Fortinet Inc. (FTNT Quick QuoteFTNT - Free Report) reported mixed third-quarter 2023 results, wherein earnings surpassed the Zacks Consensus Estimate but sales missed the same. However, both the top and bottom lines registered a steady year-over-year improvement.

Fortinet reported third-quarter 2023 non-GAAP earnings per share (EPS) of 41 cents, which topped the Zacks Consensus Estimate of 37 cents. The bottom line improved 41.4% from the year-ago quarter’s earnings of 24 cents per share.

Total revenues of $1.33 billion missed the consensus mark by 1% but improved 16.1% year over year, driven by strength in demand from small enterprise customers.

Quarter in Detail

Segment-wise, Product revenues declined 0.6% year over year to $465.9 million due to a slowdown in Secure Networking growth, along with challenges in sales execution and marketing efficiency.

Services revenues climbed 27.6% to $868.7 million, primarily driven by 34% growth in higher margin security subscriptions, which represents 57% of total services revenues. Services revenues accounted for 65% of total revenues. Our model estimates for Product and Services revenues were pegged at $499.7 million and $843.3 million, respectively.

Billings were up 5.7% to $1.49 billion, primarily driven by strong demand from small enterprises and international markets. Per our model, billings were pegged at $1.59 billion for the reported quarter.

As of Sep 30, 2023, deferred revenues were $5.29 billion, up 26% year over year.

Geographically, the Americas region registered the highest top-line growth with a 16.7% increase, followed by the Asia Pacific (APAC) region’s 16.3% and the Europe, the Middle East and Africa (EMEA) region’s 15.4%. Our model estimated 17.6%, 20.1% and 14.2% top-line growth from the Americas, APAC and EMEA regions, respectively.

During the September-end quarter, the company secured 145 total deals worth $1 million or more each. The company added more than 6,400 new logos, supported by small enterprise customers, which grew bookings by 19%

Margins

The non-GAAP gross margin expanded 70 basis points (bps) year over year to 76.9% in the third quarter of 2023, driven by the increase in Services gross margins and the six-point mix shift from product revenues to services revenues. This reflects a contraction of 310 bps in the Product gross margin, while the Services gross margin expanded 60 bps.

Non-GAAP operating income was $371.4 million for the third quarter of 2023, representing a non-GAAP operating margin of 27.8%.

Balance Sheet & Cash Flow

Fortinet exited the third quarter with cash and cash equivalents and short-term investments of $3.14 billion, down from the $3.29 billion reported at the end of the second quarter of 2023.

During the reported quarter, FTNT generated operating and adjusted free cash flows of $551.2 million and $530.8 million, respectively.

During the three and nine months ended Sep 30, 2023, Fortinet repurchased 10.4 million shares of its common stock at an average price of $58.43 per share and for an aggregate purchase price of $605.2 million.

Guidance

For 2023, Fortinet predicts revenues in the range of $5.27-$5.33 billion. Services revenues are projected in the range of $3.355-$3.375 billion. Billings are expected in the range of $6.095-$6.235 billion.

The non-GAAP gross margin and operating margin are expected in the band of 76-77% and 26.5-27.5%, respectively. Non-GAAP EPS is anticipated between $1.54 and $1.56. It forecasts a non-GAAP effective tax rate of 17% and a diluted share count between 790 million and 800 million.

Fortinet issued impressive guidance for the fourth quarter. The company estimates revenues in the range of $1.38-$1.44 billion. Billings are estimated in the band of $1.56-$1.7 billion.

The non-GAAP gross margin is expected in the range of 75.5-76.5%, while the non-GAAP operating margin is anticipated between 27.5% and 28.5%. Non-GAAP EPS is projected in the band of 42-44 cents. The company assumes a non-GAAP effective tax rate of 17% for the fourth quarter and diluted shares outstanding between 780 million and 790 million.

Zacks Rank & Stocks to Consider

Currently, Fortinet carries a Zacks Rank #3 (Hold). Shares of FTNT have gained 17.8% year to date (YTD).

Some better-ranked stocks from the broader Computer and Technology sector are Palo Alto Networks (PANW Quick QuotePANW - Free Report) , NVIDIA Corporation (NVDA Quick QuoteNVDA - Free Report) and Splunk .

Palo Alto and NVIDIA each sport a Zacks Rank #1 (Strong Buy), while Splunk carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today's Zacks #1 Rank stocks here.

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