Good day and thank you for standing by. Welcome to the Fortinet Q2 '23 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Peter Salkowski, Senior Vice President of Finance.

Thank you, Trace. Good afternoon everyone. This is Peter Salkowski, Senior Vice President of Finance and Investor Relations at Fortinet. I am pleased to welcome everyone to our call to discuss Fortinet's financial results for the second quarter of 2023. Speakers on today's call are, Ken Xie, Fortinet's Founder Chairman and CEO and Keith Jensen, our Chief Financial Officer. The live call that will be available for replay the webcast on the Investor Relations website. Ken will begin our call today providing a high level perspective of our business. Keith will then review our financial and operating results for the second quarter of 2023 before providing guidance for the third quarter of 2023 and updating the full year. Will then open the call for questions. During the Q&A session, we ask you to please limit yourself to one question and one follow up question to allow others to participate. Before we begin, I'd like to remind everyone that on today's call, we will making forward-looking statement. And these forward looking statements are subject to risks that could cause actual results to differ materially from those projected Please refer to our SEC filings in particular the risk factors in our most recent Form 10-K and Form 10-Q for more information. All forward-looking statement reflect the opinions only as of the date of this presentation and we undertake no obligation and specifically disclaim any obligation to update forward-looking statement. Also, our references to financial metrics that we make today on today's call are non-GAAP unless stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations are located in the earnings press release and in the presentation that accompanies today's remarks, both of which are posted on the Investor Relations website. Ken and Keith's prepared remarks for today's earnings call, will be posted on the quarterly earnings section of our Investor Relations website immediately following today's call. Lastly, all references to growth there on a year-over-year basis unless noted otherwise. I will now turn the call over, Ken.

Thanks, Peter. Thank you Were we weren't for joining today's call to review our second quarter 2023 results. Total revenue in the second quarter increased 26%, driven by strong revenue growth service, which 30% for the second consecutive quarter, with 34% growth in existing subscription and scription and non-FortiGate product row over 45%, which is nearly $2 billion annual run rate, building growth of 18%, leads to more normalized product revenue growth of 18%. We believe our building performance reflect large enterprise concern with the macro environment in addition to some uniquely indigestion after two years of elevated 30%-plus product building growth during the supply chain shortage. According to IDC's latest quarterly security tracker, in addition to having the number one unit in firewall category for 10 consecutive year with over 50% market share, Fortinet is now the market share leader in both unit and revenue. Based on the latest Westland Advisory on Security and Cybersecurity report, Fortinet was named but only ITOT network protection platform leader. We are currently one of the top and the fastest growing OT security vendor in the market that Westland Advisor expect to grow to $33 billion by 2030. Including our success line with our broad integrated platform, our proprietary ASIC security processor, and our ability to converge network and security both on prem and in the cloud across a single fully OS operating system, to leverage these advantages and drive future growth in addition to our leading network security solution, we have increased our go-to-market investment in universal setting as demand IoT security, cloud security and security operations. And we were dedicated more resource to support hybrid infrastructure and hybrid world. Today we are announced new FortiGate 90G, our first next generation firewall after [Indiscernible] with the new security process of flat FortiASIC,…

Thank you, Ken. And good afternoon everyone. Let's start with the key highlights from the second quarter. Billings growth was 18% as well as product revenue growth, service revenue growth held firm at 30%, resulting in total revenue growth of 26%, OT and SD-WAN revenue continue to perform well as revenue from these products were up 60% and 40%, respectively. In a sign of our strength in the small and midsized 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 buildings in more detail buildings of $1.54 billion were led by non-FortiGate billings over 30% growth, representing 34% of total billings. Non-FortiGate billings growth was driven by networking FortiGate VM, NAC [ph] and cloud. And 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%, government and construction were up over 30%, while service provider and retail were up 1% and down 5% respectively. Retail was impacted by a very difficult compare, as the industry vertical nearly doubled in the year earlier period. Billings growth vary by GIOS with international emerging leading, followed by Europe and the LatAm. APAC and to a lesser extent U.S. enterprise were challenged by difficult prior year comparisons. Deals over $1 million increased from 122 deals 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…

Thank you, Keith. Operator -- just one quick reminder before doing the Q&A, if you can please limit yourself to one question and one follow up question. Operator, you can open the call.

Thank you. [Operator Instructions] Our first question is from [Indiscernible]. Your line is open.

Good afternoon. Thank you for taking the question. Ken, I think you noted that -- and Keith commented to it as well, reflected -- I guess, the billings performance and guidance reflects enterprise concern about the macro. Could you give a little bit more color there on what you saw from a macro perspective? And I think you pointed to a weak service provider business. I think investors might draw parallels to what they saw at Juniper last week on the carrier side. Maybe if you could include a few thoughts on how dynamics there may be similar or different with regard to what you see? And then I have a follow-up.

Sure. I think for the carrier service provider, we do see they're probably a little bit behind on offer some surveys because the carrier service provider, if you look back 10-15 years ago, is our biggest market. It's like about 30% market share comes from the carrier service provider. But nowadays, security need additional service like some SASE, all these function -- function in the SASE, which service provider kind of behind, so we're still working with them and closely try to help them accelerate the service. At the same time, we're also starting to invest a little bit more self, which also, like together with the new service we announced today, the two new SD-WAN service, we feel invest in certain infrastructure that will help in drive a lot of new service going forward in the security space, and also in helping service providers to kind of accelerate some of their security service beyond the traditional security service.

Yes. I would probably add to Ken's comments, particularly as we talk about service providers and some of the other verticals and customer segments. And I think there are some lessons that we can see from, for example, manufacturing, which did extremely well in the quarter. They continue to have -- I feel they think they're under pressure in the threat environment, so you see them spending fairly richly. It's still a surprise, If you look at the government sector which was strong also, they have governments in the -- they have budgets on the slowing economy that maybe some of the other industries don't. And at the other end of the spectrum, Ken talked about service provider, and people I think are aware of that story there more broadly. But also retail, I think retail is really a very clear indicator of a vertical that can be one of the first that is sometimes impacted by a slowing economy. But also, Ken made reference to this in his comments, this concept of digestion. A lot of purchasing around SD-WAN technologies and implementations. A year ago, you saw very, very high growth a year ago. And now going through a digestion period, such as the point that it's actually negative growth in the retail vertical.

We're also interested in some cloud provider also started getting in the security space, which also kind of confused some of the enterprise customer. So that's also sometimes they take a little more time to evaluate our different solutions. So we do believe this is a hybrid approach on-premise in the cloud that will be best for the customer, even the cloud probably much more expensive or cost an average about 3x to 5x more expensive compared to on-premise, but it's -- combined altogether probably will be the best solution for customers.

Got it. That's helpful. And maybe a quick follow-up for Keith, I think you talked about a reinflection to high teens billings growth next year. How does performance this quarter and your outlook for the rest of the year impacted 2025, I guess, $10 billion billings target that you've previously thrown out there?

Yeah. I think that as we go through the second half of the year and we enter into our normal planning cycle for 2024, I think that will be a logical output at that point in time to think through what we're seeing in terms of our 2025 targets.

Okay, that’s helpful. Thank you.

Thank you very much for your question. Our next question comes from Gabriela Borges with GS. Your line is open.

Hi, good afternoon. Thank you. Keith, I want to say on the medium-term outlook, your comment on high-teens billings growth by 4Q '24, if I heard it right. Maybe just talk us through how you thought about derisking the six-month and the 18-month kind of outlook? And what are some of the leading indicators you are looking to determine when billings growth and product revenue will trough? Thank you.

I don't know, Ken, if you want to talk about longer-term trends in the industry and now avoid [ph] guides for 2024, if you do that.

Look back to like a -- certainly, yes, with the industry, network security still have a pretty good pace of growth, probably between 10% to 20% on average in the last like 30 years. And we feel we have a very unique, huge advantage solution, which we -- we only want to build our own ASIC. You can see the product we announced today, which has probably averaged about 10x better performance, more function compared to competitive solution and also much less energy consumption, probably like a 90% less energy consumption. So that's where the new SP5 actually -- the first product announced actually is that we have a 14 application engine integrated the ASIC chip, probably more than double compared to the previous version. That's also helping drive the next few quarter growth, which each -- probably every quarter, we may plan to announce a new product, you can see 5. That's a huge advantage and then it also drives the long-term convergence of networking to network security, which can agreed by 2030, the network security will be larger than the traditional network in there. So that's what continue to network security side growth. On the other side, we also mentioned a few other areas. We see kind of the non-FortiGate part also growing pretty strong, so 45%. It's part of it because consolidation, part of because certain like security budget allocation to certain cloud spending can be allocated to some security. And the other part also, kind of like how to manage on different kind of vertical and also some inventory side. That's also we try to balance. We do believe things will be recovered in the later part of next year. And because -- the last two years, we see quite a strong product revenue growth, second quarter over 50%, which is not quite normal. But it's -- once we get more normal, so that will be pretty much return to the average in the last 20-30 years, which is about 10% to 20%.

Yeah. And as I kind of take that commentary and pull it forward a little bit and say, Q3 and Q4, and I suspect I'll get a fair amount of chance -- opportunities to talk about the guidance setting process for Q3 and Q4. I guess I would start off by saying we've certainly seen over the last two or three years in various environments we've been in. You got to be pretty nimble in terms of your assumptions and what you're looking for. And with that in mind, I think I called out in the comments, you see the level of deals that pushed in the second part of June. It was a new development. We always have linearity of the deals closed to see the deals push. And I think 1 comment I would offer is that as you look -- as I look to the Q3 guidance setting and the roll-up, the assumptions for Q3 were to close rates and terms and things of that nature and push. I would say, look a lot more like the assumptions that we saw in actual results for Q2 than maybe what we saw with some higher rates, better rates earlier on. So I think there's some caution built into that, if you will. I think also if you kind of look at the results, where the guidance ends up, you can look at top line growth in Q3 versus Q2 that I think is in the low-single digit growth sequentially. And that's pretty much in the range of where we've seen Q2 to Q3 historically, and we would expect that again. And then maybe just a little more caution in the fourth quarter where -- and again, I made a comment earlier that the seasonality assumption that falls out of the guidance for the full year and is applied to the fourth quarter actually suggests a lower level of growth in the fourth quarter than we've seen in other periods. Offering a certain degree of caution, number one, but also acknowledging that Q4 last year was a very strong quarter and pretty tough compare.

Also, we do see some strong growth in the new area like SD-WAN OT, which grew 40% and 60%, total come on 25% of billings. And also the 5G growth not quite start yet, so we all have the best product for all these new solutions. So that's the additional growth, right, as we're keeping developing.

That all makes sense. Thank you. And just to clarify, is it safe to assume that 4Q, or are you assuming that 4Q billings will be the trough for billings growth?

Yeah. I'd have to go back and look at the actual compares because the compares start easy and I don't want to mix up bookings and billings in this conversation because the timing is a little bit different. But I think that the growth in billings in Q4 and Q1 of -- Q4 of last year and Q1 of this year were very, very strong.

Also, you can refer to the finance presentation #10 page, which we go back to 13 years since we IPO-ed 13 years ago. So there's some kind of a growth, some kind of margin information.

Yeah, I do like that Slide 10. Thank you for calling that out. Okay, thank you.

Thank you.

Thank you, very much. Our next question will come from Tal Liani with Bank of America. Your line is open.

Yes. Thank you. I'm going to ask my two questions together, with your permission. The first one is Palo Alto is posting their quarterly call for Friday evening, which is always a bad sign historically for that quarter. And then you are reporting weaker than expected, although you were very positive last quarter. I remember the calls. So does it mean that the environment deteriorated in the last three months? And if the environment deteriorated, what is the source for it? Meaning, is it the backlog drawdown issue that we were concerned with before? Or is it that customers are deciding not to buy, push out? I'm trying to understand the meaning of both you and Palo Alto, two successful companies kind of comments. The second question is, Keith, in your remarks, you said that projects were pushed out. But if it were pushed out, why do we see a deceleration -- continued deceleration into 3Q and 4Q? Because I can back out your 4Q guidance, and billings is declining from 18% to 13% to 11%. And if it was a push out, then we would have seen a recovery in the second half from pushouts from 2Q. So how do you connect your comments about pushouts versus cancellation to the numbers to the guidance? Thanks.

Yeah. I'll go first, and then Ken can talk about what his friend down the street is doing or not doing, to his knowledge. As I kind of alluded to, I'm not -- yes, I had pushouts in the quarter. I'm happy with what I saw in terms of July on deals getting closed, but I've retained concept of continuing pushouts in Q3 and Q4. I'm not here to suggest that there's going to be a quarter recovery in that. I think that this is going to be -- take a little bit longer through this economy kind of normalizes and this digestion process goes on. So I think it's really -- yes, picking up something in Q3 from Q2, but I'm also anticipating I'm going to see some things move from Q3 to Q4. And also the compares, if you go back and look at in Q3 and Q4 on the billings line, those are pretty attractive numbers that we put up in Q3 and Q4 of last year. What's he up to?

I don't know why Palo Alto is like at Friday afternoon, which is probably -- I'm not one want to answer the question. But on the industry, we do see some company, especially large companies, to be more tight on the budget, and also kind of take a little bit long time to closing. It's not just that this quarter, basically pretty much starting early this year, there is some sign of that one. How long will last? It's tough to say, but it's -- nearly the security is basically an underspend, then they probably will be starting to go back up after probably a few quarters. On the other side, if you see when the big environment starting kind of tough or tight, they tend to be more hand on the current product, current solution and then buy more service, which we also try to help new customers net whatever they have on hand to offer more service, like the SD-WAN service we announced today. So, let's see, the service revenue starting kind of doing well, leverage or kind of the last few years. The product revenue growth, which we already be the #1 in the product revenue in the whole network security space, which is over 28% market share, and also unit shipment is over 52% market share. So I think we'll continue to keep leading in the space and with new technology solutions, like the FortiGate 90G we announced today. But it's -- for us, more focused on long term. So we do believe the long-term convergence of network to network security, we feel we have the best technology product to meet that challenge. And at the same time, the short-term environment, we tend to be also see as an opportunity to keep gaining market share.

Got it. It's -- can you talk about -- I know you don't provide backlog, but can you talk about the backlog trends and how much of what we're seeing last quarter, this quarter, next quarter is still supported by backlog versus the environment itself? We are all looking through this. The question is whether first half of '24, for example, we can get to single-digit growth instead of the double digits? You talk about the end of the year. So I'm not asking you for guidance for first half, but trying to understand how much of current trends are supported by backlog.

Yeah, the backlogs are already back to normal now, back to that before the supply chain issue. And you can see last year towards the middle to the end, we already see the FortiGate. We already solved the issue. The majority of most of that will come from some network-related products. That's also been eased up in the first half of this year. Backlog kind of back to normal before the supply chain addition. And they do have certain cancellation. Ideally the cancellation, probably double digit?

Yeah. I think Ken is giving you not the accounting answer on backlog numbers, but the CEO version that he's done worrying about it, and he knows the company can manage their way through it. From a numbers viewpoint, we still have some backlog that we -- that will pick up. Some low single-digit benefit in Q3. And then to Ken's point, we think that largely, as you get out of Q3, we'll have a -- we'll be back to very close to normal backlog numbers.

Great. Thank you.

Thank you for your question. [Operator Instructions] Our next question is from Brad Zelnick with Deutsche Bank. Your line is open.

Thanks very much for taking my questions. I want to ask one of Tal's questions maybe a little bit differently. A lot of what you shared suggests your market position remains strong, and we've always thought that the price performance advantage of your architecture should enable you to actually take share in a tougher environment. I guess what many you're trying to figure out is if it's tough for Fortinet, does that implicitly mean it's tougher for others out there? And is there anything maybe you can share on competition, that would be helpful perhaps win rates or pricing dynamics that you're seeing in the market?

I think we do have the best solution at special level of the ASIC chip. So the product revenue still grew by 18% compared to, I think, checkpoints of minus 12%, I believe, and some other vendors is low single digit so we still feel we're keeping gaining market share. On the other side, we also see some consolidation, so it's leverage our installation base. We see some of the other products that are kind of helping sell. But on the other side, probably two other kind of maybe timing-related issue when you can see the last two years on the product revenue growth, if we go on Page 3 or Page 4? [Indiscernible] finance statement here. Because you see, the product revenue growth is probably like 40%, 50% in some quarter, but over 30% in the last two years. So I do believe some kind of inventory is being held by certain customers or some other partner or kind of service provider channel. And we're also kind of changing the policy, service grace period policy early this year, I think, in March or April. Which instead of give some of the channel like one year, they can enable service, we tighten that up to like 90 days, which can help in reduce the -- some inventory level in certain partner there. At the same time, we do announce the ISP side early this year, and today is the first product available based on the new ASIC SP5 which probably like four times, five times better performance and more application being accelerated, and at the same time, the same cost. And it's kind of -- I do believe certain partners, certain customer may be also waiting for some of the new products leverages technology, so that maybe also has certain kind of impact.

Yeah. Brad, it was a great question and kind of follow on with Ken there. When I look at the win rates for, say, our top 3 competitors, right, they are in the firewall market, I'm not really seeing a change in the win rates, loss rates. They were quite consistent, maybe improved in one of the three cases that -- of the names that we know. I think that what -- what we don't know is how much is specific to us was that we had deals teed up for the last couple of weeks of the quarter that we're on a path to close and they did not close. So how -- the question comes is that something about the macro and the enterprises that are pushing out spending a little bit? Or is it some area that we need to reprove on in terms of how we go at our own internal inspection and forecasting and look at the detailed deals, right? We'll know more about that as time plays out.

Yeah, the regional slowdown is more because of very strong growth when years ago, almost double, and now it's going to slow down. The carrier service provider is still not ramp up yet, so we do hope they will ramp up soon.

Thanks for the color, Ken. And just my follow-up, Keith. As we think about pricing, which has been a tailwind across the whole market, I think, given supply constraints over the last couple of years. Can you give us any update of what the trends are now as supply eases? And what's embedded in your your assumptions for your guide on billings for this year and next?

Yeah. I think that what we look at -- go back our approach we've had for many years when we introduced a new product, and you heard about the 90G today. Our starting point is even though it has superior functionality capacity throughput, et cetera, is we generally price that along the lines of its predecessor. I think one thing that we're seeing as we move into the second half of this year, some opportunities to take, maybe some targeted pricing actions around use cases. For example, maybe if you get really far down the low end of the market where you're dealing with some low-cost franchisee models, maybe we would take some opportunities there to perhaps offer some incentives to our channel partners and such to participate in that market. So I think the margins are obviously very, very strong on the product side, and we have that benefit there. So I do think it gives us the opportunity to make certain investments in the second half of this year, whether you want to call it price less or discounts or rebates or incentives to the channel partners.

Thank you, very helpful.

Thank you for your call. Our next question is from Eunji Song with Morgan Stanley.

Hi. Thank you, guys so much for taking my question today. In terms of cancellation rates, could you guys give us any directional color on backlog cancellation rates? And what's assumed in your guidance by year-end? And I have a follow-up after.

Last quarter, I think cancellation maybe we said was high single digits? This quarter, we say it's low, low double digits, right? And as backlog continues to subside as Ken pointed out a moment ago, it's not really going to make that much of a difference whether that cancellation rate goes from low double digits to mid-teens or something, or even 20.

Got it. Thank you. And just as a follow-up, what percentage of revenue came from SD-WAN and OT security this quarter?

We see together over 25%, pretty similar to last few quarters, but also growing pretty strong, 40% SD-WAN, 60% OT.

We have over 25% of the bookings number. I don't think we've given a revenue number for that.

Thank you. Our next question comes from Saket Kalia -- excuse me, from Barclays.

Okay. Hey, guys. Thanks for taking my questions, here. Ken, maybe just to double-click on the competitive question a little bit, but zero in on one segment. I'm wondering how you're seeing SASE vendors in this market? Meaning, do you feel like the -- maybe backing up. Keith, very helpful comment just on how the competitive win rates trend versus the other traditional network security providers. But when you look at SASE, do you feel like the growing prevalence of SASE is impacting firewall appliance decisions at all?

I think it's a little bit different market. Somehow the service provider, the traditional telecom service provider or the service provider, we are a little bit behind in the last five to 10 years. So that gave the SASE provided opportunity to offer the service. But I do believe a lot of the telecom service provider, cloud provider, they have a huge advantage on infrastructure and the cost advantage to offer some additional security service, so which we're also working closely with them. And at the same time, we also invest some of our own kind infrastructure because also, a lot of our additional service beyond SASE like the SD-WAN, the other FortiGuard, [Indiscernible] and FortiCare service also need some of the infrastructure, which we're making more profit model, cost-efficient model. Compared to some other SASE providers, they have to whether lease or whatever, which tend to -- would like double, triple the cost compared to the similar service owning the infrastructure. But it's the new service offered by the SASE provider. We do see mid sort of enterprise need, which we also started to invest more in this area.

Got it. Got it. Keith, maybe for you for my follow-up. Very helpful commentary just on the billings duration in the quarter. I think that definitely helps bridge the gap with at least the guide on billings in Q2. But maybe looking forward, how are you thinking about billings duration for the second half of this year? And I don't know, is there a way to kind of do the same exercise, like what would billings have been if the duration would have been in line with your original plan?

I mean, the spreadsheet for the second part of that question Saket. So I will come back ---

No, no problem. We can take it offline.

No, that's fine. I think there's been conversation over the last, say, three or four quarters about would duration slow down. And we commented that we had seen some slowdown in duration. Not 1 month a quarter, but it would kind of bounce around a little bit. The point I'm making is when you're measuring year-over-year growth, we lost 1.5 points of duration, which works out to be about 4 or 5 points growth. So when you're making the comparison on a growth basis, it really is a factor there. And then if you want to get in the SASE part of it, remember, that product is not impacted by duration, only services are, so you get a partial impact. I think if you're looking forward, as I made the point, as we look at Q3 and Q4, the duration assumption that, I would say, is in that pool of things that I looked at what we saw in Q2 in terms of actual results and how those -- some of those metrics and assumptions that go into the guidance setting process differed from what I've been saying for the prior few quarters and place a very heavy reliance on what I saw in Q2, whether that deal's a push or whether a term or a bucket of other things. So without going into specifics, I would probably answer that question that way.

Very helpful.

Yeah, some additional point of SASE is very -- especially a lot of companies starting return to work, return to office. So we do see a lot of like, call it, universal SASE, which is supporting both on-premise in the office and also work from home because if you back in office, forward all of office traffic to the part of SASE provided and the process, then back to the office not make much sense. And at the same time, we see a lot of leverage or SD-WAN leadership there. We do see a lot of required the single vendor SASE. And also some bigger company also, they try to do the call the private SASE solution. So instead of process SASE traffic in the service provider part, they want to own process in their own kind of datacenter infrastructure, which also we do believe will be a big potential market going forward.

Thanks, guys. Thank you.

Thank you.

Thank you. Our next question comes from Shaul Eyal with TD Cowen. Your line is open.

Thank you for taking the question. Good afternoon. Keith or Ken, can you maybe talk about the performance that you've seen with your go-to-market as it relates to your top sellers? Was there anything non-balance this quarter?

I'm not quite sure -- are you looking for the distribution of salespeople hitting quota? Or -- I'm not sure I follow the question you're try to get at, Shaul.

So actually, I'm looking for your value-added resellers, your notable ones, the biggest one, and whether performance was even or balanced or not, during the quarter?

I don't have that data handy, to be honest with you.

Yeah, we do see some release from exclusive network, which probably one of biggest picture also. We also want their biggest distributor, probably 30% business top on, but they're a little bit more ---

Sorry, resellers I'm sorry. I don't know. You're answering the right question. [Indiscernible] distributors, yeah.

Yeah, I think it's a similar common, as we are seeing.

Yeah. I don't think that -- of our business, if you will, shifted at all significantly. We look at our top three and our top six distributors, we're fairly concentrated in that regard. That mix doesn't really change all that much, maybe point or 2 in the quarter. That wasn't something that we saw that's just out there at us.

Yeah. Also, even go back to the history also going forward, also pretty similar kind of a forecast, I believe.

Yes.

Thank you.

Thank you for your question. Our next question comes from Joseph Gallo with Jefferies. Your line is open.

Hey, guys. Thanks for the question. Given the breadth of your platform, you have a better vantage point than most. When you talk to CISOs, where is the relative health in the cyber budgets? And where are you seeing the most resistance? And then given your optimistic comments on '24, what lends confidence that this is only a one to two quarter digestion period? Is there any historical context to support that?

In terms of CISO spending, obviously, there's -- the things that were getting media attention out there now, I suspect that we sit down with a CISO that we talking about it. Whether that's SASE or something with some of the AI technologies, what have you. But I don't think that CISOs and CIOs get away from having to take care of -- tending their knitting, if you will, with their infrastructure. There are obviously to be new use cases for firewalls. Opportunities, if you will. There's use cases still exists on-prem that need to be secured. There's new cases in the cloud, the Edge, et cetera. I think it's a very difficult career position to be at CISO right now with the budgets and threats that are after them. As it relates to 2024, I think whenever -- pardon me, 2024, we'll go through our planning cycle more religiously as we do the second half of the year. I think the point that Ken and I were making is really, as we move back to a more normal buying pattern after we move through the supply chain in the pandemic and so forth, that's what the industry has been historically and we would have every expectation that we'd be able to get back in that sweet spot, if you will. And I would also note that as the -- it's not a static comparison. And by that, I mean the compares get easier in every quarter as you go through 2024.

The CISO, we talk to this to have a certain shortage of people they can leverage to supporting the work for home or hybrid work environment, and so that's why they tend to a little bit more try to use in certain service kind of approach. On the other side, we do see the need to make sure that the new infrastructure, whether supporting back to office or supporting like we call it universal SASE versus the T&A [ph] environment, because there's like so many tech service starting kind of this impact and process new area like OT security. That's kind of -- but also certain security budget, they also because some companies, they commit certain cloud spending. Sometimes that is not commit spending for certain security, we also see some of that case. So that's what's happening. So that's where we also kind of keeping ahead and helping the situation which is also -- most of the CISO fuel help supporting the operation is a pretty big to help -- help them to solve the issue there. And also leverage some kind of AI, some new technology and also kind of more broadly deployed network security inside the infrastructure. It's also supporting hybrid work environment. It's also quite a high priority for them.

Thanks. That's very helpful. And then, I guess, as we work through this digestion period, how should we think about investments in hiring? You've outperformed in the first half on profit, but your guide doesn't necessarily reflect a continuation of that. Where should we think of the incremental investments from here and the classic growth versus profit debate as billings moderate? Thanks

We're still hiring and -- but also, the high probably will be a little bit behind on the top-line growth. Make sure we're keeping the -- improving the productivity efficiency. But also, we probably will also try to enhance certain hygiene process, which we kind of not quite do in the last two-three years during the pandemic, which certain low performance. We probably need to be kind of more disciplined through -- to have certain performance review of kind of participant.

Yeah. I would use that to kind of come back to, I think, Shaul's question and make a couple of points. I think that as Ken kind of pointed out, we've had a lot of salespeople. We certainly have sales capacity to deliver on the numbers. At the same time, I think we've been very faithful to -- when we talk about 25% operating margin, and you see us continually coming in above that. So we have the opportunity there to invest more. And on that note, I think that the conversations with the channel partners, the distributors that we're having, I think they're much more informative, detailed at the right levels now than they were two years ago. There's a lot more cooperation information sharing with the distributors. And I think a byproduct of that is I think there's some opportunities for us maybe to invest in our channel partners in a variety of different ways as we go through this next 12 to -- probably six to 12 months.

Yeah. I kind of keeping refer to the Page 10. The last 13 years, the gross margin. So that's where we have the margin, and we've been GAAP profit of the three years since IPO. So if we need to invest in the growth, we definitely have the margin to do that. But on the other side, we also want to keep a healthy, healthy model and take care both on the growth and margin.

Thank you.

Thank you. And our next question comes from Andrew Nowinski with Wells Fargo. Mr. Nowiski, your line is open.

Thank you. I want to ask about the geographic demand trends. So you saw -- I think you saw strength in international regions in Europe. I was just wondering how sustainable do you think that demand is in those regions? Or are they just maybe one to two quarters behind the U.S. in terms of seeing the impact from the macro?

Yeah. I think that we have a competitive advantage when you look at Europe and parts of the international emerging, where we are oftentimes viewed as being the incumbent to have number one market share. So in an environment in which maybe the IT budgets start to suffer more in Europe than they do in the U.S., which is not what we're seeing currently, right? Currently, we're seeing the IT budgets are lower in the U.S. than they are in Europe based on some recent surveys. I think we're better prepared to work our way through that in Europe because of our dominant position in that market.

Okay. Got it. And then I think you talked about seeing strength in the SMB segment, adding about 6,500 new logos. I guess I was wondering, as it relates to your universal SASE solution, can you just talk about maybe how you're competing against, if at all, against Microsoft's new Entra solutions that are targeting that market?

Yeah, we kind of more leverage our huge installation base and also the technology, the product, which address the network security. Microsoft definitely have some good customer base in the enterprise side. But on the network security, which is addressed more beyond the sort of enterprise, definitely, we have some advantage there. And also we're not seeing Microsoft have any solution to address network security area. So we do believe there's an opportunity for both companies.

Thank you.

Thank you. That concludes our question-and-answer session. I would now like to turn the call back to Peter Salkowski for closing remarks.

Thank you, Trace. I'd like to thank everyone for joining today's call. Fortinet will be attending investor conferences hosted by Deutsche Bank, Goldman Sachs, Oppenheimer, Rosenblat and Stifel during the third quarter. Fireside chat webcast links will be posted in the Events and Presentations section of Fortinet's Investor Relations website. If you have any follow-up questions, please feel free to contact me. Have a good rest of your day. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.