What's In Store For Fortinet (FTNT) This Earnings Season?

Fortinet Inc. (NASDAQ:FTNT) is set to report first-quarter 2017 results on Apr 27. Last quarter, the company posted a remarkable positive earnings surprise of 125%. Notably, Fortinet has outperformed the Zacks Consensus Estimate thrice and missed in one occasion, over the trailing four quarters. It has an average negative earnings surprise of 47.92%.

Let's see how things are shaping up for this announcement.

Factors to Consider

Fortinet’s network security solutions include firewall, VPN, application control, antivirus, intrusion prevention, web filtering, anti-spam and WAN acceleration.

For the last two quarters, there has been a slowdown in Fortinet’s sales. The company observed that organizations have been breaking their cybersecurity investment plans into phases and implementing the same over longer periods of time instead of making a single large investment. Therefore, the aforementioned factor is likely to affect the to-be-reported quarter revenues.

Nonetheless, we opine that Fortinet’s initiative to change its business model to subscription-based service provider will continue to drive the company’s bottom-line results. Subscription-based service is a high gross margin business (approximately 80%) compared with the hardware-centric model.

Notably, the company generates over 50% of the total revenue from these services, which helped it generate a 250 basis points gross margin expansion in fourth-quarter 2016. We believe that the strategy will continue to improve the company’s bottom-line performances.

Earnings Whispers

Our proven model does not conclusively show that Fortinet will beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 2 cents. Hence, the difference is 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Fortinet carries a Zacks Rank #3. Though Zacks Rank #1, 2 or 3 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 and 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are a couple of stocks, which you may consider as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases:

Identiv Inc. (NASDAQ:INVE) , with an Earnings ESP of +6.67% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Seagate Technology plc (NASDAQ:STX) , with an Earnings ESP of +3.77%, and a Zacks Rank #2.

Fiserv Inc. (NASDAQ:FISV) , with an Earnings ESP of +0.85% and a Zacks Rank #2.

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