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Why Is Fortinet (FTNT) Up 12.6% Since Last Earnings Report?

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A month has gone by since the last earnings report for Fortinet (FTNT - Free Report) . Shares have added about 12.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Fortinet due for a pullback? Before we dive into how investors and analysts have reacted as 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.

Recent Earnings

Fortinet reported strong results for second-quarter 2018, wherein revenues and earnings surpassed the respective Zacks Consensus Estimate.

Fortinet’s non-GAAP earnings per share of 41 cents beat the Zacks Consensus Estimate of 35 cents and marked an improvement over the year-ago quarter’s earnings of 27 cents.

Revenues of $441.3 million surpassed the Zacks Consensus Estimate of $425.5 million and increased 21.4% from than the year-ago quarter.

A large number of deal wins and customer additions during the reported quarter proved conducive to top-line growth.

Management notes that strong global demand for the company’s Security Fabric offerings due to digital transformation and security refresh cycle across most industries is a tailwind. The company’s Security Fabric architecture, its cloud offering and customer FortiASIC technology are helping it expand in the market.

Quarter in Detail

Segment wise, Product revenues increased approximately 17% year over year to $166.3 million, while Services revenues jumped 25% to $275 million.

Geographically, Fortinet generated 43% of sales from Americas, up 18% year over year. Sales from EMEA, contributing 37% to net sales, increased 27% from the prior-year quarter. The company generated 20% of revenues from APAC, up 20% on a year-over-year basis.

During the quarter, the company witnessed 20% year-over-year growth in the number of deals worth more than $1 million driven by enterprise business. The strength in the company’s network security business among medium-sized companies is evident from a 51% increase in the number of deals worth more than $500K and 35% surge in deals over $250K.

During the quarter, the company won a SD-WAN deal against a large networking company, with a sizable European supermarket chain.

Billings were up 20% on a year-over-year basis to $513.4 million.

During the quarter, the company, with the acquisition of Bradford Networks, expanded its IoT security offerings.

Margins

Gross margin increased 60 basis points (bps) to 75.4%. The robust gross margin performance was mainly driven by a shift in sales mix to higher-margin subscription services.

Non-GAAP operating profit surged 41.7% to $93.1 million from approximately $42.7 million in the year-ago quarter. Non-GAAP operating margin expanded 300 bps to 21%.

Balance Sheet & Cash Flow

Fortinet exited the reported quarter with cash and cash equivalents, and short-term investments of approximately $1.50 billion, up from $1.39 billion recorded at the end of the previous quarter.

During the second quarter, the company generated operating cash flow of $142.2 million. Free cash flow came in at $130.6 million.

Fortinet bought back 27K shares for $1.5 million during the quarter. The board increased the share repurchase authorization by $500 million, which brings the total authorization to $1.5 billion and extends the term to the end of 2019.

Guidance

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

For 2018, management projects revenues in the range of $1.770-$1.790 billion, up from the previous range of $1.715-$1.735 billion. Billings range has also been raised to $2.085-$2.110 billion from $2.040-$2.065 billion forecast previously.

However, non-GAAP gross margin remained unchanged at 75-76%. Non-GAAP operating margin projections have been raised to 21.2-21.7% from the previous range of 20.2-20.7%. Non-GAAP operating margin includes a 350-bps benefit related to the adoption of new accounting standards.

Non-GAAP earnings per share are now estimated between $1.63 and $1.67, up from the earlier forecast of $1.51-$1.55.

For the third quarter, the company expects revenues of $445-$455 million. Billings are estimated in the range of $500-$515 million.

Non-GAAP earnings per share are anticipated in the band of 41-43 cents. Non-GAAP gross margin is expected in the range of 75-76%, whereas non-GAAP operating margin is anticipated between 21.5% and 22%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Fortinet has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for growth based on our style scores.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Fortinet has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.




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