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.
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.
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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