Fortinet, Inc. Price & Performance (FTNT)

We will then open the call for questions. During the Q and A session, we ask that you please limit your 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 risk and uncertainties, which could cause our actual results to differ materially from those projected. Please refer to our SEC filings, in particular, the Risk Factors factors in our most recent Form 10 ks and Form 10 Q for more information. All forward looking statements reflect our opinions only as of the date of this presentation we undertake no obligation specifically disclaim any obligation to update forward looking statements. We Also, all references to financial metrics that we make on today's call are non GAAP unless stated 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. The prepared remarks for today's earnings call will 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 now turn the call over to Ken.

Thank you, Erin, and thank you to everyone for joining our call. We are pleased with our strong performance in the fourth quarter successfully balancing growth and profitability. Including record operation margin of 39%, total revenue growth of 17%, including product revenue growth of 18%, our highest growth rate in six quarters. As we further strengthen our market leadership in secure networking.

And strong growth in Unified SRC and secure operation with Security Service Edge building growth of 85% which drove our unified SaaS billing growth of 13%. Accounting for 23% of our business. The strong unified SaaS growth highlights the value that our customers see in our single vendor SaaS strategy. Are the only vendor to organically develop the key SaaS functionality into a single operation system for TOS. Which emigrate market leading Netgear firewall SD WAN, DTNA, secure web gateway, Caspi, CLP and other innovations. Seamlessly unifying networking and security delivering an enhanced user experience and securing access to application across on premise and cloud environment. Using firewall and SD WAN customer can deploy fully SaaS in the cloud or on premise within 40 SaaS within their own data center enabling tight control of their data and great connectivity. While leverage our 40 AC technology to us accelerate study function for superior performance, Additionally, FulingNet's AI powered security unified management and single agent approach provide consistent protection across all location and devices, and Fortinet full control, visibility, and simplified deployment, while also offering industry's simplest licensing and 3x or 5x. Better performance per user. AI driven secure operations accounted for 11% of while ARR grew 32%.

We recently enhanced our secure portfolio by our Perception Point a leader in advanced email and collaboration security. These acquisitions strengthen our end to end separate security by extending protection beyond email to the entire modern workspace. Addressing the growing advanced threat risk in today's elevated threat environment, In secure networking, We continue to lead inventory with a convergence and consolidation strategy a mission we have been dreaming for twenty five years. Industry forecasts predict that secure networking will surpass traditional networking by 2026. As the number one secure networking vendor Fortinet secured over half of all global firewalls and lead the convergence trend. Also, as shown on Slide four, Fortinet Fortinet to be the only vendor to leverage a single operating system Fortinet. Across five secure networking, Guard and Magic Quantum, customers are increasingly recognized that our 40 OS and 40 ASIC technology delivering a five x or 10 x better performance than competitors. While enhancing security effectiveness and reducing total cost of ownership. This is especially evident in the operation technology where OT cells approached $1,000,000,000 in 2024. Today, we introduced the 40 gigahertz 30 gs 50 gs and seven gs next generation firewall and a unified SaaS solution designed for SMB and the distributed enterprise.

With cutting edge performance and enhanced security delivering up to 5x to 10x faster support and better threat protection than industry average and supporting a wide range of secure network interface for remote access.

In addition, we recently acquired a remaining share of Limpsys, leading provider of connectivity solution. To expand our enterprise grade security to employees working remotely, home business and consumers. Lastly, I'm very proud to share that FiliNet was recently recognized on Forbes most trust company in American List. Ranked number seven overall and the only cybersecurity company in the top 50 list. Highlighting our transparency and commitment to our customer as the most trusted cybersecurity company. 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 Keith.

Thank you, Ken. Thank you, Aaron, and good afternoon, everyone. Start with the key highlights from the fourth quarter. We delivered strong execution and financial performance with top line results above the high end of guidance, together with record operating margins at 39%, Total revenue grew 17%, driven by strong product and service revenues, as product revenue growth pushed up to 18%. In addition, we added a record 6,900 new logos driven by close alignment with our channel partners.

Looking at our financial results in more detail, total buildings grew 7% to $2,000,000,000 including double digit security operations and unified SASE growth, RPO grew 12% to $6,400,000,000 ARR growth was very strong for SecOps and grew 32% and Unified Sassy, which grew at 28%, to a combined total of over $1,500,000,000 Within Unified SaaS, SSE continues to gain traction with ARR growth of 96% as we continue to see early success upselling 40 Sassy to our large SD WAN customer base. 40 Sassy deals increased over 60% and the pipeline was up [indiscernible] Typical 40 SaaS journey as with the customer's first purchase of our 70% of our large enterprise customers have adopted our SD WAN functionality and are poised to expand to 40 SaaS. Our large enterprise 40 Sassy penetration rate increased to 10% That's up two points just since our November Analyst Day reporting. Rounding out the billings commentary, deals between $5,000,000 and 10,000,000 increased over 90% SMB was our top performing customer segment. With growth of over 30%. And EMEA was our best performing geography driven by growth of over 25% from international emerging. Among our top five verticals worldwide government, and service provider both grew over 20% while financial services saw the expected challenge from the difficult year over year comparison, driven by several seven and eight figure deals in the fourth quarter of twenty twenty three.

Turning to revenue and margins. Total revenue grew 17% to $1,660,000,000 dollars Product revenue increased 18% to $574,000,000 our highest growth rate in six quarters driven by hardware revenue growth of 19%.

On a sequential basis, product revenue increased 21% and represents the third quarter in a row with elevated sequential growth. [indiscernible] Software license revenue continued its double digit growth. And represented a mid to high teens percentage of total product revenue. Service revenue of $1,090,000,000 grew 17% to 65% of total revenue. Service revenue growth was driven by SaaS solutions and up at 130% which includes the way it works as well as strong organic services growth in Unified Sassy and SecOps. Combined revenue from software licenses and software services such as cloud Latework and other SaaS security solutions increased 41% and provides an annual revenue run rate of over $1,000,000,000 Total gross margin increased three forty basis points to 81.9% and exceeded the high end of the guidance range by 140 basis points. Product gross margin of 69.3% increased nine twenty basis points as inventory related charges normalized from last year's highly elevated levels, adding eight forty basis points to product gross margin and two ninety basis points to total gross margin.

Service gross margin of 88.6% increased 50 basis points to a quarterly record as service revenue growth outpaced labor and hosting cost increases while benefiting from the mix shift towards higher margin 40 GARs security subscription services as well as some early AI related savings. Operating margin increased seven twenty basis points to a record 39.2% was five twenty basis points above the high end of the guidance range reflecting the strong gross margin, and FX tailwind of about 110 basis points as well as the top line over performance that flow through to the bottom line. Before moving to the statement of cash flows, I'd like to summarize the financial impact from the lease work NEXT BLP [indiscernible] These acquisitions increased fourth quarter billings by 115 basis points versus our expectation of 75 basis points, and decreased operating margin by 190 basis points versus our expectation of a decrease of two thirty basis points.

Looking to the statement of cash flow summarized on Slide 18 through 21, Free cash flow was $380,000,000 and free cash flow margin was 23% up 11 points.

Adjusted free cash flow was $549,000,000 representing a margin of 28%, up 16 points. Cash taxes were $156,000,000 down $186,000,000 reflecting the prior year's regulatory extension of estimated tax payments. While infrastructure investments were $98,000,000 or up. $71,000,000 Average contract term in the fourth quarter was twenty nine months down one month year over year and up one month quarter over quarter.

DSO decreased ten days reflecting improved linearity year over year. And the remaining share buyback buyback authorization is $2,000,000,000 Moving to an overview of our 2024 full year results.

Billings exceeded $6,500,000,000 while total revenue grew 12% to $5,960,000,000 by revenue growth of around 25% for both Unified Sassy to SecOps. Service revenue grew 20% to $4,050,000,000 driven by a 22% increase in security subscriptions and 33% growth in Unified SaaS services. Gross margin was up three ninety basis points to 81.3% from the revenue mix shift to service revenue, and a 140 basis point tailwind of inventory related charges normalized during the year. Operating margin increased 60 basis points to a record 35% resulting in operating income of $2,100,000,000 which was up 38%. Our GAAP operating margin at 30.3% continues to be one highest in the industry. Earnings per share increased 45% to $2.37 Free cash flow was a record $1,900,000,000 representing a margin of 32% Adjusted free cash flow was $2,200,000,000 representing a margin of 37%. If I were to just sum up 2024, I think it's important to note that we have now met or exceeded the Rule of 45 for the fifth consecutive year.

Now I'd like to share a few significant fourth quarter wins showcasing our Sassy expansion and our leadership in operational technology. In a 7 figure new customer win, the healthcare provider strategically included 40 SASE in its first Fortinet purchase alongside SD WAN while replacing a competitor's firewall. With a new leadership team focused on vendor consolidation, reduced operating cost and complexity, and addressing technical debt the 40 OS consolidated multiple security functions onto a single platform. Modernized an outdated firewall infrastructure and replace VPN technologies with a 5,000 seat SaaS solution that relies on Fortinet's Fortinet. In another 7 figure SaaS deal, an existing Fortune 500 SD WAN retail customer purchased 40 SASE for 2,000 users with the potential to scale up to 12,000. That shows Fortinet effort flexible and consistent security enforcement which enhances user experience while securing access to both on prem and cloud applications. Additionally, they valued our strategy of building our own Sassy delivery infrastructure. Powered by our proprietary ASIC technology.

And lastly, in a high 7 figure deal, a large energy company expanded its partnership with us by signing its first enterprise agreement to protect this global critical infrastructure. This customer secures its infrastructure using 40 gates, across approximately 1,000 sites spanning branch locations, data centers and cloud environments. Key factors in this win included our ability to support their global critical infrastructure both technically and through world class support programs. Our leadership in OT infrastructure capabilities in the automation and seamless integration of our 40 OS system [indiscernible] Fortinet supplying over 50% of the firewalls worldwide, Fortinet security solutions themselves have become critical infrastructure protecting the critical infrastructure. In the threat landscape where there have been has been a step level increase in sophistication, and risk. Given our scale, innovation and broad adoption, and national cybersecurity agencies around the world view our partnership as key to protecting the most important customers and entities in this dynamic landscape. Next, I'd like to review some of our key AI solutions for threat intelligence, networking, NOC and SOC, [indiscernible] For threat intelligence, FortiGuard AI Fortinet security services combined with real time threat intelligence helps organizations combat known unknown, zero day and emerging AI based threats.

Fortinet networking, 40 AI ops reduces the time needed to diagnose networking issues. Monitoring trends of the network, and with full access to logs across the Fortinet security fabric, Our AI engine uses machine learning to understand the optimal conditions for the network and highest potential issues.

For the knock and sock, 40 AI uses natural language generative AI to guide, simplify and automate analyst activities. 40 AI is integrated into seven different network and security operation products, with additional products to be added. For LLM leakage, our AI based DLP services actively identify and block sensitive information from being uploaded or shared with AI systems. [indiscernible] Before discussing our guidance, I'll offer a few updates on the record level firewall upgrade opportunity that we shared during our November Analyst Day. In the fourth quarter, we saw early upgrade movement with large enterprises. Both on buying plans and actual purchases. We expect the momentum to build as we move into the second of twenty twenty five. As we get closer to the 2026 end of service dates. [indiscernible] 2026 and 2027 cohorts present a substantial upsell opportunity for SASE switches, access points and psychop solutions. Maximize our upgrade and cross sell potential, we're implementing several initiatives including creating sales plays for each customer segment and [indiscernible] Expanding our account plans for larger enterprises to more specifically target the upgrade and expansion opportunities. And collaborating with our channel partners on SMB opportunities incentive programs, end user data, and developing targeted bundle offerings for these customers.

Moving on to guidance, As a reminder, our first quarter and full year outlooks are summarized on slides twenty three and twenty four.

Are subject to disclaimers regarding forward looking information that Aaron provided at the beginning of the call. Growth by approximately 90 basis points and decreased operating margin around 40 basis points. For the full year, we expect Winxis PerceptionPoint to increase billings and revenue growth by approximately 125 basis points and decreased operating margin by around 50 basis points. For the first quarter, we expect billings in the range of 1,520,000,000.00 and $1,600,000,000 which at the midpoint represents growth of 11%. Revenue in the range of 1,500,000,000.0 to 1,560,000,000.00 at the midpoint represents growth of 13%. Non GAAP gross margin of 80% to 81%, non GAAP operating margin of 30% to 31%, Non GAAP earnings per share of $0.52 to $0.54 which assumes a share count of between $774,000,000 and $780,000,000 infrastructure investments of $80,000,000 to $100,000,000 a non GAAP tax rate of 18% and cash taxes of $30,000,000 to $35,000,000 For the full year, we expect billings in the range of $7,200,000,000 to $7,400,000,000 which at the midpoint represents growth of 12%. Revenue in the range of $6,650,000,000 to $6,850,000,000 which at the midpoint represents growth of 13%. We service revenue range of $4,575,000,000 to $4,725,000,000 which at the midpoint represents growth of 15%.

Non GAAP gross margin of 79% to 81%, non GAAP operating margin of 31% to 33%, Non GAAP earnings per share of $2.41 to $2.47 which assumes a share count of between $7.73 and $783,000,000 Infrastructure investments up $380,000,000 to $430,000,000 a non GAAP tax rate of 18%. Cash taxes between $525,000,000 and $575,000,000 And on a personal note, you have made read in today's eight ks filings that after four decade career in finance, including eleven years of Fortinet Fortinet, it's time for me to enjoy retirement. I'll continue to serve through the next quarter earnings call and up to May 15. And plan to stay at Fortinet to help with the transition through June 30. Importantly, leaving Portnett in very good hands. Pursuant to our succession plan, Christiana Olgaard, who as discussed in the eight ks has served in various roles at Fortinet for almost six years. Take over as CFO at my step down in May. I'd like to thank Ken, Michael and the Fournette team and all of you for making this chapter in my life so rewarding. I very much appreciate the time I've had at Ford networking with Kim, Michael, the entire team, certainly with the investors and financial analysts.

I know I'll miss Vernette as people, customers, and its noble mission to protect and serve important customers and entities, around the world. Thank you, Keith, for your great service and contribution. And, Christiana, we're looking forward with you in a new role to continue to drive the success and the full net So I will now hand the call over to Aaron for the Q and A session. Thank you, Ken. As a reminder, during the Q and 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. Thank you. Our first question comes from the line of Hamed Soodawala with MS. Your line is open. Please go ahead. This is Jonathan Heissinson on for Hamzah. First off, Keith, congratulations on your career and best of luck with retirement and with your next endeavors. So Ken for you, so I believe some of the hyperscalers like Oracle are big customers and partners with Fortinet. So just curious as you have Oracle and some of the other hyperscalers extent Fortinet is involved in securing these? Yes. Thank you. It's a great question.

So, Fortuna is the only company we develop the secured ASIC processor. It's in security computing power quite a lot compared using general purpose CPU.

That's drive a lot of our growth into recorded internal segmentation within the data center, hyperscale, all these things. So we see a huge opportunity and not just secure networking there, but also a lot of data center also relate to the AI. We also see huge opportunity to drive the AI security, whether secured infrastructure itself or secure the data or secure the access So there's a lot of opportunity. I do believe that's the huge potential for growth because of unique advantage using the 40 Fortinet. Thank you. And we'll move on to our next question Our next question comes from the line of Taliani with Bank of America. Your line is open. Please go ahead. It's an honor for me to ask a question after John, my ex associate that crossed the line. I want to ask you two things. Number one is about billings. Why is billings weakened? Weak guidance? And that second question is product revenues outperformed so much this quarter [indiscernible] that might be a cycle, a refresh cycle, but the guidance for next quarter, I don't see how performance. So why is it just this quarter phenomenon you don't carry the strength into the next few quarters?

Thanks.

Yes, Todd, I wasn't sure if on your first question about buildings, if you were asking about the fourth quarter or the first quarter. I'm asking billing in general. So billing for the fourth quarter, was better, but billing for the first quarter is weaker. So why is the weakness in billing I think yes, I think the if you look at the fourth quarter, maybe we'll start there a little bit.

As you recall, we talked last quarter about the fourth quarter guidance process, there was a lot of concern around the August probably the 8 figure deals and what we were going to get out of that and we were being cautious in the guidance. That was logically or rather a prudent approach Where we got the upside was on those deals from $5,000,000 to $10,000,000 And I would say the close rate and the opportunity there was probably $40,000,000 to $50,000,000 more than what anticipated in the guidance setting process. And you saw that same over performance on those larger deals show itself in the product revenue line And then also we saw in the product revenue line our significant growth in product revenue was in the mid enterprise pardon me, the midsized firewall [indiscernible] when you peel back on that onion, you start to see enterprise companies have started their purchasing of the refreshes that we talked about at the Analyst Day.

So I think obviously that the information and the news about Q4 is very good. I think if you look at in Q1, whether it's billings or product revenue, probably just a little more caution there as we kind of got exposed to the tariffs here over the last week and we saw the reaction and some of the concerns for us were the more of a multinational footprint particularly in Latin America and Canada, for example, the customer footprint a little more exposure there. And then of course, the direct impact of perhaps some disruption in the U. S. Government where we do have a footprint also. So maybe a little caution in that regard.

The other probably may impact some of the buildings really. We are more also driving the ARRPO, which kind of a little bit different than before. It's more about building, but [indiscernible] to the future, but we'll kind of secure the customer with all these the platform, the unified SaaS approach. That's where the SASE and the secure RPP tend to have a higher growth in the AI and RPO than the building. Thank you. One moment as we move on to our next question. Our next question is going to come from the line of Gabriela Borges with Goldman Sachs. Your line is open. Please go ahead.

Hey, good afternoon. Thanks for taking my questions. I would love to hear a little bit more on the Refresh product versus cross sell in a couple of different ways. Wanted to ask you specifically about the implications for subscription revenue as you see the hardware come up for renewal and as you sell some of the networking components on the hardware side into your installed base, So either for Keith or maybe Christian, how you think about the implications for hardware comes up?

Jump in there?

Okay.

I think at the Analyst Day, I explained a little bit that the existing hardware has subscriptions. In order to grow subscription revenue, we need to upsell and sell either more subscriptions with the same hardware or more services [indiscernible] have put plans and incentives in place for our sellers and our channel partners to do so. Kind of the prerequisite for us to grow our service revenues or accelerate the service revenues.

Also the new hardware tend to be have more capacity to run additional function and better Fortinet. That's also enable additional service including a lot of new service we develop in the FortiOS in the last few years, like others unified SaaS function and some other AI kind of based function. That's gave the new [indiscernible] Thank you for the detail. Congrats on the quarter and congrats to Keith and Christian as well.

Thank you.

Thank you. One moment as we move to the next question. Our next question comes from the line of Brian Essex with JPMorgan. Your line is open. Please go ahead.

Good afternoon. Thank you for taking the question. Keith, I thought when you started with key highlights for the quarter, your retirement would be up to the top.

Seriously, it's been a real pleasure working with you and best of luck on the retirement Well deserved. And Christiana, looking forward to working with you. So congratulations on the appointment to CFO. I guess the question I had was with regard to the billings guide for this next fiscal year, Would love it if Christiana, if I think you've done a lot of work on it. If you could unpack the assumptions behind that, how much is upgrade growth of SecOps and SaaS and how much is product related cycle baked into that? And maybe if you could share an exit rate, that would be super helpful. So in our billings and revenue guidance, Of course, we have the two components, right? Product is what we said this year, [indiscernible] is what we what rose off the balance sheet mostly. And about 10%, 15% is from new services that we are selling this year. And our assumptions, of course, are as we presented at the Analyst Day that But we also are planning to with certain incentives for again our own sellers as well as our channel partners to drive new logos. [indiscernible] And from an exit rate perspective on SURF where you're looking at exit rate for services Well, I guess overall for billings and then maybe if you can help us understand how much product revenue is baked into that, but really just trying to get a sense of the trajectory that you're baking into billings to kind of get to that full year billings guidance that you have.

Product revenue growth we assume is around 10% right now. As we saw already a significant traction. This year, but yes, that's the current running assumption.

Okay, that's helpful. And does that require like a Like a exit rate in 4Q of like teens like high teens billings growth or are you expecting a more moderate build throughout the year?

Right now it's more moderate.

Okay. Super helpful. Thank you so much and congrats.

Thank you. Thank you. One moment as we move on to our next question. Our next question comes from the line of Fatima Bilani with Citi. Your line is open. Please go ahead. Good afternoon. Thank you for taking my question. Hope you very much have an enjoyable ride into the sunset. It's been terrific. Partnering with you. I wanted to go back to some of the commentary you made on the tariff impact I did want to dig into that a little bit. So I think there is significant amount of uncertainty from these tariffs. They're in flux there's some potential retaliatory policies being thrown around. So I both wanted to dig into some of the demand comments you made and how far ranging those are and how they are being contemplated in guidance. And then also from a supply chain perspective, how is that influencing or potentially impacting your supply chain and ultimately COGS and gross margins? Thank you. [indiscernible] it's as you pointed out, so it's going to be dynamic time, if you will, in trying to understand where these may end up. I would say that for selling purposes for demand, we have a fairly significant footprint in both Latin America and Mexico as well as Canada.

And over the weekend when the tariffs were announced, there was a lot of activity here internally Sunday night and Monday morning to understand what the what the disruption would be more about those economies and their buying out habits, if you will, of our products. And I think it's that type of reaction that we are focused on. I would also supplement that a little more context. Our 40 Authenticator product, I believe it is, actually it's a very small product line, but it is manufactured in Canada. And we were looking at what the tariff impact would be like that. And then by Monday night, all those things all bets were off. So we're kind of chasing it a little bit.

And we do have similar to our sales leadership in Latin America raising their hand immediately what they were seeing and being concerned about with Mexico Our U. S. Federal team similarly raised their hand and said, have aren't going to be employees in the federal government to sell to, it's going to be challenging. So I just think we're acknowledging that it's a very dynamic situation right now and let's try and not get too far ahead of our of our season until we know more. On the other side, I think in terms of tariffs, coming into the country or products, keep in mind that our pure U. S. Business is around 25%, 26%, 27% of our total business. So obviously that [indiscernible] subject to the tariff schemes of The U. S. And I think there's obviously if we had to respond in some way, the market. I think the tariffs will be broad brush and would affect not only ourselves in our U. S. Business, but 25%, 26%, but our competitors as well. And I would expect that we still at this early stage still have the pricing advantage that we currently have.

Thank you, Kristiana. Congratulations. Thank you.

Thank you. One moment as we move on to our next question.

Our next question comes from the line of Shali Yaw with TD Cowen. Your line is open. Please go ahead. Thank you so much for taking my question. Good afternoon. Congrats on the results Congrats, Keith, and congrats Christian. Keith, my question maybe builds a little bit on the prior question, but touches more specifically on your U. S. Performance. This year, you had I think this quarter the best quarterly performance in 2024. Do you see that being sustained into 2025 given some of your prior investments? What are the plans specific S. Sales operations.

Yes, great question. So I think probably starting a little bit over one years ago, we're starting as The U. S. Enterprise sales and also more focused on like adding sales capacity and also kind of working closely with our channel partner to drive the growth. Which both in the high con and also drive the program with a partner there. So that's we see some pretty good result. And so we do see there's a lot of loan growth in The U. S. And at the same time, we have a huge advantage on the resource on the first on the facility on the people here in The U. S. And Canada, the continued drive the future growth. So that's where we see The U. S. Could be the the fast growing region in the next few years.

Thank you so much.

Thank you.

Thank you. One moment as we move on to our next question. Our next question is going to come from the line of Rob Owens with Piper Sandler Companies. Your line is open. Please go ahead.

Great. Thanks for taking my question. I was hoping you could expand a little bit just on the Linksys relationship and what you hope it brings? And I know Ken you did outline some expectations relative to revenue and billings, but just strategically where it positions you better? Thanks. [indiscernible] about 51% of share about three years ago. And then we're keeping private shaping the company to more line up with our own kind of a secure networking strategy. But also this all kind of a new market we feel Fortinet Prope is only player can play in the consumer home based network security because we have this technology like AC, we have all this unified [indiscernible] and together with the Linksys consumer and also the huge user base, which they have a 25,000,000 active user and has been shipping almost two fifty million devices in the last almost forty years. So it's a leading brand and [indiscernible] we can really drive the new market for consumer to supporting work from home and also to cover some SMB space, we see pretty fast growth. So that's the strategy, but that's also probably will take some time to continue kind of develop all these technology market together, but we do feel this could be a huge potential in the next five to ten years for the company growth.

Thank you. And we'll move on to our next question. Our next question comes from the line of Eric Keith with KeyBanc. Your line is open. Please go ahead.

Great. Thanks for taking the question here and Keith, congrats as well. So Keith and Christian, I wanted to understand a little bit just ahead of the refresh opportunity that's starting in the second half.

Should we be thinking about inventory levels in anticipation of that demand? Then secondly, maybe to follow on to Brian's earlier question, just the assumptions embedded in the product guidance, specifically from the end of service refresh, are you assuming half of that $400,000,000 to $450,000,000 opportunity happens in 2025?

Yes. I'll cover up the inventory question a little bit and then maybe Christiana can come back over the top and talk a little bit more about the model for 2025 and I don't know that we explained we'll explain a specific dollar amount to each individual item in that, but in any event, and I have been at this for a long time. You guys just see it, inventory turns to two, I think, see inventory turns to five or six. I lose constantly on the inventory turns. We've gotten as we've gone through the supply chain cycle here You saw the inventory turns. We did very well with those storing inventory, if you will, on our balance sheet as we got into COVID and supply chain crisis, and it really helped fuel the super cycle for us on our income statement. And with that in mind, I think a healthy number for us, I'd have to agree with Ken now, is probably in the range of 2x for returns. And I would imagine that you would expect you could expect us to target that each quarter in terms of our inventory balance Yes. On the linearity of the product revenue assumptions, while there is definitely a compelling reason to refresh in the second half year because you can't you can only renew for one year.

We've seen refresh activity happen already, especially for customers and we will try to accelerate, the up we've assumed that there's a more gradual than kind of spiky upgrade path.

Thank you.

Thank you. And one moment as we move on to our next question. Our next question comes from the line of Saket Kie with Barclays. Your line is open. Please go ahead. Okay, great.

Hey guys, thanks for taking my questions here and I'll tip my cap to both of you on your respective exciting next steps. So very clear numbers and a lot of helpful questions. Keith and Christian, maybe I'll ask just a couple of housekeeping questions. If I may. First, can you just remind us, I think you touched on it a little bit. Can you remind us how big LatAm and Canada are just in terms of percentage of billings And then maybe on top of that, can you just remind me of the 12% growth that we're guiding to roughly in 2025, how much of that is organic versus inorganic?

To your first question, Latam and Canada are about 15% of total business. And on the organic growth number, we expect about one point in organic.

Very helpful.

Thank you. One moment as we move on to our next question. Our next question comes from the line of Adam Borg with Stifel. Your line is open. Please go ahead. Hey, guys. You've got Max on here for Adam at Stifel.

Thanks for taking the question.

Over the last few quarters, we've talked about SaaS and SecOps billings coming primarily from existing customers. So as we look out into 25, just wondering what the [indiscernible] a more meaningful contributor to new logos? And do you or do you expect that to kind of remain as primarily an upsell motion?

I think we do have a huge installation base on the MagGen firewall and also ST WAN, I still feel [indiscernible] probably will count most of the new [indiscernible] the sales force and also for the partner I believe last few quarters probably over 90% of our customers, which are already all firewall mentioned firewall and also SD WAN customer. Which does give us also more advantage compared to all these SaaS only player. So that's where and that's also the reason is also because we have the single OS, have all these networking security with all these SD WAN and also all the other SaaS function in the same OS. So it's very easy upgrade. On the other side, we do have a see a lot of new customer and especially some big enterprise. Some of them have issue with some other SaaS players and we do have a lot of advantage on the better function better integration, a single OS solution, and much better performance and pricing. Like I mentioned, probably 3x to 5x more price advantage and plus our own kind of infrastructure supporting this kind of lower cost, better margin and the same time integrate function to together is more easy to manage and better protection So that's the advantage we have.

That's where we also put the confidence [indiscernible] the number one player in the NEGAN firewall and SD WAN, we also gave us some time. We also were leading to become the number one unified SaaS player in the space.

Yes. And I think Ken is spot on in terms of the factors that NOL build on one of those, which is removing reducing complexity and reducing costs and making things simpler I was really impressed with the first deal that I talked about in the script here when I talked to the sales team, which was a pure Widespace account that started off as a competitive firewall displacement and we know we're really good at that and we know how to do that. But then to see them consult and collaborate with a customer and make it not only an SD WAN deal, which we've been a ton of sense, but also to get them in the boat on the SaaS deal. And I think that speaks to we'll want a very good sales team that brought that to the table for us.

The evolution and the maturity that you're seeing in our own organization as we get more experience underneath our feet and our ability to branch out and sell into those organizations that are focused on a consolidation play removing complexity and controlling cost.

And that also will benefit from a lot of our long term investment like in the single OS in the in the hardware and also in the ASICs. So we are the only ASIC designer in the whole space and a lot of new ASIC design will drive the new SASE function will keep and give us a much better Fortinet, lower cost, lower consumption and also the sovereign SaaS for service provider, for enterprise, for data center, we obviously see a lot of growth potential. That's really the unique advantage Fullinet has.

Thank you. And we'll move on to our next question.

Our next question comes from the line of Shurnik Khutari with Baird. Your line is open. Please go ahead. [indiscernible] Taking my question. Just really solid unified SaaS growth rates. You guys are seeing increased penetration among larger enterprises. Which in the earlier commentary was was still building momentum. So just curious can you provide an update on strategic incentives, which are tied our off selling SAPI set costs and how these incentives are impacting overall kind of property metrics, deal conversion and yes, and then I had a follow-up question as well.

Yes. Sweli, we do want to [indiscernible] the training to both our sales team, the technical team and also our partner [indiscernible] but they do see the long the customer definitely see some of the long term benefit of using a single OS to gradually adding more function and adding more security and easily upgrade to the next kind of security function they needed. And on the other side, I think we also need to keep in [indiscernible] and at the same time provide better training On the other side, we see the feedback already from customer partner, they do see this upgrade of SASE is much easier compared to this new SaaS approach. And the much shorter sales cycle And you can see since like we only launch our own SaaS approach a little bit over one year and you can see the ramp up is more or less quick and probably the fast growing in the SaaS space right now. So we do see a lot of great potential going forward.

Thank you. And one moment as we move on to our next question.

Our next question comes from the line of Junay Truist Securities. Your line is open. Please go ahead.

Great.

Thank you for taking my question. Keith and Christian, congrats to both of you. Keith, you mentioned performing customer segments, which is a bit different from what we hear from some of the other vendors. I was just curious what is underpinning that demand and what are you seeing that others are not? Thank you.

I think the channel program at Fortinet is probably fairly mature. I mean Ken has been doing it for a long, long time. I don't think we're scrambling to find channel partners, if you will. I would also give a lot of credit to Christiana and what she's done in her year here, is really focused on the channel and getting to more senior levels with channel leadership to understand what's important to them and how to structure incentives that are tailored to what the channel is trying to accomplish. There's just much more collaboration with channel partners today than I've ever seen before here. And so I think these we had some fairly specific and targeted incentive programs in the fourth quarter that and I helped develop and I think those were, as you see in the numbers with the new logos and 6,900 and the mix of the business extremely successful.

Yes. And in that angle, I also see we have probably the best product because none of our competitors a small, has this technology single OS with so many is almost 30 function integrate in the same single OS and with about half the function about fourteen fifteen using Async plus Celerade, that's give us huge performance and function advantage than any other competitor because SMB like the three model we announced today, they run the same Fortinet compared to some other big box big appliance there. And that's where the SMB and even the long term home users see some huge advantage using the same 40 OS and they can kind of whether connect to the enterprise or they can they can connect to the cloud and also this NaviDot is a new unified SaaS approach. So that's where we feel it's a technology product advantage gave us huge kind of unique benefit to our customer, SMB customer eventually can be the home user consumer space. Which we feel is because so far even in the The U. S. And Europe, the developed country, the SMBs still had only single digit of SMB customer has any network security to protect their network and their So we do see there's a lot of growth potential.

But how to address this technology need to be easy to be deploy, easy to use, easy to support and use AI. And all these and that's where we kind of invest quite a long time and we do see it's kind of a long term benefit of this long term investment also huge potential going forward.

Thank you. And one moment as we move on to our next question. Our next question comes from the line of Joseph Gallo with Jefferies. Your line is open. Please go ahead.

Hey, guys. Thanks for the question. Keith, congrats on the much deserved retirement and congrats It was great to hear about the early end of life refresh demand. In those early renewals, how was the average deal size increased versus four years ago? I'm just trying to understand how you're thinking about the size of the cross sell opportunity versus $450,000,000 product refresh? Yes. I think I tried to make the point that what we've seen and I guess it kind of makes sense is that The larger enterprises are probably moving first. We expect that the SMBs may move a little bit later on the timeline They probably have less advanced per departments and maybe less regulatory pressures and things of that nature. There's probably a lot of reasons for I think what we what you see in our large enterprises historically is they they often have a deployment schedule. They may not necessarily take all of the equipment at one point in time, but rather take a certain amount each quarter, maybe nothing in one quarter and and more in the third quarter. And that it was that same buying behavior patterns I think we started to see in the fourth quarter, which are looking back at some of these more regulated industries, also some technology companies And we could see the swapping out of the the mid major products that are being end of life and then taking on new products.

And we talked to the account person about, yes, that's are on that runway and they will continue doing that now over the next several quarters.

And let me add to what Keith just said. Regarding your question of average deal size. So at as we have a lot of large customers that have enterprise agreements, They pretty much have an ongoing purchasing habit of replacement devices that they build out during the EA.

So you don't necessarily see creeping up larger deals because they negotiate at a certain point in time what they need for the next five years and then they buy at they are ready to upgrade. [indiscernible] Our next question comes from the line of Ittai Kidron with Oppenheimer and Co. Your line is open. Please go ahead.

Thanks and congrats as well for both of you, Keith and Chris Christiana. Good luck and enjoy retirement, Keith, you earned it.

A couple of questions for me. Just again on this upgrade cycle, if you know the devices and you can ping them and you know exactly where they are and when they get retired for the vast majority, Can you just be a little bit more specific on what was the contribution of this upgrade to revenue this past quarter and what is the exact dollar contribution you expect from the upgrade in your $25,000,000 guide?

And the second question is for Ken on Sassy. Great to see the progress in adoption over there. Can you comment though of how much of the adoption with the large enterprises is against brownfield displacement of all SaaS solutions or walking into a vacuum? Would love to understand how much of your footprint in your opinion has something that you need to displace versus you're stepping into a vacuum? Thank you.

Yes, I think on it's a great question and keep in mind with the two tier distribution model, we sell to distributors, we sell to resell, we sell to end users. And oftentimes, it's SMB the quality of the data about the end user gets better and better the closer you get to the end user with the reseller. And it's why you heard a reference in the script about the importance of working with them on on data gathering. There's a bit of an honor system when they register the devices It may be more intuitive to us. And of course, when you get a device, you register like our phone or something like that. But that's not what happens in practice, particularly in the SMB. And really there's a heavy reliance there on the channel to spend time and energy if you want to get good reporting and tracking on that. So we'll get better at it as we go and that's part of working closely with channel partners. It is easier with the enterprises because we talk to the to our sales rep who's working in the large enterprise and understand the account plans and what they're seeing, but you're still only getting a partial set of information I think the reporting and information will get more mature as we go along.

It's moving pretty quickly right now on us in terms of how we're developing it.

For your second question, actually you can refer to the presentation slide number five. So they do give some some real penetration rate. I think for SaaS, it's around 10%, an increase two point from from like two months ago on Analyst Day. And then ISP one in the large enterprise probably about 70%. So that's where the firewall, making a firewall market and then that's actually drive a lot of SD WAN growth and then also after SD WAN, the SaaS will be the next growth. We'll keep in helping customer build better security infrastructure.

And in terms of your question whether brownfield or not, we are seeing some of our biggest Sassy [indiscernible] as displacements of either legacy VPN providers or legacy SaaS providers. Appreciate it. Thank you.

Thank you. And I would now like to turn the conference back over to Erin Odiva for closing remarks.

Thank you. I'd like to thank everyone for joining today's call.

Will be attending an investor conference hosted by Morgan Stanley during the first quarter The fireside chat webcast link will be posted on the Events and Presentations section of Fortinet's Investor Relations Fortinet. If you have any follow-up questions, please feel free to contact me. Have a great rest Your day participating and you may now disconnect. [indiscernible]