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Fortinet (FTNT) Down 7.9% Since Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Fortinet, Inc. (FTNT - Free Report) . Shares have lost about 7.9% in that time frame, underperforming the market.

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

Fortinet Q2 Earnings Top, Revenue Growth Rate Dismal

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

Fortinet’s non-GAAP earnings per share (excluding stock-based compensation and amortization of intangible assets) of $0.27 beat the Zacks Consensus Estimate of $0.20. Non-GAAP earnings also marked a 41.7% year-over-year improvement and was higher than management’s guidance range of $0.19–$0.20.

Revenues

Fortinet reported second-quarter revenues of $363.5 million, beating the Zacks Consensus Estimate of $361 million and up 16.7% year over year. Segment wise, Product revenues increased 4% year over year to $142.7 million, while Services revenues jumped 26% to $220.8 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 proved conducive to top-line growth.

During the quarter, Fortinet added over 10,000 customers, bringing the total count to over 320,000.The company witnessed 21% 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 5% and 10%, respectively.

Billings were up 14% on a year-over-year basis to $426.9 million.

Operating Results

Gross profit increased 18% from the year-ago quarter to $267.8 million. Moreover, gross margin expanded 80 basis points (bps) to 73.7%, primarily backed by sales of higher-value subscription bundles.

Furthermore, the company efficiently managed its operating expenses this quarter. As a percentage of revenues, non-GAAP operating expenses contracted 570 bps year over year to 55.6%. In dollar terms, however, the figure advanced 5.9% to $202.1 million.

Non-GAAP operating profit jumped 82.7% to $65.7 million from approximately $36 million in the year-ago quarter. Non-GAAP operating profit margin expanded 650 bps to 18.1%, mainly attributed to improved gross margin and efficient cost management.

Balance Sheet & Cash Flow

Fortinet exited the reported quarter with cash and cash equivalents, and short-term investments of approximately $1.21 billion, almost flat with $1.20 billion recorded at the end of the first quarter. Accounts receivable were $271.1million compared with $271.1 million recorded at the end of the previous quarter.

During the first half of 2017, the company generated operating cash flow of $274.5 million. Free cash flow for the first two quarters came in at $174.6 million. Fortinet bought back 849,000 shares for $33.2 million during the first half of 2017.

Guidance

Buoyed by a better-than-expected second-quarter performance, Fortinet raised its outlook for full-year 2017. For 2017, management now expects revenues in the range of $1.487–$1.495 billion (mid-point: $1.491 billion), up from the earlier guidance of $1.485–$1.495 billion (mid-point: $1.490 billion). Billings forecast has also been raised to $1.775–$1.795 billion from $1.770–$1.792 billion.

Similarly, non-GAAP earnings per share are now projected to come between $0.94 and $0.96 (mid-point $0.95), up from of $0.89–$0.91 (mid point: $0.90) predicted earlier.

Non-GAAP gross margin is now anticipated to come between 74.5% and 75% compared with the earlier forecasted range of 74%–75%. Non-GAAP operating margin is projected to come at 16.2%.

However, the company’s revenue forecast for the third quarter is slightly disappointing. Management expects revenues in the range of $367–$373 million (mid point: $370 million). Billings are estimated in the range of $417–$427 million.

Non-GAAP earnings per share are anticipated to come in the band of $0.22–$0.23 (mid point: $0.225). Non-GAAP gross margin is expected to be 75%, whereas non-GAAP operating margin is anticipated to be between 16% and 17%.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter.

Fortinet, Inc. Price and Consensus

 

VGM Scores

At this time, Fortinet's stock has a great Growth Score of A, though it lags on the momentum front with a C. 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.

Zacks' style scores indicate that the company's stock is more suitable for growth than momentum investors.

Outlook

While estimates have been moving upward, the magnitude of the revision is net zero. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.




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