Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Fortinet Inc (FTNT, Financial) achieved record operating margins of 35.1% and gross margins of 81.5%, exceeding expectations.
- Revenue grew by 11% year-over-year, driven by strong service revenue growth and robust software revenue growth.
- The company added 6,300 new logos, indicating successful customer acquisition and channel partner investments.
- Fortinet Inc (FTNT) continues to invest in high-growth areas such as unified SASE and secure networking, positioning itself for future growth.
- The company completed strategic acquisitions of Life's Work and Next DLP, expanding its total addressable market by $10 billion and enhancing its product offerings.
Negative Points
- Product revenue decreased by 4%, although it was better than expected.
- The company faces a tough macroeconomic environment, including high interest rates and commodity costs, which may impact customer purchasing decisions.
- Fortinet Inc (FTNT) does not expect a full firewall refresh cycle to occur in 2024, likely pushing it to 2025.
- There is a need for increased investment in sales and marketing to maintain growth, as current spending in these areas is lower than desired.
- The service provider and manufacturing verticals faced challenges, impacting overall performance in these segments.
Q & A Highlights
Fortinet Inc (FTNT) Q2 2024 Earnings Call Highlights
Q: Can you help us understand the incredible margin results for the quarter and how sustainable they are, particularly in light of the effort to incentivize the channel and the sales force?
A: The gross margin is the largest driver of the operating margin. We've returned to a more normalized state regarding inventory levels and channel inventory. We expect this to continue. We are also making investments in sales and marketing, especially with the new salespeople from the recent acquisitions. We feel comfortable with the guidance given for both Q3 and the full year on the margin line. β Keith F. Jensen, CFO
Q: How should we anticipate the impact of the operating margin on free cash flow for the rest of the year?
A: A good starting point is to look at the improvement in operating margin flowing through to free cash flow. We monitor changes like contract duration, but we don't see a dramatic shift in the next 90 days. β Keith F. Jensen, CFO
Q: Is the strong operating margin a new base for Fortinet, or is it a one-time outperformance?
A: The inventory normalization is done, and we don't anticipate significant changes in gross margin. We have opportunities to invest more in go-to-market strategies. Service revenue, which has a higher margin compared to product revenue, will continue to grow. β Keith F. Jensen, CFO and Ken Xie, Chairman & CEO
Q: What are the drivers behind the accelerating software license growth, and how should we think about the trajectory of the mix shift?
A: Our business model focuses on compelling firewall solutions, whether physical or virtual. This leads to more firewall use cases and the expansion of our sec ops product lines. We expect continued growth from the software part of the business. β Ken Xie, Chairman & CEO
Q: Can you provide more detail on why you think the firewall refresh cycle will occur in 2025 rather than 2024?
A: The macro environment remains tough, with high interest rates and commodity costs. Historically, network and security refresh cycles occur every four to five years. We believe the next refresh cycle will start in 2025, driven by the need for faster, more functional infrastructure. β Ken Xie, Chairman & CEO
Q: What are the drivers for the recent acquisitions, and what's the outlook for billings and OpEx?
A: The acquisitions will contribute to billings and revenue growth. We expect to see more opportunities for investment in sales and marketing. The outlook for buybacks remains opportunistic, depending on market conditions. β Keith F. Jensen, CFO
Q: How are you seeing the macro environment impact different customer sizes and regions?
A: We are diversified, with 70% of our business international. The international emerging part of the business has been strong, particularly in oil-producing countries. In the US, the election year may be causing some customers to wait and see. β Keith F. Jensen, CFO and Ken Xie, Chairman & CEO
Q: Can you discuss the pricing dynamics in the core firewall business and expectations for the future?
A: We have not increased prices recently and don't see pressure to decrease them. Our products offer better performance and lower total cost of ownership, which drives future service revenue. β Ken Xie, Chairman & CEO
Q: What attracted you to the stand-alone enterprise data protection market and the next DLP acquisition?
A: The tech is great, and we plan to offer it both as a stand-alone and integrated with our FortiSASE solution. This acquisition bolsters our SaaS solution and aligns with our strategy of developing competitive solutions in SASE and sec ops. β John Whittle, COO & Corporate Secretary
Q: How do you compare the upcoming firewall refresh cycle to previous ones, and how does the higher mix of virtual firewalls play into it?
A: The upcoming cycle will be different due to the hybrid work environment and the need to secure OT and IoT devices. We believe in a hybrid SASE environment, combining both hardware and software. The convergence of networking and security will drive the refresh cycle. β Ken Xie, Chairman & CEO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
