“Non-GAAP earnings per share of $0.35 to $0.37, assuming a share count of between 795 million and 805 million.”

In context

“Keith Jensen (Chief Financial Officer): Thank you, Ken. And good afternoon everyone. Let's start with the key highlights from the second quarter. Billings grew 18%, along with product revenue growth, while service revenue growth held firm at 30%, resulting in total revenue growth of 26%. OT and SD-WAN revenue continue to perform well, with revenue from these products rising 60% and 40%, respectively. In a sign of our strength in the small and mid-sized customer segments, we added a record 6,500 new logos. Operating margins of 26.9% exceeded the high end of the guidance range by 140 basis points. Free cash flow was strong at $438 million, representing a margin of 34%, benefiting from the deferral of certain cash tax payments to the fourth quarter. Looking at billings in more detail, billings of $1.54 billion were led by non-FortiGate billings, which grew over 30%, representing 34% of total billings. Non-FortiGate billings growth was driven by networking, FortiGate VM, NAC, and cloud. As Ken mentioned, non-FortiGate is nearing a $2 billion annual revenue run-rate. In terms of industry verticals, government and manufacturing topped the list as a percentage of total billings, with manufacturing up almost 50%, while government and construction grew over 30%. Retail was impacted by a very difficult comparison, as the industry nearly doubled in the year earlier period. Deal size over $1 million increased from 122 to 134 deals. Turning to revenue and margins, total revenue grew 26% to $1.29 billion, driven by non-FortiGate growth of over 45% and service revenue growth of 30%. This was the second consecutive quarter of greater than 30% service revenue growth. Security subscriptions represent over 55% of all service revenue and have seen strong increasing sequential quarterly growth dating back to Q1 of '22 of 23% to Q2 of '23 at 34%. Product revenue of $473 million increased 18%. Product lead times and backlogs are expected to approach normal levels in the third quarter. Total gross margin of 77.9% was up 140 basis points, driven by a 160 basis point increase in product gross margin to 63.5%. Product gross margin has benefited from earlier pricing actions and easing cost pressures but was partially offset by certain inventory charges. Service revenues constituted 63% of total revenues, delivering a gross margin of 86.2%. Higher service revenue mitigated higher labor costs and increased cloud delivery costs as we continue to expand our cloud SASE delivery models. Our single vendor SASE solution is opening a large new market, leveraging our sizable SD-WAN installed base as a significant market access point. We plan to accelerate our point of presence deployment with a dual strategy of investing in our own POPs as well as working with third-party providers to accelerate our deployment. Operating income of $348 million grew 36%, outpacing revenue growth by more than 10 points as operating discipline resulted in significant operating leverage. Operating margins of 26.9% exceeded the high end of the guidance range and increased by 210 basis points due to strong gross margin performance and operational efficiencies. Earnings per share increased 58% to $0.38, also exceeding the high end of guidance. Looking into the statement of cash flow summarized on Slides 7 and 8, free cash flow increased 55% to $438 million. The adjusted free cash flow, which excludes real estate investments, was $498 million, representing a 38.5% adjusted free cash flow margin. Free cash flow benefited from the deferral of approximately $190 million in cash tax payments. Capital expenditures were $77 million, including $59 million of real estate investments. The board recently increased the company's share repurchase authorization by $500 million, bringing the total available share buyback authorization to around $2 billion. I would now like to share a few significant wins from the quarter that exemplify the strength of our broad and integrated platform. First, a global pharmaceutical leader signed an eight-figure deal with Fortinet Cybersecurity Fabric, investing in our OT-aware secure networking architecture, as well as our AI operations and threat intelligence solution. Recognizing the market shift to a platform-based approach to security, this company chose Fortinet to secure its highly regulated and sensitive medical data, which continues to drive global operational and financial efficiencies through our broad integrated and automated platform approach to cybersecurity. In another significant deal, one of the largest U.S. school districts, which had recently upgraded its datacenter firewalls to FortiGate, sought to improve its network security posture with a NAC solution that offers better visibility to the devices connected to the network. Fortinet competed against multiple peers, winning the deal due to FortiNAC's ease of implementation, centralized management capability, and superior risk remediation, as well as tight integration with the existing Fortinet security fabric. This high seven-figure deal was the largest NAC deal in Fortinet's history. Finally, in a seven-figure displacement in our largest FortiSASE deal to date, a large bank embarking on its digital transformation journey selected our FortiSASE solution for over 5,000 users, integrating SD-WAN and SASE into a holistic solution that delivers comprehensive security both from the cloud and on-prem while ensuring consistent security policies for all users, regardless of their location, and wherever applications are accessed. These transactions illustrate how Fortinet's platform strategy, integrated operating systems, and proprietary ASIC technology continue to resonate with customers. Given the heightened interest in AI technology, we could not conduct this call without discussing Fortinet's investment and innovations in AI. Fortinet has been at the forefront of AI and machine learning innovation for many years, leveraging deep learning and artificial neural networks to power our products and security services, enabling a faster, stronger, and more accurate defense for our customers. One of our first AI-powered use cases was the introduction of the virtual FortiGuard Threat Analyst. FortiGuard addresses threats in real time with machine learning, coordinated protection, and is extensively used in malware detection and threat hunting. Every time a threat is identified, FortiGuard generates threat intelligence that automatically updates defense signatures across the fabric. In cloud environments where scale and speed are critical, AI and machine learning help security teams keep pace with threats on multiple fronts. All of this happens seamlessly and behind the scenes. Today, our platform, Guest and Analyzer, handles over 100 billion events every day to deliver over 1 billion security updates daily across the Fortinet security fabric and ecosystem. While many of our competitors OEM their security from different security vendors, our AI-driven FortiGuard threat intelligence has been built in-house, which allows us to leverage AI across different sources. Adversaries increasingly utilize AI in their playbooks to drive cyberattacks, which only increases the rapidly evolving cybersecurity threat landscape. We continue to invest in AI and machine learning technologies across our products, including generative AI, natural language models, and other implementations to enhance, simplify, and automate security for our customers. Before moving on to guidance, I'd like to offer some observations about the second quarter and the industry. Regarding the second quarter, we believe macro influences impacted our billing performance due to average contract duration. We saw shorter contract durations, with the average term decreasing by 1.5 months to 28 months, creating a 4 to 5-point billings headwind year-over-year. Normalizing billing growth with this change in contract duration yields billing growth in the low-20% range. It's not unusual for some enterprise deals to be pushed to future quarters, but in Q2 '23, we experienced an unusually large volume of deals expected to close in June that were instead postponed. From a market perspective, CIOs continue to prioritize and invest in securing their organizations in light of rising cybersecurity threats. We see new regulatory requirements, such as those recently announced by the SEC and the EU Cyber Resilience Act, continuing to provide market tailwinds as organizations increase their cybersecurity investments to comply with stringent new regulations. The cybersecurity industry remains highly relevant as CIOs prioritize cyber spending within their overall IT budgets, and the long-term demand drivers for Fortinet remain solid. That said, we do anticipate a return to more normal seasonality for Fortinet in the back half of the year, as the tailwinds from supply chain-driven growth subsides, and we cycle the prior period's price increases. Moving on to guidance. For the third quarter, we expect billings in the range of $1,560 million to $1,620 million, which at the midpoint represents growth of 13%, consistent with our quarter-over-quarter seasonality pre-pandemic. Revenue is anticipated in the range of $1,315 million to $1,375 million, which at the midpoint represents growth of 17%. Non-GAAP gross margin of 75.5% to 76.5%. Non-GAAP operating margin of 24.5% to 25.5%. Non-GAAP earnings per share of $0.35 to $0.37, assuming a share count of between 795 million and 805 million. Capital expenditures of $100 million to $130 million, with a non-GAAP tax rate of 17% and cash taxes of $25 million. As previously mentioned, backlog is expected to approach normal levels in Q3. For the full year, we expect billings in the range of $6,490 million to $6,590 million, which at the midpoint represents growth of 17% and applies slightly below normal seasonality in Q4. Revenue is anticipated in the range of $5,350 million to $5,450 million, which at the midpoint represents growth of 22.3%. Service revenue in the range of $3,350 million to $3,410 million, with the midpoint representing a growth of 28.2%. The service revenue guidance implies product revenue growth of 13.5%. Non-GAAP gross margin of 75.25% to 76.25%. Non-GAAP operating margin of 25.25% to 26.25%. Non-GAAP earnings per share of $1.49 to $1.53, assuming a share count of between 795 million and 805 million. Capital expenditures of $335 million to $385 million due to our continued cloud data center and facilities investments. Non-GAAP tax rate of 17%, with cash taxes of $460 million, approximately $380 million of which is due in the fourth quarter. We continue to execute our long-term strategy and remain confident in our strategy and our solutions. While it's early to be providing guidance for next year, we would expect our near-term performance to represent a short-term trough. Given our confidence in our solutions, we anticipate that growth comparisons will ease as we move through 2024, and at this early stage, we expect billings growth to approach high-teens by the fourth quarter of 2024. And with that, I'll now hand the call back over to Peter to begin the Q&A session.”