Fortinet, Inc. (FTNT.US) Q3 Earnings Call: From PHP Vulnerabilities to Agentic AI Protection Fortinet Seizes the AI Security Entry Point, Expects Service Revenue Growth to Improve by 2027

Fortinet, Inc. (FTNT.US) Q3 Earnings Call: From PHP Vulnerabilities to Agentic AI Protection Fortinet Seizes the AI Security Entry Point, Expects Service Revenue Growth to Improve by 2027 After the U.S. cybersecurity giant Fortinet, Inc. (FTNT.US) released its quarterly earnings report in the early morning Beijing time on Thursday, its stock price fell more than 25% after hours and significantly dragged down the stock prices of most cybersecurity peers, including cybersecurity supergiants CrowdStrike and Palo Alto Networks. This contrast shows that between expanding security demand and stock valuations, there still appears to be an urgent need to connect sustained strong growth in service-related revenue, earnings quality, and the pace of delivering strong results. From agentic AI privilege escalation risks to PHP vulnerabilities, the market is reassessing the foundational value of cybersecurity for AI commercialization: enterprises not only need to deploy models and computing power, but also need to ensure that the entire process of agents accessing data, invoking tools, and executing tasks is constrained. The PHP vulnerability incident had previously driven gains in cybersecurity stocks such as CrowdStrike, Cloudflare, and Palo Alto Networks. Cybersecurity demand in the AI inference era has indeed expanded significantly in a blowout manner, bringing important growth opportunities to Fortinet; the company's product revenue growth is already on a path to exceeding expectations, and the market is further focused on whether these equipment sales can sustained service revenue. This explains why product revenue surging 37% was still insufficient to dispel investors' doubts about subsequent growth. On the earnings call, Fortinet management expected service revenue growth to improve in 2027 compared with 2026, but had not yet issued formal annual guidance and had not explicitly committed to accelerating growth. Palo Alto Networks CEO Nikesh Arora previously proposed at the company's earnings call on September 1 an approximately US$1 trillion "cybersecurity debt," pointing to potential renewal demand for legacy security architectures that urgently need modernization. He noted that about US$1 trillion of pre-AI-era cybersecurity technology debt globally urgently needs modernization, emphasizing that about US$1 trillion of global cybersecurity infrastructure is not yet ready to address AI threats, and this gap will bring long-term growth space to the industry. From a technical mechanism perspective, agents push software from "providing answers" to "holding permissions and executing operations": they can call application programming interfaces (APIs), read enterprise data, run code, and modify business states. Once malicious web pages, emails, or content returned by tools change their behavior through prompt injection, the risk may escalate from incorrect answers to data leakage or unauthorized operations; improper execution by the model itself may also produce similar consequences. Therefore, enterprises need to implement machine identity management, least privilege, tool invocation authorization, runtime monitoring, and rapid isolation outside the model, rather than relying solely on the model's promise to follow rules. At the same time, AI reduces the cost of vulnerability discovery and mass attacks, compressing enterprises' remediation windows; enterprises' own deployed agents also add identities, workloads, and data flows that need protection. Palo Alto disclosed that traffic from its SASE agents had expanded more than 9x in the previous nine months, showing that the scale of protection is moving away from a growth model that relies solely on the number of human employees. Derived from engineering and commercialization perspectives, cybersecurity super-platforms that own endpoints, identity, network, and cloud data and can directly execute blocking and remediation are better positioned to convert new protection tasks into cross-module subscriptionsthat is, the value large customers purchase is shortening the time from detecting anomalies to controlling losses. This increasingly strong cybersecurity demand in the AI era also means that even as open-source and closed-source AI large models are fiercely competing, cybersecurity demand still has cross-route resilience. Cybersecurity demand depends on the scale and depth of permissions with which AI enters real business, rather than on which model business model wins. From traditional vulnerability defense to access control, data protection, and tool invocation checks for AI agents, security demand is extending to more business scenarios, and Fortinet is expanding commercial opportunities through a unified security platform, purpose-built chips, and AI protection products. Third-quarter product revenue grew 37% year over year, and service billings grew 26%, showing that equipment purchases and service contracts remained strong; however, service revenue grew only 13%, and the company simultaneously lowered its full-year 2026 service revenue guidance, highlighting the revenue recognition timing gap brought by phased deployments by large enterprises, new cloud providers, and sovereign projects. Management expects service growth to improve in 2027, so the core focus of the market has shifted to whether current product volume and service contracts can continue to subscription revenue as projects go live, providing more stable support for earnings growth and valuation. Fortinet both provides security protection for AI applications and agents and is actively using agentic AI technology to significantly enhance cybersecurity defense capabilities; among these, defending against attacks launched by hackers using AI is a threat scenario its overall security business needs to address. Fortinet's third-quarter revenue was US$2.08 billion, up 20% year over year, and adjusted earnings per share were US$0.91, up 23% year over year, both above the market expectations of US$2.06 billion and US$0.86 cited by the media; overall product revenue closely related to the cybersecurity product line grew 37%, billings increased significantly by 29%, adjusted operating margin reached a third-quarter record high of 38.2%, and free cash flow grew 52%. However, full-year service revenue guidance was lowered to US$5.155.17 billion from the previous US$5.185.22 billion. Therefore, the contradiction the market is focused on is not "whether there is strong cybersecurity-related software product demand driven by agentic AI attack incidents and precisely targeted vulnerabilities," but why strong hardware sales and large contracts have not yet brought faster recurring service revenue and full-year service revenue growth. The latest incremental explanation released at Fortinet, Inc.'s latest earnings call contains two levels: first, large enterprises, new cloud, and sovereign deployment customers install hardware first and then gradually enable services, causing a timing gap between billings and revenue recognition; second, network equipment and sovereign deployment businesses are more product-heavy, and the attach rate for additional service purchases differs from cloud software services. Management supported its judgment of improved service growth in 2027 with 26% growth in service billings and 14.5% growth in short-term deferred revenue, but the CFO specifically clarified that she used "improvement in growth rate," not a commitment to "acceleration." At the same time, the gross margin advantage from earlier low-cost inventory is weakening, and lead times for some components have lengthened, explaining why higher average selling prices did not fully offset pressure on product gross margin. In terms of technology and business model, Fortinet hopes to rely on the unified FortiOS operating system, self-developed application-specific integrated circuits, and the existing installed base to extend cybersecurity inspection to model interactions, agent identities, intra-data-center segmentation, and automated security operations. New AI security services provide a path for existing customers to make additional purchases, while large customers and AI data center expansion expand hardware demand. The core investment thesis of this call is that AI-driven security demand has already translated into product sales and cash flow, and the next stage requires proving that these deployments can continue to service subscription revenue. In addition, management explicitly corrected at the end of the call that price increases contributed about 10 percentage points to year-over-year billings growth, not to revenue growth. Below is the full transcript of Fortinet, Inc.'s (i.e., Fortinet's) earnings call (translated with the assistance of AI tools): Operator: Hello everyone, and welcome to Fortinet's third-quarter 2026 earnings conference call. Currently, all participants are in listen-only mode. After the speakers' remarks, we will conduct a question-and-answer session. Please note that this conference call will be recorded. Now, I will turn the call over to Anthony Luscri, Vice President of Investor Relations. Please go ahead. Fortinet Vice President of Investor Relations Anthony Luscri: Thank you. Good afternoon everyone, and thank you for joining us today to discuss Fortinet's financial results for the third quarter of 2026. Joining me on the call today are Ken Xie, Fortinet's Founder, Chairman and Chief Executive Officer; Christiane Ohlgart, Chief Financial Officer; and John Whittle, Chief Operating Officer. Ken will begin with an overview of our business. Christiane will then review the third-quarter 2026 financial results, provide fourth-quarter guidance, and update our full-year outlook. After that, we will open the call for questions. To allow others to participate, please limit yourself to one question and one follow-up during the Q&A session. Before we begin, I would like to remind everyone that we will be making forward-looking statements on today's call. These statements are subject to risks and uncertainties that could cause actual results to differ materially from predictions. For more information, please refer to our filings with the U.S. Securities and Exchange Commission, particularly the risk factors in our most recent annual report and quarterly report. All forward-looking statements reflect our views only as of the date of this statement, and we undertake no obligation and expressly disclaim any obligation to update forward-looking statements. In addition, unless otherwise stated, financial metrics mentioned on today's call are non-GAAP. Our GAAP results, as well as reconciliations between GAAP and non-GAAP, are included in the earnings press release and the presentation materials accompanying today's remarks, both of which have been posted on the Investor Relations website. As a reminder, this conference is being held as a live call and will be available for replay via webcast on the Investor Relations website later. A prepared transcript will also be posted in the Quarterly Results section of the Investor Relations website after the call. Finally, unless otherwise stated, all growth figures are year over year. I will now turn the call over to Ken. Fortinet Founder, Chairman and Chief Executive Officer Ken Xie: Thank you Anthony, and thank you everyone for joining our call. We are very pleased with our outstanding third-quarter results driven by strong execution and broad-based market demand. Billings grew 29%, total revenue grew 20%, with product revenue growing 37% leading the way. Based on continued strong business momentum, we raised our 2026 billings guidance for the third time this year. As the AI landscape evolves rapidly, Fortinet is leading the next phase of cybersecurity by leveraging our core strengths in network security to protect AI workflows and defend in real time against threats from AI-discovered vulnerabilities. We believe cybersecurity is the most critical foundation of AI security, and the firewall is the centralized enforcement point for inline security policy across enterprise, operational technology, and hybrid cloud environments. As shown on page 7 of the presentation, Fortinet's leadership in this area stems from more than 20 years of innovation, integration, and refinement, while we continue to expand AI capabilities and features in FortiOS and FortiGuard services. As shown on page 9, Fortinet provides protection across four key areas of infrastructure and AI security. First, at the network layer, our secure access service edge firewall natively defends against vulnerability exploitation, blocks intrusions, supports shadow AI monitoring, and provides access control for data and applications. To meet growing demand, our FortiGuard inline AI security service launched this week can turn every FortiGate into a real-time AI security policy enforcement point. Second, in data centers and AI factories, we protect GPU clusters and large language model infrastructure through FortiAIGate, providing protection for rapidly growing AI traffic and meeting the high-performance security requirements of data centers and hybrid cloud environments. Third, we are extending AI security and secure access service edge to endpoints, integrating the definition, control, and consolidation of agent identities directly into the entire lifecycle of access and incident response. Fourth, our FortiSOC agents provide highly automated solutions through autonomous event detection and response, addressing the industry's severe skills shortage and tool sprawl. [There is a transcription error at this point in the original text; translated according to the meaning expressed in the official prepared remarks.] Our secure access service edge firewall business billings grew 31%; among scaled peers, we grew the fastest, nearly twice the market growth rate, as shown on page 5. Our leadership stems from architectural advantages: we are the only vendor in the industry to integrate all key components of secure access service edge, firewall, and AI security into a single unified operating system, FortiOS. This new secure access service edge firewall business pillar represents a large, high-growth market that will drive long-term growth. As shown on page 14, combined with differentiated FortiASIC technology and our own global infrastructure, Fortinet can deliver better performance and significantly lower total cost of ownership. We are also the only vendor to offer both an easy-to-deploy on-premises sovereign secure access service edge solution and a cloud-based solution. We believe this gives us a serviceable addressable market two to three times that of competitors offering only cloud-based solutions. To further monetize our large installed base, we recently introduced FortiLink secure access service edge services, enabling FortiAP and FortiSwitch to act as hardware proxies for this architecture, allowing customers to easily layer FortiSASE on top of existing hardware and thereby drive recurring service revenue. Looking ahead, Fortinet's strong momentum comes from our strategic vision for the AI era, platform integration capabilities, and highly disciplined operating model. Combined, these factors enable Fortinet to maintain strong cash generation, high recurring revenue, and continued GAAP profitability while executing a shareholder-focused capital allocation strategy. I would like to thank our employees, customers, partners, and suppliers around the world for their continued support and hard work. I will now turn the call over to Christiane. Fortinet Chief Financial Officer Christiane Ohlgart: Thank you Ken, and good afternoon everyone. We delivered another outstanding quarter, with key growth and profitability metrics including billings, revenue, operating margin, and earnings per share exceeding the midpoint of guidance. Based on strong momentum, we raised our 2026 billings and revenue guidance. Total billings grew 29% to US$2.34 billion, reflecting broad-based demand and strong execution across customer segments, industries, regions, and our integrated innovation solution portfolio, further validating the strength of our platform strategy. As customers address the new threat environment, AI, secure access service edge, and network upgrades and expansion became key growth drivers. Large enterprise demand was strong, with total value of deals over US$1 million growing 51%, to which U.S. large enterprise business contributed particularly significantly. Secure access service edge firewall business billings grew 31%. Enterprise customers adopting our network security solutions to upgrade infrastructure for the AI era and extending Fortinet security products to operational technology and AI data center scenarios drove continued FortiGate demand. Operational technology business billings grew nearly 40%, validating our leadership in protecting mission-critical infrastructure. These results reflect our focus on durable demand drivers, leading growth and innovation, and capturing long-term expansion opportunities in emerging high-value use cases. AI-driven security operations billings grew 15%, mainly driven by strong upsell momentum: existing customers are consolidating standalone point solutions onto our broader platform. Turning to revenue. Total revenue grew 20% to US$2.08 billion; despite longer lead times for some components, product revenue still grew 37% to US$765 million. Product demand remained strong throughout the quarter. As in the prior quarter, customers shifted to higher-performance models, lifting average selling prices and benefiting product revenue. Service revenue grew 13% to US$1.31 billion, but was affected by some headwinds: we won new large enterprise customers whose services need to be enabled in phases; at the same time, some large new expansion deals consolidated different existing service arrangements into enterprise agreements. We continue to believe that the first quarter of 2026 was the trough in service revenue growth. As shown on page 19, several key leading indicators support continued positive service revenue trends, including strong 26% growth in service billings, 19% growth in total deferred revenue, and 14.5% growth in short-term deferred revenue, the highest growth rate in five quarters. In addition, we continue to roll out new AI security services, including the FortiGuard inline AI security service launched this week. At the overall performance level, several fundamental changes are underway in how enterprises address cybersecurity, driving our continued growth. We are witnessing a shift in the threat landscape: malicious actors are actively using artificial intelligence to organize fast and highly targeted attacks. This change elevates security from a back-office IT issue to a board-level enterprise risk management priority and accelerates related investment. Third-quarter results reflect our continued business momentum and how our portfolio is accelerating in line with market changes. Specifically, our wins include network and security convergence, enterprises' urgent need to secure AI usage and prepare in advance for AI-enhanced threats, IT and operational technology convergence, and rising global demand for architectures that meet sovereign compliance requirements. Sovereignty requirements are particularly prominent among European enterprises and global public sector entities, aligning with our long-standing leadership in these markets. In this environment, enterprises are scaling AI projects while facing intensifying threats, and protecting proprietary datasets has become a major challenge. This shift requires high-capacity security architectures capable of inspecting Beijing Vastdata Technology and accelerating traffic processing without compromising performance. IT and security teams are actively seeking integrated platforms that provide centralized visibility and faster automated response, rather than deploying fragmented point products that increase operational friction. Fortinet is well positioned to capture this demand by protecting physical AI data centers, distributed AI applications, and embedding AI directly into security operations. For example, an AI company developing frontier models chose Fortinet and signed a million-dollar expansion deal to protect its rapidly growing AI workloads. This strategic win builds on the successful deployment of the customer's first AI data center last year. Building on the success of the initial deployment, the deep trust relationship, and our technical strength, this customer has selected Fortinet as the standard solution to deploy our high-end data center firewalls in five additional data centers. Our solution addresses the challenge of protecting high-value AI workloads while maintaining the highest possible performance, availability, and scalability as its infrastructure expands. This deal reflects the leading throughput and resilience of our platform, making Fortinet a foundational security partner in the world's most demanding next-generation AI environments. The rapidly changing threat environment has made high-performance security a structural necessity. Enterprises and governments are highly focused on AI-enhanced attack vectors and expanding regulatory requirements, and are therefore directing spending toward secure access service edge firewalls capable of defending complex, distributed environments. To accommodate different operational and regulatory environments, Fortinet offers a high degree of flexibility. By natively converging firewall, secure access service edge, and hybrid mesh security capabilities in a single operating system, we can seamlessly protect people, customers, applications, and sensitive assets across physical locations, cloud environments, and remote teams. This flexible deployment model is a significant competitive advantage, enabling customers to build secure access service edge protection that meets their own enterprise risk and regulatory requirements. Turning to operational technology. Protecting the industrial network edge has become one of the most urgent topics in customer board discussions today. Blurring security boundaries are exposing critical supply chains, utility grids, and manufacturing systems to unprecedented risk. Manufacturing has been the most attacked industry for five consecutive years. Combined with escalating attacks on regional critical infrastructure, it is clear that operational technology environments that have long suffered from underinvestment are highly vulnerable. To mitigate these issues, organizations are adding RadNet, Inc. network segmentation, protecting legacy equipment that cannot be patched, and establishing secure remote access. As AI enhances attackers' capabilities, enterprise boards and leadership are directly accelerating these security decisions. The Fortinet FortiOS platform, combined with FortiGuard security subscriptions, provides enterprises with complete unified visibility across both corporate IT and operational technology domains and enables them to control the new attack surface brought by AI. This architectural advantage continues to drive demand for our specialized industrial product portfolio. For example, a large transportation company chose Fortinet in a competitive procurement, reaching a ten-million-dollar-level deal to protect mission-critical operational technology infrastructure. The key to the win was that the customer needed to modernize and strengthen protection of distributed environments through Fortinet's converged networking and security capabilities. By integrating firewall, secure routing, 5G connectivity, and deep operational technology inspection into a single platform on a unified appliance, the customer significantly improved operational resilience while simplifying overall network design. This important deployment demonstrates our ability to protect highly specialized, demanding operational technology environments while optimizing total cost of ownership and improving operational efficiency. Another deal further validating our edge architecture advantage came from a large U.S. retailer, which chose Fortinet and signed a ten-million-dollar-level contract to standardize deployment and security across 1,500 stores. This strategic win stemmed from the customer's desire to improve network performance and digital resilience while enhancing the in-store customer experience. To support distributed operations, the retailer needed to simplify network design and standardize architecture, enabling smooth scaling while significantly reducing overall costs. Fortinet's ability to provide a complete unified security fabric with centralized management through FortiManager became a key differentiator. Winning this large-scale deployment project also reflects the irreplaceable role of Fortinet's well-trained, specialized partner network: its deep technical capabilities are critical for deploying complex enterprise-grade solutions. This outstanding quarter reflects our continued focus on the dynamic market themes shaping the cybersecurity industry. We believe Fortinet's integrated platform model is conducive to expanding market share, achieving sustained growth, and maximizing long-term shareholder value. Turning to margins and cash flow. Non-GAAP and GAAP gross margins were 79.6% and 79%, respectively, affected by the continued high contribution of product demand. Non-GAAP operating margin was 38.2%, a record high for the third quarter, up 130 basis points year over year. This performance exceeded the high end of guidance, driven by stronger-than-expected revenue growth and strict cost management. In addition, GAAP operating margin was 33.9%, continuing to rank among the highest in the industry. Strong operating performance translated into bottom-line profit. Non-GAAP earnings per share grew 23% to US$0.91; GAAP earnings per share grew 39% to US$0.86, both growing faster than revenue, reflecting high-quality earnings supported by our long-term focus on total shareholder return. Driven by billings growth and CKH HOLDINGS' strong operating margin, third-quarter free cash flow grew 52% to US$865 million; year to date it grew 74% to US$2.84 billion. Adjusted free cash flow was US$912 million, corresponding to an excellent 44% margin. Outstanding execution and continued cash generation continue to support a strong financial position. Based on a strong balance sheet and a commitment to continuing to create long-term shareholder value, the board approved an increase of approximately US$1.2 billion to the share repurchase authorization. This brings our remaining share repurchase authorization to US$2 billion, providing us with flexibility to continue returning capital to shareholders while investing in our core growth pillars. Turning to guidance. As a reminder, the fourth-quarter and full-year outlook summarized on pages 24 and 25 is subject to the forward-looking information disclaimer at the beginning of the call. We always set guidance in a prudent and disciplined manner, and strong performance in the first nine months of the year supports raising our full-year outlook. We are raising full-year guidance for billings, revenue, operating margin, and earnings per share. For the fourth quarter, we expect: billings of US$2.7752.925 billion, up 20% year over year at the midpoint. Revenue of US$2.1552.245 billion, up 15% year over year at the midpoint. Non-GAAP gross margin of 78%80%. Non-GAAP operating margin of 35.5%37.5%. Non-GAAP earnings per share of US$0.930.95, assuming 741745 million shares. Infrastructure investment of US$180210 million. Non-GAAP tax rate of 18%, and cash taxes of US$80130 million. For the full year, we expect billings of US$9.5689.718 billion, up 28% year over year at the midpoint. Revenue of US$8.1258.215 billion, up 20% year over year at the midpoint. Service revenue of US$5.155.17 billion, up 13% year over year at the midpoint. Non-GAAP gross margin of 79.7%80.3%. Non-GAAP operating margin of 36.5%37.5%. Non-GAAP earnings per share of US$3.543.58, assuming 741743 million shares. Infrastructure investment of US$390420 million. Non-GAAP tax rate of 18%, and cash taxes of US$400450 million. Compared with the initial 2026 guidance issued in February, the current full-year billings and revenue guidance have been raised by US$1.14 billion and US$570 million, respectively. Looking ahead to 2027, we expect total billings and revenue growth to exceed the growth rate of the overall serviceable market. We expect service revenue growth in 2027 to be higher than in 2026, because we believe short-term deferred revenue growth is a good indicator of future service revenue growth. Below is the Q&A session of the earnings call (AI-assisted summary and translation): In addition, we continue to see a growing pipeline of potential projects in secure access service edge firewall use cases and expect new FortiGuard services to align closely with demand from both existing and new customers. I will now turn the call back to Anthony to begin the Q&A session. Fortinet Vice President of Investor Relations Anthony Luscri: Thank you Christiane. As a reminder, to allow others to participate, please limit yourself to one question and one follow-up during the Q&A session. Operator, please open the line for questions. Operator: 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 and receive a notification on screen that you can unmute. We will wait a moment for everyone to enter the question queue. The first question comes from Shaul Eyal of TD Cowen. Please unmute and ask your question. TD Cowen Analyst Shaul Eyal: Thank you, good afternoon. Congratulations on solid results across the board. I have one question for Ken and another for Christiane. Ken, could you talk about the importance of cybersecurity in the AI era for secure access service edge firewalls, security operations, or the entire Fortinet platform? Specifically, where does Fortinet meet the needs of AI use cases? How will this opportunity affect your growth rate and demand durability? Christiane, could you further break down service revenue? You are adding new services and also looking ahead to improved growth in 2027. Could you discuss this in the context of the third quarter? Given that leading indicators are overall very solid, is this more a matter of revenue recognition timing? Fortinet Founder, Chairman and Chief Executive Officer Ken Xie: Thank you Shaul, good question. Actually, I prepared something on page 4. As you can see, we are starting to call this business secure access service edge firewall because we believe secure access service edge is a function that needs to be integrated with the traditional FortiGate operating system, and the same applies to AI security. As I said in my prepared remarks, we believe network security is the most important component of AI security because it can enforce inline security policy on a large volume of AI traffic and provide better visibility. With our leadership in the global network security market, our devices account for more than half of global deployments. We believe this gives us better visibility and access to large amounts of data for training and building better secure access service edge firewall models. At the same time, we continue to innovate, keep up with technology developments, and invest in areas such as application-specific integrated circuits. This is exactly why we are confident in growing faster than the market. It integrates AI security, secure access service edge, and traditional security. Judging by current market growth rates, we believe the overall serviceable market will grow about 16%. We continue to grow faster, and in the most recent quarter our growth was actually close to twice the market rate. We have become the largest secure access service edge firewall player in this space and continue to grow faster than the market. We believe this remains a very large market and, as over the past two to three decades, we will maintain long-term growth. I think our position in the network security market positions us well to address AI security. Fortinet Chief Financial Officer Christiane Ohlgart: I will answer your second question, which is about the services business. Fortinet Founder, Chairman and Chief Executive Officer Ken Xie: Okay. Fortinet Chief Financial Officer Christiane Ohlgart: As I mentioned in my prepared remarks, service billings were strong, and many service revenue metrics are improving. This is indeed a timing issue. I think the strength in enterprise business is part of the reason some service revenue conversion was delayed, because we signed a number of very good large deals, and services in those deals are being enabled in phases. This reflects the strength of the business. In addition, we continue to focus on services, and new services and solutions certainly play a key role in driving upsell to existing customers. All existing FortiGuard services continue to evolve, and the new FortiGuard inline AI security service addresses some specific new risks brought by AI and requires continuous FortiGuard updates. This service will be highly relevant to customer needs. Fortinet Founder, Chairman and Chief Executive Officer Ken Xie: Thank you. Operator: Thank you. The next question comes from Saket Kalia of Barclays. Please unmute and ask your question. Barclays Analyst Saket Kalia: Okay, thanks very much. Thank you all for taking my question. Ken and Christiane, maybe this is for both of you. The product business has been very strong this year, which of course is a combination of pricing, mix shift, and volume. I know it is still early to talk about 2027, but based on where the fourth quarter stands now, and considering the very high comparison base set in 2026, how should we think about product growth next year? Fortinet Founder, Chairman and Chief Executive Officer Ken Xie: I think it may still be three months early to issue 2027 guidance, but we are confident in growing faster than the market. If you look at the secure access service edge firewall market, current growth is 16%, and we believe we will continue to gain share. In addition, our operating model is strong. With self-developed application-specific integrated circuits, self-managed manufacturing arrangements, and direct operations, we believe we are better positioned than most other competitors to handle supply chain issues. Therefore, we are confident in continuing to gain share in this area through better technology, operations, and execution. Fortinet Chief Financial Officer Christiane Ohlgart: Let me add Barclays Analyst Saket Kalia: Understood, very helpful. Fortinet Chief Financial Officer Christiane Ohlgart: Yes, let me add to Ken's point. If you look at the demand environment, it is quite solid right now. Not only is AI being deployed, but AI attacks are also occurring, and the threat level has risen significantly. This is indeed driving customers to upgrade network security and, of course, bringing new use cases. Therefore, we are confident that we are well positioned in 2027. Barclays Analyst Saket Kalia: Understood. My follow-up is still for Ken. One growth factor we just mentioned is pricing. Could you talk about your latest view on pricing? You have passed on higher memory component costs to customers. Maybe the question is: where are we in that process now? Of course, it is difficult to predict next year accurately, but how do you view the role pricing can play in 2027? Fortinet Founder, Chairman and Chief Executive Officer Ken Xie: I think, so far, price increases have contributed about 10% to revenue. On the other hand, if you look at the first half, we did benefit from inventory on hand. We have always said that in a normal year we carry about six months of inventory. Therefore, in the early stage of supply chain changes, we had some buffer and could benefit from it. But starting in the third quarter, we saw this normalize. That means we must continue purchasing like other companies. At the same time, despite our larger purchasing volume and more direct relationships with suppliers, we did see lead times lengthen. I think prices have probably stabilized, but have not improved. Compared with the first and second quarters, the pace of price increases has slowed. In the third quarter, I would say prices stabilized but have not improved, and are still rising slowly. However, future trends are difficult to predict. Our policy and strategy have always been to maintain roughly the same gross margin: if costs rise, we raise prices accordingly; if costs fall, we lower prices accordingly. We want to maintain the same gross margin on the product side. In fact, this is the strategy the company has adhered to over the past 20 years. Barclays Analyst Saket Kalia: Very helpful, thank you all. Fortinet Founder, Chairman and Chief Executive Officer Ken Xie: Thank you. Operator: Thank you. The next question comes from Gray Powell of BTIG. Please unmute and ask your question. BTIG Analyst Gray Powell: Okay, thanks for taking my question. Can you hear me okay? Fortinet Founder, Chairman and Chief Executive Officer Ken Xie: Yes, clearly. BTIG Analyst Gray Powell: Great. I want to ask a more macro question. Many investors we have spoken with are trying to compare the spending environment you are seeing this year with post-pandemic periods such as 2021 and 2022. If I had to judge, I think the current AI-driven cycle may be larger. My question is, from your perspective, what is different this time compared with the post-pandemic period a few years ago, or even the security spending cycle after the Target Corporation data breach in 2014 and 2015? Do you think this cycle is more durable than past ones? Fortinet Founder, Chairman and Chief Executive Officer Ken Xie: I personally agree with you. I do think this is larger than five or six years ago. At that time, it was more about some supply chain demand driven by remote work from home, whereas now it involves a large amount of AI infrastructure buildout. On the other hand, AI is also driving demand, because AI security has recently become a bigger focus, especially how many enterprises use AI, which is also driving demand. Therefore, we currently do not see demand slowing. [This sentence in the original transcript reads "see demand slowing," which contradicts the two explicit statements immediately following; translated here according to context.] Demand over the past several quarters has remained very strong, and even in the third quarter we did not see any slowdown in demand. On the supply side, as we mentioned, lead times have lengthened, and prices are not rising as fast as in the first and second quarters, but are still rising slightly. I would say prices have stabilized to some extent, which may mean more normalization. We believe we have strong operational capabilities and direct relationships with all component manufacturers, allowing us to negotiate directly; by contrast, some competitors purchase in much smaller volumes. Therefore, we believe we remain better positioned. Fortinet Chief Operating Officer John Whittle: I think you made a good point, and our business follows the threat. You mentioned the Target Corporation data breach, the pandemic, and so on. As someone just said, no one can accurately predict the future, but AI threats appear more durable and persistent than some previous threat drivers. Therefore, I think we are still in the early stages. As you said, our business does follow the threat, and the current threat level is high and appears likely to persist. BTIG Analyst Gray Powell: Okay, very helpful, thank you. Operator: Thank you. The next question comes from Rob Owens of Piper Jaffray. Please unmute and ask your question. Piper Jaffray Analyst Rob Owens: Thanks very much for taking my question. I want to follow up on the earlier answer about the threat environment. Clearly, the headlines in October about agents and related incidents were quite concerning. I know the fourth quarter is only one month in, but I would love to understand the current trend. Has it clearly accelerated over the past month? Given what is happening on the vulnerability front, can you provide some quantitative information to help us understand how the fourth quarter started? Thank you. Fortinet Founder, Chairman and Chief Executive Officer Ken Xie: Yes, demand remains very strong, and we do not see any slowdown. AI is indeed discovering more vulnerabilities, such as PHP and others. We believe FortiGate is well positioned to stop some of these attacks and intrusions. We have corresponding detection signatures that can block exploitation of some vulnerabilities, which is a very effective way to help many enterprises defend themselves. In addition, we see AI accelerating some convergence trends. Therefore, we see more high-end devices being deployed inside enterprises for internal network segmentation. We also mentioned sovereign AI, which is also growing strongly. We believe that in the long term, hybrid AI combining sovereign environments and the cloud will be the best solution for customers, and we believe we have a huge advantage there. I want to emphasize that demand remains very strong, with no signs of slowing. Operator: Thank you. The next question comes from Meta Marshall of Morgan Stanley. Please unmute and ask your question. Morgan Stanley Analyst Meta Marshall: Thank you. I have two questions. We noticed that operational technology, or operational technology security billings, were strong. Are you seeing the customer base expand? Could you discuss whether important new customers have emerged? Second, are you finding that when customers deploy a large number of devices, they lack related services or personnel? Can you help these customers through your own service team, or better connect them with other services that can assist with installation? Thank you. Fortinet Chief Financial Officer Christiane Ohlgart: Meta, I will answer. On operational technology, I would say we have been strong in certain regions and are now extending that strength to other regions. This is because we have more and more customer success stories, and customers can see the benefits of our appliances developed specifically for these use cases. Therefore, the reach of the advantage is expanding, and the business continues to expand. As the attack surface expands, these products are also becoming more important. On installation, Fortinet's services are usually more focused on configuration and do not necessarily include racking and installation of equipment. Therefore, we have a broad channel of resellers and partners and certify them to perform these tasks locally for customers. I have not really heard of a shortage of deployment capacity. I think this is less a matter of channel capability or capacity and more a matter of how quickly customers can complete deployments. This often depends on the customer's business. The fourth quarter may be slightly more challenging because many customers are preparing for year-end business and so on. If a company uses a calendar fiscal year, it often waits until the following year to make major changes. Fortinet Founder, Chairman and Chief Executive Officer Ken Xie: Yes. In addition, what is unique about