SASE area. And we believe this bundled service will also drive additional service revenue after customer have the hardware box.

Fatima, to address your question, Concern, so to speak, I'm super enthusiastic about our services billings. Yeah, 27% growth. Deferred revenue grew 15%. So I think it all trends in the right direction. The conversion from the balance sheet into revenue just takes longer. So you don't see it immediately. But the trends are all positive. Our growth was really good. So I'm... very happy with the quarter results and also with the attached rates of services with hardware.

Thank you. Our next question comes from Gabriella Borges at Goldman Sachs. Please go ahead with your question.

Hi, good afternoon. Thank you. Ken, if I'm hearing you right, it sounds like there has been a little bit of a step function change in the pipeline related to AI data center. And my question for you, if I'm hearing that right, is why do you think that's happening now? I'm curious if there is a shift maybe happening with sovereign AI projects or if it has something to do with the mix from training to inference. Curious to get your thoughts.

Actually, they both connect together. So both the the AI data center combined with the sovereign, SASE sovereign AI kind of drive some of the growth together. So it's, that's where, because even for this, it's interesting, it's the same 40 gate, 40 OS to do both the AI security and also the SASE, like to protect all these, like, you know, zero trust environment. I think that, yeah, they kind of, I feel is a, both connect, driving the growth together.

That's really interesting. And the follow-up I have for you is, WaterNet has been transparent on some of the vulnerabilities that you found in your own technology when you find them. How is your internal process for hardening your infrastructure changing as you get access to some of these leading edge LLM models that can perhaps help you upgrade the quality of your own infrastructure?

Yeah, we work more closely with those leading AI company, whether handle the vulnerability or kind of helping on the ultimate, a lot of operation for our customer. And at the same time, we also build our own infrastructure, which has better security, better performance than some other third-party infrastructure. We do better than most competitors. And at the same time, we kind of keeping develop new technology like we say using ai to secure ai so thank you for the thoughts congratulations on the quarter thank you our next question comes from brian essex with jp morgan please go ahead with your question

Great. Thank you for taking the question, and congrats on the results for the quarter. Maybe just a quick one for me, and I think I wanted to follow up on Fatima's question, because I wanted to make sure that I understood some of the dynamics here with regard to the unified SASE billings. Could you maybe unpack that a little bit and help me understand? With regard to the growth, how much is SD-WAN? How much is SASE? And particularly, if you can help us reconcile the deceleration and SASE-IRR, just so we can put the two together to understand what the primary drivers of that in the segments of the business at play are. Thank you.

Yeah, the slice four, we have the three pillar there. Yeah, definitely universal, including SD1. The SSE is more like a 40 SSE, some other things there. Actually, SASE also we see very, very strong growth on ARR, on all the things there. And also we believe the new bundle will also accelerate the SD-WAN, which on the last 14, both SD-WAN and the SASE service going forward. So it's, yeah, the unified SASE grow like a 31%, it's a pretty big growth. Yeah, it's about 25% of building right now to come from the unified SASE. It's a pretty big number. We're the top three player in this space and also probably one of the fast growing right now.

That's helpful. And how much was contribution from sovereign SASE? You're certainly getting a lot of focus right now on both sovereign data centers and sovereign infrastructure. We'd love to understand the contribution there.

Sovereign SASE, I feel, probably almost the same size as the cloud-based SASE, probably even bigger. But also sometimes the sovereign SASE, because we're using the same OS, same 40 gates, sometimes they just buy us a firewall, gradually turn on the SASE function and deploy internally in their data center or infrastructure. And also we see the service providers that didn't run public sovereign SASE work quickly, especially in Europe. Right. There are a few big service, telecom service providers starting kind of launch all this service with our product. So that's also helping drive a lot of product revenue.

Got it. Very helpful color. Thank you, Ken. Thank you.

Our next question comes from Gray Powell with BTIG. Your line is open. Please go ahead.

Okay, great. Thanks. I just want to make sure you can hear me okay? Yep, I'll go ahead. This is perfect timing. I actually wanted to follow up on Brian's question. And it kind of relates to what we've been hearing in our field work. Specifically, are you starting to see more of your branch office firewall customers turn on SD-WAN components and then convert their firewall subscriptions to secure service edge? And if so, I guess, how should we think about the ballpark uplift to a customer's annual spending? How should we directionally think about that opportunity? Just because it does seem like you have an installed advantage in the market that maybe we weren't thinking about six or 12 months ago.

yeah it's it's definitely uh work at uh survey work at uh feedback and that's also the reason uh on the slice 14 we launched a new bundle service to help you accelerate the sd1 sassy you can see we combine like a four five different separate servers into one bundle service including some sassy license uh based on the model of our product from like a 40k 60 up to like a like a middle range product, we all come with some kind of a SASE lessons together with all the SD-WAN, whether the underlay surveys or the application monitored. Yeah, so it's a very good observation. Definitely customer study more turn into the firewall into SD-WAN and also into the SASE zero trust environment now. So it's a kind of helping accelerate additional Also, you can see we also have the slice that we track in the big enterprise. It's a slice 11. You can see the adoption of whether the SASE SD1 is the big enterprise we're tracking. I think last quarter, the SASE about 16%, about quarter quarter is now is 18%. So it's a very strong growth. So yeah, definitely that's the trend.

And Gray, let me add to that. As we upgrade our customer base, these features become more interesting. And so it allows us also to sell the next higher end model, typically for the edge, which is super beneficial for us as well.

Okay, that's really helpful data points. I know we're tight on time, so I'll leave it there. Thank you very much. Thank you.

Our next question comes from Joe Gallo with Jefferies. Please go ahead with your question.

Hey, guys. Thanks for the question. I just want to unpack the current service billing strength in 1Q. It grew 13%. It was a nice acceleration. What was the driver there? Was that subscription? Was that more support? Was it just moving further away from prior year headwinds? And can we expect that line to further accelerate this year?

So I would say it's the strength in the quarter. We had good linearity that helped us a little bit in the current quarter already. And then with a strong overachievement, it helps for the rest of the year that we believe our growth, that we are now super confident our growth rates are picking up. As I said earlier, it takes time, right? So this is where we've adjusted the low end of the range to bring up the midpoint, but it's not that you can get super fast acceleration of the balance sheet. So that we are confident with not only this year, but also the benefits that the service billings give us for next year.

Okay, thank you. And then just as a quick follow-up, I appreciate the historical context you provided earlier on COVID versus now and the need for more cyber. But just more explicitly, did you see a change in buying behavior in 1Q related to people pulling forward because of higher memory costs? And I'm just curious, if not, what are the metrics that you're tracking that give you confidence internally that you haven't really seen a change in buying behavior yet? Thank you.

I think during the COVID, we do see some pull forward, especially like retail, when they have like a deployment, they schedule like for 12 months, they try to order ahead of time, make sure all the products are available for them. But this time, we don't see much pull forward, but we do see the demand is pretty strong. And also, we kind of control whether the channel even traces the market. We don't see an increase there also. So that's where we just try to manage better. And at the same time, we just tell customer, we just want to maintain the margin. We don't want to raise the margin. And like some other supplier, once our cost higher, we'll raise the price. But also, once it comes down, we also lower the price in real time. So that's where I think we build some good trust with some of the partner, the customer, and also the direct model also helping there. So it's difficult to judge how long this will be last, could be longer, could be shorter. But for us, we just operate based on the own kind of a healthy margin and also a more quick response and the direct operation manufacturer model to get better results. supporting better to the customer.

That's really helpful. Thank you. And really nice quarter. Congrats. Thank you.

Our last question comes from Junaid Sidiqui with Truist. Please go ahead with your question.

Thank you and good afternoon. Ken, you mentioned in the past how the edge is eating the cloud as customers move latency sensitive and cost intensive workloads to the edge. My question is, how are you adapting your security architecture to support this shift to capture this demand redistribution? And does this shift meaningfully change the value proposition or monetization opportunities at the edge versus traditional data center deployments?

Thank you. Yeah, the cloud is more because it kind of built ASIC for like 20, 30 years because we want to increase the computing power and also real-time processing on the appliance on the edge. That's got a lot of criticized before, which why this kind of big long-term investment compared to whether the cloud. But definitely the AI and also kind of the new trend, you see the edge, the hardware studying has shown better value now. So that's a few. We will continue keeping the same strategy we have, keeping investing in the ASIC, keeping investing in the hardware appliance, and also kind of because a lot of new, like, what do you call it, physical AI or some other, they do need to use edge computing to do the real-time computing decision there instead of try to go to the cloud to do some kind of cloud for the management side. So that's we see the new trend, especially like OT, you see the strong growth in OT over 70%. A lot of them have to deploy in the field and manage the traffic in real time on the edge. So that's we see pretty strong growth. I have to say it's kind of hybrid approach. It's never 100% on the cloud, never 100% on the edge, but kind of both side has a value. I just feel like a few years ago, there's too much talk emphasis on the cloud. Some competitor even thinking it's a cloud only, I don't feel that's the case. That's where we keep insisting on investing in the ASIC, investing in the system hardware side. Now the customer, the partner, see the benefit of this hybrid approach.

Great. Thank you.

Thank you.

We have no further questions at this time. I will now hand it back to Anthony Lesgris for closing remarks.

Thank you. I'd like to thank everyone for joining today's call. We will be attending investor conferences hosted by J.P. Morgan and Bank of America during the second quarter. The Fireside Chat webcast will be posted on the events and presentation sections of our investor website. If you have any follow-up questions, please feel free to contact me and have a great day.