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Fortinet (FTNT) Up 9% Since Earnings Report: Can It Continue?

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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 9% in that time frame.

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

Fortinet Beats on Q1 Earnings and Revenue Estimates

Continuing with its upbeat performance for the sixth straight quarter, Fortinet recently reported better-than-expected results for first-quarter 2018, wherein revenues and earnings came ahead of the company’s expectations, and also surpassed the respective Zacks Consensus Estimate. The company’s revenues, margins and earnings per share, all coming ahead of expectations, were the main highlights of the quarter.

Fortinet’s non-GAAP earnings per share of 33 cents beat the Zacks Consensus Estimate of 24 cents. Also, earnings came in higher than management’s guided range of 21-32 cents and marked an improvement over the year-ago quarter’s earnings of 17 cents. This was mainly driven by higher revenues and improved gross profit due to sales mix shift to higher-margin subscription services, which were partially offset by elevated operating expenses, particularly sales and marketing (S&M).

Quarter in Detail

Fortinet reported first-quarter revenues of $399 million, surpassing the Zacks Consensus Estimate of $390 million. The reported figure also came in 17.1% higher than the year-ago tally. Revenues also came ahead of management’s guided range of $387-$393 million. A large number of deal wins and customer additions during the reported quarter proved conducive to top-line growth.

Segment wise, Product revenues increased approximately 6% year over year to $143 million, while Services revenues jumped 25% to $256 million.

During the quarter, the company witnessed 21% year-over-year growth in the number of deals worth more than $100,000, while the number of deals, worth more than $50,000, climbed 20%.

Billings were up 15% on a year-over-year basis to $463.2 million.

Non-GAAP gross profit jumped 20.6% from the year-ago quarter to $301.8 million. Moreover, gross margin expanded 220 basis points (bps) to 76.4%. It also came above management’s expectation of 75–76%. The robust gross margin performance was mainly driven by aforementioned shift in sales mix to higher-margin subscription services.

Furthermore, non-GAAP operating expenses jumped 11.5% year over year to $234 million. The figure includes a benefit of $11.7 million from adoption of new accounting standards which resulted in lower commission. Excluding the same, operating expenses flared up 17% to $247 million.

Management noted that the increase was mainly due to an impact of $7 million from unfavorable currency exchange rates and a 16.8% increase in S&M expenses. Hiring was the main factor that resulted in higher S&M costs. The company revealed that since last September head counts in S&M department has increased 12%.

Non-GAAP operating profit surged 65.6% to $70.7 million from approximately $42.7 million in the year-ago quarter. Non-GAAP operating profit margin expanded 520 bps to 17.7%. The figure includes a 390-bps benefit from the aforementioned accounting standard adoption. Excluding the same, operating income improved 130 bps to 13.8%, which came above management’s guided range of 12-13%. Increase in operating margin mainly attributed to higher gross margin.

Balance Sheet & Cash Flow

Fortinet exited the reported quarter with cash and cash equivalents, and short-term investments of approximately $1.30 billion, up from $1.25 billion recorded at the end of the previous quarter. Accounts receivable were $313.1 million compared with $348.2 million recorded at the end of fourth-quarter 2017.

During the first quarter, the company generated operating cash flow of $139.7 million. Free cash flow came in at $128.1 million. Fortinet bought back 2.5 million shares for $115.5 million during the quarter.

Guidance

Buoyed by overwhelming first-quarter results, Fortinet raised guidance for full-year 2018.

For 2018, management now projects revenues at $1.715-$1.735 billion (mid-point: $1.725 billion), up from the previous range of $1.695-$1.715 billion (mid-point: $1.705 billion). Billings range has also been raised to $2.040-$2.065 billion from $2.030-$2.050 billion forecasted previously.

However, non-GAAP gross margin remained unchanged at 75-76%. Non-GAAP operating margin projections have been raised to 20.2-20.7% from the previous range of 17.7-18%. Non-GAAP operating margin include a 250-bps benefit related to the adoption of new accounting standards.

Non-GAAP earnings per share are now estimated between $1.51 and $1.55 (mid-point $1.53), up from earlier forecast of $1.30-$1.32 (mid-point $1.31). The updated range includes a 19-cent benefit from new accounting rules adoption.

The company initiated outlook for the second quarter.

The company’s forecasts for the second quarter are impressive. Management expects revenues of $420-$430 million (mid point: $425 million). Billings are estimated in the range of $485-$495 million.

Non-GAAP earnings per share are anticipated in the band of 34-36 cents (mid point: 35 cents). The guidance range represents a year-over-year increase of 27-33%. Non-GAAP gross margin is expected in the range of 75-76%, whereas non-GAAP operating margin is anticipated between 18.5% and 19%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been eight revisions higher for the current quarter compared to one lower.

Fortinet, Inc. Price and Consensus

 

Fortinet, Inc. Price and Consensus | Fortinet, Inc. Quote

VGM Scores

At this time, FTNT has a great Growth Score of A, though it is lagging a bit on the momentum front with a B. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% 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

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise FTNT has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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