“We remain committed to generating a healthy operating margin of 25% or greater in 2024 and 2025.”

In context

“Ken Xie (Founder, Chairman and CEO): Thank you, Peter. Good afternoon and thank you to everyone for joining our call. In Q3, we exceeded street expectations in our operating margin and free cash flow. However, both product revenue fell below our expectation due to a slowdown in secure networking growth, along with challenges in sales execution and marketing efficiency. In response to the slowdown in the secure networking market, we are shifting our marketing and sales team's focus towards a faster-growing secure operations and SASE market over the next few quarters, while maintaining our consistent focus on leading innovation in secure networking and the convergence of security and networking where we have been a leader for 23 years. While we anticipate limited near-term growth in the secure networking market, it is very important for Fortinet as we believe it enables our platform strategy with a massive footprint as the market leader in both firewall revenue and units shipped. The secure networking market is valued at $62 billion and is projected to grow at high single digits annually to $86 billion by 2027. Our consistent focus on our industry-leading DDoS, which supports over 30 network function and security applications combined with our ASIC-driven performance capability, which provides up to 10x better performance on average than competitors, continues to drive our market share gains. Secure networking remains a vital part of our strategy and a market that we believe will return to double-digit annual growth over time. We have been innovating for some time in the faster-growing segment of secure operations and SASE. Security operations, also known as SecOps, is a $46 billion market growing at mid-teens annually to $78 billion by 2027. Fortinet's platform is a comprehensive and integrated offering EDR, SIM, SAR, and other integrated solutions. Consolidation in security demands seamless integration and underlying secured tools. Fortinet's strength lies in its innovation and ability to enable automation through a high degree of product integration. Our AI and product capabilities underpin our automatic stock business, all underpinned by a single consolidated management and analytics platform. In addition to SecOps, we have continued to increase our focus on SASE, a $17 billion market expected to grow at a 20% compound annual growth rate to $36 billion by 2027. We believe Fortinet is the only company with a SASE service solution that can perform all functions in the cloud or on-premises with a common operating system, including networking and security sets, market-leading SD-WAN, vWAN, and the management console. Our SASE service solution is supported by Google Cloud. With over 100 worldwide SASE cloud locations together with our own 30-plus points of presence in data centers. For our client-based use case, we are scaling our SASE service function using our ASIC technology. For instance, we recently announced a Fortinet 1.8G with a security processor on the side, which supports our full SASE offering, which includes SD-WAN, firewall, Secure SD-WAN gateway, and threat prevention while improving secure computing performance up to 54x better than our competition. We anticipate that success in the SASE market will first come from upselling SASE services to our installed base of tens of thousands of customers. Our industry leadership in both firewall and SD-WAN, the two largest components of SASE provides us with a significant competitive advantage. We have a track record of successful execution and believe we are the only company with strong SASE service and SecOps solutions integrated into the same operational system. This differentiation sets us apart and provides us with a significant competitive advantage over peers. While we expect top-line growth to be modest for the next few quarters due to challenging networking comparisons and our business transformation realignment towards security operations and SASE, we anticipate growth to return to double digits by the second half of 2024. We remain committed to generating a healthy operating margin of 25% or greater in 2024 and 2025. Before turning the call over to Keith, I would like to thank our employees, customers, partners, and suppliers worldwide for their continued support and hard work.”