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Fortinet (FTNT) Q1 Earnings and Revenues Surpass Estimates

Zacks Equity Research

Fortinet Inc. FTNT delivered first-quarter 2020 non-GAAP earnings per share of 60 cents, which beat the Zacks Consensus Estimate by 20% and improved significantly from the year-ago quarter’s 46 cents.

Moreover, revenues of $576.9 million surpassed the consensus mark of $557 million and increased 22% year over year, driven by advanced FortiGate technology with SPU, integrated Security Fabric platform and hybrid multi-cloud offerings.

Strategic investments in developing powerful products and services, efforts to expand into adjacent addressable markets and increase its global sales force drove the performance.

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 18.2% year over year to $192.3 million. The growth was driven by the continued adoption of the FortiGate-based secure SD-WAN solution.

Services revenues rose 24.1% to $384.6 million. Notably, FortiGuard security subscription revenues grew 24% to $205 million. FortiCare technical support and other service revenues increased 21% to $170 million.

Billings were up 21.1% to $667.8 million, driven by solid execution and growth across EMEA and APAC.

During the quarter, the company secured 38 total deals worth equal to or more than $1 million each. Secure SD-WAN was a leading contributor to growth, in terms of the number of deals worth more than $1 million.

The number of deals worth more than $250,000 rose 21.4% to 323 and the number of deals worth more than $500K was up 11.1% to 120.

Geographically, revenues in America were up 20.8%, APAC up 20.1% and EMEA up 24.5%.

Margins

Gross margin expanded 150 basis points (bps) year over year to 78.7%. Services gross margin expanded 30 bps to 87.4% as well as product gross margin grew 300 bps to 61.4%.

Non-GAAP operating income surged 33% to $128.4 million, while non-GAAP operating margin expanded 190 bps to 22.3%.

Balance Sheet & Cash Flow

Fortinet exited the reported quarter with cash and cash equivalents, and short-term investments of approximately $1.4 billion, down from $2.07 billion reported at the end of the previous quarter.

During the first quarter, the company generated operating cash flow of $319.4 million compared with $190.4 million in the previous quarter. Free cash flow was $241.8 million compared with $143.2 million in the fourth quarter of 2019.

In the first quarter, the company purchased approximately 10 million shares of common stock for $899.9 million.

Guidance

For the second quarter of 2020, the company expects revenues of $590-$605 million. Billings are estimated in a band of $700-$725 million.

Non-GAAP earnings per share are envisioned to be 64-66 cents.

Non-GAAP gross margin is expected in the range of 77.5-78.5%, whereas non-GAAP operating margin is anticipated between 23% and 24%.

Notably, the uncertainty surrounding the coronavirus pandemic may have a material negative impact on Fortinet’s second quarter and annual results.

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 Advanced Semiconductor Engineering Inc ASX, NeoPhotonics Corporation NPTN and Avid Technology, Inc. AVID, all 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 rate for Advanced Semiconductor, NeoPhotonics and Avid is currently pegged at 26.63%, 15% and 20%, respectively.

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