“Looking forward, EMEA's pipeline growth indicates continued strength in our EMEA business, despite the situation in Eastern Europe and its potential impact on European economies.”

In context

“Keith Jensen (Chief Financial Officer): Thank you, Ken, and good afternoon, everyone. Before adding to Ken's comments and going into more detail on our Q1 financial results, I'd like to briefly discuss a wording change in how we describe our business. FortiGate is now referred to as the core platform and non-FortiGate as the platform extension. This change helps to emphasize the importance of our FortiOS operating system. FortiOS drives our entire security platform across multiple platform extension use cases, including Zero Trust access, cloud security, security operations, and secure networking. With that in mind, let's start with a more detailed Q1 discussion. Customer demand was again strong and broad-based across geographies, customer sizes, industries, use cases, and security solutions, reflecting three key demand drivers: the elevated threat environment, convergence of security and networking, and customers consolidating across our platform offerings. These key growth drivers are contributing to our strong results and accelerating pipeline growth. In short, we believe we are in a period of sustained high growth for the cybersecurity industry and Fortinet. Moving to the Q1 financial results, total revenue of $955 million was up 34%, driven by record product revenue growth of 54%. Taking into account an $80 million sequential increase in product backlog, product bookings growth was 87%. Product revenue growth was broad-based, with core platform and platform extension product revenue growth at 50% and 59%, respectively. While we continue to see robust product growth from our SD-WAN and operational technology, or OT, the core platform product revenue growth was mainly driven by the wide range of other use cases embedded in our operating system. Service revenue was up 24% to $584 million. Support and related services were up 26% to $271 million, while security subscription services revenue was up 23% to $313 million. To offer one observation about how customers may be responding to the supply chain challenges, we are seeing indications that a subset of customers are placing product orders further in advance and may have delayed purchases or registrations of the related service contracts. This, together with the timing differences with age product and service revenue recognition, creates a lag between product and service revenue growth rates. We expect quarterly service revenue growth to accelerate throughout the rest of the year. As summarized on Slide 6, total revenue in the Americas increased 32%. EMEA revenue increased 25%. And APAC posted revenue growth of 57%, which includes the contribution from AlaxalA. EMEA's growth includes the impact of suspending operations in Russia. Nonetheless, EMEA easily exceeded their internal targets. Looking forward, EMEA's pipeline growth indicates continued strength in our EMEA business, despite the situation in Eastern Europe and its potential impact on European economies. Platform extension revenue grew 49% and accounted for 34% of total revenue, up 3 percentage points. Moving to bookings, backlog, and billings, we are experiencing exceptionally strong demand that continues to exceed supply by more than historical norms. Bookings were up 50% to $1.3 billion, reflecting exceptional demand and a $116 million quarter-over-quarter increase in total backlog, bringing backlog to $278 million. Larger enterprises continue to favor Fortinet's industry-leading cost-performance advantage and are increasingly appreciative of our integrated platform strategy. The platform strategy allows customers to converge networking functionality with security capabilities and consolidate multiple point products. The following key metrics illustrate growing demand from enterprise customers: Global 2000 bookings were up over 60%. Large enterprise bookings were up over 65%. Secure SD-WAN bookings grew 54%, reflecting the convergence of networking and security as well as a strong economic case. OT bookings were up 76%, illustrating the continued response to the elevated threat environment. As a reminder, backlog is excluded from the current quarter billings and revenue; however, it is expected to provide increased visibility and a top-line tailwind in future quarters. At $1.2 billion, billings were up 36%. Core platform billings were up 30%, accounting for 67% of total billings. As shown on Slide 7, high-end FortiGate posted very strong billings growth with a mix shifting 6 points toward high-end appliances. Platform extension billings were up 50% and accounted for 33% of total billings, up 3 percentage points. Average contract term was consistent year-over-year and down 1-month sequentially at 27 months. Moving back to the income statement, total gross margin was 74.4% as the revenue mix tilted 5 percentage points to product revenue from higher-margin services. Product gross margin of 57.4% reflects the impact of component and freight cost increases as well as higher less predictable component expedite fee expenses and the impact of consolidating AlaxalA’s results. Service gross margin of 85.2% was impacted by AlaxalA, costs associated with the expansion of our data center footprint, and increased labor costs. Operating margin of 22% exceeded the midpoint of our guidance range by 200 basis points due to increased sales productivity and efficiencies in other OpEx areas offsetting the gross margin decline. Headcount increased 26% to 10,860. Moving to the statement of cash flow, free cash flow was $273 million, representing a margin of 29%. Capital expenditures in the quarter were $123 million, including $93 million for real estate investments. Adjusted for real estate purchases, our free cash flow margin was 38%. Our capital expenditure strategy includes investing in cloud and data center infrastructure, as well as our office and warehouse capacity to support our higher levels of growth. We repurchased approximately 2.3 million shares of our common stock at a cost of $691 million. At the end of the quarter, the remaining share repurchase authorization was approximately $830 million, with the authorization set to expire in February 2023. Inventory turns at 3.5x were up nearly 1.5x year-over-year. Now let's spend some time reviewing backlog in a bit more detail. As I mentioned earlier, very strong demand with a $116 million increase in total backlog to $278 million. To put this in perspective, total backlog at the end of the first quarter was approximately 6% of our trailing 12-months total billings. We shipped 60% of the Q4 ending hardware backlog in the quarter. In consistent with the prior quarter, 73% of the backlog relates to expected future product shipments, while the remaining 27% relates to various services. We believe our backlog is very strong and should provide a billings and revenue tailwind to growth in future periods. There are several reasons to support our view, including: existing customers account for 93% of our backlog, and no single end customer accounts for more than a low single-digit percentage of backlog; there are 10 deals in backlog, 9 from existing customers with the remaining balance of over $1 million that together account for less than 10% of total backlog. Remaining balances are defined as the original order amount less the partial shipments we've made; just 5% of Q4 backlog was canceled in Q1, suggesting that double ordering is not a significant contributor to our backlog. We do not believe that customers are meaningfully pivoting to software form factors from hardware. The software is frequently a more costly option and may require architectural redesign and investment in changes in form factors and other equipment beyond just the firewalls. We believe our competitors are similarly impacted by the supply chain. More customers are accepting the supply chain challenges and working with us to mitigate the issues by switching products, adjusting deployment schedules, and accelerating evaluations of new products. Similar to others, we are experiencing ongoing supply chain challenges. Our responses to these challenges include significantly increasing inventory purchase commitments, redesigning products, qualifying additional suppliers, and working closely with our suppliers to further enhance our resiliency and mitigate the effects of disruptions. We expect supply chain constraints to be challenging throughout the remainder of the year. As a result, we expect component and logistics costs to remain elevated and backlog to increase through the course of the year. As we balance our pricing actions with the opportunity for continued market share gains, we have passed along most, but not all cost increases. As such, we expect ongoing pressure on gross margins. While the situation is very dynamic, we believe we will have access to sufficient inventory to meet our guidance. The outlook is also subject to the disclaimers regarding forward-looking information that Peter provided at the beginning of the call. For the second quarter, we anticipate bookings in the range of $1.325 billion to $1.385 billion, which at the midpoint represents bookings growth of 40%. We expect billings in the range of $1.225 billion to $1.265 billion, which at the midpoint represents growth of 30%. Revenue is expected in the range of $1.005 billion to $1.035 billion, with non-GAAP gross margin of 74.5% to 76%. Non-GAAP operating margin will be in the range of 22% to 23.5%, and we expect non-GAAP earnings per share of $1.05 to $1.10, which assumes a share count of $165 million to $167 million. We estimate second-quarter capital expenditures to be between $75 million and $85 million, with a non-GAAP tax rate of 17%. For the full year, we anticipate backlog could approach or possibly exceed $500 million and expect billings in the range of $5.500 billion to $5.508 billion, representing growth of 32.5% at the midpoint. Revenue is expected in the range of $4.350 billion to $4.400 billion, representing growth of 31% at the midpoint. This assumes the current supply chain environment remains constrained throughout the year. We anticipate total service revenue in the range of $2.640 billion to $2.700 billion, representing growth of approximately 28%, and full-year product revenue growth of approximately 36%. Given our view of component costs and other supply chain pressures, we expect non-GAAP gross margins of 74% to 76%, non-GAAP operating margins of 24% to 26%, and non-GAAP earnings per share of $5 to $5.15, assuming a share count of between $166 million and $168 million. We estimate full-year capital expenditures of between $270 million and $300 million and expect our non-GAAP tax rate to be 17%. Finally, I want to remind everyone that we will be holding an Analyst Day on May 10, coinciding with Accelerate 2022. A link to register for the webcast is located on the Events and Presentation page of Fortinet's Investor Relations website. Along with Ken, I would like to thank our partners, customers, suppliers, and all members of the Fortinet team for their hard work, execution, and success. I'll now hand the call back over to Peter to begin the Q&A.”