Fortinet (FTNT) Up 1.8% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Fortinet (FTNT). Shares have added about 1.8% in that time frame, underperforming 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 drivers.
Fortinet Q4 Earnings Beat Estimates, Sales Rise Y/Y
Fortinet Inc. reported strong fourth-quarter 2023 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. Moreover, both the top and bottom lines registered a steady year-over-year improvement.
Fortinet reported fourth-quarter 2023 non-GAAP earnings per share (EPS) of 51 cents, which topped the Zacks Consensus Estimate by 18.6%. The bottom line improved 15.9% from the year-ago quarter’s earnings of 24 cents per share.
Total revenues of $1.415 billion beat the consensus mark by 0.33% and improved 10.3% year over year, driven by strong growth in services revenues.
Quarter in Detail
Segment-wise, Product revenues declined 9.6% year over year to $488.1 million due to a tough comparison. Product revenues grew 43% in the prior-year period, benefiting from the drawdown of backlog.
Services revenues climbed 24.8% to $927 million, primarily driven by strength in SecOps, SASE and other security subscriptions. Services revenues accounted for 66% of total revenues.
Billings were up 8.5% to $1.865 billion, driven by increased focus on SecOps, SASE and improved execution from sales teams.
Fortinet’s total addressable market across SecOps, SASE and Secure Networking is expected to increase from $150 billion in 2024 to $208 billion by 2027.
The company’s customer base comprises 76% of the Fortune 100, including nine of the top ten technology companies, manufacturers and healthcare sectors.
In the fourth quarter, SecOps billings grew 44%, which accounted for 11% of total billings with strong performance from several solutions, including EDR, SIEM, Email Security and NDR, to automatically detect, investigate and respond to threats. Unified SASE billings rose 19%, accounting for 21% of total billings. Secure Networking accounted for 68% of total billings.
As of Dec 31, 2023, deferred revenues were $5.74 billion, up 24% year over year.
Geographically, the Middle East and Africa region registered the highest top-line growth with a 12.8% increase, followed by the America region’s 9.2% and the Asia Pacific’s 7.4%.
During the December-end quarter, the company secured 179 total deals worth $1 million or more each. The company added more than 6,400 new logos.
Margins
The non-GAAP gross margin expanded 90 basis points (bps) year over year to 78.5% in the fourth quarter of 2023, driven by the increase in Services gross margins and the six-point mix shift from product revenues to services revenues. This reflects a contraction of 510 bps in the Product gross margin, while the Services gross margin expanded 140 bps.
Non-GAAP operating income was $453.5 million for the fourth quarter of 2023, representing a non-GAAP operating margin of 32%.
Balance Sheet & Cash Flow
Fortinet exited the fourth quarter with cash and cash equivalents and short-term investments of $2.41 billion, down from $3.14 billion reported at the end of the third quarter of 2023.
During the reported quarter, FTNT generated operating and adjusted free cash flows of $191.7 million and $164.8 million, respectively.
During the three months ended Dec 31, 2023, Fortinet repurchased 16.8 million shares of its common stock at an average price of $53.29 per share and for an aggregate purchase price of $895.3 million.
Guidance
Fortinet estimates first-quarter revenues in the range of $1.3-$1.36 billion. Billings are estimated in the band of $1.39-$1.45 billion.
Non-GAAP gross margin is expected in the range of 76.5-77.5%, while the non-GAAP operating margin is anticipated between 25.5% and 26.5%. Non-GAAP EPS is projected in the band of 37-39 cents. The company expects a non-GAAP effective tax rate of 17% for the fourth quarter and diluted shares outstanding between 775 million and 785 million.
For 2024, Fortinet predicts revenues in the range of $5.715-$5.815 billion. Services revenues are projected in the range of $3.92-$3.97 billion. Billings are expected in the range of $6.4-$6.6 billion.
The non-GAAP gross margin and operating margin are expected in the band of 76-78% and 25.5-27.5%, respectively. Non-GAAP EPS is anticipated between $1.65 and $1.7. It forecasts a non-GAAP effective tax rate of 17% and a diluted share count between 785 million and 795 million.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month.
The consensus estimate has shifted 5.24% due to these changes.
VGM Scores
At this time, Fortinet has an average Growth Score of C, a grade with the same score on the momentum front. 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Fortinet has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Fortinet is part of the Zacks Internet - Software industry. Over the past month, F5 Networks (FFIV), a stock from the same industry, has gained 4%. The company reported its results for the quarter ended December 2023 more than a month ago.
F5 reported revenues of $692.6 million in the last reported quarter, representing a year-over-year change of -1.1%. EPS of $3.43 for the same period compares with $2.47 a year ago.
For the current quarter, F5 is expected to post earnings of $2.87 per share, indicating a change of +13.4% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.5% over the last 30 days.
F5 has a Zacks Rank #2 (Buy) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of C.
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