Keith Jensen
Chief Financial Officer at Fortinet
Thank you, Ken, and good afternoon, everyone. As we look back at 2022, we see the success of our strategy to lead in convergence and consolidation as well as the combined power of our ASIC technology with our integrated operating system. Combined, these efforts are driving our strong financial results. There's been an explosion of devices that must be connected to the cloud, data center and edge compute. As a result, the infrastructure has expanded to support secure connectivity via distributed firewalls. It is no longer feasible to overlay security on top of networking in the data center. They must be deployed as a converged solution. Firewalls need to work seamlessly with networking and security applications across the company's entire infrastructure.
Fortinet is leading the convergence trend with a wide range of technologies, including network firewalls, secure SD-WAN, 5G and OT security, all embedded in our single operating system delivered as hardware, software, cloud and as a service. Traditional CPU-based solutions are very inefficient as supporting both networking and security. That's why Fortinet developed proprietary ASIC technology to build an application-specific solution. Yesterday, as Ken mentioned, we announced our next-generation ASIC, the 40 security processor or FortiSP5, which allows line speed convergence of networking and security at every network edge. The new seven-nanometer technology combines existing NP7 technology with new content processor capabilities.
Our enhanced platform suite of integrated products is delivering on customer demands for convergence, vendor consolidation, ease of management and lower operating costs. The success of this strategy is evident in our full year 2022 results, and I'll start there. Billings passed the $5 billion mark, totaling $5.6 billion and growing 34%. While revenue totaled $4.4 billion, with growth accelerating to 32%, the fifth consecutive year of revenue growth of 20% or more. Driven by strong demand for our fabric and Cloud Security Solutions, enhanced platform technology billings and revenue both increased over 40% to $1.8 billion and $1.5 billion, respectively.
And despite a challenging global supply chain environment, product revenue growth came in at 42%, our highest annual product revenue growth rate in over 10 years. Our product revenue growth was driven by the combined -- by the continued growth of our firewall use cases and the addition of over 23,000 new customers. Service revenue was up 26% to $2.6 billion, resulting in three consecutive years of accelerating service revenue growth rates. Gross margin was strong at 76.3% and operating margin outpaced our initial expectations, increasing 110 basis points to a new Fortinet record high of 27.3%. Our GAAP operating margin of 22% and is one of the highest in the industry, and we continued our streak of being GAAP profitable every year of our 14-year history as a public company.
Earnings per share increased 49% to $1.19. Free cash flow was a record at $1.45 billion. Free cash flow margin was 33% and adjusted for real estate investments, the free cash flow margin came in at 37%. And for the year, we repurchased approximately 36 million shares at a cost of $2 billion. Total deferred revenue increased 34% to $4.6 billion. Short-term deferred revenue increased 32% to $2.35 billion. Quarterly contract terms throughout the year were consistent with the year earlier periods, including the fourth quarter at 28 months. Before moving on to our Q4 results, I'd like to summarize our enterprise success and highlight a few seven-figure deals from 2022. We saw great success during the year with our strategy to expand further into the large enterprise segment as the number of deals over $1 million increased over 55% to a record 546 deals, and billings on these deals increased by over 70%.
If we look at a few of our large deals of the year, let's start with the competitive upsell deal, Fortinet displaced 11 different vendors by consolidating the customer's network to security functions on our Security Fabric. This worldwide wholesaler previously purchased Secure SD-WAN and FortiProxy. Next on the list was a centralized network security solution that could be managed and deployed to its 400 global locations. This customer chose Fortinet Security Fabric for a flexible and integrated solution across multiple scenarios, including work from anywhere, perimeter security and data center segmentation. In another upsell deal, a leading global manufacturer was spun off and had to stand up the security and networking infrastructure separately. The newly created infrastructures included remote access, SD-WAN, application delivery control, authentication, endpoint, e-mail protection and switching.
Keys to our win included our zero-trust capabilities, a cloud-first SD-WAN strategy and the ease of integration and convergence across our platform suite. Lastly, in the new logo win, a large U.S. retailer with over 500 locations were struggling with a total cost of ownership of their legacy security architecture. Keys to this win included delivering a single pane of glass versus the multiple consoles they were using and replacing the competitors' firewalls with our FortiGates, delivering URL filtering, WiFi security, and edge router replacement, all on our unified and integrated FortiOS platform. This customer reported anticipated savings of $29 million over five years. Turning to Q4 results. Both billings and revenue delivered new Fortinet records with billings of $1.7 billion and revenue of $1.3 billion.
Both metrics increased over 30%. The strong fourth quarter revenue performance reflects solid customer demand across both our core and enhanced platform technologies. In the fourth quarter, we added over 6,200 new logos, another new Fortinet record reflecting the support of our channel partners, the leverage they bring and the breadth of our worldwide customer base. Taking a closer look at the fourth quarter, billings growth of 32% was driven by a 40% increase in enhanced platform technology billings, which accounted for over 1/3 of total billings. Total revenue growth of 33% was driven by strong demand for core and enhanced technology platforms, which increased 26% and 47%, respectively. Product revenue grew 43% to $540 million.
Service revenue was up 27% and to $743 million, driven by strong product revenue growth and strength in our security subscriptions. Short-term deferred revenue grew 32% and represents eight consecutive quarters of accelerating growth rates. Total gross margin of 77.6% was driven by a 310 basis point increase in product gross margin to 65.2%. Several factors converged to drive our record high quarterly product gross margin, including legacy pricing actions, easing supply chain cost pressures and improved discounting. Service gross margin of 86.7%, ticked down 40 basis points due to increased labor cost and our expansion in cloud services and the related hosting costs. Operating margin of 32.5%, was up 400 basis points year-over-year due to the strong gross margin performance and FX benefit.
Looking to the statement of cash flow summaries on slides 11 and 12. Free cash flow was $497 million, adjusted free cash flow, which excludes real estate investments, was $510 million, representing a 40% adjusted free cash flow margin. Cash taxes were $63 million, Capital expenditures were $31 million, including $13 million for real estate investments. DSO increased 14 days sequentially and year-over-year to 89 days, also impacting service revenue growth. Moving to guidance. We believe the continued innovations we made in building our platform enables our customers' digital transformation journey. And as Ken noted, customers are increasingly recognizing how Fortinet is integrated and single platform approach to security can deliver a lower total cost of ownership and a greater return on investments than competing solutions.
Now I'd like to review our outlook for 2023, summarized on slide 15, which is subject to disclaimers regarding forward-looking information that Peter provided at the beginning of the call. For the first quarter, we expect billings in the range of $1.415 billion to $1.465 billion, which at the midpoint represents growth of 24%. Revenue in the range of $1.180 billion to $1.220 billion, which at the midpoint represents growth of 26%. non-GAAP gross margin of 75% to 76%; non-GAAP operating margin of 23% to 24%, which at the midpoint represents an increase of 150 basis points. Non-GAAP earnings per share of $0.27 to $0.29, which assumes a share count of between 795 million and 805 million. Capital expenditures of $80 million to $110 million, non-GAAP tax rate of 17%, cash taxes of $20 million. I should also note that first quarter guidance assumes backlog decreases slightly during the quarter.
For the full year, we expect billings in the range of $6.710 billion to $6.790 billion, which at the midpoint represents growth of 21%. Revenue in the range of $5.370 billion to $5.430 billion which at the midpoint represents growth of 22%. Total service revenue in the range of $3.335 billion to $3.365 billion, which at the midpoint represents growth of 27% and employees -- and implies a fourth consecutive year of accelerating service revenue growth. The service revenue guidance also implies product revenue growth of 15%. Non-GAAP gross margin of 75% to 76%, non-GAAP operating margin of 25% to 26%, non-GAAP earnings per share of $1.39 to $1.41, which assumes a share count of between 805 million and 815 million. Capital expenditures of $400 million to $450 million due to continued investments in cloud, data centers and facilities.
Non-GAAP tax rate of 17%, cash taxes of $375 million split somewhat evenly between the first and second half of the year. The increase in cash taxes reflects recently effective R&D capitalization and amortization requirements. The full year estimate assumes backlog approaches historical levels by the end of the year. Cybersecurity, but not immune to economic slowdowns is expected to remain a comparatively safe harbor. And with a strong business model and history of execution, we are confident that our market share gains will continue. We remain on track to achieve our 2025 financial targets, which include billings of $10 billion, revenue of $8 billion, non-GAAP operating margin of at least 25% and adjusted free cash flow margin in the mid- to high 30% range in 2025.
And with that, I'll now hand the call back over to Peter to begin the Q&A session.
