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Fortinet's (FTNT) Q1 Earnings & Revenues Beat Estimates

Zacks Equity Research

Fortinet Inc. FTNT 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.

Fortinet, Inc. Price, Consensus and EPS Surprise

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

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.

Zacks Rank and Other Key Picks

Fortinet currently has a Zacks Rank #2 (Buy).

A few other top-ranked stocks in the broader Computer and Technology sector are ACI Worldwide, Inc. ACIW, Cadence Design Systems, Inc. CDNS and Verint Systems Inc. VRNT, each 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 ACI, Cadence and Verint is projected to be 12%, 12% and 11%, respectively.

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