Fortinet, Inc. 2026 Q3 Earnings Call

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 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, and particularly 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 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 result, driven by strong execution and broad-based demand. Billing growth 29%, while total revenue increased 20%, led by 37% growth in product revenue. Based on our continuous strong momentum, we have raised our 2026 billing guidance for the third time this year. With the rapid evolution of the AI landscape, Fortinet is leading the next frontier of cybersecurity by securing AI workflow and protecting against AI-discovered vulnerability in real time through our core strengths in network security. We believe that network security is the most critical foundation of AI security, with the firewall serving as the centralized point of inline 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 seven, while continually expanding our AI capability and the functions in FortiOS and FortiGuard services. Fortinet secures four critical areas of infrastructure and AI security as shown on slide nine. First, at the network level, our SASE Firewall natively protects against vulnerabilities and stops intrusions, supporting shadow AI monitoring and access control to data and applications. To address growing demand, the newly launched FortiGuard Inline AI Security Service this week transforms every FortiGate into a real-time AI enforcement point. Second, in the data center and AI factories, we offer FortiAIGate to secure GPU clusters and the LLM infrastructure, securing the massive growth in AI traffic that requires high performance protection across data center and hybrid cloud.

Third, we extend AI security together with SASE to endpoint, defining, controlling, and integrating agent identity directly into access and incident response life cycle. And fourth, our FortiSOC agent delivers a highly automated solution to solve industry accuracy shortage and tools flooding by enabling autonomous incident detection and response. Our SASE Firewall pillar billing grew 31%, and we are the fastest-growing SASE Firewall vendor at scale, growing at nearly double the market growth rate, as shown on slide five. 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 AI security components into a single and unified operating system, FortiOS. This new SASE Firewall pillar represents a large, high-growth area driving long-term growth.

Combined with our differentiated FortiASIC technology and owned global infrastructure, this allows 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 an easily deployable on-premise sovereign SASE solution alongside cloud SASE, which we believe gives us an addressable market two to three times larger than the cloud-only competitors. To further capitalize on our large installed base, we recently launched FortiLink SASE Services. These positions are FortiAP and FortiSwitch as a SASE hardware agent, allowing customers to easily overlay FortiSASE on top of their existing hardware, driving recurrent service revenue. As we look ahead, Fortinet's strong momentum is a result of a vision for the AI era, a platform integration, and a highly disciplined operation model.

This combination positions Fortinet exceptionally well to drive strong cash generation, high recurrent 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 continuous 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 have 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 a 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 five 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 inspect 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 models selected Fortinet for a seven-figure expansion to secure its rapidly growing AI workloads. This strategic win builds on the successful deployment of the customer's first AI data center last year.