Fortinet, Inc. (FTNT) Q2 2025 Earnings Call Transcript

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Overview

The earnings call highlights strong growth in Unified SASE and AI-driven secure operations, positive guidance for revenue and billings, and strategic investments in OT security and AI capabilities. Despite some uncertainties in service revenue growth and management's cautious guidance, the overall sentiment is positive, with promising new product developments and market expansion. The Q&A section further supports optimism with strong future growth drivers like SASE and SecOps, outweighing short-term margin impacts. The lack of market cap data prevents a precise prediction, but the sentiment leans towards a positive stock movement.

Key Financial Performance

Billing Grew by 15% to $1.78 billion, driven by 21% growth in Unified SASE and 31% growth in SecOps. Unified SASE and SecOps now account for 24% and 11% of total billings, respectively, up 1 point each. Growth attributed to momentum in large enterprise deals and strong performance in financial services.

Revenue Grew by 14% to $1.63 billion, led by EMEA with growth of 18%, while the Americas and APAC both grew 11%. Product revenue increased by 13% to $509 million, benefiting from upgrade buying and strong growth in operational technology. Service revenue grew by 14% to $1.12 billion, driven by enterprise agreement renewals and customer loyalty.

Operating Margin Achieved a non-GAAP operating margin of 33.1%, a decrease of 200 basis points year-over-year but exceeded guidance by 60 basis points. Decline attributed to increased investments in sales headcount, costs from acquisitions, and foreign exchange headwinds.

Free Cash Flow Free cash flow was $284 million, and adjusted free cash flow was $428 million, up $104 million year-over-year. Strong cash generation attributed to robust business performance.

ARR (Annual Recurring Revenue) Unified SASE increased by 22% to $1.15 billion, and SecOps increased by 35% to $463 million. FortiSASE ARR grew by over 100%, with a 65% expansion in the customer base. Growth reflects strong adoption of integrated solutions.

Gross Margin Total gross margin increased by 10 basis points to 81.6%. Product gross margin of 67.8% increased by 180 basis points due to normalized inventory-related charges. Service gross margin of 87.8% decreased by 80 basis points due to investments in hosted security solutions.

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Operating Highlights

Unified SASE and AI-driven secure operations: Billing for both grew over 20% to a combined 35% of total billings. Fortinet was recognized as a leader in the 2025 Gartner Magic Quadrant for SASE platform.

FortiCloud expansion: Three new services were announced: FortiIdentity, FortiDrive, and FortiConnect, which integrate into the Fortinet Security Fabric.

AI innovations: New AI solutions include FortiAI-Protect, FortiAI-Assist, and FortiAI-SecureAI. AI add-on solutions are the fastest-growing part of the business.

Large enterprise customer growth: Deals over $1 million increased by more than 50%. 13% of large enterprise customers have purchased FortiSASE, a 60% year-over-year increase.

Geographic revenue growth: EMEA revenue grew by 18%, while the Americas and APAC grew by 11% each.

Infrastructure investments: Invested $2 billion in global infrastructure, including data centers, NOCs, SOCs, and R&D facilities, spanning 5 million square feet.

Operational efficiency: FortiAIOps was adopted by a leading retailer to improve operational efficiency through AI-driven capabilities.

Firewall upgrade cycle: Approximately 40%-50% of the 2026 firewall upgrade cycle is complete, providing opportunities for customer engagement and showcasing innovation.

Customer journey and platform adoption: Over 6,900 new organizations adopted the FortiOS platform, reflecting strong SMB market positioning and channel partner loyalty.

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Risk or Challenges

Economic Uncertainty: Despite ongoing uncertainty surrounding tariffs and the global economic outlook, the company has not experienced a negative impact on its business. However, this remains a potential risk factor.

Foreign Exchange Headwinds: Operating margin decreased by 200 basis points year-over-year, partly due to foreign exchange headwinds stemming from a weaker U.S. dollar, as most operating expenses are denominated in foreign currencies.

Service Gross Margin Pressure: Service gross margin decreased by 80 basis points due to increased investments associated with the expansion of hosted security solutions.

Infrastructure Investments: Significant infrastructure investments of $168 million in Q2 and $380-$430 million projected for the full year could pressure free cash flow if not managed effectively.

Firewall Upgrade Cycle: Approximately 40%-50% of the 2026 firewall upgrade cycle is complete, leaving a significant portion of upgrades to be executed over the next 6 quarters. Delays or challenges in this process could impact revenue.

Regulatory and Tariff Risks: Ongoing uncertainty surrounding tariffs and potential regulatory changes could pose risks to operations and financial performance.

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Guidance & Outlook

Third Quarter 2025 Guidance: Billings in the range of $1.76 billion to $1.84 billion, representing 14% growth at the midpoint. Revenue in the range of $1.67 billion to $1.73 billion, representing 13% growth at the midpoint. Non-GAAP gross margins of 80% to 81%. Non-GAAP operating margin of 32.5% to 33.5%. Non-GAAP earnings per share of $0.62 to $0.64. Infrastructure investments of $110 million to $130 million. Non-GAAP tax rate of 18%. Cash taxes of $60 million to $90 million.

Full Year 2025 Guidance: Billings in the range of $7.325 billion to $7.475 billion, representing 13% growth at the midpoint. Revenue in the range of $6.675 billion to $6.825 billion, representing 13.3% growth at the midpoint. Service revenue in the range of $4.55 billion to $4.65 billion, representing 14% growth at the midpoint. Non-GAAP gross margin of 79% to 81%. Non-GAAP operating margin of 32% to 33.5%. Non-GAAP earnings per share of $2.47 to $2.53. Infrastructure investments of $380 million to $430 million. Non-GAAP tax rate of 18%. Cash taxes of $400 million to $450 million, $125 million lower than prior expectations due to new tax law changes.

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Shareholder Return Plan

Share Repurchase: We repurchased approximately 4.6 million shares of our common stock for an aggregate cost of $401 million in the second quarter. The remaining share buyback authorization as of today is approximately $1.6 billion.

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Key Q&A

Q:Do sales of FortiSASE cannibalize the core appliance business?

A:Management does not see FortiSASE replacing the firewall. Instead, they view it as an enhancement. The traditional firewall remains an important control point, and FortiSASE adds new functionalities to the firewall, such as SASE capabilities, which enhance security for enterprise users. Win-loss analysis shows minimal customer movement to the cloud as a replacement, indicating expansion rather than replacement.

Q:What are the specificities of the fiscal 2027 cohort of products that will be refreshed?

A:The fiscal 2027 cohort consists of low-end products. While significant in unit terms, they are less significant in terms of product revenue. However, they provide upsell opportunities by engaging customers in discussions about future security needs.

Q:What insights can be drawn from the services guidance and its strength this quarter?

A:Services billings to revenue conversion takes longer, and management has decided to be prudent with guidance. They are confident in stronger product revenue for the rest of the year based on the pipeline. Product revenue growth is seen as a leading indicator for future service revenue growth.

Q:What is the split between FortiGuard and FortiCare, and how does it relate to customer subscription behavior?

A:Customers may replace devices with higher-end models, consolidating multiple boxes into one. This impacts service revenue attached to the boxes. Upselling additional revenue streams like SASE is critical, and customer journeys show that upselling is working, though not always at the same time as firewall purchases.

Q:What is the profile of SASE customers, and are they displacing existing vendors or entering greenfield deployments?

A:SASE customers include both existing customers and those replacing competitors' solutions. Many current customers enable SASE capabilities through Fortinet's integrated solutions. Competitors' solutions are being replaced due to the advantages of Fortinet's integrated SASE solutions, which reduce management costs and improve security.

Q:What is the margin outlook and balance between investments and margin upside?

A:Management focuses on long-term investments, such as building infrastructure for SASE, which provides cost advantages and better security. While these investments may impact short-term margins, they are expected to benefit customers and partners in the long term.

Q:Why is there not more upside in numbers this year from the 2026 refresh cohort?

A:The refresh cohort includes older products, and management is comfortable with their guidance. They emphasize that the refresh cycle is not the primary driver of growth, as the business has expanded significantly since these products were introduced.

Q:What is the outlook for OT opportunities, and how does it align with the refresh cycle?

A:OT is growing over 20% and is a fast-growing area for Fortinet. The company has invested in OT security for over 10 years and sees consistent growth across regions. OT opportunities also align with the refresh cycle, particularly for Rocket devices in the 2026 cohort.

Q:How is the sovereign SASE solution tracking, and how does it differ from competitors?

A:The sovereign SASE solution is gaining momentum, particularly with service providers who value local data processing and security. Fortinet's integrated SASE solution, which can be deployed locally, offers a significant advantage over competitors. Management believes sovereign SASE could capture half the market share in the future.

Q:What should investors be excited about beyond the 2026 and 2027 upgrade cycles?

A:Management highlights the growth of SASE and SecOps as key drivers. The new SASE firewall offers enhanced security and cost advantages. Additional TAM opportunities, such as cloud services, are also becoming meaningful growth drivers.

Q:How is Fortinet addressing agentic AI security?

A:Fortinet has invested in agentic AI and device security for over 10 years. They focus on integrated solutions that include identity and access control as part of the infrastructure, rather than separate solutions. This approach provides better management and security for customers.

Q:What is the cadence of the 2026 upgrade cycle, and where will it end?

A:Management expects the upgrade cycle to progress faster than anticipated, with strength in product revenue for the rest of the year. However, the exact endpoint of the cycle is hard to predict.

Q:What is the mix shift within services revenue, and how is it progressing?

A:Non-attached subscriptions, such as FortiSASE and SecOps, are growing faster than attached subscriptions. Attached services are also increasing as a percentage of hardware sales due to additional functionalities like SD-WAN and SASE.

Q:How are channel incentives aligned with platform adoption and multiproduct sales?

A:Channel incentives are aligned with promoting multiproduct sales. Partners receive higher back-end rebates for introducing new products and selling integrated solutions.

Q:Why is services revenue growth decelerating, and why was Unified SASE flat sequentially in Q2?

A:Services revenue growth is normalizing after benefiting from deferred revenues sold during the COVID period. Unified SASE was flat sequentially due to offsetting growth in some products and declines in others. Management expects faster growth in both product and service revenues going forward.

Q:Review of Unclear Management Responses

A:Management avoided directly addressing why underlying firewall demand isn't stronger, despite significant refresh activity. They also did not provide clear details on the exact cadence or endpoint of the 2026 upgrade cycle, leaving some uncertainty about future growth drivers.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

FTNT Transcript

Fortinet, Inc. (FTNT) Q3 2025 Earnings Call Transcript

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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.

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FTNT Slides

Fortinet Q1 2025 slides: Product revenue accelerates as SASE expansion continues

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Fortinet Q2 2025 slides: 15% billings growth driven by SASE and SecOps

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FTNT Report

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