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Fortinet (FTNT) Beats Q4 Earnings; Issues Robust Outlook

Fortinet Inc.FTNT ended 2016 on a strong note with better-than-expected results for the fourth quarter of 2017. The company's top- and bottom-line results also reflected year-over-year growth.

The network security solution provider's adjusted earnings per share (excluding one-time items but including stock-based compensation) came in at 18 cents, higher than the Zacks Consensus Estimate of 8 cents. Moreover, on a year-over-year basis, the company's adjusted earnings jumped six folds driven mainly by strong top-line growth and better cost management.

Fortinet Inc. - Earnings Surprise | FindTheBest

Revenues

Fortinet reported fourth-quarter revenues of $362.8 million, up 22.4% year over year, and beat the Zacks Consensus Estimate of $352 million. Segment-wise, Product revenues increased 9.8% year over year to $158.9 million, while Services revenues surged 34.4% to $203.9 million.

The year-over-year improvement was primarily aided by seasonal demand, improvements in sales productivity and success in selling multiple product deployments. A large number of deal wins and customer additions during the quarter also contributed to top-line growth.

During the quarter, Fortinet added over 10,000 customers, bringing the total count to over 300,000.The company witnessed 27% year-over-year growth in the number of deals worth over $100,000, while the number of deals worth over $250,000 and $500,000 increased 24% and 31%, respectively.

Billings were up 22% on a year-over-year basis to $463.4 million.

Operating Results

Gross profit increased 26.7% from the year-ago quarter to $271.9 million. Moreover, gross margin expanded 250 basis points (bps) to 74.9%, primarily backed by sales of higher-value subscription bundles.

Furthermore, the company has efficiently managed its operating expenses this quarter. As a percentage of revenues, adjusted operating expenses (excluding one-time items but including stock-based compensation) contracted 440 bps year over year to 61.4%. In dollar terms, however, it increased 14.3% to $222.9 million.

Adjusted operating profit jumped two and half folds to $49 million from $19.5 million in the year-ago quarter. Adjusted operating profit margin expanded 660 bps to 13.5% mainly due to improved gross margin and efficient cost management.

Adjusted net income jumped over six folds year over year to $31.8 million from the year-ago quarter level of $5.3 million.

Fortinet, Inc. Price, Consensus and EPS Surprise

Fortinet, Inc. Price, Consensus and EPS Surprise | Fortinet, Inc. Quote

Balance Sheet & Cash Flow

Fortinet exited the quarter with cash and cash equivalents, and short-term investments of approximately $1.09 billion, up from $1.03 billion at the end of the previous quarter. Accounts receivable were $313 million, compared with $239 million at the end of the third quarter.

During the quarter, the company generated operating cash flow of $101 million. Free cash flow for the quarter came in at $84.2 million. In 2016, the company generated operating cash flow of $345.7 million and free cash flow of $278.5 million.

During the fourth quarter, Fortinet repurchased shares worth $35.8 million, while in the full year, total share buyback under its current authorization was $110.8 million.

Guidance

Buoyed by a better-than-expected fourth-quarter performance, Fortinet provided a strong outlook for the first quarter 2017 and the full year.

For the first quarter, management expects revenues in the range of $330-$335 million (mid point: $332.5 million) and non-GAAP earnings per share of 15-16 cents (mid point: 15.5 cents). The Zacks Consensus Estimate for revenues and earnings is pegged at $332.08 million and 2 cents, respectively. Billings are expected in the range of $380 million to $388 million. Non-GAAP gross margin is expected to be 74-75%, whereas non-GAAP operating margin is expected to be between 11% and 12%.

For 2017, management expects revenues in the range of $1.470-$1.480 billion (mid point: $1.475 billion) and non-GAAP earnings per share of 87-89 cents (mid point: 88 cents). The Zacks Consensus Estimate for revenues and earnings is pegged at $1.47 billion and 29 cents, respectively. Billings are expected in the range of $1.750 billion to $1.770 billion. Non-GAAP gross margin is projected to be 74-75%, whereas non-GAAP operating margin is anticipated to improve to 16%.

Our Take

Fortinet's network security solutions include firewall, VPN, application control, antivirus, intrusion prevention, web filtering, anti-spam and WAN acceleration. The company reported better-than-expected fourth-quarter results. Despite persistent macro uncertainties, management seems to be positive on the back of a healthy network security market, solid product line-up and investment plans.

Furthermore, the company provided an encouraging outlook for the first quarter of 2017and the full year.

We believe that the industry has huge growth potential. Note that the financial well-being, brand image and reputation of enterprises and governments are always exposed to the risk of cyber threats. Consequently, cybersecurity has become a mission-critical, high-profile requirement.

With rapid technological advancement, organizations are increasingly adopting the "bring your own device" (BYOD) policy to enhance employee productivity with anytime/anywhere access. This trend, in turn, calls for stricter data security measures.

Moreover, various independent research firms forecast strong demand ahead. According to a Markets and Markets report, worldwide cyber security spending will reach $101 billion in 2018 and $170 billion by 2020.

Therefore, with its sustained focus on product innovations and strategic acquisitions, we believe that Fortinet is well positioned to capitalize on the huge opportunity available in the space.

However, competition from key network security players such as Cisco Systems Inc. CSCO , Check Point CHKP , Juniper Networks JNPR and Palo Alto Networks, remains a concern.

Currently, Fortinet has a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Notably, the stock has outperformed the Zacks categorized Computer-Integrated Systems industry in the last three months period. Fortinet gained 16.8% during the said period compared with the industry's return of 12.3%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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