FTNT

Fortinet, Inc. (FTNT)

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Fortinet, Inc. (FTNT)

Q4 2012 Earnings Call

January 30, 2013 4:30 pm ET

Executives

Michelle Spolver – Vice President, Corporate Communications & Investor Relations

Ken Xie – Founder, President and Chief Executive Officer

Nancy Bush – Interim Chief Financial Officer

Analysts

Jonathan Ho – William Blair & Company, LLC

Keith Weiss – Morgan Stanley

Gary Hall – Wells Fargo

Walter Pritchard – Citi Investment Research & Analysis

Brent Thill – UBS

Robert Breza – RBC Capital Markets

Sterling Auty – JP Morgan

Jayson Nolan – Robert W. Baird & Co.

Ron Zember – Bank of America Merrill Lynch

James Wesman – Raymond James

Shelby Seyrafi – FBN Securities

Shaul Eyal – Oppenheimer & Co.

Dan Cummins – B. Riley

Aaron M. Schwartz – Jefferies & Co., Inc.

Rick G. Sherlund – Nomura Securities International, Inc.

Daniel H. Ives – FBR Capital Markets

Scott Zeller – Needham & Co.

Presentation

Operator

Good day, ladies and gentlemen, and thank for standing by and welcome to the Fortinet Fourth Quarter 2012 Earnings Announcement. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference maybe recorded.

Now my pleasure to turn the call over to Michelle Spolver, Vice President of Investor Relations. Please go ahead.

Michelle Spolver

Thank you. Good afternoon and thank you everyone for joining us on this conference call to discuss Fortinet’s financial and operating results for the fourth quarter and full year of 2012. Joining me today are Fortinet’s Founder, President and CEO, Ken Xie; and Interim CFO, Nancy Bush.

In terms of the structure of the call, I will begin by providing a quick summary of our key fourth quarter financial metrics. Then turn the call over to Ken Xie who will provide perspective on the market and our business and product highlights. Nancy Bush will then review our operating results along with some thoughts on our outlook for the first quarter and full year of 2013 before we open up the call for questions.

As a reminder today, we are holding two calls. Following this call, we will hold a second conference call to provide an opportunity for financial analysts and investors to ask more detailed financial questions. The second call will begin at 3:30 PM Pacific Time and will also be webcast from our Investor Relations website and is accessible as detailed in our earnings release. Before we begin, let me read this disclaimer.

Please note some of the comments we make today are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause results to differ materially from those projected in these statements. Please refer to our SEC filings, in particular the risk factors described in our Forms 10-K and 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements.

Also please note that we’ll be discussing certain non-GAAP financial measures on this call. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and on slides 15 to 18 of the presentation that accompanies today’s prepared remarks. Please refer to the Investor Relation section of our website at www.investor.fortinet.com for important information, including our earnings press release issued just a few minutes ago and slides that accompanies today’s prepared remarks. A replay of this call will also be available on our website. Note that we routinely post important information on Investor Relations website, and we encourage you to make use of that resource.

Before I turn the call over to Ken to provide perspective on market drivers, and Fortinet’s product and business highlights, I will first summarize our key financial results for the fourth quarter. Note that these figures include the positive impact of the patent sale of approximately $1.9 million that was executed during the quarter. I’m pleased to say that Fortinet had an exceptional fourth quarter. Across all key financial metrics, we exceeded our prior guidance even aforementioned patent sale. Specifically, billings were $174 million exceeding our guidance and increasing 24% year-over-year. Revenue was $151 million, up 25% and also exceeding our guidance range.

From a profitability perspective, non-GAAP operating margins were 27% and non-GAAP EPS was $0.17 both above our guidance. And finally, our cash generation was strong evidenced by the $48 million of free cash flow generated during Q4, which well exceeded the high end of our guidance range.

In a few minutes, Nancy will give additional financial details. But first, let me now turn the call over to Ken.

Ken Xie

Good, Michelle. Thank you and thanks everyone for joining us here today. We’re very pleased with our first quarter results, which exceed our expectation across all key metrics. Fortinet executed well and grow all geographics, and gaining market share and continue our security technology innovation and leadership.

An area of focus for us, we continue to make good traction within the large enterprise segment. So during Q4, we won against and displaced competitors in a large deal within a key vertical market, such as financed service, and year-over-year we grow the number of deal over 1 million by 100%, and the number of deal of over 500k by 80%.

So despite some market up challenges, the security market overall remained very strong. And Fortinet is benefiting from the key market drivers such as increased network speed, require high performance security solutions.

As far when we’re fresh and the metrication to integrate next generation firewall and the UTM product. An increasingly complex tough environment demand the advanced protection and security related regulation such as PCI compliance, and the continued trend towards delivering security as a managed service and secure firewall in a public cloud. So all of this contribute to Fortinet’s strong performance during the fourth quarter, and also position Fortinet well through 2013 and beyond.

So we have a cutting edge technology innovation, an extensive product portfolio, a secure performance advantages, and a strong team executing well around the world. So we continue to have momentum in our business and deliver Fortinet well positioned to extend our leadership through the better product recently introduced, and in the pipeline as well as increase the marketing and lead generation investment already underway, and plan for later this year.

The two are often compromised when I think about Fortinet, the fast and secure. So we offered a faster product in the industry, so our family of CSMA ASIC and also having the broad security coverage, which integrate firewall, IPS, application control, antivirus, web filtering and the host of address security technologies and intelligence such as behavior based, Advanced Persistent Threats to fight in even the most sophisticated known and unknown network threats.

So during the fourth quarter, we introduced a new high, mid, low-end product and received a third-party recognition and innovative it and validate the performance of security of our solutions. So in last quarter, full-service provider and large enterprise, but introduced a new FortiGate-5001C security blade for our high-end FortiGate-5000 series, which raised the performance bar we already set.

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