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Why Is Fortinet (FTNT) Up 4.5% Since the Last Earnings Report?

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It has been about a month since the last earnings report for Fortinet, Inc. (FTNT - Free Report) . Shares have added about 4.5% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Fortinet Q3 Earnings Beat, Revenue Growth Rate Dismal

Continuing with its upbeat performance for the fifth straight quarter, Fortinet recently reported better-than-expected results for third-quarter 2017, wherein revenues and earnings came ahead of the company’s expectations, and also surpassed the respective Zacks Consensus Estimate.

Revenues

Fortinet reported third-quarter revenues of $374.2 million, beating the Zacks Consensus Estimate of $371 million and up 18.2% year over year. Segment wise, Product revenues increased 7% year over year to $137.1 million, while Services revenues jumped 26% to $237.1 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 reported quarter also proved conducive to top-line growth.

During the third quarter, the company witnessed 18% year-over-year growth in the number of deals worth over $100,000, while the number of deals worth more than $250,000 and $500,000 climbed 26% and 50%, respectively.

Billings were up 24% on a year-over-year basis to $431.7 million.

Operating Results

Non-GAAP (excluding stock-based compensation and amortization of intangible assets) gross profit jumped 20.8% from the year-ago quarter to $283.4 million. Moreover, gross margin expanded 170 basis points (bps) to 75.7%, primarily backed by sales of higher-value subscription bundles. It also came ahead of management’s expectation of 75%.

Furthermore, the company efficiently managed its operating expenses this quarter. As a percentage of revenues, non-GAAP operating expenses contracted 250 bps year over year to 57%. In dollar terms, however, the figure advanced 13.1% to $213.2 million.

Non-GAAP operating profit surged 52.5% to $70 million from approximately $45.9 million in the year-ago quarter. Non-GAAP operating profit margin expanded 420 bps to 18.7%, mainly attributed to improved gross margin and efficient cost management. Operating margin also surpassed the company’s guidance range of 16-17%.

Fortinet’s non-GAAP earnings per share of 28 cents beat the Zacks Consensus Estimate of 23 cents. Also, earnings came in higher than management’s guidance range of 22-23 cents and marked a solid improvement over the year-ago quarter’s earnings of 18 cents, driven mainly by higher revenues and efficient cost management.

Balance Sheet & Cash Flow

Fortinet exited the reported quarter with cash and cash equivalents, and short-term investments of approximately $1.28 billion, up from $1.21 billion recorded at the end of the second quarter. Accounts receivable were $258 million compared with $271.1 million recorded at the end of the previous quarter.

During the first three quarters of 2017, the company generated operating cash flow of $436.9 million. Free cash flow for the first nine months of the year came in at $315.2 million. Fortinet bought back 3.25 million shares for $124 million during the first three quarters of 2017.

This month management also announced an increase of $400 million in share repurchase authorization, bringing the total authorization amount to $1 billion.

Guidance

Despite reporting impressive third-quarter results, Fortinet lowered its revenue and billings guidance for the full year, and provided a disappointing outlook for the current quarter.

For 2017, management now projects revenues in the range of $1.482-$1.490 billion (mid-point: $1.486 billion), down from the earlier guidance of $1.487-$1.495 billion (mid-point: $1.491 billion). Billings forecast has also been trimmed to $1.772-$1.787 billion from $1.775-$1.795 billion.

Nevertheless, the company anticipates that its cost-management initiatives to drive its margins and earnings per share. Therefore, it raised its non-GAAP gross and operating margin projections to 75% and 17%, respectively. Earlier guidance ranges for gross and operating margin were 74.5-75% and 16.2%, respectively.

Similarly, non-GAAP earnings per share are now estimated to come between $1.00 and $1.02 (mid-point $1.01), up from the range of 94-96 cents (mid point: 95 cents) predicted earlier.

The company’s forecasts for the fourth quarter are slightly lackluster. Management expects revenues in the range of $404-$412 million (mid point: $408 million). Billings are estimated in the range of $510-$525 million.

Non-GAAP earnings per share are anticipated to come in the band of 28-30 cents (mid point: 29 cents). It represents a year-over-year decline of 3.3%. Non-GAAP gross margin is expected to be in the range of 75-76%, whereas non-GAAP operating margin is anticipated to be between 18% and 19%.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the past month as none of them issued any earnings estimate revisions.

VGM Scores

Currently, the stock has a strong Growth Score of A, though it is lagging a bit on the momentum front with a C. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for growth investors than momentum investors.

Outlook

The stock has a Zacks Rank #2 (Buy). We are looking for an above average return from the stock in the next few months.


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