Keith Jensen
Chief Financial Officer at Fortinet
Thank you Ken thank you Aaron and good afternoon everyone. Let's start with the key highlights from the fourth quarter. We delivered strong execution and financial performance with top line results above the high end of guidance together with record operating margins at 39%. Total revenue grew 17% driven by strong product and service revenues as product revenue growth pushed up to 18%.
In addition, we added a record 6900 new logos driven by close alignment with our channel partners. Looking at our financial results in more detail, total buildings grew 7% to $2 billion including double digit security operations and Unified SASE growth. RPO grew 12% to $6.4 billion. ARR growth was very strong for SecOps and grew 32% and Unified SASE which grew at 28% to a combined total of over $1.5 billion.
Within Unified SASE, SSE continues to gain traction with ARR growth of 96% as we continue to see early success upselling 40 SASE to our large SD WAN customer base. 40 SAASY deals increased over 60% and the pipeline was up 90%. The typical 40 SASE journey starts with the customer's first purchase of our ASIC based market leading Florida Gate Firewall followed by an expansion to SD WAN and then to our single vendor SASE solution.
The expansion journey is particularly significant as over 70% of our large enterprise customers have adopted our SD WAN functionality and are poised to expand to 40 SASE. Our large enterprise 40 SASE penetration rate increased to 10%. That's up 2 points just since our November Analyst day reporting.
Rounding out the billings commentary deals between 5 million and 10 million increased over 90%. SMB was our top performing customer segment with growth of over 30% and EMEA was our best performing geography driven by growth of over 25% from international emerging. Among our top five verticals worldwide, government and service provider both grew over 20% while financial services saw the expected challenge from the difficult year over year comparison driven by several seven and eight figure deals in the fourth quarter 2023.
Turning to revenue and margins, total revenue grew 17% to $1.66 billion. Product revenue increased 18% to $574 million, our highest growth rate in six quarters driven by hardware revenue growth of 19% on a sequential basis. Product revenue increased 21% and represents the third quarter in a row with elevated sequential growth.
Software license revenue continued its double digit growth and represented a mid to high teens percentage of total product revenue. Service revenue of 1.09 billion grew 17% to 65% of total revenue. Service revenue growth was driven by SaaS Solutions at 130% which includes Laceworks as well as Strong Organic Services growth in unified SASE and SecOps. Combined revenue from software licenses and software services such as Cloud, lacework and other SaaS security solutions increased 41% and provides an annual revenue run rate of over $1 billion.
Total gross margin increased 340 basis points to 81.9% and exceeded the high end of the guidance range by 140 basis points. Product gross margin of 69.3%
Increased 920 basis points as inventory related charges normalized from last year's highly elevated levels, adding 840 basis points to product gross margin and 290 basis points to total gross margin. Service gross margin of 88.6% increased 50 basis points to a quarterly record as service revenue growth outpaced labor and hosting cost increases while benefiting from the mix shift towards higher margin 40 gard security subscription services as well as some early AI related savings.
Operating margin increased 720 basis points to a record 39.2% and was 520 basis points above the high end of the guidance range reflecting the strong Gross margin, an FX tailwind of about 110 basis points as well as the top line over performance that flowed through to the bottom line. Before moving to the statement of Cash flows, I'd like to summarize the financial impact from the Lacework Next DLP and Perception Point acquisitions.
These acquisitions increased fourth quarter billings by 115 basis points versus our expectation of 75 basis points and decreased operating margin by 190 basis points versus our expectation of a decrease of 230 basis points. Looking at the statement of cash flow Summarized on slides 18 through 21, free cash flow was $380 million and free cash flow margin was 23%, up 11 points. Adjusted free cash flow was 549 million, representing a margin of 28%, up 16 points.
Cash taxes were $156 million, down $186 million, reflecting the prior year's regulatory extension of estimated tax payments, while infrastructure investments were $98 million or up $71 million. Average contract term in the fourth quarter was 29 months, down one month year over year and up one month quarter over quarter. DSO decreased 10 days reflecting improved linearity year over year and the remaining share buyback authorization is $2 billion.
Moving to an overview of our 2024 full year results, buildings exceeded $6.5 billion while total revenue grew 12% to $5.96 billion, driven by revenue growth of around 25% for both Unified SASE and SecOps.
Service revenue grew 20% to 4.05 billion, driven by a 22% increase in security subscriptions and 33% growth in Unified SASE services. Gross margin was up three hundred and ninety basis points to 81.3%, benefiting from the revenue mix shift to service revenue and a 140 basis point tailwind of inventory related charges normalized during the year. Operating margin increased 660 basis points to a record 35%, resulting in operating income of $2.1 billion, which was up 38%.
Our GAAP operating margin of 30.3% continues to be one of the highest in the industry. Earnings per share increased 45% to $2.37. Free cash flow was a record $1.9 billion, representing a margin of 32%. Adjusted free cash flow was $2.2 billion, representing a margin of 37%. If I were to just sum up 2024, I think it's important to note that we have now met or exceeded the rule of 45 for the fifth consecutive year. Now I'd like to share a few significant fourth quarter wins showcasing our SASE expansion and our leadership in operational technology.
In a seven figure new customer win, the healthcare provider strategically included 40 SASE in its first Fortinet purchase alongside SD Wan while replacing a competitor's firewall with a new leadership team focused on vendor consolidation, reduced operating cost and complexity and addressing technical debt. The fortyos consolidated multiple security functions onto a single platform, modernized an outdated firewall infrastructure, and replaced VPN technologies with a 5,000 seat SASE solution that relies on Fortinet's POPS. In another seven figure SASE deal, an existing Fortune 500 SD WAN retail customer purchased 40 SASE for 2,000 users with the potential to scale up to 12,000.
They chose for an effort for its flexible and consistent security enforcement which enhances user experience while securing access to both on PREM and cloud applications. Additionally, they valued our strategy of building our own SASE delivery infrastructure powered by our proprietary ASIC technology. And lastly, in a high seven figure deal, a large energy company expanded its partnership with us by signing its first enterprise agreement to protect this global critical infrastructure.
This customer secures ITS infrastructure using 40 gates across approximately 1,000 sites spanning branch locations, data centers and cloud environments. Key factors in this win included our ability to support their global critical infrastructure both technically and through world class support programs, our leadership in OT infrastructure capabilities, and the automation and seamless integration of our 4D OS system. With Fortinet supplying over 50% of the firewalls worldwide, Fortinet security solutions themselves have become critical infrastructure.
Protecting the critical infrastructure in the threat landscape where there have been heavily has been a step level increase in sophistication and risk given our scale, innovation and broad adoption. We and national cybersecurity agencies around the world view our partnership as key to protecting the most important customers and entities in this dynamic landscape.
Next, I'd like to review some of our key AI solutions for threat intelligence Networking KNOCK and SOC and LLM leakage for threat intelligence Fortiguard AI Power Security Services combined with real time threat intelligence helps organizations combat known unknown, zero day and emerging AI based threats for networking.
Fortnite aiops reduces the time needed to diagnose networking issues by monitoring trends in the network and with full access to logs across a Fortinet security fabric. Our AI engine uses machine learning to understand the optimal conditions for the network and highest potential issues for the Knock and Soc. 4 Dai uses natural language and generative AI to guide, simplify and automate analyst activities.
4DAI is integrated into seven different network and security operation products with additional products to be added for LLM leakage. Our AI based DLP services actively identify and block sensitive information from being uploaded or shared with AI systems. Before discussing our guidance, I'll offer a few updates on the record level firewall upgrade opportunity that we shared during our November Analyst Day in the fourth quarter we saw early upgrade movement with large enterprises both on buying plans and actual purchases.
We expect the momentum to build as we move into the second half of 2025 as we get closer to the 2026 end of service dates. The 2026 and 2027 cohorts present a substantial upsell opportunity for SASE switches, access points and SECOP solutions. To maximize our upgrade and cross sell potential, we're implementing several initiatives including creating sales plays for each customer segment and key vertical, expanding our account plans for larger enterprises to more specifically target the upgrade and expansion opportunities, and collaborating with our channel partners on SMB opportunities, incentive programs, end user data, and developing targeted bundle offerings for these customers.
Moving on to Guidance As a reminder, our first quarter and full year outlooks, which are summarized on slides 23 and 24, are subject to disclaimers regarding forward looking information that Erin provided at the beginning of the call, I should note we expect Linksys and Perception point to increase first quarter billings and revenue growth by approximately 90 basis points and decrease operating margin around 40 basis points. For the full year, we expect Linksys and Perception Point to increase billings and revenue growth by approximately 125 basis points and decrease operating margin by around 50 basis points. All right.
For the first quarter we expect buildings in the range of 1,520,000,000 to 1,600,000,000, which at the midpoint represents growth of 11% revenue in the range of 1,500,000,000 to 1,560,000,000, which at the midpoint represents growth of 13% non to GAAP gross margin of 80 to 81% non GAAP operating margin of 30 to 31% non GAAP earnings per share of $0.52 to $0.54, which assumes a share count of between 774 and 780 million infrastructure investments of 80 to $100 million, a non GAAP tax rate of 18%, and cash taxes of 30 to 35 million for the full year.
We expect buildings in the range of 7,200,200,000,000 to 7,400,000,000, which at the midpoint represents growth of 12% revenue in the range of 6,650,000,000 to 6,850,000,000, which at THE MIDPOINT represents growth of 13% service revenue in the range of 4,575,000,000 to 4,725,000,000, which at The MIDPOINT represents growth of 15% non GAAP gross margin of 79 to 81% non GAAP operating margin of 31 to 33% non GAAP earnings per share of $2.41 to $2.47, which assumes a share counted between 773 and 783 million, infrastructure investments of 380 to 430 million, a non GAAP tax rate of 18% and cash taxes between 525 and 575 million.
And on a personal note, you have made read in today's 8K filing that after a four decade career in finance including 11 years of Fortinet, it's time for me to enjoy retirement. I'll continue to serve through the next quarter earnings call and up to May 15 and plan to stay at Fortinet to help with the transition through June 30th. Most importantly, I'm leaving Fortinet in very good hands pursuant to our succession plan.
Christiana Olga, who as discussed in the 8K has served in various roles at Fortinet for almost six years, will take over as CFO at my step down in May. I'd like to thank Ken, Michael and the Fortinet team and all of you for making this chapter of my life so rewarding. I very much appreciate the time I've had at Fortnet working with Ken, Michael, the entire team, and certainly with the investors and financial analysts I know on this Fortinet, its people, customers and its noble mission to protect and serve important customers and entities around the world.
