FTNT

Fortinet, Inc. (FTNT)

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Fortinet (FTNT)

Q1 2013 Earnings Call

April 30, 2013 4:30 pm ET

Executives

Michelle Spolver - Vice President of Corporate Communications & Investor Relations

Ken Xie - Co-Founder, Chairman, Chief Executive Officer and President

Ahmed Rubaie - Chief Operating Officer and Chief Financial Officer

Analysts

Keith Weiss - Morgan Stanley, Research Division

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Brent Thill - UBS Investment Bank, Research Division

Tal Liani - BofA Merrill Lynch, Research Division

Michael Turits - Raymond James & Associates, Inc., Research Division

Priya Parasuraman - Wells Fargo Securities, LLC, Research Division

Rohit N. Chopra - Wedbush Securities Inc., Research Division

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Fatima Boolani - Jefferies & Company, Inc., Research Division

John Weidemoyer

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fortinet First Quarter 2013 Earnings Announcement. [Operator Instructions] Today's conference is being recorded. I would now like to turn the call over to Michelle Spolver.

Michelle Spolver

Thank you. Good afternoon, and thank you for joining us on this conference call to discuss Fortinet's financial and operating results for the first quarter of 2013. Joining me today are Ken Xie, Fortinet's Founder, President and CEO; and Ahmed Rubaie, our recently appointed CFO and COO. This is Ahmed's first conference call with Fortinet, and we welcome him to our company and look forward to his contributions as we work to execute against the company's strategic growth initiatives.

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

As a reminder, we are holding 2 calls today. Given that we already covered some of the aspects of Q1 in our pre-announcement a few weeks ago, we're going to try and keep this first call to about an hour. For those who have additional or more detailed questions, we will hold a second conference call at 3:30 p.m. Pacific Time. Both calls will be webcast from our Investor Relations website and are -- will be accessible as detailed in our earnings release.

Before we begin, let me first 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 actual 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 will 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 14 and 15 of this presentation that accompany today's remarks. Please refer to the Investor Relations section of our website at investor.fortinet.com for important information, including our earnings press release issued a few weeks ago and slides that accompany today's prepared remarks. A replay of this call will also be available on our website. Note that we routinely post information on our website, and we encourage you to make use of that resource.

Before I turn the call over to Ken to provide perspective on the market and Fortinet's product and business highlights, let me reiterate our Q1 financial highlights, all of which are consistent with the pre-announcement a few weeks ago. Specifically, billings were $148.5 million, increasing 8% year-over-year. Revenue was $135.8 million, up 16% over the prior year period. Non-GAAP operating margins were 18% and non-GAAP EPS was $0.10. And finally, our cash generation remained healthy with $36 million of free cash flow during the quarter. In a few minutes, Ahmed will provide additional financial and operational details, but first, let me now turn the call over to Ken.

Ken Xie

Okay. Thank you, Michelle, and thanks to everyone for joining us today. So first I want to welcome Ahmed to Fortinet. I know that many of you have had exposure to him in his previous position. So we are mutually excited about the timely addition of a strong operation and finance executive to our team. Ahmed has a solid track record of delivering consistent result, contribution to strong growth and scaling global business in a highly efficient manner. So as we're looking to scale Fortinet to our longer-term goals, we're looking forward to Ahmed's contributions.

Now let me give you my perspective of the business. Like several other companies that have reported to-date, we believe our Q1 result were affected primarily by the macro economic and the geopolitical challenges in Latin America and EMEA, as well as a shortfall in U.S. service provider business, which resulted in a fewer than expected larger deals in the quarter. And to a lesser extent, inventory shortages and the product transition issue also affected sales during the quarter. So from an execution standpoint, we are taking appropriate actions to improve the inventory process and better manage the transition of the new product launch in the future.

So I also want to underscore that Fortinet's global competitive position remain very strong across all our end markets. We are now a secured market leader and continue to gain shares. Despite some of the challenge in Q1, we did not see a major change in the competitive environment and no significant deals were lost to competitors. So we believe the security industry remain healthy, though growing at a slower rate than what was previously estimated. On average, research firm have the growth rate of now secured to be somewhere between 6% to 10% year-over-year and Fortinet forecast total addressable market now is in the -- just over $9 billion.

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