Fortinet, Inc. — 2024 Q1

Yes, I'll talk about the full year. I think that if you look at where we ended up in the first quarter, inside the guidance range, maybe just a little bit of weakness that we saw in Europe, just enough to move us off the midpoint, but not really a big movement in terms of where we are in our final results compared to the midpoint.

Yes. I think the high interest rate, making the money kind of more expensive, have a lot of enterprise kind of probably more favored OpEx instead of a CapEx for some of the networking security project. So that's where -- that's also the reason we're starting shifting the focus more on the kind of the SASE or kind of SecureOps, which is really more helping company saving the cost at the same time, kind of -- some kind of OpEx model.

I think our price strategy is pretty consistent in the last 20-plus years. We want to maintain a healthy gross margin and also a healthy margin for the partners. And when we see certain cost increase like doing the supply chain shortage, whether the component costs or some shipping costs increase, we kind of increase the price. But now some of the costs coming down, we also kind of returned some margin to the partner and also low on product price to match the pre-pandemic level.

I think that's a great question. I think we have a slide for that.

Try to ask that question. Yes. I think we also included in the prepared, and I'll tap the answer while somebody follows the actual slide number for you, Brian. But I think that existing customers were over 90% for both SASE and for SecOps, so they were expansion sales.

Yes, Brian. What we're trying to say there is that I think we're -- there's a common belief internally and probably externally that we're going to have a lot of success with the SASE solution by cross-selling our existing SD-WAN customers. And so the SASE billings that we saw this quarter, I believe the number was 81% of those were existing SD-WAN customers.

Yes. And also, we build SD-WAN function into the FortiOS, which, whenever you have a FortiCare, we believe like close to 60%, 70% customer all have by the FortiCare, they have automatic SD-WAN function. And so that's where we do see other SD-WAN, current SD-WAN customer, which we were not fully tracking because the part of our [ list function free ] of charge. So we do believe a lot of them are [ interest ] come into SASE for SASE function there.

Okay. where to begin? Kind of cherry picking through some data points. I think one -- first and foremost, the SMB continues to perform stronger than expectations, whether that's external to the company or from other sources, if you will, it's very resilient. And I think it's simply the breadth of the SMB space together with, as I've said in the past, the success of the channel program.

Yes. Also, Japan probably kind of about is the biggest country for us in APAC and probably 1/3 of more APAC, which the currency like the U.S. currency pretty strong again. Japan currency is that may also have some impact of some slowdown there. On the other side, we do see most SD-WAN customers definitely more interest in the SASE and also in the current environment, more and more customer set in terms SD-WAN because SD-WAN definitely have been a cost saving. So on average, it's about 50% in cost savings compared to the traditional NPI or other networking function there. So we do see more and more customer first converting to SD-WAN customer and then using the same FortiGate adding additional SASE function there.

Do you want to take the market share and the mix, and then I'll go through the algebra on Slide 19.

Yes. I think we believe we continue gaining market share even right now the quarter -- last quarter in the cyclical secure networking, which both the firewall and also some other like FortiWiFi FortiSASE space there. And I think because whether the strong performance advantage, we have all kind of more function can give a customer, like a better ROI return and better security and also more deployed case compared with the traditional firewall. So we feel we're keeping gaining market share.

But yes, for people that have access to it, Slide 19 in the deck. And for those -- a lot of you have followed the company for quite a while and you remember that we have some pressure on software revenue early in the pandemic, and we talked about things like the impact from Russia, but also that we were seeing a delay in customers registering the service contracts that attached to the hardware contracts.

Well, first of all, you're going to get me in trouble for using the term non-FortiGate. We talked about SASE and SecOps, but we're all showing our age here a little bit.

The notice probably around 10% of our product, that's probably -- all the networking side, definitely down a little bit, but there's some other like whether the FortiWeb, FortiMail some other we see for we see pretty strong growth. So it's a mix. But overall, I think pretty much similar like the FortiGate mix. But definitely, we see it.

Yes, I feel good about it. And I think we're -- the parallel that I've drawn in the conversations before is that if you went back to 2015, '16, you saw the company moving away from -- or expanding beyond the SMB space and doing $1 billion deals. But it wasn't that there was enough $1 million deals that we couldn't get whipside by them then.

Yes. The 3 parts of the business. One, like Keith mentioned, is really the digestion whatever supply chain issue. I think that's pretty much over, maybe just a few more months, it will be all normal. And the second part is really the refresh, which is the current customer over the new product, which has a better performance, all the things there. I have to say, seeing the economy slowdown or high interest rate environment, some customer may stretch the current product a little bit longer.

We have not seen any pricing pressure discount because we tend to be much better performance and more function because of ASIC technology and none of our competitor has. On the other side, [ billion ] customer considered a new function they needed for security or higher network speed environment, I think compare us to some competitor because competitors sometimes they just cannot keep in function like all the SD-WAN function in their existing firewall for us is very, very different.

Peter's point, get our COO for M&A answers. So we're all -- listen, leaning forward here wants to say. I don't think there's been any real change in our buyback philosophy. We -- the term we use is we're very opportunistic. We do put a program in place with one of the Wall Street firms each quarter and we renew it.

Thank you for the question. on M&A, we've always been very, very disciplined. We've done some very strategic tech and talent tuck-ins. And I think you'll see -- we're open-minded. We consider M&A as it makes sense, but that's definitely been our approach so far. And I think you'll see that approach continue, although we will be [indiscernible] about M&A as it makes sense.

Probably is the most busy time in the last 10, 20 years now to look at all different companies.

Yes. We see a lot of opportunities in the securities base for sure. And so yes, we build a pipeline just like sales build the pipeline, and we consider them as they come along and reach out on product as well.

If I can, we're going to say something on hire.

It's okay. I think we continue to invest balance the gross margin. So the area like a lot of on the long-term product, we continue to invest, and we do the selective hiring. And also, we also take this opportunity to mixing the management ratio or structure will be better. So it's more invest in the field sales engineering and also the R&D area and the kind of more flat on certain management level and making the whole company more efficient.

Yes. I think the -- setting aside the fact that need more resources in finance, but I was hoping Ken was just going to announce that, but that's probably not. The -- I think the business model, Brad, you've seen it through the cycles where -- if you look back at 2017, for example, and if you look at the gross margin number, when you start to see the slowdown of the pause, the cycle and the hardware, you start to see the mix shift to the really rich services. .

No, I don't think there's really a change. I think there's always a few puts and takes, if you will. I think the real driver was that last quarter, we had those 6 8-figure deals, and I believe all those closed in the last week or 2 of the quarter. So that put a lot of pressure on DSOs and only having one 8-figure deal this quarter, which I believe closed fairly early in the quarter, in mid-quarter, but not in the last week. So I think that's really all I would point to there.

Yes. I think when you say partners, I would say that all the large distributors that we're working with are offering financing programs, either in some cases, it might be through their own captive. But I think more often not, it's white labeling somebody else's product, if you will. I think that also some of the larger resellers are also offering financing.

Yes, I think we do see when we have a more enterprise customer and they also want to be long-term customers and also with many different products like the consolidation strategy they have right now, we see more EA. And at the same time, with that one, we definitely see kind of a bigger deal and also kind of a more long-term customer can be with us right now.

Yes. I think that -- and John took this over, so he gets to make that -- his habitual rap on EAs. But as Ken kind of alluded to it, it tends to make a lot of sense when -- you're -- most usually going to see it as part of your expansion inside of a larger enterprise. You're probably not going to see it frequently with the very first sale into a new logo, you could. And I think some things that are really we're starting to see resonate there are the new FortiPoints program that we make available and things with that nature, where customers have reached that point where they're very comfortable for in that for the technology and our customer support, et cetera, and they start thinking about long-term relationships. They know they're going to buy more. They may not know what. But the combination of EAs and FortiPoints, I think, has been well received by the customer group.

No. I think the two that take it really -- you see us at this point in the firewall cycle, it's really for us, we want to increase the focus on SASE. I think we feel very good about it. you see us adding some more information there. And to your point that it wasn't anything that was really new or earth shattering on the FortiGates.

I need to reverse what I covered FortiCare, FortiGuard. I think it's a great question is FortiCare, which is the traditional support offering, we talk about services being a lagging indicator. It's really what did you sell before and what rep you're recognizing now. And what's important is that FortiCare is going to be more closely linked to more recent product sales, right, because you have fewer products to attach it. So you'll probably see a little more pressure on FortiCare there.

And I think since we only launched our own FortiSASE six months ago, we see pretty strong growth but also SD-WAN has been there for a few years. So I have to say, probably most -- a majority if not the most, SASE still more comes from SD-WAN, which is in the chart there. Maybe the better way to say is really look at the pipeline, so that's on key script. He said -- it's a Unified SASE probably pipeline grow like 45%. And then the SSE pipeline growth over 150%. That's maybe a better indicator as a pretty strong for the SASE interest and also leverage our both SD-WAN and the firewall market-leading position there.

Yes. Could agree, there's a lot of interest in AI -- we started our time more fully to different products, which are helping customers more efficiently manage their operation there. And that's also what drive the additional service, additional product out there. I'd say it's still more in the early ramp-up stage, and -- but the interest is we very high end, we do see some benefit already -- but how soon will be materializing.

Yes, I think it's some more tactical responses to you. In general, we're charging for it separately. It's on the price list. It's additive to it, and you're going to really push my technical knowledge, maybe somebody here can eat me out. But I think there's an LLM the customer has to go out and buy on their own, in some cases, to enable it. And then I would offer a really shameless plug. I really tell you, you should go look at our website and see the demo that was done at Accelerate with FortiAI, it was fantastic.

I think probably if I look back to 20, 30 years when there's a big attack in the space, then they drive some kind of a new function, then there's some rush by something maybe impact some of them. Otherwise, it's pretty normal, I don't know, 7, 8 [ week ] whatever a customer to register. And then the last 2, 3 years, the supply chain really changing sometimes certain channel partners on the distributor may try to have a little bit more inventory.

Yes. And I think the charts actually goes all the way back to 2019. And you can see it by quarter there. Nothing jumps out of me in terms of seasonality by quarter that we really have that I would call out to it. So...

Thank you, Brianna. I'd like to thank everyone for joining today's call. Fortinet will be attending investor conferences hosted by JPMorgan and Bank of America during the second quarter. Fireside chat -- website link -- webcast link will be posted on the Events and Presentations section of our Fortinet's Investor Relations website. If you have any follow-up questions, please feel free to contact me. Have a great rest of your day. Thank you very much.