Fortinet (FTNT) Q1 Earnings Beat, Revenue Growth Slows Down

Continuing with its upbeat performance for the third straight quarter, Fortinet Inc. (NASDAQ:FTNT) yesterday reported strong results for first-quarter 2017, wherein revenues and earnings came ahead of the company’s expectations, and also surpassed the respective Zacks Consensus Estimate.

Fortinet’s adjusted earnings per share (including stock-based compensation but excluding amortization of intangible assets) of 7 cents beat the Zacks Consensus Estimate of 2 cents. Adjusted earnings also marked a solid improvement over the year-ago quarter’s loss of 6 cents, driven mainly by higher revenues and efficient cost management, which were partially offset by higher share counts.

On a non-GAAP (excluding stock-based compensation and amortization of intangible assets) basis, the network security solution providing company posted earnings of 17 cents, which was higher than management’s guidance range of 15–16 cents and marked a 41.7% year-over-year improvement.

Fortinet, Inc. Price, Consensus and EPS Surprise

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

Revenues

Fortinet reported first-quarter revenues of $340.6 million, beating the Zacks Consensus Estimate of $335 million and up 19.7% year over year. Segment wise, Product revenues increased 8.6% year over year to $135.3 million, while Services revenues surged 28.3% to $205.3 million.

The year-over-year improvement was primarily aided by growth 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 310,000.The company witnessed 20% 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 15% and 31%, respectively.

Billings were up 22% on a year-over-year basis to $403 million. This includes a single deal worth $12 million.

Operating Results

Gross profit increased 20.8% from the year-ago quarter to $250 million. Moreover, gross margin expanded 70 basis points (bps) to 73.4%, primarily backed by sales of higher-value subscription bundles.

Furthermore, the company 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 170 bps year over year to 70.6%. In dollar terms, however, the figure advanced 16.8% to $240.4 million.

Adjusted operating profit jumped over eight folds to $9.6 million from $1.2 million in the year-ago quarter. Adjusted operating profit margin expanded 240 bps to 2.8%, mainly attributed to improved gross margin and efficient cost management.

Balance Sheet & Cash Flow

Fortinet exited the quarter with cash and cash equivalents, and short-term investments of approximately $1.20 billion, up from $1.09 billion at the end of fourth-quarter 2016. Accounts receivable were $271.1million compared with $313 million at the end of the previous quarter.

During the quarter, the company generated operating cash flow of $129.7 million. Free cash flow for the quarter came in at $116.2 million. During the quarter, Fortinet did not make any share repurchases.

Guidance

Buoyed by a better-than-expected first-quarter performance, Fortinet raised its outlook for full-year 2017. For 2017, management now expects revenues in the range of $1.485–$1.495 billion (mid-point: $1.490 billion), up from the earlier guidance of $1.470–$1.480 billion (mid point: $1.475 billion). Billings forecast also raised to $1.770–$1.792 billion from $1.750–$1.770 billion.

Similarly, non-GAAP earnings per share are now projected to come between 89 cents and 91 cents (mid-point 90 cents), up from of 87–89 cents (mid point: 88 cents) predicted earlier. The Zacks Consensus Estimate for revenues and earnings is currently pegged at $1.48 billion and 35 cents, respectively.

However, the company kept its guidance unchanged for non-GAAP gross margin, which is likely to be in between 74% and 75%.

For the second quarter, management expects revenues in the range of $357–$363 million (mid point: $360 million) and non-GAAP earnings per share of 19–20 cents (mid point: 19.5 cents). The Zacks Consensus Estimate for revenues and earnings is pegged at $359.72 million and 6 cents, respectively. Billings are expected in the range of $325–$332 million. Non-GAAP gross margin is expected to be 74–75%, whereas non-GAAP operating margin is anticipated to be between 14% and 15%.

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 first-quarter results. Despite persistent macro uncertainties, management seems to be optimistic on the back of a healthy network security market, solid product line-up and investment plans. Furthermore, the company’s upbeat guidance for full-year 2017 is encouraging.

Despite all these, shares of Fortinet dropped over 7% in yesterday’s after-hour trade, as investors seemed concerned over the company’s declining revenue growth rate. Notably, over the last three quarters, the company’s revenue growth rates have been around 20%, which are significantly lower than its previous rates of over 30%. Additionally, Fortinet’s second-quarter revenue guidance marks an even lower growth rate of 14.6–16.6%.

Moreover, competition from key network security players such as Cisco Systems Inc. (NASDAQ:CSCO) , Check Point (NASDAQ:CHKP) , Juniper Networks (NYSE:JNPR) and Palo Alto Networks, remains a concern.

Notably, the stock has gained 34.2% in the year-to-date period compared with the Zacks categorized Computer-Integrated Systems industry’s decline of 5.6% in the same time frame.

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

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