A Hardware Company With Software-Level Margins

Today, I’m digging into Fortinet, Inc. (FTNT).

This is a $50+ billion company I'd never heard of before. They build network security hardware and then layers recurring services and support on top of it.

Specifically, they specialize in "Next-Generation Firewalls" (NGFW). What are they? Good question!

A NGFW is a smart security gate that understands what internet traffic actually is and inspects it for threats in real time, not just where it comes from or where it is going. Traditional firewalls mostly act like basic guards checking addresses and ports, while NGFW's look inside the traffic, recognize applications, and adapt as threats change.

These smart firewalls are a heck of a business....

• Gross margins are ~81% on a TTM basis, which is unusually high for a business that sells a lot of hardware.

• The reason is mix: services now make up ~68% of revenue, and those services carry much higher margins than the hardware. After some digging, it appears what they call services is more like software and less like consulting (what I normally think of as "services"). This explains why services pull product margin higher.

• Once Fortinet’s harware is installed in a network, ripping it out is painful, so customers keep renewing the services.

• This is a good example of using a product as the "wedge" and recurring services as the profit driver.

One downside worth calling out:

• They rely on channel partners for almost all of their sales, which gives them scale but also creates concentration risk.

If you’re building a business that includes anything physical, this is a strong case study in how to wrap that product in recurring, high-margin services over time. But, instead of services, it's really more like high-support software. And with 80%+ gross margins, it's working!

With that, I'll see you tomorrow!

Nick

The 30,000-Foot View

Fortinet is a cybersecurity company focused on securing networks, endpoints, and cloud environments. Its core products, especially FortiGate firewalls, are typically deployed at the heart of a customer’s network. Once installed, customers purchase ongoing subscriptions for threat intelligence, updates, and support, which is where the bulk of long-term value is created.

The business model is straightforward but disciplined. Fortinet sells products largely through third-party channel partners, then monetizes the installed base through recurring services. This approach allows Fortinet to scale globally without carrying the full cost of a massive direct sales force, while still benefiting from high gross margins as service revenue grows.

Key stats

• Market cap: $57.9B

• TTM Revenue: ~$6.6B

• TTM Gross Margin: ~80.9%

• Employees: ~14,100

• Industry: Cybersecurity, network security, secure networking

Company History

• 2000: Fortinet founded by Ken Xie (CEO) and Michael Xie (CTO).

• 2002: Launch of the first FortiGate firewall, establishing the company’s hardware-plus-security-services model.

• 2002–2004: Multiple venture and mezzanine funding rounds to support early growth and global expansion.

• 2009: Initial public offering on Nasdaq under the ticker FTNT.

• 2016: Introduction of the “Security Fabric” platform concept, positioning Fortinet as an integrated security vendor rather than a point-solution provider.

• 2016: Launch of the Fabric-Ready Partner Program, deepening ecosystem integrations and partner distribution.

• 2021: Becomes title sponsor of the Fortinet Championship on the PGA TOUR, signaling a step-up in brand investment.

• 2024: Acquisition of Lacework, strengthening cloud-security capabilities and expanding the platform story.

Show Me the Money

Standout financial features:

• Services represented ~68% of FY2024 revenue.

• Crazy-high gross margins for a hardware/services business.

• Strong growth in revenue and gross/net margin. A dream income statement.

• Sizable net-cash position.

Financial Data

The N.O.O.B. Nine — Competitive Powers

The Nerd Out on Business Nine is made up of Hamliton Helmer's famous "7 Powers" of competitive advantage (Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resource, and Process Power) combined with two of my own (Data Flywheel and Distribution Advantage).

Average Score: 4/5 - A durable moat built on switching costs, scale, and distribution rather than novelty.

Memorable Marketing

Fortinet’s marketing approach emphasizes credibility, platform breadth, and partner enablement rather than flashy consumer-style campaigns. The company positions itself as a trusted, long-term security partner and relies heavily on education, ecosystem building, and brand association to reinforce that message.

Key Campaigns and Tactics

• Fortinet Training Institute (ongoing)

  • Core idea: Close the cybersecurity skills gap while seeding future demand.

  • Channels: Online training, certifications, academic and government partnerships.

  • Why it worked: Training creates familiarity and loyalty before a purchasing decision is made.

• Fabric-Ready Partner Program (2016)

  • Core idea: Make integrations a selling point, not a barrier.

  • Channels: Partner marketing, technical certifications, solution validation.

  • Why it worked: Reduced friction for buyers and strengthened the platform narrative.

• Fortinet Championship Sponsorship (2021)

  • Core idea: Borrow trust and visibility from a premium professional sport.

  • Channels: Event sponsorship, broadcast exposure, executive hospitality.

  • Why it worked: Elevated brand credibility with enterprise decision-makers.

Tactical Takeaways

1. Turn education into demand generation by teaching your market how to use your product.

2. Make partners successful quickly with clear incentives, tools, and training.

3. Use brand investments to reduce perceived risk, not to chase hype.

4. Treat integrations as a product feature, not an afterthought.

AI Uses & Opportunities

Current Uses

• AI- and ML-driven threat detection and prevention through FortiGuard services.

• GenAI assistants embedded in security operations workflows to speed investigation and response.

• AI used internally to enhance support, triage, and customer insights.

Future Opportunities

• Autonomous policy optimization tools that continuously improve customer security postures.

• AI-driven executive dashboards that translate security data into business-level insights.

• Deeper AI support automation to reduce support costs and resolution times.

• AI-powered channel tools that accelerate solution design and quoting for partners.

Bumps in the Road

• Heavy reliance on channel partners creates concentration risk and exposure to inventory swings.

• Pricing pressure in firewall hardware reflects intense competition.

• Security vulnerabilities are inevitable and can damage trust if not handled transparently.

• Growth in service revenue is expected to slow as deferred revenue growth moderates.

• Acquisitions like Lacework introduce integration and execution risk.

Your Swipe File

• Use a durable product wedge to facilitate long-term recurring revenue.

• Build switching costs around workflows and operations, not just contracts.

• Scale distribution through partners, but watch concentration risk.