A month has gone by since the last earnings report for Fortinet (FTNT - Free Report) . Shares have added about 3.9% 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.
Fortinet's Q4 Earnings & Revenues Top Estimates
Fortinet reported strong results for fourth-quarter 2018, wherein both earnings and revenues surpassed the respective Zacks Consensus Estimate.
Fortinet’s non-GAAP earnings per share (EPS) of 59 cents beat the Zacks Consensus Estimate of 51 cents and increased significantly from the year-ago quarter figure of 32 cents.
Revenues of $507 million surpassed the consensus estimate of $496 million and increased 22%.
Management notes that strong global demand for the company’s Security Fabric offerings due to digital transformation across most industries is a tailwind. Growing adoption of its SD-WAN solution is also a positive. Further, the U.S. federal government shutdown, Brexit issues and the slowdown in the Chinese economy had no material impact on fourth-quarter results.
Moreover, the company’s full-year results were also impressive with 20% year-over-year increase in revenues, which came at $1.8 billion. EPS for 2018 was $1.84 compared with $1.04 in the prior year.
Security Fabric architecture contributed to market share gain throughout 2018, along with improved sales and marketing.
Quarter in Detail
Segment wise, Product revenues increased approximately 24% year over year to $200.8 million while Services revenues jumped 20% to $306.2 million. The company’s traditional support offering FortiCare grew 21% to $141 million and its security subscription offering FortiGuard jumped 19% to $165 million in the quarter.
Product revenue growth was driven by the new E-series products, software sales and growth in fabric platform solutions.
Billings were up 22% on a year-over-year basis to $649 million. Strong billings growth was witnessed in each of the regions. Americas and EMEA were up 23% each. Strong enterprise growth in the United States was noteworthy.
During the quarter, the company reached 47 total deals worth more than $1 million, up 17.5% year over year.
Management noted that Service providers and MSSPs continued to be its largest vertical, representing 11 of its top 25 deals in the fourth quarter, including a large SD-WAN deal with European retailer Blackmine. Per the deal, Fortinet will provide integrated SD-WAN functionality and security in a single device.
The company at the end of the fourth quarter surpassed 600 issued patents.
Moreover, Fortinet and Symantec entered into a partnership to provide customers comprehensive and robust security solutions across endpoint network and cloud environments.
Gross margin increased to 75.7%, driven by a 40 basis points (bps) increase in services gross margin. The shift in sales mix to higher-margin subscription services was a positive.
Non-GAAP operating income surged 66% to $130.6 million. Non-GAAP operating margin expanded 700 bps to 26% on the back of solid revenue growth.
Balance Sheet & Cash Flow
Fortinet exited the reported quarter with cash and cash equivalents, and short-term investments of approximately $1.65 billion, up from $1.63 billion recorded at the end of the previous quarter.
During the fourth 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 $168.6 million compared with $158.5 million in the third quarter.
For 2019, management projects revenues in the range of $2.06-$2.10 billion. The Zacks Consensus Estimate is pegged at $2.06 billion. Billings are expected to be within $2.45-$2.50 billion.
Non-GAAP gross margin is projected to be 75.5-76.5%. Non-GAAP operating margin is expected in the 22.5-23.5% range.
Non-GAAP earnings per share are estimated between $2.05 and $2.10. The Zacks Consensus Estimate stands at $1.99.
For the first quarter of 2019, the company expects revenues of $465-$475 million. The Zacks Consensus Estimate is pegged at $468.42 million. Billings are estimated in the range of $515-$535 million.
Non-GAAP earnings per share are anticipated in the band of 37-39 cents. The Zacks Consensus Estimate is pegged at 41 cents. Non-GAAP gross margin is expected in the range of 75.5% to 76.5%, whereas non-GAAP operating margin is anticipated between 18% and 18.5%.
The company expects strong adoption of its secure SD-WAN offerings, Security Fabric architecture, security processor unit, SPU, ASIC technology and the recently announced high performance FortiGate Next-Generation Firewalls E-series products over the next few years.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -8.62% due to these changes.
Currently, Fortinet has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Fortinet has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.