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

Hello, and welcome to the Fortinet's 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. Please go ahead.

Thank you. 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 ask that you please limit yourself to one question and one follow-up question to all. 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% 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 raised our 2026 guidance. With AI quickly reshaping the security landscape, I would like to offer another angle on the network security space and its trend. By combining our secure networking and Unified SASE pillar, which both run on the same FortiOS to create what we are calling the SASE Firewall. Similar to UTM NextGen firewall replaced the traditional net-based firewall 20 years ago, I believe this new SASE Firewall, which addresses 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 slides of 4 to 6 of the investor presentation. In the second quarter, Fortinet SASE Firewall business grew 34% 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 operating system, FortiOS. Furthermore, we have developed our FortiASIC technology and invested in our own global infrastructure to accelerate the performance and lower the cost, making adoption and migration seamless for a large global customer base as shown on Slides 10 and 11. Another key advantage of our SASE Firewall is that we are the only vendor offering an easily deployable on-premise sovereign SASE solution together with cloud SASE. As we announced yesterday, the new FortiGate 1200G, the next-generation SASE Firewall that combines local enforcement with cloud-delivered 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 competitors are offering, and we continue to win SASE deal versus all of the top SASE competitors. We also see strong demand across our other strategic pillar, AI-driven security op, which had billing growth of 25%, supported by over 20 AI-enabled solutions on our platform. As customers consolidate vendor and simplify operations, we recently launched FortiSOC, a new cloud-delivered AI SOC platform and expanded our FortiEndpoint 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 FortiASIC technology allow 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, our integrated and accelerated SASE Firewall platform solution and our strong operation model position 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 delivering 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. Secure networking billings grew 34%. We saw persistent high FortiGate demand as customers expanded their network security, including operational technology environments, 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 FortiSASE within our installed base increased to 90% of large enterprises. Our success is highlighted by FortiSASE 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 a cloud pop and back, it inspects and enforces security locally while seamlessly leveraging SASE for outbound 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 revenue 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 the 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 themes 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 sovereignty theme is especially concentrated in EMEA and across public sector customers globally, playing directly into our strong market position in the region and that 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 surfaces 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 3 core areas: securing AI data centers, protecting AI-driven applications and delivering AI native security operations. For example, a new 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 customer's rapid expansion. They chose Fortinet for our strong price for performance advantage and our ability to deliver scalable, high-throughput security. This enabled 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 their infrastructure can deliver the performance and protection required for the next generation of threats, which also require 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 environments 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 7-figure FortiSASE deal to secure over 45,000 users, replacing its incumbent SSE-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 FortiSASE 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 operation 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, customers 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 a 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 FortiOS 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 themes 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 attack surfaces, 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, 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, which assumes a share count of between 741 million and 745 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 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.

Guys, can you hear me okay?

Yes, all good. Thank you.

Congrats on another strong quarter. 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 do you think it would be?

Yes, Saket, it's a very good question. We also spend a lot of time trying 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 a long term for Fortinet. Definitely, you see the AI changed a lot of our security landscape. And also with our kind of like investment like from the ASIC chip, from our own infrastructure, from the R&D innovation, we also positioned much better than any of our other competitors, that's also the reason I kind of tried to call a new term, which I'm not sure will be -- everybody would like that is a SASE Firewall. You can see on the investor Slide #6, I believe. It's kind of -- this new platform, starting to replace the traditional NextGen firewall and also replaced 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 some 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 being sent to the cloud. So that's drove the change in the whole landscape. And we do believe it's the growth quite long-term, just like 20 years ago, the UTM NextGen firewall replaced the traditional net-based firewall.

Christiane, maybe my follow-up for you. Maybe the follow-up for you is, how are you thinking about the impact of price increases on your product growth for Q3 and Q4, right? 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 -- I mean, yes, there were price increases, but they were not for every product and every service. So it really depends on what's going, and this is why also if you look at 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 building the trust with our partner, with our customer. So we just want to maintain the same gross margin. That's where we kind of real time adjust the price based on some component costs like memory, that's where -- so if the price is going down, we also real time dropping the price. So there's -- so that's also we don't see any like excess inventory or pull forward because we told the partner -- customer, there's no need to really take extra inventory. And also, we have a policy where we tend to start charging 90 days after shipment for some kind of service supporting. So that's where there's no incentive to keep an extra inventory.

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

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

AI, definitely, we see generate a lot of additional traffic. There's some study whether a few weeks ago or 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 and a lot of other AI applications 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 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, it's also kind of accelerate the convergence of network-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 a -- I feel it's starting change in the landscape of network security. That I call it as a SASE Firewall. It's more like early days, when Fortinet started 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 NextGen firewall. That's all fine. But I do believe the SASE, the AI drove 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 3 growth pillars. Do you think customers are viewing Fortinet as a platform provider in a similar way they're looking at, say, the 2 leading platform providers right now like Palo or CrowdStrike. Is that a fair assessment?

From the customers I talk 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 the 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 Alto or CrowdStrike. One is 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 very focused on the network security with internal R&D and integrate, develop all this function for FortiOS and also a lot of long-term investment like FortiASIC, like our own infrastructure globally. And all this we feel is really the focus, the long-term investment starting to see the benefit compared to other competitors.

And we also do see a lot of customers buy across all three pillars.

Yes.

We're kind of converging the first two. So you consider two pillars. We see a bunch of deals where customers are buying from the 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, it's 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.

I just want to make sure. Can you hear me okay?

Yes.

Yes.

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

Yes, we see the FortiSASE more than double year-over-year. And the SD-WAN also, we see pretty strong growth because all the other top 5 competitors, all come 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 2, 3 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-premise SASE. Like the example we gave, there's a global pharmaceutical company, we're the only one can meet their requirement, have data processed locally. They have a lot of confidential data, all 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 compare all -- I mean, plus all the cloud-based, the global Fortinet infrastructure, gave them the best solution, gave them only solution actually they see on the market. So that's actually drive a lot of growth. SD-WAN, we do 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 ARR growth in attached and unattached service -- solutions.

Your next question will come from Keith Bachman with BMO.

Can you hear me okay?

Yes.

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 growth coming from SecOps, which is typically more unattached solutions. And yes, we see good growth across both.

Yes. Also with the 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.