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Fortinet (FTNT) Beats on Q3 Earnings, Raises 2019 Guidance

Zacks Equity Research

Fortinet Inc. FTNT delivered third-quarter 2019 non-GAAP earnings per share of 67 cents, which beat the Zacks Consensus Estimate of 56 cents and also improved significantly from the year-ago figure of 44 cents.

Moreover, revenues of $548 million surpassed the consensus estimate of $533 million and increased 21% year over year as well, driven by strong growth in Fortinet Security Fabric, cloud and SD-WAN offerings. Strength in the Americas and EMEA regions was a key driver.

The better-than-expected third-quarter results coupled with a bullish guidance for the fourth quarter and the full year are expected to buoy investors’ confidence in the stock. Notably, the company’s guidance raised for the full year led to a share price rally of more than 10% in the extended trading session on Thursday.

For 2019, the company expects revenues in the range of $2.135-$2.150 billion compared with $2.10-$2.12 billion estimated earlier. The Zacks Consensus Estimate is pegged at $2.11 billion.

Moreover, non-GAAP earnings per share expectations were also lifted to $2.39-$2.41 from $2.23-$2.26. The Zacks Consensus Estimate stands at $2.25.

Fortinet, Inc. Price, Consensus and EPS Surprise

Fortinet, Inc. Price, Consensus and EPS Surprise
Fortinet, Inc. Price, Consensus and EPS Surprise

Fortinet, Inc. price-consensus-eps-surprise-chart | Fortinet, Inc. Quote

Quarter in Detail

Segment wise, Product revenues increased 20% year over year to $197.1 million. Services revenues too jumped 21% to $350.4 million.

Total deferred revenues of $1.95 billion as of Sep 30, 2019 grew 26%.  Billings were up 19% as well on a year-over-year basis to $626.6 million.

During the quarter, the company secured 53 total deals worth more than $1 million compared with 30 deals in the year-ago period and 46 sequentially.

While revenues from the Americas (44% of total revenues) grew 24% year over year to $241 million, revenues from the EMEA (Europe, Middle East and Africa) region (37%) increased 21% to $201 million and that from APAC (Asia Pacific) region (19%) rose 12% to $106 million.

Margins

Gross margin expanded 170 basis points (bps) year over year to 78.2%. Also, services gross margin expanded 70 bps to 88% as well as product gross margin grew 330 bps to 60.7%.

Non-GAAP operating expense as a percentage of revenues declined 80 bps to 51.8%.

Non-GAAP operating income surged 33.3% to $144.6 million while non-GAAP operating margin expanded 200 bps to 26%.

Balance Sheet & Cash Flow

Fortinet exited the reported quarter with cash and cash equivalents, and short-term investments of approximately $1.94 billion, up from $1.83 billion recorded at the end of the previous quarter.

During the third quarter, the company generated operating cash flow of $221.2 million compared with $195.1 million in the previous quarter. Free cash flow was $203.7 million compared with $177.8 million in the second quarter.

Guidance

For 2019, billings are now expected within $2.55-$2.565 billion, up from $2.51-$2.54 billion.

Non-GAAP gross margin is projected in the range of 76.5-77%, up from 75.5-76.5% predicted earlier. Non-GAAP operating margin is now anticipated between 24% and 24.5%, up from the previously guided 23-23.5% range.

For the fourth quarter of 2019, the company expects revenues of $595-$610 million. The consensus estimate is pegged at $585.76 million. Billings are estimated in the band of $750-$765 million.

Non-GAAP earnings per share are envisioned within 69-71 cents. The Zacks Consensus Estimate is pegged at 64 cents.

Non-GAAP gross margin is forecast in the range of 75.5-76.5% whereas non-GAAP operating margin is anticipated between 25.5% and 26%.

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 Benefitfocus BNFT, Five9, Inc. FIVN and Square SQ, each flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Benefitfocus and Square  are scheduled to report earnings on Nov 6 while Five9 will announce the same on Nov 5.

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