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Fortinet (FTNT) Beats Q3 Earnings Estimates, Raises Guidance

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Fortinet Inc. (FTNT - Free Report)   reported strong results for third-quarter 2018, wherein revenues and earnings surpassed the respective Zacks Consensus Estimate.

Fortinet’s non-GAAP earnings per share of 49 cents beat the Zacks Consensus Estimate of 42 cents and increased significantly from the year-ago quarter’s earnings of 28 cents.

Revenues of $453.9 million surpassed the Zacks Consensus Estimate of $451 million and increased 21% from than the year-ago quarter.

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. Growing adoption of its SD-WAN solution is also a positive.

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

Quarter in Detail

Segment wise, Product revenues increased approximately 20% year over year to $164.5 million, while Services revenues jumped 22% to $289.4 million. The company’s traditional support offering, FortiCare grew 26% year over year to $121 million and its security subscription offering FortiGuard grew 20% to $157 million in the quarter. 

Billings were up 22% on a year-over-year basis to $528 million. Strong billings growth was witnessed in each of the regions. Americas, APAC and EMEA were up 25%, 22% and 19% respectively. Strong enterprise growth in the United States is noteworthy.

During the quarter, the company witnessed 27% year-over-year growth in the number of deals worth more than $250K, reflecting strength of its mid-enterprise and enterprise business. The company recorded 30 deals worth more than $1 million.

Management noted that Service providers and MSSPs continued to be its largest vertical. Non-FortiGate business grew faster than the FortiGate business, driven by Security Fabric.

The company in the third quarter surpassed a milestone of 500 issued patents, which, per management, was three times the number of patents issued for its nearest competitors.

Fortinet, Inc. Price and EPS Surprise

Fortinet, Inc. Price and EPS Surprise | Fortinet, Inc. Quote

Margins

Gross margin increased 50 basis points (bps) to 76.5%. The robust gross margin performance was mainly driven by a shift in sales mix to higher-margin subscription services.

Non-GAAP operating income surged 55% year over to $108.5 million. Non-GAAP operating margin expanded 500 bps to 24% on the back of solid revenue growth, which outpaced total operating expenses.

Balance Sheet & Cash Flow

Fortinet exited the reported quarter with cash and cash equivalents, and short-term investments of approximately $1.63 billion, up from $1.50 billion recorded at the end of the previous quarter.

During the third quarter, the company generated operating cash flow of $167.7 million compared with $142.2 million in the previous quarter. Free cash flow came in at $158.5 million.

Guidance

For 2018, management projects revenues in the range of $1.785-$1.795 billion, up from the previous range of $1.770-$1.790 billion. Billings range has also been raised to $2.125-$2.140 billion from $2.085-$2.110 billion forecast previously.

However, non-GAAP gross margin remained unchanged at 75-76%. Non-GAAP operating margin projections have been raised to 21.5-22% from the previous range of 21.2-21.7%. Non-GAAP operating margin includes a 300-bps benefit related to the adoption of new accounting standards.

Non-GAAP earnings per share are now estimated between $1.72 and $1.76, up from the earlier forecast of $1.63-$1.67.

For the fourth quarter, the company expects revenues of $490-$500 million. Billings are estimated in the range of $620-$635 million.

Non-GAAP earnings per share are anticipated in the band of 50-52 cents. Non-GAAP gross margin is expected in the range of 75 to 76%, whereas non-GAAP operating margin is anticipated between 24% and 24.5%.

Management believes that the company is well positioned to outperform the security market in the fourth quarter.

Zacks Rank and Stocks to Consider

Fortinet currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader technology sector are Intel Corporation (INTC - Free Report) , Twitter, Inc. (TWTR - Free Report) and CACI International, Inc. (CACI - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for Intel, Twitter and CACI International is projected to be 8.4%, 22.1% and 10%, respectively.

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