Fortinet : Q222 Earnings Prepared Remarks

Fortinet Q2 2022 Earnings Prepared Remarks

Peter Salkowski, VP of Investor Relations

Good afternoon everyone. This is Peter Salkowski, Vice President of Investor Relations at Fortinet. I am pleased to welcome everyone to our call to discuss Fortinet's financial results for the second quarter of 2022.

Speakers on today's call are Ken Xie, Fortinet's Founder, Chairman and CEO and Keith Jensen, CFO. This is a live call that will be available for replay via webcast on our investor relations website.

Ken will begin our call today by providing a high-level perspective on our business. Keith will then review our financial and operating results for the second quarter before providing guidance for the third 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, 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.

Ken and Keith's prepared remarks for today's earnings call will be posted on the Quarterly Earnings section of our investor relations website immediately following today's call.

Lastly, all references to growth are on a year-over-year basis, unless noted otherwise.

I will now turn the call over to Ken.

Ken Xie, Founder, Chairman and CEO

Thanks Peter and thank you to everyone for joining today's call to review our outstanding second quarter 2022 results.

Total billings increased 36%; the fifth consecutive quarter of at least 35% year- over-year billings growth. Revenue grew 29% driven by 34% product revenue growth. SD-WAN and OT bookings grew over 60% and 75%, which together accounted for 25% of total second quarter bookings. Our better-than-expected performance demonstrates the strong demand for our cyber security innovation.

Fortinet is at the forefront of networking and security convergence, enabling our customers to reduce complexity, while securing and connecting hybrid and remote users to advanced security with superior performance.

Today we announced the FortiGate 4800F, our latest innovation in converged Network Security. The 4800F is the world's fastest compact Firewall for hyperscale data centers and 5G networks. Powered by Fortinet's NP7 SPU, the 4800F delivers Security Compute Ratings of on average 5-10 times better performance than competitive solutions, across the 6 most common and important functions.

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A leader in the Gartner Magic Quadrant for WAN Edge Infrastructure1, Fortinet continues to take market share for Secure SD-WAN. Our integrated secure SD- WAN solution, powered by Fortinet's SPU SOC4, delivers huge performance, security and efficiencies over traditional offerings.

In addition to convergence, consolidation of vendors and product functionality is another major trend, particularly in Network Security. In a recent CISO survey, Gartner found the percentage of companies surveyed who want fewer security providers increased to 75% from only 29% in 2020.2 With over 30 products lines built mostly by our inhouse strong engineering and development innovation, Fortinet is benefiting from this consolidation with our Security Fabric MESH offering. The Fortinet Security MESH platform delivers unparalleled protection with broad, integrated and automated protection across multiple edges, from endpoint, to data center, and hybrid cloud environments. These two major trends - convergence and consolidation position Fortinet well for long-term growth.

Before turning the call over to Keith, I'd like to thank our employees, customers, partners and suppliers worldwide for their continued support and hard work, that are contributing to Fortinet's strong growth.

Keith Jensen, CFO

Thank you Ken and good afternoon everyone.

Let's start the more detailed quarterly discussion…

Second quarter results were solid and broad-based - across geographies, customer sizes, industries, and use cases - driving market share gains and demonstrating the strong support from our 3 key growth drivers…

• First, an elevated threat environment
• Second, the convergence of security and networking, and
• Third, the consolidation of security products across our platform offerings

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Total revenue of $1 billion $30 million was up 29%, passing the $1 billion dollar milestone in quarterly revenue for the first time in our history.

Total product revenue growth was up 34%. Core Platform and Platform Extension product revenue growth was up 35% and 33%, respectively.

We continued to see robust product revenue growth from a wide range of security use cases, including Secure SD-WAN and Operational Technology, or OT.

Total service revenue growth rate increased sequentially to 25%, resulting in service revenue of $629 million.

Support and related service revenue was up 26% to $289 million, while security subscriptions service revenue was up 25%, or two points sequentially, to $340 million.

Service billings, defined as total billings minus product revenue, were up 36%.

The year-over-year growth rate for short-term deferred revenue has increased for six quarters in a row - from just under 21% in Q4'2020 to just over 31% in Q2'2022 - the highest short-termdeferred revenue growth rate in over six years.

The accelerating growth rates for service billings and short-term deferred revenue reflect the earlier pricing actions that quickly appeared in product revenue and that are now beginning to appear in service revenue.

The pricing benefit more than offset various service revenue headwinds, including:

• suspending services in Russia,
• an increase in the average number of days between when a customer purchases and subsequently activates a security service contract, and
• the impact of contract manufacturers delaying deliveries to later in the quarter, limiting service revenue on new sales recognized in the quarter.

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With growth and pricing benefits more than offsetting headwinds, we expect service revenue growth will continue to accelerate through 2022 and into next year.

As summarized on Slide 6, total revenue in the Americas increased 23%, EMEA revenue increased 28%, and APAC posted revenue growth of 42%.

Despite macro conditions that may be more readily impacting other industries, our pipeline growth remains strong. In particular, EMEA's pipeline growth indicates continued strength in our European business.

Moving to a summary of our success with large enterprises…

Large enterprises continue to favor Fortinet's leading cost for performance advantage and are increasingly more appreciative of our integrated platform. The platform strategy allows customers to converge networking functionality with security capabilities and consolidate multiple point products.

Our success with large enterprise customers includes:

• Global 2000 bookings growth of over 65% year-over-year and on a rolling 4 quarter basis
• Large enterprise bookings growth of over 55% year-over-year and on a rolling 4 quarter basis, and
• The number of deals over $1 million increased over 50% to 122 deals and the total billings value of these transactions doubled.

Secure SD-WAN bookings grew over 60% reflecting the convergence of networking and security as well as a strong ROI for our customers. OT bookings were up over 75% reflecting the continued response to the elevated threat environment.

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