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Key Factors to Look for Ahead of Fortinet (FTNT) Q4 Earnings

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Fortinet Inc. (FTNT - Free Report) is slated to release fourth-quarter 2017 results on Feb 5. The question lingering in investors’ minds is whether this cybersecurity company will be able to post a positive earnings surprise in the to-be-reported quarter. Notably, over the trailing four quarters, the company delivered an average positive earnings surprise of 28.2%. So, let’s see how things are shaping up prior to this announcement.

What to Expect?

The current Zacks Consensus Estimate for the quarter under review is pegged at 29 cents. We note that the Zacks Consensus Estimate for the quarter remained nearly unchanged over the past 60 days. Additionally, analysts polled by Zacks project revenues of roughly $408.6 million, up 12.6% from the year-ago quarter.

Factors at Play

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

The company’s sluggish revenue growth rate makes us cautious about its to-be-reported quarter top-line performance. Notably, over the last five quarters, the company’s revenue growth rate has been around 20%, significantly lower than its previous rates of over 30%. Additionally, Fortinet’s third-quarter revenue guidance marks an even lower growth rate of 11.3-13.6%.

The company observed that organizations have been breaking the cybersecurity investment plans into phases and implementing the same over longer periods of time instead of making a single large investment. Therefore, the above-mentioned factor is likely to affect the to-be-reported quarter revenues. The negative impact of the same will pass down to the bottom-line results as well.

Nonetheless, we believe 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 more than 50% of the total revenues from these services, which helped it generate a 170 basis points gross margin expansion in third-quarter 2017. We believe this strategy will somewhat mitigate the impact of lower revenues on the bottom-line results.

Fortinet, Inc. Price and EPS Surprise

What the Zacks Model Unveils?

Our proven model does not conclusively show that Fortinet is likely to beat earnings 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 at least 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Fortinet currently carries a Zacks Rank #3 which increases the predictive power of ESP. However, the company has a negative Earnings ESP of 0.10%.

Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

MSCI Inc. (MSCI - Free Report) has an Earnings ESP of +0.86% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Zendesk, Inc. (ZEN - Free Report) has an Earnings ESP of +9.91% and a Zacks Rank #3.

Apple Inc. (AAPL - Free Report) has an Earnings ESP of +1.02% and a Zacks Rank #3.

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