Fortinet lifts revenue outlook, trims service forecast; shares drop 27% premarket

Fortinet makes FortiGate firewalls, the devices and software that guard a company's network, and it sells subscriptions and support that keep them up to date.¹ It sells almost entirely through resellers and distributors, and most of its billings, revenue and cash flow come from outside the United States.² Its rivals include Check Point and cloud-based security firms such as CrowdStrike and Zscaler.³ In 2025 it had revenue of $6.80 billion, up 14%, and free cash flow of $2,211.8 million. Free cash flow is the cash the business brings in, minus what it spends on equipment and buildings.⁴

Fortinet reports two kinds of revenue. Product revenue is the one-time sale of a firewall or other device. Service revenue is subscriptions and support, which customers usually pay for up front and which Fortinet counts as revenue over the life of the contract.¹ That makes service the steadier line. It is also why the company tracks billings, which is revenue plus the change in deferred revenue, the money billed but not yet earned.² Service was $4,581.2 million in 2025, about 67% of revenue.³

The year had been strong. In July, second-quarter revenue grew 26% and product revenue grew 52%, and Fortinet raised its 2026 revenue forecast to $8.020 billion to $8.180 billion.¹ A global shortage of memory chips, a part in some of its products, pushed it to raise hardware prices, and it warned that those price rises may hurt demand.² It also ordered more parts ahead: inventory purchase commitments were $1,667.1 million at June 30, and a large share of them cannot be canceled.³

In the first half of 2026 Fortinet bought back 12.5 million shares for $972.8 million, about $78 a share.¹ In our price file, which starts in mid-September, the stock closed as high as $194.74 on October 9 and as low as $169.125 on October 16, so we cannot give a full-year range.² Just before the results, Fortinet launched a new artificial intelligence security add-on for FortiGate customers, with no revenue figure attached.³

One legal cloud hangs over its forecasts. A shareholder class action filed on September 22, 2025 claims Fortinet misled investors, including about the 2026 firewall refresh cycle.¹ Fortinet asked the court to dismiss it on June 15, 2026, and it has recorded no loss for the case.²

The fourth-quarter numbers should come in an earnings release in early February, before the annual report: a Zacks article dated February 9, 2026 already reported Fortinet's revenue of $1.91 billion for the quarter ending December 2025, well before the 10-K filed on February 25, 2026.¹ The buyback program, as last described, runs through February 28, 2027.²

Fortinet reported its third-quarter results on October 28, 2026. In the quarter, which ended September 30, total revenue rose to $2,078.4 million from $1,724.9 million.¹ Product revenue grew 37% to $765.0 million, while service revenue grew about 13% to $1,313.4 million. Service is still the bigger line, at about 63% of revenue.² Against the company's own July forecast of $2.010 billion to $2.100 billion, revenue landed above the middle of the range. Adjusted earnings per share of $0.91 beat the top of the $0.83 to $0.87 range.³

Billings rose 29% to $2,336.3 million, near the top of the $2.250 billion to $2.350 billion forecast.¹ Price rises did part of that work. The company said its price increases added about 10 percentage points to billings growth.² Even so, an analyst on the call described the quarter as a revenue miss and a billings miss.³

Management gave two reasons for slow service revenue. Large new enterprise customers are switching on their services in stages, and existing services are being folded into enterprise-wide agreements, which are slower to count as revenue.¹ As customers roll out new gear, management said, they may not want to pay for services right away. It said this also weighs on the fourth quarter, which is why the service forecast was cut.² The chief financial officer called it a timing issue.³

The mix of deals matters too. Sovereign deals, where customers run their own systems, carry fewer services, and networking gear such as switches sells with fewer add-on subscriptions.¹ In the United States, tax rules that let buyers write off hardware over time are pushing spending toward hardware.²

The forecast change tilts the year toward hardware. The service midpoint fell by $40 million, while the total revenue midpoint rose by $70 million.¹ Take away the $3,792.8 million of service revenue booked from January through September, and the forecast leaves $1,357.2 million to $1,377.2 million for the fourth quarter. That is 3% to 5% above the third quarter, and 11.8% to 13.5% above the $1,213.9 million of the fourth quarter of 2025.² So the forecast calls for full-year service growth of about 13%, not a speed-up. One analyst said management had told investors service would accelerate in the second half, and the chief financial officer replied that she had said improved growth rates, not acceleration.³

There are signs the service money is on its way. Service billings grew 26%, and short-term deferred revenue, which turns into revenue within a year, grew 14.5%, its fastest pace in five quarters.¹ Total deferred revenue was $7.93 billion at September 30, up from $7.12 billion at December 31, 2025.² The chief financial officer expects those service billings to turn into revenue over 2027, and the company expects 2027 service revenue to grow faster than 2026's. These are management's goals, not results.³

Hardware is getting more expensive to build. Adjusted gross margin, the share of revenue left after the cost of products and services, fell to 79.6% from 81.6% a year earlier.¹ On reported numbers, product gross profit fell to about 64% of product revenue from about 68%. Management said the advantage of cheaper parts bought earlier is starting to disappear, and that rising costs are hurting product margin in the second half.² Fortinet aims to raise prices enough to hold margin, but its quarterly report warns that price rises may hurt demand. It guides fourth-quarter adjusted gross margin to 78.0% to 80.0%.³

Profit grew faster than revenue, but not all of the gain came from the business. Reported net income rose to $635.5 million from $473.9 million, about 34%, and operating income rose to $704.3 million from $547.3 million.¹ The tax bill barely moved, at $119.5 million against $120.7 million, so the tax rate fell to about 15.8% of pre-tax income from about 20.3%. The quarter also held a one-time $17.0 million gain from settling an escrow tied to an old acquisition.² Adjusted operating income was $793.8 million, $89.5 million above the reported figure, mostly from adding back $82.0 million of stock pay, and adjusted net income also leaves out the $17.0 million escrow gain. Adjusted net income was $678.6 million, and a lower share count helped per-share results, with diluted shares averaging 742.6 million against 761.2 million.³

Cash is where the quarter was strongest. Operating cash flow was $946.0 million, well above net income, partly because customers were billed $258.7 million more than Fortinet counted as revenue.¹ Free cash flow was $864.8 million, a figure that leaves out the $17.0 million of escrow cash. From January through September, free cash flow was $2.84 billion.² Cash and investments came to about $5.32 billion, against $497.1 million of debt in 2.2% notes due March 15, 2031. That is net cash of about $4.8 billion, so debt ratios do not bite.³ The notes carry no financial covenants, and Fortinet repaid $500.0 million of notes earlier this year. Interest on the notes was $2.9 million in the second quarter, while interest income was $42.7 million in the third.⁴ The cash that went the other way sits in the warehouse: inventory rose to $591.2 million from $399.5 million, and Fortinet lists excess inventory as a risk.⁵

The board added $1.2 billion to the buyback, leaving $2 billion of room. At July 28 there were 733,713,653 shares, worth about $93 billion at $127.08, so the room is about 2% of the company.¹ Fortinet bought no stock in the third quarter: its nine-month buybacks of $972.8 million equal the first half's.² Dilution is small. About 15.4 million options and stock units were outstanding at the end of 2025, about 2% of the 743.0 million shares then outstanding.³ Founder and chief executive Ken Xie held 52,972,372 shares after selling in August at about $160 to $164 a share, roughly 7% of the company.⁴ Chief operating officer John Whittle exercised 56,700 options at $62.11 and sold the same 56,700 shares at about $165 to $169 in mid-September, under a trading plan set up in June, leaving him with the same 96,987 shares.⁵

The stock had already slipped to $174.31 by 3:59 PM on October 28, before the release, from a $184.96 close the day before. Palo Alto Networks, a rival, also eased that day, to $394.56 from $401.53.¹ From the October 27 close, Fortinet fell 31.3% to $127.08 by 08:08 on October 29, while the S&P 500 fund went from $769.7 to $768.84, down 0.1%.² At $127.08, the shares trade at about 36 times the midpoint of the company's 2026 adjusted earnings forecast of $3.54 to $3.58 a share, down from about 52 times at $184.96. Its 2025 free cash flow equals about 2.4% of today's market value, and the $2.84 billion it generated from January through September 2026 alone equals about 3%.³

Management's goals for the fourth quarter are revenue of $2.155 billion to $2.245 billion, which at the midpoint is 15% growth, billings of $2.775 billion to $2.925 billion, and adjusted earnings per share of $0.93 to $0.95.¹ For the year it now guides billings of $9.568 billion to $9.718 billion and adjusted earnings per share of $3.54 to $3.58, up from $3.41 to $3.47 in July.² The chief executive said Fortinet has not seen any slowdown in demand.³

The strongest bull case starts with the backlog. Billings of $2.34 billion ran well ahead of revenue of $2.08 billion, so more future revenue is piling up in deferred revenue.¹ If those service billings turn into revenue in 2027, as management expects, service growth should rise from here. Meanwhile the business throws off cash, holds about $4.8 billion of net cash, and has $2 billion of buyback room at a price far below where it traded before the report.²

The strongest bear case, in order of weight. First, service revenue is the recurring core, and the company cut its own forecast for it this year.¹ Second, some of the hardware boom may be borrowed from the future. Price increases added about 10 points to billings growth, and Fortinet's quarterly report warns that orders can speed up ahead of announced price rises.² Third, chip costs are squeezing product margins as the cheaper parts run out. Fourth, revenue growth is guided to slow to 15% in the fourth quarter from 20%, and fifth, the company's past forecasts are already the subject of a lawsuit.³

What would prove the cautious view wrong is fourth-quarter service revenue above $1,377.2 million, the top of the implied range, or a 2027 forecast with service growth clearly faster than the 13% this year's forecast implies. A return of product gross margin toward last year's 67.7% would also weaken the bear case.¹ Before the fourth-quarter release, management presents at investor conferences on November 12, December 2 and December 9, 2026.²

Management blamed staged service starts on large new deals but gave no dollar amount for the revenue pushed out of 2026, or a date when those contracts are fully switched on.

Fortinet warns that orders can speed up ahead of price increases, but it does not say how much of the 37% product jump came from customers buying early.

An analyst called the quarter a revenue and billings miss, but the notes on the filings and the call give no analyst estimates for the third quarter to measure it against.

Fortinet moved to dismiss the class action on June 15, 2026, and no filing since reports whether the court has ruled.

The buyback program was last described as running through February 28, 2027, and the results release does not say whether the new $1.2 billion comes with a later end date.