Fortinet, Inc. (FTNT) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call highlights strong financial performance with optimistic growth guidance, especially in product revenue. The Q&A reveals confidence in product and service adoption, particularly in SD-WAN and OT security, with no significant headwinds. While some responses were unclear, the overall sentiment is positive, driven by growth in strategic areas and integrated solutions. The lack of specific guidance for 2026 does not overshadow the positive outlook for the upcoming quarters.
Key Financial Performance
Billing and Revenue Both grew by 14% year-over-year. This growth was driven by strong execution and broad-based demand across the organization.
Unified SASE Billing Grew by 19% year-over-year, driven by FortiSASE billing growth of over 100%. This growth positions Fortinet as a leader in the SASE space.
Secure Networking Billing Grew by 10% year-over-year, outperforming the overall secure networking market. This growth was attributed to Fortinet's market share gains and leadership in firewall technology.
AI-driven SecOps Billing Grew by 33% year-over-year, making it the fastest-growing pillar in the third quarter. This growth was supported by Fortinet's industry-leading AI patent portfolio and AI-driven solutions.
Operational Technology and Critical Infrastructure Billing Grew by over 30% year-over-year, driven by broad-based demand for both hardware and software solutions.
ARR (Annual Recurring Revenue) Unified SASE increased by 13% to $1.22 billion, and SecOps increased by 25% to $472 million year-over-year. This growth reflects strong customer adoption and expansion.
Total Revenue Grew by 14% to $1.72 billion year-over-year. Growth was led by EMEA, followed by APAC and the Americas.
Product Revenue Increased by 18% to $559 million year-over-year. This was driven by strong performance in multiproduct deals, OT security, and market share gains.
Service Revenue Grew by 13% to $1.17 billion year-over-year. This growth was supported by improved product revenue growth and customer expansions.
Gross Margin Total gross margin was 81.6%, better than expected, driven by strong execution and cost control.
Operating Margin Reached a record 36.9%, up 80 basis points year-over-year. This increase was due to operational efficiencies and strong cost management.
Free Cash Flow Was $568 million, and adjusted free cash flow was $646 million, up $41 million year-over-year. This represented a margin of 37%.
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Operating Highlights
Unified SASE billing: Grew 19%, driven by FortiSASE billing growth of over 100%, making Fortinet one of the fastest-growing SASE leaders at scale.
Secure AI data center solution: Recently launched, specifically designed for AI workloads leveraging ASIC advantage to capture growth opportunities as customers scale AI globally.
AI-driven SecOps: Fastest-growing pillar in Q3 with billing growth of 33%, powered by Fortinet's industry-leading AI patent portfolio of over 500 patents.
Secure networking billing: Grew 10%, outperforming the overall secure networking market and gaining market share.
Operational technology and critical infrastructure solutions: Achieved over 30% billing growth, driven by demand for deep visibility, advanced threat protection, and secure connectivity.
Operational efficiency: Achieved a record third-quarter operating margin of 37% and free cash flow margin of 37%, supported by strong cost management and execution.
Customer expansion: Added approximately 6,600 new organizations to the Unified FortiOS platform, showcasing strong market position.
Market leadership in SASE: Fortinet aims to become the #1 SASE market leader in the next few years, supported by strong customer adoption and recognition in the Gartner Magic Quadrant.
AI-driven solutions: Focus on securing AI workloads and leveraging AI-driven solutions to meet increasing demand, supported by a broad AI patent portfolio.
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Risk or Challenges
Market Conditions: Potential risks from economic uncertainties and market conditions that could impact customer spending on cybersecurity solutions.
Competitive Pressures: Intense competition in the cybersecurity market, including challenges from other SASE and firewall providers.
Regulatory Hurdles: Compliance with local data governance requirements, especially in regions with stringent regulations, as highlighted by the Sovereign SASE deployment.
Supply Chain Disruptions: Increased inventory purchases to meet customer demand, indicating potential risks of supply chain disruptions.
Strategic Execution Risks: Challenges in maintaining growth momentum and achieving the Rule of 45 amidst increasing investments in infrastructure and sales capacity.
Economic Uncertainties: Potential risks from fluctuating global economic conditions that could affect customer budgets and spending priorities.
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Guidance & Outlook
Fourth Quarter 2025 Guidance: Billings expected in the range of $2.185 billion to $2.285 billion, representing 12% growth at the midpoint. Revenue projected between $1.825 billion and $1.885 billion, also reflecting 12% growth at the midpoint. Non-GAAP gross margin anticipated to be 79% to 80%, and non-GAAP operating margin expected to range from 34.5% to 35.5%. Non-GAAP earnings per share forecasted at $0.73 to $0.75. Infrastructure investments estimated between $60 million and $110 million.
Full Year 2025 Guidance: Billings projected in the range of $7.37 billion to $7.47 billion, representing 14% growth at the midpoint. Revenue expected between $6.72 billion and $6.78 billion, reflecting 13% growth at the midpoint. Service revenue anticipated to range from $4.575 billion to $4.595 billion, with 13% growth at the midpoint. Non-GAAP gross margin forecasted at 80.25% to 80.75%, and non-GAAP operating margin expected to range from 34.5% to 35%. Non-GAAP earnings per share estimated at $2.66 to $2.70. Infrastructure investments projected between $380 million and $430 million.
Midterm and Long-term Outlook: Fortinet expects to continue meeting the Rule of 45 and grow faster than the market in all three business pillars. Anticipates strong growth in demand for products driven by increased cybersecurity investments, convergence of networking and security, and vendor consolidation. Plans to invest in cloud delivery infrastructure, strategic partnerships, and sales capacity. Expects AI adoption to further increase demand for solutions, particularly for securing LLMs and data movement. Committed to ongoing innovation and product portfolio development.
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Shareholder Return Plan
Share Repurchase Program: We repurchased 23.3 million shares of our common stock for an aggregate purchase price of $1.83 billion in the third quarter, which reduced our total share count by approximately 3%. In August, our Board of Directors approved a $1 billion increase in the authorized stock repurchase amount and the remaining share buyback authorization as of today is $796 million.
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Key Q&A
Q:What are the drivers behind the 18% product revenue growth, and is the end of service a significant factor?
A:Ken Xie explained that the growth is driven by strong demand and growth drivers like SASE, SecureOp, and OT, which grew by 30%. He stated that the end of service is not a significant growth driver and emphasized that new features, better hardware, and market expansion are the main contributors.
Q:Why is the guidance for next quarter's revenue growth slightly below expectations?
A:Ken Xie attributed this to the service revenue being impacted by last year's negative product revenue growth. He explained that product revenue is a leading indicator for service revenue, which has a lagging effect due to the average service term of 29 months. He expects service revenue to improve towards the end of next year.
Q:What is the trajectory of services growth in the next 12 months?
A:Christiane Ohlgart stated that service revenue growth is expected to improve in the second half of 2026 due to the recovery in product revenue. She noted that some customers are buying products ahead of services, which will attach more services over time.
Q:Can you provide details about the 8-figure SD-WAN and SASE transaction with the police force?
A:Christiane Ohlgart explained that the deal is related to billings and includes a combination of product and services. It is more focused on SD-WAN than SASE, as the customer opted for a self-hosted SASE solution to meet local data governance requirements. Ken Xie highlighted Fortinet's unique advantage in offering Sovereign SASE and integrated solutions.
Q:What is the rate of SASE penetration into the SD-WAN installed base, and how can it be accelerated?
A:Ken Xie stated that leveraging Fortinet's market share in firewall and SD-WAN makes it easier for customers to adopt SASE. He mentioned that SASE adoption is growing rapidly, with FortiSASE growing 100%. He also noted that tracking SASE penetration is challenging due to indirect sales through service providers and channel partners.
Q:What is the visibility into product revenue growth for next year?
A:Christiane Ohlgart expressed confidence in continued product growth, citing multiple drivers such as upgrades, refresh activity, new use cases, and new customers in areas like OT. Ken Xie added that new functions, hardware, and innovations like FortiOS 8.0 and a new ASIC will drive growth.
Q:What factors are driving growth in OT security, and how is Fortinet differentiated?
A:Ken Xie explained that OT security is driven by the need to secure a growing number of connected devices, especially in industries like healthcare, utilities, and manufacturing. He highlighted Fortinet's long-term investment in this area, ruggedized platforms, and leadership in the market as key differentiators.
Q:Why was the 2026 end-of-service cohort not a contributor this quarter, and what about future refresh cycles?
A:Ken Xie clarified that end-of-service is a small part of refresh cycles and not a significant growth driver. He emphasized that customers upgrade due to new functions, better performance, and additional use cases rather than waiting for end-of-service. John Whittle added that new technology like the upcoming network processor and operating system aligns with normal refresh cycles.
Q:Are there any headwinds affecting Q4 gross margins?
A:Christiane Ohlgart stated that Q4 gross margins are impacted by the mix between hardware and service revenue, as well as the absence of reserve releases that benefited Q3. There are no headwinds from tariffs or component cost increases.
Q:Was there anything unique about North America's performance in Q3?
A:Christiane Ohlgart noted that North America performed well in Q3, despite appearing to lag due to strong performance in Q2. There were no share losses.
Q:What are the moving parts affecting services billings in Q3?
A:Christiane Ohlgart explained that Q2 had significant enterprise agreements, leading to high services billings. In Q3, some products were sold into these agreements, and some customers bought hardware ahead of deployment, delaying service billings to 2026.
Q:What is the addressable opportunity for the secure AI data center offering, and who are the target customers?
A:Ken Xie stated that the opportunity is significant but still in the early stages. The offering targets AI data centers, applications, and infrastructure, with a focus on high-performance network security. Christiane Ohlgart added that the offering includes both hardware and services, depending on the use case.
Q:What is the expected trajectory of product revenue growth in 2026?
A:Ken Xie clarified that the normal growth rate for product revenue is expected to be 10%-15% in a normal case, based on historical trends and market share gains. This is not specific to 2026 but reflects long-term expectations.
Q:What percentage of SASE billings are stand-alone SD-WAN?
A:Ken Xie noted that SD-WAN is integrated into FortiOS, making it difficult to track stand-alone SD-WAN billings accurately. He emphasized Fortinet's leadership in SD-WAN and the ease of migrating to SASE.
Q:What are the pricing trends and competition in SASE?
A:Christiane Ohlgart stated that competitive bids depend on customer size and type. Fortinet's integrated solution offers significant cost savings and operational benefits compared to competitors' multi-box solutions. Ken Xie added that Fortinet's single-box solution is more attractive for SMBs and work-from-home use cases.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the specific percentage of SASE billings that are stand-alone SD-WAN, citing difficulties in tracking due to integration into FortiOS and indirect sales channels. Additionally, while they expressed confidence in product revenue growth, they did not provide specific guidance for 2026, instead referring to long-term growth expectations.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI center
AI workload
Analyst Day
FortiOS
Magic Quadrant
Rule market
SASE SecOps
Slide
Unified SASE
advantage
billing leader
consumption security
customer win
cybersecurity
demand solution
energy consumption
footprint
increase
margin share
market pillar
market share
momentum enterprise
patent AI
peer
police force
portfolio
power
price
product customer
relationship
security technology
stock
transformation
use case
variety use
FTNT Transcript
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The earnings call summary shows strong financial performance with a 22% YoY revenue increase, improved operating margins, and a 30% increase in net income. These figures indicate robust demand and effective cost management. Although no strategic initiatives or risks were discussed, the positive financial results and increased cash flow from operations suggest a positive market sentiment. The lack of additional insights from the Q&A section does not detract from the strong financial metrics presented.
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Frequently Asked Questions
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