Title

Presentation

Fortinet, Inc. beats earnings expectations. Reported EPS is $0.82, expectations were $0.619.

Operator: Hello, and welcome to Fortinet, Inc.’s first quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, we will conduct a question-and-answer session. Please be advised that this call is being recorded. I would now like to hand the call over to Anthony Luscri, vice president of investor relations. Please go ahead.

Anthony Luscri: Thank you. Good afternoon, and thank you for joining us on today’s conference call to discuss Fortinet, Inc.’s first quarter 2026 financial results. Joining me on today’s call are Ken Xie, Fortinet, Inc.’s founder, chairman, CEO, Christiane Ohlgart, our CFO, and John Whittle, our COO. Ken will begin our call today by providing high-level perspective on our business. Christiane will then review financial results for 2026 before providing guidance. During the Q&A session, we will ask that you please limit yourself to one question and one follow-up question to allow others to participate. Before we begin, I would 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 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 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.

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

has led for 26 years is accelerating in the AI era. Customers are adopting Fortinet, Inc.’s platform with secure networking, unified SASE, and security operations built on a single FortiOS operating system, enabling expansion across many use cases. By delivering all core SASE capability natively integrated in one operating system, our SASE firewall significantly reduces cost for customers. Innovations such as FortiOS 8.0 with its rich integrated functionality and FortiASIC technology deliver higher secure computing performance at significantly lower cost. And our direct supply chain management continues to differentiate Fortinet, Inc. and support market share gain. As AI drives strong demand for SASE and firewalls, secure networking billings grew 32%, outperforming the broader market.

Today, we announced the 3500G and 400G series, delivering significant performance improvement over previous generations, further strengthening Fortinet, Inc.’s leadership. OT security accelerated in the quarter with OT billings growth over 70% as customers prioritized protecting critical infrastructure amid heightened threat. Unified SASE billings grew 31%. Our differentiation is powered by three key advantages: single operating system across next-gen firewall, SD-WAN, and SASE; our own global cloud infrastructure delivering better security and performance at roughly one-third the total cost of ownership of peers; and a much larger total addressable market, especially in sovereign and private SASE, which allow customers to deploy SASE in their own environment to meet data sovereignty and regulatory requirements.

Beyond secure networking and SASE, AI is rapidly expanding opportunity in security operations, as AI-driven security operations billings grew 23%, supported by more than 20 AI-enabled solutions on our platform as customers consolidate vendors and simplify operations. Finally, given our strong results and confidence in the business, we are reiterating our 2026 guidance. We continue to expect balanced growth, strong cash generation, recurring revenue, and a shareholder-focused long-term capital allocation strategy, while consistently delivering GAAP profitability since IPO. As AI increases the demand for security, our platform approach continues to differentiate, supported by a strong direct operations model that enables us to turn supply chain challenges into opportunity to gain market share.

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

Christiane Ohlgart: Thank you, Ken, and good afternoon, everyone. As Ken noted, we delivered a strong first quarter, exceeding the high end of our guidance across billings, total revenue, operating margin, and earnings per share. The success reflects broad-based demand and strong execution across customer types, industry verticals, our geos, and all three pillars. Total billings grew 31% to $2.09 billion driven by broad strength across secure networking and unified SASE. Our large enterprise segment was particularly strong. Secure networking billings grew 32%, driven by robust FortiGate demand as customers expanded protection across operational technology environments, contributing to OT billings growth of over 70%. Unified SASE adoption continued to build during the quarter with billings growing 31% driven by strength in SD-WAN and FortiSASE.

FortiSASE expansion within our customer base also remained strong, with 18% of our large enterprise customers now having purchased FortiSASE, an increase of over 45%. AI-driven security operations billings grew 23%, highlighting our continued platform expansion within our installed base. Turning to revenue, total revenue grew 20% to $1.85 billion with product revenue increasing 41% to $645 million as customers shifted toward higher-performance products. This included a number of AI-related deployments where customers invested in FortiGates to support increased throughput, segmentation, and security requirements across AI infrastructure. Technology upgrades, upselling, and expansion into new use cases drove strong growth in both hardware and software.

We again benefited from our strong supply chain execution. Recent pricing changes had a low single-digit impact on product revenue growth. Service revenue grew 11% to $1.21 billion, while service billings growth reaccelerated to 27%, and deferred revenue increased 15%, driven in part by SecOps ARR growth. We view service billings growth, deferred revenue, and SecOps ARR growth together with accelerating product revenue as leading indicators of future services revenue. Stepping back, these results reflect both strong execution in the quarter and durable demand drivers that continue to shape customer priorities as customers invest in and upgrade their network security solutions to defend against sophisticated attacks that are growing in both speed and complexity due to the availability of AI tools.

AI is expanding the attack surface and increasing performance requirements, which is driving higher and more durable security spend across networking, SASE, and security operations. Our strong product revenue and service billings trends and outlook continue to be driven by key tailwinds, including the ongoing convergence of security and networking, rising customer investments and demand to secure AI infrastructure as traffic, segmentation, and performance requirements increase, and accelerating IT and OT convergence as customers recognize growing exposure across critical infrastructure. These drivers translated into strong demand this quarter, particularly in large enterprises, where both the number of deals greater than $1 million and total deal value grew over 60%.

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

Demand for our sovereign SASE continues to be strong, and no major SASE competitor currently offers a comparable solution. Rising cyber risk, heightened regulatory scrutiny, and growing data sovereignty requirements while dealing with economic pressures are further accelerating customers to adopt platform-based approaches. At the same time, rapid AI adoption and increased geopolitical uncertainty are expanding the cybersecurity TAM as organizations prioritize resilience, sovereignty, and consistent protection across increasingly complex and distributed global infrastructures. Importantly, these trends align with the reasons of our platform approach. Our platform approach continues to resonate. Fortinet, Inc.’s platform approach is differentiated because secure networking, unified SASE, and AI-driven security operations are all built on the single operating system FortiOS.

Unified architecture enables customers to deploy security consistently across private, public, and hybrid multi-cloud environments, as well as across hardware, software, and SaaS form factors, while supporting seamless expansion across use cases. As AI rapidly expands the attack surface, customers are prioritizing integrated platforms that share telemetry and reduce operational complexity, accelerating vendor consolidation. Against this backdrop, our strong network security foundation remains a core differentiator, driving adoption of SD-WAN, SASE, and security operations and supporting continued wallet share expansion as customers simplify architectures and consolidate vendors. This contributed to growth of 28% in unified SASE and SecOps combined, with momentum continuing across our more services-rich pillars.

We are also introducing a new SD-WAN and SASE services bundle designed to broaden adoption and further support services revenue over time. We also benefit from durable competitive advantages, particularly as performance requirements increase. Our proprietary ASIC technology and integrated operating system deliver superior performance and lower total cost of ownership, which is increasingly important in high-throughput environments as customers scale AI-driven traffic inspection. Finally, customer demand remained broad-based across segments, demonstrating the durability of our platform strategy, with over 6.6 thousand new organizations selecting our FortiOS platform during the quarter, reinforcing the breadth of demand across SMB, mid-market, and enterprise customers.

Overall, these results reflect consistent demand drivers and durable long-term trends. As the market continues to evolve toward platform-based security architectures, we believe Fortinet, Inc. remains well positioned to take share and deliver sustained growth and long-term shareholder value. Now I would like to highlight some key seven-figure deals that demonstrate our market leadership and customer expansion. First, a cloud infrastructure provider focused on GPU compute for AI workloads selected Fortinet, Inc. to secure a new AI data center as part of its continued expansion. The customer chose our FortiGates to deliver high-performance perimeter protection, segmentation, and secure connectivity for a new production environment. The win was driven by Fortinet, Inc.’s ability to provide scalable, high-throughput security aligned with the customer’s standardized architecture, enabling rapid deployment of new capacity as demand for accelerated compute continues to grow.

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

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

Lastly, a global manufacturer selected our 40 thousand users as part of a strategic initiative to modernize its remote access environment. The win was driven by our lower total cost of ownership and commitment to ongoing feature development, positioning us ahead of the competition. The customer chose FortiSASE for its unified FortiOS platform, which provides a single security policy across FortiSASE and FortiGates, with globally distributed PoPs for simpler, consistent protection across on-premises and cloud environments, enabling them to build a scalable security architecture. Turning to margins and cash flow, non-GAAP gross margin of 81% was better than expected, which is impressive given the strong product revenue growth of 41% and the related mix shift toward product.

Our GAAP gross margin was also strong at 80.3%. Non-GAAP operating margin of 35.8% was a first-quarter record, up 160 basis points and exceeded the high end of the guidance range, mainly due to better-than-expected revenue growth and continued cost management. Our GAAP operating margin of 31.4% continues to be one of the highest in the industry. Non-GAAP earnings per share increased 41% to $0.82, while GAAP earnings per share grew 29% to $0.72, significantly outpacing our top-line growth, reflecting high-quality earnings, supported by disciplined stock-based compensation and continued return of capital over the past year. Free cash flow was a record of $1.01 billion and adjusted free cash flow was $1.07 billion, up 27% and represented a margin of 58%.

We repurchased 10.6 million shares of common stock for $827 million during the first quarter, and an additional 1.9 million shares for $146 million quarter to date. The remaining share repurchase authorization as of today is approximately $766 million. Now moving on to guidance. As a reminder, our second quarter and full-year outlook, which are summarized on Slides 30 and 31, are subject to the disclaimers regarding forward-looking information that Anthony mentioned at the beginning of the call. Consistent with our disciplined and prudent approach to guidance, our strong first-quarter execution supports a higher second quarter and full-year outlook. We are raising our full-year guidance across all top-line metrics including billings, revenue, and service revenue, while managing the second half of the year on a quarter-by-quarter basis.

For the second quarter, we expect billings in the range of $2.09 billion to $2.19 billion, which at the midpoint represents growth of 20%; revenue in the range of $1.83 billion to $1.93 billion, which at the midpoint represents growth of 15%; non-GAAP gross margin of 79.5% to 80.5%; non-GAAP operating margin of 33% to 35%; non-GAAP earnings per share of $0.72 to $0.76, which assumes a share count between 736 million and 740 million; infrastructure investments of $50 million to $100 million; a non-GAAP tax rate of 18%; and cash taxes of $160 million to $180 million. For the full year, we expect billings in the range of $8.8 billion to $9.1 billion, which at the midpoint represents growth of 18%; revenue in the range of $7.71 billion to $7.87 billion, which at the midpoint represents growth of 15%; service revenue in the range of $5.09 billion to $5.15 billion, which at the midpoint represents growth of 12%.

We continue to expect services revenue growth to pick up in the second half of the year, driven by accelerating product revenue growth, a key leading indicator. We expect non-GAAP gross margin of 79% to 81%, non-GAAP operating margin of 33% to 36%, non-GAAP earnings per share of $3.10 to $3.16, which assumes a share count of 743 million to 749 million, infrastructure investments of $350 million to $550 million, a non-GAAP tax rate of 18%, and cash taxes of $400 million to $450 million. I will now hand the call back over to Anthony to begin the Q&A session.

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

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Operator: Thank you. If you would like to ask a question, please click on the raise hand button at the bottom of your screen. When it is your turn, you will hear your name called and receive a message on your screen that you may unmute yourself. We will allow one moment for the queue to form. Our first question comes from Shaul Eyal at TD Cowen. Your line is open. Please unmute and ask your question. We will now open the call for questions.

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

Ken Xie: Shaul, great question. Thank you. First, definitely AI is a tailwind to drive the growth. And for us, we also have invested in AI for, like, 15 years, with over 500 patents and a lot of internal usage and also building of the product. So that is where we prepared for this growth, also from the operations side, with our direct manufacturing operations, inventory, all these things. So we see AI as an opportunity. Also, AI accelerates the convergence of our network and our security. Like I mentioned months ago in the forum, this accelerates, which is why a lot of companies need to upgrade their internal network, their servers, data centers, all these things. So we see this growth probably will be more long term. At the same time, we differentiate ourselves a lot with other competitors.

I actually put a slide on the investor presentation, Slide 10, going back almost 30 years with all these different point solutions compared to integrated solutions. Fortinet, Inc. is probably the only company where, for every major new demand for network security, we in-house develop a solution, including SASE. At the same time, we also integrate well with all the previous functions, and we keep improving on all this with our ASIC acceleration and our own infrastructure to deliver better security at lower cost. I think all this drives the company to keep gaining market share in the last 20-plus years. This time, we definitely want to leverage this opportunity, whether AI or supply chain, and we feel we are gaining market share very quickly right now.

Saket Kalia: Okay. Great. Hey, guys. Thanks for taking my questions here, and great start to the year. Ken, maybe for you, the security environment feels different after Methos. Maybe the question is, because I know you spend a lot of time with customers, what are customers saying to you about how they are reacting, and what parts of Fortinet, Inc.’s portfolio do you think could benefit most?

Ken Xie: I keep telling customers, you need to use AI to secure AI. It is interesting and definitely exposes a lot of vulnerabilities, and you have to react very quickly and leverage AI to react in operations. So for the long term, security operations, where we have over 20 products using AI and building AI, is really helping customers. On the other side, to meet AI demand, there is also a lot of infrastructure buildout. That is why we see, especially as we are the only leader in the OT area, OT grew 70%. It is very strong growth, because OT really secures the bottom few layers of the AI five-layer cake, whether the energy level, infrastructure level, all leveraging OT security. We are probably the only leader in that space, giving us strong growth.

We also see customers start to realize the value of integrating more functions into a single OS, our ASIC advantage, and also the supply chain operation model we have. It is all long-term investment, but it is starting to pay off now.

Saket Kalia: Makes sense. Christiane, maybe for you for my follow-up. I would love to get a little bit of a historical perspective. Back in the early 2020s, post COVID, we had the benefit of some early ordering which then created a bit of an air pocket in later quarters. How do you think about how much early ordering maybe helped this quarter, and what gives you the confidence that this also does not create an air pocket at some point in the future?

Christiane Ohlgart: I think the situation in 2026 is a little bit different from COVID. The threat landscape is accelerating significantly. During COVID, there were some new requirements where companies needed to secure remote access and digitize their business a little bit more. Now it is about significantly more threats. So the demand for our products is going to continue as AI data centers are going to be built out and as customers are deploying AI internally. We see significant tailwinds for our business and for our products specifically.

Ken Xie: Also, on Slide 25 of the presentation, you can see during COVID we were the one gaining a lot of market share compared to peers. We feel this is an opportunity because our operations model and long-term investments have more advantage than competitors. We do not believe anyone can predict how long this supply chain situation will last, but we feel we have a strong direct operations model, which is better than pretty much all other competitors. A lot of long-term investments show advantages now. Slide 25 shows during COVID five or six years ago we were gaining a lot of market share. Even with some digestion in 2024 or early 2025, we still kept gaining share. We feel this is another opportunity that works better for us than for competitors.

Rob Owens: You guys, thanks for taking my question. Ken, I appreciate the throughput and segmentation arguments relative to AI, but I want to dovetail a little bit more on Saket’s question around the 20 or so products that use AI within your portfolio. Are there a couple things that customers are honing in on that are driving that sense of urgency for them right now?

Ken Xie: Christiane gave a few cases about supporting some AI data center buildout. Initially, it is like the five-layer cake. You need to have the lower layers built up first, from energy and infrastructure, and then secure the data center. After they build out some AI infrastructure, the security needs to come in, especially when the application starts to deploy. When companies leverage AI, there is a lot of opportunity for security companies to help them use AI to secure AI. We are ahead of competitors with long-term investment, patents, and investments in R&D, G&A, support, and product. I have an engineering background and love new technology. In the last 30 years, as on Slide 10, we are the only one to internally build new technology, meet challenges, integrate together, while most competitors have to go through acquisition to meet new demand. That gives us confidence to continue growing faster and gaining market share.

Christiane Ohlgart: What we hear from customers that are not building out their own AI infrastructure and are more on the AI use side, they are most concerned about traffic flows and shadow AI. A lot of our products can help them, and with FortiOS improvements and upgrades, there is a lot of interest in what our existing products can do and which additional products, like FortiAIGate, they can deploy to have more visibility, transparency, and monitoring of traffic flows.

Brad Zelnick: Excellent. Thank you so much for taking the question. I wanted to follow up on what Rob had asked and Ken’s comments about the AI data center, and Christiane, what you shared about the win in the Middle East in securing AI infrastructure. What are you seeing specifically in this market for securing AI data centers? Who are you competing with? Who are you partnering with? How long are the cycles? And how much of the pipeline for these opportunities is contributing to the strong guidance that you have given us for the year?

Ken Xie: If you look at Fortinet, Inc.’s technology, we are the only cybersecurity company that builds our own ASIC chip from day one. That gives us much better performance and lower cost, both on computing power cost and energy cost, fitting data center internal segmentation well. None of our competitors can compete with us on performance and cost, including the two products we announced today. On average, on the top functions we use, we have about 3x to 5x better performance for the same cost and much lower energy. That fits well for bigger infrastructure data center buildout and internal segmentation. AI-generated traffic generates a lot of additional east-west traffic, and all the servers or even different departments need additional security for internal segmentation. We see strong demand not just in data centers but also for internal segmentation to get better manageability and visibility for AI traffic.

Christiane Ohlgart: Related to your question on pipeline building, my comments around the customer wins were also about reference architectures and scalability. Most providers that are starting to build out data centers are creating their reference architecture to build out more as demand increases for their services. We are confident this creates a tailwind for us.

Ken Xie: Especially for technology like ASIC, systems, and hardware, these are more long-term investments compared to software, where most other security companies focus. Now is the time to see the long-term hardware and ASIC investment benefits. Customers appreciate the hardware and ASIC now.

Brad Zelnick: Thanks, Ken. It reminds me of the heritage of Fortinet, Inc. and early success in the service provider market segment and why it is so important today in AI data centers. Maybe a quick follow-up for you, Christiane, to get your latest thoughts on memory pricing and any further price increases you might be contemplating throughout the year, and specifically what is baked into the guidance?

Christiane Ohlgart: From a guidance perspective, we have baked in a low single-digit amount specifically into product. Regarding pricing, we have said multiple times that we are trying to maintain gross margin. As our component costs increase, we contemplate pricing actions, but we will also bring it down again when we do not have the pressures anymore.

Ken Xie: Our policy is not like some other companies using these opportunities to increase margin. We want to maintain a healthy margin. When our costs increase, we adjust pricing, but when costs come down, we also lower prices to maintain the same margin. That was the policy five years ago in the last supply chain, and it is the same during this memory shortage. Because we have a much bigger quantity than other competitors—we have almost 60% market share on unit shipments of network security systems—and with our direct manufacturing operations, we prepare better, operate better, and negotiate better than competitors. We feel it is a chance to gain market share again like we did five years ago.

Tal Liani: You got me back. You cannot get rid of me. I have everyone asking about AI. I am going to ask about the other thing. The most surprising part of your result is actually the billings growth of legacy—32% year-over-year growth in secure networking billings. Check Point said their firewall growth decelerated and that the market is weaker. What are the firewall trends? What drives this 32% growth in secure networking billings, and how sustainable is it?

Ken Xie: Tal, I prepared Slide 10 in the presentation for you. We go back 30 years. The most growth in network security comes from FortiGate. Every year you need to meet new functional demand. We are probably the only company that in-house keeps meeting new function development, from early UTM and next-gen firewall, to sandbox, to SD-WAN, SASE, to today’s AI and quantum computing. Once you innovate, you also need to integrate. FortiOS 8.0 integrates about 30 functions. You also need to keep improving—that is where the ASIC comes in—to improve performance and add secure computing, and at the same time invest in infrastructure to make it more secure and lower cost. I use the three I’s to describe what happened in network security over 30 years: innovation, integration, and improvement.

Some competitors cannot come up with new functions quickly or integrate; they have to go through acquisitions and become multi point-solution stacks. The blue area shows many companies, including some competitors, needing multiple solutions to meet one FortiGate/FortiOS solution we have, whether SD-WAN, SASE, and other functions. There are still many point-solution providers, including in SASE—they cannot offer customers total security infrastructure. The benefit of a single OS with integration, new functions, ASIC improvements—all of this gives more advantage over other players. This supply chain situation shows our advantage and operations model.

Tal Liani: How sustainable is 32% growth? Is there an easy comp situation this year that boosts growth, or is there something more fundamental that could be sustained over time?

Ken Xie: Look at Slides 24 and 25 compared to five years ago. It is pretty comparable. That time, we also grew around the low-40%s.

Christiane Ohlgart: Tal, we can really see interesting demand in network security. The drivers are not only AI. It is consolidation, simplicity, and the security posture across the products that are driving significant interest into the network security portfolio.

Fatima Boolani: Good afternoon. Thank you for taking my questions. Ken, at a very high level, we are in one of the most consequential CapEx and infrastructure investment cycles across the board. You are clearly seeing the benefits based on the seven-figure transactions related to AI infrastructure buildout. Specifically, what is the impact to your secure networking portfolio and the higher-end FortiGate appliances? Should we expect the product mix to trend toward very high-end SKUs? And for Christiane, related to the product growth upswing and presumably the higher-end mix, why are we not seeing a more visible catch-up on the services side? You only really tightened the services revenue range by bringing up the low end.

Ken Xie: Great question. Fortinet, Inc. has more advantage in the high end with our own ASIC solution. It is much better performance and much lower cost, both on product and on energy cost. We see strong growth in the high end. At the same time, unified SASE also grew 31%, and 4Q last year grew 40%, driven a lot by SD-WAN in the low end. That is also why we launched a new bundled service to accelerate adoption of SD-WAN and SASE. Slide 14 shows the bundle—it is very attractive for customers to adopt new SASE and SD-WAN services. So growth is both high end—more data center—and low end—more driven by SD-WAN. AI data center buildout is still in a very early stage, and once applications start leveraging AI, that will be a long-term growth driver. We also believe the bundled service will drive additional service revenue after customers have the hardware.

Christiane Ohlgart: Fatima, to address your concern, I am very enthusiastic about our services billings at 27% growth. Deferred revenue grew 15%. It all trends in the right direction. The conversion from the balance sheet into revenue just takes longer, so you do not see it immediately. But the trends are all positive. Our growth was really good. I am very happy with the quarter results and also with the rate of services with hardware.

Gabriela Borges: Hi. Good afternoon. Ken, it sounds like there has been a bit of a step-function change in the pipeline related to AI data center. If that is right, why do you think that is happening now? Is there a shift with sovereign AI projects or the mix from training to inference?

Ken Xie: Both connect together. AI data centers combined with sovereign SASE and sovereign AI are driving growth together. It is interesting—it is the same FortiGate and FortiOS to do both AI security and SASE in a zero trust environment. They both drive growth together.

Gabriela Borges: And a follow-up: Fortinet, Inc. has been transparent on some vulnerabilities that you found in your own technology. How is your internal process for hardening your infrastructure changing as you get access to leading-edge LLM models that can help upgrade the quality of your own infrastructure?

Ken Xie: We are working more closely with leading AI companies, whether handling vulnerabilities or helping automate a lot of operations for our customers. At the same time, we also build our own infrastructure, which has better security and more performance than some third-party infrastructure. We feel we do better than most. We are also developing new technology, using AI to secure AI.

Brian Essex: Great. Thank you for taking the question, and congrats on results for the quarter. A quick one and a follow-up. With regard to unified SASE billings, could you unpack that a little bit? How much is SD-WAN? How much is SASE? And could you help reconcile the deceleration in SASE ARR so we can understand the primary drivers?

Ken Xie: On Slide 4, we have the three pillars. Unified SASE includes SD-WAN, and SASE is more like FortiSASE and other things. FortiSASE is one of our strong growth areas, including AI-related. We believe the new bundle will also accelerate SD-WAN and SASE services going forward, as shown on Slide 14. Unified SASE grew 31%. About 25% of billings right now come from SASE. It is a pretty big number. We believe we are a top-three player and one of the fastest growing right now.

Brian Essex: How much was contribution from sovereign SASE? There is focus on sovereign data centers and sovereign infrastructure. Would love to understand the contribution there.

Ken Xie: Sovereign SASE is probably almost the same size as cloud-based SASE, perhaps even bigger. Sometimes with sovereign SASE, because we are using the same OS and FortiGate, customers may buy us as a firewall and gradually turn on SASE functions and deploy in their data center or infrastructure. We also see service providers starting to ramp up sovereign SASE quickly, especially in Europe. A few large telecom service providers are launching sovereign SASE services with our products, which is also driving a lot of product revenue.

Gray Powell: Okay. Great. Thanks. Specifically, are you starting to see more branch office firewall customers turn on SD-WAN components and then convert their firewall subscriptions to secure service edge? If so, how should we think about the ballpark uplift to a customer’s annual spending, or just directionally think about that opportunity?

Ken Xie: That is very good field feedback. That is also why, on Slide 14, we launched a new bundled service to help accelerate SD-WAN and SASE. We combine four to five separate services into one bundle, including some SASE licenses based on the FortiGate model—from 40, 60 up to midrange products—together with SD-WAN and application monitoring. Customers are increasingly turning firewalls into SD-WAN and then into SASE/zero trust. It helps accelerate additional services. On Slide 11, we track big enterprises and the adoption of SASE and SD-WAN. Last quarter, SASE was about 16%; now it is 18%. It is strong growth and the clear trend.

Christiane Ohlgart: And Gray, as we upgrade our customer base, these features become more interesting. It allows us to sell the next higher-end model typically for the edge, which is very beneficial for us as well.

Analyst: Hey, guys. Thanks for the question. I want to unpack the current service billings strength—it was a nice acceleration. What was the driver there? Subscription, support, moving away from prior-year headwinds? And can we expect that line to further accelerate this year?

Christiane Ohlgart: We had good linearity that helped us a little bit in the current quarter already, and then with the strong overachievement, it helps for the rest of the year. We believe our growth rates are picking up. As I said earlier, it takes time. This is where we adjusted the low end of the range to bring up the midpoint, but you cannot get super-fast acceleration of the balance sheet. We are confident not only this year, but also about the benefits that service billings give us for next year.

Analyst: As a quick follow-up, did you see a change in buying behavior in 1Q related to people pulling forward because of higher memory costs? And what metrics give you confidence that you have not seen a change in buying behavior?

Ken Xie: During COVID, we did see some pull-forward, especially in retail with scheduled deployments where they ordered ahead. This time, we do not see much pull-forward, but we do see strong demand. We cannot control channel inventories; in March, we did not see an increase there either. We are managing better. We tell customers we want to maintain margin—we do not want to raise margin like some other suppliers. When our costs are higher, we raise price, but when costs come down, we lower price in real time. That builds trust with partners and customers, and the direct model helps. It is difficult to judge how long this will last, but we operate to maintain healthy margin and respond quickly with our direct manufacturing model to better support customers.

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

Ken Xie: The edge over cloud point is because we have built ASIC for 20–30 years. We want to increase computing power and real-time processing on the appliance at the edge. That is a long-term investment that was criticized before compared to cloud, but AI and new trends show the edge has strong value now. We will continue investing in ASIC, hardware appliances, and because many new physical AI or modern applications need edge-time computing decisions instead of going to the cloud, with the cloud more for management. OT shows strong growth—over 70%—with deployments in the field and real-time edge traffic management. It is a hybrid approach: not 100% cloud or 100% edge; both have value. A few years ago, there was too much emphasis on cloud only. We insisted on investing in ASIC and systems at the edge. Now customers and partners see the benefit of this hybrid approach.

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

Anthony Luscri: Thank you. I would like to thank everyone for joining today’s call. We will be attending investor conferences by JPMorgan and Bank of America during the second quarter. Fireside chat webcasts will be posted on the Events and Presentations sections of our investor website. If you have any follow-up questions, please feel free to contact me, and have a great day.

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