$FTNT Fortinet Q4 2025 Earnings Conference Call

Hello and welcome to Fortinet's fourth quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, we will conduct a question and answer session. Please be advised that this call is being recorded. I would now like to hand the call over to Anthony Lusk, 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; Cristiano Olgard, our CFO; and John Whittle, our COO. Ken will begin our call today by providing a high-level perspective on our business. Cristiano 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 of 2026. We will then open the call for questions. During the Q&A session, we will ask you to please limit yourself to one question and one follow-up question to allow others to participate. Before we begin, I'd like to remind everyone that on today's call, we will be making forward-looking statements, and these forward-looking statements are subject to risk and uncertainties, which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10-K and Form 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements. Also, all references to financial metrics that we make on today's call are non-GAAP unless stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations are located in our earnings press release and in the presentation that accompany today's remarks, both of which are posted on our investor relations website. As a reminder, this is a live call that will be available via replay via our 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, 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 surfaces 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 multicloud 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-owned 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 a 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 US 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%. 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 US and Europe were the largest contributors to growth in $1 million plus deals, each 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 AR, unified SASE increased by 11% to $1.28 billion, which included an increase of over 90% for FortiSASE AR, while SecOps AR 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 a competitive seven-figure upsell deal, a large consumer services company, an existing FortiGate 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 enabled secure private access at scale, which highlights our platform model. Next, a leading global data center provider supporting AI and cloud workloads signed an eight-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 FortiGates, 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 securely 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 seven-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 FortiAI. 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 a competitive displacement win, a Fortune 100 company signed an eight-figure multi-year agreement for Unified SASE, selecting our virtual firewall solution to secure approximately 1,800 store locations. The customer chose FortiVM 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 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 two-point mix shift year-over-year and six points over the past two years. The two 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. Total revenue grew 14% to $6.88 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 revenue 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 one 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 59 cents to 63 cents, which assumes a share count between 746 and 750 million. Infrastructure investments of $80 to $120 million, a non-GAAP tax rate of 18%, and cash taxes of $45 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 $3.00, which assumes a share count of between 747 and 753 million. Infrastructure investments of $350 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 ratably on a daily basis, and the first quarter this year has two 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 US 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 target shared at our Analyst Day, including delivering billings and revenue CAGR above 12% and achieving the Rule of 45, reinforcing our commitment to continued growth beyond that of the overall market. Our leadership in innovation and price-for-performance enables 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, Cristiano. As a reminder, during the Q&A session, we ask that you please limit yourself to one question and one follow-up question to allow others to participate. Operator, please open the line for questions.

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

Thank you so much. Good afternoon, everybody. Congrats. Ken, 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?

I think we saw really good traction on our execution in Q4. It was very broad-based. As you heard from me, we were great in enterprise, executed well on the OT side, had successes with SASE, and AI was a big driver. 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 cybersecurity market is growing really nicely. As Ken highlighted, we have a lot of competitive advantages where we feel we can grow faster than the market and faster than each of the three pillars we focus on, as we did throughout 2025. We see a lot of different growth drivers among the three pillars, the OT momentum, opportunities with AI and quantum. When you look at our business, it's really diversified geographically, by customer segments, and industry verticals. And our solution sets are diversified among the three pillars. When we focus, we have a track record of doing really well. Look at what we did in SD-WAN; we focused and did really well starting around 2018 and grew that business. Now we are focused on unified SASE and these other areas and expect to do well, just like we've done in the past.

Got it. Thanks for the call. Maybe just a brief follow-up. Ken or the team, what are your views on AI eating software, specifically as it relates to cybersecurity? We've seen software demise, cyber has been holding a little better, but the past few days it hasn't been fun. I'm curious about your views on whether security actually augments AI or maybe it's the other way around.

Thank you so much.

Our next question comes from Saket Kalia at Barclays. Saket, your line is open. You may unmute yourself and ask your question.

Okay, great. Hey guys, thanks for taking my questions. Ken, maybe first for you, can you talk a little bit about how you're navigating the current environment in memory? And maybe as part of that, Cristiano, can you talk about how you're thinking about the impact of higher memory prices as part of your guide in 2026?

As Ken mentioned, we plan to maintain our profitability and gross margins on our products in two ways: by negotiating and ensuring we get components early, but also by adjusting pricing to maintain margins given the strong competitive advantages we have.

We've already raised some prices where we have component cost pressures and will potentially continue to do so throughout the year depending on component prices.

Got it. Maybe for my follow-up for you – it was a great billings result in the quarter and good to see the guide. Can you just remind us what billings duration was this quarter? And to Ken's point, as we think about that driving services revenue for next year, is there a way you can help us think about the shape of services revenue through the year?

From a billing duration perspective, because of all the enterprise deals, it was slightly up at around two and a half years. Not much different than normal in Q4.

Got it. Very helpful. Thanks.

Our next question comes from Rob Owens at Piper Sandler. Rob, your line is open.

Great. Thank you for taking my question. I know you highlighted sovereign versus public SASE as one of the strikes. Can you give us a sense of your actual revenue mix, sovereign versus public? And then to follow up on Saket's question about the shape of services revenue and the recovery – you talked about the second half being stronger, but it doesn't track with historical recovery given product revenue this year. Is something unique in 2026 causing it to lag more than historically?

Sovereign versus public SASE mix.

Our next question comes from Gabriella Borges at Goldman Sachs. Gabriella, your line is open.

Hey, good afternoon. Thank you. Last year we shifted the conversation from refresh tied to end of support towards refresh tied to technology upgrade cycles. Ken and Cristiano, what are you seeing in the pipeline from the 2020 and 2021 refresh cohorts? Are they willing to engage across the platform, and do those cohorts look more meaningful than the cohort refreshed last year?

Thank you for the detail. Can we hear from Cristiano?

Yeah, I would confirm what Ken said. Based on customer conversations, the driver is that they need additional security, so as they look at FortiSASE or similar, they upgrade their underlying technology at the edge as well.

Yeah, that makes sense. Thank you, Ken. My follow-up is on how to think about the second derivative of AI compute demand – more on the inference side. How does that impact network security and network traffic from your standpoint?

Thank you for the detail.

Thank you. Our next question comes from Fatima Bulani at Citi. Fatima, your line is open.

Oh, good afternoon. Thank you so much. My first question is for you, Ken. The strength in Unified SASE at 40% and product growth over 20% paints an interesting picture, perhaps in contrast to fears that SASE could cannibalize product refresh. You alluded to sovereign SASE, but I'm curious how you are independently driving strong growth in both SASE and product refresh without cannibalization, especially for branch environments. Then I have a follow-up for Cristiano.

I really appreciate that detail. Thank you, Ken. Cristiano, I wanted to go back to your comments on pricing actions. In prepared remarks and an earlier question, you mentioned pricing. Can you quantify what degree of gross pricing increases you've rolled out and the net pricing yield? How does that influence your guidance? Is that one reason we see a slower ramp in services revenue trajectory because price actions on product may not translate to services yet?