FTNT - Earnings call transcript Q2 2022

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Operator

Good day, and thank you for standing by. Welcome to the Fortinet Second Quarter Earnings Call. At this time all participants are in a listen-only mode, after the speakers’ presentation, there’ll be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference call is being recorded. I would now like to hand the conference over to your speaker today, Peter Salkowski. ahead. go Please

Peter Salkowski

results on Good Fortinet’s President Hope. on the This be our to This Peter Keith begin review call Chief will for Fortinet’s is everyone XXXX. our the Keith for quarter available quarter providing year. results Ken Thank on Jensen, by Chairman Speakers via webcast Investor the then will afternoon, operating a and Relations is Relations Vice that for today’s financial discuss to will updating of before our Ken Investor pleased Officer. full We’ll the call at guidance our Salkowski, providing call replay live website. a our then second to of today questions. the Xie, call you, are call for everyone. for Founder, Fortinet. financial quarter, open Financial welcome second and high-level our I’m perspective business. CEO; third

During ask that allow limit one participate. question please the Q&A, one follow-up to to others for we yourself and question to you

begin, statements. reflect call to which unless I’d results differ All any we of statements call, statements factors disclaim forward-looking no to today’s refer materially otherwise. information. are Form update in and the subject this our that those undertake filings, more forward-looking references particular, we on financial and and mine our to will only actual stated risk to be XX-K and in obligation as obligation all that and XX-Q Before we Form making non-GAAP, the in remind we forward-looking presentation, recent forward-looking statements, opinions risks to metrics Please of date projected. are for Also, could these specifically like cause uncertainties, everyone today’s from to our SEC most

are posted remarks, in quarterly are our will earnings which Keith’s on call press remarks on and the the in Relations website. Investor be and accompany Our that today’s reconciliations earnings GAAP non-GAAP following website Investor today’s to both posted the Ken presentation of results Relations located earnings immediately prepared GAAP for section of and release today the call. the

references all I’ll turn noted over to now call the basis, year-over-year otherwise. on unless Ken. Lastly, a are

Ken Xie

XX%, joining Thanks OT you for quarter review increased Revenue call to XX% to quarter XX% Thank quarter Peter. product the accounted growth. of everyone of XXXX and growth. for XX% at year-over-year outstanding XX% fifth today’s Total together bookings second least our grew SD-WAN consecutive which grew XX%; billings total billings and second driven XX% revenue by results. over bookings.

demonstrates cybersecurity Our better-than-expected demand our the performance strong for innovation.

announced is our we our XXXXF for and is common customers the of for forefront FortiGate and Secure take firewall complexity, Today hybrid times Gartner NPX and WAN Quadrant networks. of security and data while remote with networking converged advanced fastest Security. latest and superior world’s enabling hyperscale convergence, performance. the security in innovation securing connecting at to reduce compact to users XXXXF, Network Fortinet than the to competitive market average A most the the across better in Infrastructure, Fortinet’s centers Powered solutions, performance SPU, important continues Fortinet Magic on delivers by XXXXF Security Ratings share Compute SD-WAN. X-XX six Edge the functions. leader XG for The

performance, by and security Our huge integrated SPU delivers powered over secure SDWAN solution, SOCX, offerings. efficiencies Fortinet’s traditional

mostly security vendors edges, to engineering by for strong from particularly integrated providers Gartner in is consolidation, Fortinet trends, another growth. major survey, with and in-house The delivers Security. lines Fortinet want from of functionality increased across fewer surveyed well protection XXXX. of offering. Security percentage data our MESH consolidation a with found endpoint, In and trend, convergence, to Security recent XX% companies products product benefiting Fortinet who Network XX% XX broad, multiple to addition this and major in With only our position In CISO unparalleled two hybrid and is cloud These over long-term the platform environments. automated MESH consolidation development convergence innovation, built from Fabric center, protection and

like the hard our call to that turning employees, continued their to worldwide contributing growth. and are Before over strong suppliers Keith, partners support to I’d thank for and customers, work, Fortinet’s

Keith Jensen

Thank afternoon, and Ken, good you, everyone.

more detailed Let’s start the quarterly discussion.

of security from growth of offerings. were third, revenue market our milestone environment; second, our product first, Second geographies, across an demonstrating drivers: of growth and our in share the Core XX% use networking; XX%. elevated consolidation XX%, billion strong first and revenue convergence up for quarterly driving and XX%, was respectively. three and $X.XX passing product in solid growth and up billion Total was history. across Platform broad-based the Total cases, the revenue Extension quarter the gains industries, revenue key customer products Platform and sizes, threat results up and was support platform the $X time security

years. for over for as were growth service of in purchases has a reflect to increase million. up in the an just rate of robust between more to headwinds, including from XXXX that days revenue. in XXXX, deferred range cases, various just earlier from growth in was revenue service The XX% and billings, up $XXX deferred service pricing appear actions quickly the customer subscriptions service to new up the XX%, beginning billings service or including average $XXX related revenue more and in growth QX offset Support delaying defined Operational resulting the rates contract short-term highest which SD-WAN manufacturers for revenue billings service growth benefit continue and quarter. and service XX%, expect next of accelerating the wide while in use year. six increased minus short-term security revenue revenue or see will in continued services growth and in The than quarter, security in With revenue revenue revenue of offsetting appeared service revenue are impact growth quarters sequentially security to revenue, now to recognized We than subsequently growth million. deferred contract, a into rate Total to sequentially, X Secure headwinds, service product XX% XX%. pricing and of pricing these in Technology, QX product was accelerate to a sales benefits and number later short-term a deliveries revenue and that to revenue suspending through million, product we of OT. service the when limits $XXX Russia, revenue XXXX The six increased under points in row over year-over-year XX% total Service our activates on

may more in slide the revenue growth indicates European increased readily revenue our business. in growth other As revenue continued industries, Despite total growth remains conditions XX%, be posted and on pipeline summarized APAC X, macro XX%. EMEA’s EMEA Americas increased that our impacting strong. strength XX%, In pipeline of particular,

to multiple Moving are summary consolidate and of to of enterprises. more allows our with cost integrated platform. Large appreciative converge favor capabilities strategy products. a performance platform to large advantage The our with enterprises and functionality continue point leading increasingly security success for Fortinet’s networking customers

Ken over bookings quarter XX% on includes: of Our reflecting customers. a XX%, success X bookings XX% enterprise over the continued XX%, security of XX% customers basis; for rolling refresh XXX to impact the quarter rolling the ROI growth of our were billion of over up these total $X.X up increased cycles to pause the and and as thoughts their bookings basis; well representing global over billings. Secure enterprise of environment. over on as with financial our and convergence Billings value SD-WAN XX%, of fifth doubled. results. networking four product and deals the number OT bookings quarter year-over-year as a I’ll elevated pointed, billings of year-over-year and transactions consecutive XX%. grew were of in on growth threat offer XXXX a and to to deals here million on growth over large large reflecting billings strong response excess Shifting the $X

believe nature not product of long-term growth; product believe do new drives a our top-line we spike releases term releases the we drive rather, continual in Specifically, our near growth.

years. each new example, a series over is ASIC in of several released For products included

was Including we released chip. Platform XXXX. have chip, Our Processing NPX most the Unit, QX with recent in ASIC Core products the XXXXF today, of announced introduced high-end X the Security NPX

next we NPX. with several will quarters and high-end the release the Over products several additional midrange

since that note would we have XX new start I of over released models. the Lastly, XXXX, FortiGate

performance with of billings. illustrates up shorter While an Core our product long-term of series product some cycles, Platform much for XX% clear of signs SKU were refresh shown extended maturity of and strong billings our XX% accounted total curves. have product overlapping competitors may lists

year-over-year $X well as one largest shifting than were XX% X.X Average and XX%. government of the total accounted over mix strong month As at from was as million. growth in months, up Extension slide grabbed XX% driven their billings, Platform favor Worldwide mid-range top posted in deals availability. customers The mix for the greater verticals shown plus a by by XX for XX% on up term very mix of driven share of five one and large XX% demand contract strength up of shift enterprise billings X, X number points total supply XX% the accounted the at points. and of billings FortiGates billings the increase the billings. with were

year-over-year product XXX the year-over-year as to FX service revenue and discounting was costs; by expansion offset the XXX gross associated X freight basis mix, due benefit the income even of XX,XXX. XX.X% revenue the some XX.X% offset costs. by Product cost Operating with and component and Headcount XX lower of earlier costs product points, year-over-year points guidance the other higher points. the of of pricing basis basis points XX.X% and XXX and from data guidance points actions. partially comparison costs margins, shifted the mix the as by labor of increased FX as well and benefits midpoint higher and exceeded costs as basis from Service XXX of labor XX% range center saw travel and margin marketing midpoint costs. pricing margin The basis exceeded approximately by to back increased to sequentially to other was down increased Moving gross footprint our the margin points of statement. range approximately gross lower gross Total actions, margin XX.X% margin of revenue. offset component, increased, up and other

Looking inventory timing to and $XXX deliveries year-over-year slides XX to X of from billing and DSO was increases on days the flow cash the increased DSO by days taxes. manufacturers. X driven in cash to by the cash linearity impacted due summarized of Free and days in statement X. XX change sequentially was contract million flows and

to cash second rules $XX quarter by R&D taxes increased capitalization New million $XXX million.

third the and million taxes quarters. $XXX half Second be more are evenly fourth across of cash to approximately expected spread

total year-to-date sequentially. a of the excludes the now X.X Board of authorization is a margin, billion. real For $X.XX spending, billion. $XX cash the the bringing billion. million quarter was a estate for to $XX repurchased were times repurchase including real million of stock and XX%. down approximately which flow $X investments. adjusted remaining first cost common million for half shares up year-over-year turn $XXX of free year, half estate for We XX.X for by million, the repurchased a turns were of million, authorization $X.X repurchase total expenditures our turn cost shares XX.X our share The The Capital half increased Inventory

and Moving backlog. bookings to

X% increased it reflects XX% excluded up customer equipment million is billion. of $XXX the billings backlog accounted reminder, our in Nonetheless, no balance of is XX% account remaining to that over backlog. digits and are and XX%, total a as believe about low very total a revenue. backlog account for backlog for from a backlog, Of with of backlog. over and $X.X previously single million demand. four existing the strong together Existing Bookings networking end visibility a more total sticky. customers, than accounted and for There top-line were quarters. all $XX sequentially is of As accounts while provide up current We from XX%. expected tailwind deals for Total strong $X in percentage is to backlog of for customers quarter very single future million backlog, and FortiGates

throughout XX% suggesting contributor Just significant we teams double constraints partially have of was backlog in chain the X% a and not challenging backlog approximately prior the quarter’s backlog quarter, an fulfilled about is R&D in ending the our as supply chain of Consistent the tough with first backlog. be year. did in current excellent canceled the QX environment. of deals of and we the still job the remainder been navigating to Nonetheless, to expect QX that supply operation quarter, shipped ordering half

increasing the ways, to with supply believe commitments, continuing actions. continue including pricing to will in qualifying of outstrip redesigning that and a additional number We purchase actions, are by products, certain chain challenges suppliers, address We even demand these supply. inventory

result, we situation meet believe the expect to XXXX; while we inventory backlog a guidance. dynamic, in to continue we and As sufficient access our is to will have increase to very

actions our market with most, all share gains, the for we passed have not balance pricing we continued As but cost opportunity increases. along

such, we As our from availability. volatility ongoing inventory gross product these as to well in as mix margin expect related increases shifts

later the the reviewing in month and QX, increased noted a in observations few in the elongated offer cycles. our let’s have last supply to and larger discussed quarter, guidance, the with or deliveries. areas elsewhere. to linearity transactions due In specific of later Before heard quarter, mainly may Fortinet negotiating pushed you Also, we certain constraints

rates close norms. within the aggregate pushed out importantly, and, historical value were our deals that Lastly, of strong were

beginning Now, review the outlook as for at information Peter regarding I’d the forward-looking third like the provided call. of that our quarter summarized disclaimers slide to which subject to is the XX, on

per in the revenue the of a gross we third $X.XX, quarter bookings assumes to billings XX% million; represents sizes XXX XX%; types, of solid share to of non-GAAP $X,XXX capital XX%; Bookings $X,XXX million, earnings our expect million, midpoint count which of to million; between rate to deal million For pipeline across of to represents quarter expenditures of of the at XXX growth anticipate million XX%; million and margin support which the in and of margin geographies growth represents $XXX XX% operating non-GAAP $XXX of tax non-GAAP million which share growth we we million, $X.XX XX%; estimate the $X,XXX range $X,XXX be million of $X,XXX third the non-GAAP to and $X,XXX between range to third XX%; to a which range in growth of quarter, XX%. following:

and $XXX XX%; the begin operating million year tax expect cash for the XXXX $X,XXX in fueling $X,XXX the we are the thank mentioned execution backlog expect growth like assumes to of total to the in XXX to a U.S. of million; million capitalization exceed as could of between service growth that $X,XXX following: due in range rules between $X.XX the year and represents be million, I’ll be team our XX%; million, XX% be pipeline of million; $X.XX, hand For members growth support work, and which to to to growth XXX call $X,XXX of million, $XXX we year, all and Q&A share million taxes we to to strength, of now taxes full all higher over margin to our represents customers, industry implies I share of which paid $XXX I Along estimate the their Peter XX%; suppliers, with which R&D million we full new to XX% count XX% revenue in and market Billings earlier, non-GAAP per expect that of be rate would share of range partners, possibly back and Ken, and robust expenditures Fortinet capital the session. million represents million, to for we of gains range of $X,XXX XX%; success. $XXX cash hard XX%; full-year by the revenue the non-GAAP million will non-GAAP of midpoint the XX%; our in the margin anticipate product or growth growth, which to at of non-GAAP approach offset revenue gross to earnings $X,XXX

Peter Salkowski

you, Thank Keith.

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

Operator

with line Brian GS. Thank of you. from the comes first [Operator Instructions] Essex question Our

Brian Essex

and lower, that the pull-forward? Maybe I Great. and you. I help there maybe us Thank you results maybe the the for much year? we if commentary services Thank on to team pair with nice in Can a guide. was maybe there on full guess, quarter. guide might Congrats appreciate unpack there. and that year folks going commentary what’s and set for side you. Keith, for thank services the with on of how delays I your the afternoon comfortable certainly taking gets the revenue wondering the revenue And -- granularity of and the on questions. understand insight you comments the isn’t that activations have Good some

Keith Jensen

don’t to once. I but a -- applies I maybe of don’t it’s revenue questions service think couple -- Brian, line, pull really think Yes. forward the actually at

the change the we started your about think about I from think Russia. biggest the question revenue, to is answer really year where service I

million time, so kind about backed revenue largest that but we And we revenues you Russia, X.X% very our Earlier with be it of event, our of think Russia, to contracts in think in revenue. full that it total of applies on year change services. year, Russia. existing we did really for as the At recognizing stopped now. out well. the beginning, If not the in service we revenue Russia X.X% year the And anticipate of if a full through we services revenue for now line you there. the service suspending at conjunction of would in to that about related talked it’s are $XX That’s provide about

to expected we inventory continue constraints on current seems they’re when registrations be pretty the sold, quarter are the going of we’re see. got in actually to environment we think contracts that delay that. registered I customers, something much by what from to when with I think the in out That

little is linearity would in from shipments really we opportunity that new the the of revenue shipments a bit to get. occurred it the think that part quarter, there normally the later those QX in get because service the wasn’t I

And parts really to so, together I think the there. are those put

On revenue with ability putting and service up postpone that here that depending comment that’s I the the would period the use haven’t is the billings lose the other one and it service have as it’s the whether a think on what contracts growth we’re again, registration for deferred number to, or the itself. we the not it have point meaning to And billings well before, that just of side, and the short-term are time, number that last as that this, whether about ability year probably seeing a or really talked the cancel, I it have they they contract, geography, you. upon to or you’re XX -- days

to So, it that out revenue, pushed to comes aspect. been timing eventually, has but the

Operator

question Our Boolani with next Citibank. Fatima from comes

Fatima Boolani

Hey. Keith, for this one’s you.

to of us or Just rates stretch isn’t are that you hone digits? with that I shared, commentary the what going on of some cancellation? that said behind into some detail about to what reasons Can X% X%. respect in backlog sense escalate of want give for high you Thank and us. I single And believe the the you. gives that confidence was to mid quantified the you a you you to cancellation it maybe

Keith Jensen

Yes.

to point think would about we’ve factors I talked that of I the before. some

now I I seeing talked X%. think think quarter, about rate last that it cancellation we’re being the we X%,

But of to that that understand shipments -- to particularly it. provide I received if there’s naïve more we have think and going shipments I tick The to for number up, don’t XX% those it’s that it’s prior want customers, starts as are from that backlog number it. try backlog that Street gets existing in that and obviously, cancel. why risk also to it’s partial Also, older, unlikely

any to of really we in backlog it’s shift going important things think from sort the backlog. a I guidance isn’t that provide in lot the ship of we’re that understand reflecting to

that So, of described think prudent the stickiness we’re number. I also regard, the comfortable think in backlog I we’re as fairly with and

Operator

Borg comes Adam question Stifel. with from next Our

Adam Borg

Maybe just on macro. the

Are deeper highlighted environment conversations the and elongated You a about deals. tied and about geographies? I’d too. delayed talk smaller enterprise here look bit what and customer or verticals talked like? midsize You you to little particular bit a to these demand a any Can bit these little deals, the about maybe little or Thanks. linearity. about larger hear large love talked some to go deals

Ken Xie

It’s Ken.

design of and prevent products, expand automated we security especially attack lot also to see security and So, a new whether have network home they’re internal the from some do and the infrastructure traditional customers, work time, same ransomware to work need like to go beyond enterprise, from be to support starting at and or together. anywhere multiple segmentation to to nowadays security

pretty I also So on same change. both few we be also see the long-term call time, side, on the environment years, vendor for kind And trend of the other this Keith will security elevated product will consolidation, side. mentioned the drive. last at next the be

we’re that’s keeping we So, where for the next going see trend the few years.

last If mentioned number you ago, only in billing two two ago, compared the increase XX% quarters is is QX five look script my have to in XXXX years years of I the compared XX%. about at -- to billing over we

acceleration in see we growth. whole right So, amount the now the going be space the the on change and will pretty convergence consolidation much also do in of

Operator

Kalia with question next from Barclays. comes Our Saket

Saket Kalia

talk bigger little versus your growth. clearly delta you I the better, came into a talk just expectation about for We Can like but versus the guide think to maybe on coming a XX% this about I’d was at about for bookings. the bit bookings Keith, XX%, billings QX did guide. quarter? you. how in

in into about there’s just read of so, just can kind other? two if each to there And those anything talk with consider to that, relation you how to

Keith Jensen

think, Yes. don’t I I bookings. XX% -- obviously,

maybe bookings X good really, we feel in it. really about quarters, think line, for I XX% quarters been over now we’ve X the

had product. example the between and that the a I of bookings, at gave Demand the midrange to just the in think some trying billings available kind that is And the strong, because was it that we the of of due direction end. the had one good really very didn’t was and the product but midrange backlog product to But We was we as we’re looking availability. also low have of available. thing I very on it’s much a sense internally, business. interplay quarter of get the

quarter, this we’re shifted to we fairly dramatically. to as improved going think Now, I the end third see low probably availability

looking total disclosed we when direction information backlog, trying characterization the ship little when gauge look have in terms at is the what you’re billings a there’s and the the just historically of and that bookings it so, you at I to line. some And And versus comes gets of that what’s of to think terms distorted of the as the in available business, what bit now and of of characterization booking what’s well available. of the billings in

Ken Xie

Also compared see because quarters one year five maybe we’re about the started ago, acceleration tough a to to ago. comparison

Operator

from Tindle next Adam Raymond comes James. with Our question

Adam Tindle

currencies point expected and dollar the secondly, on timing But and local in elasticity what you. especially for fixed actions? increased with maybe Keith, zoom budgets, qualifying remarks magnitude purchase to Thank put you you’re the moving of forward. pricing in about et pricing commitments, thinking the year and wanted last see in suppliers supply actions. to prepared talked still would that and you to markets sounded actions cetera? if on just in international additional on underpins elasticity a challenges the and you strengthening expecting offset that confidence, finer And positive on confident on I point curious rest for pricing

Keith Jensen

because already. and probably Yes. one the I Great important, think take the very last probably first it’s question. I first I’ll one And forgot

is not one is it consistent. tool been it of than we incumbency, issue to So that, have bias, things percentage, tracking is that we And competitors, now a may when just -- deal, if gave price. And year. we on to lower our our but religiously could functionality specifically, a for -- track right? the want that had very because been know in which do we’ve the if the in do feature something because you, a I other a or will, to partner why, that of ones also we CRM the very Is we lose customer you we channel issue, has overcome lose a over low one that extremely like a

with so the always and loss we the conversation envelope. price percentage, which tells very me -- sometimes with channels price can a advantage, that into the will, you into how performance if you XX% translate I say significant We far know The And that that question or just XX%. elasticity, Street come consistent is or push may

consistent more in our have the increases beginning cycle. But of a has that is the known and a again, push down take We we of the phase can that. margin. that period time to over really far of become And economic just from the question how this keep longer maintain It’s mind, goal margin. really match not try cost we’re trying to

things and volatility get will quarter-to-quarter that. because the of like you mix Now

way I about win head on I’m reasons and hang say, and we think seeing really tracking on the that that we’re what I reasons we lose data long-winded to deals a So, my CRM deals.

Ken Xie

other few comments Yes. And also pricing. a about

released open, also small a of Like -- because than XX we compared the you still of or not competitors. improved actually our don’t if we Our -- for by mentioned, is more be just the by but like average on product Keith the like to have changing has better quarter. price factor do huge book loss basically tracking, performance the really do kind same price times have the policy new the product even on we every for price function, same thing released other the tends any big advantage price to we kind today, step, Also, on a on see range, a CRM competitors.

may also thing The other be to mentioned service. the

so product may new we like we one of supporting, is the we service product. the the thing going improve the shipping the based labor try the no but to one right? on is service have but the the added -- last that’s because the think no the renew customer the still price service we the of more outdated bit not changing made may forward the the price really old on X, price still increased which product, tied few even product. or cost expired release, shipping the longer I in all service increase are So, some X buying to still old for because a we renewal, little quarters, is is the the to and product the to Basically, product longer on buying

probably additional service in margin the also our the we the costs, improving helping -- also that’s compensate So, can especially labor. and the help and on

Operator

with from Our Michael Turits KeyBanc. next comes question

Michael Turits

two Keith, questions. So,

seems it in do linearity issue that about you’ve time obvious -- extension this maybe cycle. the as this feel but the of is talked as negotiation well some like you first First, ways, the and

you do do product? simply it’s that second your have those I or in mind, being think really to things, worse then, of just make now, with this So, in macro any you’re other really that And and tie primarily sure right wanted insights services you it? a as happy result to shortfall question, to year the it you

Keith Jensen

Yes.

aside well, a you So, only follow-up. and rule the and said Peter you I the broke the Mike, asked -- questions -- putting two and think one

Michael Turits

that... about Sorry

Keith Jensen

manufacturers. is challenging get the sell when and where inventory when of shift we can world” linearity That in customers we we’re not linearity, and and ship receive cetera, contract from at look Because inventory what quarter to maybe -- more timing QA, the seeing that it translates or into sense is contract DSO think a a out I the you company and around a manufacturers, unlike for close shift our it. then at it of you linearity when quarter. “normal from the can delivered it’s whether a of a we of when can see finish to kind of the the et in turn and deals our end pushing

So, a of that’s there’s play now. linear aspect different into here come

third So, that the month in quarter, contracts first service would the got have in of the of been maybe month sold quarter. the sold actually

you DSO that. So, see And revenue we free in flow. you service the that the see appearing lose and from cash it in appearing

and saw recession we was others is the maybe think to only making were did of of negotiating it, On around more of notice deal probably end of closure what if to first an concerns introduced and June through two deals there for what we I We if was larger some notice XX sure of just will, parties they or if days of were on that bit additional side a weeks the time I the approver this being saw, you the or negotiator, the you to then don’t during I to those on the just why June. side and reacceleration as customer right got conversation there, and maybe a a June make I the in a will, know in frame that either I up pause which we notice tad actually of did important common that’s the terms think shift, prepared the went remarks, first we did rates rates, in on were decision. were not but -- close a as say And quarter. this

pause the -- whatever June. for I there June last slight deals couple side everybody got reason, and there So, in just our by think on came was of for a customer back week and was done side and the weeks in that a at there

Ken Xie

bit longer a for deal time The bigger other little grow the really faster. closing reason

year-over-year. mentioned, over $X So, deal the like million over I grew XX%

the So, also -- little more also, the call close. And close. that’s products, platform take a bit to take FortiGate, evaluate a which like we not just the call -- to also long but to longer little bit multiple tend the be we involving time test deals deal also retention, bigger non-FortiGate, a see time to

supply before the of to products sea. the really by probably most majority -- we On ship compared since pandemic, chain, the

of every by where Now us to That’s the timing air. product supply shipping the is shipping the much product automatically. we’re critical pretty pretty

in Even And of so product the to we was of the drives quarter last even the quarter, lot the the we a couple shipped in months shipped but the experience booking the of -- or us, a end more are much end that towards suppliers few customer have way quarter. from weeks product pretty like a because before we to the supply did being linearity. -- the shipping goes quarter end of the

just long not and of the see We’ll improving changing, by keep by also shipping some this some product increasing will ocean. air, term, improving. be balance turn by do among we air, inventory some and product the So, everything but

Operator

Keith question next with BMO. Bachman is from Our

Keith Bachman

to about guide. Michael’s changing, want understand, viewed from isn’t which things you segue it, is year impacting think try Good talked the I different Keith, as to your I context around for question. investors. few to a a To put ‘XX disappointment revenue guide

bit. Now compressed revenues a getting that, is services little underneath

the -- weeks, August, because demand the impacting I’m b, why a going that is was raise, fact, you’re in supply you things revenue the chain just for trying there sounds of of Is demand supply if like estimates the through is billings it’s last the but the as you so, in, raise are June, said, to year, even level, are two the think end are And causing as the what and/or Xrd have forces of you guidance at revenue the it or higher the elongation it to weak that a, during side it the your understand there side? is you whether raising change sort normalized, of it modestly? are not issues will? lack about

Keith Jensen

a fourth or it’s extremely supply. conversation pipeline and go, strong. either to do don’t very, I think off the I growth good third feel may out terms the out, may don’t inflation we out, the of cover think the the in I did, you economies point -- think chain. as I chain. and you supply what -- revenue bit do you don’t in in product as did, if may go, point the of would quarter think there’s little think the of -- will, that. really supply the in amount economies shortfall, is as We a will, of you look uncertainty inflation bit necessarily cover what directions very saying revenue. beyond I little do we service service we demand revenue, the about shortfall, Yes. I fair by a the may if start quarter

that’s more success good just close a large seeing how very large other years deals is the little and our fairly So the a prior that rates about we advantage. around I competitive and some dependent the feeling deals us being in the on in size I than talked about of aspect very, And think bullish think good we getting we’re and enterprise of those. have the and

competitive aggressive a I we a about that time don’t to very, get quarter, really we think that this to we’re if in bullish, have think while is advantages. think as good fashion. very know the I fourth we

Keith Bachman

Okay.

just guide, I get lead so it to sounds where as you want they numbers particular? ahead like or the bit clarify, don’t yourself little So, you so revenues, be a to conservative are on in of want on particularly QX

Keith Jensen

that’s a fair description. I think Yes,

Operator

Eyal Our Cowen. next question Shaul from comes with

Shaul Eyal

prior from question segueing the OpEx. maybe Maybe to revenue from

your remain on Is largely it competitors? recent hiring on at track. to plans appear private So, the second easier thinking half? What’s some becoming some a given layoffs months, in current little

Ken Xie

quarters and the hiring want compared We also and space. healthy to is then ago, a margins especially maintain relatively bit few in little easier to a gaining keeping growth cybersecurity market, agreed like

on hiring, a gaining the share. side. And margin, feel especially basically, we it’s we margin good gross also -- keeping market have and and we’re us, we margin for healthy operating on margin pace So -- both the the a on still

we pretty and the growth we feel have So, margin. solid balance and among plan

Keith Jensen

Yes.

would One inventory to continue talk now spot hear our us you Ken’s things more. of a with think X that. commitments I quarters or probably offer on is out I couple looking support. to about

the XX% environment different to being with ways inflation, -- year XX% high about I to very years bullish et driving of And aggressively and cetera, are I providing fairly average good how we And the team, think market the the working to is and of full all we execution. the of target, the the obviously, it. the that together line top the And growing guidance this aspect taking in engineering XX%, and about still growth team, margins and come teams you. the feel feel the operation share, reference Company have to is Ken be in while of talk sales still other successfully teams, read the made over it an aspect through support other for as operating or it. think and about what while it to -- that we in

Operator

The next with comes Fodderwala Morgan from question Stanley. Hamza

Hamza Fodderwala

towards say, in a converged seeing platform consolidate let’s networking Maybe platform then the the weakness, bit any on Keith. a the -- is both, or platform side, more like Fortinet? a just extension if macro budgets cycles are Ken, customers FortiGate points? elongating, little to to And negotiating Is for seeing the and and environment, given general it access you’re which security impetus weighted whatnot? question pressure core Ken want you to more from Keith, for side in to

Ken Xie

convergence It’s the a very this security. network and anywhere. good we the the accelerated remote company, especially the question. Definitely, work see and from network inside also change, kind among of pandemic Also campus

Like to like end and point, growth. XX%, same growth market the OT the time, networking a strong growth have connected see only the space, we’re expanding share application that’s XX% gaining in we we network like like the to there. and with And side, but the that devices we pretty beyond all see still working secure the very not security of also lot the And and whole growth. at the network email, So keeping where also, strong from with security, cloud mentioned, OT SD-WAN together. infrastructure also with the level other web, our grew

ASIC with these like So for last prepared forward, developed the convergence this in we we product benefit us. the saying to consolidation years from R&D integrate, with technology investment together. we And the -- of see do start XX driver years long-term the keep going like and Fortinet more it’s since most all will internally for company multiple automate growth

keep and up keeping And this feel also also margin. coming growth model IPO our the benefit return. innovation makes change And have so, all the also see we in business for time to long-term from the about follow the is what at to longer. same some now the that long XX investment. see good investment and maintain And starting the now, since innovation want company is and of also, years And quickly last kind healthy the balanced healthy to term time, do to and and very we we also starting the customer is invest we’re a

Keith Jensen

your in where One, X/X think timing speculation be obviously. it’s going the enterprise. that larger, of larger large the or accurate I Hamza, business to is the that in And and is about that are our dollars Yes. comes

by champions additional question But going run on, products think customers kind to of more more into internally perhaps I little are spend a second likely little competitors. so, in time ROI. the point, deal, competitors importantly, of with a people to those or into your And you’re the adding to of that they’re and platform -- more a more your

more little than it that finish takes a line I’ll the the more here. across way. there’s so, fill complex they And because to void in get are

in As a $X number million -- XXX over deals quarter, that’s a fantastic the for did we pretty reminder, which us.

Operator

next Our with BTIG. question from Powell is Gray

Gray Powell

I understand but already, want I the dynamic you I this know Keith, services twice just make So, hit once on billings. on or sure to a

in about bless if you versus natural by business? talked nicely. numbers, in right So, you? I seem XX% out you need does pricing QX. how pretty to improving actually the if the component to was looks calculating but I recurring billings cadence directionally, so, like then, accelerated the like short-term QX, back that of much that of from And don’t that product the annual to XX% I’m of billings, revenue driven it just dynamics

Keith Jensen

channel the for I And it. of was you’re evolve was is has are with was that think for increase were would price directionally that through for by have over revenue, of in being through it’s it’s to we revenue say, they X, a service then extended I I to the our the do whether may as go a start we way. the right? XX correct, because And seeing whether when support, different partners, that by row, support. back off to you that a see that more impact buildings, -- that revenue probably a thing about effective, thing to pricing think of impact And looking do And speak, into of it. again, -- on how benefit an timing lift. same it to quickly keeping the X, think, that the mix XX But But of if item, mix installed question but X on think whether may to It’s one the I not that you that the at time you there. is way people, this how X in XX from talked back see X kind math by flavor X get, on actually of time time. see about for shift We years price we coming when period product because You preannounced right? and a it more on fairly it addressing, will think days just quarters information another that service got it’s or mix by or your you but it’s advanced and in help service lot came support so XX kind providing may increases process product an turned were Price if X on several base. of about where billings, is notice won’t the then be of way. shifting seen mind, revenue, anything not actually about is you and actions to all how the a the go because that get

time to You’re line. a longer much on of the benefit service the over see revenue going period

the will service indicator kind that future. sooner, information You and we a to going Gray, much is gave in billings earlier, revenue benefit where leading it, you very you’re looking of in at that’s see go and why good that’s growth -- of the

Gray Powell

then real a And helpful. really quick That’s follow-up. Okay. just

or on was $XX to mentioned that well, headwind. headwinds is You from a revenue apply that purely which Does revenue Russia, as service new dynamic? billings a million

Keith Jensen

of the of where where the have end would revenue from probably, we of a that beginning a in say and I dynamic, we’ll now. that was would terms That probably XX% XX% year of been billings were dynamic, XX% up to

Operator

John Our with Weidemoyer next from William question Blair. is

John Weidemoyer

to platform if extension, existing Fortinet of And security that’s cloud probably the I’m of an a I are cloud. transitioning your also the type that’s curious capabilities. fabric I’m curious they’re On profile maybe suspect there customer interested there. customer mesh.

down? are the be And -- so of Can going there all-in type characteristics customer the talk people Fortinet an an you might about all-in customer. that

Ken Xie

cloud also, this SDWAN networking growing pretty do with carrier especially much service provider, as do from with the combined see security And someone we service some cloud also growth. We pace see providers, security other come lot of similar on together. a OT, the well, all an a also and appliance offer

infrastructure, not what that’s and cloud, better other infrastructure. just saying, also product So new security, the we appliances but keep for whole secured some the

So, overall we to customers together. more consider do see want and more

of we of believe also that’s basically, and to part other term, will this in even telecom So securities security, cloud on security important a the both provider, supporting very also integrate a part. security. the where them. like especially play And in cybersecurity, cost the we also drive infrastructure long want of also lot keep part in also, other the service a service provider, space, for role do cyber very, And

we hybrid especially see kind security together consider other, security of more and all and infrastructure that’s whole a more connect, with connected the So, more parts see with more of environment lot we device of going more important. where that is still a kind important is quite forward and of

Operator

Moskowitz question Mizuho. next is from Our Gregg with

Gregg Mizuho

quarters. for ask above increased backlog, dramatically the and which of last to year levels. consistently ago each like has It’s about I’d significantly your three

by in So, it’s should And Keith, you to order shipments, great. dips same is seasonality, et at But common the rise the made backlog it to cetera. time, clear it’s see due further significant to going backlog the that grow forever. company’s which not cancellations, year-end,

helpful in your and of sense when just And perhaps flows we the so, backlog begin it to to would ebbs metric. get be see

If would you be could offer anything there, helpful. that

Keith Jensen

chain is get better supply Ken. When going to

So, one. I’ll let that you handle

Ken Xie

end about $XX little million. $XXX-some QX bit increase, better million. of to than you end increased If we less less QX, a end and QX, than also we backlog end And of It’s of then of compare QX. increased

So, is backlog. lot of improvement or of some on there parts to different also, sourcing different vendor effort we kind increased products. designed But put a

right some kind of a you the some we see chain help of So, of also alternative broad can mean, And us. quite -- product now. got kind supply broad for I leverage line more

still I why the -- reduce said, the better strong, a QX. in we And believe QX, increase get year, demand each little some of the effort, improvement better do backlog. next bit the kind improved this overall, see to maybe in that way. it manufacture, of in the a made we’ll But now. engineering -- within we’ve with investment kind we see operation do with the the will then get so see starting our little do that’s But very, bit very quarter, put So, is see like probably not we But and keeping and less be backlog I’ll expect because better. probably probably will Keith since

Keith Jensen

was it that, logical have questions there. Ken’s think place keep to are metrics I of the mind, and I provide is great. we this to add a would in the comments -- why just some

their concern in sticky gave to relatively -- question and we’re small not existing it’s fulfilled. loses get the other orders, the of also and the the dollar product are chain do context. if sort construction customers size, you, have those amounts. what these airline, and all comfortable on how these and not for industries. comparatively that to see and of up. will, giving other partially is, to same in We’re why be These industries, many that there’s And small may But have the of mind the going right? you been get is And are have you items industry, metrics those that we airplane to we some why people keep dollar compared that’s the fact some that’s you very what backlog supply And here metrics when are

Ken Xie

last the probably quarters, over the backlog even the we quarter, increase competitors. like in quarter even much and of backlog we fulfill our our if backlog. of probably Like than mentioned better XX%, previous X, every XX% Also, X Keith age

deliver. pretty few the our backlog making compared in that’s sometimes most take So, may other to short, X to months X also years to age competitors

at product. product issue. So, X the position customer continue out this to with also X us quite us shortage. use kind customer during a some of we alternative trust if some the time, chain that offer good There’s same And gives suggest pretty provide broad working a and always supply or because

any we booking deliver in every XX% I think of I over believe. quarter,

Gregg Mizuho

Yes, the bookings...

Ken Xie

to we booking, the XX% deliver of the product. Between XX%

Operator

Fargo. Our next Wells question from Andrew comes Nowinski with

Andrew Nowinski

great a cash quarter. question another flow. free had on Congrats I on

think dramatically I you you low-end to in said expect appliances So the supply QX. improve

So that QX Thanks. shortfall free impact is flow QX or on services mix to then that, And flow, are given free cash or a to shift those the cash had in unchanged on should and in you cash free assuming QX, that it quarters? linearity the there flow margin saw we and QX? remains in in your we the impact related expect rebound negative

Keith Jensen

be I I find, to to linearity found have yet. assuming that’s really is any I’m for to the not reason reason -- don’t looking Yes. going certainly one have a any but I’m think different.

up the end, a high the margins about helpful general, first from FortiGate When you level, -- more of call you firewall of look what level low -- than as you margin In no still end. bit reason have same, end see question don’t assume our families, free of look entry to are trying we it, I move internally, we commentary product you assume will. of maybe if to end is And I the we’ll your at the our to low mid-range the the we’re guide -- can I I expectations you at gross then, higher the part And information other to entry it. was little asked there. give and to others. flow, when that margin. about offer So, anything increases and think would cash increase the

that in and of be the the why mix So and both the the pricing that script product. the aspect well, can that but volatility comment also it, actions taken from of from our there as discounting margin that’s gross we’ve

all go that takes and we’re puts through are pricing actions. we in there, mix puts and So, inventory considering that see shipments, that we takes in hopefully, many that margins definition. we the -- higher higher-end give, the there’s firewall quarter be there of higher and a gross margin mix by a in when of the just will guidance we But different not the the

Operator

UBS. Our with question from last Boyd comes Roger

Roger Boyd

was curious to back Keith, to I for the just go backlog a second.

XX-XX split the FortiGate mentioned had You being about and between networking portfolio.

mix And wondering about between that Just if the those could you is the what end how product expect two Thanks. of that follow-up you to around I supply portfolios? year? the trend you’re constraints to through talk guess, the seeing

Keith Jensen

check numbers. double the might I Yes,

XX-XX and was FortiGate I it it firewalls XX% backwards. and then XX%, remainder of and between the cash XX% think have networking equipment. equipment and it. I Networking is dollars

on the we’re we’ve And switches to reasons and think on firewalls. for a points firewalls. of they more seen I certainly know everything for that successful than more, intense I term, to the read do here pressure in the be with access can probably think more seems lot

Ken Xie

agree. the FortiGate Yes, on do improving. keep we see will direction Probably I the inventory wise,

one of side that shifting kind the time But the of the backlog. the probably a whole able and issue probably ASIC, we some supply towards a it’s play a also backlog, beginning little have also the ago, on the longer issue, because for is more almost more and probably side, and little our little redesign bit own percentage, backlog towards use bit So the -- networking are is maybe to more is reduce customer. definitely, the on helping the suffering switching from this AP which see we year bit which industry more backlog

Operator

it now I Salkowski. to turn like back Peter would to

Peter Salkowski

everyone I’d Hope. thank Thank for to you, call the today. joining like

will available me Thank investor Citibank, attending website. let much. feel be to have contact third will free Fortinet rest through Stifel Please know you the a of our chats very Goldman hosted your questions, conferences be and Evercore, you during great follow-up me by quarter. KeyBanc, any have and Fireside Sachs if day. IR

Operator

in the your conclude participation you conference. today’s program. This Thank does for

now may disconnect. You

Fortinet (FTNT) 4 Aug 222022 Q2 Earnings call transcript