) reported first-quarter 2013 earnings per share of 7 cents, in
line with the Zacks Consensus Estimate. The quarter's earnings,
which exclude the effect of a patent settlement, were 15.1% lower
than 8 cents reported in the year-earlier quarter.
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Fortinet's first-quarter revenues of $135.8 million increased
15.8% from $117.2 million in the year-ago quarter and were
slightly below the Zacks Consensus Estimate of $136.0 million.
The year-over-year improvement was aided by 22.1% growth in
Services revenues, 8.9% in Product revenues and 3.6% in Ratable
and other revenues.
Fortinet performed well in the Asia-Pacific and U.S. Enterprise
sectors. However, the revenue growth was adversely affected by
macroeconomic and geopolitical challenges in Latin America and
Europe, the Middle East & Africa, a shortfall in U.S service
provider business, inventory shortages and product transition
Gross profit increased 12.2% from the year-ago quarter to $96.7
million. However, gross margin dropped 230 basis points year over
year to 71.2%. The margin contraction was due to higher mix of
low-margin entry-level products and lower service margin.
Total operating expenses surged 20.5% year over year. Operating
margin was 11.3% compared with 16.0% in the year-ago period.
Continued investments resulted in operating margin decline.
Fortinet reported adjusted net income of $12.0 million or 7 cents
per share compared with $13.9 million or 8 cents in the year-ago
Balance Sheet & Cash Flow
Fortinet exited the first quarter with cash and marketable
securities of $460.4 million, up from $413.7 million in the
previous quarter. Accounts receivable decreased 4.9% sequentially
to $102.4 million.
Cash from operating activities was $37.7 million, down from $48.5
million in the year-ago quarter. Capital expenditure in the first
quarter was $1.5 million versus $1.6 million in the year-ago
Despite the continuing macro uncertainty, Fortinet seems positive
on healthy network security market and its product line-ups.
For second quarter of 2013, Fortinet expects revenues in the
range of $141.0-$144.0 million, reflecting 11.0% year-over-year
growth. Gross margin is expected to be approximately 72.0%. The
company also expects non-GAAP operating margin of 17.0%, pro
forma tax rate of 33.0%, diluted share count in the range of 169
million to 171 million and non-GAAP earnings per share of 9
For fiscal 2013, total revenue is expected in the range of $595
million to $605 million, up approximately 12% year over year at
the midpoint. The company also expects gross margin of 72.0%,
non-GAAP operating margin of 20%, diluted share count of
approximately 170 million to 172 million and earnings per share
of 49 cents.
Fortinet provides network security solutions, which includes
firewall, VPN, application control, antivirus, intrusion
prevention, Web filtering, anti-spam, and WAN acceleration.
Fortinet's first-quarter results were disappointing with the top
line missing the Zacks Consensus Estimate, while the bottom line
matched the same. Though second quarter guidance was a bit
cautious, we are encouraged by a better visibility into fiscal
However, we prefer to have a bearish view given margin
contraction due to continuous investments and stiff competition
from the key network security players such as
Cisco Systems Inc.
) and Palo Alto Networks.
Currently, Fortinet has a Zacks Rank #4 (Sell).