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Why Is Fortinet (FTNT) Up 0.2% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Fortinet (FTNT). Shares have added about 0.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Fortinet due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Fortinet's Q2 Earnings & Revenues Top Estimates

Fortinet reported strong second-quarter 2019 results, wherein both earnings and revenues surpassed estimates.

Fortinet’s non-GAAP earnings per share of 58 cents beat the Zacks Consensus Estimate of 50 cents, and increased significantly from the year-ago quarter figure of 41 cents.

Revenues of $521.7 million surpassed the consensus estimate of $511 million and increased 18% year over year, driven by growth across both its segments, particularly Services. Strength in the Americas and APAC region was also a positive.

Quarter in Detail

Segment wise, Product revenues increased approximately 14.2% year over year to $162.7 million driven by the E-Series and Fabric products.

Services revenues (64%) jumped 20.7% to $331.8 million backed by increase in FortiGuard security subscriptions.

Total deferred revenues of $1.87 billion as of Jun 30, 2019, grew 27%.

Billings were up 21% on a year-over-year basis to $622.4 million. Strong momentum in demand for Fortinet’s Security Fabric, SD-WAN and cloud offerings contributed to billings growth.

During the quarter, the company secured 46 total deals worth more than $1 million, up 28%.

Revenues from the Americas (43% of total revenues) grew 19% year over year to $226 million, revenues from the EMEA (Europe, Middle East and Africa) region (37%) increased 17% to $192 million, and that from APAC (Asia Pacific) region (20%) jumped 19% to $104 million.

Margins

Gross margin expanded 100 basis points (bps) year over year to 76.4%, driven by a 100-bps increase in services gross margin, and 110 bps expansion in product gross margin.

Non-GAAP operating income surged 32.3% to $123 million. Non-GAAP operating margin expanded 250 bps to 23.6% 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 $1.83 billion, up from $1.8 billion recorded at the end of the previous quarter.

During the second quarter, the company generated operating cash flow of $195.1 million compared with $201.3 million in the previous quarter. Free cash flow was $177.8 million compared with $191.1 million in the first quarter.

Outlook

On second-quarter 2019 earnings call, management highlighted four major growth drivers. Firstly, the refreshed portfolio of FortiGates with integrated secure Wi-Fi, SD-WAN and 5G products are likely to boost security driven networking. Fortinet Security Fabric, a broad range of hybrid and multi-cloud deployments and the company’s Operations Technology (OT) and IoT security offering are the three other catalysts.

For 2019, management increased revenue guidance, and projects the same in the range of $2.10-$2.12 billion compared with $2.07-$2.10 billion estimated earlier.

Billings are now expected to be within $2.51-$2.54 billion, up from $2.47-$2.52 billion.

Non-GAAP gross margin continues to be projected in the 75.5-76.5% band. Non-GAAP operating margin is now expected between 23% and 23.5%, up from previously guided 22.5-23.5% range.

Non-GAAP earnings per share expectations were also raised to $2.23-$2.26, up from $2.10-$2.15.

For the third quarter of 2019, the company expects revenues of $525-$540 million. Billings are estimated in the range of $600-$615 million.

Non-GAAP earnings per share are anticipated in the band of 55-57 cents. Non-GAAP gross margin is expected in the range of 75.5% to 76.5%, whereas non-GAAP operating margin is anticipated between 23% and 23.5%.
 

How Have Estimates Been Moving Since Then?

Estimates revision followed an upward path over the past two months. The consensus estimate has shifted 9.06% due to these changes.

VGM Scores

Currently, Fortinet has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Fortinet has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.



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