Fortinet, Inc. (FTNT) Earnings Call Transcript & Summary

All right. Good morning, everyone, and welcome to Oppenheimer's Tech conference the second day. My name is Ittai Kidron, and I'm a technology analyst at the firm, and I've got the pleasure of hosting Fortinet today. With us are Keith Jensen, CFO. Say hello, Keith?

Hello, Ittai. How are you?

Very good. Good to see you. We've got John Maddison, CMO and EVP Products. Say hello, John.

Hello.

John, how do you get to be both CMO and EVP products?

I don't know what I did. Something bad.

Very good. Well, I'm sure Keith is going to arrange a double salary for you. And we also have Peter from IR. Hi Peter, say hello.

Hello.

Here we go. So the team is here. Guys, and for the audience, I'll start with a few questions. But needless to say, we'll have to get all of you involved in the discussion. [Operator Instructions]. Do not be shy.

And Keith, I'd like to get started with you, if you don't mind, especially just going back to the recent quarter. You have talked about some challenges with large enterprise customers. Can you give us a little bit more color there on what is the behavior that you've seen and what has really changed from a quarter ago? And we'll go from there.

Yes. I think the big [indiscernible] enterprise customer so it's contacts of business for others. Roughly 1/3 of our business is small, 1/3 is mid and 1/3 is large enterprise. I don't think we're really seeing a change in behavior in the small enterprises to talk about. So we'll just talk about the mid and the large enterprise. One thing we've noted dating back in Q4 and then in Q1 again in Q2 was linearity pushing out to that third month. Obviously, in Q4 and Q1, we were very successful in closing those deals in the last week of the quarter. The real shift this time was in the last 10 to 15 days of the quarter. Instead of closing those deals, a number of those deals actually pushed into subsequent quarters. I think that there's an element there on the macro, obviously having an impact. But also I think on some of the larger enterprises and probably the MSSPs, they went through a process in 2022 and maybe early part of '23 where they were concerned about shortages of supplies, and they took that as an opportunity to get some things on their shelves, if you will. And I'm talking about end users, not distributors in this case. And they're going through a period of digestion now as we look forward to it. Maybe this will be good time to bring in John. John does something in the order of 10 to 12 VBCs with large customers every week. And he can probably give a little more real-time information in terms of what he's hearing back on the large customers and what budgets may look like for the rest of the year.

Yes, definitely, I'm finding the much larger customers -- their strategies consolidation. And that consolidation really means that you've got to put some architecture in place. And so they're kind of delaying maybe a point product solution decision or bringing -- or just saying, I'll just do a year because in a year's time, I want to make a bigger decision around my architecture. And so the larger enterprises, the consolidation, the architecture, the platform approach has shortened how long they want to do the deal for because they think it might change in the next 2 to 3 years.

John, I want to press on that point, I just want to reconcile what Keith just said and what you said. Keith has talked about customers have built a little bit of inventory that they need to kind of work through, but you're talking about some architectural decisions that need to be made and until they're made, right, correct me if I'm wrong, they're just going to slow things down a little bit because they don't want to overcommit to something that might not fit their architectural plan. So am I getting this right? Like [indiscernible]

It's definitely both because we definitely saw people wanted to make sure they could operate their business and certainly didn't have gear a year ago, then that was a big issue for them. So we're definitely seeing that. So I think it's not exactly one thing. It's multiple things that happened at once.

Okay. And when you say...

Ittai, I would actually add to that. I think you also had -- as backlog has been coming down for 3 consecutive quarters. You have inventory going in the companies that they ordered 6 months ago and now they're getting. So we're eating up their budget, and we're also eating up their IT time to deal with installing their product. So -- and to John's point, they may take what they get now and then wait to sort of decide what they're going to do a year from now from an architectural perspective.

I guess, Peter, the follow-up question would be, how long does it take to digest this inventory to come back to more of a normal cadence of purchasing? And on the flip side for you, John, how long would you expect this all architectural debate to kind of take before there's greater consensus on what they need to do and -- so they can move forward a little bit more judiciously?

Yes. I think they -- it's not like they've stopped completely. They're making those architectural decisions. But when I look at the typical end price customer they may have 50 different solutions -- products and solutions and services at least. And so they just can't change everything all at once, but they definitely want to get to a more of a platform approach. And it's interesting to me that even the Gartner folks are starting to realize that these so-called Magic Quadrants point products that started to now produce Magic Quadrants for platforms, which is -- which to me is a true sign because although Gartner -- I don't think that's always got the future, right? They kind of look in the rear-view mirror. They do tune into the enterprise and what's being sought there. So you're starting to see these decisions around a platform approach. The consolidation is a byproduct of that. I can't give you a time frame because I think it's more a question of how do they decide on which products they want to converse and consolidate first. And so I think that's a continuing process, but it just -- I just saw some people just hesitate, I'm not going to make this decision on SD-WAN because I [ don't want to ] make a decision on Single-Vendor SASE at the end of the year, which includes SD-WAN, and SSC, and zero-trust and CASB and all these things.

Got it. Okay. Well, maybe then that's an opportunity to go into the next thing. John, when you see consolidated, there are multiple domains within the security space. When you say consolidate, what is the specific area of consolidation? SSCs is that the -- and SASE, is that -- those are the 2 areas of consolidation that you're focused on?

I think there's multiple areas. And so we look at the business from -- if you look to -- the most obvious one because we're in -- a larger part of our business is network security, the larger one is in networking. And the big player right there next to Converge what people call secure services edge with SD-WAN. And secure services edge has already been a convergence of Secure Web Gateway and CASB and remote ZTNA. And they're going to add in SD-WAN. You may add in digital monitoring. And so what the -- the single -- the Secure Access Service Edge or SASE is the name that everyone kind of says, and not everyone knows what it even stands for, but that's okay. Secure Service Access, yes, that is probably the biggest play inside networking. But look at endpoint. End point -- our endpoint agent, our endpoint agent can do endpoint protection, can do EDR. It can do -- it's a ZTNA agent. It's a SASE agent. It's a runability scanning agent. Those are -- and look a lot of companies, those are 6 different agents they have on the endpoint. So I think the convergence and consolidation is happening across all the infrastructure. So we can think about the cloud, where the cloud vendors want to be the platform, platform vendors out there, CNET vendors out there who want to be the platform. And so I think it just happens all over the place, network, cloud, data center, on-premise, access and consolidation.

Okay. Very good. Maybe you could talk then, John, about the portfolio. Help me think in what areas do you feel you have a very competitive solution set. And when you look into the different components of SASE, Secure Web Gateway, right ZTNA, all the other elements that are going into that platform, how developed are those use cases for you? And what has been -- how has the customer adoption been so far? Clearly, you have very strong presence in firewall, but I'm just trying to gauge how far beyond that have you gotten into the full spectrum here.

Yes. Well, we've invested mostly organically, to be honest. I mean, although we did do a SASE acquisition, most of the technology in our SASE is our existing operating system, we built new consoles, et cetera. But when I look at it, we've got 50-plus products. And the key going forward is not necessarily -- yes, you have to keep the individual products developing and adding features and functions. But the key long term would be how they integrate together. So one of the most -- one of the theories -- a lot of theories, but we say that long term, the enterprise is going to be hybrid for long term. It's going to be some cloud, where some data center. People are going to be out of the office, although looking today, maybe some more people are in the office going forward. And so you've got to deal with that hybrid world. And so we think traffic will be coming -- will stay off the network, we'll be on the network, go from on the network to off the network, from off the network, to on the network. And so one really important integration, for example, will be between our SSC, or could be SASE, and our SD-WAN solution. The ability to simply just move traffic efficiently and securely on and off the network depending on where the user is, depending on where the application is. So it's not so much on building adding features to SD-WAN and adding features to SSC. I'm just making these things work better together. So our key -- because I think we've got everything we need inside our portfolio, let's say, 50-plus products, we're in 8 Gartner Magic Quadrants. So some of them are definitely enterprise class. But the key going forward is making it work together as a platform.

So John, maybe you pick your product was kind of underwhelming and I know internally you are proponently talking about, say, 5 pillars inside the organization and now how we bucket those into solutions. Maybe for the audience, talk a little bit more in that context than products, [ if you will ].

Yes. So we have what we call secure networking. And that's probably the foundation of the company, secure networking, our founder Ken Xie, started the company 23 years ago and he says that secure networking will be bigger one day than just networking. And right now, if you look at the Gartner predictions that's 2030 secure networking will be bigger. What is secure networking? Well, let's say what networking is, it's kind of routing and switching, it's layer 2, layer 3. It just makes a decision to connect you as fast as possible. Whereas secure networking takes into account other things, content, applications, users, identity, and other capabilities, the posture of a device like zero-trust. So you take all these things into account, that's become -- so secure networking is next-gen firewall at ZTNA, Secure SD-WAN, secure wireless LAN at ZTNA and SASE. So we think that is definitely a core market of ours, and I think it's growing. But then we also see cloud security. So security in the cloud, that is. Then we also see security operations, which is the CISO world, coming on top of that. And then we also see what we call OT, Operational Technology or cyber physical, which is a new marketplace, I think that sprung off because of access and connectivity. So those are the marketplaces we kind of talk about -- within those kind of solutions for us, there are maybe 5, 6, 7, 8 products, which then we will make work together. So I know a good example is security operations where we have our SIM, our SOAR, our EDR. And in some recent ESG report we put together the ability to automate and the ability to find things much more quickly is the ability to connect things together and make sure they interact and share threat intelligence and policy and acceptance.

Got it. Keith, firewalls are still clearly a very much dominant part of your business. So help me understand how do you bundle effectively across these 5 domains that John mentioned to create more uptake? What are the strategies you're implementing there?

Yes. I think the firewall, as John alluded to, remains the cornerstone of the company. It's no way a secret. I think that well over 90% to 95% of our first sale to a customer is a firewall. And that firewall could be across a variety of use cases. It could be -- and form factors. It can be virtual or can be physical, it could be for SASE, it could be for SD-WAN. It could be for secure edges, micro segmentation. And they really provide a compelling entry point, particularly into the enterprises. And then that then creates the opportunity to move into these other marketplaces inside of organizations. I don't think you've seen us start in those other marketplaces traditionally as our first sale and then move to the firewall rather, it still remains a firewall sale.

But in the future, as John talks about moving to architectures, is anything in your pricing or bundling exercise can change to drive greater non-firewall adoption moving the portfolio?

Yes, I think when you get outside of the -- great question. When you get outside the firewall, the physical firewall, particularly with this upfront model, as you start to see us move into these other marketplaces, whether it's cloud or it's -- things that we're doing with CISO or SASE products or SaaS products, you see a much greater mix of SaaS-type models for cash flow and for revenue recognition. Many of those other solutions that we talk about are not upfront solutions, but rather they're overtime solutions, whether in terms of how they're consuming it or how they're paying for it.

Got it. Okay. How developed is the cloud, the SaaS business for you guys at this point?

Yes. So we -- some people say cloud security. So for us, that's a lot of different technology investments. And so a lot of our products have SaaS consoles now. We just talked about building out our own global network to provide SASE services. We've got products that work inside the clouds, cloud native, WAF. And so we're actually investing in a lot of different cloud technologies. The way they're realizing -- so the customer sometimes is through a SaaS implementation or sometimes as products that work inside their cloud footprint.

Yes. I think if you look at that one example, this kind of -- on the top of everyone's mind right now is SASE. And John has talked before about SASE starts with, for us, SD-WAN as one of the key components and then adds 3 or 4 other technology into it. And you heard Ken talk about it in the May earnings call about really bringing that [indiscernible] now to the market. A data point that I've shared with others is that if you look at SD-WAN, which is showing to be a very positive product for us. Back in, say, 2019 or 2020, we were talking more about how fast the pipeline was growing for SD-WAN. And then we follow that on quarters later about half, as it closed and now you see numbers from us about billings and bookings and revenues. So that's kind of the maturity curve. It's interesting looking at the SASE pipeline now and keeping in mind, we really haven't been talking about it for more than, say, a quarter is that, that SASE pipeline growth looks very, very similar to what SD-WAN pipeline growth looked like back in those earlier days in 2019, 2020. So I think the focus right now on SASE is to well one, we now have a very significant SD-WAN footprint, which provides the door to open up, if you will, to make SASE [ falls ] and continue to build that pipeline and also continue to build out the delivery model for SASE.

And Ittai, to talk about the size of the cloud business, we talk about our core and our non-core business, core being the firewalls and the product and services that go with them and then the non-core being the products that are there and the services that also get attached over there. The non-core is about 35% of our business as of this last quarter. And cloud is one part of that. That's where all the cloud revenue would be. So it's cloud, it's networking and it's other security capabilities. So those 3 buckets are about 1/3 each. So that puts your cloud at, call it, low double digits of percentage of our business.

Got it. Awesome. That's great. Then let me press on this then. Keith, let's say, you and I talk 2, 3 years down the road, what percent would you expect this to be of your business, meaning non-firewall as a percent of your business? How do you -- how far do you think you can push it in a 2, 3-year time frame?

Yes. Peter, just made a comment that, it's about 35% of the business now. And in a given year, that everything other than the firewall has been taking the mix about 1 point or 1.5 points per year. I think with some of the new architectures that John talked about in the beginning of the conversation, and SASE would be a classic example of that. I think that creates a further opportunity to see a further mix shift, if you will. And I'd like to see that move a little bit faster than what it has. I'm really happy to see 1/3 of the business now. But I'd love to see that mix shift continue to take a little bit of de-risk, if you will, the pure firewall part of the business. If you look back, let's say, 2014, '15, this was a firewall company. There wasn't a platform solution. So to see where it is today is exciting, but I think there's significant opportunity going forward.

And Ittai, if you go back to 2018, the non-firewall part of the business was 25% of the business. So over the last 5.5 years, it's moved to 35% of the business. And it's always been growing faster than the core business because of all the other opportunities. Now one of the confusion sometimes that investors have is they think about SD-WAN and they go, SD-WANs are firewalls. That's not true. The SD-WAN is firewalls because that's where the operating system lives but there's also non-firewall stuff that drives that non-firewall side of our business as well that happens in an SD-WAN sales. So there's a lot of different parts of our business that feed and help feed that non-firewall side of the business.

Got it. Okay. But if it took you 5 years to get 10 points higher on the mix, it sounds like based on Keith's comments that hopefully can be accelerated the pace could be somewhat accelerated. And I would say in 3 years, you're somewhere in the mid-40s, low 40s, yes?

It was only, I think, 18 months ago that we were talking about non-FortiGate of a platform or the [ Fabric ] or whatever term you want to use for it, being a $1 billion business unit growing over 40%. This quarter we're down, the numbers we just put up, it's now on the runway to become $2 billion business with those [ kind of growth numbers ].

Yes. And to your point, of getting a higher percentage on the non-FortiGate. Keep in mind, our core business is growing really well. So if our core business was declining 10% a year, yes, we get to 40% real quick, right? But our core business, which is bigger than our non-core business is still growing at a very healthy rate. Therefore, it should take longer for the non-core. I don't want the non-core to be 50% tomorrow at the expense of my core, right? You've got to be careful about how that mix plays out and what you all wish for in terms of what multiple you want to put on the non-core because you think it's worth more even though it's just a part of our business.

Right. You want it at 50% the right for the right reasons.

Yes. Exactly.

Very good. Well, John, let me ask you this. From a go-to-market standpoint, are -- do you anticipate any changes over the next 12 to 18 months that try to incentivize greater non-firewall type of sales? Clearly, the firewall business for you is dominant, and you're doing extremely well in the category and the market overall. And now that you're not doing any -- not well at the non-firewall business, clearly, it's growing faster than the firewall, but it's coming -- it's growing faster also for a lower revenue base. And it seems like partially going forward, customers will spend much more in those categories in the future. So in order to accelerate as we just said, Peter, I order to get there the right way, right in an accelerate the non-firewall business, is there anything that you're doing on the sales motion? On the -- either from a go-to-market approach or from an incentive standpoint in order to drive better adoption there?

Yes. I think -- go ahead, Keith.

I think, Ittai has been guilty of eavesdropping on some of our internal conversations about compensation plans and so forth. I think that when you come to market with a product, comp plans are fairly straightforward. As you're maturing you start to talk about 50 more products, there's a temptation to let salespeople get to their number and kind of say, you pick the number, you have to get there. I think now -- and it's not dissimilar to what you've seen with large enterprise software companies, the Oracle, the SAP, the CRMs of the world is saying, you really have any subject matter experts that have their comp plans tied very specifically to certain products, if you will, as opposed to just everything. And I think there's -- that is happening as part of our real-time conversations now. John, I interrupted you..

No, no, I was going to say the same thing. I think one of the biggest challenges is when you're competing last all -- one of our salespeople to compete one day against CrowdStrike and end point, against Cisco and SD-WAN, against Palo Alto and the data center, against somebody in the cloud -- I mean, it's just a lot of different technologies. And so we definitely -- as we get a bit bigger here, we have to make sure we've got the specialization in these areas to help our sales teams through that.

Does that mean, John, like overlay technical support [indiscernible]

I don't like the word overlay. Don't use that word.

We believe to be accountable. No more overlays.

Yes. I think it's that balance of -- you don't want to go too far. You don't want to get too much duplication. A lot of companies -- I went through this in the previous company where they almost create separate divisions and companies and you duplicate everything else that's definitely not where we want to go. But we want to be able to help our sales teams to compete against point solutions to obviously get the value of the platform across, but you still need to have a certain amount of features in that point product to win that case.

Got it. John, can you talk about the competitive environment? You're not the only one clearly going after the platform approach. As you said, sometimes different players have different starting points in their process. But help me understand, who do you see how out there most frequently? And how much are they well developed from a portfolio standpoint in competing with you?

Yes. I mean, people often ask who are our competitors. And I mentioned early on, we have -- we're in 8 Gartner Magic Quadrants. If you have 8 different vendors in those Magic Quadrants, that's 64 vendors straight away. But now obviously, there's multiple vendors appear twice or 3 or 4 times. I think the most -- people we compete against the most are Cisco and Palo Alto Networks. And they've got the same intention of building this platform from slightly different angles. Cisco is coming from a networking perspective and trying to bolt on security. I think Palo Alto is more of a pure software -- cybersecurity company and trying to see if they can add a bit some networking because they need that. And so they're very different, we're kind of in the middle of where we have this obviously, cybersecurity heritage, but a very strong networking portfolio as well. And so I think if you look to the portfolios -- I know Cisco has been adding some bits and pieces over the last few months. But probably, I think we have the most extensive portfolio across both cybersecurity, networking and especially OT. If you saw the recent Westlands' research where we were the only leader in the platform category across OT. So I think those 3 are the ones we come up the most if we're talking a big enterprise deal. And then when you go down and go into a point solution, there's all the endpoint vendors or SD-WAN vendors, firewall vendors and it goes on. But I think what we're definitely seeing is that customers want a consolidated platform approach long term. And that's -- those 2, I mentioned before, Cisco and Palo Alto, the ones we're probably closest to us in terms of getting to that platform approach.

Got it. Got it. Got it. Keith, on the U.S. enterprise, I mean as I think about the evolution of the company over the years, the U.S. has been an area that's been somewhat underrepresented, but you've made great progress and work more to get deeper, deeper into the market. Can you talk about the opportunity there? And in what inning are you do you think getting your "fair share" of the market? And what are the specific dynamics of that market that you can try and leverage in order to improve your position there?

Yes. I think it's still very early innings, as they like to say. I think the good news is we've left spring training, and we broke camp, but there's still a lot of opportunity there for us. When I compare some of the geographic performances, when I look at Europe and Latin America, Asia Pacific, and I see our market position being #1. And worldwide, you see now Ken talking about, John talking about having the #1 ranking in firewall on revenue and on units, by compare -- and great relations with the channels there. In the U.S., I think there were some incumbents there that are still formidable competition with Cisco. Palo Alto came out with a clear focus in that space in the very beginning. So I think there's still a ton of opportunity for us there. You're really looking for a number of things: one, you want to get your message out about your third-party validations to keep decision-makers, whether that's Gartner Magic Quadrants, whether that's for firewalls or other technologies. But it's also about access. And I think you've seen us do a lot of things to get access to the right people that are at the right level. We would talk about the Fortinet Golf Championship, which was kind of a big move for us about 3 years ago. That really, I think, made us a topic of conversation at that level that we want to be talked about. I think you see us now some time with our price advantage, getting opportunities to meet with new customers because those new customers for us are uncomfortable with the price points that they're seeing and renewals and so forth. And sometimes, I worry that we were just brought in there to be a competitor, if you will, for pricing. But I think the team has shown the opportunity that even when that is the case, to use that to leverage out someplace else. You may be brought in for a data center refresh or something that they've been able to establish a context to have a conversation then about SD-WAN solutions, about SASE architecture, about micro segmentation. So anyway, still a lot there. I think there's a ton of opportunity for us in the enterprise.

Got it. It's also -- I guess I'm trying to tie this to what we started the discussion where enterprises are working through some inventory and to John's point, are going through architectural decisions. As much as it weighs near term on business, does it also, on the other hand, create an opportunity? Like again, if we are going through the discussion here and now, wouldn't this be a great opportunity to be right there at the table with the right; portfolio, where the Magic Quadrants can -- is in the right place to validate your position in the market and help on that front?

Yes, absolutely. I mean I sent a note -- John a note last night, he was having some previews on some third-party recommendations that are coming out and just to congratulate him. And that is a very important tool. Some people kind of distill enterprise selling down to something simple as you need to have third-party recommendations or price advantage and access. Clearly, we're checking the box and having the third parties, and we've checked the box on price advantages. Now it's really about getting, to your point Ittai, about getting that message out at the right level. It's a long road, if you start trying to enter an enterprise through your inside sales function or e-mail campaigns or something like that, it's really about getting direct access to those decision makers.

Got it. So John, I'll ask you now that Keith has identified this great opportunity. Do you feel you're appropriately staffed on the go-to-market side to address this? Or do you feel like you need some more people and -- to get this going?

Yes, the opportunity. I mean, if you take what we call secure networking, which is not all networking, if we take cyber security and OT, it's $122 billion year [ town ] alone. So it's a fantastic opportunity. I think you can always improve the go-to-market in terms of getting your message out, getting -- making sure your brand is associated with enterprise platforms. And you can always improve the sales teams that you have to try and get more [ at bats ] or be at the table more often. I think that Keith mentioned that being at the table is probably the biggest problem for us especially in the U.S., so we need to improve that for sure. So there's always improvements to make. But I think we've got all the ingredients. I think when you'll start to see the new Single-Vendor SASE Magic Quadrant, there's a new foresterway for zero-trust edge. These are now platformed assets coming from the analysts. When we start to see those come out, you'd be very obvious who's in the conversation about a platform and who's not in the conversation about the platform.

I wouldn't take anything away from what John just said, but to kind of give context to the opportunity again and trying to get to some of the earlier conversations, we've been extremely successful with SD-WAN and the place -- the use case that ready identifies as retail, lots of stores and deployments. And if you kind of pull together some of the numbers that we gave in the call and moving back to your original question, retail, which was a large part of our business and still is, it had growth last year of almost 100% as a vertical, about 97%. And that is largely SD-WAN solutions. If you fast forward to today, that growth in the second quarter was basically flat, right? By itself, that's about 4 points of growth. The good news -- so that's part of the digestion that Peter talked about earlier, these large retailers that may have an 18-month or 24-month point of schedule that did not want to get caught shorthanded and took down some of the inventory in 2022. They'll work through that, but we have gained access to those companies. And so while they're going through that deployment phase. We know their people, we know the CIOs. We know the CISOs now, and we can have those conversations that John referred to earlier about architectural design and what comes next, right? What are you talking about with SASE? And how does that work with the SD-WAN solution that you just acquired from us?

Yes. I'll give you an example. I was talking to a large European financial organization. And CISO literally gave me a spreadsheet of 40 vendors that they had in different places. And they had a list of -- these are not -- these point solutions are not strategic. They can be replaced. I have strategic at this end, where I really like them, I'm going to keep them and then there was a question mark about a bunch in the middle. So exercise of going through was, how many of these vendors can you replace? And then when we looked at it, we could replace at least 20 beside that. Now they're not going to replace 20 [indiscernible] ones and then they've still got to go through a process and RP, but it was pretty startling to them that we could replace 1 or 2 -- 20 of those point solutions with a platform inside their environment.

Interesting. Keith, I want to talk about your '25 targets, $8 billion revenue, $10 billion billings, 25% operating margin. I just kind of want to make sure, after this last quarter, are you still subscribed to this target and? And what kind of -- what do we need to see over the next few quarters to make sure that you're able to hit it if you're still subscribed to it?

Yes. I think that what we'd really like to say about the targets for 2025 at the moment is, coming off of Q2, we need to restore credibility in those numbers. And the only way to restore that credibility is putting up numbers in Q3 and Q4 and show the growth, return it to where we need it to be. And that will go through now our normal planning process for 2024 here over the next 4 or 5 months as we exit the year. And I think you'll really see us say something much more formally about targets when we have the February earnings call for the fourth quarter when we have both those Q3 and Q4 results, and we have the '24 plan in place.

Got it. Okay. Great. John, on the market side of the equation, there's been a lot of discussion on how the use cases for firewalls have evolved and expanded, right, in recent years. Help us think about 2 or 3 use cases that become very prominent perhaps over the last couple of years. And -- because historically, firewalls have been considered a mature fully penetrated in the [indiscernible] type of a market. It sounds like though the use cases are evolving and because of that, there's still a lot of wind left in the sales of that opportunity. So if you could shed some more light, that will be great.

Yes. I think people just think of firewall as a firewall. Now even 5, 6 years ago, there was 2 distinct use cases: one was the perimeter of the data center and then the internal segmentation firewalls, very different types of firewalls. One is really high-performance, lots of ports. One is about inspection of the Internet traffic. And I think what was definitely very obvious is, if you move on more applications to the cloud, that kind of perimeter firewall was going to get less and less traffic. That's very obvious. The segmentation firewalls didn't really change much because you still have networks and buildings to connect everything else. I think the use case that a lot of people miss was the distributed firewall. The smaller firewalls, and we call them entry-level firewalls that sit at branches or retail or even campuses now. Our campus here as firewall sitting in the front of it. And so that use case grew really fast, even though perimeter was probably slowing down or even [indiscernible], that distributed firewall use case grew very fast over the last 5 years for us. And we actually then use that to kind of branch out into SD-WAN. It's the same kind of device. So we put SD-WAN and distributed firewall together. It's very, very cost-effective. We have a Forrester TEI, or total economic impact, which shows a 300% return. I mean, [indiscernible]. But I think that marketplace is still 95 -- Those are all hardware devices. It's still according to Gartner, about 95% of the firewall marketplace. The other 5% is the virtual firewalls, which is basically the same device, but inside cloud. Then firewall-as-a-service, which is what we put inside a SASE implementation. There's container-based firewalls. There is rugged firewalls to put inside OT environments. There is cloud-native firewalls you put inside there. So this other 5% is growing much, much faster 50% to 100%. Will it get to 10% of the marketplace in the next 2 years? Maybe, maybe not. But the use case -- I was talking to the customer, when we went through the -- I think there was 13 different use cases, they realized they had 8 different firewall vendors. And they just -- it kind of blew them away. They said we can't have 8 different firewall vendors. That's 8 different consoles, 8 different policy engines trying to make sure everything's secure. And so I think the firewall marketplace is becoming much more dynamic than it was 5 years ago in all these different use cases. And you need to be able to have a single console across all of that, single policy engine. And the same security stack, no matter what the implementation where it is, whether it's at the network edge, whether it's in the cloud or it's in the data center.

Got it. Awesome. This is great. I want to keep you guys on track. I really appreciate your time. This is fantastic. Good luck and good seeing you guys, and thanks for joining us today in the conference.

Thank you.

Thank you.

Thanks, guys.