Keith Jensen
Chief Financial Officer at Fortinet
Thank you, Ken, and good afternoon, everyone. Let's start with the key highlights from our strong first quarter performance. Our strong first quarter results reflect continued demand for our broad portfolio of cybersecurity and networking solutions and the demand for consolidation and convergence that is delivered by our integrated single-platform strategy. Total revenue growth of 32% was led by strong product revenue growth and service revenue growth accelerating to over 30%. Billings increased 30%, our eighth consecutive quarter of at least 30% billings growth. Secure SD-WAN and OT bookings once again accounted for over 25% of total bookings. Our strong topline results reflect continued customer demand across both, core and enhanced platform technologies and highlights the diversification of our business model by; solutions, geographies, customer segments and industry verticals. We continue to deliver balanced growth and profitability with better than industry average topline growth and strong profitability despite the continued economic uncertainty.
The first quarter operating margin of 26.5%, represents the highest first quarter operating margin in our 14-year history as a publicly traded company. Free cash flow of $647 million, representing a margin of 51% is up 23 percentage points. Both the quarterly free cash flow and free cash flow margin are Fortinet post, IPO records. Last month, we hosted nearly 3,000 customers and partners of our very successful Accelerate conference, I'd like to recap three key themes; one, the expanding firewall deployment environment; two, convergence and three, consolidation. So starting for us today's rapidly evolving threat landscape and connectivity demands a comprehensive approach to firewalls and network security, including a combination of hardware, virtualized software and security services. In fact, Gartner anticipates that by 2026, more than 60% of organizations will have more than one type of firewall deployment, which will prompt adoption of hybrid mesh firewalls. Fortinet is well positioned to capitalize on this expansion of firewall deployments and form factors, as we've been delivering hybrid mesh firewalls for years on a single operating system.
Second, the company was founded 20 years ago on the belief that the convergence of security and networking will become an industry standard. Gartner shares this belief, noting they expect the size of secured networking market to overtake the traditional networking market by 2030. We believe secured networking at scale, works most effectively on ASIC technology. Since its inception, Fortinet has been developing proprietary ASIC technologies to build application-specific solutions to support convergence that traditional CPU-based solutions are less efficient, as supporting both networking and security. Third, vendor and product functionality consolidation strategies continue to become more commonplace. Looking to Gartner here again, they notedg 75% of organizations are pursuing a cybersecurity vendor consolidation strategy in 2022, up from 29% in 2020. Our integrated FortiOS platform allows customers to converge networking functionality with security capabilities, while consolidating cybersecurity products and functionality, with FortiASIC significant computing power advantage, FortiOS can consolidate more security functions and solutions, while maintaining our performance and cost advantage. Specifically, FortiOS supports many security applications including network firewall, SD-WAN, SASE, 5G, WiFi security, ZTNA, VPN and SSL, with a variety of use cases for each security application. For example, firewall use cases include data center, branches, edges, virtual, cloud native, micro segmentation, both east-west and north-south and Firewall-as-a-Service. Our convergence and consolidation strategy provides security across our customers' entire digital infrastructure, while lowering their operating costs.
Now let's take a closer look at the first quarter. Buildings grew 30% to $1.5 billion, driven by enhanced platform technology solutions. In terms of industry verticals, government and financial services topped the list as a percentage of total billings, with financial services up over 40%. Construction, media and utilities were all up at least 50%. Those growth benefited from better-than-expected backlog contribution. While the backlog cancellation rate increased quarter-over-quarter, it was lower than we had forecasted in our model. We continue to believe there's an elevated cancellation risk in future periods for networking equipment backlog.
Bookings grew double digits in the quarter, off a challenging comparison to 50% growth in the first quarter of last year. We continue to see success with our strategy to expand further into the large enterprise segment with a number of deals over $1 million, increasing 38% to 124 deals and billings on these deals increasing 50%. One of these deals was an eight-figure expansion and upsell opportunity at a Fortune 50 retailer. The retailer was looking to replace their firewall point solutions with a more holistic cybersecurity solution.
After purchasing FortiManager and FortiAnalyzer in the fourth quarter of last year, this customer selected FortiGate VMs for a very competitive very competitive process for their 2,000 store locations as part of our new FortiFlex program. FortiFlex is a new point-based consumption program supporting hybrid mesh firewall deployments as well as a variety of other security solutions. The customer selected for a net due to the substantial value offered by our unified platform, and the significant technical requirements. In the first quarter, we added approximately 6,100 new logos, reflecting the support of our channel partners to their investments and the investments we've made in them. Average contract term was flat year-over-year at 27 months and down one month quarter-over-quarter.
Turning now to revenue. Total revenue grew 32% to 1.26 billion driven by strong demand for core and enhanced platform technologies, increasing 23% and 50%, respectively. Product revenue of 501 million increased 35% despite the very difficult comparison to last year's first quarter at 54%, with its very strong contribution from acquisitions. Product revenue growth was driven by strong growth in enhanced platform technologies, improving supply chain dynamics and our earlier pricing actions. Service revenue was up over 30% to 762 million, the highest growth rate in services since 2016. The average number of days between when the customer purchases and subsequently activates a security service contract declined slightly sequentially and remain elevated on a year-over-year basis. Service revenue growth was closely aligned with our short-term deferred revenue growth rate in recent periods. Short-term deferred revenue growth was over 30% for the fourth consecutive quarter.
Total gross margin of 76.3% was up 190 basis points, including a 440 basis point increase in product gross margin to 61.8%. Product gross margin benefited from earlier pricing actions, improved discounting and easing cost pressures. Service gross margin of 85.9% picked up 70 basis points as price increases offset increased investments in data centers and points-of-presence or PoPs. Operating margin of 26.5% was up 450 basis points due to the strong gross margin performance of foreign exchange benefit and revenue growth that was 10 points higher than our 22% headcount growth. As previously noted, 26.5% is our highest ever first quarter operating margin as a public company.
Looking at the statement of cash flow summarized on slide seven and eight. Free cash flow was a quarterly Fortinet record at 647 million and benefited from elevated receivables in the fourth quarter of last year in the subsequent cash collections as well as the record-setting operating margin and the timing of capex projects. Adjusted free cash flow, which includes the real estate investments, was 662 million, representing a 52% adjusted free cash margin and our highest margin since our 2009 IPO. We've come to expect some quarterly variances in our free cash flow results with the first quarter often stronger due to the seasonally strong fourth quarter billings. Capital expenditures were $30 million, including 15 million of real estate investments. This was lower than expected due to the timing of real estate activities.
Cash taxes were $21 million. The Board increased the company's share repurchase authorization by 1 billion and the total available share buyback authorization is now 1.5 billion for repurchases through February 2024. Looking forward, we are excited about the growth drivers that we've discussed previously as well as our new single vendor, universal SASE offering. Our universal SASE offering delivers a comprehensive solution that extends the convergence of networking and security from the edge to remote users, while helping teams drive operational efficiency and reducing complexity and costs by consolidating vendors. In fact Gartner predicts that by 2025, one-third of new SASE deployments will be based on a single vendor SASE offering, up from 10% in 2022. As we bring universal SASE to market, we expect to make various investments, including increasing our PoPs.
Our guidance reflects the impact of these investments to both our gross margin and capital expenditure estimates. Moving to guidance. I'd like to review our outlook for the second quarter and full year summarized on slides 10 and 11, which is subject to the disclaimers regarding forward-looking information that Peter provided at the beginning of the call. For the second quarter, we expect billings in the range of 1.560 billion to 1.600 billion, which at the midpoint represents growth of 21%. Revenue in the range of 1.280 billion to 1.320 billion, which at the midpoint represents growth of 26%. Non-GAAP gross margin of 75.5% to 76.5%. Non-GAAP operating margin of 24.5% to 25.5%, non-GAAP earnings per share of $0.33 to $0.35, which assumes a share count of between 790 million and 800 million.
Capital expenditures of 80 million to 110 million; a non-GAAP tax rate of 17%. Cash taxes of 35 million, which is lower than our prior expectation as the deadline for certain tax payments has been extended to the fourth quarter. The second quarter guidance assumes backlog decreases during the quarter. For the full year, we expect billings in the range of 6.75 billion to 6.810 billion, which at the midpoint represents growth of 21%. This guidance assumes a low single-digit impact of billings growth from backlog.
Revenue in the range of 5.425 billion to 5.485 billion, which at the midpoint represents growth of 23.5%. Service revenue in the range of 3.370 billion to 3.400 billion, which at the midpoint represents growth of 28%. The service revenue guidance implies product revenue growth of 16%. Non-GAAP gross margin is 75% to 76%. Non-GAAP operating margin of 25% to 26%, non-GAAP earnings per share of $1.44 to $1.48, which assumes a share count of between 795 million and 805 million. Capital expenditures of 400 million to 450 million, due to the continued cloud, data center and facilities investments.
Non-GAAP tax rate of 17%, cash taxes of 390 million, with approximately 300 million in the fourth quarter. The full year estimates assume backlog returns to historical levels later this year. As we wrapped up the prepared remarks, maybe one additional observation. Over many years, the Fortinet team and its partners has offered very solid and consistent level execution across a wide range of economic cycles and other challenges. Like many others, we see a level of economic uncertainty in front of us and we look forward to this possible challenge in delivering on our goals.
I'll now hand the call back over to Peter to begin the Q&A.
