“non-GAAP earnings per share of $0.58 to $0.62, assuming a share count of between $768 million and $778 million”

In context

“Keith Jensen (CFO): Thank you, Ken. Thank you, Aaron, and good afternoon, everyone. Let's start with the key highlights from the third quarter. We are very pleased with our strong execution and financial performance in the third quarter, repeating our second quarter performance by again achieving record gross margins and record operating margins while delivering top line results at the top of our guidance range. Total revenue grew 13%, driven by strong growth in services revenue, and product revenues returned to growth. We again added over 6,000 new logos driven by the resilience of small enterprise customers and the strength of our robust channel partner. We are pleased to again raise our revenue and operating margin guidance for the full year, and we believe we are on track to achieve our seventh consecutive year of exceeding the rule of 40. Looking at billings in more detail, RPO grew 15% to $6.1 billion, and total billings grew 6% to $1.58 billion, driven by robust growth in security operations at 32% and Unified SASE at 14%. SSE and related cloud technologies were again the fastest growers in Unified SASE, benefiting from our large SD-WAN customer base. Our Unified SASE and security operations pillars are gaining considerable traction, with over 50% of their billings coming from our secure networking installed base and combining to drive our SaaS solution, organic ARR growth rate of 74%. The customer buying journey from FortiGate to SD-WAN to SASE supports our customers' drive towards consolidation and is gaining traction. This consolidation journey first begins with a firewall in FortiOS and typically expands to SD-WAN and next to SASE. I should share that two-thirds of our large and mid-enterprise customers have deployed our SD-WAN technology, providing them with a gateway to FortiSASE. These customers in our first year of SASE delivered high mid-single-digit penetration rates, highlighting both the dramatic expansion opportunity as well as customer demand for vendor consolidation. Including all elements of unified SASE, pipeline growth was over 30%. While the SSE technologies are seeing pipeline and ARR growth of 130% and over 500%, respectively, larger enterprises continue to drive our expansion into Unified SASE and the security operation markets, with large and mid-enterprises representing 91% and 76% of SASE and security operations' billings, respectively. As we work through the wind-down of last year's backlog and the related year-over-year headwind to growth this year, secured networking has returned to growth as we expected. Rounding out the billing commentary, SMB and large enterprises were our top two performing customer segments, while EMEA was our best-performing geography with double-digit growth. Among our top 5 verticals, manufacturing billings grew by over 20%, driven by OT billings of 119%. Retail returned to growth for the first time in 6 quarters, up 9%, while the service provider vertical reached its highest growth rate over that same 6-quarter period. Turning to revenue and margins, total revenue grew 13% to $1.508 billion, driven by 19% service revenue growth, and product revenues returned to growth. Service revenue of $1.034 billion grew 19%, accounting for 69% of total revenue. Service revenue growth was driven by growth in our SaaS solutions, including 50% services growth in security operations and 27% services growth in Unified SASE. Product revenue returned to growth for the first time in 5 quarters, increasing 2% to $474 million. Excluding the impact of backlog, product revenue grew sequentially at double-digit rates, outpacing historical norms for Q2 to Q3. A moment ago, we talked about solution consolidation and described the customer's journey around firewalls to SD-WAN and on to SASE. The second customer buying journey is supporting the customer's convergence of security and networking. Their journey begins with Fortinet firewalls and expands to leverage our FortiLink technology to manage Fortinet switches and access points. It's worth noting that over 95% of our larger enterprise customers previously or simultaneously purchased FortiGate firewalls. At the same time, our switch penetration rate for these larger customers is around 50%, highlighting both our success and the future opportunity. Software license revenue continued its double-digit growth, driven by security operations solutions and represented a mid- to high-teens percentage of total product revenue. Combined revenue from software licenses and software services such as cloud and SaaS security solutions increased 33%, accelerating from 32% in the second quarter and providing an annual revenue run rate of over $900 million. Total gross margin increased 630 basis points to a quarterly record of 83.2%, exceeding the high end of our guidance range by 320 basis points. Gross margin benefited from higher product and service growth margins as well as a 4-point mix shift to higher-margin service revenue. Product margin of 71.6% was also a quarterly record and increased 1,370 basis points, which includes a 320 basis point benefit related to the renegotiation of supplier contractual commitments. Excluding this one-time benefit, the product gross margin would have been around 68.4%. Service gross margin of 88.4% increased 130 basis points as service revenue growth outpaced labor costs and benefited from a mix shift towards higher-margin FortiGuard security subscription services. Operating margin increased 130 basis points to a quarterly record of 36.1% and was 360 basis points above the high end of our guidance range. Excluding the one-time benefit to product gross margins, operating margins would have been 35.1%. Taken together with our reported Q2 margins, the Q3 margins excluding the one-time benefit provide directional insights into our financial performance. Before moving on to the statement of cash flows, I’d like to provide a few details related to the impact of Lacework and Next DLP acquisitions. These acquisitions increased Q3 billings and revenue by approximately 60 and 90 basis points, respectively, and increased gross and operating margins by about 30 and 220 basis points, respectively. Looking at the statement of cash flow summarized on Slides 16 and 17, free cash flow was $572 million, representing a margin of 38%. Adjusted for real estate investments, the margins came in at 40%. In the first 9 months of the year, free cash flow was $1.5 billion or $1.75 billion after adjusting for real estate investments. Cash taxes were $140 million, up $114 million, reflecting the prior year's regulatory extensions of estimated tax payments. Infrastructure investments totaled $36 million. The average contract term in the third quarter was 28 months, flat year-over-year and quarter-over-quarter. DSO decreased 6 days year-over-year and quarter-over-quarter to 62 days, reflecting stronger linearity. The $106 million gain on a bargain purchase from the Lacework acquisition relates to NOL carryforwards and the related recognition of the deferred tax assets. The gain is excluded from our non-GAAP financials but included in the GAAP financials, adding $0.14 per share to our GAAP EPS. Share buybacks in the quarter totaled $600 million, and last month, the Board increased the share repurchase authorization by an additional $1 billion, bringing our remaining share repurchase authorization to approximately $2 billion. Now, I’d like to share a few significant wins from the third quarter. First, in a 7-figure upsell deal, an existing SD-WAN customer in the retail industry continued their consolidation journey, adding FortiSASE for 16,000 users. This customer selected our FortiSASE solution for simplicity, ease of management, and consistent security enforcement across their infrastructure. We outperformed the competition by leveraging our FortiOS operating system, streamlining operations and reducing costs of ownership while showcasing our ability to consolidate multiple security functions onto a single platform. In another 7-figure win, a medical device company purchased FortiSASE to replace their existing solution. This customer chose Fortinet for simplified and consistent security management, significant cost savings, and FortiSASE's enhanced functionality, particularly the bidirectional connectivity between their data center and remote users, enabling them to push policies more effectively. In an 8-figure competitive displacement win, a multinational bank commenced their partnership with us by selecting our FortiGate firewalls and multiple set-top solutions to secure their hybrid architecture. This customer was particularly impressed with our integrated security, end-to-end visibility, and automated response capabilities of our FortiOS operating system. Before discussing our guidance, I would like to offer a couple of comments on the firewall recovery and refresh opportunity. During last quarter's remarks, we mentioned the continued improvement in the days of registered FortiGuard contracts, indicating that inventory digestion at end users was returning or had returned to normal. In the third quarter, this metric was stable, further validating our view that the firewall market is recovering. Today, we'd like to add to this commentary by noting that in 2026, a record number of FortiGates will reach the end of their support life cycle, and we expect these customers to start their refresh cycle for these products sometime in 2025. Moving on to guidance, as a reminder, our fourth quarter and full year outlook, which are summarized on Slides 19 and 20, are subject to the disclaimers regarding forward-looking information. Before reviewing our outlook, I should note we expect Lacework and Next DLP acquisitions to impact Q4 billings and revenue by 75 and 135 basis points, respectively, while decreasing our audit margins by 230 basis points. For the fourth quarter, we expect billings between $1.9 billion and an indiscernible amount, which at the midpoint represents growth of 5%. Revenue in the range of $1.56 billion to $1.62 billion, which at the midpoint represents growth of 12%. Non-GAAP gross margin of 79.5% to 80.5%; non-GAAP operating margins of 33% to 34%; non-GAAP earnings per share of $0.58 to $0.62, assuming a share count of between $768 million and $778 million; capital expenditures of $100 million to $120 million; a non-GAAP tax rate of 17% and cash taxes of $127 million to $177 million. For the full year, we expect billings in the range of $6.43 billion to $6.53 billion; revenue in the range of $5.856 billion to $5.916 billion, which at the midpoint represents growth of 11%. Service revenue in the range of $4.15 billion to $4.45 billion, which at the midpoint represents growth of 19%. Non-GAAP gross margin of 80.3% to 81.3%, non-GAAP operating margin of 32.9% to 33.9%, non-GAAP earnings per share of $2.20 to $2.28, assuming a share count of between $766 million and $776 million. Capital expenditures of $380 million to $400 million, non-GAAP tax rate of 17% and cash taxes of between $550 million and $600 million. I look forward to seeing you at the Analyst Day later this month and updating you on our progress in the coming quarters. I'll now hand it back to Aaron to begin the Q&A session.”