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Fortinet Inc. (FTNT - Snapshot Report) reported first-quarter 2013 earnings per share of 7 cents, in line with the Zacks Consensus Estimate. The quarter’s earnings, which exclude the effect of a patent settlement, were 15.1% lower than 8 cents reported in the year-earlier quarter.

Revenues

Fortinet’s first-quarter revenues of $135.8 million increased 15.8% from $117.2 million in the year-ago quarter and were slightly below the Zacks Consensus Estimate of $136.0 million. The year-over-year improvement was aided by 22.1% growth in Services revenues, 8.9% in Product revenues and 3.6% in Ratable and other revenues.

Fortinet performed well in the Asia-Pacific and U.S. Enterprise sectors. However, the revenue growth was adversely affected by macroeconomic and geopolitical challenges in Latin America and Europe, the Middle East & Africa, a shortfall in U.S service provider business, inventory shortages and product transition issues.

Operating Results

Gross profit increased 12.2% from the year-ago quarter to $96.7 million. However, gross margin dropped 230 basis points year over year to 71.2%. The margin contraction was due to higher mix of low-margin entry-level products and lower service margin.

Total operating expenses surged 20.5% year over year. Operating margin was 11.3% compared with 16.0% in the year-ago period. Continued investments resulted in operating margin decline.

Fortinet reported adjusted net income of $12.0 million or 7 cents per share compared with $13.9 million or 8 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Fortinet exited the first quarter with cash and marketable securities of $460.4 million, up from $413.7 million in the previous quarter. Accounts receivable decreased 4.9% sequentially to $102.4 million.

Cash from operating activities was $37.7 million, down from $48.5 million in the year-ago quarter. Capital expenditure in the first quarter was $1.5 million versus $1.6 million in the year-ago quarter.

Guidance

Despite the continuing macro uncertainty, Fortinet seems positive on healthy network security market and its product line-ups.

For second quarter of 2013, Fortinet expects revenues in the range of $141.0–$144.0 million, reflecting 11.0% year-over-year growth. Gross margin is expected to be approximately 72.0%. The company also expects non-GAAP operating margin of 17.0%, pro forma tax rate of 33.0%, diluted share count in the range of 169 million to 171 million and non-GAAP earnings per share of 9 cents.

For fiscal 2013, total revenue is expected in the range of $595 million to $605 million, up approximately 12% year over year at the midpoint. The company also expects gross margin of 72.0%, non-GAAP operating margin of 20%, diluted share count of approximately 170 million to 172 million and earnings per share of 49 cents.

Conclusion

Fortinet provides network security solutions, which includes firewall, VPN, application control, antivirus, intrusion prevention, Web filtering, anti-spam, and WAN acceleration. Fortinet’s first-quarter results were disappointing with the top line missing the Zacks Consensus Estimate, while the bottom line matched the same. Though second quarter guidance was a bit cautious, we are encouraged by a better visibility into fiscal 2013.

However, we prefer to have a bearish view given margin contraction due to continuous investments and stiff competition from the key network security players such as Cisco Systems Inc. (CSCO - Analyst Report), Check Point (CHKP - Analyst Report), Juniper Networks (JNPR - Analyst Report) and Palo Alto Networks.

Currently, Fortinet has a Zacks Rank #4 (Sell).

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