Fortinet, Inc. Stock

Hello, and welcome to Fortinet's Third Quarter 2026 Earnings Conference Call. [Operator Instructions].

Please be advised that this call is being recorded. I would now like to hand the call over to Anthony Luscri, 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 Third quarter 2026 financial results. Joining me on today's call are Ken Xie, Fortinet's 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 third quarter of 2026 before providing guidance for the fourth quarter and updating the full year. We will then open the call for questions. During the Q&A session, we ask that you please limit yourself to 1 question and 1 follow-up question to allow others to participate.

Before we begin, I'd like to remind everyone that on today's call, we will be making forward-looking statements, and these forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10-K and Form 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation specifically disclaim any obligation to update forward-looking statements.

Also, all references to financial metrics that we make on today's call are non-GAAP, unless stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations are located in our press -- 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 turn the call over to Ken.

Thank you, Anthony, and thank you, everyone, for joining our call. We are pleased with our excellent third quarter results, driven by strong execution and broad-based demand. building growth 29%, while total revenue increased 20%, led by 37% growth in product revenue based on our continued strong momentum, we have raised our 2026 building guidance for the third time this year. With the rapid evolution of AI landscape, Fortinet is leading the next frontier of cybersecurity by secure workflow and protecting against AI discovered vulnerability in real time through our core strength in network security. We believe that network security is the most critical foundation of AI security, with the firewall serving as a centralized point of in-line enforcement across enterprise, operation technology and hybrid cloud environment.

Fortinet's leadership in this space is driven by over 20 years of innovation integration and improvement as shown on Slide 7, while continually expanding our AI capability and functions in for the U.S. and food card services. Fortinet secured 4 critical areas of infrastructure and security are shown on Slide 9. First, at the network level, our SASE firewall natively protect against vulnerabilities and stop intrusions, supporting shadow marketing and access control to data and applications. To address growing demand, the newly launched FortiGuard Inline AI Security services this week transform every FortiGate into a real-time AI enforcement point.

Second, in the data center and AI factories, we offer FortiGate to secure GPU clusters and ARM infrastructure securing the massive growth in AI traffic that require high-performance protection across data center and hybrid cloud. Third, we extend AI Security together with SASE to endpoint defined, controlling and integrated agent identity directly into access and incident response life cycle. And fourth, our SOC FortiAgent deliver a highly automated solution to solve industry acres shortage and tools sporting by enabling autonomous incident detection and response.

Our SASE firewall -- building grew 31%, and we are the fastest growing SASE firewall vendor and scale, growing and nearly double the market growth rate. are shown on Slide 5. Our leadership stems from a fundamental architecture advantage as we are the only vendor in the industry to build all the key SASE firewall and a security component into a single and unified operation system for the OS. This new SASE firewall pillar represent a large, high-growth area, driven long-term growth. Combined with our differentiated for ASIC technology and own global infrastructure this allowing Fortinet to deliver better performance and a significantly lower total cost of ownership as shown on Slide 14. We are also the only vendor offering easily deployable on-premise sovereign sense solution alongside cloud as which we believe give us an addressable market 2 to 3x larger than the cloud-only competitors.

To further capitalize on our large installed base, we recently launched FortiLink SASE services, these positions of FortiAP and FortiSwitches as a SASE, our agent, allowing customers to easily overlay FortiCare on top of their existing hardware-driven recurring service revenue. As we look ahead, Fortinet's strong momentum is a result of our vision for the AI era, our platform integration and a highly disciplined operation model. This combination positions Fortinet exceptionally well to drive strong cash generation, high recurring revenue and consistent GAAP profitability while executing our shareholder-focused capital allocation strategy.

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 another exceptional quarter, exceeding the midpoint of our guidance across our key growth and profitability metrics, including billings, revenue, operating margin and earnings per share. Based on our strong momentum, we've raised our 2026 billings and revenue guidance.

Total billings grew 29% to $2.34 billion, reflecting 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. AI, SASE and network upgrades and expansions are key growth drivers as customers prepare for new threat environments. We saw strong demand in large enterprises with a total value of deals greater than $1 million, growing 51% driven by an outsized contribution from our U.S. large enterprise business. SASE firewall billings grew 31% as sustained FortiGate demand was driven by enterprise customers turning to our network security solutions to upgrade their infrastructure for the era of AI and expand their Fortinet security footprint into operational technology and AI data center use cases.

Our OT billings grew nearly 40%, validating our leadership in protecting mission-critical infrastructure. These achievements highlight our focus on leading growth and innovation in the durable demand drivers as we capture long-term expansion opportunities across emerging high-value use cases. Billings from AI-driven security operations grew 15%, driven by strong upsell momentum as our installed base increasingly consolidates point solutions onto our broader platform.

Turning to revenue. Total revenue grew 20% to $2.08 billion with product revenue increasing 37% to $765 million, even though we saw increasing lead times for certain components. Strong product demand persisted throughout the quarter. As in the prior quarter, our product revenue benefited from customers shifting towards higher performing models lifting ASPs.

Service revenue grew 13% to $1.31 billion and faced some headwinds from winning new large enterprise customers with ramped service activations and large new expansion deals that also consolidated various existing service arrangements into enterprise agreements. We continue to believe the first quarter of 2026 marked the trough for our services revenue growth rate.

As shown on Slide 19, we have key leading indicators supporting a continued positive trajectory, specifically robust 26% service billings growth, 19% total deferred revenue growth and a 14.5% increase in short-term deferred revenue, which represents our highest growth rate in 5 quarters. In addition, we continue to roll out new AI security services, including the FortiGuard Inline AI security service announced this week.

To put our overall performance in perspective, our sustained growth is being propelled by several fundamental shifts in how enterprises approach cybersecurity. We are witnessing a transformed threat landscape where bad actors aggressively use artificial intelligence to orchestrate rapid, highly targeted attacks. This shift has elevated security from a back-office IT concern to a board-level enterprise risk management priority accelerating investments.

Our third quarter results highlight our continued momentum and how our portfolio evolves with accelerated market shifts. Specifically, we are winning because of the convergence of networking and security. The urgent push to safeguard AI use and get ahead of increased threats enabled by AI, the merging of IT and OT domains and the rising global demand for sovereign compliant architectures. Sovereignty is especially prominent throughout European enterprises and the global public sector, matching our long-standing market leadership in those markets. In this environment, as enterprises scale their AI projects and experience the increased threat environment, they face the massive challenge of safeguarding proprietary data sets. This transition requires high-capacity security architectures that can expect vast amounts of data accelerating traffic flows without degrading performance. Rather than deploying disconnected point products that add friction, IT and security teams are actively looking for integrated platforms that offer centralized visibility and accelerated automated responses.

Fortinet is strongly positioned to capture this demand by securing the physical AI data center, protecting distributed AI applications and embedding AI directly into our security operations. For example, an AI company developing frontier model selected Fortinet for 7 figure expansion to secure its rapidly growing AI workloads. This strategic win builds on the successful deployment of the customers first AI data center last year. Driven by that initial success, a deep trusted relationship and the strength of our technology, the customer has standardized on Fortinet, deploying our high-end data center firewalls across 5 additional data centers.

Our solution addresses the challenge of protecting high-value AI workloads while maintaining maximum performance, availability and scalability as the infrastructure expands. This deal exemplifies the leading throughput and resilience of our platform, positioning Fortinet as a foundational security partner for the world's most demanding next-generation AI environment. This fast-changing threat environment has turned high-performance security into a structural necessity because enterprises and governments are highly aware of AI-powered attack vectors and expanding regulatory oversight they are directing investments towards SASE firewalls that can defend complex decentralized environments.

To address these distinct operational and regulatory environments, Fortinet provides significant flexibility. By natively converging firewall, SASE and hybrid mesh capabilities into a single OS, we deliver a seamless way to protect people, customers, applications and sensitive assets across physical sites cloud environments and remote teams. This flexible deployment model is a significant competitive advantage, allowing customers to build a SASE posture that matches their specific enterprise risk and regulatory requirements.

Turning to operational technology. Safeguarding the Edge and industrial networks has become one of the most urgent issues discussed at Board levels of our customers today. Security boundaries have blurred, exposing critical supply chains, utility grids and manufacturing systems to unprecedented risk. Manufacturing has been the single most targeted sector for 5 consecutive years. Combined with escalating attacks on regional critical infrastructure, it is clear that historically underfunded OT environments are highly vulnerable.

To mitigate this, organizations are rushing to segment their networks shield on petrol legacy machinery and established secure remote access. With AI now arming attackers, these security decisions are being fast tracked directly by corporate boards and dealers. Fortinet OS platform enhanced by FortiGuard security subscriptions gives enterprises complete unified visibility over both their corporate IT and OT domains and a way to control the new attack surfaces AI creates. This architectural advantage is driving sustained demand across our specialized industrial portfolio. To illustrate, a large transportation company selected Fortinet and an 8-figure competitive win to secure its mission-critical OT infrastructure. The win was driven by the customer's need to modernize and secure its distributed environments through Fortinet's converged networking and security capabilities.

By consolidating firewall, secure routing, 5G connectivity and deep OT inspection into a single platform on 1 unified appliance. The customer is simplifying its overall network design while significantly improving operational resilience. The significant deployment highlights our leading ability to protect highly specialized demanding OT environment while delivering an optimized total cost of ownership and streamlined operational efficiency. Further proving our architectural advantage at the edge, a large U.S. retailer selected Fortinet in an 8-figure deal to standardize and secure its footprint for 1,500 store locations. The strategic win was driven by the customers' need to enhance network performance and digital resilience while wanting to offer an improved in-store customer experience.

To support its distributed operations, the retailer required a simplified network design and architectural standardization that allowed them to scale seamlessly while dramatically reducing overall costs. Fortinet's ability to deliver a comprehensive unified security fabric managed centrally by 4D manager proved to be a key differentiator, the successful competitive win of this large rollout demonstrates also the invaluable role of Fortinet's highly trained and specialized partner network whose deep technical expertise is essentially in deploying complex enterprise-grade solutions. Our exceptional quarter highlights our relentless focus on the dynamic market teams, shaping the cybersecurity industry. We believe Fortinet's integrated platform approach positions us well to capture share, deliver sustained growth and maximize long-term shareholder value.

Turning to margins and cash flow. Non-GAAP and GAAP gross margins were 79.6% and 79%, respectively, and were impacted by the continuously high contribution of product demand. Non-GAAP operating margin of 38.2% was a third quarter record, up 130 basis points. This performance exceeded the high end of our guidance, driven by stronger-than-expected revenue growth and disciplined cost management. Moreover, our GAAP operating margin of 33.9% 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 23% to $0.91, while GAAP earnings per share grew 39% to $0.86, outpacing our top line growth reflecting high-quality earnings supported by our long-term focus on total shareholder returns.

Free cash flow grew 52% to $865 million in the third quarter and 74% year-to-date to $2.84 billion, driven by higher billings and operating margin strength. Adjusted free cash flow was $912 million, representing an exceptional margin of 44%. Our excellent execution and consistent cash generation continue to support our strong financial position. Reflecting the strength of our balance sheet and our ongoing commitment to delivering long-term shareholder value our Board of Directors approved an approximately $1.2 billion increase to our authorized stock repurchase program. This brings our remaining share repurchase authorization to $2 billion, giving us flexibility to continue returning capital to our shareholders while investing in our key growth pillars.

Now moving on to guidance. As a reminder, our fourth quarter and full year outlooks, which are summarized on Slides 24 and 25 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 performance through the first 9 months support a higher full year outlook. We are raising our full year guidance for billings and revenue as well as operating margin and earnings per share.

For the fourth quarter, we expect the following: billings in the range of $2.775 billion to $2.925 billion, which at the midpoint represents growth of 20%. Revenue in the range of $2.155 billion to $2.245 billion, which at the midpoint represents growth of 15%. Non-GAAP gross margin of 78% to 80%. Non-GAAP operating margin of 34.5% to 37.5%. Non-GAAP earnings per share of $0.93 to $0.95, which assumes a share count between $741 million and $745 million. Infrastructure investments of $180 million to $210 million. A non-GAAP tax rate of 18% and cash taxes of $80 million to $130 million.

For the full year, we expect billings in the range of $9.568 billion to $9.718 billion, which at the midpoint represents growth of 28%. Revenue in the range of $8.125 billion to $8.215 billion, which at the midpoint represents growth of 20%. Service revenue in the range of $5.15 billion to $5.17 billion, which at the midpoint represents growth of 13%. Non-GAAP gross margin of 79.7% to 80.3%. Non-GAAP operating margin of 36.5% to 37.5%. Non-GAAP earnings per share of $3.54 to $3.58 which assumes a share count of between $741 million and $743 million. Infrastructure investments of $390 million to $420 million. Non-GAAP tax rate of 18% and cash taxes of $400 million to $450 million.

Our current 2026 fiscal year guidance represents an increase for billings and revenue guidance by $1.14 billion and $570 million, respectively, compared to our initial 2026 guide in February. As we look ahead to 2027, we expect our total billings and revenue growth to outpace the growth of our overall addressable market. Our 2027 service revenue is expected to grow at a higher rate compared to 2026 as we consider short-term deferred revenue growth as a good indicator for future service revenue growth. In addition, we see continued pipeline building for SASE firewall use cases and expect that the new FortiGuard services will be highly relevant for existing and new customers.

I will now hand the call back over to Anthony to begin the Q&A session.

Thank you, Christiane. As a reminder, during the Q&A session, we ask that you please limit yourself to 1 question and 1 follow-up question to allow others to participate. Operator, please open the line for questions.

[Operator Instructions]. Our first question is from Shaul Eyal from TD Cowen.

Thank you. Good afternoon. Congrats on the solid results all around. One for Ken, one for Christiane. Ken, can you talk about the criticality of network security on SASE firewalls SecOps, or in other words, the overall Fortinet platform in the age of AI specifically. Where does Fortinet address AI use cases? How does this opportunity impact your growth rate and sustainability of demand? And maybe for Christiane. Can you maybe double-click on the service revenue? You're adding new services. You provided an early view on improved growth in 2027. Talk about the talk about it in the context of the third quarter. Is this just more of a timing issue on revenue given the leading indicators or look absolutely solid?

Thank you, Shaul. It's a great question. Actually, prepared slides for that on Slide 4. You can see we're starting all is a SASE firewall because we believe SASE is a function to integrate with the traditional firewall OS and the same for the AS security. And like in my script, we believe network security is the most important part of AI security because they are the in-line and force to a lot of AI traffic and also provide better visibility. So with our kind of leadership in the global network security market, we have like over half of the global unit deployment, we believe we have a much better visibility, and that gives us a lot of data can trend, make it better kind of sat firewall model and at the same time, kind of keep innovate keep up on this technology plus investing like ASIC. That's where we have the confidence we can grow faster than the market.

So that's where we combine all these AI security or the SASE, all the traditional security. We believe the total addressable market will grow about 16% in the current market growth rate, and we continue to grow faster. And last quarter, actually, we double, almost double the market growth rate. And you've already become the biggest SASE firewall player in the space and we continue to grow faster than the market. We feel it's still a pretty big market, and we're keeping growth for a long, long time. just like we did in the last 20, 30 years, I think network security in the market position to address the AI security concern.

And let me follow up on your second question regarding services. So as I mentioned in the prepared remarks that we see strong services in billings. And so many of the indicators for service revenue improved, it's really a timing issue. And the strength in our enterprise segment, I think, is part of the reason that we see some delays in the conversion because we saw the number of really nice big deals, and they have some ramped service activation. So it's a lot of strength in the business, plus we continue to focus on services, and this is where the newer services and solutions play, of course, a critical role to continue to upsell our existing customers. Of course, all our existing FortiGuard services are evolving, but the new FortiGuard in line AI service addresses some specific risks that are new with AI and that require constant FortiGuard updates. So it's going to be highly relevant to our customers.

Our next question is from Saket Kalia from Barclays.

Ken and Christiane, maybe for both of you, this has been a very strong year for the product line. And of course, that's sort of a combination of a variety of different things, whether it's pricing or mix shift or volume. Now I realize it's early to talk about 2027. But based on what we see here in Q4, how should we sort of think about product growth next year, given what is a very tough compare here in '26?

I think probably we're still too much early to give the '27 guidance, but we do have confidence we'll grow faster than the market, right? So if you look at the SASE firewall market, current growth at 16%, and we do believe we're keeping gaining market share there. And plus, we have a pretty strong operation model. We kind of with our own ASIC chair with our kind of manufacture and manage yourself plus operation directly. We feel we have more advantage in this supply chain issue compared to most other competitors. So that's where we have confidence we're keeping gaining market share in this space with a better technology, with a better operation and execution.

Yes. Let me add to what Ken said. If you look at the demand environment. The demand environment is pretty solid. The AI attacks are happening not only the deployment of AI, it's also the threat environment that has increased quite significantly. And so that really drives the requirement for customers to upgrade their network security and of course, new use cases as well. So we are confident that we are well positioned for 2027.

Got it. Maybe for my follow-up, again, for you, Ken. One of the building blocks there that we held was pricing I was wondering if you could just talk about your latest thoughts on pricing, right? I mean you've passed through the cost increases from memory. But maybe the question is, where are we in that journey? And of course, it's tough to have a crystal ball going into next year. But how do you think about that as a lever in 2027?

I think the price so far has about benefit on the top line. On the other side, you can look at the first half of the year, we do benefit from our kind of on-hand inventory which we keep in saying in the normal year, we keep about 6 months on hand inventory. So that's we're in the early phase of the supply chain. We kind of have a buffer we can benefit from. But now starting from Q3, we see this become more normal. So that's where we have to continue to source it like others. And at the same time, even if we have a bigger quantity and more direct relation, but we do see the lead on get longer.

I'd say the price probably stabilized, but not improved yet. It's -- I think the price increase kind of slow down compared to the first one -- Q1, Q2, Q3 kind of stabilized, but kind of not improved still kind of slowly increase, but it's difficult to forecast going forward. Our policy, our strategy, obviously, we want to keep in the same gross margin. And if our costs go higher, we'll increase accordingly. If our costs get lower, we also will decrease accordingly. So that's where we want to maintain the same gross margin on the product side. So that's the company's strategy in the last 20 years, actually.

Our next question is from Gray Powell from BTIG.

Excellent. So maybe just a higher-level question. A lot of the investors that we speak with, they're just trying to compare the current spending environment that you're seeing this year, it's better the post-COVID period, like in 2021 and 2022. If I had to guess, the current AI-driven cycle is probably bigger. But the question is just how does it feel on your side relative to post-COVID a few years back or even the post-target you're spending cycle that we saw in 2014 and 2015. And do you think that this cycle is more durable than past cycles?

I personally agree with you. I do feel these times bigger than like 5, 6 years ago. And also not times more kind of work from remote from home to drive some kind of supply chain, but now it's kind of build a lot of infrastructure kind of since there. But it's -- on the other side, AI also drive up the demand because now they -- most recently, the AI security become a bigger concern especially a lot of enterprise, how they're using AI and that's also drive up the demand. So that's where we have not seen demand slow down.

So demand is still very, very strong in the last few quarters. And even in Q3, we have not seen any slowdown in the demand. But supply, we mentioned the lead time get longer and also the price kind of not grow as fast as Q1, Q2, but still kind of go up a little bit, but I would say stabilized somehow. That's probably more become normal, but we believe we have pretty strong operation and direct relationship with all the component manufacturer, which we can negotiate kind of compared to some more competitor much small quantity. So that's where we still have more advantage.

I think your point is also good that our business follows a threat. You mentioned the target breach, COVID, et cetera. this AI threat, no one has a crystal ball, as some I mentioned earlier, just seems a lot more durable and sustainable in some of those earlier kind of threat drivers. And so I think it feels like early days. And like you said, our business does follow that threat -- net threat environment is elevated, and it seems like it's durable.

Our next question is from Rob Owens from Piper Sandler.

Maybe dovetailing that last answer around the threat environment, obviously, headlines have been somewhat scary, I guess, for the month of October relative to agentic and what's going on. Would just love to understand, I realize we're only 1 month into your fourth quarter here, but just how things are trending? Have they picked up much over the last month? And are there any -- is there anything you can quantify for us relative to, I guess, how the start of fourth quarter has looked given what's going on from a vulnerability perspective?

Yes, the demand is still very, very strong, and we don't see any slowdown. And there's definitely I discover more vulnerability iota others, and we do believe all far war in the best position to stop some of this attack intrusion, and we do have the signature can block some of this availability, which is a very, very effective way to help in a lot of enterprise to defend it. And also, we see kind of also accelerate some of the convergence. So we do see more high-end unit being deployed inside the company to do internal segmentation. And also, we mentioned the sovereign AI. Also, we see pretty strong growth. And that's where yes, to be long term, the hybrid AI, both sovereign and also cloud combination will be the best solution for customers, which we feel we have a huge advantage let's say that the demand is still very, very strong and no slowdown.

Our next question is from Meta Marshall from Morgan Stanley.

A couple of questions for me. I noted kind of the strong OT billings, OT security billings. Just are you seeing a broadening customer base there? Any kind of contextualization of how you see of any major new customers there? And then a second question just in terms of -- are you running into your customers kind of having any issues of having the services or even the staff to kind of install a lot of the equipment. And is there anything you can do with your own services organization to kind of help those customers out or align them better with additional services that can help them with the installation?

Meta, let me take your questions. So on the OT side, I would say we've been strong in certain geos, and we are expanding that strength into other regions. Just because we have more and more customer references, they see the benefits of our specialized devices that we have for that. So it's a broadening of the strength and continued expansion because it's also becoming more and more relevant with a tech surface expanding.

On the installation side. So typically, Fortinet services are more on the configuration side, not necessarily on the racking and stacking, that's why we have an extensive reseller and partner channel that we qualify to do these things locally with our customers. I've not really heard that there is a shortage and the ability to roll out. I think that's more -- it's not the channel capability or capacity, it's more so how quickly can the customers do that. And that's always, I think, depending on the business you're in, in Q4, probably a little bit more challenging because many get ready for year-end business and so on. So if you're a -- your company, you don't make major changes until the next year, yes.

Yes. Also, Fortinet kind of uniquely -- we built our own kind of a service infrastructure system, we call the FortiCare which now like half of the Food Care service can use AI to handle to help improve it there. So that's also -- we starting more have the service personnel local to customer, which also will be help for the customer to like understand the additional new service we are launching now. So that's also we feel -- that's what helping drive that additional service business going forward.

And Matt, I think to your question, I just talked to retailers considering rolling out our solution to 4,000 stores around the country. And we're going to engage in MSP, like Christiane mentioned, but at that scale, we are seeing demand where they want to work directly with us. And so our service team can augment their service team in the MSP as well. And so we are seeing large-scale rollouts where the customer wants to work directly with us in addition to working with a partner.

Our next question is from Adam Borg from Stifel.

Awesome. So maybe just to take a step back, we just talked about the really strong demand environment. continued pricing tailwinds, albeit less than in the first half of the year. Any more color on just what led to the growth deceleration in 3Q relative to 2Q is incredibly strong. But any color just what led to the deceleration across a number of the metrics?

Yes. Like I said, Q3, we see demand continues strong, probably even stronger than the first half of the year. But the first half, yes, we do benefit from some kind of inventory we used to keep for 6 months. So that's where you see some strong product growth benefit from some of the inventory we have on hand. I think starting from Q3, we more treated as a normal now. So the on-hand inventory advantage kind of starting to disappear. But that's -- and also some of the components we see a little bit longer lead time. But the demand side is still keeping growing.

And just to clarify, are you saying that you are somewhat supply constrained? Or are you saying that the new inventory at higher prices -- and that had an element?

I see a little bit both. And also the lead time kind of get a little bit longer to get some of the components.

Our next question is from Joe Gallo from Jefferies.

I've got a 2-parter on services. First, I understand the delayed ramp with some of these large ELAs. But when you remove that cohort, are you seeing the same attach rates as historical I mean you obviously have a ton of product success right now, but is it fair to say that some of the networking strength in AI, data center strength, maybe hurting the attach rates? And is there any reason to expect that to change?

Of course, over the years, there has been a little bit of a product mix shift towards networking components that we've been very strong and part of the consolidation play, which have fewer attach rates. I think that's something that hasn't changed from Q2 to Q3. What we've been seeing is really good FortiGate growth. So that will help us with attach rates. On the other hand, compared to, let's say, our success with sovereign deployment or sovereign solutions, they are a little bit more product heavy compared to cloud solutions. So that's impacting the overall kind of product service mix a little bit as well. But yes, there's product mix, sovereign has less services because we are delivering more product that the customer has versus cloud solutions. And we believe that this will be structurally helping us with product long term because it's definitely an important trend. And then it's on us to attach more relevant FortiGuard security subscriptions. That's why it's so critical to roll these out, yes.

That's really helpful. And then maybe just as a follow-up, is there a discrete subscription selling motion? Or is that entirely attached to hardware? The reason I ask is just as product is cyclical and decelerates service is obviously more important. So I'm just curious if there's any other tailwinds to subscription as we go through the cycle.

Yes. There is a separate services motion. The initial -- I would say, the initial purchase always attaches certain services, most of the time it's FortiCare and smaller customers buy services in the bundle, with larger enterprise customers, it is more of an upsell motion to make sure they roll out the hardware first and then we are upselling on relevant security subscriptions. And that's why the focus, I think, is also on the increased threat environment because virtual patching, certain OT subscriptions are really critical for our customers to have the right level of intelligence circulating through the FortiGates all the time to be protected. So I think the motion will pick up quite significantly, yes.

Our next question is from Gabriela Borges from Goldman Sachs.

Christiane, I want to stay on this topic of large enterprise deals and the impact that they're having to services revenue. Maybe just relative to your expectations, was U.S. enterprise stronger than what you expected? And then did you go from expecting it not to be a ramp deal and then the customers ask for it to be a ramped deal. Maybe just explain to us the dynamics that happened in 2Q because I don't recall you talking about price has been a growth driver for now for quite some time. Now I don't recall the specific ramp issue impacting services before us. So I'm just trying to understand what's different this time.

So I think Q3, as we reported, had a lot of not only large enterprise deals, which we had in the past that had a lot of newer customers that had truly expansion deals and not necessarily just refresh activity or also sometimes it's large customers may have big renewals. So this is where as customers roll out their infrastructure, they may not want to pay services right away, and we had more of that in Q3 also consolidating different activities. That's why I addressed it specifically in my prepared remarks.

And so as it pertains to the 4Q guide, is it fair to say that you're also expecting the trend to continue, meaning the pipeline give us some color on how the pipeline looks for those types of new customers and that type of cohort, do you think the services ramp dynamic is going to impact 4Q and maybe longer term as well?

I mean, it definitely has some impact on Q4. This is why you see our revenue guidance and respective adjustment of the 2026 service revenue guide. But the good news is the customers are buying services, which you can see in deferred revenue, which you can see in service billings. And there are more services to come. So we are actually happy with the strength in the business. It's just a little bit of a delay from when it gets recognized.

Our next question is from Fatima Boolani from Citi.

Ken, one for you and one for Christiane, please. Ken, in your comments earlier in response to a question around the product growth trajectory and some of what appears to be some supply side constraints and increasing supply side constraints but also sort of different -- and changing levels of inventory management. I'm wondering if at a high level you can comment on how customers are behaving with respect to asset sweating, so sweating their appliances for a little bit longer in response to this or in anticipation of this? And why you are protecting or defending the business against that potential risk as all of us think about what the 2027 product growth trajectory is going to look like in the face of these -- some of these bigger picture macro factors? And then a follow-up for Christiane, please.

Yes. I think for -- for the new security functioning especially like AI security, they need to kind of more high end, more computing power to like to know how this function there. That's where we do see the move more towards the high end and also more computing power FortiGate system. And that's where the ASP also go higher. We see usually the stretching size sometimes come from some low end of certain verticals like retail, which they also kind of a better try to see, hey, whether they want to move to some kind of SASE or some other ETMA environmental. We do see some retail actually leading the change, but some other probably still try to hand on some of the products for longer.

But they also starting to realize it's a new threat environment, and there's a lot of attack of vulnerability exposed by the AI. So that's where we feel probably customers more try to concern of this new vulnerability instead of trying to stretch in some of the current existing hardware because if you're keeping the power like 5-, 7-, 10-year longer, a lot of function kind of a difficult runoff kind of were no longer supporting some of the new function there. So that's where we don't feel this will stretching will be a trend going forward and because it's a new threat and a new demand for all this function will drive the additional growth. But right now, we do see that the first wave is more come from the enterprise and also especially some internal segmentation. Some of data center AI and -- but one more application -- I mean, once AI SASE -- more application, we do see there's additional demand will keep in drive the growth.

Christiane, I wanted to touch on the gross margin performance. That compression, how do we reconcile the ASP uplift commentary, the commentary of customers trading up to higher-end models with presumably higher ASPs. Why is that essentially not following through into at least stable growth gross margins because of compression on the product side, in spite of those factors was still pretty high. So wondering if you can kind of reconcile those 2 dynamics for us and how this should trend over the next 2 to 4 quarters?

So on the product gross margin side, we definitely see the increase, so we have the benefit in the first half year that we had inventory on hand. And so we had lower cost while we had already increased the prices -- so that benefited our gross margin. In the second half, you see that the costs are creeping up and then impacting the product gross margin. But on the other hand, our service gross margin is picking up nicely. So it's offsetting some of the impact. There are -- you can only increase the prices so much, right, for your customers. They also have limited budgets. So we are trading a balance between increase of price and gaining market share. And I think we've done this quite successfully this year. So I mean the guidance for the overall gross margin remains at 80% for the full year, right, which was what we said at the beginning of the year.

Our next question is from Junaid Siddiqui from Truist.

Great. Just regarding Open Wave models, does is shift towards open wave models by enterprises, structurally expand your opportunity by moving more AI security into customer controlled infrastructure? And are you seeing that translate into incremental security demand yet?

Yes, we do see more enterprise running whether some open source, Open Wave model internally. And thus also drive some additional demand for how to monitor and manage all this kind of a model within enterprise. So that's where there's more demanding for enterprise network security. Like I said, it's kind of accelerating all these convergence on to network security. And with our high-performance ASIC advantage, definitely, we feel we're leading in this area for like internal high-speed network security deployment for a lot of internal segmentation within the data center.

Great. And just regarding the SASE bundles that you've rolled out, what are you seeing in early adoption? And what kind of pricing uplift are you seeing as customers move on to the bundle?

So the pricing uplift, I think, is about maybe -- so the question is how you define the pricing uplift, right? So FortiCare and SD-WAN is priced as a percent of the hardware price. And so the question is how much more are they buying? We see some uptick, but some customers are still using SD-WAN just what is provided through FortiCare versus the incremental subscriptions that we're offering. So it's going to take a little bit longer to really get it adopted by all our SD-WAN customers.

Great. Thank you so much.

So you see it more on the customers.

Our next question is from Adam Tindle from Raymond James.

Okay. Ken, I just wanted to ask a question thinking about the business bigger picture. You're getting bigger customers like sovereign and Neo clouds that you talked about. Those are growing very, very fast and driving a ton of product growth, but disconnecting some of the services that we're talking about and stock's down a lot on this.

So a 2-parter for you. I wonder if you might just opine on the pros and cons of servicing that customer base in the first place. Is that a good customer set to be servicing? And secondly,-- have you contemplated maybe even a different business model, almost like how chip companies serve that cohort that might be just much higher volume product and lower focus on service?

Actually, a lot of this vehicle enterprise and also new cloud, even some service provider, they probably need a little bit different service. And sometimes, they also like offer some of their own service using our technology, so we'll be kind of Tier 2, Tier 3 behind. So that's probably -- and also, there's a ramp-up like Christiane mentioned, a lot of this -- they first get how we're deployed and then they gradually keeping adding service because we have so many functions, so many servers for the OS, they can use, they can leverage, and they do take time to ramp up a different kind of service. So that's what we see, and that's what Christiane mentioned, sometimes the good news we do get a lot of bigger customers. But the other side is really the survey need some time to ramp up and gradually enable more and more service. And then there's also a way how to recognize once we have the call enterprise agreements, sometimes a little bit slower to recognize some of the service.

But we do see the trend is pretty healthy, whether from the building, from the short term and deferred revenue. So that's where we have the confidence. But it's -- this being a customer also kind of give us a very strong feedback. And what was the latest new kind of a security needed and that's kind of keeping drive innovation, keeping develop new technology, working closely to making the whole Internet more secure.

If I could just -- a quick follow-up, Christiane. I imagine this might be the last question. So I want to give you the floor. The key question tomorrow is going to be why go out with the services expectation in fiscal '27 on this call. We're going to get a lot of questions on that. People are going to say you told us that it was going to accelerate in the second half of this year. And obviously, we have not seen that materialize. So you're going even further out and talking about acceleration there. People are going to say that there's structural differences with the service attach rate and the new customers that you're seeing a higher bar for fiscal '27. So just want to give you the chance to take the floor here and give us some details on what's giving you confidence to talk about services acceleration in fiscal '27.

I would say I haven't used the word acceleration. I've used the word improved growth rates. So I mean, I think we clearly see that the growth rates have bottomed in Q1. The question is how quickly can we convert some of our service billings into revenue, right? And that always takes a little bit of time, but we are -- we continue to be confident that we are selling relevant services to our customers and that they convert into revenue over the course of 2027 and continue to grow.

Our final question is from Patrick Colville from Scotiabank.

Thanks for squeezing me in here. So I guess I just want to tell some thesis together for the last hour the points you made by the large new customers in 3Q at service agreements -- timeline, than you'd expect very guided to 3 months ago. And that's what's caused us the revenue miss this -- but the confidence we then -- and that's why we [indiscernible] 2027. Is that the message interpret correctly or [indiscernible]?

A little bit hard to understand, but I think I got the question. So let me summarize what Q3 was a good quarter. We had large new customers, we had large new expansion deals that benefited us. But they also cut they came with some of delayed service activation, which is actually typical in -- or happens more often in large deals. So overall, that was one bigger factor that we may not have as anticipated. There are, of course -- there's, of course, a lot of different aspects that you see in the service line with the increase in prices, you see a little bit more discounting between hardware and services. And then also in the U.S., you definitely see a push towards hardware because it's benefiting customers from the tax perspective to depreciate. So there are different components that are not as prevalent in what happened in Q3, but there are trends that we've been seeing as we analyze where it was coming from.

If I may just very tactical question about channel inventory and billings duration just commenting on possess duration is still around is still pretty similar. It didn't increase significantly and our channel inventory is flat in percent of -- or down [ 10% ] of billings, yes. So we continue to manage the inventory in a way that we want the channel to have enough for the run rate business but we don't want to over allocate so we have dislocation of inventory when we need it in different places. So that's where we are extremely diligent in managing how much we have in the channel.

Thank you.

Thank you. That was our final question. I will now hand it back to Anthony Luscri for the closing remarks.

Thank you. One clarification to an earlier statement. Our pricing increases at around a 10 percentage point impact to year-over-year billings growth, not top line.

But other than that, I'd like to thank everyone for joining today's call. we will be attending investor conferences hosted by BMO, UBS and Barclays during the fourth quarter. The fireside chat webcast links will be posted in the Events and Presentation section of our Investor Relations website. If you have any follow-up questions, please feel free to contact me or my team.

Have a great rest of your day.

All right. Fantastic. We will go ahead and get started with the Fortinet session at the Goldman Sachs Communacopia and Technology Conference. I'm Gabriela Borges. I cover software here at Goldman. Delighted to have on stage with me, Ken Xie, CEO and Co-Founder; and Christiane, CFO. Thank you so much for joining us today.

Thank you for hosting us. Thank you.

So Ken, one of the ideas that we're exploring real time is this idea of a cyber frontier model within a cybersecurity company. And the thought process is, as a cybersecurity company, you have an incredibly rich proprietary data set that you've been hoarding for 10, 15, 20-plus years because ML has been at the heart of Fortinet's road map since the time of its founding. How do you think about what a frontier model, a cyber frontier model within Fortinet could look like?

We definitely developed a lot of our own expert model and also kind of probably maybe not a separate company, also build own infrastructure, including the global data center with GPU and already launched more than 20 AI-enabled products, more in the security operations side.

Like I said, the data is super important, like we have a majority, more than half the global network security deployment, give us a lot of data to analyze the global intrusion attack landscape there. So that also fit in our own kind of infrastructure model, the kind of AI infrastructure, we feel we have a pretty good view of what's happening globally. But definitely also you need to use AI to fight or protect the other AI, which we feel is driving the huge growth going forward, which is really the new market we have not seen since we did Analyst Day 2 years ago, which is a huge opportunity, including both the enterprise level AI security, which we see a lot of like internal segmentation, which is really the kind of the machine-generated traffic actually is a huge increase.

At the same time, some service providers, especially the neocloud provider, I hope that market for AI service provider neocloud probably can be bigger than the traditional carrier or some kind of a security service provider because definitely AI changing the whole landscape, both in enterprise and some service software industry. So that's where some AI service provider will play a more important role, especially in the security.

Let's pick up on this AI service provider trend. So when I think about one of Fortinet's strength of the cloud cycle, it was with the telecom service providers and that has been a core part of your business for some time because of the performance and cost benefits that Fortinet delivers. Talk to us a little bit about what that looks like with the AI cloud cycle now? And maybe as part of that, the opportunity that you may have with NeoCloud, for example?

Yes. It's -- I think first, just like SASE, we always believe there's a bigger market for service providers or even on-premise SASE or sovereign SASE, the same thing for AI. Besides the frontier AI model and there's always some service provider, there's always some kind of on-premise AI, SASE kind of security because they want to keep the data in their own infrastructure process locally, not just some international, but even some big companies in the U.S. have the same thinking.

That actually drive the AI security, also drive some kind of neocloud. It's similar like sovereign SASE, we feel it's a huge market and bigger than the than the cloud-only SASE by some early SASE provider. The same thing for AI security, the neocloud add another layer of AI service and compared with some hyperscalers. So that's the part we feel eventually will drive most security need for whether sovereign AI or some other local AI security market. Probably Christiane also see a lot of -- especially from Europe, there are certain regulation.

So I think the opportunity for us because we develop a technology stack that others can operate, whether it's the sovereign SASE stack or whether it is the infrastructure security for AI clusters. We see us well positioned for more of those regulatory environments where sovereignty is mandated.

And especially in Europe, there's a lot of initiatives right now to build out AI infrastructure through local companies, right? And we want to be part of that journey -- the security journey for AI infrastructure, similar to how we are partnering with global telcos on building out sovereign SASE. And that has been a theme for Fortinet for a long time that we partner with others to help build out infrastructure. And so I think right now, it's an inflection point with more infrastructure going on-prem, not only going to the cloud that Fortinet is well positioned.

And -- especially on the AI side, not only for service providers, also for enterprises, cloud AI, frontier labs are expensive. And so more and more customers are rethinking how much they should do themselves and build out their own GPU clusters and secure them and deploy open source models versus using AI through the frontier labs. And I think that's going to be a long-term theme that's going to play out over many years.

There's one key difference compared to the traditional carrier service provider to the neocloud provider. The neocloud make decision much faster. They make decisions in months. You can see we give example in earning, like Q1, there's neocloud, one of them, they evaluated, they decide to purchase the same quarter for a few million. And then Q2, they are starting like 5 to 10x bigger. You can see they make decision in months compared to the traditional carrier service provider, they take years to evaluate and make decision. And yes, we feel it's pretty strong growth, but also in the early stage.

Maybe let's talk about early stage going to the longer-term dynamic that Christiane mentioned here. So tell us a little bit, Ken, you just mentioned, I think you said neocloud, they make an initial decision in 1Q and then you can see 5 to 10x bigger of a deal in 2Q. Did I understand that right? Maybe just talk a little bit about the progression on what you're seeing in the pipeline. And a lot of us from the outside, we try to track CapEx. Is that the right way to think about what the trajectory of Fortinet's data center neocloud business could look like over a 3-year time frame? Or any color you can give us on how to think about this opportunity?

It's still pretty early stage. It's difficult to like compare to the traditional carrier service provider, they have like 20, 30 years or whatever the history we're working with them. So we know their model all this quite well. But neocloud, they are still in the ramp-up stage, but they have a huge capital. They have a huge infrastructure they try to build. I feel still more in the early stage, will protect their own infrastructure or build up -- like if you look at different layer, they are mostly in infrastructure layer right now. They're not quite in protect the model application there yet.

But once they start to offer the service in the higher layer, definitely there's other wave of opportunity. Right now, it's really more -- they're only building infrastructure, protecting infrastructure. It could be come from like a utility, energy, OT layer, could be the infrastructure of this layer, but they are making decisions, they move much faster. They see the demand for their AI cloud service is huge.

And I talked, I think, in the Q1 earnings release about building out reference architectures, right? So the neocloud won't buy and put it on the shelves. They will buy firewalls and related services as they deploy the data centers. And so it's critical for us to be in early so that we can grow with them. And so that's where most of the midsized neoclouds are probably more likely to be our customers because they won't have their custom components like proprietary components.

Yes, that's where the ASIC advantage, the performance advantage is huge compared to other competitors in our space.

Christiane, you started talking a little bit about enterprises running more agentic processes, more open source, more open weight models in-house. So my next question for you is how do you both think about network traffic at your existing customers? And maybe there's 2 pieces. There is the classic firewall. When do you start to get a bottleneck in throughput because agentic activity has gone up? And then on the sovereign SASE piece, are you already seeing a change in network activity because of agentic, and what are the implications of that? So maybe we'll do the data center, the classic firewall north-south traffic question first.

So the classic data center, I would say customers just start building out their own infrastructure as they see cloud costs increasing month-over-month. And as they also see what do they want to do with AI -- and so we have the partnership with NVIDIA, right? So we are securing GPU clusters. We are also doing it internally. And that's a big market that customers are -- enterprise customers are increasingly interested in. And on the -- on your second part of the question was on the SASE side, right?

Yes. Are you seeing an impact in your SASE network? When you look at your network capacity versus the amount of network traffic, are you starting to see the trajectory of network traffic change because of agentic activity?

I put it this way, probably the recent AI-driven traffic is more like the East-West traffic, whether within the data center, within enterprise, and also a few months ago, probably is well known is that the first time machine-to-machine traffic over passing the human-to-human, human-to-machine traffic on the whole Internet now.

That's where the enterprise, they definitely want to have a better visibility, better control, especially in their own data center campus, what kind of traffic, what kind of things agents doing there, that's where we see increase of this new internal segmentation, replacing the traditional network device. That's where the convergence we talk about for like 20, 30 years starting accelerate by this AI kind of adoption there.

But also, there's a lot of new area, which whether the neocloud, there's the sovereign SASE, that goes beyond the traditional network security doing there. And that we see is a new market opportunity compared to the traditional, whether network security or kind of replacing -- whether network security or kind of SD-WAN is really we see a new market, especially the on-premise sovereign SASE as compared to before the cloud only SASE.

From our feedback, most enterprise like this hybrid model. They do need on-premise. They do need some kind of sovereign SASE, but they don't have much choice before. So somehow when we combine this SD-WAN, SASE, firewall together in the same OS can be deployed on-premise in the cloud with a service provider has opened up huge opportunity for us, and we see quickly not only the new market, but also kind of start replacing some of the existing players.

And then to the point, customers are buying higher FortiGates compared to the past. So how do we assess this? Basically, the average ASP for us is increasing, yes, net of price increases. So we see true ASP increases, which suggests that within each band, low end, midrange and high end, they are buying bigger devices.

What we don't quite know, of course, is whether they are buying bigger devices because they are planning for more network security traffic or whether they want to deploy more of the functionality, whether it's SD-WAN, whether it's quantum encryption, whether it's all the AI visibility that comes with the new OS. That's hard to say, right? But we definitely see that customers are preparing for more requirements, more cybersecurity needs and all the functionality innovation that we are constantly rolling out with our OS versions.

I'm curious how we think about -- it's a little bit of a pricing question. So you're talking about an upgrade cycle where previously, if I would have bought a firewall at x watt capacity, I'm now buying one size up. What is the typical pricing delta between the different SKUs or cohorts? Is there a way to frame that?

It's very different by low end versus high end, right? The high end has a big differentiation between the 1,000 model and 3,000, right, versus in the low end, it's -- but it's meaningful from an ASP perspective. Yes.

Yes, that makes sense. What is the AI visibility that's in the new OS?

Yes. In the new -- in the FortiOS, there is a lot more functionality as to AI visibility, which -- where is the traffic going, which model traffic is sent to what type of a context is there kind of personal data in the prompt and some. So a lot more visibility that we are providing through the FortiGate and related products that customers may want to deploy when they have more agentic traffic, more sanctions and they want to sanction the AI use a little bit more in their company, yes.

Also a few -- because some AI models that are in market have found, like, vulnerability holes there and we're working with all the frontier AI company kind of try to quickly help customers defend this kind of AI vulnerability. But I see still probably most of this vulnerability is still not in the wild yet. But on the other side, we keep pushing customers, maybe you need to quickly patching, quickly whatever, but a few -- some customers still behind.

And that's also probably -- some other customers, they just try to buy some extra layer protection, whether by internal segmentation or protect a new attack surface or even add multiple layer defense like the network security is usually the first layer because if you have more vulnerability in OS layer, browser application, definitely the networking can help in defending the first layer. That we see also kind of increased the business for us, especially in the enterprise space.

How much of this change in buying behavior, and we'll talk now about some of the cyclical dynamics in your business as well. But I'm curious how much of a change you've noticed in customer behavior since early April when some of the more advanced frontier models first came out. How much of some of these dynamics that we're talking about can be pinned or isolated to that type of dynamic?

Definitely not that we reached to some awareness, there's someday, some AI like whatever security outbreak maybe happen. But it's -- that's where we do pushing customers need to be upgrade sooner and -- but they also have their kind of balance because there are certain operation cost for upgrade. There's a certain like a budget or some other things they need for the actual protection there. But I feel we will keep working with them before the bigger whatever things may happen.

But in general, I would say these discussions have helped with advancing security -- cybersecurity discussions to the executive level. It was there before. But now I think the need for doing something if you have aged environments is very clear. But it's a combination of factors. It's not only missiles, right? It's also the nation-state attacks, whether it's in the U.S. on the water infrastructure, whether it's internationally from Russia on the infrastructure in Europe.

So there is a combination of companies being afraid of more attacks, less time to identify them from AI and then also the threat environment increasing from other actors that are out there in the world from geopolitics. And that both sides, I think, are advancing discussions on investments in cybersecurity and how to best secure your infrastructure against these accelerating threats.

Very good. All right. Let's talk about the memory environment. Bring up to speed a little bit on what you're hearing in the field about customers -- from customers, specifically around pull forward on the firewall side because of memory prices?

I feel we are very different compared to 5 years ago, the supply chain issue. That time we definitely see more pull forward and also the increased inventory in the channel, even in the customer side. Since then, 5 years ago, we did like a few change. One thing like 5 years ago, when customers buy the hardware, you have up to 1 year to register to enable service. We shortened that one to 90 days.

So that's where we're making customers no incentive to buy anything beyond 90 days because otherwise, the service will be suddenly applied as a channel. It is a FortiCare, FortiGuard service. The second one, we also closely monitor the channel inventory. So we don't see increase in the channel inventory. So that's where to avoid the pull forward and -- which happened 5 years ago. But also, we see some components like memory, we're more using the DDR5, DDR4 compared to the HBM, the high bandwidth AI using kind of memory. So that price also kind of stabilized a little bit now compared to like 6 months ago, a huge increase. That's also kind of stabilized the whole supply chain a little bit.

On the other side, we're always keeping the -- we call the same gross margin, healthy gross margin, different than some component company, memory company, you see their gross margin big increase or big drop. But for us, we have pretty maintained the same. That's where when we see the component increase, we increased the price. But 5 years ago, we also decreased price when we see the component price drop or the kind of shipping cost dropped towards the end of COVID time. That's also -- I feel we built some good trust with our supplier, with our customer partner.

We just want to maintain the same gross margin. And we are just by based on our kind of own supply chain cost changing. I think so far working on quite well. At the same time, we do want to maintain about 6 months inventory to meet certain like a large order or big surge of demand, something like that. I think that's also working well with us. And we do working with all the component supply the manufacturer directly instead of go through third party. And our own ASIC, we're keeping about 1 year inventory. At the system level, we're keeping about 6 months. So any -- whatever -- so we have some buffer, we feel we can help smooth out the whole thing.

Let's stay on this idea of channel inventory. So the 90-day dynamic makes complete sense to me. The channel inventory dynamic makes less sense to me because, of course, the channel is actually selling through because customers are actually buying. How -- maybe just explain why the fact that channel inventory is low suggests to you that there's no pull forward.

Because of the 90-day, right? So...

Yes. The two go together.

On the other side, we also discourage channel to buy too much inventory. So we can control whether the discount or some incentive make sure they just have enough inventory to grow their business instead of just, like let's keep, like, more inventory because the price may increase, but we also told them the price may drop. Like a few years ago, we do drop the price. So if you have too much inventory, you also probably stuck with some of the inventory. And that's why we thought no need to like a pull forward of some extra inventory would not help.

I know none of us are memory analysts on the stage. Your comment on pricing coming down is a really good one because based on what you've seen in prior...

I say stabilized because -- yes.

Sorry, I mean, historically, you've adjusted pricing down.

Yes.

My question for you, and maybe it's more of a how do we think about this? Most of the data points we see around hyperscaler CapEx and supply demand, for example, it's just that things may get worse before they get better. And so I guess my question to you is, do you envision a scenario where memory pricing goes from being stable to actually Fortinet being in a position to lower prices at any point in the next 1 year, 2 years, 3 years?

I see the price increase of some shortage more in the HBM, which is more like the high-bandwidth AI related. So because we are more using DDR5, DDR4, that's more traditional, that's the system level. And there's a lot of smaller manufacturer, memory manufacturers doing other DDR4, DDR5 compared to the HBM, there's only a few bigger manufacturer doing that. So in that level seems maybe more stabilized compared to the high HBM memory, yes.

Christiane, you have the wonderful job of setting expectations, not just for the second half of the year, but also longer term. And Fortinet just put up a 52% product growth number, which is incredible. And in the past, you've talked about, look, in a normal year, product revenue likely grows north of 10%, if I'm remembering right, and there is the share dynamic that we've all talked about. And so Christiane, tell us a little bit about how you would advise us to think about the normalized growth rate of Fortinet over the next 18 months when you're going to be comping the 52% year-over-year number.

So that's a good question, and it's a difficult one. I mean, overall, we see a good demand environment, and we think there are continued tailwinds from all markets, whether it's AI, whether it's sovereign SASE, whether it's regular SASE, OT, quantum. I mean, it plays out across the board, right? That's also why we're saying we are guiding one quarter at a time because there are so many dynamics playing out right now that while we have visibility of how the pipeline shapes, it's hard to say what -- whether decisions are accelerated or playing out in normal course, right?

From a long-term growth perspective, we had benefits right now from pricing on the product side, which was a little bit higher than on the overall side, of course. But we saw great unit growth as well. So it's not just pricing related, but if we assume the pricing dynamics are a little bit more consistent, we won't have that same impact next year.

So I think that's where we are still evaluating what more from a unit growth perspective, how much more can we grow there? And then what does it -- how does it translate into billings. We are also very, very focused on attaching more services, selling more services and building out that portfolio because the service revenue is what renews and gives us long-term growth as well and the penetration in the customers.

So it's -- we are not coming out with 2027 numbers yet. I think we are feeling good about 2027, but we need to assess the unit volume in the different product segments as well as the service attach rates and renewals and how we come out there. I think -- what we feel good about is that we are outgrowing markets. And right now, the growth for cybersecurity market looks really good. And with more focus on on-prem and sovereign deployments as our customer base is extremely global. And so -- I think hardware is -- has seen a resurgence. And so I think we are well prepared.

So maybe allow me to ask you about 4Q where you have given implied guidance. Talk to us a little bit about -- we get this question, well, the implied guidance implies that unit growth slows from something that's much closer to 52% to something that's in the single-digit range. And then you layer in pricing on top of that. It's a very dramatic deceleration. Help us put that in context.

I think we were very clear that Q4 was kind of a not yet factored into the annual guidance from a full perspective, right, because we don't know how Q3 plays out. And after Q3, we have better visibility. We continue to see strength in the pipeline progression and also on the demand side, but you will hear it after Q3.

Very fair. Okay. So one of my favorite times covering Fortinet was when you announced the enterprise bundle and you upgraded from the UTM bundle. This is back in 2015, 2016. And there is such a beautiful upgrade cycle on the services side of your business, which is very high gross margin. And so Christiane, you sort of alluded to this here with attach rates. Tell us a little bit more about -- there's a new bundle that came out recently. Talk to us about the upgrade cycle and what is the premium? With UTM to enterprise, it was 65%, the cost of the box going to 80%. So we could do some really neat math around that. What does that look like in today's upgraded bundle?

So we're still selling a good share of higher-end FortiGuard bundles, but not everywhere. And so what we did with the SD-WAN bundle is actually something that I think was -- is very unique. We are selling to our customers the SD-WAN services that would typically not buy FortiGuard, but we've also embedded what we call a SASE starter license. And so for customers that are deploying SD-WAN, it's so compelling to also deploy our SASE solution because it's the same OS, it's the same policies and it's very easy to deploy.

Now that they -- if they have the starter license, they can test it out. They have like -- they get -- depending on the size of the FortiGate, they get like 10 to 15 users. And so they can use it in the IT department. And if they see how easy it is, how efficient they can manage it compared to having a cloud-only SASE SSE solution. Our goal, of course, is to upsell them when the competitors come up for renewal. And then it's an easy rollout because they were already able to configure it out.

So that's where I think the new SD-WAN bundle is not only selling more services to customers that would have traditionally not sold as many, it's also our ability to get in early and show the value of our SSE, our FortiSASE solution and then upsell as the customers may want to transition because switch -- every customer is afraid of switching, right? So you don't want to make a big investment when you don't know how it works for you. But if you can test it out and then you see how easy it is, then the switching costs have been reduced quite significantly.

Yes. There's other additional service we are going to launch later this year, more related to the AI security, more related to the SASE and especially the sovereign SASE, on-premise SASE service, which we feel also will helping drive the additional service, which are already starting to deploy in the field with the new FortiOS 8.0 we launched early this year.

Order of magnitude, how do I think about the pricing uplift from some of these dynamics like the SASE starter license, SD-WAN bundle, AI security bundle?

The bundle we launched for the new customer, I think the 50% or 55%...

Right. I mean 20% is FortiCare that's normal, right? And then typically, it's an additional 35% for cut that we are targeting customers with which would have normally only bought FortiCare. So that's, I think, the beauty here. And then upsell from there if customers like FortiSASE.

And the 35% is for the SASE starter license...

No, no, no...

SD-WAN model...

It's SD-WAN services that make one SD-WAN more efficient. So customers can use SD-WAN within the OS, but then there are certain extra services they can deploy to get more visibility.

Yes, I hear you. And then when you figure out what the configuration looks like on AI security, there would be another potential uplift off of that 30%?

Yes.

Very good. Maybe we'll end here with a question on the trajectory of services revenue. So every quarter, Christiane, you get the question of, well, product revenue did this, service revenue did this. There's lag effect, it's accelerating, it's decelerating. Maybe just level set for us, how do you structurally think about the growth in services? Could we be in a period of acceleration for even though product revenue is likely going to decelerate from the 52%. How do we think about the acceleration cadence for services?

So service revenue is a combination of the product stack, right? Some products have more services and some products have fewer services attached and then also the unattached services. I think Fortinet is attaching -- first of all, we sold more FortiGate and Ken has been talking about all the markets that we are playing in.

So I think the growth for FortiGate will continue to be there, which allows us to attach more services. We are launching new services, and we also have newer software like with the FortiAIGate, which is sold as a software subscription, which then also increases our ability to attach services. So I think we are preparing for more service growth, right? But some of it comes with additional hardware growth and some of it is attaching more to existing infrastructure.

Fantastic. I think we can leave it here. Please join me in thanking Ken and Christiane for their time. Thank you so much.

Thank you

Good morning, everybody. Welcome to our Fortinet fireside chat. We have the honor of having Christiane Ohlgart, the CFO of Fortinet; Anthony Luscri, I hope I said that correctly from IR and Aaron with us today. [Operator Instructions] In the meanwhile, I'll kick it off with one.

So we just finished the quarter. And can you walk through some of the highlights and what stood out to you the most during the quarter? It was really a fantastic quarter.

Yes. No, I agree it was a fantastic quarter. What stood out, and it really started, I would say, last year already, but that we see broad-based demand across all our geos, very successful in -- across the world and accelerating demand for hardware and build-out of networks.

So that's where some of the growth in FortiGate hardware growth was extreme, I would say, not that we haven't had it years ago, but not lately. So it was a great quarter, accelerating from prior quarters, and we continue to see good demand for multiple use cases that -- whether it's OT, whether it's the build-out of SD-WAN networks and improvements, whether it's the build-out for AI infrastructure and AI-enabled networking and then also the fact that basically all our devices improve your security posture, even a switch or even an IP shows that this one OS and one security fabric is really resonating with our customers. So I think that the Q2 showed nicely how it all comes together when demand is there.

Yes, it was really impressive. One of the things I wanted to ask on unified SASE grew 35%, now represents 1/4 of the sales and Forti SASE billings more than double. So which part of the unified SASE port is doing the heavy lifting, the SD-WAN networking, the cloud security or the on-premise enterprise deployment.

I was trying to really get a better handle on that because it seems like you have a large SD-WAN installed base.

We do have a large SD-WAN installed base, and that's where we are benefiting because the customers have everything they need to extend it to the cloud platform. And so get a unified posture for in-network and remote users. And we continue to embark on that story and trying to sell more of the SASE, but also depending on the needs of the customer, making it available with more functionality that allows them a unified SASE play.

And this is where Ken created that SASE firewall market where he really wants to say it's not either/or. It is a big market, you need functionality at the edge of your network, which our OS can do that is similar to what you do in the cloud with the SASE platform. But you don't always need to go out to the cloud.

And also as our competitors start selling hardware to improve their cloud SASE platforms, it's really -- it's a big market that if you want to have unified security for your users, you need both. And that's where we will continue to innovate and believe successful in the market.

We were late with the cloud, but we've always had the hardware. Our competitors were faster with the cloud. Now they need some hardware. So it's playing all in our favors.

And then on the metrics, which metrics you think we should focus on more billing, ARR on this because you get both. And always when I do the post earnings call, I try and figure out which one I should really concentrate on. I mean they're both important, but...

Yes. I think they signal different parts of what's going on in the business. Billings is current quarter activity, but it's also impacted by the mix of hardware and services. ARR gives you a good impression on how successfully we are selling services and growing our service portfolio in all the different stacks.

And it also gives you in contrast to revenue and in contrast to billings, a little bit more of an idea, is this a more service-centric pillar? Or is this a more hardware-centric pillar? And so I think between all these metrics, you get good insights into what are we selling.

Okay. No, that's fair. And then Ken described the combination of secure networking and unified SASE as a SASE Firewall, which I thought was really interesting. And that's over $2 billion, growing 34%. So is there -- is he framing that because of the buying pattern you're seeing? Or is there -- what's the reasoning behind that?

Yes. I think the reasoning behind it is that we are seeing success in the combination of hardware and software or hardware and services. And with sovereign SASE being an important aspect in Europe and more legislation around sovereignty. I think it's an important differentiator that SASE is not only a cloud-delivered service, but that SASE is a broader market that includes the firewall at the edge of the network in the data centers, not so much for SASE.

And also our continued innovation in what do customers really need when they want to have a holistic security picture that is also -- has low latency and good speed for security.

And if you listen to -- or if you heard about our press release that we came up that we launched in combination with earnings around the outpost functionality, it's actually very innovative. Even though we are using a firewall to do the work, it's functioning as a SASE PoP that is controlled by SASE, but then can be used in very rural areas or very locally. And so you're reducing your dependence on cloud PoPs that may not be close to where your customers need SASE security.

So we are continuing to innovate between software and hardware and the cloud posture to make sure that our customers get what they need to secure their users.

Yes. And Jim mentioned that the SD-WAN and SASE bundle was launched a few months ago and it is growing very strongly. So this bundle raising per dollar deployment, I mean, I thought that was a pretty interesting way to bundle it.

Yes. So it's a combination of factors, I think that is important. One is in this SD-WAN bundle, we are including all the services that are improving your SD-WAN functionality and security. And so you don't need it necessarily for SD-WAN technology, but it improves what you want to do. It speeds up the traffic and so on.

The other part is we added kind of a teaser license for SASE. So customers don't need to go through a buying cycle to buy the cloud SASE. Just if they want to roll it out to the whole organization, they will probably need more licenses because this teaser license per device only includes, I don't know, 10 or 20 users.

So it's a good way for customers to explore our cloud solution if they have a competitor. And because it's so easy to roll out the policies from the firewall to the cloud SASE, we believe it's a good way to potentially grab more market share.

Yes. So it's a really good starter package, but you can insert it in maybe a competitor domain where they dominant.

Exactly.

Okay. All right. So then I shouldn't think that there's going to be a huge jump in billings or ARR right now because of that. It's just it's minimum, right, but it's a good marketing.

Correct. It's a good starting point. The increase in ARR, we will see over time from the service attached, the SD-WAN service attached to the firewall. But then the driver for SASE growth will come from upselling on these starter licenses, yes.

Very clever marketing point. All right. So then on the SASE billings grew 35% and the unified SASE ARR grew 18%. So one of the things I had some people ask me about, was that because the contract length or the hardware content that drove the difference of those 2 metrics?

So it's mostly the hardware component that drives the difference between what you see in ARR growth or service growth and what you see on the billing side, yes.

Okay. And then 40 SASE adoption reach 19% large enterprise. That was one thing I have to say when you first launched it because you have such a large mid-market space that I really felt that, that would be where it would be attractive, but you have done really well in the large enterprise.

So what's happening on the AR side of that? And then are you -- and who do you see the most in these bake-offs? Or who are you taking share from on the large enterprise with your FortiSASE?

I would say, yes, in the large enterprise, we typically need to displace competitors, and it's a little bit harder. Who are we taking share of? We are taking share of -- or end customers that have a very distributed environment. If you're cloud only, you may not benefit as much from Fortinet. And this is where I think actually larger enterprises are our sweet spot because they are not born in the cloud.

Most of the larger enterprises have their own data centers. They have multi-locations. So a different setup. Smaller entities, SMB, they don't need as much security, and they are probably more born in the cloud and fine with some of our competitors. And yes, it's a gradual upsell motion.

And I think we've said it in the past, about 90% of our SSE customers are in our installed base, so upsell from existing SD-WAN solutions. And so that we continue to do that.

Es. And then the other one is that can size the sovereign and on-premise opportunity to be 2 to 3x the cloud-only market. So what do you expect in financial results over the next 2 years that would confirm that market size or show your traction? What should we look for in metrics?

So I mean, there will be no necessarily new metrics related to the sovereign SASE. You will see it in hardware growth. You will see it in ARR growth over time. And since the -- I mean, typically, who would be the buyer of sovereign SASE. It could be large enterprise. But in general, I would say it's the large telcos that have -- that want to set up sovereign environments for specific customers, for example, public sector customers or that want to compete with the cloud providers, which for them right now is harder because they can only resell that.

And we believe because we have good relationships with the telco customers that this is going to be a good growth market for us.

Yes. And then on your pipeline, would you say that it's equally split between the sovereign opportunity and the hybrid?

From a pipeline perspective, I would say Sovereign is still developing. So the hybrid is still a bigger part of the overall pipeline. Specifically, sovereign is also more a -- right now, a European play where regulations are going to drive that. And then once that's successful, I think more countries may go down that route because they want to be in control of the infrastructure.

Well, one thing we've always noticed, and I think it came out back in 2025 when you did the presentation in New York. And you talked about international and you brought in all your salespeople from Europe and Latin America and Canada. I left that so impressed on how much share you really have in Europe and Latin America and Canada. And why -- how did you end up having such a good ground game in those different regions?

I think our focus has been on global sales for a long time. And many of our competitors have focused first on the U.S. And so it has allowed us to grow faster internationally.

And that's why if you look at the sales force from a people perspective, we are smaller in the U.S. compared to our competitors, but we have more people and also more channel partners in many of the larger countries abroad, and that has given us an advantage.

Of course, I mean, if you're ahead, others are trying to chase you. So it's always a game, right, where the markets are.

Yes. No, no. I just spend -- your international always stands out every quarter. Okay. Then we're switching over to firewall hardware cycle. So on the product revenue grew 52%. That was just phenomenal, second consecutive quarter acceleration. So I want to kind of dive into the number. Is it was a unit growth versus higher prices? Have you just had that price increase? Or what was really you think some of the drivers behind that, demand, refresh? I was just trying to get into.

It is clearly demand driven, and we couldn't achieve that growth without unit growth and without the demand. That said, and that is why I had this in my prepared remarks, what we saw in addition to unit growth and even if we normalize for price increases, we saw ASP increases for the hardware, which means that customers are moving to a little bit bigger boxes.

And that's a clear trend that we've seen, I think, since Q4. And we believe that AI plays a big role in it, not necessarily only for AI security, but also for traffic. Customers are more -- are looking at upgrading their networks and making them more performant because they know there will be more network traffic in the future.

Got it. And then on -- the other thing that I noticed when I do my quarterly channel checks with everybody that all your VARs, one thing that comes out is the CVs. You've had several of them, you patch them. I get feedback from the channel that well, we're still buying that you guys are quick to patch, you find when you're quick to patch. So any -- and that's been like some of the bear case on the stock.

So I'm giving you an opportunity to kind of like talk about your CVEs and how that's really -- do you see it impacting sales? I know last quarter, a couple of people were worried that maybe they wouldn't buy as much because of the VPN one, but I'm just letting you kind of tell me what you think of that and how fast you patch and it really is a pipeline problem or not.

So I think what we saw in -- at the end of Q2 was not a new vulnerability, right? It was really cyber hygiene. And then our competitors are always good to blame Fortinet on their CVEs. The key challenge that we have is we have so many products, and we have so many firewalls that we've sold that are being used that, of course, Fortinet is a prime target, and it gives everybody a good talking point when somebody has a problem, it doesn't necessarily need to be a new vulnerability.

That said, I think the reason that on the one hand, we still sell very well despite having vulnerabilities because we've been very open and upfront with the fact that we are searching for vulnerabilities to improve our code quality and to patch them as quickly as possible versus others that may not have that rigor internally to find problems in their own code.

And we will see what happens over the next couple of months with some of the [ Mythos ] capabilities or similar AI capabilities to identify code issues faster. But Fortinet has been extremely transparent. We've signed up to these transparency guidelines. We patch fast. We are constantly reviewing our code to make sure that we are ahead of the game. But that said, we have a lot of customers.

We have a lot of devices running and not every customer is as diligent as a highly regulated enterprise customer or public sector customer with their patching. So there is always risk for us in our customer base that certain vulnerabilities can be exploited. We are working on a number of different initiatives, including virtual patching through the IPS engine to do save the devices until the customer patches them themselves.

But it is a constant worry of ours. We need to keep our customers secure, but we can only keep them secure if we validate our code as well. We want to be the first ones to find something.

Yes. And then let's talk a little bit about memory. So we on the last call that you adjust prices monthly up or down based on the component costs such as memory in order to keep the gross margin steady. Since the memory costs have leveled off, how are you thinking about pricing changes for the rest of the year? And then in that last recent increase, how much did that add to billing growth? I know I've had a couple of people ask me that question.

O as we said, the price increase to billings growth was high single digits. And the reason that we can't be more specific is because we really need to look at what have we been selling. In the end, it's a mix of software and hardware. Hardware, of course, had more increases, but all the service components did not necessarily increase.

So if you look at the billings mix, it was high single digits. On the price increases for hardware, we still see the kind of shortages in the market for memory components where the prices have leveled off, or stabilized, it's still hard to get memory components.

So there may be certain parts that still you need to pay expedite fees or something to get enough memory, and we are evaluating on a product-by-product basis, whether we need to increase the price or not. But also, of course, Fortinet always wants to remain competitive.

And we are evaluating extremely well what the competitors are doing. And I mean, they've been increasing their prices also, right? Everybody has the same situation.

Yes. All right. And then a little bit on the refresh cycle, which I have a little bit of a hangover on. But -- so what -- what share of the units shipped in the 2020 to '22 window that have already been upgraded? I mean -- and then are you seeing the firewall cycle shortening from the 5 years because of the amount of traffic?

And it seems like there must be -- you said earlier, people are moving to larger performance throughput boxes. So how much has been upgraded? And you have another upgrade cycle for 2027, too, but it doesn't seem like the refresh is really like the #1 driver of your revenue either, right?

No. So the refresh is not the #1 driver. The refresh or upgrade cycle, how we wanted to frame it a little bit more carefully is something that gives us good talking points and also inspect with the customer whether they need new architectures, whether they can expand whether more products that we can sell.

Fortinet will always have customers that have devices they need to upgrade. I think we've seen good success that our existing customers continue to buy from us. But you also have very different use cases that have, I would say, different useful lives.

OT has a little bit of a different useful life than maybe network security because you typically put a device out there into a, let's say, manufacturing plant or into a pipeline to secure pipeline traffic and so on. And these don't always get upgraded every 5 years. You also have different cycles for APs because APs with the Wi-Fi 5, 6, 7, 8, I mean, there's going to be continuous upgrade and refresh cycles.

And we are rolling out more security into these devices because, for example, an AP can also be a SASE access point for us. So for us, every device has a security posture. And so that's where we see good success, our customers adopting not only firewalls, but also the adjacent devices that help them secure their networks.

Yes. And then right before earnings, you announced the AI Internet firewall, the FortiGate 1200G. So that targeted for these meal cloud players or large enterprise. Is that the target market for this particular box?

I think that's more -- it's a large box, but it's not the largest box. So depending on the size of your AI deployments, you may want to defer to that, but there are bigger boxes for way, way bigger data centers that we have. So -- it's just one of the newer ones that we pointed to is good for AI security, yes.

And you did talk on the earnings call about the AI data center buyer and that they came back again. So is that -- are you ramping up a new overlay sales force for that, those particular new cloud buyers? Or how -- what's any change in your go-to-market to address them for this particular clients?

Yes. I mean we are definitely looking at hiring more employees, more sales employees and also potential overlays to address AI build-out to understand what the customer needs, but this also comes with -- together with working with NVIDIA because they are very much involved in selling the chips and so getting in on early on these opportunities. And we just announced this morning also a small AI acquisition.

And so we will definitely be on that AI journey as much as our competitors. It's just always -- we build internally and then we add and tuck-in acquisitions to advance our road map.

Yes. And the other thing you did really well last quarter was secure networking. So it seems like with the OT, the AI data center, the WAN Edge and campus, it seems like you sold a lot of switches last quarter in some of these deals. So that was actually -- I mean, I always knew it was part of your program, but any commentary that you can tell why that was -- it seems more prevalent this quarter than other quarters of. Is it the traffic in the network? It's a new architecture design? Is it -- what's driving them moving towards you rather than maybe doing a Cisco upgrade?

Yes. I think that what we do differently with our network equipment is that we do the inspection at the entry point into the network. And we can do that with our switches as well if they are controlled by a FortiGate. We have this FortiLink technology. So we can try to keep threats out of the network very early on and block them. And that's what many of our customers really like about our Security Fabric and the integrated FortiOS.

So would this seem like you're more like your installed base customers or would there be newer logos that would buy your networking and your security products? Or is it more of a...

It can be both. It probably -- customers look at us for the FortiGate first. But then as we educate them around all our other products, they realize that there is a whole product suite that works together and so they evaluate the benefits of having it work together for security versus maybe every single network feature that they wanted to have initially. So we see good success there.

So then in these deals that have the combo of the 2, would they come more out of the network refresh budget or the security budget or an AI budget? I mean from the enterprise side, who usually throw a budget for you?

That's a little bit unclear to us, right, where the budget is necessarily coming from, but it would definitely be more of the network organization that is looking at the benefits of the enhanced security and then working with their internal buyers as well.

Okay. And then when Ken described your customers converging on networking and the security and it's because of -- it seems like the operating system. So when you win the consolidation, what's typically being displaced? I mean, is it switches, routers, legacy APs, WiFi here? I mean, is it a combination of all the both?

It's generally a combination of all above that we consolidate on. And when I talk to customers, and typically, it's, of course, larger customers, but they all have pressures from a operating margin perspective from a cost perspective. And so they are looking at how can I improve my cost and they don't only look at what they pay to third parties.

The highest cost in most enterprises is your people. So how can I make sure that I can operate my IT department, my network security, everything I need to do with fewer people. And that typically means you want to consolidate some of your technologies, so you get economies of scale when you're operating your network.

So that -- I see these discussions a lot. And so especially the C-suite looks at what can Fortinet do for them and versus best-of-breed technologies that only few companies, I think, are really striving for.

Was it kind of a surprise to you this quarter? Or have you always seen a secure -- I mean, you've talked about it in all your industry events that secure networking. It just seemed like this quarter, it was a bigger driver, the more -- just more meat to it. Has that been building because maybe some of -- because people really need to move their legacy architecture? I'm just trying to understand what the demand is and are people realizing you finally have all the solutions and it's easier to consolidate?

Yes. I think it's -- the benefits that we've seen over the last couple of quarters is that really all geos are investing. Sometimes you have more of a trend in one country and then it takes longer until other countries are investing too. Right now, with AI, with the threat landscape, I mean the threat landscape has increased.

So this is securing your network, securing your applications is not a nice to have anymore. I mean everybody is a little bit scared of what AI can do to your security posture. So that the AI threat landscape or the threat landscape is increasing because of AI making it easier to exploit different -- not vulnerabilities, but also trick employees, find open ports, find weak passwords, right?

I mean all these things are so much easier to exploit now that the discussions are accelerating, how can I improve my security posture and then an integrated security, of course, trumps fragmented security because everybody knows, if I need to build a lot of integration points, that's another area for potential failure. So I think it's the timing that really works for us in addition to attractive pricing.

Yes. And then OT billings accelerating 55% year-over-year. What's driving the acceleration? I know in Minnesota, we had recently an attack, 30 water systems in the town next to the one I live in. And so what are you guys seeing driving? I mean that's one obvious driver. But I mean, are more of the communities in the state and the local governments more interested in it? I mean -- and what segment is really driving that growth?

We see OT across the board. And I think these flashing news articles around water systems being compromised or last year, Jaguar losing so much money because they were -- they had a ransomware attack. Or the airport terminals going dark in Europe for a while or GPS signals being intercepted by the Russians.

I mean all these things drive awareness on how critical it is to secure your infrastructure. In addition, so many more aspects of your life get digitized, right? So we are involved in EV charging station security, which would fall under OT for us, right?

And so it's across the board. It's also across the size of customers. So there are a lot of small manufacturers that are vulnerable because they haven't put as much thought into security. And so we sell OT across all customer segments, of course, into public sector, but that's not the only customer. It's across the board and because it's a very hardware-centric play, we have an advantage.

Yes. And then do you have an overlay sales team for that? Or would that be covered by the commercial or the different sectors?

So now we -- the way we are organized is we have an account manager that owns all the sales to one customer and then he brings in specialists. So we do have OT specialists that know how to that knows all the protocols that need to be secured, how to integrate IT and OT networks.

While we are educating our generalist account managers, we definitely have an OT overlay function that helps these account managers be successful and also work with partners. There are specific OT partners. We have specific industry partnerships, let's say, with Rockwell and Honeywell, Siemens, Schneider Electric to integrate our solutions into some of their equipment. And so all of this requires special knowledge.

So how would you size the OT opportunity today versus like, I'd say, 2 years ago?

I would say the opportunity, again, is growing with more digitization in every segment of your life with more exploitability, interceptability of wireless signals, traffic and so on. So it's a growing part of our market. And what has increased is definitely awareness.

And I think not only in the companies that it needs to be secured, but also across the board, across the boards, executive management that this is a very important part of your business that you don't want to be going down because of an outage or a cybersecurity event.

So would you say that's another area that you are probably maybe adding more experts to help the sales team piece?

Yes.

Okay. Perfect. All right. And then RPO grew $7.7 billion, 16% year-over-year. Current RPO was 12%. What does the gap tell us in duration I mean for us?

So I think we are comparing numbers up 1 month, we were around 30 months average duration for services in Q2. And the billings or the deferred revenue growth is a large number, right? So to increase that significantly tanks is harder than growing your service billings in a quarter. But we see good success, and we see it in the deferred revenue number now, which makes us very comfortable.

Okay. And then on services, 3 service metrics moved at different speeds during the quarter. So we had service billings grew 26% total deferred revenue 17% and service revenue at 14% so -- and I might have said service billings just said that, but -- and what's the gap between those? Is it the deferred?

So service revenue is pretty much mostly coming from the balance sheet, right? There's very in-quarter new activity. Service billings gives you the in-quarter sales and some of it is renewals, some of it is attached to hardware and some of it is services only.

So we definitely benefited from large hardware sales because we attached a lot of services. And then deferred revenue, if you look at the numbers, it's 4x the service billings. So to move it up takes a lot longer, right, than because it's such a large number.

So I mean, overall, we are pleased because current deferred, total deferred and the same on the RPO is not a big difference for us, it is -- has kind of dipped and is sloping up. And so that's where we are comfortable that we are doing the right things on the service side.

So would the AI-related services be added to FortiGuard or are those incremental SKUs at incremental price?

It's both. So we have incremental services, but we also have incremental products, right, separate products that help with securing AI infrastructure or securing AI risks. And then the OS, the FortiOS has a lot of build in security as well, which we are delivering with FortiGate with switches and APs as well.

Okay. So final question. We're getting down to the end here. So you framed 2027 on the call as 2 questions, how much share you can take from others and how much you can grow within your base. So taking those in turn, which is a larger contributor in the next year?

I think it's new markets. I think it's new markets. So new markets that open up for us in our existing customer base. It's also new markets that we are competing with, with our competitors, but that we are, I think, positioned for very well.

Well, I really appreciate your time today, and thank you very much for joining me. And I hope my questions were okay.

Yes, absolutely. Thank you for the questions. Thank you for the opportunity for us to present Fortinet success and where we are headed.

Hello, and welcome to the Fortinet Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that this call is being recorded. I would now like to hand the call over to Anthony Luscri, Vice President of Investor Relations.

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, Fortinet's 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'll ask that you please limit yourself to one question and one follow-up question to allow others to participate.

Before we begin, I'd like to remind everyone that on today's call, we will be making forward-looking statements, and these forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10-K and Form 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements.

Also, all references to financial metrics that we make on today's call are non-GAAP, unless stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations are located in our 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 results, driven by our differentiated strategy and our innovation, strong execution and broad-based demand.

Billings grew 33%, while total revenue increased 26% and 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 another angle on the network security space and its trends. By combining our secure networking and unifies SASE, which both run on the same FortiOS to create what we are calling the SASE firewall.

Similar to [ UTM NatGen ] firewall replaced 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 slide of 4 to 6 of the investor presentation.

In the second quarter, Fortinet SASE business grew 34% and to over $2 billion, cementing our position as a top player in this space. What makes Fortinet SASE firewall unique compared to other competitors, SASE and firewall solution is that we are the only vendor to develop all key components of SASE, firewall in-house and integrate into a single operation system for the U.S.

Furthermore, we have developed our fully 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 are shown on Slides 10 and 11.

Another key advantage of SASE firewall is that we are the only vendor offering an easily deployable on-premise solving sans solution together with the cloud SASE. As we announced yesterday, the new FortiGate 1200G, the next-generation SASE firewall that combine local enforcement with cloud deliver security to meet evolving customer demand for data privacy, performance and AI infrastructure management.

We believe this has driven our strong product growth recently and has an addressable market that is approximately 2 to 3x larger than the cloud only SASE our competitive offering, and we continue to win SASE [indiscernible] all of the top SASE competitors.

We also see strong demand across our other strategic pillar, AI-driven secure op, which diluted growth of 25%, supported by over 20 AI-enabled solution on our platform. As customers consolidate vendors and simplify operations, we recently launched 40 [ IOC ], a new cloud-delivered AI SoC platform and expand our end point with new capabilities.

As organizations deploy and using AI tools throughout their operations, they realize they must modernize their security to handle the complex high-speed threat of AI era, and Fortinet is uniquely positioned here as our FortiOS platform and Forti 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 or integrate and accelerate SASE firewall platform solution and our strong operation model positions Fortinet well for long-term balanced growth with strong cash generation, recurring revenue and a shareholder-focused long-term growth capital allocation strategy while consistently deliver GAAP 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. The [ Cure ] networking billings grew 34%. We saw persistent high FortiGate demand as customers expanded their network security, including operational technology environments, [ LAN A] and [ LAN ]edge and AI data centers.

OT billings increased over 55%, reflecting continued adoption of our 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% billings growth. Adoption of 40 SASE within our installed base increased to 90% of large enterprises. Our success is highlighted by 400 SASE billings 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 the cloud pop and back, it inspects and enforce security locally while seamlessly leveraging SASE for our phone 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 value increasing 52% to $773 million. Accelerating product revenue benefited from strong FortiGate 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 in 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 [ sorbent ] theme is especially concentrated in EMEA and across public sector customers globally, playing directly into our strong market position in the region and the 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 attack 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 neo cloud provider offering hosted infrastructure for generative AI workloads selected Fortinet to secure AI data centers in an 8-figure win. This builds on a 7-figure deal we secured in the first quarter, further enabling the customers rapid expansion. They chose Fortinet for our strong price for 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 a broader theme we saw in the quarter with many AI data center wins from customers scaling their 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 the infrastructure can deliver the performance and protection required for the next generation of threats, which also requires SASE 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 environment 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 Forti SASE [indiscernible] to secure over 45,000 users replacing its incumbent SSD-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 Forti SASE outpost 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 operations 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 supply chains and manufacturing operations. With Fortinet's integrated platform approach, customer 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 the 7-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 four DOS 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 team 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 at 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 gross margin of 80.9% exceeded the high end of guidance, while GAAP gross margin was also strong at 80.2%. Non-GAAP operating margin of 38% was a 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 $0.90, while GAAP earnings per share grew 44% to $0.82, 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 gross margin of 79% to 81%. Non-GAAP operating margin of 35% to 37%. Non-GAAP earnings per share of $0.83 to $0.87, which assumes a share count between 741 million and 745 million, Infrastructure investments of $100 million to $150 million non-GAAP tax rate of 18% and cash taxes of $100 million to $130 million.

For the full year, we expect billings 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 growth of 14%. We continue to expect service revenue growth to pick up in the second half of the year, driven by accelerated product revenue growth is 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 in which assumes a share count of between 741 million and 745 million. Infrastructure investments of $350 million to $450 million, non-GAAP tax rate of 80% and cash taxes of $400 million to $450 million.

I now hand the call back over to Anthony to begin the Q&A session.

Thank you, Christiane. As a reminder, during the Q&A session, we will ask to please limit yourself to one question and one follow-up question to allow others to participate.

Operator, please open the line for questions.

[Operator Instructions] Your first question comes from Saket Kalia from Barclays.

Ken, maybe for you on that point. 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 would you be?

We also spent a lot of time tried to study whether it's a new market trend or it's a supply or the other things. We do believe the growth actually is long term for Fortinet. Definitely, you see the AI changed a lot of our security landscape. And also without kind of like an 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 -- everybody would like that. It's a SASE firewall.

You can see on the investor slide #6, I believe, is kind of -- this new platforms are didn't replace in the traditional [ NatGen ] firewall and also replace a lot of like a single solution, SD-WAN vendor and also competing quite well with all the cloud SASE provider, which Christiane gave the example in like a [indiscernible] global company, the cloud-only SASE solution cannot meet the 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's a growth quite long term, just like 20 years ago, the [ UTM NatGen ] firewall replaced the traditional net-based firewall.

Christiane, maybe my follow-up for you. The follow-up for you is, how are you thinking about the impact of price increases on your product growth for Q3 and Q4. Maybe, I think there have been a couple of price increases, of course, to reflect right, the higher input costs, but curious how you're thinking about the impact here as we go into the second half? .

Yes. We have 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 it -- I mean, yes, there were price increases, but they were not for every product and every service. So it really depends on what 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.

Yes. Also, we kind of build in the trials with our partner, with our customer. So we just want to maintain the same gross margin. That's where we kind of realtime adjust the price based on the -- some component costs like memory. That's where -- so if the price is going down, we also real-time drop in the price.

So there's -- so that's also we don't see any like excess inventory or pulled forward because we told the partner customer, there's no need to really take extra inventory. And also, we have a policy with tend starting charging not days after shipment for some kind of service supporting. So that's where there's no incentive to keep actual inventory.

Your next question will come from Shaul Eyal with TD Securities.

Ken, I was listening to your firewall SASE commentary. Maybe help us understand, and maybe it's building a little bit on Saket at least you reply, but maybe how AI is propelling the convergence of firewall SASE forward?

AI definitely see generate a lot of additional traffic. There's some study whether a few weeks ago, a few months ago, the machine-to-machine traffic first time passing the human to machine or human to human traffic on the Internet. So that's definitely the AI agent, 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 8-figure deal last quarter after the 7-figure deal. We do see that kind of drive a lot of enterprise customer, even service provider to have a better visibility, better control management of this kind of traffic.

That's also kind of -- I mentioned last quarter is also kind of accelerate the convergence of network security. And especially on top of that, there's a kind of a zero trust initiative. So that's where we see it's kind of is starting to change in the landscape of network security. That's a core is a SASE firewall. It's more like early days when Fortinet starts like 25, 26 years ago, initially, I call it like an antivirus firewall because that's the first firewall can do the antivirus. And then later, they call [ UTM or NatGen ] firewall, that's all fine.

But I do believe the SASE, the AI drive a lot of growth, especially within enterprise within service provider.

And maybe slightly more of a, I don't know whether philosophical or strategic question to you, 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 talked to, it's definitely a fair assessment because there is a combination of factors that they like about us, it's the integration of our solutions. It's 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 there.

Yes. We are also very focused on the network security. It's different than whether Palo or CrowdStrike when it's 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 more focused on the network security with internal R&D and integrate -- develop all this function FortiOS and also a lot of long-term investment like Forti ASIC like our owned infrastructure globally. And all this, we feel is really the focus, the long-term investment are 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 two pillars. We see a bunch of deals where customers are buying from 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 has 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.

Your next question will come from Gray Powell with U.S. Bank.

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. Can you -- is there any way to comment on what component within that category contributed the most of the 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 the access part of SASE to become a bigger consideration point in those discussions with customers?

Yes, we see the 40 SASE more than double year-over-year. And SD-WAN, also we see pretty strong growth because all the other top 5 competitor outcome from acquisition, and they all have a separate approach compared to whether the firewall, SD-WAN and 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-prem SASE. Like the example we gave this a global pharmaceutical company. We're the only one can meet their requirement, have data projects locally. They have a lot of confidential data or this medical data. They have to process locally. 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 whether on-premise SASE, sovereign SASE, private SASE compared -- I mean plus all the cloud base, the global Fortinet infrastructure, give them the best solution gives the only solution, actually, the they see on the market. So that actually drives a lot of growth.

SD-WAN, we see more replacing -- taking market share from competitors because I don't see any of them kind of keeping invest or develop the technology, which after acquisition is more challenging for them. On the other side, we do see very, very strong growth, whether the SSE part and also the sovereign SASE and plus also AI kind of related security.

And AI growth in attached and unattached solutions.

Your next question will come from Keith Bachman with BMO.

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 [ FortiCare and FortiGuard ]. 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 coming from SecOps, which is typically more unattached solutions. And yes, we see good growth across both.

Yes. Also with 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 FortiGuard solution. So that's where we see there's 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 deployments -- and that's what I tried to point out in my prepared remarks as well, we really make sure we sell attached services, including respective FortiGuard services.

Also, the bundled service. The bundled service we launched like a few months ago, [indiscernible] cover strong growth, which bundled the SD-WAN, the SASE altogether. So that is a very good driver for the growth, service growth.

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 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?

Yes. It's really like a two, three factors. One is really -- we have invested in OT for whatever long time. And we don't see our competitor really much focused 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 feeding the OT security quite a while. So thus, we feel we have a huge advantage compared to any other competitors and that we continue to lead actually in fuel report, we're the only leader in the space, and we do believe is -- we're keeping growing going forward.

And let me add some more color on the OT side. I mean, critical infrastructure is being targeted 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 nest to others that actually acquire 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.

Yes, we are probably only network security vendors talk about OT security the last few years. I have not heard our competitors talk about OT security yet.

We've invested...

Yes, we think there's net new logos there too as well.

Yes. We've been growing this for years, and it's ruggedized solutions. So 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 allow OT providers like a lot, and I think all of this is culminated in this growth, but also industry analysts agree that we're #1 in this sector.

Your next question comes from Meta Marshall with Morgan Stanley.

A couple of questions. Just in terms of customers' changing traffic patterns with AI, just wondering like if you could speak to what are 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 refresh behavior from customers?

And then maybe a second question, just following up on that OT question that we that you just got. Just in terms of sizing, like how to think about 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 build that we should think of that is kind of security related, that would be helpful.

Yes. For the -- AI definitely change some behavior and also keep in saying AI actually accelerate the convergence of network new security. So within enterprise, the customer definitely want to have a better visibility, how this AI agent, all this AI traffic kind of behave and the same thing for the service provider and the data center or this new cloud provider. Thus, we see a pretty strong, we call the internal what we call the east-west traffic, which is mostly deploying internal inside data inside enterprise. That's actually our ASIC performance advantage is definitely much precision for that much better than the competitors.

That's actually we see -- you can see the -- both the strong product revenue growth and also the unit growth, which probably -- I think if you compare to refresh, you only take about 5-year average for the [ bus ]. But compared to 5 years ago, so our product revenue is probably tripled. And plus we had this 56% product revenue growth. Definitely, there's a much bigger than just to refresh all kind of -- so that's what we feel customers starting replacing whether some traditional firewall and SD-WAN, some other ones.

And the reason I kind of combine the two pillars together because they're running the same OS sometimes customers usually just buy for firewall, SD-WAN, and then they gradually enable SD-WAN SASE, that's actually kind of difficult to category, whether it's a SASE deal or it's kind of a secure networking deal. So that's why 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 at the second question...

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

Yes. And also especially when building the AI infrastructure, they're probably more starting from building the utility of this kind of the basic OT side and then eventually, what kind of get higher layer all this kind of like a server and then the modeled applications. So that's where we do see the initial strong OT growth to -- in the early stage of AI infrastructure build-out.

Your next question will come from Fatima Boolani with Citi.

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? What the next phase of the network and security processes look like in collaboration with Intel? And how do you think that brings to you a more advantageous position as you think of the future iterations ASIC? 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?

I see the reason from day 1, 26 years ago when we started Fortinet, and we want to build ASIC chip is a network security need much more computing power compared to networking and some other kind of security. That's where -- if we depend on the general purpose CPU, which we're also using together with own ASIC, we feel it's not enough. I cannot like a process the data quickly enough or cannot add enough function to meet a customer need.

So that's where from day 1, we're starting to invest 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 probably only manufacture in the U.S. probably do all this kind of chip manufacturer. And we have great times, and we do believe combined 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, we also feel network security will continue to expanding beyond the traditional enterprise can be eventually go to like now is the SASE can support in remote work from home eventually can be in the consumer in some a lot of broad area and the convergence of network new security, we're keeping driving the space to grow faster than the other area.

At the same time, the AI, we also see is a huge boost for the network security need, especially with a lot of new vulnerability that is covering in software and network security definitely give them other layer protection and other layer of visibility control. So that we see is -- I believe, is a very, very important strategy to keep invest in this kind of long-term ASIC chip on the infrastructure. That's what drives the long-term performance and lower the cost and eventually pass all this benefit to customers.

I appreciate that detail. Either for John or Christiane. You mentioned in your prepared remarks that the source of the operating leverage and margin outperformance was tied to the revenue beat cost controls and rigor and also some AI efficiencies.

I wanted to take a step back and ask you over the course of the last 6 to 12 months, what have you done operationally at the company to allow for these types of efficiencies to become more prominent in your profitability profile? 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 have 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 perspectives 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 [indiscernible].

Yes, I think it's a team effort across all functions where we are leveraging technology, where we are leveraging. Also our internal AI build-out 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 years ago in the support organization, and we've seen good success there with our significantly slower head count growth or not even having to backfill certain roles and 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.

Yes. 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 -- when things are going well, we buckle down and 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.

Your next question will come from Gabriela Borges with Gorman Goldman Sachs.

Ken, I wanted to follow up on your comments on 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 in 2027. I know we're still 6 months away from any sort of normal 2027 guidance.

We sort of have to dial in our model this evening on the 50%-plus product revenue growth comps and last quarter across north of 40%. So I guess if you give us a little bit of direction here. How should we be thinking about product revenue growth? It's a little bit similar to socket ability question into [indiscernible] 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 read into how they should be modeling next year?

It's pretty tough to predict the future, but it's -- maybe I'll try on two angle, one is really replacing some of the old infrastructure. The other is really the new growing area.

Definitely, we see the traditional [ UTM NatGen ] firewall and like the single point SaaS -- I mean, SD-WAN solution and even like the cloud SASE had their limitation. So we do see we're kind of quickly gaining market share there from the few case we win 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 old key, that's also we see kind of repositioned well. It's a good kind of opportunity.

We kind of closely engage with -- even for SASE like 3 years ago, we only focus on SASE service provider. Now we see -- they're all starting to come back with all these sovereign SASE, private SASE and the on-premise solution is huge. That's the reason I say it's 2 to 3x larger than the cloud-only base SASE.

And -- but on our side, we do see kind of -- as long as this -- the new trend keeping growing, we do see we're kind of keeping that -- 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 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.

Our next question will come from Junaid Siddiqui with Truist.

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

Yes, I do believe lot of service provider and they need to changing their security services, go beyond the traditional like some firewall VPN service, then that's definitely some of the SASE service is actually quite important for the customer, that also they do have an infrastructure advantage if they can lever the infrastructure deliver SASE would be more like give kind of a better data privacy, better performance, leverage their local infrastructure and the same time, kind of a win situation for them and for customer for us.

But on the other side, a few years ago, they're kind of a little bit slow, but now we see since a salary. But on the other side, we also see the enterprise also starting to demand in this sovereign SASE, like the case we gave out this 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 FortiGate, 100G, we do put some like percentage content emphasize how these outposts deployment is important for a lot of customers, but you can process all this data locally on the FortiGate and at the same time, can also leverage some cloud and management to really for some policy globally.

That's a solution we see also well adopted for the enterprise. When they see this solution, if you is much better than the cloud only, which they have to pull a lot of their data traffic to cloud process. And so we do see it as a kind of a huge market, both for the enterprise and for the service provider, but we're also kind of working well with a lot of service provider, which we see they have acceleration of this kind of sovereigns deployment now.

Our last question will come from Joe Gallo with Jefferies.

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, the -- like I said, we want to maintain the same gross margin. The memory price kind of will stabilize in the last few weeks or even last few months. We will do like a monthly adjustment based on our cost, but we want to maintain the same gross margin as the policy, so that's we feel -- but like I said, it's still single-digit impact of the business. We do believe the strong -- the bigger drive is really the new SASE firewall approach, which give a customer a much better solution, better local control of their AI, their data, and at the same time, the new growing area like OT, like all this AI related, we do see a much bigger driver for the growth. And yes, we see the SASE firewall could be the new trend to drive the growth in the next 5 to 10 years.

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

FortiGate, probably the fastest growth among that. But that's also because FortiGate run the same for the OS for both the traditional network firewall security function at the same time for like SD-WAN for SASE that's where sometimes may be difficult to category, whether it be long to unified SASE or secure networking because sometimes they may deploy a SASE secure networking first but quickly ramp up to be SD-WAN SASE. That's why I would like to call it SASE firewall because the same operation system. Yes. But FortiGate see the strongest growth.

Thank you. That concludes our allotted time for Q&A today. I will now hand it back to Anthony Luscri 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, Stifel, Deutsche Bank, Goldman Sachs and Kepler Cheuvreux during the third quarter. The fireside chat we list 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.

[Audio Gap] cybersecurity again. It's very easy with Bank of America. Whenever someone leaves, they ask me to cover it. So I cover software and data centers and cybersecurity and networking. So one-man show, research.

But I'm very pleased. I know this space extremely well. I've been covering it for 15 years, almost 20 years. And I'm very pleased to host Ken Xie, CEO; and John Whittle, Chief Operating Officer. And we are going to speak about the fundamentals.

I want to talk about the quarter, but very little because I really want to focus on the fundamentals and what's coming for the next few years. With this introduction, I'll start with the quarter, Ken.

The quarter was unique because the numbers were very strong. The billing growth was 31%. Secure networking billing was 32% up. Unified SASE was up 31%. And the question is, what drives the growth, both of the secure networking as well as the new areas?

Like I mentioned in the earnings, we see the AI actually accelerate what we call the convergence of networking and network security, especially within enterprise because AI definitely drive a lot of additional traffic whether AI agent or using some AI for certain application. Most enterprise still today, they only have this they call the perimeter security. Internally, they don't deploy much network security, whether do the internal segmentation or protect some key server or certain departments, some data there. So that's where we see the strongest growth actually come from the enterprise for us, really the middle-range FortiGate product.

You can see the product revenue growth like 41%. Not much come from this supply chain price increase. It's more come from the new demand and at the same time, there's other areas whether the OT Security, we see like a 70%, 80% growth year-over-year and some other data center building because we have a huge advantage on ASIC performance, more function to supporting this high-speed network environment and network security. So we see that also in the early stage ramp-up right now.

Yes.

There was concern after the quarter that maybe it's early ordering. People are concerned -- investors were concerned that maybe this is not sustainable. So how much of it? And can you know actually if it's early ordering of customers?

We actually managed the channel inventory, managed pull forward quite well. And also, we told customer partner [indiscernible], we will maintain the same margin. So if our costs go higher, we may adjust monthly. And like this time, we do raise some of the price on the product side. But most of service, we did not touch, really service a percentage of the hardware price.

But right now, we feel some kind of memory, some component increase may be temporary, maybe I don't know how long it will last, maybe a few quarters or maybe -- but we also -- if you look at last time 5 years ago, when there's a supply chain issue there, we raised the price in the beginning, and we lowered the price when the price come down also. That's where for us, the policy just maintain the same margin with a gross margin around 80%.

I feel we built a trust with our partner customer. And also, we told them no need to pull forward. We also have some policy once you bought the product, if you don't deploy within 90 days, we automatically trigger the service revenue, all this content, we call the FortiCare. So that's where there's no incentive for keeping excess inventory for the partner for the customer.

And we've been seeing kind of sustainable growth drivers across all 3 of our pillars, OT, et cetera, for many quarters, well before we increase pricing. And this is even before the AI tailwind, which to us feels like a sustainable growth driver as well. And so we see that momentum well before the price increase. Like Ken said, we manage the inventory. We're not seeing increasing in stocking orders.

So it feels like the sustainable growth drivers have been really strong before the AI tailwind, and now that's a new sustainable growth driver that is really accelerating that growth.

So I'm trying to understand the AI tailwind. Agentic AI is not a big driver yet in terms of deployment. The numbers are small. When I look at companies even like Salesforce who are presenting after you, it's $1 billion of orders out of $50 billion of revenues. It's not a big number. Why do we see AI as a tailwind already now before actually we see agentic being adopted?

I think usually the revenue come after people starting using all these things, right? We see the interest is pretty high. If you talk to company inside, pretty much every R&D engineer, they try to leverage AI now. And even a lot of like Salesforce, their customer support, they say maybe 80% now handled by the AI. And then there's a lot of other even G&A or even -- that's where we see a lot of company, they're starting to try to see how AI can help them or AI changing since there.

That's where we see the AI, we see the increased company traffic within the company, probably like some they say, 20%, almost 30%, 40%. They do have increased company traffic within their own kind of enterprise environment because this is really inside the company, especially all the edge AI, agentic AI. That's where the traffic, the traditional network security, they use security perimeter. They don't see how internally. That's where we see the biggest growth come from the middle range, which we see the customer more deploy inside the company. We do the internal segmentation, is kind of internal securities.

Yes. And I would almost categorize it into 3 buckets. When I think about the growth drivers, and there probably are others from AI, the AI tailwind, you have kind of the elevated threat environment in general with AI tools. And I would put Mythos in that category, even though I think people are worried about Mythos or the equivalent functionality becoming public and then their entire software surface could be exposed.

So I talk to CISOs a lot, and they're very concerned about that. That's impacting buying patterns in addition to the increased threat level with the AI tools that are out there. Then you also have the AI sprawl within organizations and people are very concerned about that. CISOs are like, I don't even know what's out there. A lot of this is shadow AI. And then you have AI data centers, and we're seeing a lot of investment there. Security is a big portion of that, and you see billions of dollars being invested there. A portion of that is going to security, and that will be a sustainable driver over time.

And where is this demand? What kind of customer? Is it bigger going to -- so if I rewind back, I don't know, 20 years, you started from the SMB market and your product specs, the fact that you are low latency and features brought you into the enterprise space. Where are we seeing this? This time you spoke about Sovereign AI. This time you spoke about -- so where do you see the demand as a result of the AI cycle? What kind of customers I mean?

I think like in early Fortinet, we more leverage the channel, right? So it is doing well. And also when we IPO-ed 17 years ago, it's like over 30% business come from what we call the service provider, telecom service provider. Now we see not only the enterprise try to get better visibility internally, but also some service providers starting to come back, where there's some AI service provider, there are also some kind of a hyperscaler working with us, but also whether the Sovereign AI, Sovereign SASE, also, we see huge market opportunity for us.

We gave a few examples during the earnings call, which I feel -- some of our competitors not address our market yet, especially like a Sovereign AI, Sovereign SASE, they do need to deploy on their own infrastructure on their own premise instead of the cloud deployment for a lot of like a SASE player there. So that's like a 2, 3x bigger total addressable market than the cloud, AI or cloud SASE there. That's where we see huge growth there.

And also, I do believe a lot of service provider will be very, very important part of the ecosystem like 17, 20 years ago when we IPO, that's where it could be even driving the biggest market segment for whether AI or SASE.

Yes. John, in general, what can you say about the sales cycle, the pricing environment? What -- where are we in terms of the risks to the business model?

Yes. I think if you look at our business, it's very well diversified across geos, solution sets, our 3 pillars and OT, across customer sizes, across verticals. It's a very diversified business. And we see these sustained growth drivers across all of those different sets.

And so we're not seeing risk to the business, if anything, we're seeing a little more urgency in terms of these conversations with Fortinet and the CISOs are coming to us for help in this new AI environment. So we see a lot of demand. We see a lot of momentum. It was reflected in our Q1 results. We saw the demand picking up before that as well, and we feel that demand right now.

So we're not seeing risk. I mean the -- our big opportunity is to address the demand, and we've got to just move really fast to make, hey, while the sun is shining, it feels like for the next 3 to 5 years at least with a company like Fortinet, where we have the scale of solution set, great solutions for this environment, the momentum is very, very strong across our diversified business.

So I'm trying to understand the secure networks. You had very strong growth of orders, and you spoke about traffic, Ken, you spoke about traffic going up. Check Point reports weakness in firewalls. Palo Alto said the firewall market is growing 5%, you're growing 31%, 32%. Where is the disconnect? Why are you more successful than the others?

That's a...

And by the way, sorry, just to -- maybe I'm not comparing apples-to-apples, so if you can expand on what's included in it.

Yes. Actually, the product revenue in Q1 grew 41%.

Right. That's the problem.

41%, that's compared to Palo Alto, Check Point, whether single digit or even negative like Cisco. I feel kind of -- you've seen the -- if I look at the brochure also in the investor presentation, you've seen the 3 eye, to describe this long -- you are the only few analysts in this space for like 20-plus years, right?

So the first eye is the innovation because if you look at Fortinet, probably the only company or a few company we internally develop SASE, SD-WAN, in the past, NextGen Firewall, Sandbox in like APP Control, all these things. And then that's where when company keeping growing, how to keeping catch up the new wave, the new like function needed, that's very, very important.

Like some companies, they starting falling behind when they're bigger, they cannot internally innovate. That's where the first eye. The second eye I call the integration. So when you develop internally, you cannot integrate easily in a single OS. So Fortinet has about 30 function now. So if you depend on acquisition, the integration is more difficult like how Cisco, Palo Alto, when they compare whether SASE, SD-WAN or before, they have a separate box, separate solution to cover SD-WAN, cover SASE, cover all the network security, all the things there. So they cannot have a single integrated solution.

In the network security, single [indiscernible] so important because customers don't like to deploy multiple box in line. That's where in the network security space in the last 20, 30 years, most point single point solution company all disappear. And only the platform when the multiple function integrate together that way. That's the second eye integration.

And then the third eye, I call the improvement, which Fortinet also is very unique. So from day 1, we developed ASIC to improving the performance, the additional computing power can enable more function, lower the cost, lower the energy consumption. And also, we're also the only cybersecurity company investing in our own global data center infrastructure. So we own the data center. We own all this kind of like a FortiStack with own software. So that's making us 1/3 cost compared to other SASE player.

That's where the 3i innovation, integration and improvement ASIC of the infrastructure. That gave us an advantage for the long-term there. That's why I feel the market itself probably grow around 10% year-over-year. But whoever can keeping this gaining market share, that's why we have confidence. I say multiple times in the last few years. We are very confident to grow faster than the market and keeping gaining market share, which some of the players starting falling behind now.

Yes. I think it's also a competitive advantage that we have been very focused on that network security market for 26 years, and there's no competitor that's been focused on that in terms of investing for growth Check Point was more focused on profitability. [indiscernible] said they're getting out of it. Cisco sometimes invest in security, sometimes doesn't. And we've been very focused on that market, and we're seeing a lot of demand for it.

I think some of the market growth rates may have been understated, which may have helped us a little bit because people don't view it as a shiny new object, but we've been very loyal to that market more than anybody else, and that investment Ken is talking about in the technology is really putting us in a good position right now.

So Ken spoke about the 3is, and you touched at the end about SASE. I want to go back to Unified SASE just to ask a simple question, why are you growing so much faster than the others? And who are the customers? Meaning what is the addressable market you're going after from a profile of customer point of view?

Yes. I think the differentiation is really we put SASE, SD-WAN and all the NextGen Firewall security in the same OS. So that's -- it's very easy, quick for customers to adopt SD-WAN, SASE. That's where in the last few years, we already become the #1 SD-WAN player because SD-WAN is part of FortiOS. Now SASE part of the FortiOS that's also like 90% base right now come from the customer transition from like network firewall to SD-WAN to SASE. Just in a few minutes, they can get the SASE deployed.

On the other side, we also the only company invest in the SASE infrastructure globally. It's part of some other service we have FortiGuard, FortiMail, which also leverage all this data center infrastructure. That make us a 1/3 cost, much lower cost compared to have using cloud providers, some other colo. So that's other huge advantage.

And then the third one, I -- so the first one I call 3-in-1, right? So 3 function into 1 OS. The second, I call like 1/3 of cost. And then the third one, I say the 3x the market size, like a Sovereign SASE, on-premise SASE, all these appliance, which the competitor not addressing, they all have a cloud SASE approach. We see the Sovereign SASE growth so strong. There's a lot of service provider carrier.

We do give an example, they just say, hey, SASE will be huge potential for them. Just like 17 years ago, the firewall VPN is big potential business for them. So they're starting to quickly adopt the sovereign SASE using our box on-premise in their own infrastructure, deploy SASE service for their customer and keep the data within their own infrastructure. So that's where the Sovereign SASE, I feel will make our market -- total addressable market like 2 to 3x compared with cloud SASE, the other play and [indiscernible] competitive.

So that's a few -- the SASE, like you can see the Unified SASE Q4 grew 40% Q1 like 31%, 32% faster than any other SASE player and also we're bigger. So that's I feel -- even starting called SASE firewall, right? So it's the same operating system, same box. You can enable SASE and together with firewall. That's why sometimes in Q1, it's a little bit difficult to differentiate because in secure networking, the most growing in the FortiGate with like maybe 80-some percent being there. Because for us, the sales have no incentive whether to identify the SASE or firewall. So both things grow like 30-some percent. So it's both pretty strong.

Got it.

But we do see SASE, we have huge advantage. Even using the SASE firewall as a turn, which is SASE just like a few years ago, all the Sandbox being integrated into the firewall, then the Sandbox firewall is kind of disappear. And also the NextGen Firewall replacing the traditional firewall. SASE is starting to replacing some of the non-SASE firewall and part of the whole network solution now.

Got it. Is your SASE offering today at par with competitors? I -- because I stopped covering you about 8 months ago and I started covering you about 2 months ago, there is a 6-month gap in my knowledge. So back then...

[indiscernible]

Yes. When I left you, you were still ramping the feature set of SASE. Where are you today in terms of competitive positioning?

Actually, we do see very, very strong demand for the SASE, and you see the ramp-up pretty quick. What's new in the last 2, 3 months, really, we started to launch, we call a 2 bundled service, bundled SASE, SD-WAN and all these other service together, which for the existing customer is 35% for the hardware cost per year. And then -- but that's also -- if you bundle all these kind of 4, 5 service together, it's less than 1/3 cost you buy individual.

Because in the past, SD-WAN, we do offer SD-WAN part of the FortiOS function, but we don't charge much service. They do have underlay over service, but only the very top customer buy it. So when we bundle SD-WAN, SASE altogether with also like a 5, 10, 20 free license part of SASE user license part of it, we see the drive of the bundled service growth like very strong.

Got it.

And we are seeing the most discerning enterprise customers buy our SASE in very competitive deals. So we're seeing an increase in that. And I think we're really kind of distinguishing ourselves versus some of the single solution providers out there who don't have the optionality of Sovereign SASE and cloud SASE. And I think you see that in growth rates and stock price performance versus like a Zscaler or Netskope. And so I think kind of the winners and others may be -- there may be a trend where that's starting to separate a little bit.

Yes. On the last call, you said, if I remember correctly, and if I'm not correct me, that you're 18% penetrated within customers with SASE?

Yes. For the enterprise, we're track it.

Right.

Probably 70% now already using the SD-WAN, but 18% now using the SASE now. But also that's probably about 50% growth compared to 1 year ago. It's a pretty strong growth for the current customer base, quick line up from like firewall to SD-WAN to SASE.

Got it. You touched on Sovereign. For those who don't understand the difference, can you explain Sovereign SASE? What is it? And what is the market opportunity?

Basically, you can process all the data within whether customer on-premise, we call private SASE all in their own kind of infrastructure, like certain countries, certain service provider want to have the data being processed with their own infrastructure instead forwarding to the cloud. That's the one. You do need to provide them the product, the tool to process within their own infrastructure, basically selling the product first and then they kind of using the product offer the SASE service to their customer base process locally.

Got it. And is this a U.S. phenomenon? Or is that the outside the U.S.

Probably more EMEA.

More EMEA. got it. Okay.

U.S., we do have a few bigger enterprise especially finance service. They do they call the private SASE. They're using their own data center infrastructure to process data on their own premise.

Yes. The other parts of the business also grew very well this quarter. Talk about the other parts. OT, I mean, take us through the journey of the newer parts of the portfolio outside of SASE.

Yes. I think OT is the one we say grow like 70%, 80% year-over-year. We kind of focused in that area in the last 5 to 10 years. And we don't see much other players getting into this space because it's kind of -- there's a lot of unique protocol. They also sometimes need a special hardware in the ruggedized form in this outdoor environment. That's where also kind of do need some kind of long-term investment there.

On the other side, you can see OT/IoT is a space, which probably a lot of time or probably most of the time, network security may be the only way to secure that environment. Because endpoint pretty much impossible to deploy in this OT/IoT device, which has a very limited computing power, very different operating system, which is the traditional endpoint solution not working. So the networking security is probably the only way to protect them. So we see a huge market potential, especially all this edge computing, all this kind of connect device, all these things.

So that's where we are probably the last 3, 4 years, if there's a market report, we are probably the only leader in that space. That gives us a huge growth potential advantage there. I feel that's probably in -- I keep saying in the next 10 years, probably there's more 10x more device connected online than people. Maybe if you add like agentic AI, maybe even 100x.

Yes. Security operations, think about how central is security operations to the broader platform?

We just try to help customers to quickly automate their security operation. So we have about -- actually about 40 products in that portfolio there. Now over half, more than 20 has all built AI capability inside like AI making all this decision automatically, so they can react very quickly within a second. So that's also -- it's for us more like upsell, cross-sell.

So if you look at secure op, it's a very huge market, almost like $200 billion. But I do believe probably no player even have a double-digit market share. They are so fragmented, right? So that's where for us, probably like around 10% business come from the secure op, but more from existing customer upsell, cross-sell. And because we develop most product in-house, they integrate up like automate together much better. So that's where kind of we feel that's the advantage we have. But on the other side, it's a very, very fragmented market. And we still are focused on network security right now. But a lot of customers, once we get in, we start expanding into some operations to help them to quickly automate.

We are also seeing a lot of kind of midsized customers who buy across the 3 pillars: secure networking, SASE and security operations and MSSPs who love the full portfolio because they can offer it as kind of an a la carte menu and sell additional amounts. And they're also expressing interest in some of our AI visibility for the AI sprawl so they can help their customers identify the AI sprawl throughout their organization and secure it and have cost control around it as well.

Is this a stand-alone product? Or is it normally sold with the other parts?

It's typically an expand sale. So it can be a stand-alone product, but more often than not, it's an expand sale and oftentimes, these mid-market customers will buy across the portfolio. And we see the bigger customers consolidating vendors as well, whereas they may buy from multiple vendors. But I think that kind of broad platform approach and opportunity is pretty significant in mid-market and below.

Yes. When we measure cybersecurity companies, very often, we look at how much business is coming from new customers versus how much business is coming from an upsell, especially now when we talk about platforms, upsell is a big part, but also new customers is a big part. So talk about your situation. Talk about kind of business with new customers versus upsell to existing customers? And how do you go-to-market differently about these 2 things?

I think for us, we definitely want to take care of the existing customers for the new security need. That's how we kind of keeping up all this space changing, whether the SASE with quantum computing with our AI. So we try to internally develop the same new function in the OS, make it very easy to migrate to the next function they needed.

On the other side, we do see competitors starting whether falling apart or behind, which make us also gaining a lot of new customers, especially like U.S. enterprise. You can see pretty strong growth. So if you look at 10, 20 years ago, there's a top 5 player has less than 50% market share on the network security. Now probably the top 2 players already have over 50% market share. So they do have some consolidation going on.

And I do believe we have more advantage than other competitor keeping gaining market share. That's why we are confident we'll grow faster than the market in the next few years. And at the same time, we're keeping gaining market share.

Got it. We're almost running out of time. I want to talk about supply chain. Any constraints? How do you handle supply constraints?

We manage this multiple times. And just like 5 years ago, we told our customer partner, we just want to maintain the margin, and we don't want to make more money or whatever. We do the real-time adjustment. And we also have a 6 months inventory. And at the same time, because we have like almost 60% market share on the unit shipment in the space, we're able to operate, manufacture, working with all this like memory supply, the CPU supply, the network chip supply directly. So we're working with the chip company directly to source all this.

I think has a better source capability, more long-term commitment contract, make it more stable. At the same time, the policy of excess inventory help us during this time to gain the market share, which a lot of competitors probably don't even have the product to shipping. That's we say this once of 5- to 10-year opportunity to gain market share, we view it this way.

Got it. And do you envision maintaining this leadership? What is structurally right with you that is wrong with the others? I mean why are you structurally able to handle supply constraint better than the others?

We're trying to be more long-term focused. Like I don't see any of our competitors try to keep in 6 months inventory for the key component like our own ASIC, we keep even 1 year inventory. So there maybe lower some operation cost short term, but they're missing the opportunity, which I feel if we don't have this, we miss -- there's an opportunity cost if we don't do this. So that I feel some kind of -- maybe we go through this a few times, we do a little bit better than competitor, but I view this as the opportunity to gain market share.

Got it. We're -- we ran out of time, but I can steal a minute or 2 from the next -- from the break. Any questions from the audience? No. Great. So I'll let you go.

Okay. Thank you.

Thank you.

Thank you so much.

Everyone, and welcome to Fortinet Quantum Cybersecurity Webinar. Thank you for joining us today. I'm Amol Bhandarkar, and on behalf of Fortinet, it's my privilege to have you all for this conversation. And I believe this is one of the most consequential one in cybersecurity right now.

Let me start with this number 2034. That's the Gartner's projection when the quantum computing is going to break virtually all the cryptographic standards. Gartner has highlighted this post-quantum cryptography as one of the top strategic technology trend, warning that the quantum computers will break all the cryptographic within a decade. And that's like -- sounds like a future, but threat is already here today. And threat actors often state-sponsored are already executing what's known as a Harvest Now, Decrypt Later attack. They're exfiltrating your encrypted data and storing it and waiting for quantum capabilities to unlock it.

For the organizations who deal with this data, financial record, patient history, intellectual properties, government communication, your data that's encrypted right now may be compromised in somebody else's data store. India's regulatory landscape also is tightening very fast. DPDP Act, which is already operationalized in 2025, mandates a reasonable security safeguards and accountability for data breaches. Regulators like RBI, SEBI, IRDAI impose additional stricter cybersecurity obligations on financial services.

Now as a country's framework are collectively establishing a robust compliance architecture for current threats, they remain largely technologically neutral when it is in case of explicit contemplation of quantum-induced vulnerabilities, which means there is a gap between a regulatory intent and the quantum readiness that falls on the organization like yours to proactively closely monitor it.

So regulators are already shifting the Q-Day estimates into the mid-2030s window, which is like more tighter deadlines for us. At Fortinet, we have been building this for this particular moment, whereas our FortiOS is supporting NIST approved PQCs, QKDs, integration, FIPS compliances, hybrid mode and algorithm stacking, which will allow the organizations like you to transition into a quantum-safe encryption at your own pace without any overheads or performance compromise. In the next 1 hour, Nitesh, who is our subject matter expert for quantum computing, will walk you through a threat landscape, regulatory imperative specifics to your vertical and the practical road map to become quantum safe, not someday, but today itself.

So let's get started. I hand it over to Nitesh to take you forward.

All right. Awesome, thank you so much, Amol. A warm, warm welcome to everyone to Quantum Cybersecurity Webinar, Securing The Future Beyond AI. Now we understand that this is one of the major technology boom that has come up from last 5 years or 3 years per se. And we understand this is the problem with a lot of customers as well in understanding the time frame, how and when to start and how to start as well, right? So that's the reason we are doing this webinar to understand the time lines, what is quantum computing in the first place, right? How the quantum physics, which talks about the electrons, protons and neutrons are being translated to the bits, which is 0s and 1s, which are computer today understand it, right? That we need to understand that how quantum is getting translated to today's computer language, which is 0s and 1s, right? So we'll talk about that as well.

To set you the context of the today's webinar, let me walk you through the agenda that we're going to cover today, right? The first thing is on the quantum computing, like I said, we'll also talk about the Harvest Now, Decrypt Later. There are interchangeable names, Store Now, Decrypt Later attacks. We'll also talk about the quantum day, right, or the quantum year, which was previous 2025, we were calling it as quantum year. And we'll talk about the impacts on specific industries that is covering most of us, right, which is finance, health care, utility, e-commerce.

Now as a user, as an administrator, as an organization, you are being impacted, right? We'll talk about the challenges also, the solution landscape, how and when you need to adopt them and what is the time line for it, right? And also the flexibility to adopt because the concern is that because you have a legacy data center firewalls per se or servers, switches or routers, which does not understand post-quantum cryptography, right?

Now your concern is how we do the shift to the post-quantum era because you might need to upgrade it, you need to buy new stuff and the procurement or the solution to adopt these will take some time. So what is your planning looks like in terms of the adoption for post-quantum. Then we'll shift our gears on Fortinet solution, which we are calling it as Quantum-safe portfolio, wherein we talk about the FortiOS, which is our fuel in the product line that we have, right, which is the operating system. We have natively integrated the post-quantum cryptography because, like I said, the challenges, the adoption is one of the challenges, right? We are making it easier for customers to adopt it from day 0, right, to your day end.

And then you already are aware of the FortiGate, be it your VM form factor or the on-prem form factor or physical form factor, all have these capabilities, right? Now we have taken a step as in -- we know that the customers would be taking certain time to adopt. That's the reason we have natively integrated with the FortiOS, and we understand the simple upgrade to a FortiOS version will make that magic happen in your environment, right? Now for certain customers who are looking into highest quality of keys, putting everything in terms of their on-prem data centers or they are more into the AI sovereignty compliances, right?

For them, we also have the integration with the quantum key distribution, which creates the highest quality of keys, which are dependent on the post-quantum cryptographies again, can be integrated with our FortiGate, which then do your quantum-safe terms like VPN, your remote access VPN or decrypt those PQCs or even do the translation from your non-PQC to PQC traffic. Then we'll talk about the performance and interoperability.

Now whenever you hear about a change in the key size or a newer technology as a whole, which is post-quantum cryptography now, and you understand this is a sophisticated technology, right? And you know that the performance would be impacted. Now what if I say you that if you turn on the services or the PQC services on the FortiOS, there is no performance impact at all, right? If you compare with any other vendors, the story is different at all, right? We'll cover that in more details when we talk about those slides.

Then on the last but not the least, we'll talk about the real-world use cases, right? We need to see that where are we implementing these? Why QKD is making sense, right? There are KVRs that you must have heard about QKDs as well that it depends on proton and protons can be translated or transmitted onto the cables, which can be extended only up to 150 kilometers, but there are vendors in-house in India, which are working on 500 kilometers and even 2,000 kilometers for defense customers, right?

So we know that the evolution is happening along the line as we speak. And we'll also talk about the OT Security. Now OT with Quantum is a very great use case that you need to see. I don't know if you have heard about this, but we'll make sure that you understand these use cases.

All Right. If that sounds good, I'll straight away go to what is quantum computing. Now like I mentioned when I started my session stating that any computer today, be it your any technology you are running, they all talk in the bits, which are 0s and 1s. Now the challenge with the scientists and researchers were how do we convert the electrons, photons and neutrons, which were there in the quantum physics to 0s and 1s, which will actually understand it in the classical computers or the computers or technology that we have today, right? Because scientists and researchers also understand that this is a phase-wise approach, not a big bang approach. You need to take a phase-wise approach wherein you need to adopt fast, react fast and then turn on the features on the whole infrastructure that will talk in the planning as well, right?

So if you have learned physics in your Class 10, 12, you must have heard about the force called centrifugal force. And you also know that in an environment, the electrons, photons and neutrons travel randomly. So when you have a force, when it pulls to yourself, a circular motion is formed, right? Now when a circular motion is forming, what the scientists and researchers were doing is whenever electrons, photons and neutrons were going up the cycle, it was denoted as 1. And whenever it is going down, it was denoted as 0. So the job of translating the electrons, photons and neutrons were done, 0s and 1s, right?

Now you would say that, okay, you just translated to 0s and 1s. Now what is the advantage of using quantum computer. We talk about it has computational power, it has more speed. It has more resources per se, which can perform and up par any of the classical computers today or supercomputers today, right? The reason is, if you look at it, when the circular motion is happening at the mid of the circle, right, there could be 2 scenarios. It could be a 0 or either it could be a 1, right? In the classical bits wherein it was just 0s and 1s, here you can get the flavor of 01100011. If you look at it, the number of bits for the same state is being multiplexed, right? That's the whole purpose of quantum computing becoming more powerful, right? Those are called as quantum bits or qubits. That's the reason we call it as quantum bits. So as long as you increase the number of qubits, the number of the quantum or the power of the quantum computer also increases.

Now there are 2 terminology. I will not go in detail, but you can do a Google, that's your homework that you can do it after the session about the super position and entanglement, right? These are 2 interchangeable or terms that we use in quantum computing. There are also algorithms like the Shor's algorithms as well as the Grover's algorithm, which actually came in, in 1996. It's a fun fact, right? It came in theory in 1996, the Shor's algorithm, which is targeting your asymmetric classical algorithms, right?

Now for the symmetric algorithm, there's another theory that came in, in 1998 called Grover's algorithm, right? So these things came in like 20, 30 years ago. Now the theory is being converted to practical, right? So it is practically available quantum computer or you might be hearing about surrogate quantum computers also because we know that the adoption or to get the quantum computer or a chip in a computer that we have today will take certain time because there are so many permutation combination and a maturity needs to be taken place.

But what they are doing is that in place of the quantum computers, they are actually using surrogate quantum computers. They are using GPUs or TPUs or even the NPUs in such a way that it gives you a feel like of quantum computer, right? That's the reason the time line that you see for 2030, 2034 is actually now coming to 2029, 2028, right, as we speak. Because you have heard about Google, Microsoft, they came up with a palm-sized quantum computer. So things are happening in the lightning speed in terms of the evolution. We imagine 100 years ago, 50 years ago that for connecting to one person to another, there used to be an operator in the telephone operating department, which used to actually multiplex the calls from one source to destination. Now we have a palm size mobile phone, tablets, watches that receive calls, right?

So the technology is evolving. Similarly, it will evolve for quantum computer also. And we have seen various advantages of quantum in AI as well. The learning the data set, which is only possible in 3D, 5D, which can be possible in 13D, 12D as well when the quantum computer servers and learning will come into picture, right? So this is what the quantum computing is all about in very brief, right?

Now what is the quantum challenge? Now we understood the advantages in the last slide that the speed is there, it is multiplexing it, and we can do a lot of processing with quantum computers. But if you put the adversaries or the actors who might take advantages of the technology as well, which means that they can use sophisticated attack using quantum computers or even they can use post-quantum cryptographies by encapsulating a malware, meaning that they have a malware, they encapsulate a malware with a post-quantum cryptography.

Now because your firewall, edge, core firewall does not have a visibility on the post-quantum cryptography, they will take it as a standard TLS and SSL connection, right? And it will pass through because it will just see the 5 tuples or maybe threat inspection and all. But threat inspection is not able to understand your PQC-based traffic. It is taking or treating it as HTTPS, right? That's when the attackers are one step ahead, right?

So we need to have solutions which can decrypt it, which can have visibility because in short, in cybersecurity, if you don't have visibility, you cannot apply security. That's simple as that, right? Coming to another theory that you must be hearing or you haven't heard about it, but it's called Mosca. Now what is it, right? It's X plus Y greater than Z. Now X is your data that you want to store, for how many years you want to store is the Y terminology and Z is the Q date, which is 2030 or 2034, if you have adopted any of the compliance from NIST or Quantum National Mission and all the stuff, right? So Z is the number when the Q date will happen. X is your data duration that you want to save those data and Y is the number of years that you want to save those data.

So if X plus Y is less than Z, then you don't have a problem, right? If X plus Y is greater than Z, meaning that you would take 2038 to safeguard your data and you need this data up to 2034, then you are already done with the quantum attacks. We'll talk about it. The threats are Harvest Now, Decrypt Later, which Amol also touched upon it, right? Now as the name suggests, we are harvesting, the adversaries or the attackers are harvesting. Now the best part for an adversaries or an attacker is they don't need a quantum computer. I am just capturing data, intercepting as a man in the middle over the Internet maybe from your banking website to the bank's -- the service. I'm just doing a man in the middle and capturing just encrypted data. And the best part again for the attacker is there's no way that the bank and the user would know that somebody is intercepting my data.

Now you would say that it's an encrypted data. What is the problem with that, right? That's when the quantum computer, the surrogate quantum computers into the play. They can actually do permutation combination looking at your public key and understanding based on the public key, they can get your private keys, meaning that they will be in clear text. So as I was mentioning, the data that you have identified, what is the number of duration of years that you want to keep this data isolated, nobody should see it.

For an example, your road map of next 5 years or 10 years per se, but nobody or no other vendors or no other country should look at it, right? Because there would be a reputational concern, right, or there would be a problem if it comes out. So that's the reason this Mosca theory and Harvest Now, Decrypt Later is one of the dangerous attack. I talked about the encapsulation. That's another attack that's happening, right?

There are experimental post-quantum cryptographies, right, which are being used in the environment or in the infrastructure. And the fun part is the HTTPS traffic that you see on the Internet, 52% and more as of December 2025, you have seen 52% of the HTTPS traffic is based on the post-quantum cryptography. So ask question to yourself, you will imagine that is it being used entirely or nobody is using post-quantum cryptography. It has already been using and it's 52% and more, right? And the total number of HTTPS traffic over the Internet would be 95%. It is already 52%, reaching 60% in the next couple of months.

So we know that the post-quantum cryptographies are being adopted by browsers, by SaaS applications, by vendors like Amazon, Flipkart and what other companies, right? So we understand the important, and that's the reason the adoption is also booming, right? Now everything that you're using, now let me take a step back, right? Everything that you're using today are all based on some encryption. And those encryptions are based on your classical algorithm, be it asymmetric, be it symmetric. Now what we are seeing is that they are all at risk.

Now you imagine from a person logging in with his card to authenticating it to their critical websites to their critical databases, everything at stake, accessing e-mails, accessing cloud database, wherein you are creating a land zone or landing zone per se and then you are creating or onboarding users in the MSSP format maybe everything is at stake, your VPNs, your remote access VPN, everything is at stake.

Code signing, you are delivering certain patches to your users. Now I'm sitting in man in the middle, get hold of these with surrogate quantum computer, quantum computer. I'll induce a malware. The user is understanding that it is coming from a legitimate source. I will simply download it. And what is happening is a fileless malware is being introduced or certain commands have been on your laptop or desktop or your services and a back door has opened up, which you have no idea about, right? And when you understand there is a back door, it's already too late, right? And there would be dynamic DNS kind of attacks that could happen with the bots that would be created in your environment, right?

So these slides talk about the users' infrastructure, application of data, everything is at stake if you're using the classical algorithm with the power, with the computational speed, the quantum computers will be able to break those, right? And the best part is we are here, Fortinet is here to help you to secure your entire estate, right? We'll talk about it.

Now like I said, we have verticals. As a user, you are using some bank website. As an administrator, you are managing certain data centers or databases, right, or websites or as an organization, you're maintaining the bunch of users or a bench of administrator or a bunch of customers per se. All are impacted in any of the verticals that you look at. PII information in the medical records, right? You are putting your credit card information in the e-commerce because you want to buy some refrigerators, right, in the sale that's going to happen. Utilities, the grid that you have, there is a power outage, uncertainty. Nobody was planning for it, right? All have been encrypted today with classical algorithms.

Innovations, the IP that is working or the patents that you are doing, right, which is -- or which should not be shared to anybody because it's a patent idea per se, right? You are securing it in some way, company's patents per se. Everything it has stake. So if you imagine any of the verticals, if you imagine any of the classical algorithms that they're using or you are using are all at stake, right?

Now quantum challenges or implementation challenges, we talked about it when I was initially pitching it, the idea. We know that the people needs to be trained, right? There would be certain budget or budget planning that you need to do. And you don't know how to educate your procurement team also, right, that whenever a BOQ or a bill of material or a bill of quantity is created, it should have a vertical or a terminology, which talks about the quantum cryptographies, right? So we understand the challenges and quantum expertise.

Now you've already taken us 2 steps ahead, right? But how would you know that you are at the right path? So you would need or want to hire certain quantum expertise that will actually tell you that you are at the right speed and the right path to take the quantum-safe journey, right? Now the last challenge that most of you are facing and you are not realizing it also, which is the legacy infrastructure. Like I said, your routers, switches, your F5 load balancers or any load balancers per se, right, are all based on classical algorithm.

Now to upgrade them, you have to upgrade the box completely because there is no way that you can upgrade on the software and then get the flexibility to adopt because you know that quantum cryptographies are heavier on the side, right? You would need different technologies. You would need quantum aware chipsets. You would need quantum aware servers, right? Then only you will do that upgradation. So you need to buy those items and then do the cryptography migration from classical to post quantum, which we understand would be long, long years ahead, right?

Now if we go back to the Mosca theory, you have data that you need for 5 years. But to do the migration, you need 10 years, which is 15 years. And you're putting Z or the Z as the 2034, you are already late, right? That's when Palo Alto Networks and vendors like Fortinet comes into picture or any other vendors are coming into the picture. But we'll talk about the advantages that we have with any other vendors out there. So the solution that we are providing you is the quantum key distribution, right?

Now there are vendors who only support a few of the vendors. We have 4 and plus QKD providers that you can integrate with the FortiGate services and FortiGate firewalls, right, which you can then leverage to create the site-to-site VPN, which is based on the highest quality of quantum keys. PQCs, now you are saying that I don't want to buy or purchase additional hardwares called as quantum key distribution. I want to use the FortiGates natively integrated post-quantum cryptography.

The answer is yes, you can utilize that as well. Meaning that you can leverage the post-quantum cryptography, base quantum-safe VPNs to create site-to-site VPN from one payer to the other payer. You can also onboard your remote users, which are using FortiClient to connect to the FortiGates using the post-quantum cryptography. Now if somebody is doing man in the middle attack and they have the surrogate quantum computers or quantum computers, they will not be able to break it because there is no characters or no prime numbers dependent on the post-quantum cryptography. That's the beauty of PQCs, right?

Now the AES and symmetric encryption, like I said, you can do the translation from non-PQC to PQC and vice versa also. We'll talk about it. You can also decrypt the post quantum because I talked about that 52% and more HTTPS-based traffic are being used over the post-quantum cryptography. So we already know that the quantum-based traffic is coming in your environment. Now to inspect those, you need decryption capabilities, right? That's when the FortiGate solutions come into the picture, right?

Now we talk about this time line. We have actually started our journey with quantum or post-quantum practices back in 2018. We have done evolutions. We have done the patents on the post-quantum cryptographies and started and now we are sitting at March 2026, wherein we have the capabilities such as the decryption over the post-quantum cryptography. You can create site-to-site VPN, you can create remote access VPN based on post-quantum cryptography. You can access Fortinet's firewalls over the post-quantum cryptographies because the SSH is also if you're using classical, they can be hampered with quantum speed.

Now if the attacker have attacked the firewall, then you are done and dusted, right? So to counter that or to prevent those kind of attack, you can actually use -- if your browser is ready with post-quantum cryptography, you can access the GUI or the Graphical User Interface using the post-quantum cryptographies. Or even if you have PuTTY or SSH terminal that supports the post-quantum cryptography, you can do the SSH based on PQC as well, right? These are all natively integrated with our FortiOS, which means that the performance impact is minimal that I will talk in the slide anyways.

But this gives you an advantage, right? So imagine that you don't have to upgrade any of the routers, switches, the legacy infrastructure. You just upgrade your firewalls with a FortiOS that supports the post-quantum cryptography and you can actually take your own time to do the migration from classical to post-quantum because all the threats have been eliminated on the FortiGate firewall altogether, right?

Now why Fortinet. Like I mentioned multiple times that we want our customer to act first and act fast, right? So we have integrated them in the FortiOS natively, which means that in a click of a button, you just enable the post-quantum cryptography and nothing is needed from the customer end, right? Standard offering, meaning that there is no charge from Fortinet if you utilize the post-quantum cryptography. You just need to upgrade the FortiOS to a certain version, right? And if you're using a legacy or an E version or D version of the FortiGate firewall, we would recommend you connect to the sales engineers that will help you size the box accordingly because we want our customer to have the highest return on investment, not only quantum, but also AI.

We are seeing in the terminologies like quantum AI or the AI optimization for quantum, right, those sort of things. So I don't want customers in next 2 years to sit in a position that you would be replacing or refreshing the boxes again. So connect to FortiGate's SE or the sales engineers to learn more and get insights on what the sizing or what the box should look like in your environment, right? We have taken the step in the hybrid migration.

Now what is hybrid migration or deployment per se? Now because your administrators are ready and understanding the classical based site-to-site VPNs, right? You can leverage the same site-to-site VPN just turning on the post-quantum cryptography. So we are not creating quantum or VPNs based on certain or a different algorithm or different ways to configure it for which you would need a separate training.

That would again put you in a step back, meaning that it will take certain time to train those administrators to learn the post-quantum-based site-to-site VPN and then perform those migrations, right? We don't want that to happen for customers. We want you to leverage the classical site-to-site VPN, just turn on the PQC or the post-quantum cryptography on top of it, giving you the hybrid migration efforts, right?

Now your concern would be that I have turned on the highest level of classical algorithm. I'm putting a post-quantum cryptography on top of it. My performance is bound to go down, I'm going to degrade. The answer is no. I will talk about the performance testing that we have done and we will show you the result as well, right? So that you understand that this is natively integrated. I'm talking about natively integrated performance become minimal to 0 that I will show you in a bit, right?

Like I mentioned that they are natively easy to configure. You just go to your site-to-site VPN, you enable it, you'll start seeing that there are options to enable post quantum by a click of a button. You choose any of the NIST-approved post-quantum cryptographies, be it FIPS 203, 204 or 205 we have all the cryptographies, right? Now you have standardized Frodo as one of your internal PQCs per se. So you have that flexibility as well. If you have standardized ML-KEM or MLD Lithium, those are also possible, right?

So all of those, as per the NIST, the governance and the standardization body, we need to have those set of PQCs. Now your answer would be -- or your question would be that why don't we allow the experimental PQCs or PQC that I can create and bring on to the table and integrate it with Fortinet or FortiOS. The answer is that is one of the biggest risk because the maturity with post-quantum cryptography is not yet reached, meaning that there are not enough users to call these or the experimental PQCs as standardized or they are mature enough to not have any vulnerabilities.

If there are no governing bodies, then you are at a higher risk of calling attacker to attack you because there would be vulnerabilities that you would not be aware of, right, or any governing body would be aware of because it's an open standard, then that will create a problem with Mythos and with the GPT cyber coming into the picture, the ball game going to change for cybersecurity, right?

So like I said, interoperability with the NIST standard offering, if you are -- you want to be as per the NIST standards, governing body for all of these, you have these many options that you can choose from, right? So you can interchangeable -- you can interchange it accordingly during your years of adoption as well. For example, you want to use BIKE-L1 for a few years and now you are upgrading or you want to use the ML-KEM-512, you can choose that by changing the keys altogether. It's simple as that, right?

So when I was mentioning the crypto agility piece, the hybrid mode, which was nothing but you can mix your Diffie-Hellmans that you are aware of and you are being trained off like N number of times, right, or N number of years, you can just turn on over these with the post-quantum cryptography, right? Now there are also another challenge that customers face, and I don't know if you are also facing it, but I want to put that challenge as well.

Meaning that if you want to do an upgrade from your legacy TLS 1.1 to 1.2, you have to upgrade the whole infrastructure to have the end-to-end TLS 1.2 encryption, right? You must have done that already wherein you have to upgrade all the switches, routers, load balancers, your firewalls, your application servers, databases and everything, which must have taken you a longer, longer time, right? With post-quantum cryptography, with crypto agility functionality, you can actually mix and match any of the PQCs, meaning that if you're -- one of the end is the ML-KEM and the other end is Frodo for an example, they will still be able to create the post-quantum cryptography, right? That's the beauty of PQCs, the crypto agility, right?

Like I mentioned, you have both the options. You can utilize the post-quantum cryptography, which is natively included on the FortiGates or the FortiOS or you can bring any of the vendors such as Toshiba, IDQ and whatnot, which we have integration with. We have the tech docs available, which all QKDs we support. You can buy those QKDs and integrate it with our firewalls to use those keys that have been generated from QKD to set up your site-to-site VPN based on post-quantum cryptography, right? So all of these options are available, be it defense, be it vertical, any vertical, you can utilize them, right?

Now say web browsing that I was mentioning that your browser is already ready. There are 2 scenarios. Your web browser is already ready with post-quantum cryptography. Now you are encapsulating the encryption with PQCs. Now like I mentioned earlier also that if your firewall is not aware, then it will understand it is a normal TLS and SSL connection, which would be a problem for the administrator or the organization, right? Because there might be a malware induced inside PQC. So you need a visibility or deep inspection that can see inside the post-quantum-based traffic, right? That is what is available.

Now the second scenario is, let's suppose a user is trying to access from a web browser, which is already ready with post quantum, trying to access a database or an application server, which is still based on classical algorithm. Now directly from the post quantum to the classical-based server, the encapsulation will not happen, right? What will happen is that the application server will tell the initiator or ask the initiator to downgrade it to the version that he is supporting or the server is supporting, right, that you don't want to happen.

You want to adopt the post-quantum cryptography phase by phase, wherein whatever the easier way and the fastest way to adopt can be turned on faster, can be turned on quickly. So browser, you have turned on the PQC per se for the users, which can access N number of things and can also access the classical base. You can actually translate the PQC traffic to non-PQC traffic and vice versa as well from the non -- if a browser or if a user is sitting inside using a classical algorithm and trying to access a SaaS application, which is based on post-quantum cryptography.

Our firewall, FortiGate firewall will do the translation for you from the classical to PQC or PQC to classical. So again, giving you another advantage is that you will take suite time to migrate to post-quantum cryptographies by buying and upgrading it and then doing the migration. We understand that's going to take a lot of time. But at the edge or at the core, you can put a FortiGate firewall can do that magic for you, right?

Now the use cases part, quantum for OT. Now you know that OT comes up with N number of visibility issue, right? Like I mentioned earlier also that if you don't have visibility, you cannot provide security as simple as that, right? So any of the monitoring equipment, any of the OT devices, be it your medical, enterprise or any of the devices, IT, OT environment, connecting to an application that is already based on post-quantum cryptography, right? Our FortiGate, like I mentioned, can translate any of the non-PQC to PQC and vice versa as well. So it only not help you with the safe browsing practices, but also technologies like OT, which will take ages to upgrade, right, because they are using certain legacy operating system and you cannot upgrade them because you know that if you turn off an OT device, there will be a disruption in the environment.

How would you turn off the power grids, right? That's one of the challenges with the customers. Now to cater that and use the FortiGate to the advantages, you can use FortiGate firewall to translate it to the post-quantum-based traffic, right, and vice versa.

Now let's come to the performance. Now we talked about it, how to configure it, what were the challenges with post-quantum, what the attack is going to use it up against their advantages like the Harvest Now, Decrypt Later attacks. We talked about the translation. We talked about the decryption capabilities. We also talked about that you can use them to access the firewalls in SSH or GUI access based on post-quantum cryptographies, right? We have seen a lot of them, right?

Now the concern is that if I turn out everything, will my performance be impacted, right? That's the beauty of our NP7, the Network Processor 7 version, right? The NP7 ensures that there is no impact on the throughput by offloading them on the NP7, right? So if you have already purchased, if you're planning to purchase, make sure that you talk to your SEs or sales engineers, about the NP7 functionalities because you have to onboard post-quantum cryptography and AI in the future or you are already onboarding it or you have already purchased GPUs or you have certain interference wherein you have already have the pretrained data that you are utilizing it to train your LLMs or any private LLMs, you need to have these in your environment, right, which will have minimal impact when you are adopting a newer technology, right?

So the results simple as that, we turned on the Diffie-Hellman, the legacy Diffie-Hellmans, Group 19, 2021. We also enabled the 520, the third version and the fifth version of the ML-KEM. We turn on all the PQCs, which is HQC BIKE, Frodo, which are based on Lattice, some are based on hash, some are based on Dilithium and all those stuff.

But what we saw was when we enable the ML-KEM, which is our recommendation from Fortinet as well, that when you turn on the ML-KEM, we see the similar impact of what the Diffie-Hellman or the classical algorithm used to give, right, which means that the recommendation, the NP7, another recommendation if you're turning on your site-to-site VPN, we recommend you to use ML-KEM. Not just that you would be -- you cannot enable the other ones. You can enable it. It's just that when you are turning on the Phase 1 tunnel of the site-to-site VPN, you see a few impact, a minimal impact on the CPU utilization of the firewall, but it will come down once the tunnel is established, right?

The second scenario, which I talked about is applying to all the vendors that are out there. Any vendor that talk about quantum-safe VPN has this problem. But because we use our ASICs or the NP7 to our advantages, we have seen this with ML-KEM. With any other vendor with ML-KEM also, they see a huge impact when they enable a single site-to-site VPN, and they see 30%, 40% of the increment in the CPU utilization. So when you are talking about thousands of CPU, your firewall will go down at all, right? So you have to be aware of the performance impact and the advantages that FortiGate or the Fortinet product brings on to the table. So talk to your sales guys and talk about these functionalities and see how you can start the next step as well, right?

Now the QKD use case, we had done the testing with the IDQs where we integrated the IDQ QKD with the FortiGates, right? There were data centers from one end to the other end, which was 46 kilometer apart, and we have chosen Singapore, which makes a lot of sense because everything is closer to them, and it has the perfect use case for QKD usage, right? And we use our FortiTester to do the testing on the PQC-based traffic, right? And then we did the end-to-end PQC. Now we are the only vendor who does the combination.

Now other vendors can choose only PQC or only QKD. You can actually combine to have a military-grade encryption in your environment. Meaning that just by turning the PQC plus the QKD, meaning that the quantum key that you have received from QKD on top of it, you have a PQC on the ML-KEM without any impact, you can create a multi-grade site-to-site VPN. So if you have a super critical environments or databases, data centers or DCD setup wherein you have that concern, you can create the set of quantum-safe VPNs, right? Or even you have on-prem to cloud connectivity. You put a FortiGate VM, you put an on-prem firewall and create a site-to-site VPN, done and dusted. So any user who is trying to reach your on-prem and then trying to access the cloud workloads can be done through those quantum-safe VPN as well, right?

Now I think you must have heard about this or you have already had this thought or you had the thought while I was giving this session, right, that what is the risk? We talked about that the verticals were all impacted because the quantum power and speed can -- what it can bring on to the table. So if your data need to stay confidential, right, you need to act now. You are already late in the game. You have to talk to your leadership, you talk to the -- to your procurement team or if you are leaders, you talk to your IT team to fastly adopt it with FortiGate firewalls and Fortinet product lines.

The SD-WAN, our SD-WAN solution also supports post-quantum cryptographies, right? So if you have these SD-WAN tunnels or you are planning to adopt or planning to have SD-WAN in your environment, give a thought to FortiGate as well. We set up the SD-WAN on based on the PQC as well, right? Now the other questions or the thoughts that can ponder is the too early, is the Harvest Now, Decrypt Later is actually happening now, right? Just put a Google search or a Gemini search or any of the GenAI or LLM search, put that is there any HNDL attack that is happening? Or are there any articles around it? You'll see 1,000-plus of articles that the customers' organization have seen. By changing just the BGP routes, they can actually redirect it to their own databases where they will capture the encrypted data, right, without the customer knowing it. They might know after some time that the latency has come in.

But if you have an edge location, which is in your region, you will not have that concern also. You will never have that visibility. If you have app accelerators, which is actually buffering some data, you will never know that there is some capturing happening within the environment, right? It is a dangerous, dangerous attack wherein you need to act now, right? There are compliances that are coming in that I will also show in the next slide. Future proofing. Is your infrastructure being evaluated for post-quantum readiness, right? Now you are doing the evaluation to adopt the post-quantum cryptography, but the attacks are happening now, Harvest Now, Decrypt Later, encapsulation, malwares, remote access VPNs are being intercepted, your site-to-site VPN being intercepted. What is the solution? The solution is FortiGate, right? Fortinet's product line.

You enable the PQCs without any cost, without any performance impact and turn on the site-to-site VPN based on PQCs, remote access VPNs on PQCs, decryption on PQCs, your SSL connection PQCs, translating the non-PQC to PQC or vice versa, all are possible in the same firewall, right? And the best part, is it too costly? Like I said, no costing, but there are vendors who are charging for quantum subscriptions.

We want our customer to stay ahead, not having any caveat or a back problem such as the costing, right? So you have the firewalls, latest firewalls, give it a thought to enable it or do the testing POCs or by the other, which has the NP7 capabilities if you are looking for a tech refresh. So call to action for all of you, schedule a quantum risk assessment with Fortinet sales guys, let them know that you are interested on to it, have your questions to them, then we can prepare POCs with you and then take it forward or you can just turn it on, do the POC because it's simple as it is, right? It is natively integrated onto the FortiOS, you can test it out with a few site to sites and just see the power of the FortiGate, right?

So now this is the sector comparison at a glance, right? How ready the quantum in India is there, right? Be it your BFSI, the banking and finance, public sector or large enterprises, how are you placed in and what all compliances you should look at, right? Top threats for the BFSI, Harvest now, Decrypt Later, as you're aware. Any SWIFT, UPIs or CBS payments that flows, if somebody is intercepting it, somebody is just doing the capturing of those encrypted data, that is one of the biggest threat.

Key regulators, RBI, SEBI, DPDP Act, that is famous, is a buzzword happening. Phase-wise action is crypto inventory, which means that the crypto bill of material, meaning that you need to -- you should know that what all cryptographies that is going inside your environment, right? And which all cryptographies needs to be migrated to post quantum first, right?

Our Fortinet fit, you need to talk about the hybrid PQC VPN with our FortiManager readiness view, right? The full PQC target for the BFSI customers is the 2029 and '30 because the data is everything for the BFSI, right? It's true for all, but it is more critical for the BFSI. Public sector, the nationwide intercept of the sovereign and comms and other cards, the top threat. Not only that, there are nation-led attacks that is happening from other countries to our country, which will lose our reputations in the reputation globally as well. So those are the concerns that are coming up as top threats.

Key regulators like [ Cerdin ], DRDO, National Quantum Mission, which has just planned to spending around INR 6,000-plus crores on the quantum initiatives, right? That's the reason you must have heard about Andhra Pradesh, Karnataka becoming the quantum states, right? The phase-wise action for these guys are discovery across the NIC, which is the governing body for the connectivity part and the governance part, the DigiLocker, OT and ICS, right, your OT environment, the control systems that you have or the SCADA system that you have. The fit from Fortinet is the QKD integration with FortiGate and create this site-to-site VPN. You also saw the OT PQC translation from non-PQC or the classical to PQC and vice versa, right? The full target is around 2030, '31. We are already late, we are sitting at 2026.

For the large enterprise, the top threats are DC interconnects or the connectivity from on-prem to data centers or your on-prem to cloud environment or even now the third threat is coming in, right, from your on-prem or legacy data center or cloud to AI factories or AI data centers, right? So for that also, you need to have the security because if you are training a data -- sorry, training your LLM with the data sets, right? And if the attackers are poisoning those LLM models, then you will never be able to do or achieve what you are trying to achieve with that LLM. The fine-tuning will take N numbers of years. The data that you have been putting on the LLMs will be at stake, right? So the data poisoning, the data theft, the data leakage kind of attacks will be on the rise, right?

Key regulators for it, DPDP that you're already aware, SEBI, NIST, [ EUS ], if you are the GCCs, you have companies or branches here in India, you are all at stake because you would be connecting any which ways to your NAM to EMEA, DCs or the services. Phase 1 action is DC interconnects, cloud gateway, crypto scan and now the AI factory and AI data centers. Fortinet's fit is, you use our intelligent FortiGate SD-WAN with PQC and Quantum readiness view, which is available on the FortiManagers and the QKD integrations, right? And the full PQC target for the large enterprise is looking at 2028 and '30, right?

So the last slide that I have for today is that Fortinet is quantum ready. We are aware of the challenges that customers are facing. That's the reason we have N number of features so that you can adopt first and adopt fast, right? You can protect your data today with the Harvest Now, Decrypt Later or Store Now, Decrypt Later kind of attacks. You have interoperability, meaning that you can enable your classical VPNs and have the PQCs on top of it without any performance impact.

You can do the translation from the non-PQC to PQC and vice versa. You can secure your firewall using post-quantum cryptographies. You can do the decryption on the post-quantum-based traffics, giving you the end-to-end in-depth protection against quantum threats. And this is not just looking at the current threats that we're talking about. It is also talking about the futuristic threats that we have not anticipated at all, right? The encapsulation of the PQCs with malware or fileless malware, right? And the transition is easy.

Talk to us, talk to the sales engineers, the sales managers and let us do the job for you. And what is the best that we can do it for you, please connect to our sales guys, right? That's all I had.

I will now go to the chats, if there are any. Stop sharing it. Let me see the chat.

Okay. I see a lot of questions here. Okay. How can we get a Fortinet certificate, where can we learn? Right. So the learning is that we have a number of YouTube videos on our FortiGate channel. So please leverage that. We have the documentation that are available that you can actually summarize it with any of the GenAI application that if you are using it any to ask and learn more about the quantum offering from Fortinet, right? And then you can learn in that way as well. And you can educate others as well, right? Because this is not a single or an isolated effort to go to quantum era. It's a team effort that you need to put in, right?

Why is government policy important in quantum cryptography. Now like I mentioned, I talked about it, right? There should be a governing body, right, that should help you with the right path. Now if you have adopted anything or everything, you don't know where you're going with, right? If there are any vulnerabilities or unseen or unknown vulnerabilities that you have not anticipated, then that would be a problem, right? So that's the reason the government policies are important as well as the governing bodies or the compliance bodies like NIST is possible and it's mandatory.

So we talked about the QKD use cases, right? So quantum key distribution, if you don't want to use the PQCs, which are on your FortiGate firewalls and you want to have the highest quality of keys from a third-party source, right, which is QKD, you can integrate them with the firewalls, and we can leverage the same keys to create the site-to-site VPN. Now the problem with that is the keys that you have created, it needs to be delivered to FortiGate, right? And the FortiGate will use that keys to the other payer. Now the same key has to be transferred to the second payer as well, right, because we need to have the same set of payers.

Now maintaining those keys would be a challenge for customers in the long run. If you have 10,000 VPNs, you would not be creating 10,000 of keys. That's the reason Fortinet has the PQC integration, right?

So I think in the interest of time, we are already 2 minutes ahead. What I will do is I will gather these questions. I will answer them on the Excel sheet and maybe I'll share with you guys, right? And like I said, thank you so much for your time today and really appreciate your time today and hope to have more conversation around post-quantum cryptographies. Do reach out to your sales engineers and sales managers and talk about how to start with post-quantum cryptographies.

In that note, thank you so much. I hope to see you on the field, and please reach out to us, like I said, and we'll see how we can help you with quantum era. Thank you so much, guys. Have a good one.

Good afternoon, everyone. Thank you for joining us. So my name is Brian Essex. I cover mid-cap large-cap software for JPMorgan. And today, we're excited to have Fortinet with us on stage. We have Christiane Ohlgart, the CFO; and Robert May, who is EVP of Product and Technology Management.

Yes.

So thank you both for joining us. We really appreciate it. So maybe I want to kind of start with one of the most popular questions I got after earnings because you guys spent a lot of time talking about AI. You flagged a couple of large deals for AI data centers. Can you help us understand how large that business is and what kind of inbound traffic you're getting for that AI data center type business?

Let me start with what kind of interest we're getting. AI is very broad for us, right? It's not only the AI data center, and Robert can talk a little bit more of what we are seeing. But there are a lot of security needs around AI. And as companies figure out what they want to do, they also realize that using AI in the cloud is going to be costly in the long term. So they are trying -- they're evaluating whether they can bring certain AI models into their own data centers and into certain specific racks or then, of course, you have a lot of companies building out AI data centers now. And so that's what we're seeing more and more coming online. And maybe, Robert, do you want to comment.

Yes, sure. I think like on the data center side, you've kind of got 2 dynamics, right? You've got existing data centers that are being repurposed or adding AI stacks in there. And then you've got brand-new deployments. Now each of these obviously take time to build out and you start with a small footprint and you continue building it out. We've had obviously large success in the data center for a long time due to the high performance, the low latency, the low power consumption of the ASIC technology. So it's something that is obviously attractive even more so in the AI era.

Great. And maybe, Christiane, like if we think about your exposure to data centers overall, any way you kind of get a sense of how large that exposure is? I've always kind of in the back of my head, thought about maybe some of your peers who are more large enterprise exposed with bigger firewalls having better exposure. But how do you think about it as a percentage of your business?

So I mean, I think we've always talked about, if we look at our firewall estate, it's about 1/3 of the revenue comes from large firewalls, 1/3 from medium size and 1/3 from smaller firewalls. And as you know, our business is extremely diverse, but we sell a lot into financial services and also into public sector, and they tend to have larger data centers. The benefit for Fortinet on the data center build-out for AI infrastructure is really our low power consumption and our advantage there, which is extremely important when you think about AI, which consumes a lot of power.

And what is the -- and you asked about the opportunity, right? We all want to quantify it. I think what I said in the earnings call is that the build-outs that we saw were pretty much reference architectures. And so I think for us, it's not about one big quarter with AI data centers, but it's going to be a consistent deployment as more companies start to look at how do they deploy AI and as other enterprises ramp up. And Fortinet is globally diversified. So it's not a U.S.-specific opportunity. It is a global opportunity and a lot of enterprises think about where do they run their AI deployments. And if you think about Fortinet's footprint outside the U.S., we have high market share in EMEA and especially with the sovereignty rules there, they are a lot more concerned about where the data sits. And so that's a good opportunity for us.

Got it. And one of the things you said at dinner last night, I thought was pretty compelling. So I wanted to ask both you and Robert, in terms of the ASIC architecture, the firewalls that you have exposed to data centers and then other feature functionality within your firewalls. What are -- and one of the things that caught my ear was particularly the energy consumption component of it. But what -- how much of a factor is that in the decision process as well as some of the other feature functionality that you might have like unified OS to manage your estate?

Sure. Yes. Well, certainly, the power consumption is more of a concern now. Like it's always been a concern for other in places like Europe and what have you. But now with AI, it's really drawing a ton of power. And so they're really an advantage of having a much lower powered device overall. So when you look at the amount of power consumption per gigabit of traffic or what have you, it's quite compelling.

In terms of the other feature functionality, I think one of the big things, right, as you're building out data center, it's not just the traffic coming in and out, it's also the east-west traffic that is going to those AI workloads and having the ability to run the same OS in a virtual environment on top of NVIDIA chips, for example, BlueField DPUs is really compelling because that means that the operations team only has to manage really one set of security, right, for all of the data centers. So it really provides a competitive advantage there.

Got it. And then I wanted to ask about one of the other things that I think it was Ken on the earnings call alluded to, but almost like a return to edge or on-premise renaissance, so to speak, particularly when comparing this spending cycle to the spending cycle that you may have seen during the COVID era. Maybe could you maybe compare and contrast the dynamics of what you're seeing right now from a demand environment relative to what you saw maybe during that kind of 2019 to '22 time frame?

Sure. From my side, I guess one of the things I hear constantly is the data sovereignty requirements, right? This isn't just AI, but also SASE and other technologies and having the ability to run that in country or in local service that want to offer services with it. In terms of contrasting that with, say, the COVID era, obviously, the drivers there were suddenly I've got a ton of remote users that need to access my network, right? So there was a totally different driver there, but it was kind of a similar trend in that way.

And in terms of AI and how that plays, obviously, when companies are doing like initial projects for AI, they oftentimes might use public cloud, but they quickly realize the cost advantages of running their own security or their own AI infrastructure. And so they slowly start to migrate that back, especially as they scale up the usage, the token usage and start to offer it as services for their customers.

Got it. Super helpful. And then one of the things that was really impressive about the first quarter was this phenomenal growth in product revenue that you had. And then Christiane, I asked you the question, if you look at the relationship between product revenue and services revenue, just to understand how that may have shifted over the past year or so versus historically the relationship that you may have had. And you referenced historically, you had a higher mix of switches and access points, but this quarter was a higher mix of firewall-related hardware. How long has that kind of mix shift been persistent? And how do we think about the durability of that mix as we kind of look to the mix to expect for product and services for the rest of the year?

So I think what we see is we see a lot of use cases for firewalls. AI is one. We continue to see high demand for operations technology. And this has been a growth area for Fortinet for a long time. Over the last couple of quarters, we've always reported out that OT grew faster than the overall business. And so it's a significant component. OT does not only consume firewalls, but it's one area where we sell a lot of hardware into that use case. And with recent attacks, high-profile press releases about companies not being able to produce or having to close their stores last year or airport terminals not working. I think there has been more awareness how detrimental an OT attack can be.

And so companies are spending more money and are looking more into this area for security. And in many cases, it's white space. So it's a good business for us to grow in, in addition to the needs on the AI side to segment and then SD-WAN is having a renaissance as well. So I'm confident about continued high growth for firewalls for a significant time, it's not short term.

Great. And then I wanted to ask you, with respect to the overall spending environment and the impact that recent AI-related events may have on that spending environment, namely, we've had several high-profile foundation models come out, and it's been highlighted their ability to find vulnerabilities and potentially engineer exploits those vulnerabilities. How much -- one of the issues that I think is -- that I think maybe not well understood is that you have several different categories of vulnerabilities, you have package where you can just push a patch.

You have custom-built software, which may be a little more difficult. You may need to refactor that software. And then you have hardware, which may be a little bit more challenging in that you might have to replace the hardware. Is that hardware component a factor in some of your customer purchasing decisions? I know you don't have like a clear crystal ball into what kind of refresh activity that you might have. But just wondering if that's part of the conversations that your customers are having, particularly given the elevated urgency you may have around an accelerated amount of vulnerabilities across that multiproduct landscape?

Well, from my side, what I could see is like, obviously, we've -- the last several years, we've had a solid program of communicating with customers and keeping them up to date, right, in the latest version. So there's always going to be some outliers where they're running very old equipment that can't upgrade to the latest version, but I think we've managed that quite diligently, I would say. Now on the other hand, it does trigger discussion, I would say, where it may be a consideration to say, maybe we should run the later version of the OS. And since we're going to go through an upgrade, maybe we decide to upgrade the hardware at the same time. These kind of discussions, I think, happen because it's an operational discussion there.

But yes, if you look at Fortinet, we've been extremely focused on improving our code quality. And we've had, as people know, vulnerabilities that we've communicated and worked with our customers to upgrade. And so I think we have a good program in place to work with our customers on upgrades. And hardware replacements are only required if you really run very old. So the first step is always going to be upgrading your operating software or upgrading your application software. Is everything vulnerable? No, only those components that are open to the cloud. A lot of estates are run without access to the cloud. So I think that for every vendor, the situation is going to be a little bit different. But of course, there are now interest in putting also firewalls around your perimeter, new firewalls to secure what you cannot upgrade as quickly inside.

Got it. Super helpful. And then I wanted to ask about FortiOS 8.0. -- falls in Robert's wheelhouse. I mean introducing Agentic AI as a pillar of that security fabric, how should we think about the impact that has on the attach rate of higher-margin security subscriptions across your firewall footprint?

Well, let's say, in FortiOS 8.0, there's a couple of different areas, right? One is -- at the highest level, you can say we talk about AI for security and security for AI, right? And in terms of AI for security, this is really how we use AI to improve the product. So this is usability, automation, those agents and assistants that you interact with. And it really helps to speed up the deployment process, the troubleshooting and any type of things on the operations side.

Mitigation.

Exactly, yes. And then when we get into the other side of security for AI, there's a few different products there, but specific to, say, FortiOS 8.0, it's a lot about the shadow AI, right? Like many companies having conversations with, they really don't know what's being used in their network, right? They want to uncover that, get the visibility and then take back the control, right? So this provides not just what SaaS services they're using, but also what agents are in the network, what are they communicating to and gives them the ability to control that traffic. And a lot of these capabilities come with some service component, which is added on top to go back to your kind of original question there for the service attach. So all these capabilities have that type service attachment.

Got it. And then the other point that kind of came up briefly, I think, at dinner last night is your involvement with Glasswing and OpenAI's tech, access to those foundation models, how critical or how much of an advantage is that for you to be able to utilize the findings from the visibility that those models provide in terms of what you're developing on your platform to help protect not just your infrastructure, but your customers' infrastructure?

Yes. Yes, sure. I mean, so obviously, for the last couple of years, we've had a large focus in this area. And so Glasswing is another tool, right, that gives another perspective, another set of visibility for the engineering team to address issues that may come up. In terms of the criticality, we haven't necessarily seen the level that's reported in the media, you could say that way. But I think one thing it does really showcase is that for most enterprises, they're worried about all of the software and products that they're running, right?

And I think we've had a very effective way of working with our customers when there is something or an upgrade that needs to happen. And other vendors have maybe hidden things as bug fixes and stuff. I think Glasswing exposes that quite critically so that you can't do that anymore, right? It has to be open, transparent and good communication with the customer base.

Right. Got it. Maybe I want to hit on macro real quick. Would love to get a sense of not just for 1Q, but what we've seen so far this quarter, how has the macro impacted customer spending patterns? And then as a part B to that question, it seems like security has been getting access to budgets outside of traditional security budgets if you have a Chief Marketing Officer that wants to secure his Agentic project or whatever. It now also seems that both Mythos and GPT 5.5, you're getting kind of incident spending where people are freaking out or CIOs are freaking out and you're getting this extra juice. What are you seeing across your platform? And is that for 1Q and then 2Q so far, is it a meaningful contributor to performance?

I mean I think what we're seeing is that pipeline is improving significantly. And you're right. I think security spend is getting prioritized and probably also getting elevated because AI creates the need for security. You have nation-state activity. I mean the war in Iran has heightened those activities and especially Europe is also very wary of Russian activities constantly. So you see that -- you see the increased attacks on critical infrastructure. And so we've seen all of these aspects benefiting Fortinet's pipeline and our strong belief in durable growth.

Got it. Super helpful. I want to touch on sovereign SASE, which we briefly discussed, but it seems like you've carved out a relatively unique position there, allowing customers to deploy SASE within their own data centers as opposed to relying on a vendor's public cloud. But could you elaborate on the competitive landscape there a little bit? Specifically, which customers do you see within sovereign SASE like RFPs? And what does that mean for potential market expansion for you?

Well, let's say, when we talk about sovereign, I think there's a few different layers, right? It's like what level of sovereign do I need, right, for the -- either the application I'm using, the data that is being sent through and then the regulation, right? So on some, say, applications you're using, maybe there is no concern. It's just a regular SaaS application. I'm fine with using the cloud. And on the other extreme, it's like there's a highly regulated thing or it's got my company secrets in it, so I want to make sure that's on-premise, right? So -- and then at Fortinet, we have like a SASE offering that spans both of these, right?

So you can -- from the public -- from the different pop locations, you can select to use anything globally or you can start to restrict that down and say, I only want data centers that are in country, right? And then you can even augment that with, say, FortiGate appliances to say, okay, I want to also install a couple of additional locations, maybe where I have a factory or I have some other specific locations that are requirements. Then when you get into sort of like, okay, I need to have sovereignty on-premise for various reasons.

The type of customers that we see in the early stage, of course, are the telco providers and the large financial institutions, which are wanting to basically have their own fully managed stack. And the benefit there is we provide really the same technology, the same user experience and everything, but it's a drop-in solution. So it's not integrating with virtualization and things. It's actually just drop it in the data center, and it stand up and up and running very quickly. So it provides that same experience as the public offering.

Yes. And from that perspective, we certainly heard a lot about telco provider traction and how might the profile of that customer cohort in terms of service providers, whether it's [ Neo cloud ] or telco providers, how is that shifting given what you're seeing in the demand environment today?

So I would say the service providers have 2 main reasons why they're looking at sovereign SASE, right? When SASE was becoming more attractive, they started reselling because they needed an offering for the -- so they started reselling some of the -- of our competitor solutions. And the problem is they don't own the customer this way. So they are replaceable and that doesn't give them the attachment to the security spend of the customer. So if they have their own sovereign SASE solution, they can actually own the customer and they can continue to service the customer with all the needs the customer has.

The other aspect, I think, is that many of the service providers also host public sector applications and data centers and with more sovereignty requirements, especially in the public sector, Europe is a good example. They are looking at being able to service their big customers, the big agencies that have a lot of data that needs to be stored in country and shouldn't be accessed from different providers. So this is the main driver for service providers looking at our sovereign SASE solution.

Got it. And are those dynamics shifting? I mean, I think you mentioned that your business tends to be 1/3, 1/3, 1/3 small, mid and large enterprise. Is the mix shift of enterprise size shifting at all given what you've seen over the past few quarters in terms of growth dynamics for the company?

I think our focus over the years has been on larger enterprise customers and service providers. So we see a little bit of that mix shift. It doesn't mean we are deprioritizing the lower end of the market, but also the lower end of the market is continuously serviced more by service providers just because security gets so much more complex. And so that's a big focus area for us to make sure we capture and we service the needs of all customer segment.

Got it. Another point, and I'll ask one more question, and then I'll open it up if anyone has questions from the audience, just to give you guys a heads up. But I wanted to ask about the SD-WAN and SASE service bundling. What has the impact been on your business so far? And to what extent might you pursue bundling for other products and services to accelerate traction of the business?

Well, certainly, so far, I mean, it's only been a couple of months, right? But we see definitely a large attraction towards it. Really, it just makes the overall SD-WAN experience smoother and everything, but then it adds additional SASE starter pack to the SD-WAN deployment. So what that means is that the IT can just immediately start to use it and get comfortable and then start to roll it out in a more normalized way instead of another separate project that they have to issue RFP and everything for.

In terms of that kind of motion, I don't know -- the bundling part is one aspect, but it's really the other motions around, say, the endpoint or the security operations areas. These are other areas where traditionally you see multiple different endpoint technologies or multiple different products in the SOC. These are quickly converging together to have more unified offerings and single licensing, single SaaS portal, like all these kind of elements that really bundle everything.

Got it.

But I think on the SD-WAN, SASE bundle, the main benefit that we see is that if a customer has kind of this SASE starter pack and they already have deployed SD-WAN, they can see how easy it is to deploy SASE. And because it's just a small, what we call startup pack, they can deploy it and then we hope to upsell the customers as we may displace competitors or as we may displace VPN solutions or similar, yes.

Got it. I want to reach out to see if anyone in the audience had a question for the company, and then I have a follow-up. Okay. Well, I'll hit you with a follow-up. But please feel free to raise your hand if you do have questions that come to mind. But I want to follow up on the SASE SD-WAN relationship. I know historically, you've had a bit of a different go-to-market motion than other vendors in the space where you focused on converting SD-WAN customers to SASE. Is that dynamic changing at all? Are you leading with SASE? Is that becoming a higher mix of SASE business? Or is SD-WAN conversion still like your bread and butter in terms of how you're growing that business?

I mean I would say the main benefit for customers can be experienced if you have both SD-WAN and SASE because then you only have to manage one set of policies, it can extend easily. You don't duplicate your efforts. Our SASE solution can do exactly the same that what our competitors can do. But if you don't integrate it into the network, you still manage duplicate environments. And so I think that's the true benefit for our architecture is that you can manage one environment holistically, yes.

Got it. Yes. I think what I kind of see on the project-by-project basis is kind of like maybe 3 different areas, right? One is where they've already deployed Fortinet SD-WAN and then they want -- they're looking to do a remote access project and then they realize quickly that, oh, this just plugs directly in. I can shortcut a lot of these operational things, both in turning it on and also in the ongoing management. The other one is when maybe they're deploying an SD-WAN project and then they quickly realize, oh, I can actually do SASE at the same time, right? So these are kind of similar, but they're driven from a different starting point maybe. And then you've got a third category where it's maybe they're starting with a SASE project that maybe they aren't a Fortinet customer. This actually, we see some motion to actually -- they're starting to reconsider, oh, maybe I should deploy SD-WAN at the same time as SASE. So it's kind of coming from the opposite direction. But again, the same operational benefits and everything.

Got it. Super helpful. I want to ask a couple of kind of shorter questions. One was on duration. We saw a little bit of longer duration, I think, in the quarter this quarter. I mean, have you disclosed what duration is? And how should we think about the profile of the contracts that you signed this quarter and what to expect kind of as we go through the rest of the year?

So yes, we disclosed duration to be about 2.5 years. And -- what we typically see is when we sell a lot of product, we sell an additional initial service contract and the initial service contract with most of the solutions are 36 months. So it drives up duration versus when you have more services coming from renewals. And it's going to flex up and down a little bit on that trajectory, right?

The more new hardware we sell, the more you will see some increase in the service duration and then it comes down again as some of contracts are renewal more on -- which is typically 12 to 18 months average term.

Got it. And then what about experience with regard to sales cycles in the quarter? I mean, has a focus on AI and high-end firewalls driven any kind of divergence in sales cycles between large enterprise strategic deals and what we've historically seen in the mid-market, particularly given the way that the current interest rate environment may have on -- or the impact that the rate environment may have on customer spending patterns...

I don't think we've seen too many discussions on financing deals or concerns around that. So what we really saw in Q1 was certain deals coming back from Q4 that we had thought we had lost and due to supply chain constraints, they came back specifically in LatAm. We saw a lot of higher close rates, higher win rates and so some acceleration of the deals.

Got it. And you mentioned supply chain. So we'll follow up on that, too. You guys have done a great job historically, and we saw this was really evident during kind of the COVID era where you did an amazing job in terms of like managing the supply chain and making sure that you maintained a healthy amount of inventory where your customers didn't have that inventory.

And certainly, you took share on the back of that. How has -- how would you compare the current -- and frankly, investors are asking about the impact of memory costs and potential supply chain constraints in the current environment, but a bit of a different environment. So could you compare and contrast like what maybe the company saw during the COVID era and how different is the environment you're seeing now? And then how you feel about the way that you're positioned from an inventory management and supply chain perspective?

Yes. Fortinet has historically always had about 2 quarters' worth of inventory on hand just to make sure we can be ready to supply, and we've never changed that. That benefited us in Q1. Of course, with the increase in demand, we are also going out to the market to try to accelerate production for the rest of the year. Everybody in the industry is impacted by the increase in memory chips components, and we are working through that. The benefit for Fortinet is that we do not only rely on the contract manufacturers negotiating with the memory vendors. We also have direct relationships, and we can consign it to contract manufacturers, and we're using that actively.

And one of the things I think I asked you, I think it was yesterday, was one of the things that we've seen -- that we saw during the pandemic was a certain amount of overbuying. But I think you commented that it was the right move to make because you were able to take share. What is your confidence level in the rate of inventory acquisition that you have now and how it matches up with demand that you're seeing in the market?

I mean we see strong demand and -- and we want to make sure that we can continue to deliver. And because our business is so global, every geo is a little bit at a different stage, but our -- yes, we feel good about what we've ordered and what we think we will need.

And with regard to how you're spreading inventory across the globe, I think you've expanded the level of, I don't know, inventory management that you have on a global basis. How has that impacted how you're managing your supply chain in the current quarters?

It hasn't really impacted how we manage supply chain. But with our continued growth, we needed more warehouse capacity. And so we bought a warehouse in Europe last year, which allows us now to have inventory in Europe, in Taiwan and in the U.S. And it also diversifies our capabilities or risk management, right, if there are constraints on freight getting out of a place, right? So we have more capabilities to meet the customers' demands.

Great. Maybe one last quick one. Level of confidence and visibility that you have in the rate of product growth that's embedded in your guidance for the rest of the year?

So I mean, our visibility is typically 2 quarters out mostly, and then it gets a little bit more blurry. We -- the pipeline is shaping up nicely, and that gave us the confidence into a good guide up after Q1. And yes, this is where we are.

Sounds good. With that, I think we're out of time. So Christiane, Robert, thank you very much for joining us, and thank you all in the audience as well.

Yes. Thank you, Brian.

Hello, and welcome to Fortinet's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that this call is being recorded.

I would now like to hand over the call to Anthony Luscri, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss Fortinet's first quarter 2026 financial results.

Joining with me on today's call are Ken Xie, Fortinet's 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 first quarter of 2026, before providing guidance. During the Q&A session, we will ask that you please limit yourself to one question and one follow-up question to allow others to participate.

Before we begin, I'd like to remind everyone that on today's call, we will be making forward-looking statements, and these forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10-K and Form 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation specifically disclaim any obligation to update forward-looking statements.

Also, all references to financial metrics that we make on today's call are non-GAAP, unless stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations are located in our press release and in the presentation accompanying today's remarks, both of which are posted on our Investor Relations website. As a reminder, this is a live call that will be available for replay via webcast on our Investor Relations website. The prepared remarks will also be posted on the Quarterly Earnings section of our Investor Relations website following today's call. Lastly, all references to growth are on a year-over-year basis, unless noted otherwise.

I will now turn the call over to Ken.

Thank you, Anthony, and thank you to everyone for joining our call. We are very pleased with our excellent first quarter results, exceeding our guidance through strong execution and broad-based demand. As a result, billings growth 31%, total revenue increased 20% and the product revenue grew 41%. Non-GAAP and GAAP operating margin were very strong at 36% and 31%, with GAAP operation margin and revenue growth totaled together 51%, one of the highest in the industry. We also generated a record $1 billion free cash flow, highlighting the strength and durability of our business model. GAAP earnings per share increased 29%, demonstrating our commitment to strong shareholder return.

The convergence of networking and security approach Fortinet has lead for 26 years is accelerating in the AI era. Customers are adopting Fortinet platform with secure networking, Unified SASE, security operation built our single FortiOS operation system, [ enabled and ] expanding across many use cases. By delivering our core SASE capability natively integrated in one operating system, our SASE firewall significantly reduced capacity for customers.

Innovations such as FortiOS 8.0 with its rich integrated functionality of FortiASIC technology, which delivers higher secure computing performance and a significant lower cost and our direct supply chain management continue to differentiate Fortinet and support the market share gain as AI drive strong demand for SASE firewalls. Secure networking billing grew 32%, outperforming in the broad market. Today, we announced a FortiGate 3500G and 400G, delivered significant performance improvement over previous generations further strengthening Fortinet's leadership.

OT security accelerated in the quarter with OT billing growth over 70% as customer prioritized protecting critical infrastructure amid heightened threat. Unified SASE billing grew 31%. Our differentiation is powered by 3 key advantages: single operating system across [ net ] firewall, SD-WAN and SASE, our own global cloud infrastructure delivered better security and performance and roughly 1/3 of total cost ownership of peers and our much larger total addressable market especially in sovereign and private SASE, which allow customers to deploy SASE in their own environment to meet data sovereignty and regulatory requirements. Beyond secure networking and SASE, AI is rapidly expanding the opportunity in secure operation. as AI-driven security operation billing grow 23%, supported by more than 20 AI-enabled solution on our platform as customers consolidate vendors and simplify operations.

Finally, given our strong results and confidence in the business, we are raising our 2026 guidance. We continue to expect balanced growth, strong cash generation, recurring revenue and shareholder-focused long-term growth capital allocation strategy while consistently delivered GAAP profitability since IPO. As AI increased demand for security, our platform approach continues to differentiate supported by a strong direct [ operation ] model that's enabled us to turn supply chain challenges into opportunity to gain market share.

I would like to thank our employees, customers, partners and suppliers worldwide for their continued support and hard work. I will now turn the call over to Christiane.

Thank you, Ken, and good afternoon, everyone. As Ken noted, we delivered a strong first quarter, exceeding the high end of our guidance across billings, total revenue, operating margin and earnings per share. The success reflects broad-based demand and strong execution across customer types, industry verticals, our geos and all 3 pillars.

Total billings grew 31% to $2.09 billion driven by broad strength across secure networking, Unified SASE. Our large enterprise segment was particularly strong. Secure networking billings grew 32%, driven by robust FortiGate demand as customers expanded protection across operational technology environments, contributing to OT billings growth of over 70%. Unified SASE adoption continued to build during the quarter with billings growing 31%, driven by strength in SD-WAN and FortiSASE. FortiSASE expansion within our customer base also remained strong with 18% of our large enterprise customers now having purchased FortiSASE, an increase of over 45%. AI-driven security operations billings grew 23%, highlighting our continued platform expansion within our installed base.

Turning to revenue. Total revenue grew 20% to $1.85 billion, with product revenue increasing 41% to $645 million as customers shifted toward higher-performance products. This included a number of AI-related deployments, where customers invested in FortiGate to support increased throughput, segmentation and security requirements across AI infrastructure. Technology upgrades, upselling and expansion into new use cases drove strong growth in both hardware and software.

We again benefited from our strong supply chain execution. Recent pricing changes had a low single-digit impact on product revenue growth. Service revenue grew 11% to $1.21 billion, while service billings growth reaccelerated to 27% and deferred revenue increased 15%, driven in part by SecOps ARR growth. We view service billings growth, deferred revenue and SecOps ARR growth, together with accelerating product revenue as leading indicators of future services revenue.

Stepping back, these results reflect both strong execution in the quarter and durable demand drivers that continue to shape customer priorities as customers invest in and upgrade their network security solutions to defend against sophisticated attacks that are growing in both speed and complexity due to the availability of AI tools. AI is expanding the attack surface and increasing performance requirements, which is driving higher and more durable security spend across networking, SASE and security operations.

Our strong product revenue and service billings trends and outlook continue to be driven by key tailwinds, including the ongoing convergence of security and networking, rising customer investments and demand to secure AI infrastructure as traffic, segmentation and performance requirements increase. and accelerating IT and OT convergence as customers recognize growing exposure across critical infrastructure. These drivers translated into strong demand this quarter, particularly in large enterprises where both the number of deals greater than $1 million, and total deal value grew over 60%. We saw strong growth in both Europe and the U.S.

Looking ahead, we can see these dynamics reinforced by durable tailwinds that support continued platform adoption over time. Tailwinds include vendor consolidation, ongoing technology upgrade cycles and the continued expansion of enterprise attack services across cloud, OT and AI environment. In OT specifically, we are seeing strong demand driven by heightened ransomware and nation-state activity alongside rapid digitalization as organizations seek to deploy AI. These same dynamics are extending into SASE, where customers increasingly require flexibility to meet data privacy, sovereignty and regulatory requirements. We support both cloud-based and Sovereign SASE, enabling enterprises and service providers to deploy SASE within their own data centers when required.

Demand for our Sovereign SASE continues to be strong and no major SASE competitor currently offers a comparable solution. Rising cyber risk, heightened regulatory scrutiny, growing data sovereignty requirements while dealing with economic pressures are further accelerating customers to adopt platform-based approaches. At the same time, rapid AI adoption and increased geopolitical uncertainty are expanding the cybersecurity TAM as organizations prioritize resilience, sovereignty and consistent protection across increasingly complex and distributed global infrastructures.

Importantly, these trends align with the reasons of our platform approach -- our platform approach continues to resonate. Fortinet's platform approach is differentiated because secure networking, Unified SASE and AI-driven security operations are all built on the single operating system, FortiOS. This unified architecture enables customers to deploy security consistently across private, public and hybrid multi-cloud environments as well as across hardware, software and SaaS form factors while supporting seamless expansion across use cases.

As AI rapidly expands the attack surface, customers are prioritizing integrated platforms that share telemetry and reduce operational complexity, accelerating vendor consolidation. Against this backdrop, our strong network security foundation remains a core differentiator, driving adoption of SD-WAN, SASE and security operations and supporting continued wallet share expansion as customers simplify architectures and consolidate vendors. This contributed to growth of 28% in Unified SASE and SecOps combined, with momentum continuing across our more services-rich pillars.

We are also introducing a new SD-WAN and SASE services bundle designed to broaden adoption and further support services revenue over time. We also benefit from durable competitive advantages, particularly as performance requirements increase. Our proprietary ASIC technology and integrated operating system delivers superior performance and lower total cost of ownership, which is increasingly important in high throughput environments as customers scale AI-driven traffic inspection.

Finally, customer demand remained broad-based across segments, demonstrating the durability of our platform strategy with over 6,600 new organizations selecting our FortiOS platform during the quarter, reinforcing the breadth of demand across SMB, mid-market and enterprise customers.

Overall, these results reflect consistent demand drivers and durable long-term trends as the market continues to evolve towards platform-based security architectures, we believe Fortinet remains well positioned to take share and deliver sustained growth and long-term shareholder value.

Now I would like to highlight some -- key 7-figure deals that demonstrate our market leadership and customer expansion. First, a cloud infrastructure provider focused on GPU compute for AI workloads selected Fortinet to secure a new AI data center as part of its continued expansion. The customer chose our FortiGate to deliver high-performance perimeter protection, segmentation and secure connectivity for a new production environment. The win was driven by Fortinet's ability to provide scalable, high throughput security aligned with the customer standardized architecture enabling rapid deployment of new capacity as demand for accelerated compute continues to grow.

In another AI-related deal, Fortinet was selected for the initial phase of an AI data center project in the Middle East for a leading generative AI company. This win positions Fortinet as a key security partner for next-generation AI data center infrastructure, which demands significant scale, performance and architectural flexibility. The customer selected Fortinet for the strength of our security architecture to address the complexity of securing high-performance AI environments. This deployment also reinforces the importance of standardizing Fortinet security solutions to enable consistent, scalable and efficient protection as AI data center deployments continue to expand.

Next, a multinational energy company selected Fortinet to standardize and secure its network through the deployment of our full SD-Branch solutions across more than 3,000 locations. Alongside OT Security for an additional 300 global sites. The win reflects strong customer confidence in our ability to support large-scale distributed infrastructure environment, with a unified approach to networking and security. By consolidating networking and security onto a single platform, the customer simplified operations while improving resilience and highlights Fortinet's ability to scale securely within complex, mission-critical infrastructure environments. The customer is also exploring an expansion into FortiSASE, highlighting the opportunity to further extend secure access capabilities across the enterprise.

Lastly, a global manufacturer selected our FortiSASE solution to secure approximately 40,000 users as part of a strategic initiative to modernize its remote access environment. The win was driven by our lower total cost of ownership and commitment to ongoing feature development, positioning us ahead of the competition. The customer chose FortiSASE for its unified FortiOS platform, which provides a single security policy across FortiSASE and FortiGate, with globally distributed PoPs for simpler, consistent protection across on-premises and cloud environments enabling them to build a scalable security architecture.

Turning to margins and cash flow. Non-GAAP gross margin of 81% was better than expected, which is impressive given the strong product revenue growth of 41% and the related mix shift towards product. Our GAAP gross margin was also strong at 80.3%. Non-GAAP operating margin of 35.8% was a first quarter record, up 160 basis points and exceeded the high end of the guidance range, mainly due to better-than-expected revenue growth and continued cost management. Our GAAP operating margin of 31.4% continues to be one of the highest in the industry.

Non-GAAP earnings per share increased 41% to $0.82 while GAAP earnings per share grew 29% to $0.72, significantly outpacing our top line growth, reflecting high-quality earnings supported by disciplined stock-based compensation and continued return of capital over the past year.

Free cash flow was a record of $1.01 billion and adjusted free cash flow was $1.07 billion, up 27% and represented a margin of 58%. We repurchased 10.6 million shares of common stock for $827 million during the first quarter and an additional 1.9 million shares for $146 million quarter-to-date. The remaining share repurchase authorization as of today is approximately $766 million.

Now moving on to guidance. As a reminder, our second quarter and full year outlooks, which are summarized on Slides 30 and 31 are subject to the disclaimers regarding forward-looking information that Anthony provided at the beginning of the call.

Consistent with our disciplined and prudent approach to guidance, our strong first quarter execution supports a higher second quarter and full year outlook. We are raising our full year guidance across all top line metrics, including billings, revenue and service revenue while managing the second half of the year on a quarter-by-quarter basis.

For the second quarter, we expect billings in the range of $2.09 billion to $2.19 billion, which at the midpoint represents growth of 20%. Revenue in the range of $1.83 billion to $1.93 billion which at the midpoint represents growth of 15%. Non-GAAP gross margin of 79.5% to 80.5%. Non-GAAP operating margin of 33% to 35%. Non-GAAP earnings per share of $0.72 to $0.76, which assumes a share count between 736 million and 740 million. Infrastructure investments of $50 million to $100 million. A non-GAAP tax rate of 18% and cash taxes of $160 million to $180 million.

For the full year, we expect billings in the range of $8.8 billion to $9.1 billion, which at the midpoint represents growth of 18%. Revenue in the range of $7.71 billion to $7.7 billion, which at the midpoint represents growth of 15%. Service revenue in the range of $5.09 billion to $5.15 billion, which at the midpoint represents growth of 12%. We continue to expect services revenue growth to pick up in the second half of the year driven by accelerating product revenue growth, a key leading indicator. Non-GAAP gross margin of 79% to 81%. Non-GAAP operating margin of 33% to 36%. Non-GAAP earnings per share of $3.10 to $3.16, which assumes a share count of between 743 million and 749 million. Infrastructure investments of $350 million to $550 million. Non-GAAP tax rate of 18% and cash taxes of $400 million to $450 million.

I will now hand the call back over to Anthony to begin the Q&A session.

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

[Operator Instructions] Our first question comes from Shaul Eyal at TD Cowen.

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

Sure. It's a great question. Thank you. First, definitely, AI is a tailwind to drive the growth. And for us, we can also invest in AFFO for like 15 years with over 500 patents and a lot of internal usage and also like building the product. So that's where kind of -- we prepare for this growth also from the operation side, which is whether direct manufacturer operation, inventory, all these things. So that's where we see it's an opportunity. And also AI, I keep it on saying AI accelerate the convergence of our network [ and ] our security, like I mentioned, like 2 months ago in the [ Fortinet Accelerate ], which is really a lot of companies need to secure their internal network, their server, data center, all these things.

So that's where we see this growth probably will be more long term. And at the same time, we kind of differentiate ourself a lot with other competitors. I actually put the slides on the investor presentation, Slide 10, go back almost 30 years with all these different point solution compared to all this integrated solution. So Fortinet probably the only company in every major like new demand for network security, we kind of in-house development solution, including the right now, the SASE. And at the same time, we kind of also integrate well with all the previous function. And we also keep improving all this with our ASIC acceleration, with our own infrastructure to better security, lower cost. I think all this drives the company keeping gaining market share in the last like 20-plus years. So that's a few -- this time is that we definitely want to leverage this opportunity and whether AI [ or ] kind of supply chain and we just feel we're gaining market share very quickly right now.

Our next question comes from Saket Kalia at Barclays.

Okay. Great start to the year. Ken, maybe for you, the security environment feels different after me those. Maybe the question is because I know you spend a lot of time with customers. What are customers saying to you about how they're reacting? And what parts of Fortinet's portfolio do you think could benefit most?

I think, I keep telling customer, you need to use AI to secure AI. [ All the threat ] there. It's kind of interesting, definitely, AI exposes a lot of vulnerability and also you have to react very quickly and leverage AI to react all these operations. So that's where like for long term, definitely secure operation, which we have over 20 products using AI, building AI, that's really helping the customer.

But on the other side, we also feel the AI also build -- I mean, to meet all this AI demand, also a lot of infrastructure build up. So that's why we see like -- especially we're the only leader in the OT security area. We see the OT grow like 70% is very, very strong growth because OT really like secured pretty much the bottom fuel layer of the AI 5-layer cake, right, so whether the energy level, infrastructure level, all this leverage OT security. That's -- we are probably the only leader in that space, give us a lot of strong growth there. On the other side, we also see kind of a customer see the value -- starting to realize value, whether they integrate more function into a single OS and also the ASIC advantage and also the supply chain operation model we have, it's all kind of a long-term investment but starting playing off now.

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

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

Yes. Saket, also, we put a presentation on the Slide 25. You can see during the COVID, we're the one gaining a lot of market share compared to our other peers, right? So we feel this is an opportunity because we feel our operation model, our kind of long-term investment has much more advantage than any other competitors. So we feel -- this is the same like last time. I don't feel anybody can predict how long this supply chain [ seems ] will last, but we feel we have a strong direct operation model, which much better than pretty much all the other competitors. And at the same time, a lot of long-term investments starting to show the advantage right now.

So that you can see the Slide 25 showing during the COVID 5, 6 years ago, we're the one gaining a lot of market share. Even there are some kind of -- we call the digestion in the '24, early 25, but we're still keeping gaining share. And that's we feel is the other opportunity we feel that works better for us than other competitors.

Our next question comes from Rob Owens with Piper Sandler.

Ken, I appreciate the throughput and segmentation arguments relative to AI, and I want to dovetail a little bit more on Saket's question just around when you mentioned the 20 or so products that you use AI within your portfolio, are there a couple of things that customers are honing in on are driving kind of a set urgency for them right now?

Actually, Christiane gave a few cases about supporting some AI data center build-out, all these things. I think initially, they probably just like the 5-layer cake, right? You need to have all this lower layer build up first from all this energy, infrastructure and then secure the data center. So we see after they build out some kind of AI infrastructure, then the security need to come in especially when the application is starting to deploy.

So we see when company when starting to kind of leverage AI, we feel it's a lot of opportunity for secure company to helping the company or customer to really using AI to secure, I would say, which we feel is kind of ahead of most of our competitors with all this long-term investment, with all the [ patterns ], with all the -- whether in R&D side, in the G&A, in the customer supporting and also in the product. We feel it's -- like I said, I'm kind of with [ engineered bacon ], I love all the new technology. That's where in the last 30 years. Like I said, in the Slide 10. So we're the only one internally develop all these new technology, meet all the challenge, integrate together and compared to most of our competitors have to go through acquisition to meet all this new demand. That actually give us the confidence to continue to grow faster, gaining market share.

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

Our next question comes from Brad Zelnick at Deutsche Bank.

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

Actually, if you look at the Fortinet technology, we are the only cybersecurity company build their own ASIC chip from day 1. So that gives us much better performance and lower cost, both on the [ companion ] power cost and also energy costs and also feed all these data center internal segmentation development quite well. None of our competitors competing with us whether on the performance on [ cards ], including the 2 products we just announced today. And on average, all the top like function we yielded like a 3 to 5x better performance for the same [ card ], same function and much lower energy consumption, that's fitting quite well for lot of bigger infrastructure, data center build out also for a lot of internal segmentation.

AI, especially the agent, agentic traffic definitely generated a lot of additional traffic, especially we call the [ eastward ] traffic and all the server or even like a different department, you do need additional security to protect that for the internal segmentation. That's where we see a lot of strong demand in not just data center, but also internal segmentation to protect all these -- [ or ] get better manageability or better visibility for all these agent traffic.

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

And also especially like a lot of technology like ASIC, like a system, the hardware, it's more long-term investment compared to some software, some other, which most other [ security ] companies kind of more focused on that one on the software side, which I feel definitely now is the time to see all this long-term investment benefit or the hardware ASIC benefit that customers are starting to appreciate more in the hardware ASIC now.

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

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

Yes, the policy we have is not like some other companies using this opportunity to increase margin. We are now we just want to maintain the [ policy ] margin. And when our cost increase, we also do the monthly adjustment. But when the cost is coming down, we also won't adjust lower just maintain the same margin. That's the policy. And just like 5 years ago in the last supply chain and also it's the same policy during this time, the supply chain memory shortage. But for us also because we have a much bigger quantity than on the other competitor, like we have almost 60% market share on the unit shipment of the network security system, which we feel and also with direct manufacturing operation model, we feel we prepare better, we kind of operate better. We also negotiate better compared to other competitors. So that's what fuels a chance to gain market share again like we did 5 years ago.

Our next question comes from Tal Liani with Bank of America.

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

You are the few analyst stuck with the space for...

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

Yes. Actually, I prepared Slide 10 in the presentation for you. We go back to -- actually, the most growth on [indiscernible] [ bookings ] come from FortiGate. You can see for the network security, every year, you need to meet a new function demand requirements. So basically for us, we are probably the only company in-house keeping with all this new function development, whether from early day UTM agent firewall to sandbox to like SD-WAN, SASE to today's AI [ quant ] and computing, right? So once you kind of come up all the innovation, you also need to integrate. So now the FortiOS 8.0 integrated about 30 function there. But without the 30 function, you also need to keep improvement. That's where the ASIC come in to improving the performance and additional secure computing.

At the same time, we also invest in infrastructure to make it more secure and also kind of lower the cost. So that's where I use the [ 3i ] to describe what happened in the network security space in the last 30 years. I feel some of our competitor, they kind of cannot come up the new function quick enough or kind of cannot integrate, they have to go through acquisition to meet all this demand, end up, they become like a multi-point solution. That's the blue area, you can see there's a lot of company, including -- some of our competitors there for using multiple solutions to meet one FortiGate solution, FortiOS solution we have, whether the SD-WAN, the SASE, some other function there, there are also still a lot of point solution provider including SASE, they just cannot offer customers a total security infrastructure security there.

So that we see the benefit of this single OS with all these integration with all this kind of new function and improvement, ASIC, all these things it more like advantage over other players. And this supply change, the opportunity is show the advantage we have, and that's also the operation model we have. that's come out of this slide is kind of using to describe the advantage we have.

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

So you can look at Slides 24 and 25 compared to 5 years ago. It's pretty comparable. That time, we also grow like 40-some percent, yes.

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

Our next question comes from Fatima Boolani with Citi.

Ken, I wanted to ask you my first question, and then I'll follow up with Christiane. We are at a very, very high level in one of the most consequential CapEx and infrastructure investment cycle across the board. You are clearly seeing the benefits of that based on the 7-figure precedent transactions you talked about related to AI infrastructure build-out and some of the responses to earlier questions.

I wanted to ask you specifically what the impact is to your secure networking portfolio and specifically the higher end FortiGate appliances, should we expect that product mix of the business to trend towards some of the very, very high-end SKUs as you support the infrastructure build-out and the secure infrastructure build-out opportunities ahead? And then my follow-up for Christiane is related to the product growth upswing and presumably the higher-end mix of product and appliance uptake from your FortiGate portfolio. Why aren't we seeing maybe a more visible bigger catch-up on the services side? And I guess, to ask it more simply, when I look at your services revenue guidance, you've only really tightened the range, bringing the low end of the services revenue up. So I'm just wondering if to the extent you are seeing a better product mix shift why we wouldn't see an even better attach on the services revenue.

It's a great question. Yes, definitely, Fortinet has more advantage in the high end with our own ASIC solution. It's a much better performance, much lower cost and both on the product and also on the energy cost there. So that we see pretty strong growth in the high end, but at the same time, you can look at the Unified SASE, you also grow like 31%. And also Q4 last year, it grew 40%. That's more a lot of the SD-WAN [ low end ]. That's also the reason we kind of launched a new bundled service to accelerate both the current customer and also the new customer adopt SD-WAN and SASE.

I also put a slide down there, try to give the number there. It's a one-off slide. Also, you can see the bundle is very, very attractive for the customer to adopt the new SASE and SD-WAN service, there, it's Slide 14 actually. So that lists all these different incentive there for both current customers and also the new customer there. So that's why I feel the growth like both high and also low end but lower and more driven by the SD-WAN, SASE side, [ high ] and definitely more data center. But data center also a few -- one small AI data center build-out is still in the very early stage. And also, once the application is starting leverage AI, that will be whatever long-term growth going forward. It's just starting to kind of early ramp-up stage. But definitely on the other side, we see also the growth was strong in the SD-WAN, SASE area, and we believe this is a bundled service will also drive additional service revenue after customer have the hardware box.

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

Our next question comes from Gabriela Borges at Goldman Sachs.

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

Actually, both connect together. So both the AI data center combined with the Sovereign SASE, sovereign AI kind of drive some of the growth together. And so it's -- that's where -- because even for this -- it's interesting, it's the same FortiGate, FortiOS to do both AI security and also the SASE to protect all these like zero-trust environment. I think the kind of view is both connected, driving the growth together.

That's really interesting. And the follow-up I have for you is what not has been transparent on some of the vulnerabilities that you found in your own technology when you find them, how is your internal process for hardening your infrastructure changing as you get access to some of these leading-edge LLM models that can perhaps help you upgrade the quality of your own infrastructure?

Yes. We're working very closely with the leading AI company, whether to handle the vulnerability, all kind of helping on the -- automate a lot of operation for our customer. At the same time, we also build on infrastructure and which has better security, more better performance than some other like third-party infrastructure. we feel we do better than most of the competitors. And at the same time, we're kind of keeping developed new technology like we say, using AI to secure AI.

Congratulations on the quarter.

Thank you.

Our next question comes from Brian Essex with JPMorgan.

Congrats on the results for the quarter. Maybe just a quick one for me. And I think I wanted to follow up on Fatima's question because I wanted to make sure they understood some of the dynamics here with regard to the Unified SASE billings. Could you maybe unpack that a little bit and help me understand with regard to the growth, how much is SD-WAN? How much is SASE? And particularly with -- if you can help us reconcile the deceleration in SASE ARR just so we can put the 2 together to understand what the primary drivers of that in the segments of the business at play are.

Yes, the Slide 4, we have the 3 pillars there. Yes, definitely Unified SASE, including SD-WAN [ after the ] SSE is more like FortiSASE, some other things there. Actually, the FortiSASE, also we see very, very strong growth on ARR, all the things there. And also, we believe the new bundle will also accelerate the SD-WAN, which on Slide 14, both SD-WAN and SASE service going forward. So it's -- yes, the Unified SASE grow like 31%. It's a pretty big. It's about 25% of billing right now is coming from the Unified SASE. It's a pretty big number. We are the top 3 player in the space and also probably one of the fast-growing right now.

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

Sovereign SASE, a few, probably almost the same size as the cloud-based SASE, probably even bigger. But also sometimes the sovereign SASE because we're using the same OS, same FortiGate, sometimes they just buy as a firewall, gradually turn on the SASE function and deploy internally in their data center or infrastructure. And also we see the service providers starting to ramp up Sovereign SASE work quickly, especially in Europe, which there are a few big service -- telecom service providers starting kind of launch all this Sovereign SASE service with our product. So that's also helping drive a lot of product revenue.

Our next question comes from Gray Powell with BTIG.

I just want to make sure you can hear me okay?

Yes, all good.

This is perfect timing. I actually wanted to follow up on Brian's question and it kind of relates to what we've been hearing in our field work. Specifically, are you starting to see more of your branch office firewall customers turn on SD-WAN components and then convert their firewall subscriptions to secure service edge. And if so, I guess, how should we think about the ballpark uplift to a customer's annual spending? Or just how should we directionally think about that opportunity just because it does seem like you have an installed advantage in the market that maybe we aren't thinking about 6 or 12 months ago?

It's definitely market survey work got feedback. And that's also the reason on the Slide 14, we launched a new bundled service to helping accelerate the SD-WAN and SASE. You can see we combine like 4, 5 different separate service into one bundled service, including some SASE license based on the model of a product from like FortiGate [ 6K ] up to like middle-range product, [ we all ] come with some kind of SASE license together with all the SD-WAN, whether the underlying [ service ] or the application monitor -- yes, so it's a very good observation. Definitely customers [indiscernible] more turn into the firewall into SD-WAN and also into the SASE zero-trust environment now. So it's kind of helping accelerate additional service.

Also, you can see we also have the slides -- thus, we're tracking the big enterprise, it's Slide 11. You can see the adoption of whether the SASE, SD-WAN with the big enterprise we're tracking. I think last quarter, the SASE, about 16%, quarter-to-quarter is now at 18%. So it's a very strong growth yes, definitely, that's the trend.

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

Our next question comes from Joe Gallo with Jefferies.

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

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

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

I think, during the COVID, we do see some pull forward, especially like a retail when they have like a deployment, they schedule like for 12 months, they try to order ahead of time, make sure all the products are available for them. But this time, we don't see much pull forward, but we do see the demand pretty strong. And also we kind of control the -- whether the channel inventory [ some others ] in the market, we don't see an increase there also. So that's what we just try to manage better.

At the same time, we just tell customers, we just want to maintain the margin. We don't want to raise the margin. And like some other suppliers and when the costs higher, we'll raise the price, but also once it come down, we also lower the price in real time. So that's where -- I think we built some good trust with some of the partner, the customer and also the direct model also helping there. So it's difficult to judge how long this will be last, could be longer, could be shorter. But for us, we just operate based on [ their ] own kind of healthy margin and also more quick response and the direct operation manufacturing model to get better supporting better to the customer.

Our last question comes from Junaid Siddiqui with Truist.

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

Yes, the edge eating cloud is more because kind of built ASIC for like 20, 30 years because we want to increase the computing power and also real-time processing on our [ plans ] on edge. That's got a lot of criticized before which -- why this kind of big long-term investment compared to whether the cloud, but definitely, the AI and also kind of the new trend, you see the edge, the hardware starting to show better value now. So that's a few -- we'll continue keeping the same strategy we have, keep investing in the ASIC, keeping invest in the hardware appliance.

And also kind of -- because a lot of new like what you call the physical AI or some hardware, they do need to use edge computing to the real-time computing decision there instead of trying to go to the cloud to do some kind of cloud, they're more for the management side. So that's where we see the new trend, especially like OT, you see the strong growth in OT, over 70%. A lot of them have to deploy in the field and manage the traffic in real time on edge. So that we see pretty strong growth. I have to say it's kind of a hybrid approach. It's not. It's never 100% on the cloud, never 100% on the edge. But kind of both side has a value. I just feel like a few years ago, there's too much talk, emphasis on the cloud, some competitors even thinking the cloud only, I don't feel that's the case. That's where we're keeping [indiscernible] the ASIC in the system, hardware side, now the customer, the partner see the benefit of this hybrid approach.

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

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

[Presentation]

Good day, everyone. Thank you for joining today's Demo Day Unified SASE in the AI era. My name is Ruth Goh, and I will be our host for today's session. Before we get started, I encourage all online attendees to view the screen using a laptop or desktop for optimal experience. Additionally, please feel free to download resources listed. For more information on the topics we'll be discussing today.

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Now let me turn the time over to Alexandra Mehat, Product Marketing Director, for keynote message.

Very happy to be here with you. And I will be later joined at the end of my presentation by our great experts and ADA on SASE that will show you the extent of what SASE is. But today, we are talking about unified SASE in the AI era. Definitely, AI is at the center of every single conversation now that we have with customers, with partners, with analysts also, of course, and it is a key trend and the key challenge on securing AI, making sure you have AI capabilities to help you with threat detection in your solution. And that's definitely what Fortinet has.

So let's get started here. You have a lot of challenges that have been brought by AI today. So one of them is shadow AI as a subset of shadow IT, actually. It's what are the users doing? Which Gen AI application are they accessing? What are they sending to these Gen AI applications? So who accesses what?

Then AI security, are you using all the key capabilities of AI for threat detection, for that intelligence and triage and alerting that you need every solution so that you're more efficient, thanks to these AI power actually. And then, well, I was talking about securing what the access to these Gen AI application do we -- do you have a solution for that? A lot of customers are asking, well, when employees are accessing ChatGPT Copilot, Claude, Grok, et cetera, I want to know if they're not sending confidential or sensitive information.

These are the key challenges from AI today that we can solve with SASE. But let's start with what is our -- well, our solution SASE is actually built with our FortiGuard services. And at Fortinet, we have what we call our FortiGuard Labs. We have more than 1,000 people looking into that, but not only people, they are using AI technology, they are alerting AI, machine learning, deep learning to select, to determine the threats that can be defined. We have 15-plus years of experience in applying AI at Fortinet.

And we didn't just start yesterday. AI is really in our DNA. We had the sixth generation of our machine learning engine. And we've blocked more than 3 trillion vulnerability attempts just in 2024, by 2024. And we have more than 500 patents in AI, just in AI by itself. So we are also innovating there in the AI space.

But this FortiGuard Labs, well, we have our products everywhere in the world. We're one of the -- well, we have more than half of the firewalls worldwide are Fortinet. So we have the broadest telemetry available. We take it from our firewalls, anonymously, of course, firewalls, e-mails, endpoints or sandbox files, they are all pushing all these data to us.

And with that AI mail capability, we are looking into trillions of events to have that real-time automation and that feedback loop into our products. And we're also partnering with research partners. We are a founding member of the Cyber Threat Alliance. We are partnering with the World Economic Forum, with the Interpol and to make sure that all the threats are detected as much as we can, 0-day threats, regular threats. And we are using AI to help us do that with all its power.

But what about SASE? What does -- so SASE, secure access service edge, is the way to secure your remote users as well as with SD-WAN and FortiGate users in the office, sorry, unified SASE solution. So we have a clear integration between our FortiGates and our SD-WAN as well as on FortiSASE, you'll see it in the demos later, really that integration is key and really fast and easy to do for simplifying your operations. That is our unified SASE solution.

A unified SASE solution is all about convergence, convergence between networking and security with one management, one agent to access. So it's all about simplification. You either access with an agent, without an agent, with different key capabilities, you can connect to FortiGate also if you want to offload the security for guests, for example, to FortiSASE.

We also connect with third-party SD-WANs as well as have a cool capability called Thin Edge, you can have an access point or where we call FortiBranch SASE, as kind of a combination between a switch and an AP where you connect the devices and you can offload the traffic to FortiSASE and then make sure that all the security is done there.

And our SASE solution has a lot of key capabilities. It's a nice package solution that allows you to secure the Internet access, the private access as well as the SaaS access, including Gen AI applications. So you have Firewall-as-a-Service, secure web gateway for Internet access protection.

You have universal ZTNA across everything, same policy, same tags that you can have across the office and the remote locations. that allows you to have a granular private access, checking the security posture at Fortinet, we do it every 60 seconds so that you're sure you're fully protected. Then we have CASB and also SSPM to protect these SaaS application access misconfiguration also through SSPM.

And all of that with data leak protection across everything. So it includes Gen AI application, it includes Internet access. So we really check what the user is sending out and make sure it's not sensitive information we have in the EDM, fingerprinting, regex, all these cool capabilities in our DLP that will allow to check that no sensitive information is sent out.

We're releasing secure browser extension so that even at the browser level, you have an add-on to existing browsers where you can fully secure your users there. And what is key also is that digital experience monitoring throughout from the endpoint to the point of presence to the POP as well as the connectivity between the POP and the application. We check the latency, the jitter at the endpoint side.

We check CPU, memory, bandwidth, WiFi connection to make sure that when you want to troubleshoot any issue, you really can do it from end to end, from the endpoint to the application itself. And I was talking about that key integration between our SD-WAN and our SASE, which you'll see in the demo moving forward. So all of these services are really based on our FortiGate AI-powered services.

It also includes Sandbox in SASE actually. And these FortiGate services I've talked about, AI-powered services are here in SASE to help you out and to have all these performance, resilience, efficiency in your SASE solution. We also have our FortiAI Assist that is available today in our SD-WAN, very soon in our SASE, where this DEM capability can also be assisted through that Gen AI assistant that will make troubleshooting done in minutes instead of hours or even days sometimes.

So AI is really at the heart of our SASE solution and our SASE solution also protects Gen AI application. So it's across everything. You have that -- I was talking about the challenges. So you have that visibility of everything the user does, which application they're accessing, what they're searching for actually on the Internet and these type of stuff, very detailed analytics and reporting.

We have that -- these AI-powered FortiGuard services that are here with all their power and all this data analytics that we can push back into our product as well as this FortiAI Assist, the Gen AI assistant that helps you troubleshoot faster and configure faster also. So really, AI is at the heart of everything. It's not just securing AI, it's AI security at the same time.

And so it's both sides of the solution. A little flashback kind of on what we've done recently in the last 6 months to 1 year in FortiSASE. So we really expanded that Gen AI security that I was talking about, making sure that we have that full DLP on it. We'll see it in the next slide. Then we enhanced all these BYOD, bring your own device connectivity as well as contractor connectivity.

So we have that agentless T&A portal that we can use for private application access. Also that secure browser extension. It's not ripping and replacing your browser that you're used to with a full new browser. It's the same security capabilities, but just with an add-on as security. So it's a very lightweight installation for contractors or BYOD.

Also, we've expanded -- we'll see the map later, but we're expanding our number of POPs. We have almost 100 of them, more than 100 compute POPs. We're using our own POPs. We're growing also our own data centers of POPs throughout the world. We expanded also our public cloud POPs. We have Google Cloud POPs, AWS POPs and now Oracle with OCI public cloud POPs. It's -- we're really expanding the reach so that you can access to the closest and have the best performance and the lowest latency.

Let's go a little bit deeper on that Gen AI because it's really that SASE and the AI era is, as I said, every conversation I have with customers, or partners, or analysts is about how do I secure the access to my Gen AI? How do I know if customers -- my employees are not sending sensitive data to AI apps. So first, we do that web filtering with our in-line CASB, make sure that we have all the profiles, we can allow, monitor, block, warn, disable access to Gen AI applications.

Then we have a really broad Gen AI application catalog. We have all of them, that's not the whole list, of course, you see here. We have the ChatGPT, the Copilot, the Claude, the Grok, the Anthropic, et cetera, et cetera. The whole list we support them. And as I said, DLP is key. We are going to check whatever is sent to that Gen AI application for, I don't know, fingerprinting.

So you make sure that you have a fingerprinting of your document and you make sure that this a confidential document or document with sensitive information is not sent out or we can have source code detected so that you don't send source code out. Your employees don't send anything. That's really key and the key -- well, the solution to the key challenge that I was talking about initially. So I was talking about that network of POPs.

We have POPs globally everywhere and it's growing our own POPs to improve the performance, lower the cost also for you as well as Google Public Cloud POPs with AWS, OCI and Google Cloud. We are also in the marketplace for Google and AWS so that you can also purchase FortiSASE from there. Really, we really try to expand the number of POPs. We're one of the largest ones out there.

And yes, very important too. Number one, we've been the only vendor with SD-WAN customer choice for 7 years. So it's not just us saying it, it's our customers saying it here in the Gartner Peer Insights and giving us that customer choice. It's for SD-WAN as well as for SSE and for ZTNA. Actually, for ZTNA, we're the only vendor and have that customer choice, and we're a leader in the SASE platforms MQ. So we're pretty proud of all of that.

And as well, SASE is all about securing our customers' employees, securing these remote workers, the workers everywhere, wherever they are at home, in a coffee shop at an event or in the office. So -- but it's doing it with that converged solution. It's not a lot of point products that bring complexity.

It's a simpler and faster operation. It's one platform, one management, one agent. Digital experience monitor for troubleshooting everywhere and FortiAI Assist on SD-WAN today, FortiSASE soon. So it's really simplifying your life, your operations very easily. Second, reliable and improved user experience is always on. You get fast, consistent and secure access everywhere to application, private, SaaS or to the Internet.

And all of this, it lowers the risk, lowers the gaps. There's less gaps, especially with that convergence, less point products, same policy everywhere throughout. So it lowers the risk, which is very important for you, maybe some CIOs and CISOs out there. And it it's really you give the access they need and you make sure the employees are safe and secure from malware or threats wherever they are.

And that's kind of peace of mind for all of you and making sure that even in this AI era, your employees are still safe. Well, thank you very much, and I will give it up to our great SASE experts here for great demos that would show you SASE in real life and how it's really done everything there.

Thank you. In this session, I will be covering the topic from SD-WAN to true Unified SASE. For today's agenda, I will be covering our view of Fortinet Unified SASE and 2 demos. First, demo, securing private assets for branch and remote users through FortiSASE.

Second demo is FortiSASE integration with FortiManager. Fortinet Unified has a combined FortiSASE a cloud delivered security service with Fortinet Secure SD-WAN both are built on a single operating system, which is FortiOS, to provide a unified single vendor SASE solution.

FortiSASE includes integrated security services such as Secure Web Gateway, Firewall-as-a-Service, CASB or DLP zero trust network access, digital experience monitoring, remote browser isolation and SD-WAN. As you can see from the diagram on the left-hand side, there is a remote user, which can be the agent or agentless or for the branch user or the Thin Edge device, which is FortiAP or features.

On the right-hand side, there is a destination, it can be the Internet access, SaaS by Microsoft 365, Salesforce and also public cloud. Beside that, we also can integrate with the private cloud, which is the corporate data center to provide private access or accessing to the private resources in the company.

Fortinet Unified SASE is a platform built with the single management console or single pane of glass. All the configuration is from a single portal instead of accessing multiple portal or devices to make the configuration change.

First demo, securing private access for branch and remote users through FortiSASE. In this demo, I will demonstrate how to secure both remote and branch users when assessing private resources. For the remote users, the user connect via IPSec to the nearest FortiSASE security, leveraging geo location and latency. All the traffic is then routed to the security POP for security inspection.

For branch users without an agent installed on the endpoint, the branch edge device such as the router or firewall will establish an IPSec partner to the FortiSASE on-prem security port. All the traffic will be redirected through the FortiSASE security port for security inspection. In my demo environment, there are 2 server has been set up at the data center site, the HR server and the finance server.

In order to provide access to the private resources for the remote user or branch users, we do have the ability to connect using the SD-WAN. By integrating the FortiSASE with SD-WAN, the solution enhance resiliency application assets for both remote and branch users. I will show you how easy it is to integrate the FortiSASE with existing SD-WAN. There are 2 parts of this configuration need to configure in FortiSASE to integrate with SD-WAN.

The first is the BGP setting and next will be the secure private access setting. To configure BGP setting, go to network BGP and you need to configure a router ID sub. And for the SDA Hub belongs to, we will use the default FortiSASE autonomous system, which is SPA Hub is same AS number with the FortiSASE. And for the FortiSASE AS number we use is 65001. And for the hub selection method, we use the hub health and priority, and we need to configure the health check IP address.

Next, I will show you the secure private access configuration, go to operation Secure Private access. To configure the new service function or new tunnel, you can click on create. And there are 2 ways to configure. One is using the easy configuration key that you can retrieve from. You can get it from the hub by FortiGate or the second one, you can do a manual configuration.

In this, demo I have 2 IP has been configured to Hub 1 and Hub 2, on the service connection priority, by default, when you have configured the IPSec connection, all the security POP will initiate the IPSec partner with the hub. So in my case, I have 2 hubs, the Hub 1, Hub 2. So as you can see, in all my security POP, I have configured and there are 2 IPSec has been initiated to the Hub and Hub 2.

And default, the priority is P1 for both tunnel. And for this demo, I have manually changed the Hub 2 to P1 and Hub 1 to P5 priority. So that in Hong Kong POP, Hub 2 will be the priority to access to the private resources. Click on the health. You can see for the hub that I configure Hub 1 and Hub 2 and Trio has been initiated the connection and the tunnel is up, and this is the health check and the BGP also has been established.

And you can click on one of the tunnel and you click on the view the BGP route. And this is showing that all the BGP route learned by the security POP. Let's move to demo. I have a remote user that connected using finance and Test locker. And I will -- okay, I have 2 server. One is the HR server and the finance server. Let me try to access to the HR server. Okay.

Access to the HR server is failed. Let me try to access to finance server. For this access to the finance server is success. Okay. Let's proceed for the demo with another user. I have another user. This user is logged in as HR. So from these HR users, I will assess the same resources again. First, I will access to HR server. And second, I will access to finance server. Okay. access to the finance server is failed, but the HR server is success.

Let's move on to another demo with the same user HR. On this endpoint, I will be accessing to both HR and finance server again. HR server is still, even though I'm logged in as a HR user. Let's see why this happened. Let's go back to the FortiSASE. We will check on the logs. We will check on the locks to the private access or the SPA log. As you can see, I do have a HR user and accessing to the finance server is getting blocked.

The HR user is connected to the Singapore POP and using the Hub 1. And let's check on the finance user. For the finance user, it is connected to the Hong Kong POP. And the private access tunnel we use is using Hub 2. This is because I have changed the priority for the Hub 2 in the Hong Kong P to the highest priority, which is the P1 and then the H1 will be the P5.

Now let's check on the policy. For private access, as you can see, for the policy I configure to the HR server only allowed by only HR user or HR member can access to the HR server. And for the finance, only finance group user can access to the finance server. That's why as you can see from the demo previously, HR user can only access to the HR server and finance user only can access to the finance server.

Remember, I have demo using 2 remote user assessing -- connect using the HR user. But while one of the user is accessible to the -- the HR server is accessible, another is not because of the security posture that I configure. So in my policy, I configure the user from the HR with the security tag compliance then only can access to the HR server.

Let's check on the server, the remote user for the first one that can access to the HR server. Let's check on the security posture tag. It is shown as a compliance. Let's check on the another remote user using HR. The security posture is as a noncompliance. That's why the users are not able to access to the HR server, even though connected to the VPN.

From the previous demo, the FortiSASE not only check based on the user name and password, but it also check the endpoint compliance whether the employees meet the security posture that has been configured. Next demo, I will showcase using the branch user. And in the FortiSASE, I have provisioned on-ramp security that is allow the branch user, the branch device to connect to the FortiSASE and route or redirect all the traffic to the FortiSASE inspection.

So as you can see the connections, there are 2 branch has been connected to FortiSASE. Let's access to one of the endpoint at the branch office. So from this branch office, this branch office will be able to access the Internet from the SE. And I will show access from this branch user to access to the HR server. And from here, I can also access to the finance server. Let's check on the configuration.

In my policy, secure private access policy, I have a branch policy. So for this, I will allow the user in the branch to access all the private application. This is only for demo purpose. With this, I have concluded my first demo. Next demo is FortiSASE integration with FortiManager. FortiSASE can be integrated with FortiManager to provide centralized management for selected configuration setting.

Only specific configurations are seen from FortiManager to SASE, including policy package, security profile group, external feed, firewall address and address group, services and services group as well as user-related configuration such as local user, PKI user, the LDAP users, user groups and authentication source like LDAP and RADIUS. In this demo, I will showcase the integration between the FortiSASE and FortiManager, along with the use of FortiAI Assist to help configuration policy for FortiSASE.

Currently, FortiAI Assist has some limitation. Only certain tasks can be performed using it. In this demonstration, FortiAI Assist will be used to create a firewall object and create a policy to allow FortiSASE user to access through Internet. Let's check the on the FortiSASE. First, you need to go to the system center management setting. You need to enable the status. After that, you need to save it.

On the FortiManager side, you will prompt the request that there is a new request from the FortiSASE. And you need to generate the FortiManager key. This key will be added to the FortiManager to authorize the FortiSASE device. In the FortiManager, you will receive a request from FortiSASE. You might say more, I have authorized the FortiSASE in FortiManager. That's why I'm not getting any prompt.

Let's move on to the policy creation using the FortiAI Assist. So first, you can click on the FortiAI Assist icon. And I put my question is to request the FortiAI Assist to create a policy for SASE user to access Internet using the profile IT group. Okay. As you can see, the CLI script has been generated to create a policy. But from the script that some of the parameters we need to manually replace it.

So I will save the script and the SASE interface need to be replaced with SASE underscore ingress zone. And for the destination interface need to replace to the SASE underscore public zone, and I will change the SASE address to all as well. For this name, I will change for the SASE. And I will I need to run the script through the policy package, and then I will save it. And from the script, you can run it to the policy default policy package.

There is no error. And now we can go through the policy package to check the policy has been created. And now I will install the policy to FortiSASE. Okay. The installation now has success. Let's move to the FortiSASE, go to the security policy. As you can see that the policy has been configured successfully from the FortiManager. With this, I have concluded my demo session, and I will pass the session to the next presenter.

I'm going to walk you through secure Internet access everywhere, managed and unmanaged device. That is agent-based and agentless secure Internet access. We'll see how easy it is to set up that it's not complex. For example, we'll see how we can apply the same policy set, the same web filter application controls for both agent and agentless devices, making it easy to manage policy and apply controls.

So as an agenda, we will have a bit of an overview of the demo and what we'll see today, then we'll jump on to 2 different hosts that are connected to FortiSASE, one using an agent and the other being agentless using a PAC File configuration. Both these hosts are directly connected to the Internet. The managed device with the agent will have a full secure tunnel to FortiSASE while the other device will securely forward its traffic to FortiSASE based on the proxy PAC File configuration. During the demo session, we'll see and discuss what the differences are in the user experience, policy control options and the considerations for using either agent or agentless.

With regards to user experience, we will see that a user on either a managed or unmanaged device will have a very similar experience. The same policy will be applied. So both users will experience the same block messages, have the same allowed access and receive the same threat control messaging as we run through the demo sequence of connecting to various Internet resources and destinations.

As we go through the demo, we will look at the policy options for both agent and agentless connections. We'll see how we can be very efficient at removing the complexity by applying the same Internet controls to both agent and agentless devices, meaning we could have a single secure Internet policy that can be applied across managed and unmanaged devices.

Of course, we could apply different Internet controls as well as apply these controls to specific users or groups for agent and agentless devices and users. But keeping it simple, it is possible to streamline and maintain a single Internet policy. Further to this, we will look at what additional controls we can apply with an agent-based device. For example, using device posture as a means to further enforce secure Internet access.

So what are the considerations for using an agent or agentless-based approach? Typically, we would see FortiSASE agent being installed on organization-owned devices. That is the organization has full control of the device, and it is likely enrolled in a mobile device management platform. Generally, these devices are used by an employee of the organization.

Unmanaged devices, on the other hand, are more likely to be a BYOD device, like a contractor's device, where the user still needs to access corporate resources in a secure way, either -- even though they are not an employee or have a corporate device. For example, the agentless device could be used to access corporate Office 365 environment.

The organization wants the contractor user to go through a secure control point we like FortiSASE to be able to access their SaaS services. So the user must come from the FortiSASE public source IP address where conditional access policies based on the user source IP can be applied at the SaaS service itself.

Next, we're going to jump into the demo and see some secure Internet access controls being applied, and we'll see them in action. So in this demo, we will look at secure Internet access for a corporate user on a managed device. That is the device with FortiSASE agent installed. We'll also look at a contractor user on an unmanaged device where they have turned on the proxy so that they can access the corporate services.

Our scenario is a corporate user that has received a personal e-mail via the webmail. This e-mail is suggesting that they have won something. We will see the secure Internet access policy protect the user as they explore a spam e-mail and click on the links. So let's jump into the demo and see how it turns out for them.

All right. So on our corporate device, the first thing we will look at is the agent to confirm that we are indeed on a managed device with a secure tunnel to FortiSASE. We can see that we are on a managed device as we have the agent installed, and it is managed by FortiSASE. And we can see that management connection there.

We can see that the VPN is up. This is an always-on auto connect VPN, meaning that the agent will establish the tunnel when the user logs into their device. Finally, we can see that we have some Zero Trust tags applied which can be used in FortiSASE secure Internet policy to provide more controls on their access.

Now a user is going to browse the Internet and access their personal webmail. So you can see that we have a mail here and the user has won a prize. So they're super keen to find out what this prize is. So they click on the link, and we get a block, right? We are getting a block on category phishing, right? So this is clearly an unsavory email, though our user is not picking up on that just yet.

They're persistent, so they move forward and they try and download the brochure to see if they can find out any more information about their prize, but we get a high security alert now on this one, right, that is infected with a virus. Still, our user is not having it. So they go back and I think I must need to update my details as it's asked and they click on the link.

Again, we get another high security alert, the virus detection. Our user is curious, so they click on the FortiGuard information link to try and get some more understanding about why they may be getting a block and what this is all about and why they can't access information about their prize. And we do note here that this detection is based on the AB AI malware detection model.

So the users they get -- I still need to grab some more information about this. I'm going to follow the link to the website and see if I can actually find out what this mountain lodge is all about. However, we get another block, we got a web page block that unrated.

So this is a newly formed domain and is something that we should be suspicious of. So our corporate user is feeling a little bit frustrated now that they cannot see exactly what they've won. They know that the secure VPN solution on their corporate device is stopping and blocking them. So they forward the e-mail to their friend, who was a contractor at the company, however, they have their own device.

So let me go through and forward that e-mail now. So user is hoping that the contractor will be able to access this e-mail and tell them what they've won. They will send that through. And then we'll go jump on our contractor device then check out what's going on for our contractor.

So here on our contractor device, we can see the proxy settings. We can see that we have enabled the scripts. It's an easy toggle on the device to turn it on or off, and we have put in the script address, which is hosted in FortiSASE. So it's really easy to set up. So our contractor is going to go browse the Internet. To do that, our contractor will need to authenticate on FortiSASE.

They attempt to get to our hotmail account, we'll get our redirect and we will authenticate. All right. So now that we can safely browse the Internet, we will sign into our web mail. See what -- from our corporate friend. All right. So we can see we do have that e-mail. It has arrived. So we're going to open it up, going to read the message. Hi, can you please see if you can access this e-mail to see what I've won.

So I'll scroll up and have a look. So our contractor is going to click on the link, see what they've won, and we're getting the same block as what our corporate user was getting. So again, we're picking up on a phishing attempts. Our contracted user attempts to download the brochure. And again, we're getting the same block, picking up that there's a virus on that link. Now our contractor is not going to click on any more links rather, our contractor is going to try and find out what is the Mountain View Lodge scam all about.

So they go and try and use ChatGPT as an AI engine to find out what's going on and they paste in their search. Well, we get a block. Now the contractor has not thought twice about that, didn't work, so they've moved on and they're going to use Google AI model and do the same search here.

While that loads -- all right, so we get a result there. So Google AI is working for our contractor. Okay. So the user experiences that we have had is very similar between our agent and our agentless approach, where we're getting the same blocks and the same controls.

What I'm going to do now is we're going to have a look at FortiSASE at the policy to see why we'll get the user experiences that be worth, but we'll do is we'll go to security, and we'll have a look at our security profiles. And the profile group of interest is this demo web filter. You can see we have our antivirus configured. And we can see that we have picked up some threat detections. We have our web filter, so our content filter configured and we come in and have a look. And if we scroll down to our threats, our security risk, we can see we are blocking on everything, and I keep coming down. We can see unrated is also blocked.

If I look at our DNS filter, in the same way, we are blocking on security with categories. If I scroll down, we can see we are blocking on the unrated as well. Now why did our corporate contractor user have limited access to ChatGPT, we come down to our application control.

We can see that we are blocking all AI, generative AI. If we come and have a little bit signatures. So there's a whole stack there in ChatGPT is one of them. We cancel out of there. Now the reason we're able to access the Google AI is because we have an override, right, we are allowing that as part of our secure Internet access control.

So once we've configured our profile group demo web filter in this case, we would apply it to our policies. So we have proxy policies here and we have policies. Proxy policies being for our agentless devices, we jump in and have a look at the policy. We can see that we are applying that demo web filter security profile group here. Now you also see that we can specify users if we wanted to create different secure internet access policies for different users. And if we come and have a look at our policies, we'll see that we are using the same demo web filter profile. So it's exactly the same. So we're getting that consistency now, that's secure Internet access everywhere whether my user is an agent or an agentless-based device. Also, you can see I can specify user, just like I could in the agentless, the proxy policy.

But additionally, you can see that we have a security posture tag applied. So our agent devices must have a compliant security tag to pass through this rule. If we just jump back to my agent-based device. We can see that we do have that compliant tag.

Now those tags can be configured to appear based on a whole number of conditions. It could be that my antivirus is running. It could be that I'm running Windows 11, and it was updated in the last 2 weeks. It could be that I've got a particular certificate on my device or it could be a combination of those things. And should I not meet that rule set, then my tag might change and so will my access.

Okay. So that's all I wanted to run through today. I'm going to hand it over now to the next presenter to take you through the next session. Thank you very much.

Today, I will demonstrate how FortiSASE secures SaaS and AI application access across different user types and risk scenarios. Organizations today are moving towards SaaS and AI platform like ChatGPT, Microsoft Copilot and DeepSeek. However, this introduced 3 key challenges. how do you securely enable access for unmanaged users like contractors?

How do you protect sensitive company data when users interact with SaaS? And most importantly, how do you prevent data exposure when using generative AI platform? This is exactly where FortiSASE provides a unified solution.

In this demo, I will walk through 3 phases. First, agentless Zero Trust access for contractors; second, advanced data protection using agent-based inspection; and finally, policy enforcement for generative AI interactions.

In terms of the workflow in Phase 1, we will have 2 unmanaged users, John and Tammy. Both of them will be authenticated through SAML and get redirected to the configured ZTNA agentless portal based on their SAML groups. In Phase 2, we will have a single agent based user running FortiClient on a Windows device and they're trying to share some sensitive credit card information online. And finally, in Phase 3 same FortiClient agent-based user who will be interacting with ChatGPT and DeepSeek trying to lead some unsupported key orders with the AI agent online.

Let's start with a contractor scenario. This user is accessing corporate applications from an unmanaged device, meaning we cannot rely on endpoint control. Using FortiSASE, access is provided through an agentless ZTNA portal where your identity is verified before granting access to specific locations. This is where we define a specific dedicated applications.

The application can be an IP base or FQDN. Those IP will be completely hidden from the end user. After we define the applications, you can move towards the bookmarked portal. You can define which users or user group have access to which applications. For example, I have 2 users here. One will have access to the payment and database based on the user group of finance, while the other user will have access to the sales, which is basically a FortiManager of portal access.

For us, it's not only about the access, but also we have a security inspection when you can define different security policies similar to the standard firewall policy looking at the user group applications and what kind of security inspections should be applied.

For me here, the authentication will be based on SAML. And the SAML has been configured under FortiSASE SSO. We are using the same suite SAML authentication. Now I just need to move to the portal, copy the portal URL, move to my machine open the browser, paste the URL, authenticate this is my application. As defined by my policy.

So my user Tammy is based of old engineering, which is allowing FortiManager-only access. If I go back in applications here. The IB information of my FortiManager is completely hidden from the end user. You can just try to log in and your contractor can have a normal access to the FortiManager from outside. If I sign out, I will be using John.

John has 2 different applications based on what we have defined on the bookmark portal here, payment and database, if hover the data appears all the information are completely hidden from the end user. If I go back and then open the other application, we don't expose any information about my private app to the end user.

The key concept here, access is not just a network based. It's an application specific, and it follows the Zero Trust principles. Even in this scenario, FortiSASE applies in line DLP controls a similarly different files. You'll see here my DLP has blocked the file because it has social security information based on my DLP policy. If I go back and then I try to download a different file, let's say, this one simulating a credit card information, again, it will be blocked by my FortiSASE portal.

If I go here and then go again file, this time, I will try to leverage Microsoft Purview label protection, try to download the blocked file. Again, the file will be blocked based on my defined DLP rules. To look at the DLP rules, this is my application policy, matching the finance. In this one, we have our security profile that has DLP and endpoint. If I go back to my security profile and the security profile, I go down my DLP. Here, I had my DLP rules triggered the customize.

I have a different DLP rules, some of them are file based and some of them are messages. We were hitting the first one and the second one here. If you look at the Microsoft Information Protection labels, you can define it here in FortiSASE. And within the rule, you will have your dictionary that has a specific value of matching your information protection label. So we are sure that the file tagged to this is blocked by FortiSASE.

If I go back as well and try to simulate downloading an infected file FortiSASE will be able to detect and block the file based on our antivirus rule. This really provides a strong baseline level of protection for unmanaged users. However, because this is an agentless, inspection is limited compared to the full endpoint-based visibility.

Let's now move to a managed user scenario where deeper control is possible. In this phase, we are working with a managed device where the FortiSASE agent is installed. This allows for deeper inspection across all traffic and enables more advanced data protection techniques. Here, we are using the exact data matching. Unlike the traditional DLP that relies on patterns, EDM allows the system to identify a specific company data, such as internal recorders or sensitive data sets.

Under FortiSASE security profiles, we have our profile resources that define our DLP template. From the resources, we have the EDM templates, let's add the existing one. You have 2 ways to upload your company data, either through external feed or file upload. Once the data has been uploaded, it will be displayed on the right side. You can view my interest.

If I go back, I have defined two matching criteria, one, which is the mandatory field, to look at the credit card information or credit card number. And this can be matched with either the first name or last name as per my data set. We can view the record is here on the file on Column 14 that credit card information and in column 5 and 6, we have the last name and the first name.

Once we have defined our DLP EDM template, we can start to create our DLP rules under profiles. This time, I will be using advanced DLP profile within the advanced DLP profile as long as we have the deep inspection enabled. If I go down to the DLP customize, I have my existing EDM rule. It's a message type edit. This is my current sensor. Usually, the DLP rule should be containing a sensor. And within the sensor, we can define multiple dictionaries. So inside my sensor, I have my dictionary.

If I added the existing one, it should be matching more employee data, which is the initial dictionary we have defined under the EDM profile resources. So go back to the action, I will be looking at all the protocols, but basically for our scenario, looking at the HTTP post is enough. The action will be blocked. And the way we block at is when the customer trying to enter our message, under the existing policies, my active DLP policy, we are basically looking for all the users, and we are enforcing this specific profile, advanced DLP.

On the client side, I have a FortiClient connected to FortiSASE with an active telemetry and VPN established. Once I try to open my browser and try to paste some sensitive information outside, let's say, DLP, we should see that as the user attempts to upload or share sensitive company data, FortiSASE will detect the data and it blocks the action in the real time. Let's try to view the data in our file. It's matching the correct information. So the credit card's number with the first name has defined our message here. This is critical for protecting customer data and internal documents when using the SaaS platforms. It also reduces the risk of accidental data leakage which is one of the most common causes of breaches.

Now that we have secured the SaaS access and data, let's look at the next challenge, generative AI usage. Gen AI platforms are being adopted across organizations, but they introduced a new type of risk because the biggest risk is not accessing these platforms, it's what the users submit into them. Here, the user is interacting with multiple AI platforms such as the ChatGPT, DeepSeek and Google Gemini.

The user has FortiClient with tunnel up and established with for FortiSASE. FortiSASE will be configured to apply policies based on a defined key words related to sensitive topics such as confidential data, customer recorders or internal projects. And FortiSASE, I have a DLP profile configured to match different LLM applications.

For example, with the existing rule here, if I try to add instead of looking any message that will be submitted as part of the HTTP post within the sensor itself. It has a dictionary. And within that dictionary, we should have our existing data. As I mentioned, we will be looking at blocking based on a specific keyword. And these key words are basically code and tips.

So anytime the user will try to the message that has code, like can you fix my code, or can you help me with my code or it has something like I need some tips or guidance? The evaluation criteria can be all, which is and or any like or. After we define the security profile, we have to link it back to our security policy. I have one active policy at the moment, which is LLM applications. Within this policy, I am mentioning all 3 different destinations. Those destinations are the ChatGPT, Google Gemini and DeepSeek.

From the user perspective, I have a machine that has the FortiClient connected to FortiSASE. Next, I will try to open my browser. I have a session open to ChatGPT and another one to a DeepSeek. So I will start, I have my normal conversations. You should see that ChatGPT is responding back to us.

Now I'll try to send some information that will trigger our keyword. We should see the communication is broken at this moment, even if you try, you can start again. Again, the conversation will be blocked. Now I'll move to DeepSeek. On DeepSeek we will try to send something similar that will trigger the keyword. From our demo, we saw that when such a content is detected, FortiSASE blocks or restricts the interaction in real time. This really allows the organization to safely enable the AI adoption without risking any data exposure.

This is important because AI platforms retain and process user input which can create long-term data exposure risk. Across all 3 cases, FortiSASE provides a consistent and unified approach to security. We have seen secure access for unmanaged users, advanced data protection for managed devices and policy control for AI interactions, all delivered through a single platform without requiring multiple disconnected tools.

To summarize, FortiSASE enables organizations to access Gen AI securely by combining zero trust access, real-time data protection and centralized visibility. And this ensures that organizations can move fast with the modern technologies while staying fully in control of their data and risk posture. Thank you. And I hope that you have enjoyed our demo for today.

Thank you once again for investing your time with us. We hope that today's session has been informative and insightful. As we wrap up, we kindly request you to take a moment to fill the survey form as your feedback is important to us. The on-demand webinar will be available after today and sent to your registered e-mail address. We look forward to seeing you again in our next Demo Day Webinar. Stay safe, and have a wonderful day ahead.

All right. Good afternoon, everyone. Thank you for joining us today. My name is Anthony Luscri. I'm the Vice President of Investor Relations at Fortinet. It's my pleasure to welcome you here at Accelerate 2026 in our investor briefing session today.

You'll hear about Fortinet's vision for cybersecurity and how our strategic positioning drives sustained, durable and profitable growth. Before we begin, I'd like to remind everyone that we will be making forward-looking statements during today's presentation. These forward-looking statements are subject to risks and uncertainties that could cause our 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 additional information on factors that could cause our actual results to differ materially from current expectations. Also, the presentations from today's event will be available on our Investor Relations website within 24 hours after the event concludes.

So in terms of agenda, it's a fairly simple one today. We'll start off things with Ken Xie, our Founder, Chairman and CEO. He'll talk about some of the innovations that accelerate this year as well as our longer-term competitive advantages; then Christiane Ohlgart and I will provide a financial overview of the business.

The primary purpose of the prepared remarks is just to tee up the Q&A session where we'll be joined by John Whittle, our COO; Robert May, EVP of Product Management; and Joe Sarno, Trevor Pagliara; and Pedro Paixao, our sales leaders across international, U.S. and LatAm, Canada, respectively.

And with that, I'd like to introduce Ken Xie.

Good afternoon. Thank you for joining. I probably have like 5 to 10 minutes. Just quickly for some this morning slide highlights. basically, you can see the AI definitely we feel will accelerate the convergence because whether the edge computing or most of the traffic increased by AI agent or robot is more East West traffic. So we see this really match our kind of vision quite well. And we have some unique advantage whether on the convergence or the [ SASE ] there, which I will cover.

So -- but basically, AI is a tailwind for us. We feel we will be keeping accelerate conversion and keeping the company long-term growth. And this operating system, which we introduced today, also very, very important. Actually, this is the only operating system five Gartner Magic Quadrant as a leader whether in the traditional network security or in like one line management, which has built in like a controller for Wi-Fi in the whole networking, I have a controller for all the switch with all the [ FortiLink ] technology and also the leader, whether in the SASE, in SSE and also in SD-WAN.

So you can see this is the only OS, the single OS have a five Gartner Magic Quadrant as a leader, so which never happened in the industry before. There's so many functions, about 30 function integrated and about half of that actually using ASIC to accelerate. So that's the differentiation we have compared to other competitors. They have acquired different companies, separate SD-WAN OS, separate network security OS, separate SASE OS. So we have a single OS with ASIC, a huge advantage to accelerate half the function there, which gave each function like a 5 to 10x better performance, lower cost and also kind of -- and more function integrated together.

And then also for the ASIC, it's not only take $1 billion [ start ] to invest, but also economy of scale working with Fortinet. A lot of people ask me question, why other companies don't want to do ASIC. They need a big investment, minimum 5 to 10 years cost billion. But also once we have the economy of scale, so we have about 60% market share on the unit shipment. That's also more benefit for us because not only the big [ NIE ] per chip, but also each chip cost will be lower when they have the quantity. So we already reached a threshold, which we starting to see the benefit, making other competitors more difficult to catch up because of the quantity we have.

And also, you can see -- this show up on the right side is about last 8 years, you see the product revenue growth, unit shipment growth. So we feel with the supply chain issue come up now. So the story we have 5 years ago may repeating again because we have a much better inventory management. We have a better control on the manufacturer production, operation and which right now, a lot of competitors starting out of the stock of the product. So we are the only one still can ship in. That gave us advantage getting into a lot of white space to replace a lot of competitors. So this is the time we feel it's the time we're gaining market share, and we can grow faster than competitors.

And also SD-WAN, so we are the #1, the most deployed, most valid SD-WAN and also it's a single OS compared to network security compared to the SASE. So -- and also the only SD-WAN now using ASIC to accelerate, give us better performance, better cost and also easy to manage. This is also a huge advantage. SD-WAN market kind of grow a little bit slow now, but we do see we're gaining market share very quickly because a lot of other SD-WAN players because they have been acquired by the other company, they kind of slow down on the R&D side.

They're also kind of starting behind on the new function needed. That's also we kind of not only launch this SD-WAN, but also the new bundled service, very easy to transition to SASE. So that's for the SASE advantage we have. That's using this number three kind of more easy. It's 1/3 cost and three into one basic network security, SD-WAN and SASE in the same OS in the same system and 3x size of total addressable market, which none our competitor right now address, whether on-premise SASE, the sovereign SASE and also in the cloud SASE. So that's where we see a much bigger total addressable market for us, probably 3x larger than competitor.

It's 1/3 cost and also very easy migrate, much shorter sales cycle. That's the reason also last quarter, the unified SASE grew 40% year-over-year, more than double the market growth rate. And this is the investment we have not only will be for SASE, but also AI. We also have invested $1 billion in all this infrastructure, including AI, all these things there. So we have our GPU farm. We have our own AI model. We have own kind of SASE data center. We have own kind of -- we call the [ Forti stack ] to make it more secure. And there's also like e-mail security using this. There's like a web content security using this.

So a lot of service behind this infrastructure, much broader benefit for Fortinet beyond the SASE. That's also one of the differentiation. I don't see any of our competitors invest billions dollars into this infrastructure. And so besides buyback stock, which probably close to $10 billion, this also we spent a few billion dollars on building infrastructure in the last 15 years. And secure operation we cover that's more than half the product related to secure operation with all AI enabled. And the other thing really because we have about 40 products in the secure operations side, it's very fragmented market.

But for us, most of the products are homegrown or internal development. So that's making day 1, integrate automate together. That's also make it more easy to use AI to enable all this and working together with other products, especially the [ FortiGate ], [ FortiOS ]. The benefits very easy to understand, like responding second and shrinking the attack surface and a much better easy operate and lower cost.

And then quantum computing, we're actually leading the market. We are already shipping 5 years ago. So compared to some of our competitors just announcing some quantum. This we are already shipping. And also, we are kind of -- the biggest market share for us really is the government, the finance service, they all leverage this quantum computing already, this technology we have. So that's where the FortiOS already shipping 5 years ago. So there's a -- we believe we dominate this market.

The other part probably will be good growth, also leverage new ASIC chip come up this year is the secure AI infrastructure. So we're kind of able to secure all the five layer of our AI -- and besides we also secure the biggest like AI company and at the same time, whether from the OT security cover the energy and also the chip level security, at the same time, the infrastructure side, AI model, we also develop our own model there and also a lot of application. So that's where we feel we're in the best position to secure the AI infrastructure itself.

Besides, we are the company, we believe, mostly leverage of using AI internally. So every department, every function, every position, we want people to use AI. So you feel free to talk to some of the people here, and they will give you an example of how we use AI, whether internally or helping partner. We feel the company will keep up all this innovation and keep up all this long-term investment will drive the company long-term growth going forward.

With that, let me transfer to Anthony.

All right. Thank you, Ken. So the next section of our short presentation here is just to walk over the business attributes of Fortinet, mainly around our fast-growing market opportunity, our sustainable competitive advantages, our diversified business model, as well as the customer journey and then, of course, our strong business model that drives significant free cash flow.

So first up, large and fast-growing addressable market. So you've all seen this slide before. These are the strategic and go-to-market focus of Fortinet. We're focused on three primary pillars. Secure networking, unified SASE and SecOps. Secure networking, this remains the foundation of our business, driven by FortiGate firewalls and the convergence of networking and security. Unified SASE, this is a high-growth opportunity where we're integrating SD-WAN and cloud security into a single platform, providing consistent security, flexible deployment across hybrid, multi-cloud and lower TCO. And then finally, SecOps. This pillar focuses on AI-driven security operations to detect, investigate and respond to threats.

And as you saw in 2025, we outgrew each of these markets. And as we outlaid in our reaffirmed 3- to 5-year model, we expect to grow 12% or above, continuing to outgrow these markets. These are large opportunities totaling over $300 billion. And even as a leader within these spaces, we currently hold less than 20% of the market share in these highly fragmented segments. So this provides an enormous opportunity for us to upsell and cross-sell our customer base.

Now let's talk a little bit about secular tailwinds to our business. As you all know, security spending remains a high priority amongst organizations worldwide. But beyond that, Fortinet also has some particular attributes that we find valuable on calling out. One is just the convergence of security and networking. As Ken pointed out this morning, demand for secure networking is rapidly growing as we're taking the traditional networking segment.

As of in 2026, we hold a 55% unit market share in firewalls, and we're outperforming the broader secure networking market. Then you've got consolidation trends. Basically, customers are looking to reduce complexity. They're replacing disparate joint -- disparate point products with our integrated platform. And then finally, an evolving threat landscape, and this is an important point that helps drive us -- drive durable growth.

The move toward multi-cloud and hybrid infrastructures and work from home has created a highly fragmented environment, but there's some particular opportunities that Fortinet has some unique opportunities with our differentiated approach. So again, the threat landscape is evolving. Attackers are increasing their speed, scale and sophistication of attacks against an increasingly distributed enterprise environment. A couple of these opportunities we want to highlight is OT. We've been in the OT market for a while. Beyond that, we have some early innings opportunities such as sovereign SASE, AI, quantum.

And then finally, as Ken pointed out, the edge is becoming increasingly important as well. So these are unique opportunities for Fortinet's platform to address, and we're taking advantage of these opportunities by leveraging our strong differentiation versus peers. And I would consider them to be greenfield opportunities. So let's walk you through a couple of them.

First is OT. There's a couple of secular tailwinds within the secular tailwind we could go over. There's the surge in connected devices. This is the proliferation of IoT and connection of previously air-gapped industrial assets. Then there's IT/OT convergence, where organizations are increasingly moving toward converged architectures underneath the CISO. Then there's regulatory compliance with increasing standards, they're needing to adopt more robust OT security controls.

And then finally, there's just modernization cycles where there's legacy equipment that can't handle software or is either unsecured that needs to be updated. So this is, as we talked about, is over $1 billion for us in terms of growth. We've highlighted on the earnings call, it's been growing 20% or more. And so we distinguish our OT platform through a combination of proprietary hardware, a unified operating system and a long-term investment that peers have yet to match. So we feel good about this opportunity.

Next is Sovereign SASE. It's a key driver of our SASE pillar. This model is entirely built on FortiOS. It enables providers to deliver localized high-performance security services at approximately 1/3 the cost of computing solutions. We believe the TAM for this opportunity increases the SASE market opportunity, making it much larger when you include sovereign deployments because they address a segment in which organizations are increasingly need to be full control over the data residency and routing.

So we've been particularly successful here in the public sector and service provider markets where data localization is a mandate, namely Europe and Middle East as of today. Next up is the topic of the day, which is artificial intelligence. So we view this as a multi-vector tailwind to our business that spans infrastructure where AI is built, protecting the application they use it and leveraging AI to automate global security operations. So again, the tailwinds to this business are infrastructure upgrades to accommodate for LLMs and AI, new AI attack surface, faster, more sophisticated threats from lower-level actors and then just increasing east-west traffic related to AI traffic.

So how are we addressing this? Well, this is an early innings opportunity. But at the same time, we're securing the AI data center. This focuses on the infrastructure. And we believe this is a significant opportunity in providing the throughput and low latency required to secure lateral east-west traffic. We're securing AI applications. This focuses on the software and logic layer. where we're protecting organizations from risks associated to LLMs.

Finally, our AI-enabled solutions. This involves using AI to automate the detection, investigation and remediation of threats. Our AI-driven SecOps pillar or opportunity is currently probably the largest near-term AI revenue driver with billings for AI-driven SecOps pillar growing 22% for the full year 2025. So this is a unique opportunity where we feel the tailwinds far outweigh any risks in the segment, and we're addressing that and have been addressed through our AI patent portfolio as well as getting out ahead of the market in terms of our ASIC development, which provides a high throughput opportunity.

With that, I'll pass it over to our CFO, Christiane Ohlgart.

Thank you. Thank you for coming. I think it's a great opportunity for everybody to see our tech in action and the Tech Expo. And I hope you will make good use of it and talk to our engineers because there's a lot of exciting stuff that we are announcing here. So what are our sustainable competitive advantages?

Ken has talked about it. It's the ASIC, and we've built it into our products and consolidated functions. And why does it matter to our customers? Because it makes our products more affordable. So that's a key advantage that we continue to develop on and Ken already mentioned, we will have a launch this year. We announced today FortiOS 8.0. 8.0 comes with a lot of new AI-related security features. And the benefit is across our portfolio because FortiOS spans across our products.

We also have improvements for SASE and integration with SASE, and we have some new SD-WAN features that we are bringing out with 8.0. So a lot of innovation for our existing customers and, of course, new customers that they can use. And there are also some features for operational technology. So very important that we continue to innovate with our FortiOS that is so integral to our products. Then you've seen this slide. We talked about it. I talked about it this morning.

Why is it so important? Because Fortinet has a unique approach to how we deliver cloud solutions. whether it's SASE or other cloud solutions that Ken talked about. And the fact that we have a multi-delivery strategy with our own data centers, with [ colos ] and with cloud providers gives us the ability to be fast when we need to spin up something for customers that are buying in regions where we don't have our own data centers yet, but it also allows us to manage the economics of our delivery through our own infrastructure that is purpose-built and, of course, more efficient than going through cloud providers. So very important for us, and we continue to build out our own data centers and [ colos ].

You've seen this slide. Why is this so important to continue to talk about diversification? Because it gives us a lot of benefits. I talked about this morning about financial stability. We have a lot of different customer sizes that we need to cater to. So it means we need to have very complex scenarios that we can address for our customers, but we also need to have simple ways of operating our solutions. This is where we are successful in large enterprises, in small enterprises, in public sector.

We sell into over 100 -- or over 200 countries. We have customers in over 200 countries and so many industries that are regulated that have a lot of retail or other outlets. And of course, public sector is a big one for us, which is highly regulated and very important so that we have all our products certified. This diversification gives us a lot of intel and it also gives us a lot of financial stability because these markets may go at different speeds.

So one area that we've been focused on is to move upmarket. Over the last 3 years, we've grown with a 14% CAGR for deals greater than $1 million, which shows you that we are getting traction in the enterprise, in the G2000 segment, and we continue to put a big focus on that. How do we do that? First of all, we have our expanding platform approach. We start typically, and you see this with our customer journeys in unified networking. We add endpoint cloud solutions, SASE on top. And now we are also launching a simplified licensing to make it easier for customers to adopt more of our platform.

So let me talk about a couple of customer journeys. You know that we've talked about the upsell from the firewall to SD-WAN to SASE for a long time. We see that happen more and more. SD-WAN is still super relevant for us because this is where customers can benefit from the advantages and also simplify their network, get more visibility and save a lot of money because most of the SD-WAN providers are added on top of their infrastructure and Fortinet is embedded. So it's an efficient way for customers to improve their network infrastructure.

As a result of our upsell opportunities, you know that our billings mix has shifted a little bit away from secure networking towards unified SASE and security operations over the last couple of years. Typically, Unified SASE and security operations would be more service-centric, and we have a ton of services that are -- that we sell in these growth engines. But what we also see that at Fortinet, many of our customers benefit from the various form factors that we have. And so while we started with Unified SASE and the FortiSASE SaaS solution, now we have significant success with sovereign SASE as well. So our customers really embrace our products, not always our service bundles. But I talked about it this morning. Key services are important to enable the products for full security. So we do sell FortiCare and FortiGuard services with almost all our products.

Let me talk about a couple of customer wins. This one is about a major league sports franchise owner, and we didn't start on the firewall side. We actually started with a mobile IP solution, and then they added on more of our products, SASE, SD-WAN to get full visibility for the network and protect the IP from all the scouts in the stadium.

This is another example of a customer, which is similar from a solution set and the journey of the customer I talked about this morning, but it's not the same customer. It's a national government who needed to modernize their MPLS infrastructure, purchased SD-WAN and FortiSASE and created a unified management console for seamless security integration and management. So they have significant cost savings. And that's the typical benefit that we see for our customers that when they go to Fortinet, they can save a lot of money because it's fully integrated, it reduces their cost of operations and it's fewer vendors. So the consolidation team also plays a big role.

Back to some numbers. So we want to make sure that you all are aware of the targets that we have for the next 3 to 5 years. We believe we will outgrow the market. Based on our weighted averages of the markets we are playing in, we believe it's greater than 12% CAGR. We continue to have good margins and follow the Rule of 45. And of course, we continue to expect to deliver high mid-teens adjusted free cash flows based on our business model, which is generating a lot of cash flows.

So here's the Rule of 45 that we've pledged for and targeting for this year and also for the future. So where are we for the last couple of years? Our CAGR was 13%, so right in the wheelhouse of what we are estimating for the future from a total revenue perspective. Our adjusted free cash flow was a little bit higher, 16%. And we believe our business model supports this type of growth rates for the future. I know a lot of analysts think we should not grow that fast or we will not grow that fast. So why do we believe -- why are we super comfortable that we are growing faster than the market?

Secure networking TAM is not growing as fast, but we have unique benefits that allow us to grow faster. First of all, we have two other segments, Unified SASE and SecOps, which are big TAMs that we can upsell our customer base on. We have an expanding attack surface that allows us to capture more market. And we believe our technology is superior, which allows us to capture market share gains. So from that perspective, we have confidence that our product revenue midterm growth is going to be between 10% and 15%.

These are some updated numbers on share repurchases through our 10-K filing. So this quarter, we've already repurchased $471 million. We still have $1.3 billion of buyback authorization. But since our IPO, we've returned $9 billion, which is quite significant, and we still have a good cash balance. So I think shareholders should be happy with how we allocate our capital between innovation and shareholders.

So what are the key takeaways? We are operating in a growing TAM. We continue to innovate, and you can see this here at the event, and you can ask our innovators in a second in the Q&A as well. Our foundations for growth have been the same. It's our ASIC for our product, which optimizes the use cases for the product. It is our FortiOS, which spans across multiple solutions. It's our cloud delivery as well as our constant innovation and investments, whether it's in AI, whether it's in quantum, whether it's in OT, we understand what the market requires, where the risks are and where we can benefit our customers. So really, really innovative and always customer-oriented, customer value outcome based.

As we said, we have a large customer base on the firewall side. So we have tremendous upsell opportunities for all our products, not only for FortiSASE because we have a significant product portfolio, and we are constantly innovating in all our products. And you know we have strong growth and profitability for the past, and we assume that we will follow the Rule of 45 in the future. So that's a good setup for investors.

Now let's get to the Q&A because I'm sure that with all the information you can get here, you want to hear from all the executives as well. And welcome.

All right. With that, we welcome the exec team up to the stage. I'd like to kick things off. I know everyone is excited to ask questions, but I'd like to tee one up for Robert May.

We want to target him but I'd like to pick on this. What are you most excited about today's announcements at Accelerate?

Well, I guess, yes, there's -- I mean, hundreds of things, right? I mean even the tech expo, there's over 60 Fortinet booths. So if you're there, you'll see there's just really hundreds of things that we're talking about. I think the top ones, you can really look to the kind of the two press releases we issued this morning.

Of course, AI is a super big topic here across many different things. But if you want to just summarize at the top level, there's AI for security, which means that we use AI across the product portfolio. And you can see this reflected in many Agentic AI agents throughout the product line. One of the most exciting ones is around really being able to replicate what the SOC analysts do in the SOC platform. So really providing a full ability to do a full analysis there.

There's also several innovations around products and services that are helping customers secure their AI deployments. This includes the use of shadow AI or other AI tools in the enterprise. It also includes securing the AI infrastructure and also identifying and controlling those Agentic AI communications in the network, okay?

Other areas that we announced this morning is around, of course, SASE and SD-WAN. There's a new SD-WAN bundle, which has many different management components integrated together, as well as including SASE starter pack, so allowing customers to quickly and easily get SASE up and running. And then also a lot of innovation around bringing all of the capabilities from our public cloud SASE into the sovereign SASE lineup there.

A couple of other things maybe to highlight. One would be around Quantum. Really a lot of -- we've had QKD and PQC for quite a long time already, whereas other vendors actually don't have one or both of those. We really also added in 8.0, a lot of extension around securing both the management plane and further extension of the data plane. That includes remote access, which could be remote VPN access or even remote access to SASE, okay? Also includes SSL deep inspection. So some things that a lot of our competitors actually don't have.

On the SOC side, maybe a couple of things to highlight would be some further consolidation. As we know, there's a lot of tools and different vendors within the security operations. So on the SOC platform part, bringing together some of the core features and making it more accessible to larger sets of customers. And also on the endpoint side, unifying further several of those stand-alone endpoint agents that you see in the market under a single license and single management plane. So these are some of the kind of top highlights there.

That's great. Let's go ahead and move to the crowd. Aaron is going to pick it here.

Saket Kalia from Barclays. Really appreciate you hosting this session and having us here at Accelerate. It's always a great event. Also great to have the whole team here. So I'm going to ask a couple of you kind of the same question, but maybe to start with you, Christiane.

There's clearly a lot of noise right now just around higher memory input costs, right, which then, of course, carries forward to pricing. And the question that I get, and I'm sure a lot of us get here in the room is how customers could potentially change their purchase decisions just around kind of that higher pricing, right? That question comes up versus how you -- versus what was a very healthy product guide.

So the question for you is, how much flexibility do you feel like you've left in product in case that customer behavior changes? And since I've got Trevor, Pedro and Joe on the stage, I'm going to ask, are you seeing any of that behavior change from customers given what are higher prices right now? A lot there. Does that make sense?

So to answer your question, I think there are two different scenarios. There is new projects that require new hardware or expansion and customers won't be able to wait. And there is the ability for customers to maybe wait for price improvements when they have existing firewalls. So we don't really see yet a slowdown.

And -- and we believe that Fortinet and Ken said it earlier, is in a good place. We have good relationships on the supply chain, on the component delivery side, and we are actively working through also changing our component setup to be a little bit more flexible.

I've not seen any difference right now. I think it's too early, Frank.

In Latin America and Canada, we're starting to see actually some customers asking us if we can deliver and we can. And so actually, we're taking advantage of that.

Yes. Same thing holds true in the U.S. It is a bit of a compelling event in some areas where companies can save a substantial amount of money from when we raised our prices on March 2 by pulling opportunities in further even if they don't need the firewalls today, they'll have it staged in a warehouse so they can save a material amount of money.

And if you could say your name and firm name, that would be great.

Okay. Great. Gray Powell with BTIG. So this might just be me, but it sounds like you're more positive on the SD-WAN side of the market today than you were at least 6 months ago. Can you maybe just talk more about what's driving that optimism? And then on the Secure Service Edge side of Universal SASE, what are some of the main product gaps you've closed against the likes of Palo Alto and Zscaler? And just how should we think about the opportunity there over the next 12 months? Is that something that could accelerate within the portfolio?

On the SD-WAN front, so I run U.S. sales. I've been in this role, running all the U.S. since January 1, 2025. And I will tell you that the momentum that we have with SD-WAN is off the charts across all customer sizes, some of the most demanding banks in the world, some of the most demanding retailers in the world. I'm on the road a lot. I visited I'm an executive sponsor for a handful of very, very large retailers as well as a company that processes $1 trillion worth of transactions through their network.

And guess what? They're betting on Fortinet. They're betting on SD-WAN, right? And if you look at SD-WAN and our number one dominance, as Ken said earlier, you can leverage that and leverage FortiOS, right? And if you look at SASE, SASE, I wasn't at Fortinet 5 to 6 years ago. But it's really similar to what SD-WAN is today. We will absolutely be #1 in SASE in less than 2 years. It's the power of FortiOS. We have a massive installed base, to Christiane's point to cross-sell into, and we're just seeing tremendous, tremendous momentum. And if you can solve for SD-WAN in some of these very complex large accounts, you can go down market. So we're seeing great success with SD-WAN across all the segments inside the U.S.

And let me add to the SD-WAN momentum. We -- we -- we've been the leader in the Gartner Magic Quadrant for a while now, and that benefits us quite tremendously when we go into RFPs. There are still a ton of companies that have SD-WAN as a separate security component where it's on top of their firewall estate or their router estate.

And so understanding that with Fortinet, they can combine it is still an extremely important selling point. And then when we go into EBCs with the larger customers and explain how our FortiSASE works and they understand that it's an extension from SD-WAN and they can actually use the same policies, it's extremely powerful. So it's sometimes that a SASE opportunity also pulls SD-WAN into the whole deal cycle.

And just to echo what Christiane just said, I've been talking to a number of customers have two vendors for firewall and SD-WAN. And if you present and explain the cost benefit of our single OS solution, it's very compelling, very, very compelling. And when you have the same OS with SASE as well and talking with a number of the salespeople out there, it used to be that firewall was our wedge into customers.

Now we've got multiple different wedges in terms of firewall, SD-WAN. I think you'll see SASE more and more as we have closed the gaps in functionality for enterprise. And so it just gives us more opportunities to get into customers and expand across that common OS in those three areas over time because the renewal for SD-WAN may be different than firewall or vice versa. But once we get in, it gives us an opportunity to expand across those three different offerings.

Yes. Let me just one point on SD-WAN. SD-WAN actually is the first routing network protocol, you can readout traffic based on application. It's very different than our previous routing protocol. And what's unique about Fortinet is really we have SD-WAN building with the Wi-Fi controller in the FortiOS, building with the security firewall in OS, building SASE, also kind of using FortiLink to control all the switch and WiFi point.

So it's not only applied to the WAN, but also applied to the LAN. The local network can also manage East traffic besides the no traffic, that's the WAN traffic. So that have a unique advantage, can easily expand both internally and externally. That's where there's not much study about how SD-LAN or some other things there. But we believe the FortiOS is super OS can manage not just networking, but also security management together.

Robert May is a tech expert, I can -- correct me if I'm wrong. So that's where we see is a huge advantage can go beyond the traditional SD-WAN market and also other top five SD-WAN players all come from acquisition, which they kind of slow down and also kind of keeping losing market share. That's why we feel SD-WAN has a lot of potential going forward because not only manage the WAN traffic, but also LAN traffic, which also eventually a lot of AI traffic also within data center can use in this SD-WAN or kind of software-defined networking to manage the FortiOS.

Fatima Boolani from Citi. Ken and Robert, maybe a jump ball for you. Just with respect to the FortiOS 8.0 release, clearly, a significant and consequential amount of innovation as it relates to AI enabling and AI or integrating rather AI and infusing it across the portfolio. So my question is just around the fact that this being a .0 operating system release.

Historically, what have you seen with respect to customers upgrading to the newest OS release? And then the related question to that is what type of a hardware refresh or an upgrade cycle is necessarily going to be a prerequisite for the average customer to enjoy the benefits of 8.0? And then I have a follow-up as well, if you wouldn't mind.

Okay. I can start maybe. So maybe to answer the second part of your question first, there is no hardware prerequisite necessarily for 8.0 this time. Yes, like it's common features across existing platforms. In terms of, let's say, the first part of your question was?

How long does it take?

The upgrade process. Yes. So I mean, there's always -- I think there's kind of three phases, right? There's going to be the early adopters that want to take advantage of the new features, and we'll definitely see that as beneficial with things like the bundle options that have additional components in there as well as, of course, the AI security. They want to get that visibility that they're missing today.

The second part is when there is new hardware models coming out, they may adopt 8.0 earlier as part of that shipping version. So this will be a second wave outcome. And then, of course, other customers may take more time just based on their internal processes or their kind of standard operating procedures for upgrades there.

I appreciate that. And it's a good segue into the follow-up that I wanted to get your perspective on. One of the themes in some of your opening remarks were just around more flexibility around licensing and pricing modalities in your customer engagement as well as perhaps your engagement with some of your larger service provider partners.

So I was hoping you could go into a little bit more granularity as it relates to the SASE starter packs, for instance, how much of that is dramatically incremental and how you're seeing that show up positively in pipeline activity, conversion and uplift realization. So any additional detail around some of the pivots or changes or refinements on pricing that you're rolling out over the course of this year?

Well, I can let maybe the sales to talk about the pipeline part, but let's say, from the technical side, what we try to do with the bundling is make it easier to -- like there's a lot of different individual components. We make it easier to adopt all of them together.

And then what we kind of see is that oftentimes, that starter pack is useful for the internal team to get going on SASE because oftentimes, it's the IT or those teams that need to get it POC and up and running first and then they roll it to the company. So it's kind of a multistage rollout in that way.

From a pipeline perspective, I agree that Trevor said earlier that it's early similar to the SD-WAN adoption we're seeing in SASE in it that customers back then would only have to enable a certain configuration and all of a sudden, they have SD-WAN working. And here, we're doing the same thing, making it easier for the customers to adopt SASE without overhauling the whole thing, without introducing a new technology without -- or leveraging the knowledge that they have with the FortiOS on the gates, on the WiFi on the switching and all of the ecosystem. So the barrier of entry is getting lower and lower with these bundles and obviously, customers are reacting very positively to it.

And maybe I can add that what we're seeing now with the maturity of our SASE products that customers are coming to us to, yes, work on SD-WAN projects, right, because there's still a big need to reduce total cost of ownership and ROI with respect to the MPLS, let's say, backbones.

And seeing that our SASE solution has matured so quickly in such a short time frame are asking us for both, right, integrated into one package, one RFP or whatever. But that's what's very interesting to see the quick adoption of the different bundles together.

Okay. Brian Essex from JPMorgan. So thank you again for doing all this. This is an amazing event to talk to customers and partners. And just based on some conversations that I had, Christiane, I had a question on one of your favorite topics.

From a services perspective, so one of the things that we're hearing from customers and partners are some customers coming back for end of service saying, look, we want to extend these agreements and some partners talking about extending those 1 to 2 years. So I want to understand how you're managing those relationships. Now I would imagine that the extended service agreements have a more expensive price tag associated with them. So I would love to know like what's the typical uplift if you do decide to extend the service agreement? And how are you managing those relationships throughout that extended service cycle?

I think I need a clarification. Are you talking about extended services after end of support -- or I mean, in general, end of support is end of support, right? But there are customers that may ask for long time before anything is end of support, they ask for a life cycle guarantee for certain years, right?

And then if we do that, we sell a premium support because we need to guarantee a longer life cycle for these customers, independent of when we declare it end of support. So that's one aspect, which is more -- happens more often in OT because these investment, life cycles are long and customers want to make sure they secure their investment for 5, 7, 8 years. So that's one area.

Other than that, upsell of services is -- it's dependent on the type of service. And of course, any customer expects volume discounts. So large customers may pay a little bit less or get a higher discount than others.

Okay. So what you're saying is if something is coming up for end of support in, say, 2027, that's the date you can't push that back?

I mean, in general, we don't -- for certain customers, we may have an extension in rare cases or it may be prenegotiated that a customer has a pre-agreed time frame until we support them, even though for the rest of the business, we may say it's end of support.

Max Gamperl from Goldman Sachs. You've talked about one of the drivers of AI workloads being the growing need for internal segmentation. From what you're seeing with customers today, how meaningful has that been as a demand driver so far? And how meaningful do you think the need for network capacity tied to AI could become over the next few years?

Network capacity, you mean internally?

Yes.

In my region, I haven't seen a big requirement, but then Latin America is always behind in these things. Customers are not too worried about it. I think the worry about around AI is how we can do it securely, how we can use it securely. Customers are still very reticent of using it, how we're going to control it. Those are the main questions. I haven't heard a customer come to us worried about this network capacity at this time. I don't know if you guys...

Data center capacity.

Data center, I think, again, in my region, we're seeing sort of move away from the cloud. A lot of companies because of what I just said and worrying about where my data is going are heavily considering deploying their own models internally. And so they're looking at data center capacity, okay?

It's very similar in the U.S.

Joshua Tilton, Wolfe Research. I actually want to follow up on that last question, but maybe a different lens and a little bit bigger picture. I don't even know the right way to ask this, but I guess, imagine 5 years from now, the agentic workforce is a reality and everyone you see sitting here is kind of replaced by a little cute little agent widget doing work for us.

How does the baseline level of network traffic change from where it is today, that future? Is network traffic in a 10x to 100x to 1,000x? And what does that mean for a business like the firewall market that prices for throughput?

I just look at my Anthropic account and see the number of tokens going back and forth. And you'll see even mundane work that we do today, if you really look at what we're using, it's orders of magnitude more in this -- the traffic and the tokens that we're moving back and forth.

Now if we're talking about an army of agents, every single one of them being able to communicate between themselves, right, acting at speed, I do think that it's going to scale, and it's going to scale dramatically in terms of requirements, yes.

I think maybe what you're trying to ask is around where the traffic shifts, right? Like traditional SaaS services, everything go to the cloud, and so you need to keep building this bigger and bigger and bigger data center, right?

But with the move towards Agentic AI and with MCP and agent-to-agent communication, that data traffic actually or the traffic shifts to the edge, right, between the remote endpoints and inside the enterprise environment. So the need for on-prem, the need for scaling that up goes up. I think that's also kind of what was asking as well. Right.

And then when we take the human out of the picture, right, we check e-mail every so often. The agent is going to check it real time, right? And so there's, again, a very different pattern of use when it's an agentic entity doing the thing rather than us, right? We have other things to go attend to. And if the agent is just doing that, it's going to continue to do that continuously, right? And so you'll see definitely an increase.

Maybe just a completely unrelated follow-up question. In the presentation today or just being out on the floor, like it's very clear that you guys have a ton of products regardless of how you want to go to market with them. But I think there was a stat that the SecOps has 40 offerings that you talk to when you're on the stage.

So how do you ensure that your sellers, your partners are really capable of selling such a broad swath of offerings? And like why are so many offerings not capable of driving a CAGR above and beyond 12% rate that you talk to long term?

So on the enablement side, we have specializations from a training perspective. So certain partners are specialized. I think from a -- why are we not growing much faster? It's scale, right? So the partners have existing vendor relationships. And I think it's us driving customer awareness about our products is something that has to happen before we can grow faster.

Junaid Siddiqui, Truist Securities. Regarding the Quantum-Safe enhancements that you rolled out earlier today, I just had a question in terms of like what are customers thinking, what are they asking because we've heard about Quantum for some time now. And how would you say you're distinguishing yourself versus some of the competitors?

Well, so for the distinguishing part, I mean, even what we've supported before the announcement today distinguishes us just having the combination of QPD and PQC like to secure basically the encryption. Now what we added or what we announced today was kind of three things, right?

One was that connection from the remote endpoint to where it's going, could be SASE or could be remote access, right? So this is one part of the data plane traffic. Another part of the data plane traffic is that [ deep ] SSL inspection, right? So this is also now added as a secured. And the third one was around the management plane full quantum safe encryption as well. These are three definite differentiators overall.

And then to your question, I mean, we -- because of the strength in financial services and in public sector, Quantum has been a topic for us for a longer time. We've had it and certain customers have deployed it. I think now there's more awareness because the ability to decrypt certain things is coming nearer. So more customers in other industries are more aware and asking these questions. But we've had it in the FortiGate for a longer period and certain customers have been using it there.

Meta Marshall from Morgan Stanley. Just on the OT security business, obviously, a generational amount of building of data centers right now and just ways in which you guys are finding avenues with expanding beyond enterprise customers to get into that market or to get into that opportunity? And then noted [ Armis ] as one of your major sponsors here. Just kind of any traction with that partnership or change just given their pending sale?

Do you want to talk about Armis?

Yes. On Armis, it's funny. They have their sales kickoff here in Las Vegas this week as well. So they're a good partner of ours. And they are using our FortiGate as a collector for their OT visibility. We really like those guys, and it's early days in the partnership, but great partnership, complements us very well on the OT side, which is obviously a big focus of ours.

Then I guess the first question was about capitalizing on the data center build-out. I think we see a lot of demand for our solutions that we've gone through in AI data centers and elsewhere. And so I think it's just another one of those durable growth drivers that Anthony was talking about earlier.

Joe Gallo from Jefferies. I want to follow up on Josh's second question. You walk around, there's a ton of optimism. You have this really broad software portfolio. It sounds like you're investing for channel awareness.

Can you help me just marry the -- but you said it's going to take time for that to kind of ramp. Can you help me marry that with like your guidance for services revenue this year, which I think embeds an acceleration in services billings and just kind of your confidence in your visibility into that?

Yes. I think we have talked about our services revenue before, right? So it's -- based on the product traction that we see, we believe and the new services that we're announcing that we're focusing on, we believe that we are confident with the guidance.

Catharine Trebnick, Rosenblatt. So you have a broad range of products. Is there any plans when I talk to the channel, it's really interesting to simplify your messaging across this broad range of products, make it more digestible to maybe speed up even some of the deals that you're doing within the channel?

Sometimes the messaging depends on the target customer. And I think with this broad range of products and the vendor consolidation movement that we see, when we're targeting kind of mid-market SMB, it seems like a really, really good opportunity to simplify that messaging around that platform.

And that's a big opportunity for us to sell not only firewall but sell beyond the firewall. And we're seeing big opportunity there. We're doing well, and we're just scratching the surface there. So I think you're right. In certain markets, simplifying that message can be really effective for us around the different products.

And I think another -- embedded in your question perhaps there's so much opportunity with all these solutions. It's an exercise in prioritization, and we need to figure out where the top priority areas are to focus on. It's a good problem to have. We've got great solutions across the board, and we just have to prioritize the solutions that are the real big opportunities for us.

I shouldn't sit next to a tie because he turned my mic off when I wasn't...

It's rough crowd. Keith Bachman from BMO. I wanted to ask 2 questions. The first is, maybe, Ken, for you. As you think about the type of workloads, the type of customers in the SASE market, that you have won over the last 12 months or so, how do you think that changes? Or how do you want that to change in terms of the competitive dynamics versus Zscaler and NetScope and others and Palo, what needs to happen from a product functionality perspective in order to grow your capabilities against the established incumbents?

I think there's -- originally, we designed a SASE more for service provider. And then we started launching our own kind of SASE 2.5 years ago because we feel if we can do the things ourselves better, definitely it will be more easy to convince service provider, which we feel they are somehow more little bit slow.

And in the last like 2.5 years, definitely from the coverage of the infrastructure, whether with all the cloud provider, the [indiscernible] data center, you can see it is a big jump. And also some of the function there, which also helping driving the Sovereign SASE, we see Sovereign SASE starting to catch up. I do believe eventually Sovereign SASE market probably bigger than this cloud-based SASE.

And then also some customers starting to see the on-premise there, which not our competitor, whether Palo Alto have all the sovereign on-premise SASE solution because they all depend on some cloud provider to offer some of the coverage, which probably will be -- in the beginning, there are some advantage because cloud provider already established infrastructure.

But in the last 2.5 years, we see we catch up. We have more than 200 locations being covered by whether our own data center or colo or kind of cloud provider, which also we have 1/3 of cost, a lot of customer base very easy to migrate. So that gave us more advantage right now. We do see quite some win case over all the competitors you mentioned, like some example we gave out here is all starting replacing some of the competitors.

But still SASE is still pretty fast-growing market, and I still feel there's a room for player. But long term wise, we feel we have more advantage. And right now, whether you compare on the infrastructure side, whether compared to the function side, we feel we're probably the same or even ahead of all the competitors compared to like 1 or 2 years ago.

So now that's also we see the acceleration of unified SASE like last quarter grew like 40% -- it's faster than the previous quarter. And each quarter, we see some kind of acceleration. And that's we feel the advantage starting building up and also the long-term investments starting paying back now.

Perfect. And Christiane, maybe I'll direct one to you, too. In the longer-term margin framework, it looks like you're allowing for some compression in margins from where you've historically been on the operating margin side, at least.

What -- recognizing there's probably conservatism in there in some measure, but what would you want to have some flexibility in terms of spending envelopes that might precipitate some margin compression as we look longer term? And that's it for me.

So at the beginning of the year, you never know what happens. And we see tons of volatility right now, whether it's the U.S. dollar or so. So what we typically -- why do we commit to the Rule of 45 because it's a good combination of being able to invest and grow. Invest in go-to-market, which then gives us scale over time and should help margins. But initially, from a revenue perspective, the revenues may not kick in right away. So that's where the current framework comes in.

Madeline Brooks, Bank of America.

The question is if we look at the growth trajectory for the long-term targets, it assumes Fortinet is taking share in each of the markets. But a lot of the really compelling value propositions of Fortinet aren't new, like your ASIC technology, FortiOS, that really tight integration.

So what now is the catalyst to be able to take market share and really get business from competitors, even though you've had these value propositions kind of baked inherently into the Fortinet business model for a while?

Definitely more sales and marketing investment. We have the sales team leadership team here. I'd say some of our competitors definitely invest much more in the sales marketing than Fortinet. We are more investing in some technology, some long-term kind of infrastructure and ASIC, all other things there. But I think with the size we have, I think going forward, definitely, we'll see more investment go towards some sales and marketing side.

Maybe we'll have the team try to see. I think on the other side, we're also kind of probably the most profitable company in the cybersecurity space right now. And we also have this very healthy margin which we feel give us a lot of long-term benefit. On the other side, sales and marketing, we kind of grow in the pace we feel maintain healthy margin at the same time, gaining market share. So we are not a rush, hey, let's grow as fast as we can. It doesn't matter what the margin.

We do control the margin, which we make a healthy margin and still pretty profitable, whether to buy back share or kind of invest some long term there. But on the other side, we do see the sales and marketing starting also once we get bigger, become more efficient and also kind of starting over competitors now. Maybe we'll let the sales see what they need.

Yes, we're also hiring very fast in the future. This is extremely important to build a stronger pipeline. So we are fortunate to be able to have Ken's support in allowing us to continue to hire good salespeople across the board. We're seeing that we're gaining a lot of traction against our rivals from this perspective. It looks as though Fortinet is becoming from my perspective, at least from international, extremely attractive in terms of a company.

I mentioned it this morning in the plan. We have a great culture and people are attracted by that. And I think that's a huge benefit for a company like ours. Sometimes we're talking a lot of numbers and technology, but it's down at the end of the day to -- it's all about people and how people find themselves in companies. And this is something that we built, thanks to the culture we have, and we always talk about this when we hire new sales and new people in the company.

Yes. And to add to that, we are hiring a lot of direct quota-carrying salespeople from Cisco, from Apollo, from Check Point, right? We have -- and we've talked about it today. There isn't one cybersecurity company that can do all the things that we can do, firewall, SD-WAN, SASE, all in one unified OS. So I go on tons of sales calls, a common denominator, top three through the lens of a CIO or a CISO, they're trying to do more business with fewer security and networking vendors.

You're talking to a group on stage that works for one of the top five most viable and security networking companies in the world. There are 5,000-plus security vendors in the market today. It's too many, right? I've had several meetings today with partners. They're trying to reduce their line cards. They're doubling down on Fortinet. And you know what, when we compete head-to-head with Apollo, when we got SD-WAN, we crushed them, absolutely crush them.

We're replacing Cisco at scale, right? I mean, the momentum in the U.S. is real. When I came in on January 1, 2025 in this role, we didn't have great growth in '24. We absolutely crushed it. What we're doing is working. I talked about it in 2024, focus, urgency, accountability, right? Selling is a contact sport. Our people are moving. They're out in front of customers, they're out in front of partners. And we're in the early stages of a 9-inning game.

And I'll tell you what, there's never been a better time to be at Fortinet than now, right? And I talk to -- like I said, I'm on the road a lot. I love going on calls and some of the feedback that I'm given by, only cow, you can do firewall, SD-WAN, SASE, all these other things in one unified OS, it's a big thing.

One thing we have now that we didn't have years ago as this and Joe and Trevor alluded to this, the scale advantage and this great momentum. And when you think about the scale advantage, it's across multiple different areas in terms of the huge set of channel partners we have, the great sales force we have, the great access to threat intelligence that we have.

And all of that gives us an advantage that we didn't have many years ago. If you look at our solution set, I think I'm going to get this right. When I went back to our IPO prospectus, our total addressable market at the time was $5 billion. We have that in our IPO prospectus from 2009. Now as you saw from Christiane's slide, it's over $300 billion. So the solution set scale has broadened out tremendously since the IPO in addition to all these other elements of the scale advantage. We have the biggest companies in the world who are coming and wanting to do business with us. They wouldn't have picked up the phone when we called them 15 years ago. And so they're knocking at our door now. So that gives us an advantage that we can hopefully capitalize on.

I would just add a small detail. I think it goes back to the SASE question and the features. The ecosystem is bigger than any feature. And so customers are buying into the platform, into the consolidation. And really, when they're looking into adding a new vendor just because of one feature, that's taking a back seat more and more.

So we're seeing customers being more intelligent and leveraging what they already have. And maybe that one feature that is missing, we talk to Robert and he goes and puts it in the product. And so customers are more accepting of that and realizing that the value, long-term value that they get from the ecosystem is bigger than one specific feature they might get at one point in time from a single vendor.

Roger Boyd with UBS. Just on the SD-WAN competitive environment, we've seen a lot of the Gen 2 SD-WAN competitors go through various stages of M&A over the past couple of years. And I guess to what extent should we look at the past few quarters as really benefiting from a strong SD-WAN replacement cycle?

And I think the real question is, if this is the case, shouldn't we expect that for some customers, SD-WAN to SASE is still a 2-part journey, meaning a lot of the service upside is still in front of you? Does that make sense?

I think there's a lot of opportunity ahead of us in both. A lot of the SD-WAN solutions we did sell, at least in Latin America, Canada, we're mostly networking. There's a huge opportunity to go back to these customers and sell the secure SD-WAN, which has been our messaging from the beginning, the consolidation of the two things. And that's obviously a stepping stone to then go to SASE. So I think the opportunity ahead of us is massive -- particularly on services.

Ittai from Oppenheimer. Christian, it sounds like based on Trevor's comments, we should raise numbers on your right here right now. So tell me how you feel about that. But more specifically, can you be specific about the timing and the magnitude of price increases to your firewall portfolio? And then I have a follow-up.

The list price change went into effect on March 2. And -- but any quote that has a 30-day validity, so any quote that was done on the old list price would still be vetted through the end of March.

Got it. And anything on the magnitude, roughly on average, how that evens out?

It was between -- I mean, we said it at the earnings release, it was between 50 and 20 for certain select products, not for all products.

Okay. And then a follow-up on the flexibility on the licensing, you've talked about the starter packs as a way to be more flexible of customers and bundle simplify. My knowledge, you haven't done anything that looks like Flex, like what CrowdStrike is doing or some other vendors are doing. Can you help me think about if you and I will talk 6 or 12 months from now, is there anything like that, that can come along? You have such a big massive portfolio. It feels like that.

We have Flex licensing already. So we have different ways of flexibility that customers can buy. So that is already part of our -- has been for a while.

Eric Heath from KeyBanc. Maybe just come back to on more of a macro perspective. Contrasting this conference to last year, what do you think the sentiment is from customers? And what's the conversations like when it comes to AI? Are we starting to see -- when you're talking to your customers, are they maturing along the AI spectrum?

And where are we with maybe that opening up more cyber budget? Is any of that kind of coming up in conversations at all? And maybe a second part to that, a lot of stuff you talked about with Fortinet can help with securing AI and all the tailwinds there. But like maybe where do you think you would see that materialize first in the portfolio?

I'll give you some -- there's been a lot of work going on in the background on -- especially on the service providers, building their GPU farms, right? And that's been going on for the last 12 months, especially in international and EMEA. We are seeing massive investments in some of the bigger service providers.

Now they're coming to the table with us in looking how to secure those GPUs. There's a lot of interesting services that they're building, service stacks like GPU as a service. And that's why we feel extremely well positioned in building out that security stack as a service, especially on the NVIDIA, we have this partnership with NVIDIA. We announced a few weeks back. And we're seeing the first real massive, I would say, concrete projects on securing BlueField 3 GPU server farms.

So that is something that's super exciting for us. We're seeing an extremely high opportunity there in working with these service providers. And from an enterprise perspective, I think there's still a lot of confusion out there. There's a lot of companies who want to do a lot of things with AI, but there's a lot of confusion. I think Pedro has some good insights here.

Yes, I agree with you, Joe. I think companies are still very hesitant. I already mentioned a little bit earlier that everybody is worried about where the data is going. And from an international perspective, the data sovereignty aspect of it, the sovereignty of the AI, it's a major conversation and discussion with governments all over.

And so we're seeing massive investment in those areas as well. The geopolitics of these past few months have changed things quite dramatically. And so governments especially are looking at having their own infrastructure, hosting their own models and obviously putting those investments upfront.

And if I may add, I just had a meeting just before coming to this event with a Spanish government entity that are working on health care frameworks for AI, and they're asking us for help. And this is emblematic when a customer comes and say, will you -- can we go hand-in-hand and build this framework together and then use that as a blueprint that we can replicate across the Spanish governments. That's the type of conversations we're having today.

It's Patrick Colville from Scotia. I've got one for Ken and Robert and then one for Joe and Trevor. I guess in our conversations with customers today, there was a theme that kept on coming up again and again. And that theme is that Cisco looks to be really falling back and [ Ainet ] is clearly winning against Cisco and firewall right now in our customer conversations.

So my question to Ken and Robert is how much more displacement of Cisco is there in core networking this year called network security? And then the second part is, Joe and Trevor, this price increase that was announced or implemented last week, what's the real-time feedback in your customer conversations? Have customers pulled forward purchases? Are they delaying purchases? Are they pushing back? Can you just give us some real-time color?

So maybe I can start. So I guess -- well, from my side, I guess the feedback that I hear is across all parts of the Cisco question, right? It's the SD-WAN, the switching, the wireless. And to be honest, the odd thing is I don't get a lot of feature requests to displace them.

We actually have the features that are compelling and the products that are better in the market. And so when they're looking to refresh things, they're actually looking to us and coming to us. So I don't know if the sales see the same thing, but this is generally what from my side.

Yes. So on the increases, no, look, it's a problem everybody has worldwide. So some people maybe anticipated, others are fine and waiting. We're seeing a mix. My region is huge. So it's very difficult for me to pinpoint a clear answer for you, but it's a bit mixed, but in one way or another.

And talking about Cisco, to be frank, it's not one of my main competitors, right? Cisco wins because they have a massive portfolio. And when they go in, they sell a bit of everything, right? But generally speaking, in international, we don't see too much competition from Cisco. That's -- it's always been like that. I've been in the company 20 years.

Yes, well, absolutely, yes. The compelling story around Fortinet is this ability to consolidate Ken has been talking about it for 20 years, you guys should know it. The consolidation between networking and security, we're there now, right? Security is bigger than networking. And that's what we've been -- our mantra has been for 20 years. We're finally getting there. Maybe it's time to retire, Ken.

But it's interesting because, yes, it's -- that's our advantage. We have a solid networking technologies at the base of it. I remember when I started out, our appliances were seeing more like routers or routers since we're in the U.S. than anything else, right, because the underlying networking technology there was very strong. And that's why companies like [ Pall ] have never really given us a hard time when it comes down to this type of solution.

SD-WAN was just we built that SD-WAN technology so quick. And that's why Ken is adamant in saying we're going to be leaders in SASE because just like we did with SD-WAN, we overtook everybody and become leaders by far, that's what's going to happen with SD-WAN or with SASE.

We have a bigger market in Europe, probably EMEA is about 43% of our business right now. So that's also -- we starting to divide the region for this kind of conference. So next year, just like last year, so every 2 years, we do one global and then a year will be like one in EMEA. Next year it will be in Amsterdam, I believe. Last year is in Berlin. And then there's probably same size of a customer partner attending there.

So if you can travel there, we'll be welcome. There's a lot of customers, especially like not the new [indiscernible] or this area. And then we'll do also one in U.S. next year, but probably will be less people from Europe, Middle East come to the U.S. So this is the opportunity to have the global view, whether the EMEA or APAC, they have their own choice, whether they can come to the U.S. or they can go to Europe. But definitely one conference in EMEA, one in U.S. for next year, and then we'll alternate. And then the year after next, 2028 will be, again, a global conference. So this happened every 2 years.

We do better in EMEA.

In the U.S., we replace Cisco more than any single competitor. not only in SD-WAN, but in switching or routing, we crush them. And for me, it's -- my mentor was employee #11 at Cisco. We actually hired John Chambers. And so he actually advises me a lot, and he's tough, very, very tough and he loves it. We crush Cisco in a big way.

And -- while we're talking about SD-WAN, they have a product called Viptela, but we also replace a company called Velocloud. We replace Versa. But Cisco, we replaced probably more than any single competitor in the U.S. And on the pricing front, I echo Joe's sentiment there.

We have a couple of minutes left. Let's go with two more questions, please.

Shrenik Kothari from Baird. The other big innovation announcement was party SOC, and there are not too many questions so far. So it integrates your SIEM, [ SOAR ] analytics, leveraging AI. And just in light of your earlier comments about simplification of the messaging piece as well as you talked about pricing packaging in your opening remarks.

Just curious, is that the angle guys are trying to have an operational and packaging simplification as part of that? Or is the grand plan also like some of your peers have done is kind of unlocking incremental budgets by displacing legacy SIMs and stuff. Just curious.

Well, I can start maybe. So I think, yes, this kind of if I break it into three categories. There's the traditional products where you got large enterprise building their own SOC to stand-alone SIMS or analyzer products. This doesn't displace that because that motion is already there and people are still doing this, right?

On the other extreme, you've got SOC as a Service, which a lot of our partners offer, telcos offer, and we do have a small offering there. But our offering was more built to actually figure out how to add features quickly that were really relevant for the SOC environments. I would say the FortiSOC is somewhere that sits in the middle, right?

This is a SaaS platform, firstly, that leverages all of those technology components behind the scenes and implements a very simple licensing and simple user interface over the top. So it's for that maybe mid-market or another segment of the market, right, that is able to get that up and running quickly, ramp up their SOC process and be able to hit the ground running.

Going forward, it also provides a platform to quickly integrate more and more SOC or SecOps solutions. So you can imagine EDR, NDR, DLP, the type of visibility coming into that down the road. So some ways to make that overall simpler, both on the licensing, but especially on the usability to answer your question there.

And if I may add, we've seen a massive opportunity on the mid-market, especially for this type of solution. It's -- the need for that medium-sized company to have more control, whether it be in the cloud or with local solutions built in-house is pretty interesting. We're seeing a big demand there as well.

So as Robert was saying, if you want a high enterprise, we're going for the single same-store products. If we're looking at something a platform that's a little bit more flexible, looking at FSO.

Alex Rocha from Guggenheim. So we talked a lot about AI impacting customers and the benefits that they're seeing. I'm just curious if you could talk about the AI efficiencies you're seeing within Fortinet and how you're utilizing AI internally.

I know you talked about, I think, on the last earnings call or maybe it was a call back, you discussed working with vendors to help offset memory prices. One thing that stuck out to me was that you said you're hiring more. A lot of other software companies out there, they're actually reducing headcount because of AI efficiencies. So I'm just curious if you could talk about that, what you're seeing internally and then eventually how that can kind of maybe impact margins and the bottom line.

So I think it depends on which function you're looking at, right? So there are certain functions like customer support where we have AI enablement, and we haven't hired many people over the last couple of years. And that's an area where we think headcount growth is slowing down because we can offload support cases through AI agents.

In sales, I think you want that human connection, you want somebody in front of you that explains how the products work and what the benefits are. So we are still investing from a headcount perspective in sales. But other functions, headcount growth may slow if we can implement AI-enabled processes.

And if I may add, but we are using -- we are developing an internal tool for our sales, an AI tool that's going to help go to market faster and do training not through the usual internal training that we normally do, but doing training on the job. So this tool will be something that will augment the opportunities that we're going to be building. So it's a pipeline generator.

Yes. And so he created a sales AI tool that's in process. The U.S. created a tool called AsTech/ It's meant for sales engineers or anyone in the company as a tool to help in a sales call, customer support call. It's actually really, really good. So that's generally available with all the employees inside of Fortinet.

The same for R&D for some other area. We're keeping hiring much younger capable engineer to replace someone like me. So that's where when we retire, I'm quite sure a lot of young AI capable people will be take over.

All right. With that, Fortinet team and myself would like to thank you for spending your day with us. We appreciate the time, and we hope you found it very productive.

And I'd also like to take this time to thank the team here for their time in the afternoon as well. Thank you very much.

All right. Welcome, everybody. Delighted to have you guys here. For disclosures, please see the Morgan Stanley research website at morganstanley.com/researchdisclosures. If you have any questions, reach out to your sales representative. I'm Meta Marshall. I cover the cybersecurity space here at Morgan Stanley. Delighted to have Fortinet here with us today. Ken Xie, CEO, Founder, Fortinet; and Christiane Ohlgart, CFO.

So maybe I want to start with, Ken, you've -- Fortinet has long been referring to this convergence of networking and security. Now as the Fortinet story evolves, we're seeing kind of this consolidation of multiple security solutions. like SASE, SecOps and more. Just walk us through the evolution of Fortinet and the prevalence of kind of this combination of networking and security and just how that gives you the legs for kind of a broader platform going forward?

Yes, great question. Also, thank you, Morgan Stanley, for hosting us again. Since Morgan Stanley lead our IPO 17 years ago, been here pretty much every year, the same. Yes, I think the convergence is where is the founding vision we have. So we do believe network and network security will be converged together to give you better visibility, better control for the traffic, whether inside the company or in the cloud. And also this year is the first year, the network security market, total addressable market will be larger than the networking market.

And also with a lot of new things come up every year in cybersecurity, like SASE, like all the AI now, we also see convergence starting to get more and more important. And like the SASE is a function, just like in the past, there's like a company had a lot of individual function like FireEye for sandboxing, like before that one, like Intra for intrusion prevention. You can see in the network security space, a lot of time, the platform vendor gradually will integrate the single function into their platform and then making -- then have a much better position compared to the single function device, right?

And that's where -- for the FortiOS, which were announced the FortiOS 8.0 next week in Las Vegas, we now have about 30 functional, including all the networking function and all the network security function, including SASE, SD-WAN and half the function starting using ASIC to accelerate. So we're using the same process, the same trick in the last 26 years in the company, keeping integrate more function and using ASIC to offload this function to the ASIC chip to get a better performance and also lower the cost.

So that's the same process and that also addresses the converged market. So I think the market kind of grow maybe 7%, 8%. We do believe we're keeping increased market share. I think last quarter, 62% of business come from what we call secure networking, and then 27% come from the unified SASE. But unified SASE grew faster. We grew like 40% unified SASE last quarter. Definitely, we see the trend, customers a little bit more move to add additional security function like a SASE function. And that's also not just this cloud SaaS-based SASE function, but also we see a lot of -- we call the sovereign SASE, which a lot of service providers, they buy the product offer their own SASE service. We feel that market probably double, triple compared to the cloud SaaS-based SASE.

And there are also a lot of other areas like OT also need all this kind of converged network, network security together to secure the OT device because a lot of like IoT, OT device have a difficult to install the agent. So that's where the only solution for them protection come from the network is. That's where the convergence is also helping. We see that grow also very fast. Last quarter grew 25%. Maybe anything you want to add?

I think we're good. I mean the -- I guess the question, between this networking and security, the ASIC has long been kind of part of your differentiation. As you move into more of these software-based categories, like how can you bring the success you've had in that convergence based around the ASIC to kind of some of these other software-based categories?

Actually, the new function always handled by software. The ASIC just add additional computing power to process the software function much more efficient. That's where the ASIC always come like 3 to 5 years after the software function being delivered [indiscernible] that we have the same process in the last 26 years, now the AI already in the eighth or ninth generation now, right? So that's where it's the same process, accelerate the software and increase the computing power by 5 to 10x. That's every product -- every quarter, we do release like a new FortiGate product every quarter. And we do compare with the same function for the same cost in the industry, all the other competitors.

So in pretty much every function, we have 5 to 10x better performance for the same cost or the same function. That's compound benefit of ASIC, not just the security, but also networking side like SD-WAN, right? So it's the same trick. But ASIC, the only issue like ASIC, you do need to invest minimum 5 to 10 years to see the benefit. And also the economy of scale also very important because there's a big cost, initial investment cost, but also the unit per chip also depends on the quantity.

So now we already have almost 60% of the unit shipment for the industry. So we do see the benefit of our economy scale now because we already have more than half the market share. That's the ASIC that will benefit the company. That's where we probably have the highest GAAP margin in the whole industry and also the [ Rule of 45 ] growth, we feel pretty comfortable for the next 5 to 10 years for the...

Okay. Got it. We'll circle up on those margins in a second. So as GenAI adoption drives more traffic and growth, just how are you seeing it kind of -- there's a lot of theories about how AI impacts the software. But how are you actually seeing it impact kind of the firewall network security demand? And just -- maybe just start with that piece of the question.

Yes. I think there's a lot of AI will change quite some SaaS or some software, something maybe AI may need the software. But what we see is really, especially a lot of the new GenAI, the AI agent, they do a lot of machine-to-machine talking. So when you look at where the AI agent is, where the traffic they generate, we found it more like east-west traffic, whether within the data center, within enterprise between departments, several of these things there.

So that's actually making the traditional networking device have difficult time to control and manage all the genic traffic. So you do need to have a convergence story to deploy internal for the internal segmentation and also how to secure the AI data center, the East traffic, that's become more and more important. That actually drives some of our additional growth because some enterprise, they see, hey, how I can manage all this AI to kind of have all the API of my server, how to manage all this kind of the machine-to-machine traffic. So that we see a lot of protection have to go to the server level, have to go through all these things to really deal with all the kind of agent traffic.

Okay. Yes. I mean, certainly, we're seeing kind of the difference in the traffic flows from the bursty traffic in the past to kind of the steady flows that should be a catalyst for you guys. Maybe coming out of earnings, another kind of topical piece was around memory costs. You guys mentioned that you've raised prices kind of 5% to 20% based on kind of the particular product. Can you just walk through kind of how memory is impacting you guys so far and how you see it kind of playing throughout the year?

Yes. I mean I think there are 2 components, right? One is availability and one is price. We are actively sourcing with multiple providers. We are qualifying new components to make sure we have the availability, and we have pretty good supply chain relationships because we do direct sourcing. We are not just reliant on our contract manufacturers. And so of course, there are some price increases, but we are aiming to manage our margins accordingly. And also, we have significant inventory always. So we can buffer some short-term disruption, yes.

And then how did -- I mean, so you weren't in the same seat, but just how does the experience that you guys had during COVID and supply chain challenges kind of inform either changes that you're making to pricing or how you get visibility into what the impact of those price changes will be?

We want to -- like first, like we maintain 6 months inventory, just prepare for this one. That's where during the last supply chain issue 5 years ago, we actually like grow like a 2 to 3x gained more market share than any other competitor because we prepare this one. We also manage all these key component supply directly. We have own kind of manufacture center, shipping center globally, 3 biggest shipments, one in U.S., one in Europe, Netherlands, one in like Asia, Taiwan.

So that's where -- because we maintain more inventory, we have a managed direct manufacturer, we feel we respond this much quicker. And also the buffer we have for the inventory also can very easily. So we see this as an opportunity to gain market share because some of our competitors only have like a couple of weeks inventory, right? So they call it intense supply, good or bad. But in this time, they are probably more in trouble. That's where some customers, they need this one, we are probably the only one can keep shipping. That's where we use this as a gaining market share. On the other side, for the margin, like we said, we maintain healthy margin.

So whenever we see the margin kind of impact that the price increase of memory, if we use up the buffer, then we also increase the price. But it's -- and once the price drop, whether the memory or the operation shipping costs drop, we also lower the price. So that's where we feel -- so far, we feel we are probably the highest GAAP margin in the cybersecurity industry, right? So that's where we kind of Rule of 45 still pretty.

I think those margins are pretty uncontested. But yes. All right. So maybe turning to kind of the product revenue growth and refresh cycle. You previously referenced 10% to 15% product hardware growth over the medium, long term. Can you just walk through kind of how you see those -- the horizon for kind of that product outlook? And if any of that's kind of based on any upgrade cycles kind of coming up?

Will definitely accelerate the product revenue growth. If you look at the year 2021, I think product revenue growth almost 30%, '22 grew like 37%. And then it dropped down in '24, right? So '23 also 27%. But in the last 5 years, still CAGR over 20%, I believe 24%, 25%. But I believe in the last 20-some years, the product revenue should grow between 10% to 20% in a normal year.

Just last year, we grew like 16%, I believe, the product revenue. So that's more normal. But with this supply chain issue, they can accelerate and then they sometimes maybe have to digest, but we're not changing the total average like 10% to 15%. The other thing, we do see a lot of opportunity in the OT security and also the software SASE initial deploy more in the hardware product side for a lot of service provider that also help in the product revenue side.

Okay. We talked about AI security or AI driving network security traffic. But let's just talk about kind of the AI security opportunity separately. You guys have talked about that spanning kind of 3 separate vectors, AI data center, securing AI applications and AI-enabled solutions that help automate security. Just which do you think kind of represents the largest near-term and long-term opportunities for you guys?

The near term probably more come from the AI-driven security operations, which we have more than 20 products in that category. That category, we have about 40 products, but more than half now is AI-enabled. You can see last year, probably close to 30% growth. It's kind of about 11% of the total business still growing like 20%, 30%. And then on the AI secure AI data center, that's the other part. We see with the AI data center keeping building up because we have ASIC performance advantage.

We secure a few biggest AI company worldwide and also helping build the data center with security, all the generative AI also increased a lot of traffic in the data center and enterprise. So we see that also kind of what drive the next few years' growth. And the new ASIC come up this year will also help, right? So that's where we -- and the long term, we also internally feel Fortinet probably is the most AI-enabled AI investor company than security company. We have probably more AI patent than any other company.

And we also like probably half -- more than half the supporting customers are probably already using AI to handle that one. But R&D, we have a lot of R&D engineer technology coding using AI. We are also the only cybersecurity company invest our own kind of AI data center GPU farm. So we spend billions of dollars investing in all this infrastructure. That also will benefit both the short term and long term of internal also the customer. We have own kind of model. That's what we feel. We're still kind of more engineer-driven company, but we also kind of try to hire more like a younger AI engineer, not like me. So that's also keeping changing in the next few years, but I do believe AI will change in the space quite a lot.

Okay. And so when do you think that we can start to see some of that meaningful revenue hit?

We already see the benefit like the cost saving, whether in the customer support and some G&A, we use kind of AI replacing some of the GMV function. And I think -- like I said, the secure AI operation will be more benefit short term, right? So the data center AI probably we will still take a little bit more time because they tend to a bit long time to evaluate.

As they need to build them out, right? I think while we've seen already some traction in Q4 on some data center providers, it's going to take longer until they put the firewalls and security perimeter in place. So it's a longer-term tailwind for us for sure.

Definitely. Okay. Maybe circling back on the OT security piece. We had written a large report about this opportunity being a big market. You mentioned that you're seeing very strong growth there with kind of billings up more than 25% year-over-year. Just can you kind of speak to just how you see that opportunity and the competitive dynamics that are kind of benefiting you over the next couple of years?

Yes, definitely, OT security, I feel is quite important. Basically, there's not many firms studied OTM definitely one of the leading firms who studied that one. The other one we're using is Westland. So in the last 3 years, we are the only market leader in OT security there. But I do believe OT is starting to get more and more important [ OT/IoT ] security and also including edge computing or other like a robot or the things they connect the car. So that's where we feel it's a little bit different market than the traditional network security market, but we've been investing like in the last 10, 15 years. I do believe that market will be probably keeping growing faster than the average network security market will be a huge opportunity.

Got it. You've had 40% unified SASE billings growth in Q4. This has clearly been an area of more focus for you guys. Just how have some of the go-to-market adjustments you guys have made led to some of the growth that you've seen on the SASE side beyond just kind of products that you always have?

Yes. I feel we have 3 key differentiation than the other SASE player. First, we have a single OS, including the network security, SD-WAN, SASE together. We call the 3 into 1, right? So that's where that leverage of a huge installation base of we're the #1 firewall, #1 SD-WAN, they can more easy to migrate to the SASE. That's where over 97% of customers come from the current customer already using firewall SD-WAN. Second one, we are probably the only SASE company build their own global data center PO infrastructure, give us 1/3 cost compared to other SASE player.

Whether they're using cloud or using colo, we have much lower cost. We have a long term -- we already invest $1 billion in the last 15, 20 years in all this infrastructure, not just for SASE, but other like e-mail security, secure log storage for the customers. We leverage that one as much lower 1/3 cost. The third one, also we feel we have a much bigger total addressable market than the cloud SaaS space, like sovereign SASE. It could be my mistake, like in the first few years, I only more focused on sovereign SASE.

We did not launch our own kind of cloud [ SaaS, SASE ] only launched about 2, 3 years ago, right? But once we launch, we see very strong growth. But we also believe there's other part of the market, probably same or even bigger than the cloud SaaS, SASE. Sovereign SASE is a private SASE basically deploy SASE inside the company or inside whatever data center or inside the kind of service provider. So process traffic locally initially would more drive the product sales because we have the same OS and using AS to accelerate a lot of SASE function. So that's what drive the product revenue growth first.

Eventually, the service revenue will follow. So that's a bigger total addressable market, 1/3 of cost and also like a 3 functions in the same OS, helping upsell, cross-sell quickly. So that's, I believe, will be the #1 SASE player in the next few years, just like firewall SD-WAN because of these 3 key differentiation.

I mean I think you asked how we changed our go-to-market, right? And I think the go-to-market needed to address these benefits of our 4D SASE solution directly with the customers. So what we did a little bit more is really make sure that we reach the end customer versus just relying on channel partners who have sold already other SASE solutions. So we needed to bring our customers on board about the benefits and especially the financial benefits they have, operational benefits they have from our SASE to consider the next steps, whether in an RFP to invite us or even look at displacements.

I mean there are certain SASE vendors who might have been here yesterday who like to talk about kind of SASE eventually leading to eliminating the firewall. I think this has been something that you guys have long said this is kind of the mark in some areas. Can you just kind of give a sense of where you think customers are just in terms of what SASE means to them and the presence of the -- continued presence of the firewall?

I think the firewall, just like in early days, just a firewall VPN, there's then the UTM next-gen firewall, the firewall also need to keep adding additional protection, additional function, just like the firewall add intrusion prevention, firewall add sandboxing the firewall also need to add SASE function, which is DRP, the CASB, all these other web, all these things there. So the current firewall, they don't have enough computing power to run this function at the same time or they don't have the function integrate together like most SD-WAN has a separate box. So we're the only one that integrate the firewall.

So that's the firewall need to keep evolving there. That's one part. On the other part, if you only offer SASE in the cloud, SaaS-based area and you limit your kind of total addressable market. On the other side, I see their biggest competitor probably will be the hyperscaler cloud provider, like the Microsoft, right? They can very easily leverage their cloud infrastructure with much lower cost and they have enterprise customers, they can enable that SASE function, the same thing for Google.

So that will be their biggest competitor going forward. For us, we more leverage our huge customer base. We have like 15 FortiGate deployed globally. They can enable the SASE function, whether they work from home or they work from a branch office or work in headquarter within data center. So we have the same approach we did like 10, 15, 20 years ago when there's like intrusion prevention and there's a sandboxing function, there's other like now the SaaS function or SD-WAN function.

That's where the firewall platform need to keep adding function and also keeping our salary function using ASIC to handle the better speed and the more function kind of integrate together additional computing power. I feel the firewall also need to be keeping changing up evolving. Otherwise, we'll be falling behind. because a lot of -- you look at a lot of other old firewall company, whether they watch or some others kind of disappeared, even Juniper from my previous also disappear. If they don't add -- keep adding function, then they kind of falling behind. That's why we feel we need to add a new SASE function into the firewall. At the same time, we need to keep accelerate function and then keep looking for what's the new function we can integrate.

Got it. Okay. On the SecOps side, which now includes FortiXDR, FortiSIEM, FortiEDR, you guys saw a 21% growth in Q4. How are you making this kind of a natural upsell for Fortinet? And then are the -- what is the customer that's buying this kind of SecOps product?

Most come from our current customers. They kind of see the consolidation benefit. And also because most of the product also developed internally, so they integrate automate enable AI much better compared to most of our competitors come from acquisition. They do have some kind of benefit -- customer base benefit. But for us, so far, the secure more come from the current customer, see the benefit of consolidation and see the benefit of managed together lower the management cost. So we feel leverage our #1 in the firewall SD-WAN. We feel that upsell, cross-sell is more easy, cost lower, more efficient than try to target a new customer in this area.

Got it. You talked about this a little bit earlier, but you guys have been building out your own PoPs kind of post SASE. You've now talked about having over 170 PoPs. Just what is you've talked about having a large installed base now, but just how do we think about kind of investment that needs to go towards building out that platform going forward?

Yes. We now have over 200 PoPs, but also we do using the cloud provider. We have 3 different cloud providers working with us. We also have multiple colo company working with us right now. And plus our own kind of own data center PoP, which also have own kind of -- the server, the Fortistack, all these things. So we try to balance among the 3, right? So that's where -- that gives us, I feel the best cost advantage and also the best security because we feel leverage on kind of Fortistack, we get a better security and the cost also much lower. That's also the reason we can offer the SASE service and 1/3 cost than the competitors. I still enjoy a pretty healthy margin.

Got it. Christiane, maybe turning back to you. Just in terms of how to think about kind of the growth cadence in '26 about the split between product and subscription and just kind of what are the moving parts to the low teens product growth guidance?

So I mean, it's beginning of the year. We just found out -- I mean there's a lot of moving parts, right, with supply chain, with growth opportunity from AI and so on. So we saw this as a trajectory into 2026 that we definitely can reach. And from a mix perspective, product versus subscriptions, we tend to sell more hardware-agnostic solutions. And so that takes a little longer to -- for services to follow, and that's what we built into our guidance as well.

Okay. Any nuances from geographic perspective? Obviously, we've had a lot of geopolitical attention paid over the last weekend. You guys have a big EMEA business. Just anything to think about kind of just from a geographic split?

Yes. I mean we saw good strength across the board, like similar to what we saw in Q4 so far. How this is going to change now for the last month, we will see, but the business is healthy.

Okay. Got it. From an operating margin perspective, Ken, you alluded to kind of leading margins a number of times. Just how do we think about kind of the margin trajectory of the business and particularly as you kind of layer in some of these hosting businesses?

I think this kind of long-term investment on infrastructure eventually payoff, you only take about 5 to 10 years. That's also the reason I don't see other competitors kind of do this long-term investment. Same thing for ASIC. We're still the only one keeping building ASIC chip, right? So it also take 5 to 10 years to see the benefit of that. So we are already starting to enjoy some of the benefit from the investment we made like 15 years ago. So that's where 15, 20 year ago, we started to invest in this infrastructure, data center, real estate. So that's where I think we'll continue to invest. We do see the payback starting to come back to help in the margin and more competitive.

Got it. Your capital allocation has been pretty aggressive of late. You've repurchased a significant amount of share over the past couple of quarters. Just had another $1 billion authorization in 2026. Just how should investors kind of think about kind of capital allocation and share buybacks as a piece of that?

I mean Fortinet is generating a lot of free cash flow, right? And that capital allocation question always comes up. We -- on the share buyback, we are typically opportunistic, and we see this as an opportunistic time to buy back shares. We will invest in M&A as we -- from a tuck-in perspective, like we have in the past. And of course, the infrastructure, as Ken just mentioned, is one area where we continue to invest in because it's going to give us long-term benefits from our margin perspective. So that's the strategy that hasn't changed.

Yes. We're pretty confident about like the future growth. We also believe in all these 3 pillars, each we're keeping gaining market share in each of the 3 pillars: network security, unified SASE, Secure OP. So on average, like we mentioned in the Analyst Day, a little bit over 1 year ago, if the market grows 12%, we're pretty confident in the midterm, next 3 to 5 years, we'll grow faster than the market. We're keeping gaining share. And that gives us the confidence, invest in the long term, also invest ourselves like buyback give us probably the best return.

Got it. Maybe just as a last question. Ken, I think you clearly laid out why Fortinet is kind of well positioned with AI. But what do you think that -- or do you think that investors are kind of getting wrong about the discussion about AI and cybersecurity right now?

I think AI will be the catalyst for a lot of change -- accelerate a lot of change. Also, I do believe the edge immersive will eat the cloud and mobile, right, so in the next 5 to 10 years. But for us, the hybrid approach probably will be better than too much depend on SaaS or software. That's because a lot of edge device, a lot of infrastructure and combined hardware, software, including ASIC will be more long-term benefit, drive the long-term growth in AI instead of too much depend on software or the SaaS.

So that's kind of a combination of hardware, software infrastructure and more internally innovate, AI using AI, invest in AI, that's will be kind of -- will be positioned better for all this change. I think AI will drive a lot of change in the next few years. That we need to keep investing in that.

Yes. And if you look at the CFO perspective, I think there are a lot of -- 3 main vectors for us, right? It's AI used internally to drive efficiencies and improve margins, which we've done already on the support side. And then it's AI built into our products so that the efficiency we gain with certain AI solutions, our customers can get from AI agents to manage security, whether it's on the networking side or whether it's more on the SecOps side, right? And we've already -- we have a lot of solutions that have built in AI, but we have also launched a lot of solutions that have AI agents that help with the cybersecurity skill shortage, right, because you can't have that many people in your operations. And then the last one is AI threats, right, which -- and managing AI from a security perspective. So I think there's -- there are really 3 main tailwinds that hit cybersecurity companies in -- from different perspectives, but they are all business enabling, which is exciting.

Right. Well, Ken, Christiane, thanks so much for being here today.

Thank you.

Thank you.

Hello, and welcome to Fortinet's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that this call is being recorded.

I would now like to hand the call over to Anthony Luscri, 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 fourth quarter and full year 2025 financial results. Joining me on today's call are Ken Xie, Fortinet's 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 fourth quarter and the full year of 2025 before providing guidance for the first quarter and full year 2026. We will then open the call for questions. During the Q&A session, we will ask you to please limit yourself to 1 question and 1 follow-up question to allow others to participate.

Before we begin, I'd like to remind everyone that on today's call, we will be making forward-looking statements, and these forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10-K and Form 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements.

Also, all references to financial metrics that we make on today's call are non-GAAP, unless stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations are located in our earnings press release and in the presentation accompanying 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 via replay via a webcast on the 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'll now turn over the call to Ken.

Thank you, Anthony, and thank you to everyone for joining our call. We are very pleased with our excellent fourth quarter growth, driven by broad-based demand across our platform as building increased 18% and revenue grew 15%, driven by product revenue growth of 20%. Our provision margin was strong at 37%, reflecting our continued focus on [ betting ] growth of profitability. Secure networking billing grew 13%, outperforming the overall secure networking market as we continue to gain market share. Fortinet remained the #1 firewall leader with a 55% unit market share and the highest product revenue among our segment security peers.

Fortinet has led the convergence of networking and security for over 25 years, and secure networking is expected to surpass the traditional networking by the end of this year. Our firewall leadership is driven by FortiOS, which unified networking and security, and our FortiASIC technology, deliver 5x to 10x better performance than competitors while lowering the total cost of ownership and energy consumption, which provide a large advantage and a scale and securing AI data center.

We will introduce the FortiOS 8.0 at the Fortinet's Annual Customer and Partner Conference accelerated in March, featuring significant and new capability in security and networking, especially in AI security, such as agentic AI security in enterprise, plus a new bundled SD-WAN and SASE service.

We also recently partnered with NVIDIA to leverage their BlueField 3 DPU to secure AI infrastructure. Unified SASE billing grew 40%, representing 27% of our total billing, supporting our belief that Fortinet is the fastest growing SASE leader and scale. Our momentum is powered by 3 key advantages. First, Fortinet uniquely integrate [ Negen ] firewall, SD-WAN and SASE on a single OS for the OS, running on-premise all in the cloud, allowing customers to expand a SASE in minutes and driving upsell across a large customer base.

Second, we're supporting both Sovereign SASE and Public SASE. Sovereign SASE enterprise and service provider to deploy SASE in their own data center to meet the data privacy, sovereignty and the compliance requirement. We are seeing strong demand in Sovereign SASE, and none of our major SASE competitors offer a Sovereign SASE solution, making Fortinet's total Unified SASE addressable market significantly greater than our peers.

Third, our owned and long-term invested global cloud infrastructure for the cloud delivers high performance and security and roughly 1/3 of the total cost of ownership of our peers. These differentiators position Fortinet as a leader in the 2025 Gartner Magic Quadrant for SASE platform as we continue to be the leader in SD-WAN and believe we'll be the #1 Unified SASE within the next few years.

AI-driven secured billing grew 6% in the fourth quarter and 22% for the full year, while ARR was up 21%. Our strong performance was driven by more than 20 AI power solutions as customers consolidate multiple security vendor on to Fortinet's platform. In addition, Fortinet's leadership in security also extend to operational technology and the cyber physical system, offering enhanced visibility, robust threat protection and secure connectivity. The demand for OT solution has driven significant growth, with billing up more than 25%.

Finally, we reaffirmed the midterm target we shared at our Analyst Day, reinforcing our commitment to continue to grow faster than the overall market, including delivering billing and revenue CAGR above the market growth of 12% and achieving a Rule of 45. 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. As Ken mentioned, we are very pleased with our strong fourth quarter performance, exceeding the high end of guidance across billings, total revenue and operating margins. This outperformance reflects solid global execution and broad-based demand for our solutions, with product revenue growth accelerating in the second half of the year.

We are well positioned to deliver durable long-term growth as a leader in large and rapidly expanding cybersecurity markets, including secure networking, Unified SASE and security operations. This opportunity is supported by strong secular tailwinds such as vendor consolidation, the convergence of security and networking, ongoing technology upgrades and the expansion of enterprise [ attack ] services across cloud, OT and AI. Our strong network security foundation drives adoption of SD-WAN, SASE and SecOps while creating significant opportunities to upsell integrated solutions across enterprise customers.

Building on these market dynamics, our leadership in secure networking, combined with our Unified FortiOS operating system and broad platform, enables customers to deploy security anywhere across private, public and hybrid multi-cloud environments and in any form factor, including hardware, software and SaaS. As a result, our platform approach drives strong customer expansion, increases wallet share and supports growth across both existing and new markets.

In addition, we benefit from durable competitive advantages through our proprietary ASIC technology and single integrated operating system, which delivers superior performance, lower total cost of ownership and meaningful differentiation versus peers. At the same time, continued investment in R&D across custom silicon, OS convergence, AI-driven security, quantum readiness and Fortinet own cloud infrastructure supports rapid innovation and organic growth.

Finally, our highly diversified business across geographies, customer segments and industry verticals reduces volatility and enhances resilience across economic cycles. Complementing this diversification, we operate a strong and balanced model with the Rule of 45 plus profile, robust recurring revenues, strong free cash flow generation, a solid balance sheet and a disciplined shareholder-focused capital allocation strategy. This balanced model supports our confidence in our 2026 guidance and continued long-term shareholder value creation.

Now moving to an overview of our strong fourth quarter results. Total billings grew by 18% to $2.37 billion, driven by strong growth in Unified SASE, OT security and success in large enterprises in the U.S. and Europe. Unified SASE billings grew 40%, driven by growth in cloud security solutions. Furthermore, SASE adoption momentum has remained strong, as 16% of our large enterprise customers have purchased FortiSASE, an increase of over 50%, highlighting our continued expansion of FortiSASE in our customer base.

Operational technology use cases continue to contribute strong growth to our success with billings growth of over 25%, with broad-based demand for both our hardware and software solutions. And our continued momentum in large enterprise drove growth in the fourth quarter as the number of deals greater than $1 million increased by over 30%, while the total deal value grew by over 40%. The U.S. and Europe were the largest contributors to growth in $1 million-plus deals, delivering more than 30% growth.

In addition, we continue to expand our customer base. 7,200 new organizations selected our Unified FortiOS platform, reinforcing our strong position across all market segments. With regards to ARR, Unified SASE increased by 11% to $1.28 billion, which included an increase of over 90% for FortiSASE ARR, while SecOps ARR increased by 21% to $491 million.

Total revenue grew 15% to $1.91 billion. Product revenue increased by over 20% to $691 million, reflecting broad-based growth driven by strong performance across our product portfolio as we continue to gain market share. Both hardware and software grew 20%, supported by technology upgrades, upselling and expansion into new use cases. Service revenue grew 12% to $1.21 billion, reflecting lower product revenue in 2024, while service billings growth was strong at 18% in Q4. As a reminder, we view product revenue growth as a leading indicator of future service revenue growth, as shown on Slide 20 of the earnings presentation.

Now I'd like to highlight some key deals that demonstrated our market leadership and customer expansion. In the competitive 7-figure upsell deal, a large consumer services company and existing 41 SD-WAN customer selected FortiSASE to secure more than 10,000 users as part of its next-generation access and security transformation. The win was driven by our single OS approach that tightly integrates SD-WAN and SASE, enabling rapid expansion to SASE and delivering strong performance at a meaningfully lower total cost of ownership.

The customer chose Fortinet for our Unified FortiOS operating system, which reduces complexity by enabling a single consistent security policy across FortiSASE and FortiGate devices while leveraging our globally distributed PoPs. By integrating our PoPs into their existing SD-WAN fabric, the customer has simplified centralized policy management and enable secure private access at scale, which highlights our platform model.

Next, a leading global data center provider supporting AI and cloud workloads signed an 8-figure deal with Fortinet to support its rapid global expansion. The customer selected Fortinet for a predictable, scalable investment model that aligns security growth with its accelerated data center build out. As the company standardizes on our FortiGate, FortiSwitches and [ FortiAPs ], our solutions will streamline operations across IT and OT environments, including critical power, cooling and physical security systems. This strategic partnership enables the customer to scale security and consistently, supporting its long-term global growth strategy.

In another key win, a major utility company expanded its partnership with us through a high 7-figure agreement to secure its operational technology environment. The deal includes a comprehensive set of solutions covering network segmentation, identity and access management and zero-day threat detection across the utility's advanced distribution management system. Along with the adoption of 4D AI, this competitive win was driven by our ability to automate critical security operations, our proven expertise in protecting critical national infrastructure and a compelling price for performance advantage.

Lastly, in the competitive displacement win, a Fortune 100 company signed an 8-figure multiyear agreement for Unified SASE, selecting our virtual firewall solution to secure approximately 1,800 store locations. The customer chose FortiGate VM through our FortiFlex points-based consumption program, which supports flexible hybrid firewall deployments and a broad set of security solutions. Fortinet was selected after a highly competitive evaluation due to the flexibility of the program and our ability to meet demanding technical requirements at scale, enabling the customer to consolidate security on a single architecture while gaining deployment flexibility, centralized management and long-term cost efficiency to support future growth.

Turning to margins and cash flow. Total gross margin of 80.3% was better than expected, which is especially impressive given the strong product revenue growth and related mix shift. Operating margin of 37.3% exceeded the high end of the guidance mainly due to stronger-than-expected revenue growth and cost management. Free cash flow was very strong at $577 million, and adjusted free cash flow was $589 million, up $130 million and represented a margin of 31%.

We repurchased approximately 730,000 shares of common stock for $57 million during the fourth quarter and an additional 4.6 million shares for $356 million quarter-to-date. In January, our Board of Directors approved a $1 billion increase in the authorized stock repurchase amount, and the remaining share repurchase authorization as of today is approximately $1.4 billion.

Turning to our full year 2025 results, where we once again exceeded the Rule of 45 for the sixth consecutive year. Billings grew 16% to $7.55 billion. Our faster-growing pillars of Unified SASE and SecOps grew a combined 24%, representing a 2-point mix shift year-over-year and 6 points over the past 2 years. The 2 pillars now make up 36% of total billings, reflecting the value of our integrated platform approach and the convergence of security and networking and success in cross-selling our other solutions.

[indiscernible] revenue grew 14% to $6.8 billion, driven by strong product revenue growth of 16%. Service revenue grew 13% to $4.58 billion, representing 67% of total revenue. Gross margin of 81.3% was flat despite the shift to product -- new and investments in the build-out of our data center infrastructure. Operating margin increased 50 basis points to a record of 35.5%, resulting in operating income of $2.41 billion, which is up 16%.

Our GAAP operating margin of 30.7% continues to be 1 of the highest in the industry. Earnings per share increased 16% to $2.76. Free cash flow was a record of $2.21 billion, representing a margin of 33%, while adjusted free cash flow was $2.5 billion, representing a margin of 37%. Our adjusted free cash flow CAGR of greater than 20% over the past 5 years demonstrates the strength of our business model.

Now moving on to guidance. As a reminder, our first quarter and full year outlooks, which are summarized on Slides 24 and 25, are subject to the disclaimers regarding forward-looking information that Anthony provided at the beginning of the call. For the first quarter, we expect billings in the range of $1.77 billion to $1.87 billion, which at the midpoint represents growth of 14%. Revenue in the range of $1.7 billion to $1.76 billion, which at the midpoint represents growth of 12%. Non-GAAP gross margin of 80% to 81%, non-GAAP operating margin of 30% to 32%, non-GAAP earnings per share of $0.59 to $0.63, which assumes a share count between 746 million and 750 million, infrastructure investments of $80 million to $120 million, a non-GAAP tax rate of 18%, cash taxes of $45 million to $50 million.

For the full year, we expect to achieve the Rule of 45 for the seventh consecutive year and expect billings in the range of $8.4 billion to $8.6 billion, which at the midpoint represents growth of 13%, revenue in the range of $7.5 billion to $7.7 billion, which at the midpoint represents growth of 12%. Service revenue in the range of $5.05 billion to $5.15 billion, which at the midpoint represents growth of 11%. We expect service revenue growth to pick up in the second half of 2026, driven by accelerating product revenue growth in 2025 as a key leading indicator. Non-GAAP gross margin of 79% to 81%, non-GAAP operating margin of 33% to 36%; non-GAAP earnings per share of $2.94 to $3, which assumes a share count of between 747 million and 753 million; infrastructure investments of $350 million to $450 million; non-GAAP tax rate of 18%; cash taxes of $350 million to $400 million.

Before we open it up for Q&A, I just wanted to share a few modeling considerations. As a reminder, the majority of our service revenue is recognized relatively on a daily basis, and the first quarter this year has 2 fewer days than Q4. From a margin perspective, our first quarter operating margin guidance reflects the timing of several marketing events. Additionally, the recent weakness of the U.S. dollar may create a modest headwind in the first quarter.

And finally, we plan to repay the first tranche in the amount of $500 million of our senior debt at maturity at the end of the first quarter. This, alongside lower market interest rates, will reduce net interest income for the year. As we look to 2026 and beyond, we are confident in our growth strategy, driven by significant secular tailwinds such as rising cybersecurity spend, the convergence of security and networking, vendor consolidation and the increasing need to secure AI and OT environments. We believe we can sustain product revenue growth of 10% to 15% over the midterm on average and reaffirm the midterm targets shared at our Analyst Day, including delivering billings and revenue CAGR above 12% and achieving the Rule of 45.

We are enforcing our commitment to continued growth beyond that of the overall market. Our leadership in innovation and price for performance enables the lower total cost of ownership across secure networking, Unified SASE and SecOps, positioning us to outperform the overall market. We are well positioned to deliver durable long-term growth considering our highly diversified, cash-generative and profitable business.

I will now hand the call back over to Anthony to begin the Q&A session.

Thank you, Christiane. As a reminder, during the Q&A session, we ask that you please limit yourself to 1 question and 1 follow-up question to allow others to participate. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from Shaul Eyal at TD Cowen.

Thank you so much. Good afternoon, everybody. Congrats. I'm interested in what drove the strength or the change that you've seen during the quarter, specifically the Unified SASE billings and the strong guide? What gives you confidence into 2026?

Yes, that's a great question, Shaul. Thank you. Actually, you can see the Unified SASE grew 40%. That where we see probably the fast-growing Unified SASE vendor and skill. Because the 3 unique advantage I mentioned, first, actually, the Sovereign SASE, we see very, very strong growth. I believe the Sovereign SASE market probably even bigger than the current public. So that's all the other vendors doing right now. But we don't see any of them try to get in the Sovereign SASE or have the function to support Sovereign SASE, which we kind of design the SASE in the beginning to supporting our service provider and all these things, which is all kind of Sovereign SASE approach.

Last, have a huge growth and Sovereign SASE usually buy the product first, then deploying the customer or service provider data center and then where we're keeping supporting with additional service. So that's a huge market opportunity. We believe we are the only leader in the space for the Sovereign SASE.

Second, we have 3 functions into single OS: network security, SD-WAN and SASE. That's actually give us a huge advantage lever our huge customer base. None of our competitors has this advantage. And that's making us grow very, very quickly, both our sales and the partners see the huge advantage and starting to ramp up very quickly.

And then also long term, because of our investment in the infrastructure. So we do see -- we have a cost advantage. So our cost is about 1/3 compared to some of the competitors, right? So that's also we can pass all this kind of cost savings to customers and play the long-term game. That we see very strong growth of Unified SASE. Maybe Christiane and John had some other point?

Yes. So I think we saw a really good traction on our execution in Q4, and it was very broad-based. So -- as you heard from me, I mean we were great in enterprise. We executed well on the OT side. We had successes in SASE. AI was a big driver. So that gives us significant confidence for 2026 that these growth drivers are going to continue because the demand is definitely there.

I would just say, obviously, the sub-security market is growing really nicely. As Ken highlighted, we have a lot of competitive advantages where we feel like we can grow faster than the market and faster than each of the 3 pillars that we focus on, as we did throughout 2025. And we see a lot of different growth drivers amongst the 3 pillars, the OT momentum. We see opportunities with AI and with quantum.

And when you look at our business, it's really diversified in a number of ways, geographically based on customer segments and also industry verticals. And then if you look at our solution sets as well is diversified amongst the 3 pillars that we focus on. And when we focus, we have a track record of doing really, really well. If you look at what we did at SD-WAN, we focused and did really, really well, starting around 2018 or so and really grew that business. And we're really focused on Unified [ SaaS ] in these other areas as well and expect to do well just like we've done in the past.

Got it. Maybe just a brief follow-up. Ken or team, what are your views on AI eating for specifically as it relates to cybersecurity? We have seen -- we're sitting here in front of the screens. We probably -- everyone else, my peers here, seeing software demise. Cyber has been holding a little better. But I think today, the past few days, it hasn't been fun at all. Just curious as to your views whether security actually augments AI or maybe it's the other way around?

Yes, definitely changing the -- especially enterprise landscape. Some software probably also need to be changing to see whether they take advantage of the AI or they kind of falling behind, which led AI to eat some of the software. But on the other side, we do see as an opportunity in the cybersecurity space because also how to control some of the AI. We do see in the enterprise environment as kind of -- see some strong demand in whether internal segmentation to kind of control some of agentic AI or some other data leakage provision.

So on the other side, the AI data center also, we see some huge opportunity there. I think we will present more detail in the next month [ Accelerate ] if you see some of the presentation I did in the last few Accelerate 6 years ago. I don't see the edge will the cloud and mobile. So that's where I think some time -- some of this like AI solution and the immersive technology with AI, I think it would be kind of changing some of the traditional weather software infrastructure, which we keep invest, be keeping kind of prepared this in the last 5 to 10 years. So we see this as an opportunity to both leverage there and also helping enterprise to secure the AI.

Our next question comes from Saket Kalia at Barclays.

Okay. Great. Ken, maybe first for you. Can you just talk a little bit about how you're navigating the current environment in memory? And maybe as part of that, Christiane, can you just talk about how you're thinking about the impact of higher memory prices as part of your guide in 2026?

That's a great question. Actually, we prepare for this kind of supply chain since -- you can see 5 years ago when there's a supply chain issue during the COVID, we're doing quite well because we do have inventory on average about 6 months. We try to buffer during this kind of time. And also, we keep mentioning during the Analyst Day, we were maintaining a healthy margin. So we're adjusted by some of the price based on our margin. And because even we had adjusted recent price, we still have a huge advantage like leverage our technology, whether the ASIC give a 5x to 10x better performance for the same functions, same cost. At the same time, the OS offer more function than other competitors. So that even with a little bit of recent price to maintain our margin, we still feel we are very competitive compared to any other competitors.

So we view this just like 5 years ago, it's an opportunity to gain market share. So that's where we're well prepared with good inventory and also managed operation manufactured directly with our own operations center worldwide. And also with the technology, we feel we even a little bit price rise, we still ever competitive will not reduce our growth or market share. Christiane, other things you want to add?

Yes. As Ken mentioned, we are planning to maintain our kind of profitability and gross margins on our products in 2 ways, right? One is by negotiating and making sure we get the components early, but also, we are -- we've already raised some prices where we have some component cost pressures, and we will potentially continue to do so throughout the year depending on what the components prices do.

Yes. The other part in helping the margin is we're starting to see the service revenue will be turn around probably during 2026 this year. And also when we shift the more like sales into like whether Unified SASE or the [ AMCP ], which has the most service, we feel the margin also will be kind of improving from that angle, which has more service. So that's also helping. But there is other things we also kind of measure, whether the currency issue mode. But we kind of feel we are prepared and with all the diversification we have by vertical, by geo, we feel we kind of maintain the margin and keeping the Rule of 45.

Got it. Got it. Christiane, maybe for my follow-up for you. It's a great billings result in the quarter and good to see the guide. Can you just -- and apologies if I missed it, but can you just remind us what billings duration was this quarter? And to Ken's point, just as we think about that driving services revenue for next year, is there a way that you just have us think about the shape of services revenue for next year through the year?

So from a billings duration perspective -- because of all the enterprise deals, it was slightly up, it's around 2.5 years. And so yes, not too much different than it is normally in Q4, yes.

Our next question comes from Rob Owens at Piper Sandler.

Great. I know you highlighted the Sovereign versus Public SASE is 1 of the strikes. Curious if you can give us a sense of what your actual revenue mix looks like, Sovereign versus Public? Number one. And then number two, to kind of follow up on sockets. I think it was the third question, but I'm not going to call them out. When you look at the shaping of services revenue and the recovery there, and I know you talked about the second half being stronger. But it doesn't seem to track with where you've been historically in terms of a recovery given what you saw with product revenue this year. So is there something unique in 2026 or something unique going on that's causing that to lag just a little bit more than maybe you've seen historically?

For the service or product revenue, as you can refer to the Page 20 on the presentation, we gave out the last 16 years since IPO, the growth between the service revenue and product revenue. You can see that since changing the product revenue leading indicator of service revenue, so we do believe this year with the last few quarters with product revenue in the last few quarters growth stronger. That's what's helping drive the service revenue turnaround, starting to grow faster.

On the first question, sorry. Sorry, what's the first question?

Sovereign versus Public SASE mix.

Yes, I believe the Sovereign SASE market is probably even bigger than the current Public SASE market, but kind of approach is different. The Sovereign SASE market, the service provide enterprise handled by the product first, which also we see the product growth very, very strong in Q4 and also believe it will helping drive this year product revenue growth with Sovereign SASE.

We have not compared the Sovereign and also the Public yet. But I believe probably pretty close to each other right now, but Sovereign SASE, we see more strong growth because we don't see any of our competitors offer this Sovereign SASE approach. And also with the product with the ASIC salary is a huge advantage for us. So that's why I do believe we have probably doubled the total addressable market in the SASE market with a Sovereign SASE supporting the service provider enterprise with their own kind of SASE approach.

Our next question comes from Gabriela Borges at Goldman Sachs.

I know last year, we shifted the conversation away from refresh tight end of support and more towards refresh tight to technology upgrade cycles. Tell us a little bit, Ken and Christiane, on what you're seeing in the pipeline from the 2020 and 2021 refresh cohorts, their willingness to engage across the platform? And do those cohorts look more meaningful or notable than the cohort that you had refreshed last year?

Yes. I think there's 2 things. One is we mentioned on [ Antas ] an end of a service, which we think there's the 11 part, 11 product will be end of this year, may end of the service. But actually doing some communication with the customers, some of them still want to supporting young and service. So I think we kind of found some solution probably win-win.

We may extend and our service instead of try to force customers to buy the new product. We may give them actual external services, but we do charge more service fee, both hardware, [ AFE ] and also the to maintain a software fee. So that's a win-win situation. And then also, like I said, that's not the major driver of this growth because the growth will come from the new function, come from all these kind of like new demand in the market.

The second refresh is that as -- in the past, probably the average hardware product, whether network security, network can even serve probably after 5 to 6 years, they may have to get a new one. So we do see 5 years ago during the supply chain COVID time, there is a strong growth of product revenue, you can see on the Page 21, 22, there is a pretty strong product revenue growth, like over 40%. Some of that one probably will help in the next couple of years. But like I said, the better driver will be new function, like how to support in the SASE in the [ T trust ] network environment, how to go internal segmentation supporting enterprise to convert from the traditional network into the network security and like helping protect the data level, whether the data decade or some kind of AI agent. That fuels the 1 to drive the strong growth. Just like the strong growth comes from the Unified SASE used 40% in Q4. A few customers definitely more interested in if you have a better function and also kind of -- they can see the future of advantage, that will more drive customers to buy. Otherwise, they may replace the product with some other different vendors. So that I see is more important we more focus on the how the strong function, how the future kind of advantage we have and also how to leverage the long-term investment we have, whether in the AI in the content, in the infrastructure. That gives the customer confidence and also keeping more partner with Fortinet.

[indiscernible] Please, Christiane.

Yes, I would confirm what Ken said, based on the customer conversations we are having. The driver is that they need additional security. And so as they look at 40 SASE or similar, they upgrade their underlying technology at the edge as well.

Yes. That makes sense. And my follow-up is on how to think about the second derivative of AI compute demand. So more on the inference side. How does that impact what you see from a network security standpoint and a network traffic standpoint in particular?

That's everybody still kind of -- because the space changes so quick with AI. We definitely tried working closely with customer, with our engineer, try to develop all this technology, try do better protection. But in general, I think we kind of move in to weather like edge computing and also how the broad infrastructure protection instead of too much weight on certain cloud, also in software. That's where we kind of -- a lot of long-term investment we have whether in the ASIC chip in all this kind of system level in the infrastructure level and also in the support and a few is a kind of more broad approach will be helping better instead of just too much focus on 1 single area.

Our next question comes from Fatima Boolani at Citi.

My first question is for you, Ken. The strength in Unified SASE at 40%, your product growth this quarter in excess of 20%. That paints really the interesting picture that maybe is in contrast to some fears around SASE or FortiSASE, rather, being maybe a force of cannibalization of the product refresh opportunity. And I know you alluded to SASE Sovereign SASE specifically. But I'd be curious to get your perspective on how you are independently driving strong growth in SASE and independently driving strong growth from a product refresh perspective? That doesn't seem to be affirming fears of cannibalization, especially for branch location environment. And then I have a follow-up for Christiane, please.

I have to say that's the same kind of by some of the networking security come from somehow competitor. And even SASE will be canonized all these network security, even the branch I think would be complement and also will be added on additional business opportunity. That's what we're doing both in the networking and like traditional network security and also SD-WAN and SASE for many, many years. So from our anchor, we do see SASE to offer additional business opportunity, additional product service, both in the customer level, in the service provider level and also in some other like a branch approach and eventually may even try to supporting working remotely, working from home of this kind of approach.

And also will be leveraged both the infrastructure in the public cloud, in the colo and also on kind of infrastructure. So that's where we see there's a lot of different approach to SASE and the different customer, different regions may have a kind of a different need. So that's where we kind of -- in the very beginning, when we developed SASE technology probably like 6, 7 years ago, we more believe the Sovereign SASE service provider kind of SASE will be the future. That's where we're kind of keeping investing in this area.

But also like when we launch our own kind of SASE over 2 years ago, we also feel kind of who can see side provide of our own SASE and even some infrastructure also very, very important. So that's where we see the SASE actually will be a complement also will be additional business opportunity to add beyond the traditional networking and network security.

In the branch office, you still need a physical device, that's the advantage we have. We have like we call 3 in 1. You look at the networking device, network security device and a SASE device into 1 solution, 1 for the [indiscernible] in the branch office, as probably not our competitor offer this kind of a solution, and that we see a huge opportunity. So we don't see SASE will be replaced and trial phase and network security solution.

And you can see the unit shipment in the branch office solution, a low end in retail grew very, very strong. Some of because of SASE, but some also they try to buy, deploy, I believe the future they able whether the SASE was some other additional security service they needed, but they do need to have a device in the branch office. They do need some kind of edge solution to handle the both security and networking.

I really appreciate that detail. Christiane, I wanted to go back to some of your comments with respect to pricing actions in response to an earlier question and something you mentioned in the prepared remarks. I was hoping you could quantify what degree of pricing, gross pricing increases you've been able to roll out in the base and to the extent there's a net pricing yield associated with that and how that's influencing your guidance?

And maybe just to take that a step further, is that 1 of the reasons why we're maybe seeing a slower ramp in the services trajectory of the business because you are seeing a price action yield on the product, which may not necessarily be translating to services? I'd love for you to just explain that for all of us.

So the pricing actions are on specific products and of course, dependent on the components that go into it. Overall, it's -- I think it's between 5% and 20%. But then also positively impact services because our service pricing is a percent of list price. But of course, it's going to take longer until that materializes in service revenue, right? So for a product, you will see it in the next couple of quarters for service revenue, it's going to take a bit.

Our next question comes from Junaid Siddiqui at Truist.

Great. I just had a question on your software firewall business. As AI transformation across enterprises, accelerate growth and cloud workloads, do you feel that your software firewall business, which has been growing at a nice rate, could inflect even further? And how do you think about that hardware software firewall mix going forward?