FTNT

Fortinet, Inc. (FTNT)

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Fortinet, Inc (FTNT)

Q2 2011 Earnings Call

July 19, 2011 04:30 p.m. ET

Executives

Ken Xie – President, CEO

Kenneth A. Goldman – CFO

Analysts

Philip Rueppel – Wells Fargo Securities

Jonathan Ruykhaver – Morgan, Keegan & Company

Keith Weiss – Morgan Stanley

Jonathan Ho – William Blair

Walter Pritchard – Citi

James Wesson – Raymond James

Sterling Auty – JPMorgan

Shaul Eyal – Oppenheimer & Company

Dan Cummins – Thinkequity

Rohit Chopra – Wedbush Securities

Rob Owens – Pacific Crest

Norman Heimlich – Dundee Securities

Presentation

Operator

Good day ladies and gentlemen and welcome to Fortinet Second Quarter 2011 Earnings Announcement. (Operator Instructions) I would now like to turn the conference over to Mr. Ken Goldman, Chief Financial Officer. Sir, you may begin.

Kenneth Goldman

Good afternoon and thank you for joining us in this conference call to discuss Fortinet’s financial and operating results for second quarter 2011. Joining me today are Ken Xie, Founder President and CEO of Fortinet and Michelle Spolver, Vice President of Corporate Communications.

In terms of structure of the call I will begin with a view of our operating results before I turn the call over to Ken to provide additional perspective of performance of our business. I will then conclude with some thoughts for the third quarter and full year 2011, before we open up for your questions.

As reminded today we are holding two calls, following this call we will hold a second conference call to provide an opportunity for financial analysts to ask more detailed financial questions and second call will begin at 03:30 Pacific Time and will also be a webcast from our investor relations website and is accessible as detailed in earnings release.

Before I begin let me read a disclaimer Safe Harbor statement. Please note that some of the comments made today are forward-looking statements regarding our financial guidance for the third quarter and full year, our expectation regarding continuous sales momentum and retail vertical including potential customer wins, expected business growth in certain regions, increased sales resulting from investments in our sales organization, future product launches, traction for sales of new products, in case of which we hire new employees, the impact of currency exchange rates, the momentum of our business in the global UTM market, ability to gain market share, expected growth in our service revenues and the impact of new FAS revenue recognition rules.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our SEC filings, in particular the risk factors described in a Form 10-K and 10-Q for more information on these risks and uncertainties. Again limitation apply to forward-looking statements. Copies if you request can be obtained from SEC or by visiting investment relations section of our website.

All forward-looking statements reflect our opinions only on the day of this presentation and we undertake no obligation and specifically disclaim any obligation to revise or probably reach results of any revision of these forward-looking statements in light of new information or future events.

Please note that we will be discussing certain non-GAAP financial measures on this call. Our GAAP results and non-GAAP reconciliations can be found on earnings press release on slides 14 and 15 of the presentation and communication remarks.

You can also refer to our website at www.investor.fortinet.com for important information including earnings press release issued a few minutes ago and slides that accompany prepared remarks. Replay of this call will also be available on the website. Note that we routinely post important information on investor relations website and I encourage you to make use of that resource. Okay.

Let me now talk about second quarter. It was a solid quarter where strong financial metrics have been consistent with or above the high end of our previously provided guidance. We saw strong revenue growth, strong profits, continued very strong free cash flow duration. We witnessed momentum on deal flow. Let me talk about key numbers and you could see those on slide three.

Billings of a $110 million which was an increase of 22% year-over-year. Revenues were $103 million up 35% year-over-year. Non GAAP operating income at $22 million was up 84% year-over-year. Non-GAAP margin was 22% which was up 6% year-over-year. Non-GAAP EPF $0.09, free cash flow was $33 million up about a 100% year-over-year. Revenues were strong driven by growth in the Americas and APAC at 40% and 44% respectively. The main revenue growth was also solid at 24%. We continue to see robust demand for UTM in high performance network security solutions in the enterprise driven by network security consolidation and network upgrades.

Recent product introduction continue to reinforce our competitive edge and drive market share gains. Finally, let we talk about a few things to point out before I delve further into financials. The Q2 guidance we issued last quarter include the impact of the adoption of new revenue recognition rules. As a result, revenue increased approximately $5.7 million. Certain product revenue which can now be recognized upon shipment in both China and the US would not have been recognized under previous revenue recognition rules. Additionally, we believe that had the previous revenue recognition rules been made in effect the impact would have been less as we have also changed certain business practices to better merit changes to the revenue recognition rules. That was again reminding you that our guidance included the impact of these new rules.

We achieved two to one stock split which is effective June 1st and we held our annual shareholders meeting last month where among other things shareholders approved an employee stock purchase plan.

In terms of profitability it was above expectations at our business model. We maintained a profitability while continuing to ramp up our hiring efforts, investments in sales, support and R&D to meet the strong demand we are seeing.

A non-GAAP operating margin of 22% was above our guidance range and above the 16% reported during the same period last year.

In terms of free cash flow we achieved $33.3 million up nearly a 100% year-over-year well exceeding our guidance of around $25 million plus. Cash generation continues to reflect trends in our collections, profitability and working capital management.

A strong result this quarter continues to be driven by leverage we are getting in our investments in R&D and the execution of our global sales strategy. We saw especially a strong growth in Americas and APAC, with healthy deal volumes from enterprise across all of our verticals. Let me highlight a few that were strictly strong.

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