Fortinet's higher outlook is all hardware as it trims service revenue guidance

Fortinet sells firewalls, and alongside them it sells security subscriptions and support contracts that run for years. Those contracts are booked as service revenue and recognised gradually, which makes service the steadier half of the business. For about a year management has said that strong hardware sales would feed that line, and that service growth would pick up in the second half of 2026. The first quarter of that half is now reported, and it did not. In the September 2026 quarter product revenue rose 36.8% from a year earlier, while service revenue rose 12.7%.

The company also lowered its full-year service revenue guidance by $40 million at the midpoint, after raising it in May and July. The new range implies growth of about 12.6% for the year, calculated from the guidance midpoint and last year's reported service revenue of $4.58 billion. That is no faster than the 13% the line grew last year. The chart below shows how little the rate has moved while hardware sales surged.

None of this stopped the company from raising its overall revenue guidance for the year again. Compared at the midpoints, the guidance is now $570 million higher than in February, and only $60 million of that increase is service. Since July the gap is starker: total revenue guidance went up $70 million while service guidance went down $40 million. The higher outlook is, in other words, an outlook for more hardware.

The reasons given for the lag have also moved. In November 2025 the company presented strong product sales as the leading indicator of a service recovery. This quarter the chief financial officer, Christiane Ohlgart, pointed instead to large new enterprise customers whose service contracts start in stages, and to expansion deals that folded existing contracts into single enterprise agreements. Answering analysts, she added that sovereign deployments, where customers run more of the equipment themselves, carry fewer services, and she pointed to somewhat more discounting between hardware and services, though she said such factors were less a feature of the third quarter than longer-running trends, and that the delayed activations were the bigger factor. The first explanation is about when service revenue arrives. The others are about how a deal is divided between product and service, which would not necessarily reverse with time.

Ohlgart's case is that the shortfall is temporary: "it's really a timing issue". Her evidence is deferred revenue, the amounts customers have been billed for contracts the company has yet to deliver and recognise. It rose $817.8 million in the first nine months of the year, against $288.1 million in the same period a year earlier. That money has been billed but has not yet shown up as revenue. On that basis management expects service revenue to grow faster next year than this year, and Ohlgart described the outlook as improved growth rather than acceleration when an analyst used that word.

The hardware that is carrying the year also earns less than it did. Product gross margin was 64.4% last quarter against 67.7% a year earlier, calculated from the reported figures, and management said component costs were rising in the second half. So the year's higher guidance leans on the part of the business with thinner and falling margins, while the service line's implied growth for this year sets a low bar for the next. Whether it is cleared depends on how fast the billed contracts become revenue, and on how many services the product-heavy deals now winning carry with them.