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Fortinet's Q4 Earnings Lag, Rev Beats

Zacks Equity Research

Fortinet Inc. (FTNT) reported fourth-quarter 2013 earnings per share of 7 cents, which missed the Zacks Consensus Estimate of 9 cents. The quarter’s earnings, which exclude the effect of a patent settlement, amortization and impairment of intangibles but include stock-based compensation expenses, were 39.0% lower than the 13 cents reported in the year-ago quarter.


Fortinet reported fourth-quarter revenues of $177.3 million, up 17.3% from the year-ago quarter. The quarter’s results were above the Zacks Consensus Estimate of $166.0 million and the company’s guided range of $162.0–$167.0 million.

The year-over-year improvement was aided by an 18.1% increase in Product revenues and 17.7% increase in Services revenues. However, this was partially offset by a 6.9% decline in Ratable and other revenues.

Geographically, Americas (42.0% of total revenue) grew 21.0% from the year-ago quarter, EMEA (34.0% of total revenue) increased 10.0% from the year-ago quarter while Asia Pacific (constituting the remaining 24.0% of revenues) grew 21.0% on a year-over-year basis.


Billings during the quarter grew 20.4% on a year-over-year basis to $209.8 million. Number of deals worth over $100K was 260, up from 229 in the year-ago quarter. Deals over $250k increased to 96 from 78 in the year-ago period while deals over $500k were 37, up from 27 on a year-over-year basis.

Operating Results

Adjusted gross profit increased 12.5% from the year-ago quarter to $123.5 million. However, gross margin contracted 296 basis points year over year to 69.6%, primarily due to higher mix of low-margin entry-level products and lower service margin.

Higher-than-expected adjusted operating expenses (up 32.3% year over year) led to a decline in operating margin. Moreover, as a percentage of revenues, operating expenses increased 633 basis points, thereby impacting margins. Adjusted operating margin came in at 14.2%, down from 23.0% in the year-ago quarter.

Fortinet posted adjusted net income (excluding the effect of a patent settlement, amortization and impairment of intangibles but include stock-based compensation expenses) of $13.3 million or 7 cents per share compared with $21.5 million or 13 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Fortinet exited the fourth-quarter with cash and cash equivalents and short-term investments of $491.4.0 million, down from $513.0 million in the previous quarter. Accounts receivable were $130.5 compared with $107.8 million in the year-ago quarter.

Cash from operating activities was $46.7 million, up from $25.4 million in the previous quarter. Free cash flow in the fourth-quarter was $39.5 million. During the fourth quarter of 2013, the company repurchased $38.9 million worth of shares.


For the first quarter of 2014, management expects revenues in the range of $155.0–$159.0 million, a 16.0% year-over-year increase at the mid-point. The Zacks Consensus Estimate is pegged at $155.0 million. Billings are expected in the range of $168.0 million to $176.0 million, up approximately 15.0% year over year.

Gross margin is expected in the range of 70.0%-71.0%. The company expects operating margin to be approximately 12.0%, diluted share count of approximately 167 million to 169 million and earnings per share to be approximately 8 cents.


Fortinet provides network security solutions, which include firewall, VPN, application control, antivirus, intrusion prevention, web filtering, anti-spam, and WAN acceleration. Fortinet reported mixed fourth-quarter results and provided encouraging first-quarter guidance.

The company’s top line increased year over year and beat the Zacks Consensus Estimate, whereas the bottom line was down year over year and also fell short of the consensus mark. Despite the continuing macro uncertainty, Fortinet seems positive on a healthy network security market, its product lineup and investment plans.

Margin contraction due to continuous investments and competition from key network security players such as Cisco Systems Inc. (CSCO), Check Point (CHKP), Juniper Networks (JNPR) and Palo Alto Networks are concerns. But we think that product ramps, deal momentum, share gains from competitors, continuous growth of the network security market and expected benefits arising out of ongoing investments are catalysts.

Currently, Fortinet has a Zacks Rank #4 (Sell).

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