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

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.