Fortinet, Inc.

Hello, and welcome to the Fortinet Second 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 the call over to Anthony Luspre, 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 Second Quarter 2026 financial results. Joining me on today's call are Ken Xie, Fort Innes founder, chairman, and CEO, Christiane Ohlgart, our CFO, and John Whittle, our COO. Ken will begin our call today by providing a high-level perspective on our business. Christiane will then review our financial results for the second quarter of 2026 before providing guidance for the third quarter and updating the full year. We will then open the call for questions. 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 risk 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 earnings 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 second quarter result, driven by our differentiated strategy and our innovation, strong execution, and broad-based demand. Buildings grew 33%, while total revenue increased 26%. propelled by 52% growth in product revenue, free cash flow more than tripled year-over-year to nearly $1 billion. Based on this strong momentum, we have reached our 2026 guidance. With AI quickly reshaping the security landscape, I would like to offer an other angle on the network security space and its trends. By combining our secure networking and unified SASE pillar, which both run on the same 40 OS to create what we are calling the SASE firewall. Similar to UTM NetGen firewall replaced the traditional net-based firewall 20 years ago, I believe this new SASE firewall, which address the fast-growing area of SASE, AI, and quantum, represent another massive opportunity for accelerated growth with a much larger total addressable market as shown on the slides of four to six of the investor presentation. In the second quarter, Fortinet's SASE firewall business growth 34% to over $2 billion, cementing our position as a top player in this space. What makes Fortinet's SASE firewall unique compared to other competitors' SASE and firewall solution is that we are the only vendor to develop all key component of SASE firewall in-house and integrate into a single operation system, 40 OS. Furthermore, we have developed 40 ASIC technology and invest in our own global infrastructure to accelerate the performance and lower the cost, making adoption and migration seamless for a large global customer base, as shown on the slides 10 and 11. Another key advantage of a SASE firewall is that we are the only vendor offering an easily deployable on-premise solvent SASE solution together with the cloud SASE. As we announced yesterday, the new FortiGate 1200G, the next generation SASE firewall that combines local enforcement with cloud-delivered security to meet evolving customer demand for data privacy, Performance and AI Infrastructure Management. We believe this has driven a strong product growth recently and has an addressable market that is approximately two to three times larger than the cloud-only SASE or competitor offering. And we continue to win SASE deals versus all of the top SASE competitors. We also see strong demand across our other strategic pillar, AI-driven secure ops. which had building growth of 25%, supported by over 20 AI-enabled solutions on our platform. As customers consolidate vendor and simplify operations, we recently launched 4T-ISOC, a new cloud-delivered AI SOC platform, and expanded our 4T endpoint with new capabilities. As our nation deployed and used AI tools throughout their operations, they realize they must modernize their security to handle the complex, high-speed threat of AI error. And Fortinet is uniquely positioned here as a 40 OS platform and 40 ASIC technology along enterprise to securely scale their next-generation AI environment with faster and better protection and simplified operation. Looking ahead, we believe the combination of AI-driven security demand Our integrated and accelerated SASE firewall platform solution and our strong operation model position Fortnite well for long-term balance growth with strong cash generation, recurring revenue, and a shareholder-focused long-term growth capital allocation strategy while consistently delivering gap profitability. 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 Christiane.

Thank you, Ken, and good afternoon, everyone. We delivered a strong second quarter, exceeding the high end of our guidance across billings, total revenue, operating margin, and earnings per share. Our continued momentum reflects broad-based demand and strong execution across customer segments, Industry Verticals, Geographies, and our integrated and innovative portfolio of solutions, further validating the strength of our platform strategy. Total billings grew 33% to 2.37 billion, driven by robust demand for physical infrastructure and related attached services across secure networking and unified SASE. We delivered exceptional billings growth across each of our three pillars, in the first quarter, followed by an even stronger accelerating growth rate in each of the pillars in the second quarter. Secure networking billings grew 34%. We saw persistent high porticate demand as customers expanded their network security, including operational technology environments, LAN edge, and AI data centers. OT billings increased over 55%. reflecting continued adoption of all solutions in industrial environments with high contribution to growth. We also saw outstanding strength in unified SASE where momentum built throughout the quarter resulting in 35% buildings growth. Adoption of 40 SASE within our installed base increased to 90% of large enterprises. Our success is highlighted by 40 SASE buildings growing over 100% benefiting from expansion sales across our installed base, competitive replacements, and new wins with large enterprises. This momentum was driven by customers recognizing us for our continued investments into flexible deployment strategies for SASE, including our new SASE firewall strategy. The SASE firewall natively converges firewall, SASE, and hybrid mesh capabilities to protect users Applications and data across the data center, cloud, and remote workforce. Instead of juggling high-volume east-west traffic up to a cloud pop and back, it inspects and enforces security locally while seamlessly leveraging SASE for our own traffic. Billings from AI-driven security operations grew 25%. Driven by strong upsell momentum as our installed base increasingly consolidates point solutions onto our broader platform. Turning to revenue. Total revenue grew 26% to $2.05 billion, with product revenue increasing 52% to $773 million. Accelerating product revenue benefited from strong 40K unit growth. and an increase in ASPs as customers shifted towards higher performing models. Customer investments to secure AI workloads and mitigate AI-related risks drove both new business and upgrade activity across our installed base, supporting growth across hardware, software and attached services. Service revenue grew 14% to 1.27 billion, with growth improving from the prior quarter. Service Billings growth increased 26% and Total Deferred Revenue increased 17%. This quarter's improved service revenue alongside robust product momentum and operational improvements driving revenue conversion reinforces our confidence in the long-term durability of our service business. We believe the first quarter of 2026 marked a trough for our service revenue growth rate and we anticipate a positive trajectory in our growth rates going forward. Taking a step back, our results reflect strong ongoing momentum from the durable market theme shaping customer priorities. Today, bad actors are leveraging AI to automate and scale sophisticated attacks, increasing the speed and complexity of threats facing organizations. Consequently, cybersecurity has become an urgent business priority with high visibility at the executive and board levels driving faster investment decisions. In addition, regulatory activity requires companies to act. In response, enterprises are increasingly upgrading their network security infrastructure to support the demands of AI-driven workloads and growing data volumes, more complex distributed environments, and the need for stronger network segmentation. Our strong second quarter results and outlook continue to reflect several important market dynamics, including the ongoing convergence of networking and security, increased investments to secure AI infrastructure, accelerating IT and OT convergence, and growing demand for high-performance security solutions that address evolving compliance and sovereignty requirements. This sovereignty theme is especially concentrated in EMEA, and across public sector customers globally, playing directly into our strong market position in the region and that customer segment. As we look ahead, we continue to see these market dynamics gaining momentum, supported by ongoing technology upgrades, vendor consolidation and the continued expansion of enterprise tech services across cloud, AI, OT and critical infrastructure environments. AI is becoming a dominant driver of security infrastructure modernization. As organizations move from AI experimentation and early adoption toward broader deployment, they require security platforms capable of protecting AI models and data sets while securing large volumes of east-west traffic and enforcing zero-trust segmentation across distributed AI workloads. To navigate this growing complexity, customers are progressively looking for integrated platforms that provide shared telemetry, improved visibility, and reduced operational overhead. Fortinet addresses these evolving needs with a comprehensive strategy centered on three core areas, securing AI data centers, protecting AI-driven applications, and delivering AI-native security operations. For example, a NeoCloud provider offering hosted infrastructure for generative AI workloads selected Fortinet to secure AI data centers in an eight-figure win. This builds on a seven-figure deal we secured in the first quarter, further enabling the customer's rapid expansion. They chose Fortinet for our strong prideful performance advantage and our ability to deliver scalable, high-throughput security. This enables the customer to accelerate deployment of new capacity while maintaining consistent security and operational efficiency as demand for accelerated computing continues to grow. This expansion reflects the broader theme we saw in the quarter, with many AI data center wins from customers scaling the AI infrastructure. AI is creating demand for high-performance security solutions that serve as the foundation for secure, compliant infrastructure. As organizations gain greater awareness of AI-enabled attack technologies, security teams are accelerating investments to ensure their infrastructure can deliver the performance and protection required for the next generation of threats, which also require fast technologies. To meet this critical need for high-performance security, Fortinet supports complex customer requirements through cloud-based, hybrid, on-premises, and sovereign SASE offerings, enabling organizations to deploy SASE in the environments that best meet their operational and regulatory needs. Customer demand continues to grow with our flexible deployment approach, representing a meaningful differentiator. In a competitive displacement win, a global pharmaceutical company signed a seven-figure FortiSASE deal to secure over 45,000 users, replacing its incumbent SSE-only provider. The customer chose Fortinet for our unified architecture and integrated platform approach across SD-WAN, next-generation firewall, and switching, which reduces complexity and it delivers significant cost savings versus managing multiple point solutions. A key differentiator in this SASE win was our ability to extend security processing to the edge through our on-premises appliances, providing greater control, improved performance, and deeper visibility compared to a cloud-only architecture. This deal validates our strategic rollout of 40 SASE outposts, which is specifically engineered to bring local SASE enforcement closer to users and applications. This win also highlights our platform advantage as we were the only vendor able to meet the customer's full set of technical requirements while enabling centralized management, simplified operation, and enhanced end-user experience. Beyond AI and SASE, OT security remains a critical business and board level risk priority. The threat landscape has expanded beyond traditional OT environments into critical infrastructure, with supply chains and manufacturing operations. With Fortinet's integrated platform approach, customers gain visibility across both their OT and IT networks. Consequently, we continue to see strong demand across our OT portfolio and related services, driven by the combination of increasing cyber threats, AI adoption, and geopolitical uncertainty. In a seven-figure deal, a major utility organization selected Fortinet to support a large-scale communications modernization OT initiative spanning thousands of distributed field locations. The deployment leverages our integrated FortiOS platform to enable reliable, secure connectivity for operational environments while simplifying management and reducing infrastructure complexity. This engagement demonstrates Fortinet's ability to support mission-critical infrastructure initiatives. Our strong results highlight our continued execution against the durable market themes shaping the cybersecurity industry. This is reflected in our services acceleration in the second quarter and our improved services outlook for the year, reinforcing the compounding strength and high margin predictability of our recurring revenue model. As organizations navigate AI adoption, expanding tech services, evolving regulatory requirements, and complex infrastructure environments, we believe Fortinet's integrated platform approach positions us well to capture share, deliver sustained growth, and create long-term shareholder value. Turning to margins and cash flow. Non-GAAP cost margin of 80.9% exceeded the high end of guidance. while GapGov's margin was also strong at 80.2%. Non-Gap operating margin of 38% was set as second quarter record, up 490 basis points. This performance exceeded the high end of our guidance, driven by stronger than expected revenue growth, disciplined cost management, and growing efficiencies from our AI initiatives. Moreover, our GAAP operating margin of 33.7% continues to be one of the highest in the industry. The strong operating performance translated to the bottom line. Non-GAAP earnings per share increased 41% to 90 cents, while GAAP earnings per share grew 44% to 82 cents, significantly outpacing our top-line growth, reflecting high-quality earnings supported by disciplined stock-based compensation and continued capital return over the past year. Free cash flow more than tripled year-over-year to $966 million, benefiting from improved linearity, higher billings and strong working capital discipline. Adjusted free cash flow was $996 million, representing an exceptional margin of 49%. We repurchased 1.9 million shares of common stock for $146 million during the second quarter and 12.5 million shares for $973 million year-to-date, which represents an average price for repurchases this year of around $78 per share. The remaining share repurchase authorization as of today is approximately $766 million. Now moving on to guidance. As a reminder, our third quarter and full year outlooks, which are summarized on slides 23 and 24, are subject to the disclaimers regarding forward-looking information that was provided at the beginning of the call. Consistent with our disciplined and prudent approach to guidance, our strong first half of the year supports a higher full year outlook. We are raising our guidance across all top-line metrics, including billings, revenue and service revenue, as well as operating margin and earnings per share while managing the remainder of the year on a quarter-by-quarter basis. This quarter's improved services revenue growth along with a strong outlook allows us to raise our service revenue guidance reflecting a positive trajectory in our service revenue growth rates. For the third quarter, we expect billings in the range of $2.25 billion to $2.35 billion, which at the midpoint represents growth of 27%. Revenue in the range of $2.01 billion to $2.1 billion, which at the midpoint represents growth of 19%. Non-GAAP costs margin of 79% to 81%. Non-GAAP operating margin of 35 to 37%. Non-GAAP earnings per share of 83 to 87 cents, which assumes the share count between 741 and 745 million. Infrastructure investments of 100 to 150 million. Non-GAAP tax rate of 18% and cash taxes of 100 to 130 million. For the full year, we expect fillings in the range of 9.35 billion to 9.55 billion, which at the midpoint represents growth of 25%. Revenue in the range of 8.02 billion to 8.18 billion, which at the midpoint represents growth of 19%. Service revenue in the range of $5.18 billion to $5.22 billion, which at the midpoint represents close to 40%. We continue to expect service revenue growth to pick up in the second half of the year, driven by accelerated product revenue growth, a key leading indicator. Non-GAAP gross margin of 79% to 81%. Non-GAAP operating margin of 35% to 37%. Non-GAAP earnings per share of $3.41 to $3.47, which assumes a share count of between $741 and $745 million. Infrastructure investments of $350 to $550 million, non-GAAP tax rate of 18%, and cash taxes of $400 to $450 million. I now hand the call back over to Anne Sneed to begin the Q&A session.

Thank you, Christiane. As a reminder, 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. 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 a moment for the queue to form. Your first question comes from Socket Kalia from Barclays. You may now unmute and ask your question.

Okay, great. Hey, guys, can you hear me okay?

Yeah, all good.

Thank you. Okay, excellent. Well, hey, thanks for taking my question here, and congrats on another strong quarter. Ken, maybe for you on that point. You know, this is the second quarter in a row of accelerating billings and product growth. and we've all talked about things like AI data center, OT and other trends. But I'm curious, what do you think is driving the accelerating growth here? And just as importantly, how durable could it be?

Yes, that is a very good question. We also spend a lot of time trying to study whether it's a new market trend or it's a supply of other things. We do believe the growth actually is long-term for Fortinet. Definitely you see the AI changing a lot of our security landscape. And also, with our kind of like investment, like from the ASIC chip, from our own infrastructure, from the R&D innovation, we also position much better than any of our other competitors. That's also the reason I kind of try to call a new term, which I'm not sure will be everyone will like that. It's a SASE firewall. You can see on the slide number six, I believe. It's kind of a, this new platform starting replacing the traditional legend firewall. and also replace a lot of like a single solution IC1 vendor and also competing quite well with all the cloud SaaS provider which Christiane gave the example in like some global company. The cloud only SaaS solution cannot meet a customer requirement which they need to have a data privacy, they need to process a lot of information locally instead of send to the cloud. So that drives the change in the whole landscape, and we do believe it grows quite long-term, just like 20 years ago, the UTM 9GEN firewall replaced the traditional net-based firewall.

Got it. That's very helpful. Christiane, maybe my follow-up for you, and Hopefully your team has gotten you a little cup of tea or a cup of water there, but maybe the follow-up for you is, how are you thinking about the impact of price increases on your product growth for Q3 and Q4? I think there have been a couple price increases, of course, to reflect the higher input costs, but curious how you're thinking about the impact here as we go into the second half.

Yeah, we have a Approximately high single-digit impact built into our billings assumptions for the second half. And it's very dependent on product mix and what is being sold because, I mean, yes, there were price increases, but they were not for every product and every service. So it really depends on what's going. And this is why also if you look back at my prepared remarks, we saw really good unit growth and we saw good ASP growth from moving higher in the various product mixes. So that's a good sign also that the customers are preparing for more network traffic than previously.

Yeah, also we kind of building the trust with our partner, with our customer. So we just want to maintain the same growth margin. That's where we kind of real-time adjust the price based on some component costs like memory. That's where, so if the price going down, we also real-time drop in the price. So that's also we don't see any like excess inventory or pull forward because we told the customer there's no need to really take extra inventory. And also we have a policy we tend to start in charging 90 days after shipment for some kind of service supporting. So that's where there's no incentive to keep actual inventory.

Very helpful, guys. Thanks so much.

Thank you.

Your next question will come from Shaul et al. with TD Securities. You may now unmute and ask your question.

Thank you. Good afternoon, everybody. Congrats on the ongoing strong performance. Ken, I was listening to your firewall SASE commentary. Maybe help us understand, maybe it's building a little bit on SACET's question or a future reply, but maybe how AI is propelling the convergence of firewall SASE forward?

AI definitely generates a lot of additional traffic. There's some study whether A few weeks ago, a few months ago, the machine-to-machine traffic is first time passing the human-to-machine or human-to-human traffic on the internet. So that's definitely the AI agent and a lot of other AI application drive a lot of traffic. And a lot of the traffic actually within the enterprise, within some kind of data center. And also like the new cloud deal we mentioned in the last quarter, which is an eight-figure deal last quarter after the seven-figure deal. We do see that kind of a drive a lot of enterprise customer, even service provider to have a better visibility, better control management of this kind of a traffic. That's also kind of a, I mentioned last quarter, it's also kind of accelerate the convergence of network security and especially on top of that, there's a kind of a real trust initiative. So that's what we see is kind of a, I feel it's a sudden change in the landscape of network security. That's a call, it's a sassy firewall. It's more like an early day, when I started like 25, 26 years ago, initially I call it like an antivirus firewall because that's the first firewall can do antivirus. and then later they call UTM or Nigerian Firewall. That's all fine. But I do believe the SASE, the AI, drive a lot of growth, especially within enterprise, within service provider.

Understood. And maybe slightly more of a, I don't know whether philosophical or strategic question to you or Christiane. So broad-based performance across the three growth pillars Do you think customers are viewing Fortinet as a platform provider in a similar way they're looking at, say, the two leading platform providers right now, like Palo or CrowdStrike? Is that a fair assessment?

From the customers I talk to, it's definitely a fair assessment, because there is a combination of factors that they like about us. It's the It's the integration of our solutions. It's the one OS, but then it's also the cost benefits that we return to the customer from that, making it much easier to operate. So from that perspective, I think our customers definitely see us as platform providers, and they are constantly asking us to develop more functionality to expand, yeah.

Yeah, we are also very focused on the network security. It's different than whether Palo Alto Crosstrek. One is more endpoint side. The other probably a little bit everything with endpoint, with secure operation, with a lot of acquisition. But for us, it's very focused on the network security with the internal R&D and integrate, develop all these functions for the OS. and also lots of long-term investment like 40ASIC, like our own infrastructure globally. And all this we feel is really the focus, the long-term investment starting to see the benefit compared to other competitors.

And we also do see a lot of customers buy across all three pillars. We're kind of converging the first two, so you consider it two pillars. We'll see a bunch of deals where customers are buying from the secure networking, the SASE, and the security operations pillar. So I think that's indicative of the fact that we are a platform play. We've got a really broad solution out there that customers like because, like Ken said, it's integrated well together. It was designed from the ground up to be integrated and work really well together. So I think that's a big competitive differentiator for us.

Thank you for the call.

Your next question will come from Gray Powell with U.S. Bank. You may now unmute and ask your question.

Okay, great. Thanks. Just want to make sure. Can you hear me okay?

Yep.

Yep. All right. Well, thank you. Congratulations on the strong results. Maybe just to dig into some of the disclosures. It was really great to see the acceleration in both unified SASE, ARR, and Billings this quarter. Is there any way to comment on what component within that category contributed the most acceleration? Was it on the SD-WAN or the Secure Service Edge side of the portfolio? And then I guess just my follow-up would be, are you seeing SD-WAN or like the access part of SASE become a bigger consideration point in those discussions with customers?

Yeah, we see the 40 SASE more than double year over year. And the SD-WAN also we see pretty strong growth because all other top five competitor all come from acquisition and they all have separate approach compared to whether the firewall, SD-WAN, and then SASE. So they have to have a point solution run like a two, three different box to do what we can do in a single box, single OS. On the other side, we also, there's a new market that we call the sovereign SASE, on-premise SASE. Like the example we gave, this global pharmaceutical company, we're the only one can meet their requirement, have data processed locally. They have a lot of confidential data, all this medical data. They have to process locally. and at the same time, they do have a global footprint and workforce. They also have some kind of global access. That's where the solution we provide can have a wider on-premise SASE, sovereign SASE, private SASE, compare all, I mean, plus all the cloud-based, the global for the infrastructure, give them the best solution, give them the only solution actually they see on the market. So that's actually drive a lot of growth. I see why we do see more replacing, taking market share from competitors. because I don't see any of them kind of keeping the invest or develop the technology, which after acquisition is more challenging for them. On the other side, we do see very strong growth, whether the SSE part and also the sovereign SSE, and plus also AI kind of related security.

And AR growth.

All right.

Attached and unattached solutions.

Understood. That was a great comment. Thank you. Thank you.

Your next question will come from Keith Hoffman with CMO. Please go ahead. If your line is open, please ask your question.

Yeah, can you hear me okay? Mm-hmm.

Yeah, good.

Okay, great. Christiane, first of all, I hope you feel better. And second, on the services, when you indicated that services growth would increase through the year, I was hoping you could give a little bit of color on the distinction between 40 care and 40 guard. In other words, the support function should increase because you have more firewall units in the field and it's been going on for several quarters, so that should increase. but is there any color you can give on the contributing factors to the increase in service growth? Is it both the FortiGuard and FortiCare part or is the support sort of more weighted towards the increase in growth?

It's both. It's attached services which is FortiCare and FortiGuard as well as also growth coming from SecOps which is typically more Unattached Solutions, and we see good growth across both.

Yeah, also with the SASE firewall, we're also launching some new service, like SD-WAN, and also some kind of AI-related security service could be part of the 45 solution. So that's what we see. There's an additional service we can add on top of the traditional firewall and the SASE service, which will drive the new service business.

And maybe to provide some more color, I mean, when we expand in customer deployment, and that's what I tried to point out in my prepared remarks as well, we really make sure we sell It's Hatch Services, including respective 40 Guard services.

Also, the bundle service. Yeah, the bundle service we launched like a few months ago, the Varva Strong Girls, which bundled the SD-WAN, the SASE all together. So that's a Varva good for the girls, service girls.

Okay, great.

And my follow-up is for you. On slide 17, you depict that OT grew 56%, billings grew 56%. Maybe give a little bit of characterization about what's really driving the acceleration in OT, and so how durable is that? If it was AI-based, it would seem that that has long-term durability, but just maybe flesh out a little bit on the why and the durability. Okay.

Yeah, it's really like a two-three factor. One is really we have invested in OT for a very, very long time, and we don't see our competitor really much focus in this area. And also recently there's a lot of growing in like infrastructure buildup, utility, security, and all this. That's also because the Not only long-term investment, but also technology like ASIC are feeding the OT security quite well. So thus, we feel we have a huge advantage compared to any other competitors and that we continue to feed. Actually, if you report, we're the only leader in the space, and we do believe we're keeping growing going forward.

And let me add some more color on the OT side. I mean, critical infrastructure is being targeted are quite a bit more than maybe years ago. And it hasn't had that much security in the past from a cybersecurity perspective, mostly because the critical infrastructure was not integrated into IT networks. So we see a lot of white space, so to speak, from that perspective in this field. If you look at Europe, you have A lot of regulations, whether it's NIST 2 or others, that actually require critical infrastructure providers to secure their infrastructure and have good reporting, have supply chain validations and so on for cybersecurity there. So there are a lot of drivers that make this a super durable and growth driver for us.

Yeah, we are probably the only network security vendor to talk about OT security the last few years. I have not heard a competitor talk about OT security yet.

We've invested... Yeah, we think there's net new logos there, too, as well.

Yeah, we've been growing this for years, and, you know, it's ruggedized solutions. It's also on-prem solutions that are well-suited for OT environments, and it's integrated solutions that simplify the management So, for example, our FortiGate integrated with FortiLink and access points and switches really is a solution that a lot of OT providers like a lot, and I think all of this has culminated in this growth, but also industry analysts agree that we're number one in this sector.

Yeah, perfect. Thank you.

Our next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Great. Thanks so much. A couple of questions. Just in terms of customers changing traffic patterns with AI, just wondering like if you could speak to whether some of the increases that you're seeing are due to kind of shortening refresh cycles as they need to kind of upgrade to the newest ASICs to accommodate the traffic or just kind of how you're seeing that refreshed behavior from customers. And then maybe a second question just following up on that OT question that you just got. Just in terms of sizing, like how to think about, you know, for an average data center, how we should think about kind of the OT attach rate if there's just like a percentage of a data center bill that we should think of that is kind of security related that would be helpful. Thanks.

Yeah, for the, yeah, AI definitely changes some behavior. And also, like you've been saying, AI actually accelerates the convergence of 911 security. So within enterprise, the customer definitely want to have a better visibility, how this AI agent or this AI traffic kind of behave. And the same thing for the service provider, the data center, or this near cloud provider. Thus, we see a pretty strong, we call the internal, we call it east-west traffic, which is mostly deployed internal inside data center, inside enterprise. That's actually, ASIC performance advantage is definitely much, precision for that much better than the competitors. That's actually we see. You can see both the strong product revenue growth and also the unit growth, which probably, I think even compared to refresh, usually take about five years average for the bots, but compared to five years ago, so all product revenue probably tripled, and plus we have this 56% product revenue growth. Definitely this is much bigger than just the refresh or kind of a So that's where we feel Cosmos starting replacing whether some traditional firewall and SD-WAN, some other one. And the reason I kind of combine the two pillars together because they run in the same OS. Sometimes Cosmos initially just buy for firewall, SD-WAN, and then they gradually enable SD-WAN SASE. That's actually kind of difficult to calibrate whether it's a SASE deal or it's kind of a secure networking deal. So that's, I feel, using the SASE firewall, which addresses much better compared if we secure networking growth, still kind of single digit, but we grow like 34%. On the second question...

The sizing of IT versus OT, it really depends on the industry. In some industries, the OT side could be much bigger, and in other industries, the IT side is much bigger.

Yeah, and also especially when building the AI infrastructure, they probably move starting from building the utility, all this kind of the basic OT side, and then eventually we'll kind of get a higher layer of this kind of like a server and then the model application. So that's where you see the initial strong OT growth to an early stage of AI infrastructure build out.

Great, thank you.

Thank you.

Your next question will come from Fakima Bulani, The City. You may now unmute and ask your question.

Good afternoon. Thank you so much for taking my questions. Ken, I wanted to ask you a higher-level strategic question. Fortinet has done a remarkable job navigating through the supply chain environment. Not only in recent memory, but also during COVID. And so I wanted to talk to you and ask you about the collaboration with Intel, you know, what the next phase of the network and security processes look like in collaboration with Intel. And, you know, how do you think that... brings to you a more advantageous position as you think about the future iterations of basics and how you can deliver them profitably and continue to kind of navigate the current environment where cost inflationary pressures are extremely high. And then I have a follow-up for either John or Christiane.

It's a great question. I see the reason from day one, 26 years ago, when we started Fortinet, We want to build ASIC chip. It's a network security need much more computing power compared to networking and some other kind of security. That's where if we all depend on the general purpose CPU, which we're also using together with our own ASIC, we feel is not enough, cannot like process the data quick enough or cannot add enough function to meet a customer need. So that's where from day one we started investing in the ASIC chip. It's one of our strategy. Sometimes the payback may take 10 years, but we feel after 10 years we have a huge advantage. And I believe so far we are still the only separate security company to develop own ASIC chip. And the partnership with Intel also very, very significant because Intel is probably the only manufacturing in the U.S., probably to all these kind of chief manufacturer. And we have great partnership and we do believe combine the two company technology innovation, we can really bring the network security to the new level and also even can be expanding into the new space. On the other side, yeah, we also feel Network security will continue to expand beyond the traditional enterprise. It can be eventually go to like now it's a business you can support in remote work from home. Eventually it can be in a consumer in some lot of broad area and the convergence of network security will keep driving the space grow faster than the other area. At the same time, the AI, we also see It's a huge boost for the network security need, especially with a lot of new vulnerabilities discovered in all this software. And network security definitely gives them another layer of protection, another layer of visibility control. So that we see is, I believe, is a very, very important strategy to keep investing in this kind of long term. ASIC chip-only infrastructure. That's what drives the long-term performance and lower the cost and eventually pass all these benefits to customers.

I appreciate that detail. Either for John or Christiane, Christiane, you mentioned in your prepared remarks that the source of the operating leverage and the margin about performance was tied to the revenue VD costs. Thank you so much for having me. and specifically from a go-to-market sales management, sales rigor perspective, could you talk to anything that you've been doing differently whereby your forecasting and your planning accuracy has increased because the trend of results in the recent quarters has been consistently up and to the right and certainly since you've come into the role. So I wanted to get more deeper, maybe granular perspective on Internally, I mean, the external market opportunity is very strong, but internally, how have you prepared with any metrics that you can share in very nimbly responding to the very strong market and demand for it? So, thank you.

Yeah, I think it's a team effort across all functions where we are leveraging technology, where we are leveraging also our internal AI Buildout to develop additional solutions that help us with cost-effective processes and insights. So that's what we're going to continue to do. We started it years ago in the support organization, and we've seen good success there. with our significantly slower headcount growth or not even having to backfill certain roles in support. And we are doing it across many functions to make sure that we are on top of technology trends, deploy them internally, and also mine our own data for better insights to make the right business decisions.

Yeah, and I think we also have a culture of being very disciplined and also not really getting complacent when things are going well and really buckling down. And I think Ken spreads this culture throughout the organization. And like Christiane has said, it's a team effort to reinforce that. And so I think we, you know, when things are going well, we buckle down and, you know, we don't want to get complacent on the sales and growth side, but also on the cost side. and AI helps us there and other efficiencies and economies of scale can help there as well.

Our next question will come from Gabriella Borges with Goldman Sachs. Please unmute and ask your question.

Hey, good afternoon. Ken, I wanted to follow up on your comment. how this product growth that you're seeing today is unlikely to be a function of pull forward. And I wanted to ask you and Christiane to comment a little bit on the visibility of the pipeline to 2027. I know we're still six months away from any sort of formal 2027 guidance. We sort of have to dial in our model this evening on these 50% plus product revenue growth crops and last quarter of course not the 40% so I guess give us a little bit of direction here. How should we be thinking about It's a little bit similar to socket durability question into 1H27 next year. What is the pipeline telling you? I know in the past you've talked about that 10% plus industry growth rate and taking share on top of that. So whatever you can tell us early reads into how we should be modeling next year.

It's pretty tough to predict the future, but it's a Maybe I try from two angles. One is really replacing some of the old infrastructure. The other is really the new growing area. Definitely we see the traditional UTM 9GEN firewall and the single point, I mean, IC1 solution and even like the cloud has their limitations. So we do see We kind of quickly gaining market share there from the few case we went there. That's definitely, we feel pretty confident our product solution is much better. The customer partner will benefit a lot. And on the other side, there's a new area whether related to some kind of AI security and the new infrastructure build-out, the OT. That's also, we see, we position well. It's a good kind of opportunity. We kind of closely engage with, even for SASE, like three years ago, we only focused on SASE for service provider. Now we see they're all starting to come back with all this solvent SASE. and the on-premise solution is huge. That's the reason I say it's two to three times larger than the cloud-only-based SASE. But on the other side, we do see the new trend keeping growing. We do see it keeping growing in this new space also quite well. But it's probably a little bit too early to give any number on the 2027. Maybe Christiane will have better visibility.

I think we are focused on the durability of our growth and the themes that we're seeing, whether it's AI, whether it's SASE, whether it's OT, they will continue into next year. And then the regulatory activity in some parts of the world will continue as well. I think the question is how much share can we capture from others and how much can we grow in our own customer base and we will get you those numbers in January or February.

That is fair enough.

Thank you. Our next question will come from Junaid Siddiqui with Trist. Please unmute and ask your question.

Thank you for taking my question. Ken, you've talked about, you know, the sovereign SASE opportunity, you know, ultimately could be much larger than the cloud delivered SASE around 2 to 3x, as you just mentioned. You know, much of that sovereign SASE opportunity seems tied to service providers deploying and monetizing their own SASE infrastructure. You know, what are you seeing in the field that suggests providers are prepared to invest behind that strategy? And, you know, what are some of the big factors that could potentially slow adoption relative to your expectations?

Yeah, I do believe a lot of service providers, they need to change in their security service, go beyond the traditional like some firewall VPN service. That's definitely some of the sassy services actually are quite important for their customer. that also they do have an infrastructure advantage if they can leverage their infrastructure to deliver a SASE would be more like give kind of a better data privacy, better performance, leverage their local infrastructure and same time kind of a win-win situation for them and for customers for us. But on the other side, a few years ago they were kind of a little bit slow, but now we see since our salary, But on the other side, we also see the enterprise also starting demanding this sovereign SASE. Like the case we gave out, it's a global pharmaceutical company. They do want to have a SASE deployed within their enterprise, within their data center. That's where the on-premise solution also quite important. That's also the product we announced yesterday, the 40K-1200G. We do put some like a big percentage of content emphasize how this outpost SASE deployment is important for a lot of customers because you can process all this data locally on a fully gate and at the same time can also leverage some cloud, some management to really enforce some policy globally. That's the solution we see also well-adapted for the enterprise. When they see this solution, they feel it's much better than the Cloud-only, which they have to fool a lot of their data traffic to cloud the process. And so we do see it's a kind of huge market, both for the enterprise and for the service provider. But we're also kind of working well with a lot of service providers, which we see they have acceleration of this kind of soft and sassy deployment now. Thank you so much. Thank you.

Our last question will come from Joe Gallo with Jefferies. You may now unmute and ask your question.

Hey guys, thanks for the question. Margin guidance is really, really impressive. Can you just kind of talk about visibility into that and do you envision any more price increases as it stands today?

Actually, like I said, we want to maintain the same gross margin The memory price kind of was stabilized in the last few weeks or even last few months. We were doing like a monthly adjustment based on the cost, but we want to maintain the same gross margin as the policy. So that's what we feel. But like I said, it's still a single-digit impact of the business. We do believe the bigger drive is really The new SASE firewall approach, which gave a customer a much better solution, better local control of their AI, their data, and at the same time, the new growing area, like the OT, like all this AI-related, we do see that's a much bigger drive for the growth. And we see that the SASE firewall could be the new trend to drive the growth in the next five to ten years.

And then thanks for that. Just as a quick follow-up, you know, product growth was very, very strong. Just any sense of the different components of that, you know, networking versus firewalls, you know, how late growth profiles were for each of those?

FortiGate, probably the fastest growing, still the fastest growth among that. But that also, because FortiGate run the same 40 OS for both the the traditional network firewall security function at the same time for like IC1 and for SASE. That's why sometimes it may be difficult to categorize whether it belongs to unified SASE or secure networking because sometimes it may deploy as a secure networking first but quickly ramp up to enable IC1 and SASE. That's why I would like to call it a SASE firewall because it's the same operating system. Yeah, but FortiGate sees the strongest growth.

Awesome. Thank you very much. Nice job.

Thank you.

Thank you. That concludes our allotted time for Q&A today. I will now hand it back to Anthony Lusgrave for closing remarks.

Thank you. I'd like to thank everyone for joining today's call. We will be attending investor conferences hosted by Rosenblatt, Stiefel, Deutsche Bank, Goldman Sachs, and Kepler Chevro during the third quarter. The Fireside Chat web links will be posted on the Events and Presentations section of our Investor Relations website. If you have any follow-up questions, please feel free to contact me, and have a great rest of your day.