Fortinet (FTNT) Q3 2026 Earnings Call: Q&A Summary

Q: Shaul Eyar from TD Cowen asked about the criticality of network security on SASE firewalls and SecOps in the age of AI.

A: Ken Xie explained that network security is the foundation of AI security, and Fortinet's SASE firewall is the fastest growing in the space, leveraging better visibility and data to maintain a competitive advantage.

Q: Junaid Siddiqui from Truist asked if the shift toward Open Wave models by enterprises expands the opportunity for AI security in customer-controlled infrastructure.

A: Ken Xie stated that enterprises running Open Wave models internally drives demand for network security, and Fortinet's high-performance ASIC advantage positions them well for internal segmentation.

Q: Shaul Eyar from TD Cowen asked for a double-click on service revenue and the outlook for 2027.

A: Christiane Ohlgart noted that service revenue growth is a timing issue caused by strong enterprise deals with ramped service activations, and new services like FortiGuard Inline AI are highly relevant.

Q: Joseph Gallo from Jefferies asked if the networking and AI strength is hurting service attach rates.

A: Christiane Ohlgart explained that there is a product mix shift toward networking components and sovereign solutions which are product-heavy, but the focus remains on upselling security subscriptions.

Q: Joseph Gallo from Jefferies asked if there is a discrete subscription selling motion or if it is attached to hardware.

A: Christiane Ohlgart clarified that while initial purchases include FortiCare, larger enterprise deals involve a separate upsell motion for security subscriptions.

Q: Gabriela Borges from Goldman Sachs asked about the impact of large enterprise deals on services revenue and if the trend will continue in 4Q.

A: Christiane Ohlgart confirmed that large new customers and expansion deals caused delayed service activation, which will impact 4Q, but deferred revenue and billings indicate strong underlying demand.

Q: Adam Tindle from Raymond James asked for details on what gives management confidence in service growth acceleration in 2027.

A: Christiane Ohlgart clarified she expects improved growth rates rather than acceleration, noting that growth bottomed in Q1 and she is confident in the conversion of service billings to revenue.

Q: Patrick Colville from Scotiabank asked to summarize the thesis regarding large new customers and service agreements.

A: Christiane Ohlgart explained that large deals in 3Q came with delayed service activation and noted that U.S. customers are pushing toward hardware for tax depreciation, which impacted the service line.

Q: Saket Kalia from Barclays asked how to think about product growth in 2027 given the tough 2026 compare.

A: Ken Xie expressed confidence in gaining market share due to operational advantages, while Christiane Ohlgart added that the threat environment is driving upgrades.

Q: Saket Kalia from Barclays asked about pricing and cost levers for 2027.

A: Ken Xie stated that pricing has stabilized but not improved, and the company's strategy is to maintain gross margins by adjusting prices if costs change.

Q: Adam Borg from Stifel asked what led to the growth deceleration in 3Q relative to 2Q.

A: Ken Xie explained that while demand remains strong, the first half of the year benefited from 6 months of on-hand inventory, whereas 3Q was more normal with longer lead times.

Q: Adam Borg from Stifel asked if the company is supply constrained.

A: Ken Xie confirmed that both supply constraints and longer lead times for components are factors.

Q: Fatima Boolani from Citi asked if customers are sweating assets longer and how that impacts 2027 product growth.

A: Ken Xie noted that AI security requires high-end computing power, so customers are moving to high-end models rather than sweating old assets, as new threats require new functionality.

Q: Gray Powell from BTIG asked how the current spending environment compares to post-COVID or 2014-2015 cycles.

A: Ken Xie stated this cycle is bigger due to AI-driven demand, and John Whittle added that the AI threat environment is more durable and sustainable than previous drivers.

Q: Robbie Owens from Piper Sandler asked about trends in October and the impact of the vulnerability environment.

A: Ken Xie reported that demand remains very strong with no slowdown, and the company is seeing high-end units deployed for internal segmentation and strong growth in sovereign AI.

Q: Adam Tindle from Raymond James asked about the pros and cons of servicing sovereign and Neo cloud customers and if the business model should change.

A: Ken Xie explained that these customers have different service needs and longer ramp-up times, but their feedback is critical for driving innovation.

Q: Meta Marshall from Morgan Stanley asked if the OT security customer base is broadening.

A: Alexandra Mehat stated that Fortinet is expanding its OT strength into other regions and broadening the customer base due to increased threat surfaces.

Q: Meta Marshall from Morgan Stanley asked if customers are having issues with installation or staffing.

A: Alexandra Mehat explained that services are configuration-focused and rely on a qualified partner channel, while Ken Xie noted that FortiCare uses AI to assist, and John Whittle added that large-scale rollouts sometimes involve direct service engagement.

Q: Fatima Boolani from Citi asked to reconcile gross margin performance with ASP uplift.

A: Christiane Ohlgart explained that product gross margin was impacted by rising costs in the second half, but service gross margin is offsetting this, and the full year gross margin guidance remains 80%.

Q: Junaid Siddiqui from Truist asked about early adoption of SASE bundles and pricing uplift.

A: Christiane Ohlgart noted there is an uptick in pricing, but it will take time for full adoption across all SD-WAN customers.

Q: Patrick Colville from Scotiabank asked about channel inventory and billings duration.

A: Management stated that billings duration remains similar and channel inventory is flat or down as a percentage of billings, with the company maintaining a diligent approach to inventory allocation.