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Fortinet (FTNT) Down 16.9% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Fortinet (FTNT - Free Report) . Shares have lost about 16.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Fortinet due for a breakout? 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 drivers.

Fortinet's Q1 Earnings & Revenues Top Estimates

Fortinet reported strong results for first-quarter 2019, wherein both earnings and revenues surpassed estimates.

Fortinet’s non-GAAP earnings per share of 46 cents beat the Zacks Consensus Estimate of 38 cents, and increased significantly from the year-ago quarter figure of 33 cents.

Revenues of $472.6 million narrowly surpassed the consensus estimate of $472 million and increased 18% year over year, driven by strong growth in service revenues. Strength in EMEA and APAC regions was also a positive.

Quarter in Detail

Segment wise, Product revenues increased approximately 14% year over year to $162.7 million, driven by a shift in revenue mix to the midrange FortiGates, and higher software revenues.

Services revenues jumped 21% to $309.9 million. The company’s FortiCare technical support and other services grew 17% to $140 million. Its security subscription offering — FortiGuard — jumped 24% year over year to $170 million in the quarter.

Deferred revenues contributed to about 60% of total revenues.

Billings were up 19% on a year-over-year basis to $552 million. Strong billings growth was witnessed in Japan and APAC regions.

Non-FortiGate billings grew faster than FortiGate billings. Private and public cloud billings surpassed infrastructure fabric billings driven by strong growth in FortiGate virtual machines and play-as-you-go billings.

During the quarter, the company secured 35 total deals worth more than $1 million, up 3% year over year.

Management noted that Service providers and MSSPs continued to be its largest vertical, representing 40% of its top 25 deals in the first quarter.

Notably, Fortinet closed a seven-figure transaction with an EMEA-based power and water utility company, which included FortiGates, secure SD-WAN capabilities and centralized management functionality, enabling integration with a customer's OT network.

In the Americas, a seven-figure secure SD-WAN deal with a major school district was secured, wherein Fortinet will provide secure and direct Internet connectivity to each of the district's 80,000 students.

Margins

Gross margin increased 50 basis points (bps) year over year to 77.2%, driven by a 130 bps increase in services gross margin.

Non-GAAP operating income surged 36.6% to $96.6 million. Non-GAAP operating margin expanded 200 bps to 20% 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 $1.8 billion, up from $1.65 billion recorded at the end of the previous quarter.

During the first quarter, the company generated operating cash flow of $201.3 million compared with $167.7 million in the previous quarter. Free cash flow came in at $191.1 million compared with $168.6 million in the fourth quarter.

Guidance

For 2019, management increased the lower limit of revenue guidance, and projects revenues in the range of $2.07-$2.10 billion compared with $2.06-$2.10 billion estimated earlier. The Zacks Consensus Estimate is pegged at $2.08 billion.

Billings are now expected to be within $2.47-$2.52, up from $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 expectations were also raised to $2.10-$2.15, up from the range of $2.05 and $2.10. The Zacks Consensus Estimate stands at $2.08.

For the second quarter of 2019, the company expects revenues of $505-$515 million. The consensus estimate is pegged at $510.32 million. Billings are estimated in the range of $585-$605 million.

Non-GAAP earnings per share are anticipated in the band of 49-51 cents. The Zacks Consensus Estimate is pegged at 50 cents. Non-GAAP gross margin is expected in the range of 75.5% to 76.5%, whereas non-GAAP operating margin is anticipated between 22% and 22.5%.

A healthy pipeline growth and higher IT spending on cybersecurity is expected to aid Fortinet to grow faster than the security market in 2019 and thereafter.

Fortinet expects to continue benefiting from SPU, ASIC technology, particularly the new SD-WAN ASIC and the FortiSPU SoC4.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months.

VGM Scores

Currently, Fortinet has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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.

Outlook

Fortinet has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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