Fortinet, Inc. Q4 2025 earnings call

Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss Fortinet's fourth quarter and full year 2025 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 fourth quarter and the full year of 2025 before providing guidance for the first quarter and full year of 2026. We will then open the call for questions. During the Q&A session, we will ask you to please limit yourself to one question and one 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 and specifically disclaim any obligation to update forward-looking statements. Also, all references to financial metrics that we make on today's call are non-GAAP unless stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations are located in our earnings press release and in the presentation that accompany today's remarks, both of which are posted on our Investor Relations website.

As a reminder, this is a live call that will be available via replay via our webcast on the 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'll now turn over the call to Ken.

Thank you, Anthony, and thank you to everyone for joining our call. We are very pleased with our excellent first quarter growth. Driven by broad-based demand across our platform, our billings increased 18% and revenue growth 15%, driven by product revenue growth of 20%. Our operating margin was strong at 37%, reflecting our continued focus on balancing growth and profitability. Secure Networking billings growth 13%, outperforming the overall secure networking market as we continue to gain market share. Fortinet remains the number one firewall leader with 55% unit market share and the highest product revenue among our cybersecurity peers. Fortinet has led the convergence of networking and security for over 25 years, and secure networking is expected to surpass the traditional networking by the end of this year.

Our firewall leadership is driven by FortiOS, which unifies the networking and security, and our FortiASIC technology delivers 5-10x better performance than competitors while lowering the total cost of ownership and energy consumption, which provides a large advantage in securing AI data centers. We will introduce the FortiOS 8.0, and Fortinet's annual customer and partner conference is celebrated in March, featuring significant new capability in security and networking, especially in AI security such as agentic AI security in enterprise, plus a new bundled SD-WAN and SASE service. We also recently partnered with NVIDIA to leverage their BlueField-3 DPU to secure AI infrastructure. Unified SASE billing growth 40%, representing 27% of the total billing, supporting our belief that Fortinet is the fastest growing SASE leader on the scale. Our momentum is powered by three key advantages.

First, Fortinet uniquely integrates leading firewall, SD-WAN, and SASE on a single OS, FortiOS, running on-premise or in the cloud, allowing customers to expand SASE in minutes and driving upsell across a large customer base. Second, we're supporting both sovereign SASE and public SASE. Sovereign SASE enables enterprise and service providers to deploy SASE in their own data centers to meet data privacy, sovereignty, and compliance requirements. We are seeing strong demand in sovereign SASE, and none of our major SASE competitors offer sovereign SASE solutions, making Fortinet's total unified SASE addressable market significantly greater than our peers. Third, our owned and long-term invested global cloud infrastructure, FortiCloud, delivers high performance and security at roughly one-third of the total cost of ownership of our peers.

This differentiates positioning Fortinet as a leader in the 2025 Gartner Magic Quadrant for SASE platform as we continue to be the leader in SD-WAN, and I believe we will be the number one unified SASE within the next few years. AI-driven SecOps billings growth 6% in the fourth quarter and 22% for the full year, while ARR was up 21%. Our strong performance was driven by more than 20 AI-powered solutions as customers consolidated multiple security vendors onto Fortinet's platform. In addition, Fortinet's leadership in security also extends to operational technology and cyber-physical systems, offering enhanced visibility, robust threat protection, and secure connectivity. Demand for OT solutions is driving significant growth, with billings up more than 25%.

Finally, we reaffirm the midterm target we share and our annual guidance, reinforcing our commitment to continue to grow faster than the overall market, including delivering billings and revenue CAGR above the market growth of 12% and achieving the Rule of 45. 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. As Ken mentioned, we are very pleased with our strong fourth quarter performance, exceeding the high end of guidance across billings, total revenue, and operating margins. This outperformance reflects solid global execution and broad-based demand for our solutions, with product revenue growth accelerating in the second half of the year. We are well-positioned to deliver durable, long-term growth as a leader in large and rapidly expanding cybersecurity markets, including Secure Networking, Unified SASE, and security operations. This opportunity is supported by strong secular tailwinds such as vendor consolidation, the convergence of security and networking, ongoing technology upgrades, and the expansion of enterprise attack surfaces across cloud, OT, and AI. Our strong network security foundation drives adoption of SD-WAN, SASE, and SecOps while creating significant opportunities to upsell integrated solutions across enterprise customers.

Building on these market dynamics, our leadership in secure networking, combined with our unified FortiOS operating system and broad platform, enables customers to deploy security anywhere across private, public, and hybrid multi-cloud environments and in any form factor, including hardware, software, and SaaS. As a result, our platform approach drives strong customer expansion, increases wallet share, and supports growth across both existing and new markets. In addition, we benefit from durable competitive advantages through our proprietary ASIC technology and single integrated operating system, which delivers superior performance, lower total cost of ownership, and meaningful differentiation versus peers. At the same time, continued investment in R&D across custom silicon, OS convergence, AI-driven security, quantum readiness, and Fortinet-owned cloud infrastructure supports rapid innovation and organic growth. Finally, our highly diversified business across geographies, customer segments, and industry verticals reduces volatility and enhances resilience across economic cycles.

Complementing this diversification, we operate a strong and balanced model with a Rule of 45-plus profile, robust recurring revenues, strong free cash flow generation, a solid balance sheet, and a disciplined shareholder-focused capital allocation strategy. This balanced model supports our confidence in our 2026 guidance and continued long-term shareholder value creation. Now, moving to an overview of our strong fourth quarter results. Total billings grew by 18% to $2.37 billion, driven by strong growth in Unified SASE, OT security, and success in large enterprises in the US and Europe. Unified SASE billings grew 40%, driven by growth in cloud security solutions. Furthermore, SASE adoption momentum has remained strong, as 16% of our large enterprise customers have purchased FortiSASE, an increase of over 50% highlighting our continued expansion of FortiSASE in our customer base.

Operational technology use cases continue to contribute strong growth to our success, with billings growth of over 25%, with broad-based demand for both our hardware and software solutions. Our continued momentum in large enterprise drove growth in the fourth quarter, as the number of deals greater than $1 million increased by over 30%, while the total deal value grew by over 40%. The U.S. and Europe were the largest contributors to growth in $1 million-plus deals, each delivering more than 30% growth. In addition, we continue to expand our customer base. 7,200 new organizations selected our unified FortiOS platform, reinforcing our strong position across all market segments. With regards to ARR, unified SASE increased by 11% to $1.28 billion, which included an increase of over 90% for FortiSASE ARR, while SecOps ARR increased by 21% to $491 million. Total revenue grew 15% to $1.91 billion.

Product revenue increased by over 20% to $691 million, reflecting broad-based growth driven by strong performance across our product portfolio as we continue to gain market share. Both hardware and software grew 20%, supported by technology upgrades, upselling, and expansion into new use cases. Service revenue grew 12% to $1.21 billion, reflecting lower product revenue in 2024, while service billings growth was strong at 18% in Q4. As a reminder, we view product revenue growth as a leading indicator of future service revenue growth, as shown on slide 20 of the earnings presentation. Now, I'd like to highlight some key deals that demonstrated our market leadership and customer expansion. In the competitive seven-figure upsell deal, a large consumer services company, an existing Forti SD-WAN customer, selected FortiSASE to secure more than 10,000 users as part of its next-generation access and security transformation.

The win was driven by our single OS approach that tightly integrates SD-WAN and SASE, enabling rapid expansion to SASE and delivering strong performance at a meaningfully lower total cost of ownership. The customer chose Fortinet for our unified FortiOS operating system, which reduces complexity by enabling a single, consistent security policy across FortiSASE and FortiGate devices, while leveraging our globally distributed POPs. By integrating our POPs into their existing SD-WAN fabric, the customer has simplified centralized policy management and enabled secure private access at scale, which highlights our platform model. Next, a leading global data center provider supporting AI and cloud workloads signed an eight-figure deal with Fortinet to support its rapid global expansion. The customer selected Fortinet for a predictable, scalable investment model that aligns security growth with its accelerated data center build-out.

As the company standardizes on our FortiGates, FortiSwitches, and FortiAPs, our solutions will streamline operations across IT and OT environments, including critical power, cooling, and physical security systems. This strategic partnership enables the customer to scale securely and consistently, supporting its long-term global growth strategy. In another key win, a major utility company expanded its partnership with us through a high seven-figure $ agreement to secure its operational technology environment. The deal includes a comprehensive set of solutions covering network segmentation, identity and access management, and zero-day threat detection across the utility's advanced distribution management system, along with the adoption of FortiAI. This competitive win was driven by our ability to automate critical security operations, our proven expertise in protecting critical national infrastructure, and a compelling price-for-performance advantage.

Lastly, in a competitive displacement win, a Fortune 100 company signed an eight-figure multi-year agreement for Unified SASE, selecting our virtual firewall solution to secure approximately 1,800 store locations. The customer chose FortiGate VM through our FortiFlex points-based consumption program, which supports flexible hybrid firewall deployments and a broad set of security solutions. Fortinet was selected after a highly competitive evaluation due to the flexibility of the program and our ability to meet demanding technical requirements at scale, enabling the customer to consolidate security on a single architecture while gaining deployment flexibility, centralized management, and long-term cost efficiency to support future growth. Turning to margins and cash flow. Total gross margin of 80.3% was better than expected, which is especially impressive given the strong product revenue growth and related mix shift.

Operating margin of 37.3% exceeded the high end of the guidance, mainly due to stronger-than-expected revenue growth and cost management. Free cash flow was very strong at $577 million, and adjusted free cash flow was $589 million, up $130 million, and represented a margin of 31%. We repurchased approximately 730,000 shares of common stock for $57 million during the fourth quarter and an additional 4.6 million shares for $356 million quarter to date. In January, our board of directors approved a $1 billion increase in the authorized stock repurchase amount, and the remaining share repurchase authorization as of today is approximately $1.4 billion. Turning to our full year 2025 results, where we once again exceeded the Rule of 45 for the sixth consecutive year. Billings grew 16% to $7.55 billion.

Our faster-growing pillars of Unified SASE and SecOps grew a combined 24%, representing a two-point mix shift year-over-year and six points over the past two years. The two pillars now make up 36% of total billings, reflecting the value of our integrated platform approach and the convergence of security and networking and success in cross-selling our other solutions. Total revenue grew 14% to $6.8 billion, driven by strong product revenue growth of 16%. Service revenue grew 13% to $4.58 billion, representing 67% of total revenue. Gross margin of 81.3% was flat despite a shift to product revenue and investments in the build-out of our data center infrastructure. Operating margin increased 50 basis points to a record of 35.5%, resulting in operating income of $2.41 billion, which is up 16%. Our GAAP operating margin of 30.7% continues to be one of the highest in the industry.

Earnings per share increased 16% to $2.76. Free cash flow was a record of $2.21 billion, representing a margin of 33%, while adjusted free cash flow was $2.5 billion, representing a margin of 37%. Our adjusted free cash flow CAGR of greater than 20% of the past five years demonstrates the strength of our business model. Now, moving on to guidance. As a reminder, our first quarter and full year outlooks, which are summarized on slides 24 and 25, are subject to the disclaimers regarding forward-looking information that Anthony provided at the beginning of the call. For the first quarter, we expect billings in the range of $1.77 billion-$1.87 billion, which at the midpoint represents growth of 14%. Revenue in the range of $1.7 billion-$1.76 billion, which at the midpoint represents growth of 12%. Non-GAAP gross margin of 80%-81%.

Non-GAAP operating margin of 30%-32%. Non-GAAP earnings per share of $0.59-$0.63, which assumes a share count between 746 million-750 million. Infrastructure investments of $80 million-$120 million. A Non-GAAP tax rate of 18%. Cash taxes of $45 million-$50 million. For the full year, we expect to achieve the Rule of 45 for the seventh consecutive year and expect billings in the range of $8.4 billion-$8.6 billion, which at the midpoint represents growth of 13%. Revenue in the range of $7.5 billion-$7.7 billion, which at the midpoint represents growth of 12%. Service revenue in the range of $5.05 billion-$5.15 billion, which at the midpoint represents growth of 11%. We expect service revenue growth to pick up in the second half of 2026, driven by accelerating product revenue growth in 2025 as a key leading indicator.

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.