FORTINET Q3 2026 EARNINGS CALL - FORTINET INC

Hello, and welcome to Fortinet's third quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, we will conduct a question and answer session. Please be advised that this call is being recorded. I would now like to hand the call over to Anthony Luskery, Vice President of Investor Relations. Please go ahead. Thank you. 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 Zee, Fortinet founder, chairman, and CEO, Christiana Olgaard, our CFO, and John Whittle, our COO. Ken will begin our call today by providing a high-level perspective on our business. Christiana 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-thinking 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 10Q, for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation, 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-GAP reconciliations are located in our earnings press release and in the presentation that accompanied 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. Building growth 29%, while total revenue increased 20%, lead by 37% growth in product revenue. Based on our continuous strong momentum, we have reached our 2026 building guidance for third time this year with the rapid evolution of ai landscape fortnite is leading the next frontier of cyber security by secure 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 inland 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 7, while continually expanding our AI capability and functions in FortiOS and FortiGuard services. Fortinet secures four critical areas of infrastructure and air security, as shown on slide 9. First, on the network level, our SASE firewall natively protect against vulnerabilities and stop intrusions, supporting shadow air monitoring and access control to data and applications. To address growing demand, the newly launched FortiGuard inline air security services this week transform every 40 gate into a real-time AI enforcement point second in a data center and AI factories we offer 48 gate to secure GPU clusters and the LM infrastructure securing the massive growth in AI traffic that require high performance protection across data center and hybrid cloud third we extend and AI security together with SASE to endpoint, define, controlling, and integrate agent identity directly into access and incident response lifecycle. And fourth, our SOC 40 agent deliver a highly automated solution to solve industry accurate skill shortage and tool spoiling by enabling autonomous incident detection and response. Our SASE firewall pillar building grows 31% and we are the fastest growing SASE firewall vendor on the scale, growing at nearly double the market growth rate as shown on slide 5. Our leadership starts from a fundamental architectural advantage as we are only vendor in the industry to build all the key SASE firewall and AI security component into a single and a unified operation system. for the U.S. This new sustainable pillar represents a large, high-growth area driven long-term growth. Combined with our differentiated for the ASIC technology and owned global infrastructure, this allows Fortinet to deliver better performance and significantly lower total cost 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 give us a 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. This positions our Forti AP and FortiSwitches as a SASE hardware agent, allowing customers to easily overlay FortiSASE on top of their existing hardware-driven recurrent service revenue. As we look ahead, Fortinet's strong momentum is a result of our 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 recurring revenue, and consistent gap profitability while executing our shareholder-focused capital allocation strategy. 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 Christiana. 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've 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 a strong demand in large enterprises with the total value of deals greater than 1 million growing 51%, driven by an outsized contribution from our US 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 the 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 cyber security 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 i.t 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 model selected fortinet for seven figure expansion to secure its rapidly growing ai workloads this strategic win builds on the successful deployment of the customers first ai data center last year driven by that initial success a deep trusted relationship and the strength of our technology the customer has standardized on fortinet deploying our high-end data center firewalls across five additional data centers our solution addresses the challenge of protecting high value ai workloads while maintaining maximum performance availability and scalability as the infrastructure expands This deal exemplifies the leading throughput and resilience of our platform, positioning Fortinet as a foundational security partner for the world's most demanding next-generation AI environments. This fast-changing threat environment has turned high-performance security into a structural necessity. Because enterprises and governments are highly aware of AI-powered attack vectors and expanding regulatory oversight, they are directing investments towards SASE firewalls that can defend complex, decentralized environments. To address these distinct operational and regulatory environments, Fortinet provides significant flexibility. By natively converging firewall, SASE, and hybrid mesh capabilities into a single OS, we deliver a seamless way to protect people, customers, applications, and sensitive assets across physical sites, cloud environments, and remote teams. This flexible deployment model is a significant competitive advantage, allowing customers to build a SASE posture that matches their specific enterprise risks and regulatory requirements. turning to operational technology safeguarding the edge and industrial networks has become one of the most urgent issues discussed at board levels of our customers today security boundaries have blurred exposing critical supply chains utility grids and manufacturing systems to unprecedented risk manufacturing has been the single most targeted sector for five consecutive years combined with escalating attacks on regional critical infrastructure it is clear that historically underfunded ot environments are highly vulnerable to mitigate this organizations are rushing to segment their networks shield unpatchable legacy machinery and establish secure remote access with ai now arming attackers these security decisions are being fast-tracked directly by corporate boards and leaders 40 nets 40 os platform enhanced by 40 god security subscriptions gives enterprises complete unified visibility over both their corporate i.t and ot domains and a way to control the new attack surfaces ai creates this architectural advantage is driven driving sustained demand across our specialized industrial portfolio To illustrate, a large transportation company selected Fortinet in an eight-figure competitive win to secure its mission-critical OT infrastructure. The win was driven by the customer's need to modernize and secure its distributed environments through Fortinet's converged networking and security capabilities. By consolidating firewall, secure routing, 5G connectivity, and deep OT inspection into a single platform on one unified appliance, the customer is simplifying its overall network design while significantly improving operational resilience. The significant deployment highlights our leading ability to protect highly specialized demanding OT environments while delivering an optimized total cost of ownership and streamlined operational efficiency. Further proving our architectural advantage at the edge, a large U.S. retailer selected Fortinet in an eight-figure deal to standardize and secure its footprint for 1,500 store locations. the strategic win was driven by the customer's need to enhance network performance and digital resilience while wanting to offer an improved in-store customer experience to support its distributed operations the retailer required a simplified network design and architectural standardization that allowed them to scale seamlessly while dramatically reducing overall costs. Fortinet's ability to deliver a comprehensive unified security fabric managed centrally via Forti Manager proved to be a key differentiator. The successful competitive win of this large rollout demonstrates also the invaluable role of Fortinet highly trained and specialized partner network whose deep technical expertise is essential in deploying complex enterprise-grade solutions our exceptional quarter highlights our relentless focus on the dynamic market themes shaping the cyber security industry we believe fortinet's integrated platform approach positions as well to capture share deliver sustained growth and maximize long-term shareholder value turning to margins and cash flow non-gap and gap cross margins were 79.6 and 79 respectively and were impacted by the continuously high contribution of product demand non-gap operating margin of 38.2 was a third quarter record up 130 basis points this performance exceeded the high end of our guidance driven by stronger than expected revenue growth and disciplined cost management moreover our gap operating margin 33.9 percent continues to be one of the highest in the industry The strong operating performance translated to the bottom line. Non-GAAP earnings per share increased 23% to $0.91, while GAAP earnings per share grew 39% to 86 cents, outpacing our top-line growth, reflecting high-quality earnings supported by our long-term focus on total shareholder returns. Free cash flow grew 52% to 865 million in the third quarter, and 74% year-to-date to $2.84 billion, driven by higher billings and operating margin strength. Adjusted free cash flow was $912 million, representing an exceptional margin of 44%. Our excellent execution and consistent cash generation continue to support our strong financial position. Reflecting the strength of our balance sheet and our ongoing commitment to delivering long-term shareholder value, our Board of Directors approved an approximately 1.2 billion increase to our authorized stock repurchase program. This brings our remaining share repurchas authorization to 2 billion, giving us flexibility to continue returning capital to our shareholders while investing in our key growth pillars. Now moving on to guidance. As a reminder, our fourth quarter and full year outlooks, which are summarized on slides 24 and 25, are subject to the disclaimers regarding forward-looking information that was provided at the beginning of the call consistent with our disciplined and prudent approach to guidance our strong performance through the first nine months support of higher full year outlook we are raising our full year guidance for billings and revenue as well as operating margin and earnings per share for the fourth quarter we expect the following billings in the range of 2.775 billion to 2.925 billion which at the midpoint represents growth of 20 percent revenue in the range of 2.155 billion to 2.245 billion which, at the Midpoint represents, growth of 15 percent non-gap gross margin of 78 to 80 percent non gap operating margin of 35.5 to 37.5 percent nongap earnings per share of 93 to 95 cents which assumes a share count between 741 and 745 million infrastructure investments of 180 to 210 million a non-gap tax rate of 18 and cash taxes of 80 to 130 million for the full year we expect billings in the range of 9.568 billion to 9.718 billion which at the midpoint represents growth of 28 percent revenue in the range of 8.125 billion to 8.215 billion which at the midpoint we presents growth of 20 percent service revenue in the range 5.15 billion to 5.17 billion which at the mid point represents growth of 13 percent non-gap gross margin of 79.7 to 80.3 percent Non-GAAP operating margin of 36.5% to 37.5%. Non-GAP earnings per share of $3.54 to $3,58, which assumes a share count of between 741 and 743 million. Infrastructure investments of 390 to 420 million. Non-gap tax rate of 18% and cash taxes of 400 million to 450 million. Our current 2026 fiscal year guidance represents an increase for billings and revenue guidance by 1.14 billion and 570 million respectively compared to our initial 2026 guide in February. As we look ahead to 2027, we expect our total billings in revenue growth to outpace the growth of our overall addressable market. Our 2027 service revenue is expected to grow at a higher rate compared to 2026 as we consider short-term deferred revenue growth as a good indicator for future service revenue growth in addition we see continued pipeline building for sassy firewall use cases and expect that the new 40 guard services will be highly relevant for existing and new customers i will now hand the call back over to anthony to begin the q a session thank you christiana as a remind reminder during the q and a session we ask that you please let limit yourself to one question one follow-up question to allow others to participate operator please open the line for questions thank you if you would like to ask a question please click the raise hand button at the bottom of your screen when it is your turn you will hear your name called and receive a message on your screen notifying you that you may unmute yourself we will allow a moment for the queue to form our first question is from shawl isle from td cowan Please unmute your line and ask your question. Thank you. Good afternoon. Congrats on the solid results all around. One for Ken, one for Christiana. Ken, can you talk about the criticality of network security on SASE, firewalls, psych ops, or in other words, the overall Fortinet platform in the age of AI specifically. Where does Fortinet address AI use cases? How does this opportunity impact your growth rate and sustainability of demand? And maybe for Christiana, can you maybe double click on the service revenue? You're adding new services. You provided an early view on improved growth in 2027. Talk about it in the context of the third quarter. Is this more of a timing issue on revenue given the leading indicators, all in all, look absolutely solid? Thank you, Shao. It's a great question. I actually prepared slides for that on the slide four. You can see we're starting to call it a SASE firewall because we believe SASE is a function you do integrate with the traditional firewall OS and the same for the AI security. and like in my script we believe network security is the most important part of ai security because they they are the inland enforcer to a lot of ai traffic and also provide better visibility so without kind of a leadership in the in the global network security market we have a like a over half of the global unit deployment we believe we have a much better visibility and that's give us a lot of data can train make a better kind of a sassy firewall model and the same time kind of keep innovate keep up all this technology plus investing like asic that's that's where we have the confidence we can grow faster than the market so that that's combine all this ai security all the sassy all the traditional security we believe the total addressable market will grow about 16 percent in the current market growth rate and we continue to grow faster and the last quarter actually we double almost double the the market growth rate and you've already become the biggest sassy firewall player in the space and then we continue grow faster than the market we feel it's a still pretty big market and we're keeping growth for a long long time uh just like we did in the last 20 30 years i think network security in the market position to address the ai security concern and let me follow up on your second question regarding services so as i um as i mentioned in in the prepared remarks that we see strong services billing and sub billings and so um many of the indicators for service revenue improved it's it's really a timing issue and the strength in our enterprise segment i think is is is a is part of the reason that that we see some delays in the conversion because we saw we sold a number of really nice big deals and they have some ramped service activation so it's it's a lot of strength in the business plus we continue to focus on services and this is where the newer services and solutions play of course a critical role to continue to upsell our existing customers they of course all our existing 40 guard services are evolving, but the new FortiGuard inline AI service addresses some specific risks that are new with AI and that require constant FortiGuard updates. So it's going to be highly relevant to our customers. Thank you. Thank you, our next question is from Saket Kalia from Barclays. Please unmute your line and ask your question. Okay, great. Hey guys, thanks for taking my question this year. Ken and Christiana, maybe for both of you, you know, this has been a very strong year for the product line. And of course, that's sort of a combination of a variety of different things, whether it's pricing or mix shift or volume. Now, I realize it's early to talk about 2027, but based on what we see here in Q4, how should we sort of think about product growth next year, given what is a very tough compare here in 2026? I think probably we're still three months early to give the 2027 guidance, but we do have a confidence we'll grow faster than the market. right so if you look in the the sassy far will mark a current growth rate 16% and we do believe we're keeping gaining market share there and plus we have pretty strong operation model we kind of a with own a sick chair with our kind of manufacturer managed by ourselves plus operation directly and we feel we have a more advantage in this a supply chance issue compared to our most other competitors so that's where we we have a confidence with keeping guinea market share in this space with the better technology with a better operation and the execution got it got it very helpful yeah let me add to what ken ken said if if you look at um the demand environment the demand and environment is pretty solid the ai attacks are are happening, not only the deployment of AI, it's also the threat environment that has increased quite significantly. And so that really drives the requirement for customers to upgrade their network security and, of course, new use cases as well. So we are confident that we are well positioned for 2027. Got it. Maybe for my follow-up, again, for you, Ken, you know, one of the building blocks there that we hit on was pricing. I was wondering if you could just talk about your latest thoughts on pricing, right? I mean, you've passed through the cost increases from memory, but maybe the question is, where are we in that journey? And, of course, it's tough to have a crystal ball going into next year, but how do you think about that as a lever in 2027? I think the price so far has about 10% benefit on the top line. On the other side, you can look at the first half of the year, we do benefit from all kind of on-hand inventory, which we keep in saying in the normal year we keep about six months on hand inventory so that's where in the early phase of supply chain we kind of have a buffer we can we can benefit from but now starting from q3 we see this become more normal so that is where we have to continue to source in and like others and at the same time even we have a bigger quantity we have more direct relation But we do see the lead time get longer. I say the price probably stabilized, but not improved yet. I think the price increase kind of slowed down compared to the first one, Q1, Q2. Q3 kind of, I say stabilized, but kind of not improved. Yes, still kind of a slowly increase, But it's difficult to forecast going forward. Our policy of strategy always we want to keep in the same growth margin. And if our costs go higher, we'll increase accordingly. If our costs get lower, we also will decrease accordingly. So that's where we want the same gross margin on the product side. So that that's the company strategy in the last 20 years, actually. very helpful thanks guys thank you thank you our next question is from gray powell from btig please unmute your line and ask your question okay great um thanks for thanks for taking the question uh can you hear me okay yep all good all right excellent uh so maybe just a higher level question uh a lot of the investors that that we speak with, they're just trying to compare the current spending environment that you're seeing this year to that of the post COVID period, like in 2021 and 2022. If I had to guess that the current AI driven cycles probably bigger, but the question is just, how does it feel on your side relative to post COVID a few years back or even the post target era spending cycle that we saw in 2014 and 2015? And do you think that this cycle is more durable than past cycles? I personally agree with you. I do feel these times are bigger than like five, six years ago. And also not times more kind of a work from remotely from home, drive some kind of supply chain, but now it's kind of AI build a lot of infrastructure kind of since there but it's on the other side AI also drive up the demand because a lot now they in most recently that the AI security become bigger concern especially a lot of Enterprise how they use in AI and that's also drive after demand so that's where we have not seen demand slow down so demand still very strong in the last few quarter and even in Q3 we have no see any down on the demand but supply we mentioned the lead time get longer and and also the price kind of uh not grow as fast as a q and q2 but still kind of go up a little bit but i would say stabilize some somehow that's probably more become normal but we believe we have pretty pretty strong operation and the direct relation with all the component manufacturer which we can negotiate kind of compared to some more competitor much small quantity so that's where we feel we still have more advantage i think i think your point is also good that you know our business follows the threat you mentioned the target breach covet etc this ai threat you know no one has a crystal ball as somebody mentioned earlier just seems a lot more durable and sustainable than some of those earlier kind of threat drivers and so I think you know it feels like early days and like you said our business does follow that threat and that threat environment is elevated and it seems like it's durable. Okay that's that's helpful thank you. Thank you our next question is from Rob Owens from Piper Sandler. Please unmute your line and ask your question. Great. Thank you very much for taking my question and maybe dovetailing that last answer around the threat environment. Obviously, headlines have been somewhat scary, I guess, for the month of October relative to agentic and what's going on. Would just love to understand, I realize we're only one month into your fourth quarter here, but just how things are trending. Have they picked up much over the last month and Is there anything you can quantify for us relative to, I guess, how the start of fourth quarter has looked, given what's going on from a vulnerability perspective? Thanks. Yeah, the demand is still very strong, and we don't see any slowdown. And there's definitely AI discovered more vulnerability, like all the PHP and other, and we do believe all firewalls are in the best position to stop some of this attack intrusion. And we do have the signature can block some of these vulnerability, which is a very effective way to help a lot of enterprise to defend it. and also we see kind of a also a salary some of the convergence so we do see more high-end Union being deployed inside the company to do internal segmentation and also mention the sovereign AI also we see pretty strong growth and that's where we do people long-term the the hybrid AI both sovereign and also cloud combination will be the best solution for customer, which we feel we have a huge advantage. Yeah, let's say that the demand is still very, very strong and no sign of a slowdown. Thank you, our next question is from Meta Marshall from Morgan Stanley. Please unmute your line and ask your question. Great, thank you. A couple of questions for me. noted kind of the strong OT billings or OT security billings just you know are you seeing a broadening customer base there you know any kind of contextualization of how you see of any major new customers there and then a second question just in terms of you know, are you running into your customers kind of having any issues of having the services or even the the staff to kind of install a lot of the equipment and is there anything you can do with your own services organization to kind of help those customers out or align them better with additional services that can help them with the installation? Thanks. Meta, let me take your questions. So on the OT side, I would say we've been strong in certain geos and we are expanding that strength into into other regions um just because we have more more customer references they they see the the benefits of our um specialized devices that we have um for for that so it's a it's broadening of of the strength and and continued um expansion now because it's also becoming more and more relevant with the attack surface expanding. On the installation side, so typically Fortinet services are more on the configuration side, not necessarily on the racking and stacking. That's why we have an extensive reseller and partner channel that we qualify to do these things locally with our customers I've not really heard that that there's a shortage and in the ability to roll out I think that's more it's not that the channel capability or capacity it's more more so how quickly can the customers do that and and that's always I think it depending on the business you are in in q4 probably a little bit more challenging because many get ready for for year-end business and so on yeah so if you're a calendar your company you you don't make major changes until the next year yeah yeah also yeah fortnite kind of uniquely we build our own kind of a service infrastructure system we call the 40 care which now like half of the 40 car service kind of can use ai to to handle to to to helping improving there so that's also we be studying more have the service personnel local to customer which also will be helpful to customer to to like understand that additional new service we are launching now so that's all so we feel that's what helping drive the additional service business going forward I think to your question I just talked to a retailer who's considering rolling out our solution to 4,000 stores around the country. And we're going to engage in MSP, like Christian mentioned. But at that scale, we are seeing demand where they want to work directly with us. And so our service team can augment their service team and the MSP as well. And so we are seen large-scale rollouts where the customer wants to work directly with in addition to working with a partner. great thank you thank you our next question is from adam borg from steifel please unmute your line and ask your question awesome and thanks so much for taking the question so maybe just to take a step back we just talked about the really strong demand environment continued pricing tailwinds albeit less than in the first half of the year any more color on just what led to the growth deceleration in 3Q relative to, you know, 2Q is incredibly strong, but any color, just what led to the deceleration across a number of the metrics. Thanks again. Yeah, like I said, the Q3 we see demand in continuous strong, probably even stronger than the first half of the year. But the first off year, we do benefit from some kind of inventory we usually keep for six months. So that's where you see some strong product growth benefit from some of the inventory we have on hand. I think starting from Q3, we more treat it as normal now. So the on-hand inventory advantage kind of starting to disappear. And also some of The Component, we see a little bit longer lead time. But the demanding side is still keeping growing. And just to clarify, are you saying that you're somewhat supply constrained, or are you're saying that the new inventory is at higher prices and that had an element? Thanks again. I see a little bit both, and also the lead time kind of get a little longer to get some of the component. excellent thanks again thank you our next question is from joe gallo from jeffries please unmute your line and ask your question hey guys thanks for the question i've got a two-parter on services you first i understand the delayed ramp with some of these large las but when you remove that cohort are you seeing the same attach rates as historical i mean you obviously have a ton of product success right now but is it fair to say that some of the networking strength and AI data center strength, maybe hurting the attach rates? And is there any reason to expect that to change? Of course, over the years, there has been a little bit of a product mix shift towards networking components that we've been very strong in and part of the consolidation play, which have fewer attach rates. I think that's something that hasn't changed from Q2 to Q3 what what we've been seeing is really good good 40-gauge growth so that that will help us with attach rates on the other hand compared to let's say our success with sovereign deployments or sovereign solutions they are a little bit more product heavy compared to two clouds are solutions so that that's impacting the overall kind of product service mix a little bit as well but but yeah there's product mix sovereign has less services because we are delivering more product that the customer has versus cloud solutions and and we believe that this will be structurally helping us with product long term because it's definitely an important trend and then it's on us to to attach more relevant FortiGuard security subscriptions. That's why it's so critical to roll these out. That's really helpful. And then maybe just to follow up, is there a discrete subscription selling motion or is that entirely attached to hardware? The reason I ask is just as product is cyclical and decelerates, service is obviously more important. And so I'm just curious if there's any other tailwinds to subscription as we go through this cycle. There is a separate services this motion, I would say the initial purchase always attaches certain services. Most of the time it's 40 care, and smaller customers buy services in a bundle. With larger enterprise customers, it is more of an upsell motion to make sure they roll out the hardware first, and then we're upselling on relevant security subscriptions. And that's why the focus, I think, is also on the increased threat environment, because IPS, virtual patching, certain OT subscriptions are really critical for our customers to have the right level of intelligence circulating through the 40 gates all the time to be protected. So I think that the motion will pick up quite significantly. Thank you very much. Thank you. Our next question is from Gabriela Borges from Goldman Sachs. Please unmute your line and ask your question. Hi, good afternoon. Thank you, Christiane. I want to stay on this topic of large enterprise deals and the impact that they're having to services revenue. Maybe just relative to your expectations, Was U.S. Enterprise stronger than what you expected? And then did you go from expecting it not to be a ramp deal and then the customers asked for it to be ramp deal? Maybe just explain to us the dynamic that happened in 2Q because I don't recall you talking about, Lodge Enterprise has been a growth driver for quite some time now. I don'T recall this specific ramp issue impacting services before. So I'm just trying to understand what's different this time. So I think Q3, as we reported, It had a lot of, not only large enterprise deals, which we had in the past, it had a lot of newer customers that had truly expansion deals and not necessarily just refresh activity, or also sometimes large customers may have big renewals. So this is where, as customers roll out their infrastructure, they may not want to pay services right away. And we had more of that in Q3, also consolidating different activities. That's why I addressed it specifically in my prepared remarks. And so as it pertains to the 4Q guide, is it fair to say that you're also expecting the trend to continue, meaning the pipeline? Give us some color on how the pipeline looks for those types of new customers in that type of cohort. Do you think the services ramp dynamic is going to impact 4Q and maybe longer term as well? I mean, it definitely has some impact on Q4. This is why you see our revenue guidance and respective adjustment of the 2026 service revenue guide. But the good news is the customers are buying services, which you can see in deferred revenue, which you can't see in service billings. And there are more services to come. So we are actually happy with the strength in the business. It's just a little bit of a delay from when it gets recognized. Thank you for the call. Thank you. Our next questioner is from Fatima Bulani from Citi. please unmute your line and ask your question good afternoon thank you so much for taking my questions um can one for you and one for christiana please um can in your comments earlier in response to a question around uh the product growth trajectory and some of what appears to be some supply side constraints some increasing supply side side constraints uh but also sort of different in changing levels of inventory management. I'm wondering if at a high level, you can comment on how customers are behaving with respect to asset sweating. So sweating their appliances for a little bit longer in response to this or in anticipation of this and why you are protecting or defending the business against that potential risk as all of us think about what the 2027 product growth trajectory is going to look like in the face of some of these bigger picture macro factors and then a follow up for Christiana please I think for for the new security function especially like security they need to kind of a more high end more competent power to to run out this function there That's where we do see the move more towards the high-end and also more computing power for the gate system. And that's where the ASP also go higher. We see usually the stretching size sometimes come from some low end or certain vertical like a retail, which they also kind of a balance, try to see hey whether they want to move to some kind of sassy or some other gtna environment or they they we do see some retail actually leading the change but some other probably still try to hang on some of the product for longer but they also starting to realize it's a new threat environment and there's a lot of attack of vulnerability exposed by the ai so that's where we feel uh probably customer more try to concern of this new vulnerability instead of trying to stretch in some of the current existing hardware because uh if you're keeping the hardware like a five seven ten year longer a lot of function kind of a difficult to run up kind of no longer supporting some of the new function there so that's where we don't feel this will stretching will be a trend going forward and because it's a it's new threat and a new demand for all this function what will drive the additional growth but right now we do see that the first way is more come from the enterprise and also especially some internal segmentation and some of a data center, AI. But once more application, I mean, once AI started getting more application we do see there's additional demand will keep driving the growth. Thank you, Ken. Christian, I wanted to touch on the gross margin performance. That compression, how do we reconcile the ASP uplift commentary, the commentary of customers trading up to higher end models with presumably higher ASPs. Why is that essentially not following through into at least stable gross margins? Because compression on the product side, in spite of those factors, was still pretty high. Wondering if you can reconcile those two dynamics for us and how this should trend over the next two to four quarters. Thank you. So on the product gross margin side, we definitely see the increase. So we had the benefit in the first half year that we had inventory on hand. And so we had lower cost while we had already increased the prices. So that benefited our gross margin. and the second half you you see that that the that the costs are creeping up and then um impacting the product gross margin but on the other hand our service gross margin is picking up um nicely so it's offsetting some of the impact um there are you can only increase the prices so much right for your customers they also have limited budgets so we're we are um trading a balance between increase of price and gaining market share and i think we've done this quite successfully successfully this year so our cross i mean the the guidance for the for the overall gross margin remains at 80 for the full year right which was what we said at the beginning of the year Thank you. Thank you, our next question is from Junaid Siddiqui from Truist. Please unmute your line and ask your question. Great, thank you for taking my question. Just regarding open wave models, does this shift towards open wave model by enterprises, structurally expand your opportunity by moving more AI security into customer controlled infrastructure, and are you seeing that translate into incremental security demand yet? Yeah, we do see more enterprise running, whether some open source, open-weight model internally. And that's how to drive some additional demand for how to monitor, manage all this kind of AI model within enterprise. So that's where there's more demanding for enterprise network security. Like I said, it's kind of accelerating all this convergence on network security. And with our high-performance ASIC advantage, definitely we feel we're leading in this area for like internal high-speed network security deployment for a lot of internal segmentation within the data center. Great, thank you. And just regarding the SASE bundles that you've rolled out, what are you seeing in early adoption? And what kind of pricing uplift are you seeing as customers move on to the bundle? So the pricing uplift, I think, is about maybe. So the question is how you define the pricing uplift, right? So 4D Care and SD-WAN is priced as a percent of the hardware price. And so the question is, how much more are they buying? We see some uptick, but some customers are still using SD-WAN, just what is provided through 4D-Care versus the incremental subscriptions that we're offering. So it's going to take a little bit longer to really get it adopted by all our SD-WAN customers. Great. Thank you so much. So you see it more on your customers. Thank you. Our next question is from Adam Tindall from Raymond James. Please unmute your line and ask your question. Okay. Thank You. Ken, I just wanted to ask a question thinking about the business bigger picture you're getting bigger customers like sovereign and neo clouds that you talked about those are growing very very fast and driving a ton of product growth but disconnecting some of the services that we're talking about and stocks down a lot on this so a two-parter for you i wonder if you might just uh opine on the pros and cons of servicing that customer base in the first place is that a good customer set to be servicing and secondly have you contemplated maybe even a different business model almost like how chip companies serve that cohort that might be just much higher volume product and lower focus on service actually a lot of this bigger enterprise and also near clouds even some service provider they probably need a little different service and sometimes they also like offer some of the their own service using our technology so we become a tier two tier three behind so that's probably and and also there's a ramp up like Christina mentioned a lot of these are they first get Howard deployed and then they gradually keep adding service because we have so many functions so many service in the 40 OS they can they can use they can leverage and they do take time to ramp up different kind of a service so that's what we see and that's where Christina mentioned sometime the goodness we do get a lot of bigger customer but the other side is really the server needs some time to run pop and gradually I able more and more service and and then there's also way how to recognize once we have they call the enterprise agreement sometimes it is slower to recognize some of the service But we do see the trend is pretty healthy, whether from the building, from the short-term, and the deferred revenue. So that's where we have the confidence. But this bigger customer also kind of gave us a very strong feedback on what was the latest new kind of air security needed. And that's kind of keeping drive our innovation, keeping developing new technology, working closely to making the whole Internet more secure. If I could just a quick follow up, Christiana, I imagine this might be the last question. So I want to give you the floor. The key question tomorrow is going to be why go out with the services expectation in fiscal 27 on this call? We're going to get a lot of questions on that. People are going to say you told us that it was going to accelerate in the second half of this year. And obviously, we have not seen that materialize. So you're going even further out and talking about acceleration there. People are going to say that there's structural differences with the service attach rate and the new customers that you're seeing, a higher bar for fiscal 27. So just want to give you the chance to take the floor here and give us some details on what's giving you confidence to talk about services acceleration in fiscal 27th. Thanks, guys. I would say I haven't used the word acceleration I've used the word improved growth rates yeah so I mean I think we clearly see that that the growth rates has have bottomed and in q1 the the question is how quickly can we convert some of our service billings into revenue right and and that always takes a little bit of time but we are continued we continue to be confident that we are selling relevant services to our customers and that they convert into into revenue over over the course of 2027 and continue to grow thank you thank you our final question is from patrick colville from scotia bank please unmute your line and ask your question thank you for taking my question and you know thanks for squeezing me in here so i i guess i I just want to tie some of the pieces together from the last hour. The points you made are that large new customers in 3Q service agreements are turning on them slowly than you'd expect to be guided three months ago. And that's what's caused the revenue miss, but the confidence rate was negative. the time and that's why you're going to value it for the compliance and 2017 is that the message can i interpret it correctly or is there is a subject a little bit hard to understand but but i think i got the question so let let me let me summarize what q3 was was a good quarter we we had large new customers we had large new expansion deals that benefited us and but they also can't cut that they came with with some of um delayed service activation which which is actually typical in in um or happens more often in large deals so overall that that was one one bigger factor that that we may not have as anticipated there are of course there's of course a lot of different aspects that um you see in in the service line with with the increase in prices you see a little bit more discounting between um hardware and and and services and then also um in the u.s you you definitely see a push towards hardware where because it it's benefiting customers from the tax perspective to to depreciate so there are there are different components that are not as not as prevalent in what happened in q3 but but there are trends that we've been seeing as as um as we analyzed where it was coming from and if i may just um i guess a very tactical question about um channel inventory and billing's duration but we're just commenting on those issues um duration is still around it's still pretty similar it didn't increase significantly and our channel inventory is is flat in percent of um or down in percent of buildings yeah so we we continue to manage um the inventory in a way that we want to that we want the channel to have enough for the run rate business, but we don't want to over-allocate so we have dislocation of inventory when we need it in different places. So that's where we are extremely diligent in managing how much we have in the channel. Thank you. That was our final question. I will now hand it back to Anthony Luskri for closing remote. Thank you. One clarification to an earlier statement. Our pricing increase has had around a 10 percentage point impact to year-over-year billings growth, not top line. But other than that, I'd like to thank everyone for joining today's call. We will be attending investor conferences hosted by BMO, UBS, and Barclays during the fourth quarter. The Fireside Chat webcast links will be posted in the events and presentation section of our investor relations website if you have any follow-up questions please feel free to contact me or my team have a great rest of your day