Fortinet, Inc. (FTNT)

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Fortinet, Inc. (FTNT)

Q4 2011 Earnings Call

January 31, 2012 4:30 p.m. ET


Ken Goldman – CFO

Ken Xie - Founder, President and CEO

Michelle Spolver – Vice President, Corporate Communications


Sterling Auty – JPMorgan

Walter Pritchard - Citi Investment Research & Analysis

Keith Weiss – Morgan Stanley

Jonathan Ruykhaver - Morgan Keegan

Michael Turits – Raymond James

Jonathan Ho – William Blair

Jayson Noland – Robert W. Baird

Erik Suppiger – JMP Securities

Rohit Chopra – Wedbush

Brent Thill - UBS

Aaron Schwartz – Jefferies

Scott Zeller – Needham & Company

Dan Cummins – ThinkEquity

Brian Freed - Wunderlich Securities

Alan Weinfeld – David Securities



Good day, ladies and gentlemen and welcome to the Fortinet Q4 Fiscal Year 2011 Earnings Announcement Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

And I would now like to introduce your host for today’s conference Ken Goldman. Sir, you may begin.

Ken Goldman

Hi, great and good afternoon and thank you for joining us in this conference call to discuss Fortinet’s financial and operating results for the fourth quarter and full year 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 review of our operating results before I turn the call over to Ken to provide additional perspective of the performance of our business. I will then conclude with some thoughts on our outlook for the first quarter and full year 2012 before we open up for the 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. Second call will begin at 03:30 PM Pacific Time and will also be webcast from our Investor Relations website and is accessible as detailed in the earnings release.

Before I begin, I know you are waiting for this. Let me first read the disclaimer. Please note some of the comments we make today are forward-looking statements, including those regarding the financial guidance for the first quarter of fiscal 2012, our ability to execute on our 2011 momentum, market opportunities and pipeline, expectations regarding renewals, service revenue, product revenues and ratable on other revenue, impact of investments on our sales and R&D teams, expectations regarding non-GAAP gross margin and our cash balance expenses, expectations regarding inventory levels and hiring trends, and expectations around our competitive position, market awareness, market share and macro-economic environment and demand for security solutions.

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

All forward-looking statements reflect our opinions only as of the date of this presentation. 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 15 through 18 of the presentation accompanying today’s prepared remarks. Please refer to our website for important information including our earnings press release issued a few minutes ago and slides that accompany today’s prepared remarks. A replay of this call will also be available on our website.

So relative to Q4 2011 financial results, I am very pleased to report that Fortinet had a great fourth quarter, which was ahead of our expectations and represented a very strong finish to a record year. Our performance was driven by high growth in network security and UTM markets, solid execution of our business plan, our superior product offerings and market share gains across all geographies.

Combination of these factors has been a driving force behind Fortinet’s success since we have been a public company and has contributed to two consecutive years that we have meaningfully overachieved each of our primary financial objectives, including billings, revenue, profitability and free cash flow. Moreover, we have met or exceeded our quarterly for eight consecutive quarters.

We are in a large and a growing market. Security sector remains healthy with robust demand, and our core UTM market is one of the fastest growing segments within the space. Our stated goal has been to grow faster in our core market, which is growing a little less than 13%. Fortinet grew at more than twice its level in 2011 with growth accelerating (inaudible) and as we expanded our footprint in key segments, such as large enterprise and service provider.

We are well positioned in the fastest growing segments of security market and our total adjusted market is increasing. We are growing simply faster than major competitors.

And recall in 2011, there were few areas of business that have received particular attention from investors during the year, including billings growth and renewals, traction enterprise and EMEA performance. We previously shared that we expected the metrics to improve in each of these areas and you will see by financial results that we did exactly what we said we would do. In fact, we overachieved.

The bottom line is our business is strong and is right here where we experienced non-recurring issues we delivered. And let me really go through a few of those that we did talk about this past year.

First in billings, we had a strong finish to the year from a billings perspective. On our 3Q call, we said that we expected billings to accelerate in Q4 in part due to high renewal activity that coincided with seasonality. As anticipated, (indiscernible) didn’t factor, so we did in the fourth quarter to $140.6 million representing year over year growth of 27% and exceeding our guidance of $131 million to $135 million.

In addition, with new business gained, our deferred revenue balance as of December 31 increased $20 million compared to September 30, 2011. Second, Fortinet is winning in enterprise and high end markets, which currently accounts for roughly two-thirds of our business. We saw particular strength in penetrating large enterprises during Q4 (indiscernible) the numbers of large deals over 250K grew 24% year over year. Additionally, as we remind you in 3Q, we had significant enterprise deal which was the largest in the company’s history.

Growth in enterprise and high end is primarily due to Fortinet’s ability to deliver continuous innovation and unmatched performance through our customized ASICs. We offer one of the best (indiscernible) firewalls available and we are deploying a significant number of them in the enterprise environments.

We’ve talked about several of our next-generation firewall wins in large enterprise environments in past calls and during Q4 we had several more that I will mention later. However, I want to highlight one of the largest enterprise next-generation firewall wins we had in the quarter.

It was a multi-million dollar deal with a large healthcare organization in North America that’s working to consolidate share days (ph) reduce costs to enhance service. They require upgrade firewall solutions selected multiple Fortinet products, including FortiGate 2140 and FortiGate-5001B high end chassis systems along with FortiManager and FortiAnalyzer products.

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