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Fortinet's (FTNT) Q4 Earnings & Revenues Beat Estimates

Zacks Equity Research

Fortinet Inc. FTNT reported strong results for fourth-quarter 2018, wherein both earnings and revenues surpassed the respective Zacks Consensus Estimate.

Fortinet’s non-GAAP earnings per share (EPS) of 59 cents beat the Zacks Consensus Estimate of 51 cents and increased significantly from the year-ago quarter figure of 32 cents.

Revenues of $507 million surpassed the consensus estimate of $496 million and increased 22%.

Management notes that strong global demand for the company’s Security Fabric offerings due to digital transformation across most industries is a tailwind. Growing adoption of its SD-WAN solution is also a positive. Further, the U.S. federal government shutdown, Brexit issues and the slowdown in the Chinese economy had no material impact on fourth-quarter results.

Moreover, the company’s full-year results were also impressive with 20% year-over-year increase in revenues, which came at $1.8 billion. EPS for 2018 was $1.84 compared with $1.04 in the prior year.

Security Fabric architecture contributed to market share gain throughout 2018, along with improved sales and marketing.

Quarter in Detail

Segment wise, Product revenues increased approximately 24% year over year to $200.8 million while Services revenues jumped 20% to $306.2 million. The company’s traditional support offering FortiCare grew 21% to $141 million and its security subscription offering FortiGuard jumped 19% to $165 million in the quarter.

Product revenue growth was driven by the new E-series products, software sales and growth in fabric platform solutions.

Billings were up 22% on a year-over-year basis to $649 million. Strong billings growth was witnessed in each of the regions. Americas and EMEA were up 23% each. Strong enterprise growth in the United States was noteworthy.

During the quarter, the company reached 47 total deals worth more than $1 million, up 17.5% year over year.

Management noted that Service providers and MSSPs continued to be its largest vertical, representing 11 of its top 25 deals in the fourth quarter, including a large SD-WAN deal with European retailer Blackmine. Per the deal, Fortinet will provide integrated SD-WAN functionality and security in a single device.

The company at the end of the fourth quarter surpassed 600 issued patents.

Moreover, Fortinet and Symantec SYMC entered into a partnership to provide customers comprehensive and robust security solutions across endpoint network and cloud environments.

Margins

Gross margin increased to 75.7%, driven by a 40 basis points (bps) increase in services gross margin. The shift in sales mix to higher-margin subscription services was a positive.

Non-GAAP operating income surged 66% to $130.6 million. Non-GAAP operating margin expanded 700 bps to 26% 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 $1.65 billion, up from $1.63 billion recorded at the end of the previous quarter.

During the fourth quarter, the company generated operating cash flow of $167.7 million compared with $142.2 million in the previous quarter. Free cash flow came in at $168.6 million compared with $158.5 million in the third quarter.

Guidance

For 2019, management projects revenues in the range of $2.06-$2.10 billion. The Zacks Consensus Estimate is pegged at $2.06 billion. Billings are expected to be within $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 are estimated between $2.05 and $2.10. The Zacks Consensus Estimate stands at $1.99.

For the first quarter of 2019, the company expects revenues of $465-$475 million. The Zacks Consensus Estimate is pegged at $468.42 million. Billings are estimated in the range of $515-$535 million.

Non-GAAP earnings per share are anticipated in the band of 37-39 cents. The Zacks Consensus Estimate is pegged at 41 cents. Non-GAAP gross margin is expected in the range of 75.5% to 76.5%, whereas non-GAAP operating margin is anticipated between 18% and 18.5%.

The company expects strong adoption of its secure SD-WAN offerings, Security Fabric architecture, security processor unit, SPU, ASIC technology and the recently announced high performance FortiGate Next-Generation Firewalls E-series products over the next few years.

Fortinet, Inc. Price, Consensus and EPS Surprise

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

Zacks Rank and Other Stocks to Consider

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

Some other top-ranked stocks in the broader Computer and Technology sector are Twitter, Inc. TWTR, and Xilinx, Inc. XLNX, 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 for Twitter and Xilinx is projected to be 22.05% and 9.5%, respectively.

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