Fortinet Misses on Q2 Earnings, Revenues Beat, Shares Up - Analyst Blog

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Fortinet Inc. ( FTNT ) reported second-quarter 2014 earnings per share of 5 cents, which missed the Zacks Consensus Estimate by a penny. The quarter's earnings, which exclude the effect of amortization and impairment of intangibles but include stock-based compensation expenses, were also down 12.8% reported in the year-ago quarter.

Nonetheless, shares of Fortinet went up 8.6% in after-hours trading on Wednesday, primarily due to a strong year-over-year increase in revenues and a positive guidance that indicate enhanced growth prospects in all the segments.

Revenues

Fortinet reported second-quarter revenues of $184.1 million, up 24.9% from the year-ago quarter. Revenues were above the Zacks Consensus Estimate of $171.0 million and the company's guided range of $169.0-$172.0 million.

The year-over-year improvement was primarily aided by solid yield on sales and marketing strategies and strong network security market. Moreover, a 28.3% increase in Product revenues and a 22.0% increase in Services & other revenues also supported year-over-year growth in revenues.

Geographically, Americas (43.0% of total revenue) grew 31.0% from the year-ago quarter, EMEA (34.0% of total revenue) increased 23.0% from the year-ago quarter while Asia Pacific (constituting the remaining 23.0% of revenues) grew 18.0%on a year-over-year basis.

Billings

Billings during the quarter grew 32.5% on a year-over-year basis to $212.9 million. Number of deals worth over $100K was 263, up from 190 in the year-ago quarter. Deals over $250k increased to 97 from 58 in the year-ago period while deals over $500k were 39, up from 20 in the year-ago quarter.

Operating Results

Adjusted gross profit increased 21.8% from the year-ago quarter to $126.3 million. However, gross margin contracted172 basis points year over year to 68.6%, primarily due to higher cost of services.

Higher-than-expected adjusted operating expenses (up 28.1% year over year) led to a decline in operating margin. Moreover, as a percentage of revenues, operating expenses increased 156 basis points, thereby impacting margins. Adjusted operating margin came in at 7.6%, down from 9.6% in the year-ago quarter.

Fortinet, Inc - Earnings Surprise | FindTheBest

Fortinet posted adjusted net income (excluding the effect of amortization and Impairment of intangibles but include stock-based compensation expenses) on a proportionate tax basis of $8.1 million or 5 cents per share compared with $9.2 million or 5 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Fortinet exited the second-quarter with cash and cash equivalents and short-term investments of $558.1 million, down from $561.1 million in the previous quarter. Accounts receivable were $127.8 compared with $111.5 million in the year-ago quarter.

Cash from operating activities was $104.7 million, up from $60.9 million in the previous quarter. Free cash flow in the second-quarter was $34.0 million. During the second quarter of 2014, the company repurchased $15.0 million worth of shares.

Guidance

For the third quarter of 2014, management expects revenues in the range of $182.0-$185.0 million, a 19.0% year-over-year increase at the mid-point. The Zacks Consensus Estimate is pegged at $176.0 million. Billings are expected in the range of $195.0 million to $200.0 million, up approximately 20.0% year over year.

Gross margin is expected in the range of 70.0%-71.0%. The company expects operating margin to be in the range of 14.0%-15.0%, diluted share count to be approximately 169 million to 171 million and earnings per share to be approximately 11 cents, higher than the Zacks Consensus Estimate of 8 cents.

For fiscal 2014, management expects revenues in the range of $735.0-$740.0 million, a 20.0% year-over-year increase at the mid-point. The Zacks Consensus Estimate is pegged at $712.0 million. Billings are expected in the range of $835.0 million to $840.0 million, up approximately 22.0% year over year.

Gross margin for fiscal 2014 is expected in the range of 70.0%-71.0%. The company expects operating margin to be in the range of 16.0%-17.0%, diluted share count to be approximately 168 million to 170 million and earnings per share to be in the range of 47 cents to 48 cents, higher than the Zacks Consensus Estimate of 40 cents.

Conclusion

Fortinet provides network security solutions, which include firewall, VPN, application control, antivirus, intrusion prevention, web filtering, anti-spam, and WAN acceleration. Fortinet reported mixed second-quarter results, wherein the top line came ahead of Zacks Consensus Estimate while the bottom line missed the same. However, the company provided an encouraging second-quarter and fiscal 2014 guidance. Moreover, revenues increased year over year aided by an increase in its operating segments.

Despite the continuing macro uncertainty, Fortinet seems positive on a healthy network security market, its product lineup and investment plans.

Margin contraction due to continuous investments in research and development and competition from key network security players such as Cisco Systems Inc. ( CSCO ), Check Point Software Technology ( CHKP ), Juniper Networks ( JNPR ) and Palo Alto Networks are concerns. But we believe that product ramps, deal wins, continuous growth of the network security market and expected benefits from the ongoing investments are positives.

Currently, Fortinet has a Zacks Rank #3 (Hold).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: CHKP , CSCO , JNPR , FTNT

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